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 your licensed securities dealer, bank, bank manager, solicitor, professional accountant or other professional advisers.

If you have sold or transferred all your shares in China Nan Feng Group Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

This circular is addressed to the shareholders of China Nan Feng Group Limited in connection with the special general meeting of the Company to be held on 5 June 2006. This circular does not constitute an offer of, nor is it intended to invite offers for, shares in, or other securities of the Company.

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

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

(stock code: 979)

(A) PROPOSED SHARE CONSOLIDATION

(B) PROPOSED OPEN OFFER OF 256,431,132 OFFER SHARES AT HK$0.60 PER OFFER SHARE PAYABLE IN FULL ON APPLICATION ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD AND

(C) GRANT OF SPECIAL MANDATE

Financial Adviser to the Company

REXCAPITAL (Hong Kong) Limited

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

Underwriters

Always Adept Limited First Win Trading Limited

A letter from the Board is set out on pages 9 to 27 of this circular and a letter from the Independent Board Committee is set out on page 28 of this circular. A letter from the Independent Financial Adviser containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 29 to 49 of this circular.

It should be noted that the Underwriting Agreement contains provisions granting Always Adept Limited (for itself and on behalf of First Win Trading Limited) the right to terminate the obligations of Always Adept Limited and First Win Trading Limited thereunder on the occurrence of certain events. These certain events are set out in the paragraph headed “Termination of the Underwriting Agreement” on pages 19 and 20 of this circular. If the Underwriting Agreement is terminated by Always Adept Limited (for itself and on behalf of First Win Trading Limited) or does not become unconditional, the Open Offer will not proceed.

A notice convening a special general meeting of China Nan Feng Group Limited to be held at Gun Room, Royal Hong Kong Yacht Club, Kellet Island, Causeway Bay, Hong Kong at 10:00 a.m. on 5 June 2006 is set out on pages 100 to 102 of this circular. A form of proxy for use at the special general meeting is enclosed. Whether or not you are able to attend and vote at the special general meeting, you are requested to complete the enclosed proxy form in accordance with the instructions printed thereon and deposit the same with the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding of the special general meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the special general meeting or any adjournment thereof should you so wish.

* For identification purposes only

19 May 2006

	Pages
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
EXPECTED TIMETABLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . .	28
LETTER FROM GUANGDONG SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29
APPENDIX I – FINANCIAL INFORMATION OF THE GROUP. . . . . . . . . . . . . . . . . . . . .	50
APPENDIX II – UNAUDITED PRO FORMA FINANCIAL INFORMATION . . . . . . . . . .	86
APPENDIX III – GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	90
NOTICE OF SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	100

DEFINITIONS

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

“Announcement” the announcement of the Company dated 28 April 2006 relating to, among other things, the Share Consolidation and the Open Offer

“Application Form(s)” the application form(s) for use by the Qualifying Shareholders to apply for the Offer Shares

“Always Adept”
Always Adept Limited, a company incorporated in the BVI with limited liability and wholly owned by Always New Limited, which is a company incorporated in the BVI and wholly owned by the Trustee
“Associates” has the meaning ascribed to it under the Listing Rules
“Board” the board of Directors
“Business Day” a day, other than Saturday, on which banks in Hong Kong are open for business
“BVI”

the British Virgin Islands

“CCASS” the Central Clearing and Settlement System established and operated by HKSCC
“Company” China Nan Feng Group Limited (中國南峰集團有限公司 )*, an exempted company incorporated in Bermuda with limited liability and whose shares are listed on the Main Board of the Stock Exchange
“Consolidated Share(s)” ordinary share(s) which will have a par value of HK$0.10 each in the capital of the Company, immediately after the Share Consolidation
“Companies Act” the Companies Act 1981 of Bermuda
“Companies Ordinance” Companies Ordinance, Chapter 32 of the Laws of Hong Kong
“concert parties” in respect of a person, means parties acting in concert (as defined in the Hong Kong Code on Takeovers and Mergers) with such person in relation to the voting rights of the Shares or the Offer Shares
“connected person(s)” has the meaning ascribed to it in the Listing Rules

DEFINITIONS

“Director(s)” the director(s) of the Company
“Excluded Shareholders”
Overseas Shareholders, to whom the Directors, based on legal opinions provided by legal advisers and on account either of legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place, consider it necessary or expedient not to offer the Offer Shares

“Existing General Mandate” the general mandate granted to the Directors at the 2004 AGM to allot, issue or otherwise deal in up to 170,954,089 Existing Shares

“Existing Share(s)” Share(s) currently having a par value of HK$0.01 each in the capital of the Company, before the implementation of the Share Consolidation
“First Win”
First Win Trading Limited, a company incorporated in the BVI with limited liability and wholly owned by Always New Limited, which is a company incorporated in the BVI and wholly owned by the Trustee
“Group”

the Company and its subsidiaries

“Hong Kong”
the Hong Kong Special Administrative Region of the PRC
“HKSCC”
Hong Kong Securities Clearing Company Limited
“Independent Board Committee”
an independent committee of the Board comprising Mr. So Yin Wai, Mr. Zhou Yaoming and Ms. Zhu You Chun, being all the independent non-executive Directors, appointed to consider and make recommendations to the Independent Shareholders in relation to the Open Offer
“Independent Financial Adviser” or “Guangdong Securities”
Guangdong Securities Limited, a licensed corporation to carry on business in types 1, 4 and 6 (dealing in securities, advising on securities and advising on corporate finance) regulated activities under the SFO and the independent financial adviser to the Independent Board Committee
“Independent Shareholders”
the Shareholders (other than Always Adept and First Win, their respective concert parties and their Associates, who are interested in or involved in the Open Offer)
“Independent Third Party”
a party who is independent of and not connected with any of the directors, chief executives or substantial shareholders of the Company or any of its subsidiaries, or their respective Associates

DEFINITIONS

“Latest Acceptance Date”
4:00 p.m. on 21 June 2006 or such later time as may be agreed between the Company and the Underwriters, being the latest time for application for Offer Shares
“Latest Practicable Date”
17 May 2006, being the latest practicable date for ascertaining certain information for inclusion in this circular
“Listing Committee”

the listing sub-committee of the directors of the Stock Exchange elected or appointed in accordance with the Articles of Association of the Stock Exchange

“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Mr. Yip” Yip Wai Leung Jerry, the chairman of the Company and an executive Director
“Mrs. Yip” Chui Pui Fun, one of the directors of First Win and the wife of Mr. Yip
“Open Offer” the proposed offer by the Company of the Offer Shares at the Subscription Price pursuant to the Prospectus Documents and summarised in this circular
“Offer Shares”

new Consolidated Share(s) to be issued under the Open Offer

“Overseas Shareholder(s)”
the Shareholder(s) whose name(s) appear(s) on the register of members of the Company on the Record Date and whose registered address(es) on that date is/are outside Hong Kong
“Prospectus”

the Open Offer prospectus

“Prospectus Documents”
the Prospectus and the Application Form
“Prospectus Posting Date” 6 June 2006 or such later date as the Underwriters may agree with the Company
“PRC”
the People’s Republic of China, excluding Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
“Qualifying Shareholders” Shareholders whose names appear on the register of members of the Company on the Record Date, other than the Excluded Shareholders
“Record Date”
5 June 2006, being the date by reference to which Shareholders’ entitlements under the Open Offer will be determined

DEFINITIONS

“REXCAPITAL” REXCAPITAL (Hong Kong) Limited, a licensed corporation to carry on Type 6 regulated activity as defined in schedule 5 of the SFO, being appointed as the financial adviser to the Company in relation to the Open Offer
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“SGM” the special general meeting of the Company to be convened to approve, among others, (i) the Share Consolidation; (ii) the Open Offer, and (iii) the grant of the Special Mandate
“Share(s)” (i) before the implementation of the Share Consolidation, the Existing Shares currently having a par value of HK$0.01 each in the capital of the Company and (ii) immediately after the implementation of the Share Consolidation, the Consolidated Shares which will have a par value of HK$0.10 each in the capital of the Company
“Shareholders(s)” holder(s) of the Share(s) “Share Consolidation” the consolidation of every ten (10) Existing Shares having a par value of HK$0.01 each in the capital of the Company into one Consolidated Share having a par value of HK$0.10
“Special Mandate” a special mandate to allot and issue Shares to be sought from the Shareholders at the SGM to satisfy the allotment and issue of Offer Shares
“Stock Exchange” The Stock Exchange of Hong Kong Limited “Subscription Price” subscription price of HK$0.60 per Offer Share “Subscription Monies” the subscription monies payable by the Underwriters to the Company in respect of the Underwritten Shares
“Trustee” New Zealand Professional Trustee Limited, a company incorporated in New Zealand and the trustee for the time being of the Yip’s Family Trust (which was established by Mr. Yip for the benefit of himself and his wife and such beneficiary and/or beneficiaries as the protector (currently being Mr. Yip) for the time being of the Yip’s Family Trust may from time to time declare), which holds all the issued shares in the capital of Always New Limited, which in turn holds the entire issued share capital of each of the Underwriters

DEFINITIONS

“Underwriters”

Always Adept and First Win

“Underwriting Agreement” the underwriting agreement dated 28 April 2006 between the Company, Always Adept and First Win in relation to the Open Offer
“Underwritten Shares” 121,954,131 new Consolidated Shares underwritten by the Underwriters
“U.S” the United States of America
“Yip’s Family Trust” a discretionary family trust constituted by a Deed of Settlement dated 5 December 2005 and entered into between the Trustee and Mr. Yip, whereby Mr. Yip established the discretionary family trust for the benefit of himself and Mrs. Yip and such beneficiary and/or beneficiaries as Mr. Yip, the protector for the time being of the discretionary family trust, may from time to time declare
“2004 AGM” the 2004 annual general meeting of the Company held on 31 May 2005
“2005 AGM” the annual general meeting of the Company to be held on 5 June 2006
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“%” per cent.

* for identification purpose only

2006

EXPECTED TIMETABLE

The expected timetable for the Share Consolidation and the Open Offer is set out below:

Despatch of the circular in relation to the SGM to the Shareholders . . . . . . . . . . . . . . . . . . Friday, 19 May Last day of dealings in Shares on a cum-entitlement basis . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 26 May First day of dealings in Shares on an ex-entitlement basis . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 29 May Latest time for lodging transfers of Shares accompanied by the relevant title documents in order to qualify for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4:00 p.m. on Tuesday, 30 May Latest time for lodging forms of proxy for the SGM . . . . . . . . . . . . . . . . . 10:00 a.m. on Saturday, 3 June Register of members closed (both dates inclusive) . . . . . . . . . . . . . . . Thursday, 1 June to Monday, 5 June Record Date for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 5 June SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:00 a.m. on Monday, 5 June Effective date of the Share Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 5 June Despatch of the Prospectus Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June Announcement of results of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June Dealings in the Consolidated Shares commence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June Original counter for trading in the Existing Shares in board lots of 20,000 Existing Shares temporarily closes . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June Temporary counter for trading in the Consolidated Shares (represented by existing certificates for the Shares) in board lots of 2,000 Consolidated Shares opens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June First day of free exchange of existing certificates for the Existing Shares for new certificates for the Consolidated Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June Register of members re-opens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 6 June

EXPECTED TIMETABLE

2006

Original counter for trading in the Consolidated Shares (represented by new certificates for the Consolidated Shares) in board lots of 2,000 Consolidated Shares reopens . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 20 June Parallel trading in the Consolidated Shares (represented by both existing and new certificates) commences . . . . . . . . . . . . . . . . . . Tuesday, 20 June Designated broker starts to stand in the market

to provide matching service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 20 June Latest time for payment for and application for the Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Wednesday, 21 June Latest time for the Open Offer to become unconditional . . . . . . . . . . . . . . . 4:00 p.m. on Monday, 26 June Announcement of results of the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 27 June Despatch of share certificates for Offer Shares on or before . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 27 June Dealing in Offer Shares commences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 29 June Temporary counter for trading in the Consolidated Shares (represented by existing certificates for the Shares) in board lots of 2,000 Consolidated Shares closes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 11 July Parallel trading in the Consolidated Shares

(represented by both existing and new certificates) ends . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 11 July Designated broker ceases to stand in the market

to provide matching service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 11 July Last day of free exchange of existing certificates for the Existing Shares for new certificates

for the Consolidated Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, 13 July

Notes:

All times in this circular refer to Hong Kong time.
Dealings in fully-paid Offer Shares will commence as soon as the relevant Shareholders receive the share certificates for the Offer Shares.
Dates or deadlines specified in this circular for events in the timetable for (or otherwise in relation to) the Open Offer are indicative only and may be extended or varied by agreement between the Company and the Underwriters. Any consequential changes to the anticipated timetable will be published by way of press announcements or notified to Shareholders as appropriate.

EXPECTED TIMETABLE

EFFECT OF BAD WEATHER ON THE LATEST TIME FOR APPLICATION OF AND PAYMENT FOR THE OFFER SHARES

The latest time for application of and payment for the Offer Shares will not take place if there is:

a tropical cyclone warning signal number 8 or above, or
a “black” rainstorm warning
(i) in force in Hong Kong at any local time before 12:00 noon and no longer in force after 12:00 noon on the Latest Acceptance Date. Instead the latest time for application of and payment for the Offer Shares will be extended to 5:00 p.m. on the same Business Day;
(ii) in force in Hong Kong at any local time between 12:00 noon and 4:00 p.m. on the Latest Acceptance Date. Instead the latest time for acceptance of and payment for the Offer Shares will be rescheduled to 4:00 p.m. on the following Business Day which does not have either of those warnings in force at any time between 9:00 a.m. and 4:00 p.m..

If the latest time for application and payment for the Offer Shares does not take place on the Latest Acceptance Date, the dates mentioned in this section may be affected. A press announcement will be made by the Company in such event.

LETTER FROM THE BOARD

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

(stock code: 979)

Executive Directors: Mr. Yip Wai Leung Jerry Mr. Ming Kar Fook Charles

Independent non-executive Directors:

Mr. So Yin Wai Mr. Zhou Yaoming Ms. Zhu You Chun

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place of business in Hong Kong: Room B, 11/F. Cheung Lee Industrial Building No. 9 Cheung Lee Street Chai Wan Hong Kong

19 May 2006

To the Shareholders

Dear Sir/Madam

(A) PROPOSED SHARE CONSOLIDATION

(B) PROPOSED OPEN OFFER OF 256,431,132 OFFER SHARES AT HK$0.60 PER OFFER SHARE PAYABLE IN FULL ON APPLICATION ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD AND

(C) GRANT OF SPECIAL MANDATE

INTRODUCTION

On 28 April 2006, the Company announced that it proposed to (1) implement the Share Consolidation pursuant to which every 10 Existing Shares of HK$0.01 each will be consolidated into one Consolidated Share of HK$0.10; and (2) raise approximately HK$153.9 million before expenses by issuing 256,431,132 Offer Shares at a price of HK$0.60 per Offer Share by way of the Open Offer, payable in full on application, on the basis of three Offer Shares for every one Consolidated Share held by the Qualifying Shareholders as at the Record Date. The Open Offer is not available to the Excluded Shareholders.

* For identification purposes only

LETTER FROM THE BOARD

The Open Offer is fully underwritten by Always Adept and First Win, the substantial Shareholders, on the terms and subject to the conditions set out in the Underwriting Agreement.

The Company also proposes that a special mandate be granted to the Directors following the approval of the Open Offer at the SGM to satisfy the allotment and issue of the Offer Shares under the Open Offer.

The Independent Board Committee comprising the three independent non-executive Directors, namely Mr. So Yin Wai, Mr. Zhou Yaoming and Ms. Zhu You Chun, has been established for the purpose of advising the Independent Shareholders on the terms of the Open Offer.

The Independent Shareholders will be advised by the Independent Board Committee regarding the terms of the Open Offer. Guangdong Securities has been appointed by the Company to advise the Independent Board Committee and the Independent Shareholders on whether the terms of the Open Offer are fair and reasonable so far as the Independent Shareholders are concerned.

The purpose of this circular is to provide you with, among other things, further details of the Share Consolidation, the Open Offer, the grant of the Special Mandate, information on dealings in and acceptance of the Offer Shares and certain financial information in respect of the Group. This circular also contains the recommendation of the Independent Board Committee and the advice of Guangdong Securities in respect of the Open Offer and the notice of the SGM.

PROPOSED SHARE CONSOLIDATION

The Company proposes to implement the Share Consolidation pursuant to which every 10 Existing Shares of HK$0.01 each will be consolidated into one Consolidated Share of HK$0.10.

Effects of the Share Consolidation

Following completion of the Share Consolidation,

(i) the authorised share capital of the Company will remain unchanged at HK$400,000,000;
(ii) the authorised share capital of the Company of HK$400,000,000 will be divided into 4,000,000,000 Consolidated Shares, of which 3,914,522,956 Consolidated Shares will remain unissued; and
(iii) the issued share capital of the Company will be HK$8,547,704.4 divided into 85,477,044 Consolidated Shares.

The Consolidated Shares will rank pari passu in all respects with the Existing Shares in issue prior to the Share Consolidation becoming effective and there will be no change in the relative rights of the Shareholders. Fractional entitlements of Consolidated Shares will be aggregated and sold for the benefit of the Company. Board lot size for trading in the Shares will be changed from 20,000 Existing Shares each to 2,000 Consolidated Shares each after the Share Consolidation becoming effective.

LETTER FROM THE BOARD

Conditions of the Share Consolidation

The Share Consolidation is conditional upon the following conditions having been fulfilled:

(i) the passing of an ordinary resolution by the Shareholders at the SGM to approve the Share Consolidation as contained in the notice of SGM; and
(ii) the Listing Committee granting the listing of, and permission to deal in, the Consolidated Shares in issue upon the Share Consolidation becoming effective.

Reasons for the Share Consolidation

Taking into account the theoretical ex-entitlement price of approximately HK$0.0865 per Existing Share upon completion of the Open Offer and for compliance with the requirements under Rule 13.64 of the Listing Rules, the Directors are of the view that the Share Consolidation is in the best interests of the Company and recommend the Shareholders to vote in favour of the resolution for approval of the Share Consolidation at the SGM.

Application for listing

Application will be made to the Listing Committee for the granting of the listing of, and permission to deal in, the Consolidated Shares in issue upon the Share Consolidation becoming effective.

Subject to the granting of the listing of, and permission to deal in, the Consolidated Shares on the Stock Exchange, the Consolidated Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Consolidated Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

Arrangement on odd lot trading

In order to facilitate the trading of odd lots (if any) of the Consolidated Shares, the Company has appointed RexCapital Securities Limited to stand in the market to match the purchase and sale of odd lots of the Consolidated Shares at the relevant market price per Consolidated Share for the period from Tuesday, 20 June 2006 to Tuesday, 11 July 2006 (both dates inclusive). Holders of odd lots of the Consolidated Shares who wish to take advantage of this facility either to dispose of their odd lots of the Consolidated Shares or to top up to a full board lot may contact Mr. Jacky Man of RexCapital Securities Limited at 34/F., COSCO Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Hong Kong at (852) 2236 6817 during the aforesaid period. Holders of odd lots of the Consolidated Shares should note that the matching of the sale and purchase of odd lots of the Consolidated Shares is not guaranteed.

LETTER FROM THE BOARD

Trading arrangement for the Consolidated Shares

Subject to the Share Consolidation becoming unconditional, the arrangements proposed for dealings in the Consolidated Shares are expected to be as follows:

(i) From Tuesday, 6 June 2006, the original counter for trading in the Existing Shares in board lots of 20,000 Existing Shares will be temporarily closed and a temporary counter for trading in the Consolidated Shares in board lots of 2,000 Consolidated Shares will be set up.
(ii) With effect from Tuesday, 20 June 2006, the original counter for trading in the Consolidated Shares will be reopened for trading Consolidated Shares in board lots of 2,000 Consolidated Shares.
(iii) During Tuesday, 20 June 2006 to Tuesday, 11 July 2006 (both dates inclusive), there will be parallel trading at the above two counters.
(iv) The temporary counter for trading in the Consolidated Shares in board lots of 2,000 Consolidated Shares will be removed after the close of trading on Tuesday, 11 July 2006. Thereafter, trading will be in board lots of 2,000 Consolidated Shares only and the existing certificates for the Existing Shares will cease to be marketable and will not be acceptable for dealing and settlement purposes. However, such certificates will remain effective as documents of title on the basis of 10 Existing Shares for one Consolidated Share.

Free exchange of share certificates

Shareholders may exchange their share certificates for the Existing Shares for new certificates for the Consolidated Shares on or after Tuesday, 6 June 2006. This may be done free of charge by delivering the certificates for the Existing Shares to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, during the period from Tuesday, 6 June 2006 to Tuesday, 13 July 2006 (both dates inclusive). Thereafter, certificates for the Existing Shares will be accepted for exchange for certificates for the Consolidated Shares only on payment of a fee of HK$2.5 (or such higher amount as may be stipulated in the Listing Rules from time to time) for each new certificate to be issued or each old certificate submitted, whichever number of certificates is higher.

New certificates for the Consolidated Shares will be green in colour in order to distinguish them from certificates for the Existing Shares which are pink in colour.

It is expected that new certificates for the Consolidated Shares will be available for collection on or after the 10th business day from the date of submission of the certificates for the Existing Shares to the Company’s branch share registrar in Hong Kong at the above address for exchange. Unless otherwise instructed, new certificates for the Consolidated Shares will be issued in board lots of 2,000 Consolidated Shares.

As stated above, from 12 July 2006, the existing share certificates for the Existing Shares will cease to be marketable and will not be acceptable for dealing and settlement purposes. However, such certificates will remain effective as documents of title on the basis of 10 Existing Shares for one Consolidated Share.

LETTER FROM THE BOARD

PROPOSED OPEN OFFER

Issue Statistics

Basis of the Open Offer

: three Offer Shares for every one Consolidated Share held by each Qualifying Shareholder on the Record Date at the Subscription Price of HK$0.60 per Offer Share

Number of Existing Shares in issue : 854,770,446 Existing Shares as at the Latest Practicable Date

Number of Consolidated Shares : 85,477,044 Consolidated Shares in issue assuming the Share Consolidation becoming effective Number of Offer Shares : 256,431,132 Offer Shares

The aggregate number of Offer Shares to be issued pursuant to the terms of the Open Offer represents 300% of the Company’s issued share capital upon the Share Consolidation becoming effective and 75% of the Company’s issued share capital as enlarged by the issue of the Offer Shares. As the Open Offer would increase the issued share capital of the Company by more than 50%, the Open Offer is conditional on, among other things, the approval of the Independent Shareholders pursuant to Rule 7.24(5) of the Listing Rules.

As at the Latest Practicable Date, the Company had no outstanding options, warrants or other convertible securities which confer any right to subscribe for, convert or exchange into new Shares and the Company has no intention to issue any Shares, options, warrants or other convertible securities prior to the completion of the Open Offer.

