THIS COMPOSITE DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this composite document, 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 composite document.

CHINA STRATEGIC HOLDINGS LIMITED ��

NATION FIELD LIMITED

(Incorporated in the British Virgin Islands with limited liability)

(Incorporated in Hong Kong with limited liability) Stock code: 235

MANDATORY UNCONDITIONAL CASH OFFER MADE BY KINGSTON SECURITIES LIMITED ON BEHALF OF NATION FIELD LIMITED TO ACQUIRE ALL THE ISSUED SHARES IN CHINA STRATEGIC HOLDINGS LIMITED OTHER THAN THOSE ALREADY OWNED BY NATION FIELD LIMITED AND PARTIES ACTING IN CONCERT WITH IT

Financial adviser to China Strategic Holdings Limited

A Member of the Guoco Group

Financial adviser to Nation Field Limited

KINGSTON CORPORATE FINANCE LIMITED

Independent financial adviser to the Independent Board Committee

A letter from the Independent Board Committee containing its recommendation in respect of the China Strategic Offer is set out on page 27 of this composite document. A letter from Hercules Capital Limited, the independent financial adviser to the Independent Board Committee, containing its recommendation in respect of the China Strategic Offer to the Independent Board Committee is set out on pages 28 to 46 of this composite document.

The procedures for acceptance and settlement of the China Strategic Offer are set out on pages 47 to 53 in Appendix I to this composite document and in the accompanying form of acceptance and transfer. Acceptances of the China Strategic Offer should be received by China Strategic Holdings Limited’s share registrar, Standard Registrars Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong by no later than 4:00 p.m. on 16th June, 2006 or such later time and/or date as the Offeror may determine and announce in accordance with the Takeovers Code.

26th May, 2006

	Page
Definitions......................................................................................................................................	1
Expected timetable.......................................................................................................................	7
Letter from the Board..................................................................................................................	8
Letter from Kingston Securities.................................................................................................	17
Letter from the Independent Board Committee......................................................................	27
Letter from Hercules....................................................................................................................	28

Appendices

I	Further terms of the China Strategic Offer.........................................................	47
II	Financial information on the Group.....................................................................	54
III	Unaudited pro forma
	financial information on the Group.......................................................................	133
IV	Accountants’ report on the GDI Group................................................................	148
V	General Information................................................................................................	230

Accompanying document — Form of Acceptance

– i –

DEFINITIONS

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

“acting in concert” has the meaning ascribed to it in the Takeovers Code “associate(s)” has the meaning ascribed to it under the Listing Rules “Board” the board of Directors “Business Day” a day (excluding Saturday and any day on which a tropical cyclone warning no. 8 or above is hoisted or remains hoisted between 9:00 a.m. and 12:00 noon and is not lowered at or before 12:00 noon or on which a “Black” rainstorm warning is hoisted or remains in effect between 9:00 a.m. and 12:00 noon and is not discontinued at or before 12:00 noon) on which licensed banks in Hong Kong are open for business
“BVI” the British Virgin Islands “Credit Facility I” the credit facility of up to HK$31,300,000 made available to the Offeror by Kingston Securities to satisfy part of the consideration for the acquisition of Shares by the Offeror under the Share Sale pursuant to an agreement dated 19th April, 2005 and a supplemental agreement dated 30th December, 2005
“Credit Facility II” the credit facility of up to HK$50,000,000 made available to the Offeror by Kingston Securities for financing the China Strategic Offer pursuant to an agreement dated 17th March, 2005
“Capital Reorganisation” the capital reorganisation of the Company which became effective on 19th May, 2006, details of which are set out in the circular of the Company dated 10th September, 2005 and the Joint Announcement

“CCASS” the Central Clearing and Settlement System established and operated by HKSCC

“CEL” China Enterprises Limited, a company incorporated in Bermuda with limited liability, the shares of which are traded on the OTC (over-thecounter) Bulletin Board in the United States of America and is owned as to 55.22% effective equity interest and 88.8% effective interest of voting right by the Company