Subscription Price

The Subscription Price is HK$0.60 per Offer Share payable in full when a Qualifying Shareholder applies for the Offer Shares under the Open Offer. The Subscription Price represents:

a discount of approximately 63.86% of the closing price of HK$1.66 per Consolidated Share (assuming the Share Consolidation becoming effective) as quoted on the Stock Exchange on 21 April 2006 (being the last trading day immediately prior to the Announcement);
a discount of approximately 50.90% of the average closing price of HK$1.222 per Consolidated Share (assuming the Share Consolidation becoming effective) based on the daily closing prices as quoted on the Stock Exchange over the last 10 consecutive trading days up to and including 21 April 2006 (being the last trading day immediately prior to the Announcement);

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a discount of approximately 30.64% of the theoretical ex-entitlement price of approximately HK$0.865 per Consolidated Share (assuming the Share Consolidation becoming effective) based on the aforesaid closing price per Share;
a discount of approximately 63.64% to the closing price of HK$1.65 per Consolidated Share (assuming the Share Consolidation becoming effective) as quoted on the Stock Exchange as at the Latest Practicable Date; and
a premium to approximately 4,185.71% to the audited consolidated net assets value per Consolidated Share (assuming the Share Consolidation becoming effective) of HK$0.014 as at 31 December 2005.

The Subscription Price was determined after arm’s length negotiations between the Company and the Underwriters, with reference to the market price of the Shares and also other factors such as liquidity and performance of the Shares. As stated in the Company’s annual report for the year ended 31 December 2005, the Group incurred a consolidated loss attributable to shareholders of the Company of HK$4,558,000 for the year ended 31 December 2005 and as at 31 December 2005, the Company had net current liabilities and capital deficiency of HK$8,438,000 and HK$954,000 respectively while the Group had net current liabilities of HK$996,000. The Group needs additional funds to finance its operations and activities. In view of recent financial condition of the Group as mentioned above and taking into consideration the theoretical ex-rights price per Consolidated price per Consolidated Share (assuming the Share Consolidation becoming effective), in order to increase the attractiveness of the Open Offer to the Qualifying Shareholders, the Directors consider that the discount on the Subscription Price to the above average closing prices is appropriate. The Directors consider that the Subscription Price is fair and reasonable so far as the Company and the Shareholders as a whole are concerned.

The Open Offer is conditional upon, among others, the passing by the Independent Shareholders at the SGM of an ordinary resolution to approve the Open Offer (on which the Underwriters and their respective Associates will abstain from voting), and the Share Consolidation having been completed and becoming effective. Please refer to the paragraph headed “Conditions of the Open Offer” for further details of the conditions of the Open Offer.

Qualifying Shareholders

The Company will send the Prospectus Documents to the Qualifying Shareholders only and, for information only, the Prospectus to the Excluded Shareholders.

To qualify for the Open Offer, a Shareholder must be registered as a member of the Company on the Record Date and must not be an Excluded Shareholder.

In order to be registered as members of the Company on the Record Date, all transfers of Shares (together with the relevant share certificates) must be lodged with the Company’s share registrar and transfer office, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong by not later than 4:00 p.m. on Tuesday, 30 May 2006 pursuant to the expected timetable.

The rights of the Qualifying Shareholders to apply for the Offer Shares is not transferable.

LETTER FROM THE BOARD

Excluded Shareholders

If as at the close of business on the Record Date, a Shareholder’s address as recorded on the register of members of the Company is in a place outside Hong Kong, that Shareholder may not be eligible to take part in the Open Offer as documents to be issued in connection with the Open Offer will not be registered and/or filed under the applicable securities or equivalent legislation of any jurisdictions other than Hong Kong and Bermuda. The Board will make enquiries as to whether the issue of the Offer Shares to the Overseas Shareholders may contravene the applicable securities legislation of the relevant overseas places or the requirements of the relevant regulatory body or stock exchange pursuant to Rule 13.36(2)(a) of the Listing Rules. If, after making such enquiry, the Board is of the opinion that it would be necessary or expedient, on account either of the legal restrictions under the laws of the relevant place or any requirement of the relevant regulatory body or stock exchange in that place, not to offer to such Excluded Shareholders, no issue of the Offer Shares will be made to such Excluded Shareholders. Accordingly, the Open Offer will not be extended to the Excluded Shareholders. The Company will send the Prospectus (but not the Application Form) to the Excluded Shareholders for their information only.

The Offer Shares to which the Excluded Shareholders would otherwise have been entitled under the Open Offer will be taken up by the Underwriters.

According to the register of members of the Company as at the Latest Practicable Date, there were three Independent Shareholders who were Overseas Shareholders whose registered addresses are in U.S., Japan and the PRC and in aggregate hold 2,150 Existing Shares, representing approximately 0.0003% of the total number of Existing Shares in issue.

The Company has been advised by its legal advisers on the laws of U.S. that the Company would need to take additional steps to comply with the regulatory requirements of the relevant regulatory authorities in U.S. if the Offer Shares are issued to the Overseas Shareholder with registered address in U.S.. Accordingly, the Company would be required to comply with the relevant laws and regulations if the Offer Shares are to be issued to the Overseas Shareholder with registered address in U.S.. Having considered the circumstances, the Directors are of the view that it is not expedient to extend the Open Offer to such Overseas Shareholder taking into consideration that the time and costs involved in complying with the legal requirements of this jurisdiction will outweigh the possible benefits to the relevant Overseas Shareholder and the Company. Thus, the Open Offer will not be extended to the Overseas Shareholder in U.S..

The Company has also been advised by its legal advisers on the laws of Japan and the PRC that either (i) there is no legal restriction under the applicable legislation of the relevant jurisdictions or requirement of any relevant regulatory body or stock exchange with respect to the issue of Offer Shares to the Overseas Shareholders in the relevant jurisdictions; or (ii) the Company would be exempt from obtaining approval from the relevant regulatory authorities under the applicable laws and regulations of the relevant jurisdictions since the Company would meet the relevant requirements for exemption under the relevant jurisdictions. Based on the advice of the Company’s legal advisers on the laws of Japan and the PRC, the Directors believe that the Company may extend the Open Offer to Overseas Shareholders in these two jurisdictions without any restrictions. In view of this, the Directors have decided to extend the Open Offer to the Overseas Shareholders with registered addresses in Japan and the PRC.

LETTER FROM THE BOARD

No application for excess Offer Shares

After arm’s length negotiation with the Underwriters, and taking into account that (1) in view of the discount of the Subscription Price per Offer Share to the market price per Share, the Board believes that there would be a high level of acceptance of Offer Shares by the Qualifying Shareholders and, accordingly, there would not be a significant number of Offer Shares which are not taken up by the Qualifying Shareholders and available for excess application; and (2) the arrangement of application for excess Offer Shares will involve additional administrative work and costs, the Company decided that no Qualifying Shareholder is entitled to apply for any Offer Shares which are in excess to its assured entitlements.

Any Offer Shares not taken up by the Qualifying Shareholders will be taken up by the Underwriters. As there will not be arrangement for the disposal of Offer Shares not validly applied for by the Independent Shareholders in excess of their assured allotments and the Open Offer is wholly underwritten by the Underwriters who are substantial shareholders of the Company, the said arrangement as contemplated under the Underwriting Agreement is conditional upon the approval of the Independent Shareholders under Rule 7.26A(2) of the Listing Rules. The Underwriters and their respective Associates will abstain from voting on the resolution to approve the Underwriting Agreement and the Open Offer. Save as the Underwriters and their respective Associates, as at the Latest Practicable Date, there was no other substantial Shareholder (within the meaning of the Listing Rules) who would be required to abstain from voting on the resolution to approve the Underwriting Agreement and the Open Offer.

Status of the Offer Shares

The Offer Shares (when allotted, issued and fully paid) will rank pari passu in all respects with the Shares in issue on the date of allotment and issue of the Offer Shares. Holders of the Offer Shares (when allotted, issued and fully paid) will be entitled to receive all future dividends and distributions which are declared, made or paid on or after the date of allotment and issue of the Offer Shares.

Offer Shares are expected to be traded in board lots of 2,000 Consolidated Shares. Dealings in the Offer Shares will be subject to the payment of the applicable stamp duty, Stock Exchange trading fee, the SFC transaction levy or any other applicable fees and charges in Hong Kong.

Share option scheme and convertible securities

As at the Latest Practicable Date, there were no outstanding share options granted pursuant to the Company’s share option scheme approved by Shareholders on 11 June 1997 nor outstanding convertible securities issued by the Company.

Certificates of the Offer Shares

Subject to the fulfilment of the conditions of the Open Offer, certificates for all the fully-paid Offer Shares are expected to be posted to those who have applied and paid for the Offer Shares at their risk on or before Tuesday, 27 June 2006, at their own risks.

Fractions of Offer Shares

According to the basis of the Open Offer, there will not be any allotment of fractions of the Offer Shares.

LETTER FROM THE BOARD

Closure of register of members

The register of members of the Company will be closed from Thursday, 1 June 2006 to Monday, 5 June 2006 (both dates inclusive) to determine the eligibility of Shareholders to the Open Offer. No transfers of Shares will be registered during this period.

Listing and dealings

The Company will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Offer Shares. Dealings in the Offer Shares will be subject to the payment of stamp duty in Hong Kong.

None of the securities of the Company is listed or dealt in on any other stock exchange other than the Stock Exchange and no such listing or permission to deal is being or is proposed to be sought.

Subject to the granting of the listing of, and permission to deal in, the Offer Shares on the Stock Exchange, the Offer Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Offer Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

UNDERWRITING ARRANGEMENT

Underwriting Agreement

Date : 28 April 2006

Underwriters

: Always Adept and First Win, each of which is a company incorporated in the BVI and wholly owned by Always New Limited, which is a company incorporated in the BVI and wholly owned by the Trustee for the benefit of the Yip’s Family Trust

Total number of Offer : 121,954,131 Offer Shares (Note) Shares Underwritten

Underwriting commission

: Two (2)% of the aggregate subscription price of the number of Offer Shares underwritten by the Underwriters, which is determined after arm’s length negotiation between the Company and the Underwriters and accords with the market rate

Note: This figure excludes the pro-rata entitlement of 134,477,001 Offer Shares to be provisionally allotted to the Underwriters in respect of their respective beneficial shareholding in the Company, which they have undertaken to subscribe for in full pursuant to the Underwriting Agreement.

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Underwriting fee

The Company shall pay to the Underwriters the underwriting commission mentioned above and such out-of-pocket and other expenses reasonably and properly incurred by the Underwriters in connection with the Underwriting Agreement.

The entering into of the Underwriting Agreement by the Company with the Underwriters constitutes a connected transaction of the Company under the Listing Rules but is exempted from the reporting, announcement and independent shareholders’ requirements pursuant to Rule 14A.31(3)(c) of the Listing Rules, provided that Rule 7.26A(2) of the Listing Rules has been complied with.

Each of Always Adept and First Win has irrevocably undertaken to the Company that:

(a) the Shares beneficially owned by it will remain registered in its name from the date of the Announcement to the Record Date;
(b) it will subscribe for 40,343,100 Offer Shares and 94,133,901 Offer Shares respectively that will be allotted to it under the Open Offer on an assured basis; and
(c) it will underwrite the 36,586,239 Offer Shares and 85,367,892 Offer Shares respectively.

Under the terms of the Underwriting Agreement, the Company and the Underwriters agreed that if the conditions of the Open Offer are fulfilled on or before the Latest Acceptance Date (or such later time and/or date as the Company and the Underwriters may determine) and the Underwriting Agreement becomes unconditional and is not terminated in accordance with the terms thereof, the Underwriters shall subscribe for those Offer Shares which have not been taken up by other Qualifying Shareholders and to pay the relevant Subscription Monies not later than 4:00 pm on the fourth Business Day after the last day for application for the Offer Shares.

Conditions of the Open Offer

The Open Offer is conditional upon each of the following events:

(i) the Company dispatching this circular to the Shareholders containing, among other matters, details of the Share Consolidation and the Open Offer together with proxy form and notice of SGM;
(ii) the passing of a resolution by the Shareholders at the SGM to approve the Share Consolidation as contained in the notice of SGM, by no later than the Prospectus Posting Date and the Share Consolidation having been completed and becoming effective;
(iii) the passing by the Independent Shareholders at the SGM of ordinary resolutions to approve the Open Offer (including, but not limited to, the exclusion of the offer of the Open Offer to the Excluded Shareholders, the absence of arrangement for the disposal of Offer Shares not validly applied for by the Independent Shareholders in excess of their assured allotments and the taking up of such excess Offer Shares by the Underwriters and the Underwriting Agreement) by no later than the Prospectus Posting Date;

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(iv) the Listing Committee of the Stock Exchange granting and not having withdrawn or revoked listing of and permission to deal in all the Offer Shares (in their fully-paid forms);
(v) the filing and registration of all documents relating to the Open Offer with the Registrar of Companies in Hong Kong;
(vi) the filing of the Prospectus Documents with the Registrar of Companies in Bermuda;
(vii) the posting of the Prospectus Documents to Qualifying Shareholders; and
(viii) compliance with and performance of all the undertakings and obligations of the Company under the terms of the Underwriting Agreement.

Neither the Company nor the Underwriters may waive the conditions (i) to (vii) above. Always Adept (for itself and on behalf of First Win) may waive the condition (viii) in whole or in part by written notice to the Company.

If the conditions to the Underwriting Agreement are not satisfied and/or waived in whole or in part by Always Adept (for itself and on behalf of First Win) by the Latest Acceptance Date or such later date or dates as the Underwriters may agree with the Company in writing, the Underwriting Agreement shall terminate and (save in respect of any rights or obligations which may accrue under the Underwriting Agreement prior to such termination) no party will have any claim against any other party for costs, damages, compensation or otherwise.

Termination of the Underwriting Agreement

The Underwriting Agreement contains provisions granting Always Adept (for itself and on behalf of First Win), by notice in writing, the ability to terminate the obligations of the Underwriters thereunder on the occurrence of certain events. Always Adept (for itself and on behalf of First Win) may terminate the Underwriters’ commitment under the Underwriting Agreement on or before the third business day after the Latest Acceptance Date if, prior to 4:00 p.m. on the third business day after the Latest Acceptance Date:

(1) in the absolute opinion of Always Adept (for itself and on behalf of First Win), the success of the Open Offer would be materially and adversely affected by:
(a) the introduction of any new regulation or any change in existing law or regulation (or the judicial interpretation thereof) or other occurrence of any nature whatsoever which may, in the absolute opinion of Always Adept (for itself and on behalf of First Win), materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole or is materially adverse in the context of the Open Offer; or

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(b) the occurrence of any local, national or international event or change (whether or not forming part of a series of events or changes occurring or continuing before, and/or after the date of the Underwriting Agreement), of a political, military, financial, economic or other nature (whether or not ejusdem generic with any of the foregoing), or in the nature of any local, national or international outbreak or escalation of hostilities or armed conflict, or affecting local securities markets which may, in the absolute opinion of Always Adept (for itself and on behalf of First Win) materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole; or
(c) any material adverse change in the business or in the financial or trading position or prospects of the Group as a whole; or
(2) any material adverse change in market conditions (including, without limitation, a change in fiscal or monetary policy or foreign exchange or currency markets, suspension or restriction of trading in securities, and a change in currency conditions for this purpose includes a change in the system under which the value of the Hong Kong currency is pegged with that of the currency of the United States of America) occurs which in the absolute opinion of Always Adept (for itself and on behalf of First Win) makes it inexpedient or inadvisable to proceed with the Open Offer; or
(3) this circular or the Prospectus in connection with the Open Offer when published contain information (either as to business prospects or the condition of the Group or as to its compliance with any laws or the Listing Rules or any applicable regulations) which has not prior to the date of the Underwriting Agreement been publicly announced or published by the Company and which may in the absolute opinion of Always Adept (for itself and on behalf of First Win) is material to the Group as a whole and is likely to affect materially and adversely the success of the Open Offer or might cause a prudent investor not to apply for its assured allotment of Offer Shares under the Open Offer.

If the Underwriting Agreement is terminated by Always Adept (for itself and on behalf of First Win) on or before the aforesaid deadline or does not become unconditional, the Open Offer will not proceed.

Information on the Underwriters

Each of Always Adept and First Win is an investment holding company incorporated in the BVI with limited liability. The ordinary course of business of each of Always Adept and First Win does not include underwriting.

Each of Always Adept and First Win is wholly owned by Always New Limited, which is a company incorporated in the BVI and wholly owned by the Trustee for the Yip’s Family Trust. Mr. Yip, an executive Director and a beneficiary of the Yip’s Family Trust which owns the entire issued share capital in each of Always Adept and First Win, has confirmed that he will provide adequate financial support to the Underwriters for the latter to fully fulfil and accomplish their duties and obligations of being the underwriters as stipulated by the Underwriting Agreement.

LETTER FROM THE BOARD

Pursuant to a sale and purchase agreement dated 13 January 2006 entered into between Main Faith Limited and Mr. Tam Jin Rong (the then controlling shareholders of the Company) as vendors and Always Adept and First Win as purchasers as announced by the Company on 26 January 2006, the Underwriters became the controlling shareholders of the Company on 14 February 2006 and Mr. Yip was, among others, nominated to the Board on 2 March 2006.

Although Always Adept and First Win have no previous experience in underwriting securities, having considered factors such as the liquidity of the Shares, the size of the Open Offer, the Directors are of the view that the entering into of the Underwriting Agreement is beneficial to the Company and the Shareholders as a whole.

WARNING OF THE RISKS IN TRADING OF SHARES

The Open Offer is conditional upon the obligations of the Underwriters under the Underwriting Agreement having become unconditional and Always Adept (for itself and on behalf of First Win) not having terminated the Underwriting Agreement in accordance with the terms thereof. Shareholders and potential investors should therefore exercise caution when dealing in Shares, and if they are in any doubt about their positions, they should consult their professional advisers.

Shareholders should note that Shares will be dealt in on an ex-entitlement basis commencing from Monday, 29 May 2006 and that dealings in Shares will take place while the conditions to which the Open Offer is subject remain unfulfilled. Any Shareholder or other person dealing in Shares up to the date on which all conditions to which the Open Offer is subject are fulfilled, will accordingly bear the risk that the Open Offer cannot become unconditional and may not proceed. Any Shareholder or other person contemplating selling or purchasing Shares who is in any doubt about his/her/its position is recommended to consult his/her/its own professional adviser.

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE

The following table sets out the existing shareholding structure of the Company and the shareholding structure immediately after completion of the Open Offer:

Shareholding upon completion of the

		completion of the
Always Adept_(Note 1) First Win(Note 1)_ Always Adept (as Underwriter) First Win (as Underwriter) Sub-total: Public shareholders Total	Existing structure No. of % Existing Shares 134,477,004 15.73 313,779,676 36.71 – – – – 448,256,680 52.44 406,513,766 47.56 854,770,446 100.00	Open Offer, assuming none of the Independent Shareholders take up their entitlements to the Offer Shares and that the Underwriters are required to take up all the Underwritten Shares No. of % Consolidated Shares 53,790,800 15.73 125,511,868 36.71 36,586,239 10.70 85,367,892 24.97 301,256,799 88.11 40,651,377 11.89 (Note 2) 341,908,176 100.00	Shareholding upon completion of the Open Offer, assuming that all the Independent Shareholders take up their entitlements to the Offer Shares in full No. of % Consolidated shares 53,790,800 15.73 125,511,868 36.71 – – – – 179,302,668 52.44 162,605,508 47.56 (Note 2) 341,908,176 100
				52.44 47.56
				100

Notes:

with respect to its entitlement under the Open Offer.
These shares include Consolidated Share(s) which may be issued upon aggregation of fractional entitlements of Consolidated Shares.

LETTER FROM THE BOARD

As shown in the above table, in the event that the Underwriters are called upon to fulfil their underwriting obligations under the Underwriting Agreement in full, the aggregate shareholdings of the Underwriters together with their concert parties (including Mr. Yip) in the issued share capital of the Company as enlarged by the Open Offer would be increased from approximately 52.44% to approximately 88.11% immediately after the Open Offer.

In the event that the number of Shares held by the public is below 25% as shown in the above table, the Company will take appropriate steps before completion of the Open Offer, including but not limited to making necessary placing arrangements, to ensure that not less than 25% of the Shares are held by the public at all times in order to comply with the minimum public float requirement under the Listing Rules.

The Stock Exchange has stated that, in the event that less than 25% of the Shares are in public hands following the closing of the Open Offer; or if the Stock Exchange believes that a false market exists or may exist in the Shares or that there are insufficient Shares in public hands to maintain an orderly market, it will consider exercising its discretion to suspend trading in the Shares.

BUSINESS REVIEW AND FUTURE PROSPECTS

The principal activities of the Group are construction contractor and provision of management services.

For the year ended 31 December 2005, the Group’s turnover was approximately HK$51.7 million representing an increase of 40.5% as compared with that for the year ended 31 December 2004, because of the continuing effort of the Group to expand its business. In view of the austerity measures adopted by the authorities of the PRC to curb overheating of the economy, the Group has been prudent and selective in accepting new contracts in order to minimize the risk of bad debts. During the year ended 31 December 2005, the Group recorded a net loss of HK$4.6 million as against a net profit of HK$161.9 million for 2004. The net profit in 2004 included gains of approximately HK$100.3 million arising from debts discharged under the Creditors’ Scheme sanctioned by courts in March 2004; a gain of approximately HK$50.2 million arising from deconsolidation of Prosperity Construction and Decoration Limited, formerly a wholly-owned subsidiary of the Company, upon receiving a winding-up order made by the court; and a gain of approximately of HK$23.0 million arising from the disposal of several subsidiaries. Excluding such gains, the Group had incurred a loss of HK$11.7 million in 2004.

In 2005, the total construction contract costs which comprised of direct materials, subcontracting costs and government tax other than profit tax for construction projects, increased by 38.9% from approximately HK$34.2 million in 2004 to HK$47.5 million, which was close to the percentage change in turnover. General and administrative expenses, which included staff costs, professional fees, consultancy fees and general administrative expenses decreased by 41.8% from approximately HK$12.2 million in 2004 to HK$7.1 million in 2005 due to the reduction in corporate activities and resolution of litigation disputes in 2004 and implementation of strict costs control on the operating expenses.

For the current financial year ending 31 December 2006, the Company has been and will continue to be prudent and selective in accepting new contracts in order to minimize the risk of bad debts in view of the austerity measures adopted by the authorities of the PRC to curb overheating of the economy. It is

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currently expected that there may not be substantial growth in the Group’s turnover in the current financial year. The construction contract costs comprised of direct materials, labour costs and subcontracting costs have been increasing and are expected to continue to increase. The increase in the construction contract costs will increase the Group’s operating costs and affect the Group’s net profits. Therefore, while the Company will continue to focus on the construction and property related sectors in the PRC, the Company will also look for other business opportunities, in particular, in the areas of environmental protection and recycling business in both Hong Kong and the PRC which will generate positive cashflow and earnings for the Group. As at the Latest Practicable Date, the Company has not identified any business opportunities.

FUNDS RAISED BY WAY OF ISSUANCE OF NEW SHARES DURING THE PAST 12 MONTHS

During the 12 months immediately prior to the date of the Announcement, the Company has not carried out any equity fund raising activities.

REASONS FOR THE OPEN OFFER AND USE OF PROCEEDS

The net proceeds of the Open Offer, estimated to be approximately HK$151 million, is intended to be used for the Group’s working capital.

As stated in the Company’s annual report for the year ended 31 December 2005, the Group incurred a consolidated loss attributable to shareholders of the Company of HK$4,558,000 for the year ended 31 December 2005 and as at 31 December 2005, the Company had net current liabilities and capital deficiency of HK$8,438,000 and HK$954,000 respectively while the Group had net current liabilities of HK$996,000. Notwithstanding the Group’s efforts to optimise its operation in existing business, the Directors consider it necessary to raise funds for its working capital in order to achieve improvement for the financial position and operating performance of the Group.

The Directors have considered other methods of fund raising such as debt financing, bank borrowing, placement of new shares and rights issue. However, given the Group’s losses incurred in recent years resulting in accumulated losses in years and the high gearing ratio of approximately 4.72 (calculated by dividing the total borrowings by the total shareholders’ funds attributable to the Shareholders), the Directors are of the view that the capability of the Group to raise sufficient funds from bank borrowing would be minimal and in light of the current financial position of the Company, the Company will be better off by avoiding further interest burden resulted from further debt financing and bank borrowing.

The Directors are of the view that the Open Offer not only allows the Company to expand its capital base but also allows Qualifying Shareholders to maintain their respective pro rata shareholdings in the Company and participate in the future growth and development of the Company. In addition, the Directors consider that, compared with rights issue, the Open Offer is more time and cost effective as the Open Offer will not incur additional time and costs for trading of nil-paid rights. The Directors therefore believe that the Open Offer is in the interests of the Company and the Shareholders as a whole.

LETTER FROM THE BOARD

The Open Offer is subject to a number of conditions, in particular the Open Offer is subject to the approval by the Independent Shareholders voted at the SGM. Shareholders and other potential investors should therefore exercise extreme caution when dealing in the Shares.

Implication of the Takeovers Code

As Always Adept and First Win and their respective concert parties (including Mr. Yip) hold and will remain to hold over 50% of the voting rights in the Company before and after the Open Offer, no general offer obligation will arise under Rule 26 of the Takeovers Code from the acquisition of additional Shares by Always Adept and First Win and their respective concert parties pursuant to the underwriting obligation under the Underwriting Agreement or the proposed Open Offer.

MAINTENANCE OF THE LISTING OF THE SHARES

It is the intention of Always Adept and First Win that the listing of the Shares on the Stock Exchange should be maintained. Should the number of the Shares held by the public fall below 25%, Always Adept and First Win will take appropriate steps before the close of the Open Offer to ensure that such number of the Shares as may be required by the Stock Exchange are held by the public.

According to Always Adept and First Win, it is their intention that Group will continue to carry on its existing business.

SPECIAL MANDATE

The Directors was granted the Existing General Mandate at the 2004 AGM of the Company held on 31 May 2005 to allot, issue and otherwise deal in up to 170,954,089 Existing Shares, representing 20% of the share capital of the Company in issue on the date of the 2004 AGM. The Existing General Mandate has not been exercised at all as at the Latest Practicable Date. A general mandate will be sought at the 2005 AGM to be held on the same date of the SGM to allot, issue and otherwise deal in up to 170,954,089 Existing Shares or (assuming the Share Consolidation becoming effective) 17,095,408 Consolidated Shares, representing 20% of the share capital of the Company in issue on the date of the 2005 AGM.

In contemplation of the Open Offer and in order to allow the Company to maintain flexibility in allotting and issuing Shares as and when the Company considers desirable, the Offer Shares will not be issued under the Existing General Mandate or the general mandate to be sought at the 2005 AGM, but the Company will seek the grant of a Special Mandate (which is in addition to, and will not prejudice nor revoke the general mandate to be sought at the 2005 AGM) from the Independent Shareholders to allot and issue the Offer Shares under the Open Offer at the SGM. The Underwriters and their respective Associates will abstain from voting on the resolution approving the Special Mandate.

SGM

A notice convening the SGM to be held at Gun Room, Royal Hong Kong Yacht Club, Kellet Island, Causeway Bay, Hong Kong 10:00 a.m. on 5 June 2006 is set out on pages 100 to 102 of this circular.

LETTER FROM THE BOARD

At the SGM, ordinary resolutions will be proposed to approve (i) the Share Consolidation; and (ii) the Open Offer (including the arrangement for the disposal of Offer Shares not validly applied for by the Independent Shareholders in excess of their assured allotments and the taking up of such excess Offer Shares by the Underwriters, the Underwriting Agreement) and the grant of the Special Mandate.

The Share Consolidation is conditional upon the approval of the Shareholders while the Open Offer and the grant of the Special Mandate are conditional upon the approval of the Independent Shareholders. In accordance with Rule 13.39(4) of the Listing Rules, the vote of the Independent Shareholders taken at the SGM to approve the Open Offer will be taken by poll, with the Underwriters and their respective Associates abstain from voting. The voting results will be announced after the SGM in compliance with Rule 13.39(5) of the Listing Rules.

A form of proxy for the SGM is enclosed with this circular. Whether or not you are able to attend the SGM in person, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the SGM. Completion and return of the form of proxy will not preclude you from attending and voting at the SGM in person should you so wish.

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Pursuant to Bye-law 70 of the Bye-laws of the Company, a resolution put to vote of a meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for poll) demanded:

(a) by the chairman of such meeting; or
(b) by at least three Shareholders present in person or by a duly authorised corporate representative or by proxy for the time being entitled to vote at such meeting; or
(c) by any Shareholder or Shareholders present in person or by a duly authorised corporate representative or by proxy and representing not less than one-tenth of the total voting rights of all the Shareholders having the right to vote at the meeting; or
(d) by any Shareholder or Shareholders present in person or by a duly authorised corporate representative or by proxy and holding Shares conferring a right to vote at such meeting being Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the Shares conferring that right.

RECOMMENDATION

The Directors consider that the Share Consolidation is in the best interests of the Company and its Shareholders and recommend the Shareholders to vote in favour of the resolution proposed at the SGM to approve the Share Consolidation.

LETTER FROM THE BOARD

The executive Directors consider the terms of the Open Offer are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Your attention is drawn to the letter from the Independent Board Committee set out on page 28 of this circular which contains its recommendation to the Independent Shareholders as to voting of the ordinary resolution at the SGM concerning the Open Offer.

Your attention is also drawn to the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders set out on pages 29 and 49 of this circular which contains, among other matters, its advice to the Independent Board Committee in relation to the terms of the Open Offer and the principal factors and reasons considered by it in concluding its advice.

The Independent Board Committee, having taken into account the advice from the Independent Financial Adviser, considers that the terms of the Open Offer are fair and reasonable and in the interests of the Company and its Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM to approve the Open Offer and the grant of the Special Mandate to issue the Offer Shares in connection therewith.

ADDITIONAL INFORMATION

Your attention is also drawn to the additional information as set out in the appendices to this circular and the notice of the SGM.

By Order of the Board China Nan Feng Group Limited Yip Wai Leung Jerry Chairman

LETTER FROM INDEPENDENT BOARD COMMITTEE

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

(stock code: 979)

19 May 2006

To the Independent Shareholders

Dear Sir or Madam,

PROPOSED OPEN OFFER OF 256,341,129 OFFER SHARES OF HK$0.10 EACH AT HK$0.60 PER OFFER SHARE PAYABLE IN FULL ON APPLICATION ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD ON THE RECORD DATE

We refer to the circular of the Company despatched to its shareholders dated 19 May 2006 (“ Circular ”) of which this letter forms part. Terms defined in the Circular have the same meanings when used in this letter unless the context otherwise requires.

We, being all the independent non-executive Directors constituting the Independent Board Committee, have been appointed by the Board to consider the Open Offer and to advise the Independent Shareholders as to the fairness and reasonableness of the Open Offer and to recommend whether or not the Independent Shareholders should vote for the resolution to be proposed at the SGM to approve the Open Offer and the grant of the Special Mandate. Guangdong Securities has been appointed to advise the Independent Board Committee in relation to the terms of the Open Offer.

We wish to draw your attention to the letter from Guangdong Securities to the Independent Board Committee and the Independent Shareholders set out on pages 29 to 49 of the Circular which contains its advice to us in relation to the Open Offer. We also wish to draw your attention to the Letter from the Board set out on pages 9 to 27 of the Circular.

Having taken into account the advice and recommendation of Guangdong Securities, we consider the terms of the Open Offer to be fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution set out in the notice convening the SGM to approve the Open Offer and the grant of the Special Mandate at the SGM.

Yours faithfully

Zhou Yaoming Zhu You Chun So Yin Wai Independent Board Committee of China Nan Feng Group Limited

For identification purposes only

LETTER FROM GUANGDONG SECURITIES

The following is the text of the letter of advice given by Guangdong Securities in relation to the terms of Open Offer for inclusion in this circular.

Guangdong Securities Limited Unit 2505-06 25/F Low Block Grand Millennium Plaza 181 Queen’s Road Central Hong Kong

19 May 2006

To the Independent Board Committee and

the Independent Shareholders of China Nan Feng Group Limited

Dear Sirs,

PROPOSED OPEN OFFER OF 256,431,132 OFFER SHARES AT HK$0.60 PER OFFER SHARE ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD AND GRANT OF SPECIAL MANDATE

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Open Offer, details of which are contained in the letter from the Board in the circular issued to the Independent Shareholders dated 19 May 2006 (the “Circular”), of which this letter forms part. Terms used in this letter shall have the same respective meanings as defined in the Circular unless the context requires otherwise.

The Board intends to put forward proposals to the Shareholders in relation to the (A) the Share Consolidation; (B) the Open Offer of 256,431,132 Offer Shares at a price of HK$0.60 per Offer Share on the basis of three Offer Shares for every one Consolidated Share held by the Qualifying Shareholders as at the Record Date; and (C) the grant of the Special Mandate.

The following is a summary of the components of these proposals:

(A) the Share Consolidation

The Company proposes to implement the Share Consolidation pursuant to which every 10 Existing Shares of HK$0.01 each will be consolidated into one Consolidated Share of HK$0.10.

LETTER FROM GUANGDONG SECURITIES

(B) the Open Offer

The Company proposes to raise approximately HK$153.9 million before expenses by issuing 256,431,132 Offer Shares at a price of HK$0.60 per Offer Share by way of the Open Offer, payable in full on application, on the basis of three Offer Shares for every one Consolidated Share held by the Qualifying Shareholders as at the Record Date. The Open Offer is not available to the Excluded Shareholders.

The aggregate number of Offer Shares to be issued pursuant to the terms of the Open Offer represents 300% of the Company’s issued share capital upon the Share Consolidation becoming effective and 75% of the Company’s issued share capital as enlarged by the issue of the Offer Shares. Under the Listing Rules, the Open Offer is conditional upon the approval of the Independent Shareholders of the Open Offer at the SGM.

The net proceeds of the Open Offer, estimated to be approximately HK$151 million, will be used for the Group’s working capital.

Always Adept and First Win have agreed to underwrite the Open Offer. As at the Latest Practicable Date, Always Adept and First Win, being the substantial Shareholders, hold 134,477,004 Existing Shares and 313,779,676 Existing Shares, representing approximately 15.73% and 36.71% of the existing issued share capital of the Company. If Always Adept and First Win are required to subscribe for all the Underwritten Shares pursuant to the Underwriting Agreement, the aggregate shareholdings of Always Adept and First Win together will increase from approximately 52.44% to approximately 88.11% of the enlarged issued share capital of the Company immediately after the Share Consolidation and the Open Offer assuming none of the Independent Shareholders take up their entitlements to the Offer Shares. The Open Offer is conditional and thus, the Open Offer may or may not proceed.

(C) the Special Mandate

In contemplation of the Open Offer, the Company will seek the grant of the Special Mandate from the Independent Shareholders to satisfy the allotment and issue of Offer Shares at the SGM.

The Independent Board Committee, comprising Mr. So Yin Wai, Mr. Zhou Yaoming and Ms. Zhu You Chun, all of whom are independent non-executive Directors, has been established to advise the Independent Shareholders as to whether the terms of the Open Offer are fair and reasonable so far as the Independent Shareholders are concerned and whether the Open Offer are in the interests of the Company and the Shareholders as a whole.

In formulating our opinion, we have relied on the accuracy of the information and facts supplied, and the opinions and representations expressed to us by the Directors, the Company and its management. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and are based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations referred to in the Circular and provided to us by the Company, its management and the Directors, and have been advised by the Directors that no material facts have

LETTER FROM GUANGDONG SECURITIES

been omitted from the information provided to us and referred to in the Circular. We have also assumed that all statement of intention of the Company, its management or its Directors as set out in the Circular will be implemented. We believe that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have assumed that all information and representations made or referred to in the Circular and provided to us by the Company, its management and the Directors, for which they were solely and wholly responsible, were true, complete and accurate at the time they were made and continue to be true, complete and accurate at date of the SGM.

In formulating our opinion, we have reviewed relevant information and documents provided by the Company and its Directors and management in connection with the Open Offer. Relevant information and documents included, among other things, the Underwriting Agreement and the annual reports of the Company for the three years ended 31 December 2005. We have not, however, conducted any independent verification of the information and representations provided by the management of the Company and the Directors nor have we carried out any form of independent investigation into the business and affairs, financial position or the future prospects of the Company or its subsidiaries or associated companies.

Our opinion is necessarily based upon the financial, economic, market, regulatory and other conditions as they existed on, and the facts, information, representations and opinions made available to us as of, the Latest Practicable Date. Our opinion does not in any matter address the Company’s own decision to proceed with the Open Offer. We disclaim any undertaking or obligation to advise any person of any change in any fact or matter affecting the opinion expressed herein, which may come or be brought to our attention after the Latest Practicable Date.

LETTER FROM GUANGDONG SECURITIES

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE OPEN OFFER

In formulating our opinion and recommendation to the Independent Board Committee and the Independent Shareholders relating to the fairness and reasonableness of the terms of the Open Offer, we have taken into consideration, inter alia, the following principal factors and reasons:

A. Background information of the Group

The principal activity of the Company is investment holding. The principal activities of the Group are the construction contractor and the provision of management services.

I. Analysis on consolidated income statement of the Group

The consolidated income statements of the Group for the three years ended 31 December 2005 as extracted from the annual report of the Company for the year 2005 are set out below:

Turnover
Operating loss after finance costs
Share of profits of associated companies
Amortisation of premium on acquisition
of associated companies
Impairment loss on investments
in associated companies
Impairment loss on investment held
for resale
Gain on disposal of subsidiaries
Gain on deconsolidation of a subsidiary
Gain on debt discharged
under Creditors’ Scheme
(Loss)/Profit before taxation
Taxation
(Loss)/Profit for the year attributable
to the shareholders of the Company

For the year ended 31 December
2005
2004
2003
HK$’000
HK$’000
HK$’000
51,688
36,781
14,062
(4,607)
(10,875)
(126,382)
–
–
2
–
–
(7,764)
–
–
(11,862)
–
–
(115,739)
1,068
23,022
–
–
50,239
–
–
100,306
–
(3,539)
162,692
(261,745)
(1,019)
(841)
(596)
(4,558)
161,851
(262,341)

LETTER FROM GUANGDONG SECURITIES

Comparing with the financial results of the Group in the year 2004 with 2003 and the financial results of the Group in the year 2005 with 2004, the turnover of the Group have increased by approximately 161.6% and 40.53% respectively; and the operating loss after the finance costs of the Group have decreased by approximately 91.4% and 57.6% respectively. Since the (loss)/profit for the year attributable to the Shareholders of the Company in the years 2003, 2004 and 2005 have included certain one-off items as disclosed above, it is not used as a financial indicator of the Group here. We regards that although the financial performance of the Group is not promising, it is improving.

II. Analysis on consolidated balance sheets of the Group

The consolidated balance sheets of the Company as at 31 December 2003, 2004 and 2005 as extracted from the annual reports of the Group for the years 2003, 2004 and 2005 are set out below:

Non-current assets Property, plant and equipment Current assets Inventories Investment held for resale Amounts due from customers on construction contracts Accounts receivable Prepayments, deposits and other receivables Club membership Bank and cash balances Current liabilities Accounts payable Amounts due to customers on construction contracts Accruals and other payables Redeemable debentures Loan notes Current portion of long term borrowings Shareholder’s loan Provision for taxation	As at 2005 HK$’000 3,356 407 – 17,373 690 1,798 245 1,970 22,483 7,091 15 9,967 – – 54 4,361 1,991 23,479	31 December 2004 HK$’000 3,477 748 – 16,993 – 2,644 245 3,365 23,995 3,913 – 7,975 – – 71 7,670 974 20,603	2003 HK$’000 539
			– – – 1,693 5,747 245 112
			7,797
			32,209 – 94,814 40,000 10,000 – 8,125 749
			185,897

LETTER FROM GUANGDONG SECURITIES

Net current (liabilities)/assets Total assets less current liabilities Non-current liabilities Long term borrowings Net assets/(liabilities) Capital and reserves Share capital Reserves Shareholders’ funds/ (Capital deficiency) Gearing ratio (dividing the total borrowings by shareholders’ funds)	As at 2005 HK$’000 (996) 2,360 1,175 1,185 8,548 (7,363) 1,185 4.7	31 December 2004 HK$’000 3,392 6,869 1,223 5,646 8,548 (2,902) 5,646 1.6	2003 HK$’000 (178,100) (177,561) – (177,561) 204,923 (382,484) (177,561) N/A (Note 1)

Note 1: No gearing ratio is calculated for the year 2003 due to the deficit of shareholders’ fund as at 31 December 2003.

We note that the Group had net current liabilities as at 31 December 2003 and 2005. In addition, the gearing ratio of the Group is considered to be high in the year 2005. In this regard, we consider that it is necessary for the Group to raise funds to improve its working capital position.

LETTER FROM GUANGDONG SECURITIES

III. Business review and future prospects

As stated in the letter from the Board, for the year ended 31 December 2005, the Group’s turnover was approximately HK$51.7 million representing an increase of 40.5% as compared with that for the year ended 31 December 2004, because of the continuing effort of the Group to expand its business. In view of the austerity measures adopted by the authorities of the PRC to curb overheating of the economy, the Group has been prudent and selective in accepting new contracts in order to minimize the risk of bad debts. During the year ended 31 December 2005, the Group recorded a net loss of HK$4.6 million as against a net profit of HK$161.9 million for 2004. The net profit in 2004 included gains of approximately HK$100.3 million arising from debts discharged under the Creditors’ Scheme sanctioned by courts in March 2004; a gain of approximately HK$50.2 million arising from deconsolidation of Prosperity Construction and Decoration Limited, formerly a whollyowned subsidiary of the Company, upon receiving a winding-up order made by the court; and a gain of approximately of HK$23.0 million arising from the disposal of several subsidiaries. Excluding such gains, the Group had incurred a loss of HK$11.7 million in 2004. In 2005, the total construction contract costs which comprised of direct materials, subcontracting costs and government tax other than profit tax for construction projects, increased by 38.9% from approximately HK$34.2 million in 2004 to HK$47.5 million, which was close to the percentage change in turnover. General and administrative expenses, which included staff costs, professional fees, consultancy fees and general administrative expenses decreased by 41.8% from approximately HK$12.2 million in 2004 to HK$7.1 million in 2005 due to the reduction in corporate activities and resolution of litigation disputes in 2004 and implementation of strict costs control on the operating expenses. For the current financial year ending 31 December 2006, the Company has been and will continue to be prudent and selective in accepting new contracts in order to minimize the risk of bad debts in view of the austerity measures adopted by the authorities of the PRC to curb overheating of the economy. It is currently expected that there may not be substantial growth in the Group’s turnover in the current financial year. The construction contract costs comprised of direct materials, labour costs and subcontracting costs have been increasing and are expected to continue to increase. The increase in the construction contract costs will increase the Group’s operating costs and affect the Group’s profitability. Therefore, while the Directors will continue to focus on the construction and the property related sectors in the PRC, the Company will also look for other business opportunities, in particular, in the areas of environmental protection and the recycling business in both Hong Kong and the PRC with a view to generating positive cashflow and earnings for the Company. As at the Latest Practicable Date, the Company has not identified any business opportunity.

LETTER FROM GUANGDONG SECURITIES

B. Reasons for the Open Offer

As stated in the Letter from the Board, the net proceeds of the Open Offer, estimated to be approximately HK$151 million, is intended to be used for the Group’s working capital. As stated in the annual report of the Company for the year ended 31 December 2005, the Group incurred a consolidated loss attributable to shareholders of the Company of HK$4,558,000 for the year ended 31 December 2005 and as at 31 December 2005, the Company had net current liabilities and capital deficiency of HK$8,438,000 and HK$954,000 respectively while the Group had net current liabilities of HK$996,000. Notwithstanding the Group’s efforts to optimise its operation in existing business, the Directors consider it necessary to raise funds for its working capital in order to achieve improvement for the financial position and operating performance of the Group.

We have conducted researches on the construction industry where the existing business of the Group is in and on GDP growth rate in Guangdong Province and the PRC. As extracted from the reports published by the National Bureau of Statistics of China Census, the value of the completed construction work from the year 2001 to 2005 in Guangdong Province were approximately RMB 24.08 billion, RMB 26.20 billion, RMB 40.73 billion, RMB 37.76 billion, and RMB 76.86 billion respectively, representing increase of approximately 8.8% and 55.5% in year 2002 and 2003 respectively, a decrease of approximately 7.3% in year 2004 and an increase of approximately 103.5% in year 2005 or an average yearly increase of approximately 40% while the value of the completed construction work from the year 2001 to 2005 in the PRC are approximately RMB 646.2 billion, RMB 704.7 billion, RMB 816.6 billion, RMB 957.2 billion, and RMB 1,001.8 billion respectively, representing increase of approximately 9.1%, 15.9%, 17.2% and 4.7% respectively from the year 2002 to 2005 or an average yearly increase of approximately 12%. Further, as extracted from the reports published by the National Bureau of Statistics of China Census, the GDP growth rate for the year 2001 to 2005 in Guangdong Province were approximately 9.5%, 10.8%, 13.6%, 14.2% and 12.5% respectively, representing an average yearly increase of approximately 12% in the growth rate while the GDP growth rate for the year 2001 to 2005 in the PRC were approximately 8.3%, 9.1%, 10.0%, 10.1% and 9.9% respectively, representing an average yearly increase of approximately 9% in the growth rate. In view of the growth rate in the completed construction work and the GDP growth rate both in Guangdong Province and in the PRC, we share the same view with the Directors’ to continue to focus on the existing construction and the property related business in the PRC is beneficial to the Group.

As stated in the letter from the Board, the Directors will also look for other business opportunities, in particular, in the areas of environmental protection and recycling business in both Hong Kong and the PRC which the Company has not identified any business opportunity yet.

We are of the view that either the Group to continue the existing construction and the property related business in the PRC or to look for any business opportunities, if any, in order to diversify the Group’s business, it is critical for the Group to have necessary and sufficient financial resources and working capital for its operations, activities and diversification. In light of the current financial position of the Group with the net current liabilities, we concur with the Directors’ view that it is necessary for the Group to raise funds for its working capital in order to further improve its financial position and operating performance.

LETTER FROM GUANGDONG SECURITIES

As stated in the letter from the Board, the Directors have considered other methods of fund raising such as debt financing, bank borrowing, placement of new shares and rights issue. However, given the Group’s losses incurred in recent years resulting in accumulated losses in years and the high gearing ratio of approximately 4.72 (calculated by dividing the total borrowings by the total shareholders’ funds attributable to the shareholders of the Company), the Directors are of the view that the capability of the Group to raise sufficient funds from bank borrowing would be minimal and in light of the current financial position of the Company, the Company will be better off by avoiding further interest burden resulted from further debt financing and bank borrowing. The Directors consider that it is more conservative for the Company to implement equity funds raising activities. The Directors consider that it will not be in the interest of the Shareholders to have their shareholdings in the Company being immediately diluted if equity financing in the size comparable to the Open Offer is proceeded through a placing of new Shares. The Directors are of the view that the Open Offer not only allows the Company to expand its capital base but also allows the Qualifying Shareholders to maintain their respective pro rata shareholdings in the Company and participate in the future growth and development of the Company. In addition, the Directors consider that compared with rights issue, the Open Offer is more time and cost effective as the Open Offer will not incur additional time and costs for trading of nil-paid rights. As discussed in the section headed “Dilution effect on the Shareholders and absence of excess application of the Offer Shares arrangement” and “Alternatives to the Open Offer” below, we share the same view with the Directors’ that the Open Offer is an appropriate method to raise funds for the Group under the current circumstances.

C. Principal terms of the Open Offer

I. Basis

As stated in the letter from the Board, the Open Offer is on the basis of provisional allotment of three Offer Shares for every Consolidated Share held by the Qualifying Shareholders on the Record Date at the subscription price of HK$0.60 per Offer Share assuming that the Share Consolidation becoming effective.

II. Subscription Price

The Subscription Price is HK$0.60 per Offer Share payable in full when a Qualifying Shareholder applies for the Offer Shares under the Open Offer. The Subscription Price represents:

a discount of approximately 63.86% of the closing price of HK$1.66 per Consolidated Share (assuming the Share Consolidation becoming effective) as quoted on the Stock Exchange on 21 April 2006 (being the last trading day immediately prior to the Announcement);
a discount of approximately 50.90% of the average closing price of HK$1.222 per Consolidated Share (assuming the Share Consolidation becoming effective) based on the daily closing prices as quoted on the Stock Exchange over the last 10 consecutive trading days up to and including 21 April 2006 (being the last trading day immediately prior to the Announcement);

LETTER FROM GUANGDONG SECURITIES

a discount of approximately 30.64% of the theoretical ex-entitlement price of approximately HK$0.865 per Consolidated Share (assuming the Share Consolidation becoming effective) based on the closing price of HK$1.66 per Consolidated Share (assuming the Share Consolidation becoming effective) as quoted on the Stock Exchange on 21 April 2006;
a discount of approximately 63.64% to the closing price of HK$1.65 per Consolidated Share (assuming the Share Consolidation become effective) as quoted on the Stock Exchange as at the Latest Practicable Date; and
a premium of approximately 4,185.71% to the audited consolidated net assets value per Consolidated Share (assuming the Share Consolidation becoming effective) of HK$0.014 as at 31 December 2005.

As stated in the letter from the Board, the Subscription Price was determined after arm’s length negotiations between the Company and the Underwriters, with reference to the market price of the Shares and also other factors such as the liquidity and the performance of the Shares. As stated in the annual report of the Company for the year ended 31 December 2005, the Group incurred a consolidated loss attributable to shareholders of the Company of HK$4,558,000 for the year ended 31 December 2005 and as at 31 December 2005, the Company had the net current liabilities and the capital deficiency of HK$8,438,000 and HK$954,000 respectively while the Group had the net current liabilities of HK$996,000. The Group needs additional funds to finance its operations and activities. In view of recent financial condition of the Group as mentioned above and taking into consideration the theoretical ex-rights price per Consolidated Share (assuming the Share Consolidation becoming effective), in order to increase the attractiveness of the Open Offer to the Qualifying Shareholders, the Directors consider that the discount of the Subscription Price to the above average closing prices is appropriate. The Directors consider that the Subscription Price is fair and reasonable so far as the Company and the Shareholders as a whole are concerned.

The Open Offer is conditional upon, among others, the passing by the Independent Shareholders at the SGM of ordinary resolutions to approve the Open Offer, and the Share Consolidation having been completed and becoming effective. Please refer to the section headed “Conditions of the Open Offer” in the letter from the Board for further details of the conditions of the Open Offer.

LETTER FROM GUANGDONG SECURITIES

(i) Share price performance

The average daily closing prices, the monthly highest closing price and the monthly lowest closing price of the Shares traded on the Stock Exchange in each of the twelve months during the period commencing from 1 May 2005 up to and including the Latest Practicable Date (the “Review Period”) are shown as follows (based on the closing price per Share as quoted on the Stock Exchange on each trading day during the Review Period and adjusted for the effect of the Share Consolidation):–

Table 1: Share price performance and the trading volume of the Shares

Months		Share price		Trading	volume
	Average daily	Highest	Lowest		Percentage to
	closing	closing	closing	Total monthly	the then total
	price	price	price	trading volume	issued Shares
	(Note 3)	(Note 3)	(Note 3)
	(HK$)	(HK$)	(HK$)	(Number of	(%)
				Shares)
2005
May	0.89	0.92	0.82	22,793,000	2.67
June	0.87	0.92	0.83	11,007,600	1.29
July	0.81	0.87	0.80	6,265,000	0.73
August	0.83	0.90	0.80	12,904,000	1.51
September	0.86	0.92	0.78	7,886,100	0.92
October	0.79	0.83	0.73	4,927,200	0.58
November	0.76	0.84	0.61	5,364,000	0.63
December	0.76	0.80	0.68	8,642,000	1.01
2006
January	0.77	1.07	0.67	114,634,535	13.38
February	0.94	0.99	0.91	120,497,574	14.10
March	0.99	1.05	0.94	45,378,139	5.31
April(Note 2)	1.20	1.66	1.01	39,061,600	4.57
May(Note 1)	1.80	2.05	1.20	104,240,291	12.20

Source: The Stock Exchange of Hong Kong Limited

Notes: 1. Up to the Latest Practicable Date.

The trading of Shares on the Stock Exchange was suspended from 24 April 2006 to 28 April 2006 pending for the release of the Announcement.
For the share price comparison purpose, the share price is presented as the price per Consolidated Share which has been adjusted for the Share Consolidation on the basis of every 10 Existing Shares be consolidated into one Consolidated Share assuming the Share Consolidation becoming effective.

LETTER FROM GUANGDONG SECURITIES

During the Review Period and before the date of the Announcement, the Shares (assuming the Share Consolidation becoming effective) were traded with a decreasing trend with a lowest closing price of HK$0.61 per Share on 1 November 2005 and then traded with an increasing trend after 27 January 2006, being the resumption trading day immediately after the announcement of the mandatory conditional cash offer by Always Adept for the Shares, at a highest closing price of HK$1.66 per Share on 21 April 2006, the day before the Shares were suspended from trading pending for the Announcement. The Directors have advised that the Subscription Price was set at a lower price than the aforesaid range and represents a slight discount of approximately 1.6% to the lowest closing price per Share of HK$0.61 per Share and a discount of approximately 63.86% to the highest closing price per Share of HK$1.66 per Share during the Review Period and before the date of the Announcement so as to induce the Independent Shareholders to participate in the Open Offer.

We further note that the trading volume of the Shares within the Review Period and before the date of the Announcement increased from the lowest percentage to the then total issued Shares at 0.58% in October 2005 before the announcement of the mandatory conditional cash offer by Always Adept for the Shares on 27 January 2006 to the highest percentage to the then total issued Shares at 14.10% in February 2006 and, afterwards, the trading volume of the Shares as to the percentage to the then total issued Shares decreased to 4.57% and 5.31% in March and April 2006 respectively. In overall, the trading volume of the Shares is thin within the Review Period.

Given (1) the trading volume of the Shares is thin before the publication of Announcement; (2) the Group recorded losses after taxation for the year ended 31 December 2005, we concur with the Directors that it is a common market practice for the subscription price of the Open Offer to be set at a discount to the prevailing market prices of the Shares before the Announcement. Our assessment on the fairness and reasonableness of the Subscription Price is set out in the section headed “Comparison with recent open offers by listed companies in Hong Kong” below.

LETTER FROM GUANGDONG SECURITIES

(ii) Comparison with recent open offers by listed companies in Hong Kong

We have reviewed and included, so far as we are aware of, all the companies listed on the Stock Exchange which have announced open offer during the period from 1 May 2005 up to and including 23 April 2006, being the last trading day of the Shares on the Stock Exchange prior to the Announcement (the “Period”). We consider that using the reference within one year before the last trading day of the Share on the Stock Exchange prior to the Announcement is appropriate for assessing the reasonableness of the pricing of the Open Offer. Based on the publicly available information, the open offers of listed companies on the Main Board of the Stock Exchange and GEM (the “Comparable Companies”) announced during the Period, is summarized in the table below:

Table 2: Open offers announced by listed companies in Hong Kong

					Subscription price
					per share as a
			Subscription price	Subscription price	premium/(discount) to
			per share as a	per share as a	theoretical ex-rights
			premium/(discount)	premium/ (discount)	/ex-entitlements price
			to the closing	to the average closing	per share based on the
		Basis of	price per share	price per share	closing price per share
	Date of	allotment	on the last trading	over 10 trading	on the last trading
Company	announcement	for the open	day prior to the	days prior to the	day prior to the	Underwriting
(Stock code)	(dd/mm/yy)	offer	press announcement	press announcement	press announcement	commission	Underwriter(s)
Ngai Hing Hong	11/5/05	1 for 5	(6.25)%	(9.64)%	(5.21)%	2.5%	Underwritten by the
Co. Ltd. (1047)							controlling shareholder
U-Right Int’l	23/5/05	1 for 2	(31.50)%	(31.22)%	(23.48)%	2.0%	Underwritten by the
Holdings Ltd (627)							controlling shareholder
Sino Gas Group	30/5/05	2 for 1	(48.70)%	(62.50)%	(23.10)%	3.0%	Underwritten by an
Ltd. (260)							independent underwriter
Shang Hua Holdings	07/07/05	1 for 2	(83)%	(84)%	(77)%	2.5%	Underwritten by an
Limited (371)							independent underwriter
Gorient (Holdings)	05/08/05	3 for 1	(60.0)%	(67.0)%	(27.54)%	3.0%	Underwritten by a
Limited (729)							connected person and an
							independent underwriter
United Power	29/08/05	1 for 1	(67.39)%	(69.01)%	(50.82)%	1.5%	Underwritten by a
Investment Limited							connected person and
(674)							an independent
							underwriter
ePro Limited (8086)	17/11/05	1 for 2	(18.75)%	(12.16)%	(13.33)%	Fixed sum of	Underwritten by a
						HK$1,000	connected person
Satellite Device Ltd	25/11/05	3 for 1	(13.3)%	(19.8)%	(3.7)%	2.5%	Underwritten by an
(8172)							independent underwriter
TCL Communication	23/12/2005	1 for 1	(20)%	(21)%	(11)%	2.5%	Underwritten by an
Technology							independent underwriter
Holdings Ltd. (2618)

LETTER FROM GUANGDONG SECURITIES

					Subscription price
					per share as a
			Subscription price	Subscription price	premium/(discount) to
			per share as a	per share as a	theoretical ex-rights
			premium/(discount)	premium/ (discount)	/ex-entitlements price
			to the closing	to the average closing	per share based on the
		Basis of	price per share	price per share	closing price per share
	Date of	allotment	on the last trading	over 10 trading	on the last trading
Company	announcement	for the open	day prior to the	days prior to the	day prior to the	Underwriting
(Stock code)	(dd/mm/yy)	offer	press announcement	press announcement	press announcement	commission	Underwriter(s)
Fourtuna Int’l	27/1/2006	2 for 1	(90)%	(90)%	(75)%	1.0%	Underwritten by four
Holding Ltd.							independent underwriters
(530)
South Sea Petroleum	27/1/2006	1 for 2	(41.18)%	(39.39)%	(31.03)%	2.5%	Underwritten by a
Holding Ltd. (76)							controlling shareholder
							and an independent
							underwriter
Uni-Bio Science	15/2/2006	2 for 1	(18.0)%	(18.2)%	(6.9)%	2%	Underwritten by a
Group Ltd (690)							connected person
Heng Tai	1/3/2006	2 for 5	(47.6)%	(47.2) %	(39.5)%	2.5%	Underwritten by an
Consumables Group							independent underwriter
Ltd. (197)
Tomorrow	8/3/06	5 for 4	(13.4)%	(20.1)%	(30.7)%	2.5%	Underwritten by a
International Holdings							controlling shareholder
Limited (760)
Great Wall	21/4/06	9 for 5	N/A	N/A	(94)%	2.5%	Underwritten by an
Cybertech Limited			Note (1)	Note (1)			independent underwriter
(689)
Results of the
comparison:
Minimum			(6.25)%	(9.64)%	(3.7)%	1.0%
Maximum			(90)%	(90)%	(75)%	3.0%
Mean/Average			(39.93)%	(42.23)%	(21.62)%	2.32%
Median			(36.34)%	(35.31)%	(25.51)%	2.5%
The Company	28 April 2006	3 for 1	(63.86%)%	(50.9)%	(30.64)%	2%	Underwritten by the
							controlling shareholder
							of the Company

Source: The Stock Exchange of Hong Kong Limited

Note (1): No such information could be found in the respective announcement or circular.

LETTER FROM GUANGDONG SECURITIES

We are mindful of the fact that the pricing of an open offer may vary under different stock market conditions as well as for companies with different financial standing and business performance. Nevertheless, we consider that a broader comparison of open offers announced recently would provide a more general reference during a comprehensive period for assessing the reasonableness of the pricing of the Open Offer.

The Directors advised that, in order to attract the Qualifying Shareholders to participate in the Open Offer, the Subscription Price must be set at a discount to the closing price. We note from results of the Table 2 that it is the common market practice for the Comparable Companies setting their subscription prices of an open offer at a discount (instead of a premium) to the prevailing market prices of the relevant shares before the announcement of the open offers.

In view of (1) the discount rates of the Comparable Companies’ subscription prices to their respective closing price per share on the last trading day prior to the press announcement of the open offers range from discounts of approximately 6.25% to approximately 90%; (2) the discount rates of the Comparable Companies’ subscription prices to their average closing price per share over 10 trading days prior to the press announcement of the open offers range from discounts of approximately 9.64% to approximately 90%; and (3) the discount rates of the Comparable Companies’ subscription prices to their respective theoretical ex-rights or ex-entitlements price per share based on the closing price per share on the last trading day prior to the press announcement of the open offers range from discounts of approximately 3.7% to approximately 75%, the respective discount rates of the Subscription Price falls within all the respective discount rates ranges of the Comparable Companies as mentioned above. As such, we note that the basis of determining the Subscription Price by making a discount to the closing price of the Shares before the publication of the Announcement is consistent with market practice and acceptable.

(iii) Comparison of the Subscription Price with audited consolidated net assets value per Consolidated Share and the closing price of the Shares as at the Latest Practicable Date

We note that the Subscription Price of HK$0.6 per Offer Share represents a premium of approximately 4,185.71% to the audited consolidated net assets value per Consolidated Share (assuming the Share Consolidation becoming effective) of HK$0.014 as at 31 December 2005. Also, the closing price of the Shares as at the Latest Practicable Date is HK$0.165 per Shares which is equivalent to HK$1.65 per Consolidated Share (assuming the Share Consolidation become effective) and is 275% to the Subscription Price. Up to the Latest Practicable Date, we consider that the Open Offer will enable the Qualifying Shareholders to subscribe for the Offer Shares at a relatively favourable price level and provide an equal investment opportunity for the Qualifying Shareholders.

LETTER FROM GUANGDONG SECURITIES

To conclude, (1) we note that the basis of determining the Subscription Price by making a discount to the closing price of the Shares before the publication of the Announcement is consistent with market practice and acceptable; (2) the respective discount rates of the Subscription Price to various closing price per Share falls within the respective discount rates ranges of the Comparable Companies as mentioned above; (3) the Open Offer allows all Qualifying Shareholders to participate in the enlargement of the Company’s capital base; and (4) the Open Offer provides an investment opportunity for the Qualifying Shareholders to subscribe Shares at a relatively favourable price level as discussed above, we consider that the pricing of the Open Offer is fair and reasonable so far as the Company as a whole and the Independent Shareholders as concerned.

III. Dilution effect on the Shareholders and absence of excess application of the Offer Shares arrangement

As stated in the letter from the Board, after arm’s length negotiation with the Underwriters, the Company decided that no Qualifying Shareholder is entitled to apply for any Offer Shares which are in excess to its assured entitlements. Any Offer Shares not taken up by the Qualifying Shareholders will be taken up by the Underwriters.

In this regard, the Open Offer which is to be made on the basis of three Offer Shares for every Consolidated Shares held will lead to a maximum dilution of approximately 75% of the attributable interest in the Company (in terms of percentage shareholding) of the Qualifying Shareholders who do not elect to subscribe for in full their assured allotments under the Open Offer after completion of the Share Consolidation. Despite the relatively significant dilution effect by the Open Offer of a maximum of 75%, we consider that it should be balanced against the facts that (1) the Open Offer will raise funds for the Group as its working capital to continue its operation in existing business and to invest in any new business opportunities, if any, as discussed in the section headed “Reasons for the Open Offer” above; (2) the Open Offer will improve the Company’s financial position (including the net asset value and the gearing ratio) as discussed in the section headed “Financial effects of the Open Offer” below; and (3) it is an alternative way to enable the Shareholders to share the possible future development of the Group that may be brought about by the Group’s future expansion in its construction and property related business while the Company is able to reserve the net proceeds of the Open Offer for future use should other future business opportunities arise; we consider the possible dilution effect on the Qualifying Shareholders is fair and reasonable.

Pursuant to the terms of the Underwriting Agreement, no provision is stipulated for any arrangement for excess application of Offer Shares, and it was on such basis that the Underwriters agreed to enter into the Underwriting Agreement. In this regard, the Qualifying Shareholders will not be entitled to apply for any Offer Shares in excess of their assured entitlements to apply for the Offer Shares. In the absence of such excess application arrangement, we have the following views: (1) the controlling shareholder of the Company will take up the excess Offer Shares under its obligation as the Underwriters in a passive manner only after the Qualifying Shareholders have selected not to accept their assured entitlements. We consider that the Underwriters to discharge their obligation to take up the

LETTER FROM GUANGDONG SECURITIES

excess Offer Shares will rely only on the preference of the Qualifying Shareholders but not at the discretion of the Underwriters; (2) the Open Offer grants each of the Qualifying Shareholders the first priority and equal opportunity to subscribe for the Offer Shares should they are eager to; (3) in view of the discount of the Subscription Price to the market price per Share, the Board believed that there would be a high level of acceptance of the Offer Shares by the Qualifying Shareholders and, accordingly, there would not be any significant number of the Offer Shares available for excess application; (4) among the 15 Comparable Companies listed in the Table 2 above, 3 of which did not offer arrangement for excess application of offer share; and (5) the arrangement of application for excess Offer Shares will involve additional administrative work and costs as stated in the letter from the Board. We are of the view that absence of the arrangement for excess application of the Offer Shares is not an uncommon market practice, but it will affect the rights of the Qualifying Shareholders (other than the Underwriters) by limiting them to further participate in the Open Offer and subscribe for excess Offer Shares at a relatively favourable price level.

IV. Special Mandate

In order to implement the Open Offer, the Company will seek the grant of the Special Mandate together with the Open Offer from the Independent Shareholders to satisfy the allotment and issue of the Offer Shares and that the Special Mandate is in addition to, and shall not prejudice nor revoke the existing general mandate granted to the Directors by the shareholders of the Company in the annual general meeting of the Company or such other general or special mandate(s) which may from time to time be granted to the Directors prior to the SGM. As such, since the Special Mandate is a necessary procedure to implement the Open Offer, we consider that the seeking of the grant of the Special Mandate is fair and reasonable.

D. Underwriting arrangements

From the Table 2 as set out above, we note that the commission rate of the respective commercial underwriters of the open offers of the Comparable Companies range from 1.0% to 3.0%. In view of this, we consider the commission to be charged to the Company by the Underwriters of 2% is within the range of normal commission rate charged by the underwriters of the open offers of the Comparable Companies and is also comparable to the market practice.

Mr. Yip, an executive Director and a beneficiary of the Yip’s Family Trust which owns the entire issued share capital in each of Always Adept and First Win, has confirmed that he will provide adequate financial support to the Underwriters for the latter to fully fulfill and accomplish their duties and obligation of being the Underwrites as stipulated by the Underwriting Agreement. The underwriting arrangements also demonstrate the financial commitment of Mr. Yip, Always Adept and First Win to the Group’s future development.

LETTER FROM GUANGDONG SECURITIES

Subject to the fulfillment of the conditions contained in the Underwriting Agreement, it should also be noted that the Open Offer would not be proceeded if the Underwriters exercise their termination rights under the Underwriting Agreement, details of the provisions granting the Underwriters such termination rights are included in the section headed “Conditions of the Open Offer” in the letter from the Board. We consider such provisions are in normal commercial terms and in line with the normal market practice.

Hence, we are of the view that the terms of the underwriting arrangement are fair and reasonable so far as the Company as a whole and the Independent Shareholders are concerned.

E. Equity fund raising activities during the past 12 months

During the 12 months immediately prior to the date of the Announcement, the Company has not carried out any equity fund raising activities.

F. Alternatives to the Open Offer

I. Debt financing or bank borrowings

The Directors advised that they have considered other methods of funds raising such as debt financing and bank borrowing. Given the Group’s losses incurred in recent years resulting in accumulated losses in years and the high gearing ratio of approximately 4.72 (calculated by dividing the total borrowings by the total shareholders’ funds attributable to the shareholders of the Company), we concur with the Directors’ view that the capability of the Group to raise sufficient funds from bank borrowing would be minimal and in light of the current financial position of the Company, the Company will be better off by avoiding further interest burden resulted from further debt financing and bank borrowing.

II. Equity funding

The Directors consider that it is more conservative for the Company to implement equity funds raising activities. The Directors consider that it will not be in the interest of the Shareholders to have their shareholdings in the Company being immediately diluted if equity financing in the size comparable to the Open Offer is proceeded through a placing of new Shares. The Directors are of the view that the Open Offer not only allows the Company to expand its capital base but also allows Qualifying Shareholders to maintain their respective pro rata shareholdings in the Company and participate in the future growth and development of the Company. In addition, the Directors consider that, compared with rights issue, the Open Offer is more time and cost effective as the Open Offer will not incur additional time and costs for trading of nil-paid rights.

LETTER FROM GUANGDONG SECURITIES

Accordingly, as compared to debt financing, bank borrowing, placement of new Shares and rights issue, we concur with the Directors’ view that the Open Offer under the prevailing arrangement is a more appropriate funds raising alternative to finance the Group’s business expansion plans while enable the Shareholders to maintain their proportionate interests in the Company should they so wish and we are of the view that the fund raising by way of the Open Offer is appropriate and is in the interest of the Company and the Shareholders as a whole.

G. Risks associated with the Open Offer

As stated in the letter from the Board, the Open Offer is conditional (a summary of which is set out in the section headed “Conditions of the Open Offer” in the letter of the Board) upon the obligations of the Underwriters under the Underwriting Agreement having become unconditional and Always Adept (for itself and on behalf of First Win) not having terminated the Underwriting Agreement in accordance with the terms thereof (a summary of which is set out in the paragraphs headed “Termination of the Underwriting Agreement” in the letter of the Board). Shareholders and potential investors should therefore exercise caution when dealing in Shares, and if they are in any doubt about their positions, they should consult their professional advisers. Shareholders should note that Shares will be dealt in on an ex-entitlement basis commencing from Monday, 29 May 2006 and that dealings in Shares will take place while the conditions to which the Open Offer is subject remain unfulfilled. Any Shareholder or other person dealing in Shares up to the date on which all conditions to which the Open Offer is subject are fulfilled, will accordingly bear the risk that the Open Offer cannot become unconditional and may not proceed. Any Shareholder or other person contemplating selling or purchasing Shares who is in any doubt about his/her/its position is recommended to consult his/her/its own professional adviser.

Considering the above risks, we concur with the Directors’ view that the Shareholders should note that dealings in on an ex-entitlement basis commencing from Monday, 29 May 2006 and that dealings in Shares will take place while the conditions to which the Open Offer is subject remain unfulfilled. Any Shareholder or other person dealing in Shares up to the date on which all conditions to which the Open Offer is subject are fulfilled, will accordingly bear the risk that the Open Offer cannot become unconditional and may not proceed.

H. Use of Proceeds

As stated in the letter from the Board, the estimated net proceeds from the Open Offer will be approximately HK$151 million which is intended to be used for the Group’s working capital.

After considering that (i) the financial performance of the Group is improving with its continuous focusing on the construction and property related sectors in the PRC; (ii) the Company already has a plan to look for other business opportunities, in particular, in the areas of environmental protection and recycling business in both Hong Kong and the PRC as discussed in the paragraphs headed “Reasons for the Open Offer” above, of which funding may be required in the future; and (iii) the Open Offer will improve the liquidity of the Group and strengthen the financial position of the Group, we consider that the use of proceeds undertaken by the Group is justifiable.

LETTER FROM GUANGDONG SECURITIES

I. Financial effects of the Open Offer

(i) Net asset value

The completion of the Open Offer will result in an increase of approximately HK$151.059 million in the consolidated net asset value of the Group from approximately HK$1.185 million as at 31 December 2005 to approximately HK$152.244 million. Accordingly, the consolidated net assets per Share will be improved from approximately HK$ 0.0014 per Existing Share or equivalent to HK$0.014 per Consolidated Share as at 31 December 2005 to approximately HK$0.45 per Consolidated Share immediately after the completion of the Open Offer.

We are of the view that the Open Offer presents an opportunity for the Qualifying Shareholders to participate in the enlargement of the capital base of the Group while providing the Group with necessary working capital to continue its existing business and to develop other business (if any) in order to diversify the Group’s business.

(ii) Gearing ratio

The completion of the Open Offer will result in an increase of the shareholders’ funds of the Group from approximately HK$1.185 million as at 31 December 2005 to approximately HK$152.244 million immediately after the completion of the Open Offer. Accordingly, the gearing ratio of the Group, which is calculated by dividing the total borrowings by the shareholders’ funds will be reduced from approximately 4.72 as at 31 December 2005 to approximately 0.04 immediately after the completion of the Open Offer.

(iii) Loss per Consolidated Share

The loss per Consolidated Share (assuming the Share Consolidation become effective) for the year ended 31 December 2005 was approximately HK$0.053 and will be decreased to approximately HK$0.013 immediately after the completion of the Open Offer (assuming that the Open Offer have been completed on 1 January 2005 and a total of approximately 341.9 million Consolidated Shares were in issue during the entire year). Such decrease in loss per Consolidated Share is mainly due to the increase of the Offer Shares to the share base of the Company.

Based on the above analysis, given that (1) the consolidated net asset value of the Group will be increased after the Open Offer; (2) the gearing ratio of the Group will be reduced after the Open Offer; (3) the loss per Consolidated Shares for the year ended 31 December 2005 will be decreased after the Open Offer, we are of the view that the Open Offer, of which the net proceeds are intended to be used for the Group’s working capital, is in the interest to the Company and its Shareholders as a whole.

LETTER FROM GUANGDONG SECURITIES

RECOMMENDATION

Having considered the above principal factors and reasons, we consider that the Open Offer and the grant of the Special Mandate is in the interests of the Company and the Independent Shareholders as a whole, and that the terms of the Open Offer are fair and reasonable as far as the Company as a whole and the Independent Shareholders are concerned. Accordingly, we advise the Independent Board Committee to recommend to the Independent Shareholders to vote in favour of the ordinary resolution approving the Open Offer and the grant of the Special Mandate at the SGM.

Yours faithfully, For and on behalf of GUANGDONG SECURITIES LIMITED C. K. Poon Jimmy Chan Authorized signatories

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

A summary of the results, assets and liabilities of the Group for the three financial years ended 31 December 2005, as prepared by reference to the published audited financial statements for the three years ended 31 December 2005, is set out below:

Results

Turnover
Operating loss after finance costs
Share of profits of associated companies
Amortisation of premium on acquisition of
associated companies
Impairment loss on investments in associated
companies
Impairment loss on investment held for resale
Gain on disposal of subsidiaries
Gain on deconsolidation of a subsidiary
Gain on debt discharged under Creditors’ Scheme
(Loss)/profit before taxation
Taxation
(Loss)/profit for the year attributable to
Shareholders of the Company

Year ended 31 December
2005
2004
2003
HK$’000
HK$’000
HK$’000
51,688
36,781
14,062
(4,607)
(10,875)
(126,382)
–
–
2
–
–
(7,764)
–
–
(11,862)
–
–
(115,739)
1,068
23,022
–
–
50,239
–
–
100,306
–
(3,539)
162,692
(261,745)
(1,019)
(841)
(596)
(4,558)
161,851
(262,341)

Assets and liabilities

TOTAL ASSETS TOTAL LIABILITIES Net Assets/(Liabilities)	As at 31 December 2005 2004 HK$’000 HK$’000 25,839 27,472 (24,654) (21,826) 1,185 5,646	2003 HK$’000 8,336 (185,897) (177,561)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Modified opinion

Fundamental uncertainty relating to going concern

As set out in the auditors’ report in respect of the Company’s financial statements for the year ended 31 December 2005, which is set out on pages 25 and 26 of the Company’s annual report for the year ended 31 December 2005, the Company’s auditors (“ Auditors ”), in forming their opinion, have considered the adequacy of the disclosure made in the financial statements for the year ended 31 December 2005 concerning the basis of preparation of financial statements made by the Directors. As explained in note 2 (a) to the financial statements set out below, the Group incurred a consolidated loss attributable to shareholders of the Company of HK$4,558,000 for the year ended 31 December 2005 and as at 31 December 2005, the Company had net current liabilities and capital deficiency of HK$8,438,000 and HK$954,000 respectively while the Group had net current liabilities of HK$996,000.

The financial statements set out below have been prepared on a going concern basis, the validity of which depends upon the financial support of a substantial shareholder. The financial statements do not include any adjustments that would result from a failure to obtain such financial support. The circumstances relating to this fundamental uncertainty are described in note 2(a) to the financial statements. The Auditors consider that the fundamental uncertainty has been adequately disclosed in the financial statements and the Auditors’ opinion is not qualified in this respect.

The following is the financial statements for the Group for the year ended 31 December 2005, together with the accompany notes as extracted from pages 27 to 74 of the annual report of the Company for the year ended 31 December 2005.

Consolidated Income Statement

For the year ended 31 December 2005

Note Turnover 5 Other revenue 5 Construction contract costs Staff costs Depreciation Other operating expenses Operating loss 6 Gain arising from debts discharged under Creditors’ Scheme 7 Gain on deconsolidation of a subsidiary under winding-up court order 8,26(a) Gain on disposal of subsidiaries 26(b) Finance costs 9 (Loss)/profit before taxation Taxation 10(a) (Loss)/profit for the year attributable to shareholders of the Company 11 (Loss)/earnings per share – Basic 12 – Diluted 12	2005 HK$’000 51,688 307 (47,477) (5,075) (383) (3,347) (4,287) – – 1,068 (320) (3,539) (1,019) (4,558) HK$(0.01) N/A	2004 HK$’000 36,781 14 (34,160) (6,109) (477) (5,656) (9,607) 100,306 50,239 23,022 (1,268) 162,692 (841) 161,851 HK$0.28 N/A

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

At 31 December 2005

Note Non-current assets Property, plant and equipment 15 Current assets Inventories 17 Investment held for resale 16(a) Amounts due from customers on construction contracts 19 Accounts receivable 20 Prepayments, deposits and other receivables Club membership 18 Bank and cash balances Less:Current liabilities Accounts payable 21 Amounts due to customers on construction contracts 19 Accruals and other payables Current portion of long term borrowings 22 Shareholder’s loan 23 Provision for taxation Net current (liabilities)/assets Total assets less current liabilities Non-current liabilities Long term borrowings 22 NET ASSETS Capital and reserves Share capital 24(a) Reserves 25(a) SHAREHOLDERS’ FUNDS	2005 HK$’000 3,356 407 – 17,373 690 1,798 245 1,970 22,483 7,091 15 9,967 54 4,361 1,991 23,479 (996) 2,360 1,175 1,185 8,548 (7,363) 1,185	2004 HK$’000 3,477 748 – 16,993 – 2,644 245 3,365 23,995 3,913 – 7,975 71 7,670 974 20,603 3,392 6,869 1,223 5,646 8,548 (2,902) 5,646

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

At 31 December 2005

Note Non-current assets Investments in subsidiaries 16(b) Current assets Prepayments and deposits Bank and cash balances Current liabilities Accruals and other payables Shareholder’s loan 23 Provision for taxation NET CURRENT LIABILITIES NET LIABILITIES Capital and reserves Share capital 24(a) Reserves 25(b) CAPITAL DEFICIENCY	2005 HK$’000 7,484 172 134 306 4,274 4,336 134 8,744 (8,438) (954) 8,548 (9,502) (954)	2004 HK$’000 (19,925) 5 2,807 2,812 3,515 7,644 134 11,293 (8,481) (28,406) 8,548 (36,954) (28,406)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 31 December 2005

	Reserves	Total HK$’000 (177,561)
Share Contributed premium surplus HK$’000 HK$’000 459,012 22,130 – – – – (459,012) 459,012 – 203,898 17,931 – (2,150) – 16,200 – 4,200 – (218) – – (606,013) – (22,130) – – 35,963 56,897 – – – – – – – – – – 35,963 56,897	Translation reserves HK$’000 – – – – – – – – – – – – – – 97 97 – 97 – 97
		161,851
		161,851
		– – 23,054 (2,150) 18,000 4,800 (218) – (22,130) –
		5,646
		97
		97 (4,558)
		(4,461)
		–
		1,185

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31 December 2005

Note CASH FLOWS FROM OPERATING ACTIVITIES (Loss)/profit before taxation Adjustments for: Write down of receivables Interest income Finance costs Depreciation Gain on deconsolidation of a subsidiary under winding-up court order Loss on disposal of property, plant and equipment Gain arising from debts discharged under Creditors’ Scheme Gain on disposal of subsidiaries Operating loss before working capital changes Increase in amounts due from customers on construction contracts (Increase)/decrease in accounts receivable Decrease in prepayments, deposits and other receivables Decrease/(increase) in inventories Increase in accounts payable Increase in amounts due to customers on construction contracts Increase in accruals and other payables Cash generated from/(used in) operations Interest paid Income tax paid Net cash generated from/(used in) operating activities	2005 HK$’000 (3,539) 19 (6) 320 383 – 8 – (1,068) (3,883) (380) (690) 827 341 3,723 15 2,515 2,468 (320) (11) 2,137	2004 HK$’000 162,692 139 (4) 1,268 477 (50,239) – (100,306) (23,022) (8,995) (16,993) 1,693 793 (748) 1,845 – 5,690 (16,715) (1,268) – (17,983)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement (Continued)

For the year ended 31 December 2005

Note CASH FLOWS FROM INVESTING ACTIVITIES Deconsolidation of a winding-up subsidiary 26(a) Purchase of property, plant and equipment Proceeds on disposal of property, plant and equipment Disposal of subsidiaries 26(b) Interest received Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital Payment to Scheme Creditors Advances from a shareholder Repayment to a shareholder Proceeds from loan from a finance company Repayment of loan from a finance company Net cash (used in)/generated from financing activities NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT 1 JANUARY Effect of foreign exchange rate changes CASH AND CASH EQUIVALENTS AT 31 DECEMBER ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank and cash balances	2005 HK$’000 – (278) 8 – 6 (264) – – – (3,309) – (65) (3,374) (1,501) 3,365 106 1,970 1,970	2004 HK$’000 (43) (3,415) – (2) 4 (3,456) 27,636 (12,000) 7,762 – 1,300 (6) 24,692 3,253 112 – 3,365 3,365

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Financial Statements

For the year ended 31 December 2005

1. GENERAL INFORMATION

The Company was incorporated in Bermuda on 24 March 1997 under the Companies Act 1981 of Bermuda as an exempted company limited by shares. Its shares have been listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on 26 June 1997.

The Company is an investment holding company. The principal activities of its subsidiaries are set out in note 16(b) to the financial statements. The address of its registered office is Clarendon House, 2 Church Street, Hamilton HM11, Bermuda.

2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

(a) Basis of preparation

The Group incurred a consolidated loss attributable to shareholders of the Company of HK$4,558,000 for the year ended 31 December 2005 and as at 31 December 2005, the Company had net current liabilities and capital deficiency of HK$8,438,000 and HK$954,000 respectively while the Group had net current liabilities of HK$996,000.

The financial statements have been prepared on a going concern basis, the validity of which depends upon the financial support of a substantial shareholder, at a level sufficient to finance the working capital requirements of the Group. The substantial shareholder has agreed to provide adequate funds for the Group to meet its liabilities as they fall due. If the going concern basis is not used, adjustments would have to be made to the financial statements to adjust the value of the Group’s assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively.

(b) Adoption of new and revised Hong Kong Financial Reporting Standards

In the current year, the Group has adopted all of the new and revised standards and interpretations of Hong Kong Financial Reporting Standards (the “HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) that are relevant to its operations and effective for accounting periods beginning on or after 1 January 2005. The adoption of these new and revised standards and interpretations of HKFRSs has resulted in change to the Group’s accounting policies in the following area:

Upon the adoption of HKAS 17, the land and buildings elements are considered separately for the purposes of lease classification, unless the lease payments cannot be allocated reliably between the land and buildings elements, in which case, the entire lease is generally treated as a finance lease. To the extent that the allocation of the lease payments between the land and buildings elements can be made reliably, the leasehold interests in land are reclassified to prepaid land lease payments under operating leases, which are carried at cost and subsequently recognised in the income statement on a straight-line basis over the lease term. This change in accounting policy has been applied retrospectively.

In previous years, leasehold land and buildings were included in property, plant and equipment and carried at cost less accumulated depreciation and any accumulated impairment losses. Since the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments continue to be treated as finance leases and included in property, plant and equipment.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)

(b) Adoption of new and revised Hong Kong Financial Reporting Standards (Continued)

The Group has not applied the following new standards or interpretations that have been issued but are not yet effective. The application of these standards or interpretations will not have material impact on the financial statements of the Group.

HKAS 1 Amendment Presentation of Financial Statements – Capital Disclosures[1] HKAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures[2] HKAS 21 Amendment The Effect of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation[2] HKAS 39 Amendment Financial Instruments: Recognition and Measurement – Cash Flow Hedge Accounting of Forecast Intragroup Transactions[2] HKAS 39 Amendment Financial Instruments: Recognition and Measurement – The Fair Value Option[2] HKAS 39 and Financial Instruments: Recognition and Measurement and Insurance HKFRS 4 Amendments Contracts – Financial Guarantee Contracts[2] HKFRS 6 Exploration for and Evaluation of Mineral Resources[2] HKFRS 7 Financial Instruments: Disclosures[1] HKFRS-Int 4 Determining whether an Arrangement contains a Lease[2] HKFRS-Int 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds[2] HK(IFRIC)-Int 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment[3] HK(IFRIC)-Int 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies.[4]

1 Effective for annual periods beginning on or after 1 January 2007
2 Effective for annual periods beginning on or after 1 January 2006
3 Effective for annual periods beginning on or after 1 December 2005
4 Effective for annual periods beginning on or after 1 March 2006
(c) Share consolidation, capital reorganisation, creditors’ scheme of arrangement, open offer and whitewash waiver

In response to the summary judgement awarded against the Company and the statutory demand issued by Mr. Alfred Siu Wing Fung, an ex-chairman of the Company, the Company according to the restructuring proposal announced on 1 September 2003 and subsequently revised on 5 November 2003:

(i) implemented a consolidation of every 20 existing shares of HK$0.10 each into 1 consolidated share of HK$2.00 each (each a “Consolidated Share”) on 2 December 2003 (“Share Consolidation”);
(ii) implemented a capital reorganisation of the Company (“Capital Reorganisation”) which involved (a) a reduction in the nominal value of each then issued Consolidated Share from HK$2.00 to HK$0.01; (b) a subdivision of each authorized and unissued Consolidated Share into 200 adjusted shares of HK$0.01 each (“Adjusted Shares”) on 27 April 2004; and (c) cancellation of the entire amount standing to the credit of the share premium account of the Company on 27 April 2004;
(iii) implemented a scheme of arrangement (“Creditors’ Scheme”) on 27 April 2004 under section 99 of the Companies Act 1981 of Bermuda and under section 166 of the Companies Ordinance (Chapter 32 of the laws of Hong Kong) between the Company and the scheme creditors (the “Scheme Creditors”) which resulted in the indebtedness and liabilities owing to Scheme Creditors as at the date for determination of entitlements of the Scheme Creditors being discharged in full and final settlement by way of a combination of the cash payment and the issuance of new Adjusted Shares (each a “Creditors Share”) to the Scheme Creditors. Pursuant to the Creditors’ Scheme, for every HK$1 of valid claim, the Scheme Creditors received (a) cash payment of not more than HK$0.1 and (b) not more than 1.5 Creditors Shares which were issued credited as fully paid at HK$0.10 per Creditors Share; and

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)

(c) Share consolidation, capital reorganisation, creditors’ scheme of arrangement, open offer and whitewash waiver (Continued)
- (iv) raised approximately HK$23.1 million (before expenses) on 27 April 2004 by way of an open offer on the basis of an assured allotment of five new Adjusted Shares (each an “Offer Share”) for the equivalent of every Adjusted Share held by shareholders other than overseas shareholders at the subscription price of HK$0.045 per Offer Share (the “Open Offer”).

The implementation of the Share Consolidation, Capital Reorganisation, the Creditors’ Scheme and the Open Offer was inter-conditional to each other.

The Capital Reorganisation and the Creditors’ Scheme became effective and the Open Offer became unconditional and that all conditions precedent to the Share Consolidation, the Capital Reorganisation, the Creditors’ Scheme and the Open Offer were fulfilled on 27 April 2004. A whitewash waiver was granted by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission in respect of the Open Offer. Immediately following the completion of the Share Consolidation, Capital Reorganisation, the Creditors’ Scheme and the Open Offer, Mr. Tam Jin Rong and his concert parties beneficially held 410,935,123 shares, representing approximately 51.7% of the then issued share capital of the Company.

3. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with the HKFRSs issued by HKICPA and generally accepted accounting principles in Hong Kong. In addition, the financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”) and by the Hong Kong Companies Ordinance.

The financial statements are prepared under the historical cost convention. The principal accounting policies are summarised as follows:

(a) Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to 31 December. Subsidiaries are those entities in which the Company, directly or indirectly, has the power to govern the financial and operating policies so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

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.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by other members of the Group.

All significant intercompany transactions and balances within the Group are eliminated on consolidation.

The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Group’s share of its net assets together with any goodwill or capital reserve which was not previously charged or recognised in the consolidated income statement and also any related accumulated foreign currency translation reserve.

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

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

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(b) Foreign currency translation
(i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency.

(ii) Transactions and balances in each entity’s financial statements

Transactions in foreign currencies are translated into the functional currency using the exchange rates prevailing on the transaction dates. Monetary assets and liabilities in foreign currencies are translated at the rates ruling on the balance sheet date. Profits and losses resulting from this translation policy are included in the income statement, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

Translation differences on non-monetary items, such as equity instruments held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation difference on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity.

(iii) Translation on consolidation

The result and financial position of all the group entities (none of which has the currency of hyperinflationary economy) that have a functional currency different from the Company’s presentation currency are translated into the Company’s presentation currency as follows:

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedgers of such investments, are taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are recognised in the consolidated income statement as part of the gain or loss on sale.

(c) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Depreciation is being calculated using the straight line method to allocate the cost to their residual values over their estimated useful lives. The principal annual rates are as follows:

Leasehold land and buildings over unexpired lease term Leasehold improvements over unexpired lease term or 5 years, whichever is shorter Furniture, fixtures and equipment 10% to 30% Motor vehicles 20%

The gain or loss on disposal of an asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the consolidated income statement.

The useful lives and residual values of the assets are reviewed and adjusted, if necessary, at each balance sheet date.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(d) Club membership

Club membership is stated at cost less any impairment in value.

(e) Impairment of assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell 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.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease in the revaluation reserves.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase in the revaluation reserves.

(f) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis, and in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

(g) Construction contracts in progress

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred.

When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs are recognised over the period of the contract as revenues and expenses respectively. The Group uses the percentage of completion method to determine the appropriate amount of revenue and costs to be recognised in a given period. The stage of completion is measured by reference to the proportion that contract costs incurred for work performed to date bear to the estimated total costs for the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

In determining costs incurred up to the year end, any costs relating to future activity on a contract are excluded and shown as contract work-in-progress. The aggregate of the costs incurred and the profit or loss recognised on each contract is compared against the progress billings up to the year end. Where costs incurred and recognised profits (less recognised losses) exceed progress billings, the balance is shown as due from customers on construction contracts. Where progress billings exceed costs incurred plus recognised profits (less recognised losses), the balance is shown as due to customers on construction contracts.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(h) Financial instruments

Financial assets and financial liabilities are recognised on the consolidated balance sheet when the Group has become a party to the contractual provisions of the instrument.

Trade and other receivables

Trade and other receivables are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

Borrowings

Interest-bearing borrowings are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognized over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Trade and other payables

Trade and other payables are stated at their fair value and subsequently measured at amortised cost using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

(i) Revenue recognition

(i) Contract revenue

Revenue for construction contracts is recognised as set out in note 3(g).

(ii) Interest income

Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(j) Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Rentals applicable to such operating leases are charged to the consolidated income statement on a straight line basis over the lease term.

(k) Borrowings costs

All borrowing costs are charged to the consolidated income statement in the year in which they are incurred.

(l) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a present legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow is remote.

(m) Related parties

Two 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. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans for the benefit of employees of the Group or of any entity that is a related party of the Group.

(n) Event after the balance sheet date

Post balance sheet events that provide additional information about the Group’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate are adjusting events and are reflected in the financial statements. Post balance sheet events that are not adjusting events are disclosed in the notes when material.

(o) Segment reporting

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

In accordance with the Group’s internal financial reporting, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(o) Segment reporting (Continued)

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to the segment. Unallocated costs mainly represent corporate expenses. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Segment liabilities comprise operating liabilities. They exclude items such as taxation and corporate borrowings. Segment revenue, expenses, assets and liabilities are determined before intragroup balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period.

In respect of geographical segment reporting, sales are based on the countries in which customers are located. Total assets and capital expenditure are based on where the assets are located.

(p) Employee benefits

(i) The Group has arranged for its Hong Kong employees to join the Mandatory Provident Fund Scheme (the “MPF Scheme’), a defined contribution scheme managed by an independent trustee. The Group’s subsidiaries incorporated in the People’s Republic of China (the “PRC”) make contributions to a state-managed defined contribution scheme for the Group’s PRC staff on a monthly basis pursuant to laws and regulations in the PRC through a government agency.
The Group’s contributions to the defined contribution retirement schemes are recognised as expenses in the consolidated income statement as incurred.
(ii) Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date.
Employee entitlements to sick leave and maternity or paternity leave are not recognised until the time of leave.
(iii) Termination benefits are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

(q) Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affect neither the taxable profit nor the accounting profit.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(q) Taxation (Continued)

Deferred tax liabilities are recognised for taxable temporary differences arising on investment in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

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

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

4. CRITICAL ACCOUNTING JUDGEMENT AND ESTIMATES

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

Critical accounting judgement

The Company’s directors prepared the financial statements on a going concern basis, the validity of which depends upon the financial support of a substantial shareholder at a level sufficient to finance the working capital requirements of the Group. Details are explained in note 2(a).

Key sources of estimation uncertainty

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

(a) Revenue and profit recognition

The Group estimated the percentage of completion of the constructions contracts by reference to the proportion that contract costs incurred for work performed to date to the estimated total costs for the contracts. When the final cost incurred by the Group is different from the amounts that were initially budgeted, such differences will impact the revenue and the profit or loss recognised in the period in which such determination is made. Budget cost of each project will be reviewed periodically and revised accordingly where significant variances are noted during the revision.

(b) Property, plant and equipment and depreciation

The Group determines the estimated useful lives and related depreciation charges for the Group’s property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. Management will revise the depreciation charge where useful lives are different to previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

(c) Split of land and buildings elements

The Group determines that the lease payments cannot be allocated reliably between the land and buildings elements. Accordingly the entire lease of land and buildings is classified as a finance lease and included under property, plant and equipment.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. REVENUE AND SEGMENT INFORMATION

Turnover
Other revenue
Interest income on bank deposits
Others
Total revenue
Primary reporting format – business segments
Construction contracts in Hong Kong
Construction contracts in the PRC
Total segment results
Unallocated costs
Other revenue
Gain arising from debts discharged
under Creditors' Scheme
Gain on deconsolidation of a subsidiary
under winding-up court order
Gain on disposal of subsidiaries
Finance costs
(Loss)/profit before taxation
Taxation
(Loss)/profit for the year attributable to
shareholders of the Company

Group
2005
2004
HK$’000
HK$’000
51,688
36,781
6
4
301
10
307
14
51,995
36,795
Revenue
Segment results
2005
2004
2005
2004
HK$’000
HK$’000
HK$’000
HK$’000
–
–
–
(135)
51,688
36,781
1,031
1,462
51,688
36,781
1,031
1,327
(5,625)
(10,948)
307
14
(4,287)
(9,607)
–
100,306
–
50,239
1,068
23,022
(320)
(1,268)
(3,539)
162,692
(1,019)
(841)
(4,558)
161,851

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. REVENUE AND SEGMENT INFORMATION (CONTINUED)

Primary reporting format – business segments (Continued)

Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Depreciation Write down of receivables	Construction contracts 2005 2004 HK$’000 HK$’000 22,930 21,830 – – 22,930 21,830 12,775 9,190 – – 12,775 9,190 278 1,019 174 62 – 135	Unallocated 2005 2004 HK$’000 HK$’000 – 2,396 209 415 19 4	Total 2005 2004 HK$’000 HK$’000 22,930 21,830 2,909 5,642 25,839 27,472 12,775 9,190 11,879 12,636 24,654 21,826 278 3,415 383 477 19 139	Total 2005 2004 HK$’000 HK$’000 22,930 21,830 2,909 5,642 25,839 27,472 12,775 9,190 11,879 12,636 24,654 21,826 278 3,415 383 477 19 139
				27,472

				9,190 12,636
				21,826

				3,415

				477

				139

Secondary reporting format – geographical segments

Hong Kong PRC	Revenue 2005 2004 HK$’000 HK$’000 – – 51,688 36,781 51,688 36,781	Total assets 2005 2004 HK$’000 HK$’000 2,856 5,642 22,983 21,830 25,839 27,472	Capital expenditure 2005 2004 HK$’000 HK$’000 – 2,396 278 1,019 278 3,415	Capital expenditure 2005 2004 HK$’000 HK$’000 – 2,396 278 1,019 278 3,415
				3,415

6. OPERATING LOSS

Operating loss has been arrived at after charging the following:

	Group
	2005	2004
	HK$’000	HK$’000
Auditors’ remuneration
Current year	600	600
Overprovision in prior year	(50)	–
Depreciation	383	477
Loss on disposal of property, plant and equipment	8	–
Operating leases
Hire of office equipment	–	104
Land and buildings	89	501
Staff costs (including directors’ emoluments, note 14)
Salaries and allowance	4,987	6,035
Retirement benefits cost	88	74

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. GAIN ARISING FROM DEBTS DISCHARGED UNDER CREDITORS’ SCHEME

On 19 February 2004, the majority of the Scheme Creditors approved the Creditors’ Scheme under which all indebtedness owed by the Company to the Scheme Creditors on the date for determination of entitlement of the Scheme Creditors were released, discharged and fully settled.

The Creditors’ Scheme was sanctioned by the High Court of Hong Kong and the Supreme Court of Bermuda on 16 and 19 March 2004, respectively. The total indebtedness admitted by the Scheme Administrator under the Creditors’ Scheme was discharged in full and final settlement by way of a combination of the cash payment of an aggregate amount of HK$12 million from the proceeds of the Open Offer and issuance of 180,000,000 Creditors Shares at HK$0.10 per Creditors Share to the Scheme Creditors, resulted in a gain amounted to approximately HK$100.3 million.

8. GAIN ON DECONSOLIDATION OF A SUBSIDIARY UNDER WINDING-UP COURT ORDER

In previous year, the gain on deconsolidation of a subsidiary under winding-up court order represented the gain arising on deconsolidation of Prosperity Construction and Decoration Limited (“PCDL”), a subsidiary of the Company, upon the receipt of a winding-up order on PCDL from the High Court of Hong Kong on 9 June 2004. Before its winding-up, PCDL had a substantial capital deficiency and had an insignificant scale of operation, this resulted in a gain of approximately HK$50 million.

9. FINANCE COSTS

Interest on loan notes and redeemable debentures wholly repayable within five years Other loan wholly repayable within 5 years Other loan not wholly repayable within 5 years	Group 2005 2004 HK$’000 HK$’000 – 604 270 661 50 3 320 1,268	Group 2005 2004 HK$’000 HK$’000 – 604 270 661 50 3 320 1,268
		1,268

10. TAXATION

(a) The amount of taxation in the consolidated income statement represents:


	2005	2004
	HK$’000	HK$’000
PRC income taxes	1,019	841

No provision for Hong Kong profits tax is required since the Group has no assessable profit sourced in Hong Kong for the year. PRC income taxes are calculated at tax rates applicable in the PRC where subsidiaries of the Group are assessable for tax.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. TAXATION (CONTINUED)

(b) Reconciliation between taxation and tax at the Hong Kong Profits Tax applicable rate of 17.5%:

(Loss)/profit before taxation Tax at the applicable tax rate Tax effect of income that is not taxable in determining taxable profit Tax effect of expenses that are not deductible in determining taxable profit Tax effect of utilisation of tax losses not previously recognised Effect of different tax rates of subsidiaries operating in other jurisdiction Underprovision Taxation charge	2005 HK$’000 (3,539) (619) (191) 9,855 – (8,011) (15) 1,019	2004 HK$’000 162,692 28,694 (21,911) 8,329 (8,804) (5,467) – 841

(c) Deferred tax assets are not recognised for temporary differences and tax losses carried forward due to uncertainty of realisation of the related tax benefit through the future taxable profits. The tax effect on temporary differences and unrecognised tax losses was approximately HK$4,368,000 as at 31 December 2005 (2004: HK$4,419,000).

11. (LOSS)/PROFIT FOR THE YEAR ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY

The profit for the year attributable to shareholders of the Company is dealt with in the income statement of the Company to the extent of HK$27,452,000 (2004: HK$57,596,000).

12. (LOSS)/EARNINGS PER SHARE

The calculation of basic (loss)/earnings per share is based on the Group’s loss for the year attributable to shareholders of the Company of HK$4,558,000 (2004: profit of HK$161,851,000) and 854,770,446 (2004: weighted average number of 574,681,847) ordinary shares in issue during the year.

There was no potential dilutive share for the years ended 31 December 2005 and 2004.

13. RETIREMENT BENEFIT COSTS

The Group operates a defined contribution MPF Scheme under the Hong Kong Mandatory Provident Fund Schemes Ordinance for those employees who are eligible to participate in the MPF Scheme. The MPF Scheme became effective on 1 December 2000. Contributions are made by the Group based on 5% of the employees' basic salaries subject to a monthly maximum contribution of HK$1,000 per employee and are charged to the consolidated income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with employees when contributed into the MPF Scheme.

The Group's subsidiaries incorporated in the PRC make monthly contributions to a state-managed defined contribution scheme for the Group’s PRC staff to a government agency based on 18% of the standard salary set by the provincial government, of which 10% is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff upon their retirement. The Group accounts for these contributions on accrual basis.

The total cost charged to the consolidated income statement of approximately HK$88,000 (2004: HK$74,000) represents contributions payable to the MPF Scheme and a state-managed defined contribution scheme by the Group.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. DIRECTORS’ AND SENIOR MANAGEMENT'S EMOLUMENTS

(a) Directors’ emoluments

The remuneration paid or payable to each of the eight (2004: seven) directors of the Company for the year ended 31 December 2005, disclosed pursuant to Section 161 of the Hong Kong Companies Ordinance and the Listing Rules is set out below:

Name of Director Executive Directors Mr. Tam Jin Rong Mr. Ko Chung Ting Peter Mr. Tao Ke Wei Mr. Tam Kai On Independent non-executive Directors Mr. Choy Sai Man Mr. Lau Kwok Wah Mr. Huang Shou Deng Mr. Tsui Wing Tak	Basic salaries, Employer’s allowances contribution and benefits to pension Fees in kind scheme HK$’000 HK$’000 HK$’000 – 1,300 – – 300 16 – 577 – – 520 28 – 2,697 44 – – – 60 – – 60 – – 48 – – 168 – – 168 2,697 44	Total HK$’000 1,300 316 577 548
		2,741
		– 60 60 48
		168
		2,909

Out of the total emoluments of HK$2,741,000 (2004: HK$5,114,000) to executive Directors as stated above, HK$1,883,000 (2004: HK$2,048,000) are unpaid and included under accruals and other payables in the balance sheet of the Group and the Company.

During the year, Mr. Choy Sai Man, an independent non-executive Director, resigned and waived his director’s fee for the year ended 31 December 2004 due by the Company amounted to HK$83,000 which was included in the consolidated balance sheet under the accruals and other payables as at 31 December 2004 and credited to the consolidated income statement under other revenue for the year ended 31 December 2005.

No share option has been granted to the Directors during both years.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. DIRECTORS’ AND SENIOR MANAGEMENT'S EMOLUMENTS (CONTINUED)

(a) Directors’ emoluments (Continued)

The remuneration of each of the Directors for the year ended 31 December 2004 is set out below:

Name of Director Executive Directors Mr. Tam Jin Rong Mr. Ko Chung Ting, Peter Mr. Tao Ke Wei Mr. Tam Kai On Independent non-executive Directors Mr. Choy Sai Man Mr. Lau Kwok Wah Mr. Huang Shou Deng	Basic salaries, Employer’s allowances contribution and benefits to pension Fees in kind scheme HK$’000 HK$’000 HK$’000 – 1,733 – – 1,230 27 – 1,026 – – 1,098 – – 5,087 27 138 – – 85 – – 15 – – 238 – – 238 5,087 27	Total HK$’000 1,733 1,257 1,026 1,098
		5,114
		138 85 15
		238
		5,352

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year included four (2004: four) executive Directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one (2004: one) highest paid individual during the year are as follows:

Basic salaries, allowances and other benefits Retirement benefits cost	Group 2005 2004 HK$’000 HK$’000 192 360 10 27 202 387	Group 2005 2004 HK$’000 HK$’000 192 360 10 27 202 387
		387

The number of individuals whose emoluments fell within the following band is as follows:

		Group
	2005		2004
HK$Nil - HK$1,000,000	1		1

During the year, no emoluments were paid by the Group to the directors of the Company or any of the five highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of office.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. PROPERTY, PLANT AND EQUIPMENT

Group Cost At 1 January 2004 Additions Disposals At 31 December 2004 At 1 January 2005 Additions Disposals At 31 December 2005 Accumulated depreciation At 1 January 2004 Charge for the year Disposals At 31 December 2004 At 1 January 2005 Charge for the year Disposals At 31 December 2005 Net book value At 31 December 2005 At 31 December 2004	Leasehold Furniture, land and Leasehold fixtures and buildings improvements equipment HK$’000 HK$’000 HK$’000 – 241 885 2,174 313 891 – (241) – 2,174 313 1,776 2,174 313 1,776 – 7 205 – – (23) 2,174 320 1,958 – 23 564 4 237 233 – (241) – 4 19 797 4 19 797 62 63 242 – – (7) 66 82 1,032 2,108 238 926 2,170 294 979	Motor vehicles HK$’000 – 37 – 37 37 66 – 103 – 3 – 3 3 16 – 19 84 34	Total HK$’000 1,126 3,415 (241) 4,300 4,300 278 (23) 4,555 587 477 (241) 823 823 383 (7) 1,199 3,356 3,477

The leasehold land and buildings comprise land held under operating lease and buildings held under finance lease. The Group determines that the lease payments cannot be allocated reliably between the land and buildings elements. Accordingly the entire lease of land and buildings is classified as a finance lease and included under property, plant and equipment.

The leasehold land and buildings are situated in Hong Kong and are held under medium-term leases.

At 31 December 2005, property, plant and equipment with net book value of HK$2,108,000 (2004: HK$2,170,000) was pledged as a security for the Group’s loan from a finance company.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INVESTMENTS

(a) Group – Investment held for resale

Unlisted shares, at cost Amount due from investment held for resale Less: Impairment loss	2005 HK$’000 – – – –	2004 HK$’000 28,672 2,144 (30,816) –

In previous year, investment held for resale was related to an investment in a group of subsidiaries owning the film copyright and licences. On 30 June 2005, the group of subsidiaries was disposed of and accordingly the investment held for resale was excluded from the Group.

(b) Company – Investments in subsidiaries

Unlisted shares, at cost Less: Impairment loss Amounts due from subsidiaries_(note (i)) Less: Write down Amounts due to subsidiaries(notes (i) and (ii))_	2005 HK$’000 2 (2) – 161,903 (152,290) 9,613 (2,129) 7,484	2004 HK$’000 3 (3) – 185,716 (173,139) 12,577 (32,502) (19,925)

Note:

(i) Amounts due from/(to) subsidiaries are unsecured, interest-free and have no fixed repayment terms.

(ii) At 31 December 2004, included in amounts due to subsidiaries was an amount due to a subsidiary of HK$32,154,000. During the year, the Group disposed of the aforesaid subsidiary and that subsidiary waived the amount due by the Company amounted to HK$32,154,000 in accordance with a deed of waiver dated 30 June 2005. It resulted in a gain on waiver of amount due to a subsidiary and which was credited to the income statement of the Company.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INVESTMENTS (CONTINUED)

(b) Company – Investments in subsidiaries (Continued)

The following is a list of the principal subsidiaries at 31 December 2005:

	Place of	Issued /
	incorporation	registered	Equity interest
	and principal	and paid up	attributable	Principal
Company name	operation	capital	to the Group	activities
Keyway China Limited*	British Virgin	US$100	100%	Construction
	Islands/PRC			contractor
United Bright Holdings	Hong Kong	HK$2	100%	Provision of
Limited				management
				services
東莞市中盛園林	PRC	RMB500,000	100%	Construction
有限公司#				contractor
東莞中盛企業管理顧問	PRC	HK$1,000,000	100%	Investment
有限公司△				holding

Shares held directly by the Company
Domestic enterprise
Foreign-owned enterprise

The above table sets out the subsidiaries which, in the opinion of the directors, materially affected the amounts of the results for the year or the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

17. INVENTORIES

Raw materials Construction supplies	Group 2005 2004 HK$’000 HK$’000 211 331 196 417 407 748	Group 2005 2004 HK$’000 HK$’000 211 331 196 417 407 748
		748

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. CLUB MEMBERSHIP

Cost At 1 January Deconsolidation of subsidiary under winding-up court order At 31 December Impairment At 1 January Deconsolidation of subsidiary under winding-up court order At 31 December Net book value At 31 December 2004 and 2005	Group 2005 2004 HK$’000 HK$’000 245 370 – (125) 245 245 – 125 – (125) – – 245 245

19. CONSTRUCTION CONTRACTS IN PROGRESS

Costs incurred plus attributable profit less foreseeable losses Less: Progress billings Amounts due from customers on construction contracts Amounts due to customers on construction contracts	Group 2005 2004 HK$’000 HK$’000 79,429 34,416 (62,071) (17,423) 17,358 16,993 17,373 16,993 (15) – 17,358 16,993

At 31 December 2005, retention held by customers for contract work included in prepayments, deposits and other receivables of the Group amounted to HK$1,052,000 (2004: HK$721,000).

At 31 December 2005, retention held by the Group for contract work included in accruals and other payables of the Group amounted to HK$589,000 (2004: HK$1,105,000).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. ACCOUNTS RECEIVABLE

The Group has a policy of allowing its trade customers with credit period of normally between 30 to 60 days or terms in accordance with construction contracts. The ageing analysis is as follows:

Less than 3 months 3 months to 6 months Over 1 year Less: Write down for doubtful debts	Group 2005 2004 HK$’000 HK$’000 38 – 652 – – 576 – (576) 690 –	Group 2005 2004 HK$’000 HK$’000 38 – 652 – – 576 – (576) 690 –
		–

21. ACCOUNTS PAYABLE

The ageing analysis is as follows:

Less than 3 months 3 months to 6 months 6 months to 1 year Over 1 year	Group 2005 2004 HK$’000 HK$’000 6,350 3,123 600 246 20 – 121 544 7,091 3,913	Group 2005 2004 HK$’000 HK$’000 6,350 3,123 600 246 20 – 121 544 7,091 3,913
		3,913

22. LONG TERM BORROWINGS

Interest bearing borrowings Loan from a finance company, secured Current portion of long term borrowings Amount due for settlement after twelve months The loan from a finance company is repayable as follows: Within one year In the second year In the third to fifth years After five years	Group 2005 2004 HK$’000 HK$’000 1,229 1,294 (54) (71) 1,175 1,223 54 71 61 73 182 232 932 918 1,229 1,294	Group 2005 2004 HK$’000 HK$’000 1,229 1,294 (54) (71) 1,175 1,223 54 71 61 73 182 232 932 918 1,229 1,294
		1,223

		71 73 232 918
		1,294

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22. LONG TERM BORROWINGS (CONTINUED)

The carrying amount of the interest bearing borrowings is denominated in Hong Kong dollars.

The carrying amount of the borrowings approximates its fair value. The fair value is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments.

The Group’s loan from a finance company is secured by the pledge of Group’s leasehold land and buildings, and guarantees executed by an executive Director and the Company, and interest-bearing at prime rate minus 2.25% per annum.

23. SHAREHOLDER'S LOAN

The shareholder’s loan is unsecured and interest-bearing at a prime rate plus 2% per annum and will be immediately repayable by the Group in accordance with the shareholder’s loan agreement dated 30 April 2004 (the “Shareholder's Loan Agreement”) should the shareholding of the shareholder becomes less than 30% of the issued share capital of the Company.

On 13 January 2006, a sale and purchase agreement (“Sale and Purchase Agreement”) was entered into between the shareholder and Main Faith Limited on one part, and Always Adept Limited and First Win Trading Limited on the other part, pursuant to which the shareholder waived his rights under the Shareholder’s Loan Agreement to immediate repayment of the shareholder’s loan due by the Group upon the completion of the Sale and Purchase Agreement and agreed to extend the repayment date of the shareholder’s loan to 29 April 2006.

24. SHARE CAPITAL

(a) Share capital

Number of shares
’000
Authorised:
Ordinary shares of HK$2 each at 1 January 2004
200,000
Share Subdivision_(note (i))
39,800,000
Ordinary shares of HK$0.01 each at
31 December 2004 and 2005
40,000,000
Issued and fully paid:
Ordinary shares of HK$2 each at 1 January 2004
102,462
Capital reduction(note (ii))
–
Issue of Offer Shares(note (iii))
512,308
Issue of Creditors Shares upon settlement of debts(note (iv))
180,000
Top-Up subscription(note (v))_
60,000
Ordinary shares of HK$0.01 each at
31 December 2004 and 31 December 2005
854,770

Par value
HK$’000
400,000
–
400,000
204,923
(203,898)
5,123
1,800
600
8,548

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24. SHARE CAPITAL (CONTINUED)

(a) Share capital (Continued)

Note:

(i) Pursuant to the Capital Reorganisation, on 27 April 2004, all of the authorised but unissued shares of HK$2.00 each in the capital of the Company be sub-divided into two hundred shares of HK$0.01 each.
(ii) Pursuant to the Capital Reorganisation on 27 April 2004, the issued share capital of the Company was reduced by cancelling paid up capital to the extent of HK$1.99 on each issued share such that the nominal value of all the issued shares was reduced from HK$2.00 to HK$0.01 each.
(iii) Pursuant to the Open Offer on 27 April 2004, 512,308,705 Offer Shares of HK$0.01 each, ranking pari passu in all respects with the then existing ordinary shares of the Company were issued at a subscription price of HK$0.045 per Offer Share.
(iv) Pursuant to the Creditors’ Scheme on 27 April 2004, 180,000,000 Creditors Shares of HK$0.01 each, ranking pari passu in all respects with the existing ordinary shares of the Company were issued at HK$0.10 per Creditors Share to the Scheme Creditors for the settlement of the total indebtedness owed by the Company to the Scheme Creditors.
(v) On 29 November 2004, Main Faith Limited (“Main Faith”), a company which is wholly and beneficially owned by an executive director, entered into a placing agreement (“Placing Agreement”) and, a top-up subscription agreement (“Top-Up Subscription Agreement”) with a placing agent and the Company respectively.

Pursuant to the Placing Agreement, Main Faith placed, an aggregate of 60,000,000 existing shares at a price of HK$0.08 per share, on a fully underwritten basis, to not fewer than six placees who were independent individual, corporate and/or institutional investors on 13 December 2004.

Pursuant to the Top-Up Subscription Agreement, Main Faith subscribed for an aggregate of 60,000,000 shares (“Top-up Subscription Shares”) at a price of HK$0.08 per share. The Top-Up Subscription Shares ranked pari passu in all respects with the existing ordinary shares of the Company.

Details of the Placing Agreement and Top-Up Subscription Agreement were disclosed in the Company’s announcement dated 29 November 2004.

(b) Share option scheme

On 11 June 1997, the Company in general meeting adopted a share option scheme (the “Scheme”) under which the Directors may, at their discretion and at any time during the ten years from the date of adoption, invite any full-time employee or executive Director of the Group to take up options to subscribe for shares of the Company. The subscription price may not be less than the greater of 80% of the average closing price of the Company’s shares as quoted on the Stock Exchange for the five trading days immediately preceding the date of offer of the option or the nominal value of the Company’s shares. The maximum number of shares in respect of which options may be granted may not exceed 10% of the issued share capital of the Company excluding any shares issued on the exercise of option from time to time. The Scheme became effective upon the listing of the Company's shares on the Stock Exchange on 26 June 1997. In compliance with chapter 17 of the Listing Rules, the Directors consider that it is the interests of the Company to terminate the Scheme of the Company and to adopt a new share option scheme. An ordinary resolution will be proposed at the Company's general meeting for the approval of the new share option scheme and the termination of the Scheme.

As at 31 December 2005, there was no outstanding share options granted.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. RESERVES

(a) Group

Balance at 1 January 2004 Share premium cancellation (notes (i) and (ii)) Capital reduction (note 24(a)(ii)) Issue of Offer Shares (note 24(a)(iii)) Offer Shares issue expenses Issue of Creditors Shares (note 24(a)(iv)) Top-Up subscription of new shares_(note 24(a)(v) New shares issue expenses Credit transfer(note (ii)) Realisation of contributed surplus on disposal of a subsidiary(note 26(b)) Profit for the year Transferred from accumulated losses(note (iii)) Balance at 31 December 2004 Exchange differences arising on translation of foreign operations Loss for the year Transferred from accumulated losses (note (iii))_ Balance at 31 December 2005	Share Contributed Translation premium surplus reserves HK$’000 HK$’000 HK$’000 459,012 22,130 – (459,012) 459,012 – – 203,898 – 17,931 – – (2,150) – – 16,200 – – 4,200 – – (218) – – – (606,013) – – (22,130) – – – – – – – 35,963 56,897 – – – 97 – – – – – – 35,963 56,897 97	General Accumulated reserves losses HK$’000 HK$’000 – (863,626) – – – – – – – – – – – – – – – 606,013 – – – 161,851 62 (62) 62 (95,824) – – – (4,558) 9 (9) 71 (100,391)	Total HK$’000 (382,484) – 203,898 17,931 (2,150) 16,200 4,200 (218) – (22,130) 161,851 –
			(2,902)
			97 (4,558) –
			(7,363)

The contributed surplus of the Group represents the remaining balance of the aggregate amount of credit arising from the Capital Reduction and the share premium cancellation net of transfer to accumulated losses pursuant to the implementation of restructuring proposal on 27 April 2004.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. RESERVES (CONTINUED)

(b) Company

Balance at 1 January 2004 Share premium cancellation (note (i) and (ii)) Capital reduction_(note 24(a)(ii)) Issue of Offer Shares(note 24(a)(iii)) Offer Shares issue expenses Issue of Creditors Shares (note 24(a)(iv)) Top-Up subscription of new shares (note 24(a)(v)) New shares issue expenses Credit transfer(note (ii))_ Profit for the year Balance at 31 December 2004 Profit for the year Balance at 31 December 2005	Share Contributed Accumulated premium surplus losses HK$’000 HK$’000 HK$’000 459,012 – (793,423) (459,012) 459,012 – – 203,898 – 17,931 – – (2,150) – – 16,200 – – 4,200 – – (218) – – – (606,013) 606,013 – – 57,596 35,963 56,897 (129,814) – – 27,452 35,963 56,897 (102,362)	Total HK$’000 (334,411) – 203,898 17,931 (2,150) 16,200 4,200 (218) – 57,596 (36,954) 27,452 (9,502)

The contributed surplus of the Company represents the remaining balance of the aggregate amount of credit arising from the Capital Reduction and the share premium cancellation net of transfer to accumulated losses pursuant to the implementation of restructuring proposal on 27 April 2004 and to a resolution passed at a special general meeting on 1 December 2003.

Note:

(i) Pursuant to the Capital Reorganisation and pursuant to a resolution passed at a special general meeting on 1 December 2003, the share premium of the Company was cancelled on 27 April 2004.
(ii) Pursuant to the Capital Reorganisation and pursuant to a resolution passed at a special general meeting on 1 December 2003, the credit arising from the Capital Reduction and the share premium cancellation be transferred to the contributed surplus account of the Company on 27 April 2004 and thereafter be applied against the accumulated losses of the Company as at 30 June 2003.
(iii) In accordance with the PRC regulations, the general reserves retained by a subsidiary in the PRC are nondistributable.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Gain on deconsolidation of a subsidiary under winding-up court order

Net liabilities of a subsidiary under winding-up court order: Bank and cash balances Accruals and other payables Accounts payable Retention payables Net cash outflow arising from deconsolidation of a subsidiary under winding-up court order: Bank and cash balances	2005 HK$’000 – – – – – –	2004 HK$’000 43 (37,577) (12,695) (10) (50,239) (43)

(b) Gain on disposal of subsidiaries

During the year, the Group disposed of certain subsidiaries for a nominal consideration of HK$9. In previous year, the Group disposed certain other subsidiaries for a nominal consideration of HK$6.

	2005	2004
	HK$’000	HK$’000
Net assets/(liabilities) disposed of:
Prepayments, deposits and other receivables	–	22
Bank and cash balances	–	2
Accounts payable	(545) (176)
Accruals and other payables	(523) (721)
Provision for taxation	–	(19)
Net amounts due from/(to) group companies	3,977	(282,996)
	2,909	(283,888)
Contributed surplus	–	(22,130)
Waiver of amounts due from/to group companies	(3,977) 282,996
	(1,068) (23,022)
Gain on disposal of subsidiaries	1,068	23,022
Total consideration, satisfied by cash	–	–

Analysis of the net cash outflow of cash and cash equivalents in respect of the disposal of subsidiaries:
Bank balances and cash disposed of	–	(2)

The subsidiaries disposed of during the year have no contribution to the Group’s turnover but incurred a loss of HK$5,000 (2004: HK$201,000) attributable to the Group which was included in the determination of consolidated income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. CONTINGENT LIABILITIES

At 31 December 2005, the Company executed corporate guarantee amounting to HK$1,229,000 (2004: HK$1,294,000) in favour of a finance company to secure a loan granted to its subsidiary.

28. FACILITIES FROM A FINANCE COMPANY

At 31 December 2005, the Group has facilities from a finance company totalling HK$1,229,000 (2004: HK$1,294,000). These facilities were secured by the pledge of the Group's leasehold land and buildings and a personal guarantee executed by an executive director of the Company and corporate guarantee by the Company.

29. RELATED PARTY TRANSACTIONS

(a) Pursuant to the Shareholder’s Loan Agreement, the shareholder committed to provide a loan with maximum amount of HK$10 million to the Company for daily operation with interest rate at prime rate plus 2% per annum (note 23). The loan is unsecured and repayable on demand. During the year, the Group paid interest of HK$270,000 (2004: HK$495,000) in relation to the shareholder's loan.
(b) During the year, the Group recognised construction revenue of HK$351,000 (2004: HK$366,000) from a company in which an executive director of the Company is a beneficial shareholder.
(c) During the year, the Group paid rental of HK$45,000 (2004: HK$39,000) in relation to office premises and staff quarters in the PRC, to a company in which an executive director is a beneficial shareholder.
(d) During the year, the Group purchased material of HK$172,000 (2004: Nil) from a company in which an executive director is a beneficial shareholder.
(e) During the year, the Group paid cleaning expenses of HK$19,000 (2004: Nil) in relation to office premises and staff quarters in the PRC, to a company in which an executive director is a beneficial shareholder.
(f) As at 31 December 2005, included in the following accounts are balances with companies in which an executive director is a beneficial shareholder:

	Group
	2005	2004
	HK$’000	HK$’000
Prepayments, deposits and other receivables	84	84
Amounts due from customers on construction contracts	–	121
Amounts due to customers on construction contracts	(15)	–
Accounts receivable	38	–
Accruals and other payables	(604)	–
Accounts payables	(172)	–

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. FINANCIAL RISK MANAGEMENT

Financial risk factors

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

(a) Foreign exchange risk

The Group mainly operates in the PRC and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Renminbi. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.

(b) Credit risk

The carrying amount of the accounts receivable included in the consolidated balance sheet represents the Group’s maximum exposure to credit risk in relation to the Group’s financial assets.

The Group performs ongoing credit evaluation of its customers’ financial conditions and requires no collateral from its customers. There are no significant concentrations of credit risk for financial assets within the Group.

(c) Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of long term borrowings, other payable and shareholder's loan. As at 31 December 2005 approximately HK$1,175,000 of the Group's long term borrowings will mature in more than one year. The Group aims at maintaining flexibility in funding by shareholder’s loan.

(d) Interest rate risk

As the Group has no significant interest-bearing assets, the Group's income and operating cash flows are substantially independent of changes in market interest rates.

The Group exposure to interest-rate risk arises from its long-term borrowings. These borrowings bear interests at variable rates varied with the then prevailing market condition.

31. FINANCIAL INSTRUMENTS

Fair values

The carrying amounts of the Group’s financial assets and financial liabilities as reflected in the consolidated balance sheet approximate their respective fair values.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. POST BALANCE SHEET EVENTS

(a) On 13 January 2006, Sale and Purchase Agreement was entered into between Mr. Tam Jin Rong and Main Faith (the “Vendors”) and Always Adept Limited (the “Offeror”) and First Win Trading Limited (“First Win”), pursuant to which the Offeror and First Win agreed to purchase and the Vendors agreed to sell an aggregate of 312,035,123 ordinary shares of the Company for a consideration of HK$29,019,266 (equivalent to HK$0.093 per share) which represented approximately 36.5% of the entire issued share capital of the Company.

Pursuant to the Sale and Purchase Agreement, Mr. Tam Jin Rong waived his right under the Shareholder’s Loan Agreement to immediate repayment of the shareholder's loan owed by the Group upon the completion of the Sale and Purchase Agreement and agreed to extend the repayment date of the shareholder's loan to 29 April 2006.

The Sale and Purchase Agreement was completed on 14 February 2006. A possible mandatory conditional cash offer was made by the Offeror and parties acting in concert with it (the “Cash Offer”). Upon completion of the Cash Offer on 24 March 2006, the Offeror and First Win totally held approximately 52.44% of the issued share capital of the Company. The shares held by the Offeror and First Win are the investment assets of the Yip’s Family Trust, which was established by Mr. Yip Wai Leung Jerry, the existing executive Director of the Company, for the benefit of himself and his wife and such beneficiary and/or beneficiaries as the protector of the Yip’s Family Trust may from time to time declare.

(b) On 24 March 2006, Mr. Tam Jin Rong resigned as chairman and executive director of the Company, Mr. Tam Kai On and Mr. Tao Ke Wei resigned as executive directors of the Company. Mr. Huang Shou Deng, Mr. Lau Kwok Wah and Mr. Tsui Wing Tak resigned as independent non-executive directors of the Company. All the resigning directors confirmed that they had no disagreement with the Board. On the same day, Mr. Tam Jin Rong, Mr. Tam Kai On and Mr. Tao Ke Wei waived their salaries as Directors due from the Company amounted to HK$1,800,000, HK$792,000 and HK$792,000 respectively which were included in the balance sheet of the Group and the Company under accruals and other payables.

33. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved by the Board of Directors on 21 April 2006.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. STATEMENT OF INDEBTEDNESS

As at the close of business on 30 April 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of approximately HK$7.3 million, comprising amount due to a former director, namely Mr. Tam Jin Rong, of approximately HK$4.8 million, amount due to a shareholder, namely First Win Trading Limited, of approximately HK$1.3 million and loan from a finance company on property mortgage of approximately HK$1.2 million which is secured by the pledge of the Group’s leasehold land and building, a corporate guarantee executed by the Company and a personal guarantee executed by a former director, Mr. Tam Kai On.

As at the close of business on 30 April 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the contingent liability of the Company was the corporate guarantee for property mortgage as described above to the extent of approximately HK$1.2 million.

Save as aforesaid or otherwise disclosed in the paragraphs above, and apart from intra-group liabilities and normal trade payables in the ordinary course of the business, at the close of business on 30 April 2006, the Group had no other outstanding mortgages, charges, debentures or other loan capital or bank overdrafts or loans or other similar indebtedness, finance lease or hire purchase commitments, liabilities under acceptance or acceptance credits, guarantees or other material contingent liabilities.

3. WORKING CAPITAL

The Directors, after due and careful consideration, are of the opinion that, taking into account the internal resources available to the Group and the net proceeds to be raised from the Open Offer of about HK$151 million, the Group will have sufficient working capital for at least twelve months from the date of this circular.

APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION

A. STATEMENT OF UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

The statement of unaudited pro forma adjusted consolidated net tangible assets of the Group prepared in accordance with paragraph 13 of Part B of Appendix 1 and rule 4.29 of the Listing Rules is set out below to illustrate the effects of the Open Offer on the consolidated net tangible assets of the Group as if the Share Consolidation and the Open Offer had taken place on 31 December 2005.

The statement of unaudited pro forma adjusted consolidated net tangible assets of the Group has been prepared for illustrative purposes only, based on the judgements and assumptions of the Directors of the Company, and because of its hypothetical nature, it may not give a true picture of the financial position of the Group following the Open Offer.

The following statement of unaudited pro forma adjusted consolidated net tangible assets of the Group is based on the audited consolidated net tangible assets of the Group as at 31 December 2005, adjusted as described below:

Audited consolidated net tangible assets of the Group attributable to shareholders of the Company as at 31 December 2005 (Note 1) HK$’000 1,185 Audited consolidated net tangible assets per Existing Share before implementation of the Share Consolidation and before completion of the Open Offer_(Note 3) Consolidated net tangible assets per Consolidated Share immediately before completion of the Open Offer (Note 4) Unaudited pro forma adjusted consolidated net tangible assets per Consolidated Share immediately after completion of the Open Offer(Note 5)_	Unaudited pro forma adjusted Estimated net consolidated net proceeds from tangible assets the Open Offer of the Group as at (Note 2) 31 December 2005 HK$’000 HK$’000 151,059 152,244 HK$0.0014 HK$0.014 HK$0.45	Unaudited pro forma adjusted Estimated net consolidated net proceeds from tangible assets the Open Offer of the Group as at (Note 2) 31 December 2005 HK$’000 HK$’000 151,059 152,244 HK$0.0014 HK$0.014 HK$0.45

		HK$0.0014

		HK$0.014

		HK$0.45

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX II

Notes:

The audited consolidated net tangible assets of the Group attributable to the shareholders of the Company as at 31 December 2005 are based on the consolidated net assets in the audited consolidated balance sheet of the Group as at 31 December 2005.
The estimated net proceeds from the Open Offer are based on 256,431,132 Offer Shares at the Subscription Price of HK$0.60 per Offer Share, after deduction of the underwriting fees and other share issue related expenses payable by the Company of approximately HK$2,800,000.
Based on 854,770,446 Existing Shares in issue as at 31 December 2005 before implementation of the Share Consolidation.
Based on 85,477,044 Consolidated Shares immediately before completion of the Open Offer, assuming that the Share Consolidation had become effective as at 31 December 2005.
Based on 341,908,176 Consolidated Shares, on which 85,477,044 Consolidated Shares and 256,431,132 Offer Shares were in issue as at 31 December 2005, assuming that the Share Consolidation and Open Offer had been completed on 31 December 2005.

APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION

B. ACCOUNTANTS’ REPORT ON STATEMENT OF UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from RSM Nelson Wheeler and addressed to the Directors of the Company in respect of the statement of unaudited pro forma adjusted consolidated net tangible assets of the Group as set out in this appendix.

Nelson Wheeler

羅申美會計師行 Certified Public Accountants

19 May 2006

To the Directors of China Nan Feng Group Limited

Dear Sirs

We report on the statement of unaudited pro forma adjusted consolidated net tangible assets (the “Unaudited Pro Forma Financial Information”) of China Nan Feng Group Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the Directors for illustrative purposes only, to provide information about how the Open Offer (as defined in the circular of the Company dated 19 May 2006 (the “Circular”) might have affected the consolidated net tangible assets of the Group as if the Share Consolidation and the Open Offer had taken place at 31 December 2005, for inclusion as Appendix II to the Circular. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in Section A of Appendix II to the Circular.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the Directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 13 of Part B of Appendix 1 and rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by rule 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX II

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the Directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the Directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 31 December 2005 or any future date.

Opinion

In our opinion:

a. the Unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated;
b. such basis is consistent with the accounting policies of the Group; and
c. the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

Yours faithfully

RSM Nelson Wheeler Certified Public Accountants Hong Kong

GENERAL INFORMATION

APPENDIX III

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 collectively and individually accept full responsibility for the accuracy of the information contained in this circular (other than that in relation to the Underwriters) and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained in this circular (other than those in relation to the Underwriters) the omission of which would make any statement herein misleading.

The directors of each of the Underwriters accept full responsibility for the accuracy of the information contained in this circular (other than those in relation to the Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained herein (other than those in relation to the Group) the omission of which would make any statement herein misleading.

2. SHARE CAPITAL OF THE COMPANY

(a) Shares

As at the Latest Practicable Date Authorised share capital: 40,000,000,000 Existing Shares Issued and fully paid share capital or credited as fully paid: 854,770,446 Existing Shares Upon completion of the Share Consolidation and the Open Offer Authorised share capital: 4,000,000,000 Consolidated Shares Issued and fully paid share capital or credited as fully paid: 85,477,044 Consolidated Shares 256,431,132 Offer Shares 341,908,176 Consolidated Shares	HK$ 400,000,000.00 8,547,704.46

	HK$ 400,000,000.00 8,547,704.4 25,643,113.2
	34,190,817.6

GENERAL INFORMATION

APPENDIX III

All the issued Shares rank pari passu with each other in all respects including the rights as to voting, dividends and return of capital. The Offer Shares to be allotted and issued will, when issued and fully paid, rank pari passu in all respects with the existing Consolidated Shares in issue on the date of allotment of the Open Offer in fully-paid form. The Company had no debt securities in issue as at the Latest Practicable Date.

(b) Share options

There were no outstanding option under the share option scheme of the Company adopted on 11 June 1997. The Board confirms that no share options will be granted under the share option scheme prior to completion of the Open Offer.

(c) Convertible securities

The Company has not issued any options, warrants, derivatives or securities convertible or exchangeable into Shares since 31 December 2005, being the date to which the latest published audited consolidated accounts of the Group were made up. As at the Latest Practicable Date, there were no outstanding options, warrants, derivatives or securities convertible or exchangeable into the Shares and no capital of any member of the Group is under option, or agreed conditionally or unconditionally to be put under option.

3. DISCLOSURE OF DIRECTORS AND CHIEF EXECUTIVES OF THE COMPANY

As at the Latest Practicable Date, the interests or short positions of the Directors and chief executives of the Company and their respective Associates in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO), as required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, or as recorded in the register required to be kept by the Company under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers were as follows:

Interests in Existing Shares

		Number of	Approximate
		Existing	shareholding
Name of Director	Capacity	Shares held	percentage
Mr. Yip_(Note 1)_	Person who set up	448,256,680	Note 2
	a discretionary trust

GENERAL INFORMATION

APPENDIX III

Notes:

Mr. Yip sets up a discretionary family trust pursuant to a deed of settlement dated 5 December 2005 entered into between him and the Trustee. The Trustee holds the entire issued share capital of Always New Limited, which owns the entire issued share capital of each of Always Adept and First Win. Always Adept and First Win hold 134,477,004 Existing Shares and 313,779, 676 Existing Shares respectively. Always New Limited is deemed to be interested in the Existing Shares held by First Win and Always Adept by virtue of the SFO.
As confirmed by Mr. Yip, these shares are Existing Shares having a par value of HK$0.01 each. These shares represent about 52.44% of the Company’s total number of issued shares, on the basis of 854,770,446 Existing Shares in issue immediately before completion of the Share Consolidation and the Open Offer.

Interests in Consolidated Shares

		Number of	Approximate
		Consolidated	shareholding
Name of Director	Capacity	Shares held	percentage
Mr. Yip_(Note 1)_	Person who set up	256,431,132	Note 2
	a discretionary trust

Notes:

Mr. Yip sets up a discretionary family trust pursuant to a deed of settlement dated 5 December 2005 entered into between him and the Trustee. The Trustee holds the entire issued share capital of Always New Limited, which owns the entire issued share capital of each of Always Adept and First Win. Always Adept and First Win hold 76,929,339 Consolidated Shares and 179,501,793 Consolidated Shares respectively, Always New Limited is deemed to be interested in the Consolidated Shares held by First Win and Always Adept by virtue of the SFO.
As confirmed by Mr. Yip, these shares were Consolidated Shares having a par value of HK$0.10 each and the Offer Shares to be allotted to First Win and Always Adept on an assured basis under the Open Offer and underwritten by First Win and Always Adept. These shares represent about 75% of the Company’s total number of issued shares, on the basis of 341,908,176 Consolidated Shares in issue immediately after completion of the Share Consolidation and the Open Offer.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interest or short position in any shares, underlying shares or debenture of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which are required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under the SFO) or were recorded in the register required to be kept by the Company under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers.

4. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, as far as is known to any Directors or chief executive of the Company, the following persons (other than a Director or chief executive of the Company) had, or were deemed to have an interest or short position in the Shares and underlying Shares which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or recorded in the register kept by the Company pursuant to Section 336 of the SFO, or who were, directly or indirectly interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company or any other members of the Group.

GENERAL INFORMATION

APPENDIX III

Interests in Existing Shares

		Number of	Approximate
		Existing	shareholding
Name of Shareholder	Capacity	Shares held	percentage
Always Adept_(Note 1)_	Beneficial owner	134,477,004	Note 5
First Win_(Note 1)_	Beneficial owner	313,779,676	Note 6
Always New Limited	Controlled corporation	448,256,680	Note 7
(Note 1)
The Trustee_(Note 2)_	Trustee	448,256,680	Note 7
Mr. Yip_(Note 3)_	Person who set up	448,256,680	Note 7
	a discretionary trust
Mrs. Yip_(Note 4)_	Interest of spouse	448,256,680	Note 7

Notes:

Always New Limited holds the entire issued share capital of each of Always Adept and First Win. Always New Limited is deemed to be interested in the Existing Shares held by the Always Adept and First Win by virtue of the SFO.
The Trustee holds the entire issued share capital of Always New Limited, which owns the entire issued share capital of each of Always Adept and First Win, which in turn holds 448,256,680 Existing Shares in such numbers as mentioned above.
Mr. Yip sets up a discretionary family trust pursuant to a deed of settlement dated 5 December 2005 entered into between him and the Trustee. The Trustee holds the entire issued shares in the capital of Always New Limited, which own the entire issued share capital of each of Always Adept and First Win, which in turn holds 448,256,680 Existing Shares in such numbers as mentioned above.
Mrs. Yip is the spouse of Mr. Yip and she is deemed to be interested in the Existing Shares in which Mr. Yip is interested by virtue of the SFO.
As confirmed by Mr. Yip, theses shares are Existing Shares having a par value of HK$0.01 each. These shares represent about 15.73% of the Company’s total number of issued shares, on the basis of 854,770,446 Existing Shares in issue immediately before completion of the Share Consolidation and the Open Offer.
As confirmed by Mrs. Yip, theses shares are Existing Shares having a par value of HK$0.01 each. These shares represent about 36.71% of the Company’s total number of issued shares, on the basis of 854,770,446 Existing Shares in issue immediately before completion of the Share Consolidation and the Open Offer.
As confirmed by Mr. Yip, these shares are Existing Shares having a par value of HK$0.01 each. These shares represent about 52.44% of the Company’s total number of issued shares, on the basis of 854,770,446 Existing Shares in issue immediately before completion of the Share Consolidation and the Open Offer.

GENERAL INFORMATION

APPENDIX III

Interests in Consolidated Shares

		Number of	Approximate
		Consolidated	shareholding
Name of Shareholder	Capacity	Shares held	percentage
Always Adept_(Note 1)_	Beneficial owner	76,929,339	Note 5
First Win_(Note 1)_	Beneficial owner	179,501,793	Note 6
Always New Limited	Controlled corporation	256,431,132	Note 7
(Note 1)
The Trustee_(Note 2)_	Trustee	256,431,132	Note 7
Mr. Yip_(Note 3)_	Person who set up	256,431,132	Note 7
	a discretionary trust
Mrs. Yip_(Note 4)_	Interest of spouse	256,431,132	Note 7

Notes:

Always New Limited holds the entire issued share capital of each of Always Adept and First Win. Always New Limited is deemed to be interested in the Consolidated Shares held by the Always Adept and First Win by virtue of the SFO.
The Trustee holds the entire issued share capital of Always New Limited, which owns the entire issued share capital of each of Always Adept and First Win, which in turn holds 256,431,132 Consolidated Shares in such numbers as mentioned above.
Mr. Yip sets up a discretionary family trust pursuant to a deed of settlement dated 5 December 2005 entered into between him and the Trustee. The Trustee holds the entire issued share capital of Always New Limited, which own the entire issued share capital of each of Always Adept and First Win, which in turn holds 256,431,132 Consolidated Shares in such numbers as mentioned above.
Mrs. Yip is the spouse of Mr. Yip and she is deemed to be interested in the Consolidated Shares in which Mr. Yip is interested by virtue of the SFO.
As confirmed by Mr. Yip, theses shares are Consolidated Shares having a par value of HK$0.10 each and the Offer Shares to be allotted to Always Adept on an assured basis under the Open Offer and underwritten by Always Adept. These shares represent about 22.50% of the Company’s total number of issued shares, on the basis of 341,908,176 Consolidated Shares in issue immediately after completion of the Share Consolidation and the Open Offer.
As confirmed by Mrs. Yip, theses shares are Consolidated Shares having a par value of HK$0.10 each and the Offer Shares to be allotted to First Win on an assured basis under the Open Offer and underwritten by First Win. These shares represent about 52.50% of the Company’s total number of issued shares, on the basis of 341,908,176 Consolidated Shares in issue immediately after completion of the Share Consolidation and the Open Offer.
As confirmed by Mr. Yip, these shares are Consolidated Shares having a par value of HK$0.10 each and the Offer Shares to be allotted to First Win and Always Adept on an assured basis under the Open Offer and underwritten by First Win and Always Adept. These shares represent about 75% of the Company’s total number of issued shares, on the basis of 341,908,176 Consolidated Shares in issue immediately after completion of the Share Consolidation and the Open Offer.

GENERAL INFORMATION

APPENDIX III

Save as disclosed herein, there is no person known to the Directors, who, as at the Latest Practicable Date, 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 10% or more of the normal value of any class of Shares carrying rights to vote in all circumstances at general meetings of the Company or any other members of the Group.

5. OTHER DISCLOSURE OF INTERESTS

(a) As at the Latest Practicable Date, none of the Directors had any interest, direct or indirect, in any asset which have been since 31 December 2005, the date to which the latest published audited financial statements of the Group were made up, acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group.
(b) None of the Directors is materially interested in any contract or arrangement subsisting as at the date of this circular which is significant in relation to the business of the Group.

6. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had a service contract with any member of the Group which is not determinable within one year without payment of compensation (other than statutory compensation).

7. EXPERTS AND CONSENTS

The following are the qualifications of the experts who have been named in this circular or have given opinions, letters or advice which are contained in this circular:

Name Qualification RSM Nelson Wheeler Certified Public Accountants Guangdong Securities A licensed corporation under the SFO to carry out types 1, 4 and 6 regulated activities (dealing in securities, advising on securities and advising on corporate finance) under the SFO.

As at the Latest Practicable Date, neither RSM Nelson Wheeler nor Guangdong Securities had any beneficial interest in the share capital of any member of the Group or had any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group or have any interest, either directly or indirectly, in any assets which have been, since 31 December 2005, being the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

GENERAL INFORMATION

APPENDIX III

Each of RSM Nelson Wheeler and Guangdong Securities has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter/report and/or references to its name, in the form and context in which it respectively appears.

8. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any litigation or arbitration or claims of material importance which is known to the Directors to be pending or threatened by or against either the Company or any of its subsidiaries.

9. MATERIAL ADVERSE CHANGE

The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 31 December 2005, being the date to which the latest audited consolidated financial statements of the Group were made up.

10. MATERIAL CONTRACTS

In the two year immediately preceding the date of this circular, the following contracts that are or may be material, not being contracts entered into in the ordinary course of business, were entered into by the Group or its subsidiaries:

(a) the provisional agreement dated 24 September 2004 entered into between United Bright Holdings Limited (“ United Bright ”), a wholly owned subsidiary of the Company and Links & Resources International Limited in relation to the acquisition (“ Property Acquisition ”) by United Bright of the property situated at Workshop B, 11/F., Cheung Lee Industrial Building, No. 9 Cheung Lee Street, Hong Kong at a consideration of HK$2,174,200;
(b) the agreement dated 29 October 2004 entered into between United Bright and Links & Resources International Limited in relation to the Property Acquisition;
(c) the deed of assignment dated 25 November 2004 executed by United Bright and Links & Resources International Limited in relation to the Property Acquisition;
(d) the loan agreement dated 9 November 2004 entered into between United Bright and HKCB Finance Limited pursuant to which HKCB Finance Limited agreed to lend to United Bright a loan in the principal sum of HK$1,300,000;
(e) the guarantee dated 23 November 2004 executed by the Company in favour of HKCB Finance Limited pursuant to the loan agreement referred to paragraph (d) above;
(f) the subscription agreement dated 29 November 2004 entered into between the Company and Main Faith Limited pursuant to which Main Faith Limited subscribed for 60,000,000 new Shares at HK$0.08 per Share;

GENERAL INFORMATION

APPENDIX III

(g) the subscription agreement dated 23 March 2005 entered into between the Company and Main Faith Limited pursuant to which Main Faith Limited agreed to subscribe for 98,900,000 new Shares at HK$0.08 per Share. This agreement was lapsed as set out in the Company’s announcement dated 6 April 2005; and
(h) the Underwriting Agreement.

Save as disclosed, no other contacts (not being contracts entered into in the ordinary course of business) were entered into by any member of the Group with in two years prior to date of this circular, which is or may be material.

11. EXPENSES

The expenses in connection with the Open Offer, including financial advisory fee, underwriting commission, printing, registration, translation, legal and accounting charges are estimated to amount to approximately HK$2,800,000 and are payable by the Company.

12. CORPORATE INFORMATION

Registered office

Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place Room B, 11/F. of business in Hong Kong Cheung Lee Industrial Building No.9 Cheung Lee Street Chai Wan Hong Kong

Company secretary and Cheng Sing Wai, CPA (practising) Qualified accountant

Authorised representatives Yip Wai Leung Jerry 31 New Henry House 10 Ice House Street Central, Hong Kong

Cheng Sing Wai Room 1516, Tsui Yung House Tsui Ping Estate, Kwun Tong Kowloon, Hong Kong

GENERAL INFORMATION

APPENDIX III

Auditors

Auditors RSM Nelson Wheeler Certified Public Accountants 7th Floor, Allied Kajima Building 138 Gloucester Road Hong Kong Financial adviser to the Company REXCAPITAL (Hong Kong) Limited 34/F., COSCO Tower Grand Millennium Plaza 183 Queen’s Road Central Hong Kong Legal adviser to the Company Chiu & Partners as to Hong Kong law 41st Floor, Jardine House 1 Connaught Place Hong Kong Legal adviser to the Company Conyers Dill & Pearman as to Bermuda law in relation to 2901, One Exchange Square the Open Offer 8 Connaught Place Central, Hong Kong Principal share registrar The Bank of Bermuda Limited and transfer office 6 Front Street Hamilton HM 11 Bermuda Hong Kong branch share registrar Computershare Hong Kong Investor Services Limited Room 1901-5, 19th Floor Hopewell Centre 183 Queen’s Road East Wanchai, Hong Kong Principal Bankers The Hongkong and Shanghai Banking Corporation Limited 1 Queen’s Road Central Hong Kong

GENERAL INFORMATION

APPENDIX III

13. MISCELLANEOUS

The English text of this circular shall prevail over the Chinese text in the case of any inconsistency.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the head office and the principal place of business in Hong Kong of the Company at Room B, 11/F., Cheung Lee Industrial Building, No.9 Cheung Lee Street, Chai Wan, Hong Kong from the date of this circular up to and including 1 June 2006 and at the SGM (and any adjournment thereof):

(a) this circular;
(b) the memorandum of association and the bye-laws of the Company;
(c) the letter from the Independent Board Committee, the text of which is set out on page 28 of this circular;
(d) the letter from Guangdong Securities to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 29 to 49 of this circular;
(e) the audited financial statements of the Company for the two years ended 31 December 2005;
(f) the report from RSM Nelson Wheeler on the statement of unaudited pro forma adjusted consolidated net tangible assets of the Group, the text of which is set out on pages 86 to 89 of this circular;
(g) the material contracts referred to under the paragraph headed “Material Contracts” in this Appendix; and
(h) the written consents referred to under the paragraph headed “Experts and Consents” in this Appendix.

NOTICE OF SGM

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

(stock code: 979)

NOTICE IS HEREBY GIVEN that a special general meeting of China Nan Feng Group Limited (the “ Company ”) will be held at 10:00 a.m. on Monday, 5 June 2006 at Gun Room, Royal Hong Kong Yacht Club, Kellet Island, Causeway Bay, Hong Kong, for the purposes of considering and, if thought fit, passing, with or without modification, the following ordinary resolutions:

ORDINARY RESOLUTIONS

“ THAT conditional on the Listing Committee of The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) granting the listing of, and permission to deal in, the Consolidated Shares (as defined below), with effect from 4:00 p.m. (Hong Kong time) on the date of passing this resolution:
(a) every ten issued and unissued shares of HK$0.01 each in the share capital of the Company be consolidated (the “ Share Consolidation ”) into one share (the “ Consolidated Share(s) ”) having a par value of HK$0.10 in the share capital of the Company;
(b) all of the Consolidated Shares resulting from the Share Consolidation shall rank pari passu in all respects and have the rights and privileges and be subject to the restrictions contained in the Company’s bye-laws as to shares; and
(c) any director of the Company (the “ Director ”) be and is hereby authorized to do all acts and things which in his opinion are necessary or expedient to effect and implement any of the foregoing.”
“ THAT conditional upon (a) the passing of ordinary resolution numbered 1 as set out in the notice convening this meeting; (b) the Listing Committee of the Stock Exchange granting or agreeing to grant (subject to allotment) and not having revoked the listing of and permission to deal in the Offer Shares (as defined below) in their fully-paid forms, which are to be allotted and issued to the shareholders of the Company pursuant to the terms and conditions of the Open Offer (as defined below); (c) the filing and registration of all documents relating to the Open Offer required by law to be filed or registered with the Registrar of Companies in Bermuda in accordance with the Companies Act 1981 of Bermuda and with the Registrar of Companies in Hong Kong in accordance with the Companies Ordinance in Hong Kong, respectively; and (d) the obligations of the Underwriters (as defined in the Circular) under the underwriting agreement dated 28 April 2006 entered into between the Company and the Underwriters (the “ Underwriting Agreement ”, a copy of which has been

* For identification purposes only

100

NOTICE OF SGM

produced to the meeting marked “A” and signed by the chairman of the meeting for the purpose of identification) becoming unconditional and the Underwriting Agreement not being terminated in accordance with the terms thereof on or before 4:00 p.m. on the third business day following the last day for application for the Offer Shares,

(i) the issue by way of an open offer (the “ Open Offer ”) of 256,431,132 new Consolidated Shares (the “ Offer Shares ”) to the shareholders of the Company whose names appear on the register of members of the Company on 5 June 2006 (excluding those shareholders, if any, with registered addresses as shown in the register of members of the Company on that date are outside Hong Kong whom the board of directors (the “ Directors ”) of the Company consider it necessary or expedient to exclude after making the relevant enquiries) in the proportion of three Offer Shares for every one Consolidated Share then held and otherwise pursuant to and in accordance with the terms and conditions set out in the circular dated 19 May 2006 despatched to shareholders of the Company (the “ Circular ”, a copy of which has been produced to the meeting marked “B” and signed by the chairman of the meeting for the purpose of identification) be and it is hereby approved;
(ii) the Directors be and they are hereby authorised to allot and issue the Offer Shares pursuant to or in connection with the Open Offer notwithstanding that the same may be offered, allotted or issued otherwise than pro rata to the existing shareholders of the Company and, in particular, the Directors be and they are hereby authorised to make such exclusions or other arrangements in relation to fractional entitlements or overseas shareholders as they deem necessary or expedient having regard to any restrictions or obligation under the laws of, or the requirements of or the likely expenses and delay that may be incurred in determining the extent of any such restrictions, obligations or requirement of any recognised regulatory body or any stock exchange in, any territory applicable to the Company;
(iii) the Underwriting Agreement and the transactions contemplated thereby (including but not limited to the arrangement for the disposal of Offer Shares not validly applied for by the Independent Shareholders (as defined in the Circular) in excess of their assured allotment and the taking up of such excess Offer Shares by the Underwriters) be and the same are hereby approved, confirmed and ratified;
(iv) the Directors be and they are hereby authorised to sign and execute such documents and do all such acts and things incidental to the Open Offer or as they consider necessary or expedient in connection with the implementation of or giving effect to the Open Offer, the Underwriting Agreement and the transactions contemplated thereunder, including the satisfaction or fulfilment of any conditions to which the Underwriting Agreement is subject (subject to such variations which the Directors may consider necessary, desirable and in the best interest of the Company); and

101

NOTICE OF SGM

(v) the Directors be and they are hereby generally and specifically authorised to allot and issue such number of new Consolidated Shares (the “ Special Mandate ”) as may be required to be allotted and issued pursuant to or in connection with the Open Offer and that the Special Mandate is in addition to, and shall not prejudice nor revoke the existing general mandate granted to the Directors by the shareholders of the Company in the annual general meeting of the Company or such other general or special mandate(s) which may from time to time be granted to the Directors prior to the passing of this Resolution.”

By Order of the Board China Nan Feng Group Limited Yip Wai Leung Jerry Chairman

Hong Kong, 19 May 2006

Head office and principal place of business in Hong Kong:

Room B, 11/F. Cheung Lee Industrial Building No. 9 Cheung Lee Street Chai Wan Hong Kong

Notes:

1 A member of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint a proxy or, if he is the holder of two or more shares, more than one proxy to attend and, subject to the provisions of the bye-laws of the Company, vote in his stead. A proxy need not be a member of the Company. A form of proxy for use at the meeting is enclosed herewith.
2 To be valid, the form of proxy together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power or authority must be deposited with the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong not later than 48 hours before the time appointed for holding the meeting or any adjournment thereof.
Completion and return of the accompanying form of proxy will not preclude members of the Company from attending and voting in person at the meeting or any adjournment thereof should they so wish.

As at the date hereof, the Company has two executive Directors, namely Mr. Yip Wai Leung Jerry and Mr. Ming Kar Fook Charles and three independent non-executive Directors, namely Mr. So Yin Wai, Mr. Zhou Yaoming and Ms. Zhu You Chun.

102

AI assistant

Green Energy Group Limited — Proxy Solicitation & Information Statement 2006

49600_rns_2006-05-19_b521c3e8-40fc-4f17-82f8-e208e86fea0a.pdf

CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]

(A) PROPOSED SHARE CONSOLIDATION

(B) PROPOSED OPEN OFFER OF 256,431,132 OFFER SHARES AT HK$0.60 PER OFFER SHARE PAYABLE IN FULL ON APPLICATION ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD AND

(C) GRANT OF SPECIAL MANDATE

Financial Adviser to the Company

REXCAPITAL (Hong Kong) Limited

Underwriters

Always Adept Limited First Win Trading Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

EXPECTED TIMETABLE

EXPECTED TIMETABLE

EFFECT OF BAD WEATHER ON THE LATEST TIME FOR APPLICATION OF AND PAYMENT FOR THE OFFER SHARES

CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]

(A) PROPOSED SHARE CONSOLIDATION

(C) GRANT OF SPECIAL MANDATE

INTRODUCTION

LETTER FROM THE BOARD

PROPOSED SHARE CONSOLIDATION

Effects of the Share Consolidation

Conditions of the Share Consolidation

Reasons for the Share Consolidation

Application for listing

Arrangement on odd lot trading

Trading arrangement for the Consolidated Shares

Free exchange of share certificates

PROPOSED OPEN OFFER

Issue Statistics

Subscription Price

Qualifying Shareholders

Excluded Shareholders

No application for excess Offer Shares

Status of the Offer Shares

Share option scheme and convertible securities

Certificates of the Offer Shares

Fractions of Offer Shares

LETTER FROM THE BOARD

Closure of register of members

Listing and dealings

UNDERWRITING ARRANGEMENT

Underwriting Agreement

Underwriters

Underwriting commission

Underwriting fee

Conditions of the Open Offer

Termination of the Underwriting Agreement

LETTER FROM THE BOARD

Information on the Underwriters

LETTER FROM THE BOARD

WARNING OF THE RISKS IN TRADING OF SHARES

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE

BUSINESS REVIEW AND FUTURE PROSPECTS

LETTER FROM THE BOARD

FUNDS RAISED BY WAY OF ISSUANCE OF NEW SHARES DURING THE PAST 12 MONTHS

REASONS FOR THE OPEN OFFER AND USE OF PROCEEDS

Implication of the Takeovers Code

MAINTENANCE OF THE LISTING OF THE SHARES

SPECIAL MANDATE

SGM

LETTER FROM THE BOARD

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

RECOMMENDATION

ADDITIONAL INFORMATION

CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]

PROPOSED OPEN OFFER OF 256,341,129 OFFER SHARES OF HK$0.10 EACH AT HK$0.60 PER OFFER SHARE PAYABLE IN FULL ON APPLICATION ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD ON THE RECORD DATE

PROPOSED OPEN OFFER OF 256,431,132 OFFER SHARES AT HK$0.60 PER OFFER SHARE ON THE BASIS OF THREE OFFER SHARES FOR EVERY ONE CONSOLIDATED SHARE HELD AND GRANT OF SPECIAL MANDATE

(A) the Share Consolidation

(B) the Open Offer

(C) the Special Mandate

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE OPEN OFFER

A. Background information of the Group

I. Analysis on consolidated income statement of the Group

Green Energy Group Limited Proxy Solicitation & Information Statement 2006

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**