– 1 –

DEFINITIONS

“China Strategic Offer”	the mandatory unconditional cash offer made by Kingston Securities
	on behalf of the Offeror to acquire all issued Shares not already owned
	by the Offeror and parties acting in concert with it at a price of
	HK$0.386 per Share in cash, details of which are set out in this
	composite document
“Company”	China Strategic Holdings Limited, a company incorporated in Hong
	Kong with limited liability and the issued shares of which are listed
	on the main board of the Stock Exchange
“Dao Heng Securities”	Dao Heng Securities Limited, a corporation licensed under the SFO
	to conduct types 1 (dealing in securities), 4 (advising on securities)
	and 6 (advising on corporate finance) regulated activities and the
	financial adviser to the Company
“Directors”	the directors of the Company
“Distributed Business”	all business other than the Remaining Business which is carried on by
	the GDI Group upon completion of the Group Reorganisation,
	including property development, manufacturing and marketing of tires,
	vessels for sand mining, business of providing package tour, travel
	and other related services and other investment holding business
“Executive”	the Executive Director of the Corporate Finance Division of the SFC
	and any delegate of the Executive Director
“Form of Acceptance”	the form of acceptance and transfer of Shares in respect of the China
	Strategic Offer
“GDI”	Group Dragon Investments Limited, a company incorporated in the
	BVI with limited liability
“GDI Group”	GDI and its subsidiaries
“GDI Offer”	the voluntary unconditional offer made by Somerley on behalf of Well
	Orient to acquire all the GDI Shares not already held by Well Orient
	and parties acting in concert with it (other than Paul Y), the terms of
	which are set out in a separate offer document to shareholders of GDI
	dated 26th May, 2006

– 2 –

DEFINITIONS

“GDI Share(s)”	ordinary share(s) of US$0.01 each in the share capital of GDI
“Group”	the Company and its subsidiaries and where upon completion of the
	Group Reorganisation, excluding members comprising the GDI Group
“Group Reorganisation”	the internal group reorganisation of the Company completed on 19th
	May, 2006 which resulted in (i) the Company continuing as a public
	listed company concentrating on the Remaining Business; (ii) GDI
	concentrating on the Distributed Business; and (iii) the Shareholders
	receiving by way of distribution in specie of the GDI Shares on the
	basis of one GDI Share for one Share
“Hanny”	Hanny Holdings Limited, a company incorporated in Bermuda with
	limited liability and the issued shares of which are listed on the main
	board of the Stock Exchange
“Hanny Bond”	the convertible bond to be issued by Hanny in denominations of
	HK$15.0 each under one of the options of the GDI Offer, which can
	be convertible into new Hanny Shares at an initial conversion price of
	HK$9.0 per Hanny Share at any time after its issue and up to the fifth
	anniversary from its date of issue
“Hanny Conversion	new Hanny Share(s) to be allotted and issued by Hanny upon
Share(s)”	conversion of the Hanny Bond
“Hanny Group”	Hanny and its subsidiaries
“Hanny Share(s)”	ordinary share(s) of HK$0.01 each in the issued share capital of Hanny
“Hercules”	Hercules Capital Limited, a licensed corporation under the SFO
	permitted to carry out type 6 regulated activities (advising on corporate
	finance) for the purposes of the SFO and the independent financial
	adviser to the Independent Board Committee
“HKSCC”	Hong Kong Securities Clearing Company Limited
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Independent Board	an independent committee of the Board, comprising the three
Committee”	independent non-executive Directors namely Messrs. David Edwin
	Bussmann, Wong King Lam, Joseph and Sin Chi Fai

– 3 –

DEFINITIONS

“ITC”	ITC Corporation Limited, a company incorporated in Bermuda with
	limited liability and the issued shares of which are listed on the main
	board of the Stock Exchange
“Joint Announcement”	the announcement jointly made by the Offeror, Hanny, Well Orient,
	GDI and the Company dated 19th April, 2005 in relation to, among
	other things, the China Strategic Offer
“Kingston Securities”	Kingston Securities Limited, a licensed corporation under the SFO
	permitted to carry out type 1 (dealing in securities) regulated activity,
	which is making the China Strategic Offer on behalf of the Offeror
“Latest Practicable Date”	24th May, 2006, being the latest practicable date prior to the printing
	of this document for the purpose of ascertaining certain information
	for inclusion in this composite document
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock Exchange
“MRI”	MRI Holdings Limited, a 57.26% owned subsidiary of the Company
	and the shares of which are listed on the Australian Stock Exchange
“Offeror”	Nation Field Limited, a company incorporated in the BVI with limited
	liability, the issued shares of which are beneficially and wholly owned
	by Mr. Gao Yang
“Offer Period”	the period commencing from 15th October, 2004, being the date of
	the initial announcement relating to the China Strategic Offer, until
	the date on which the China Strategic Offer is closed for acceptance
“Overseas Shareholders”	Shareholders whose addresses on the register of members of the
	Company are outside Hong Kong
“Paul Y”	PYI Corporation Limited (formerly known as “Paul Y. - ITC
	Construction Holdings Limited”), a company incorporated in Bermuda
	with limited liability and the issued shares of which are listed on the
	main board of the Stock Exchange
“PRC”	the People’s Republic of China

– 4 –

DEFINITIONS

“Qualifying Shareholders”	Shareholders other than the Offeror and its associates and parties acting
	in concert with it
“Remaining Business”	the business remained in the Group upon completion of the Group
	Reorganisation, including manufacturing and trading of battery
	products, investments in securities and property and investment in
	unlisted investments
“SFC”	the Securities and Futures Commission
“SFO”	the Securities and Futures Ordinance, Chapter 571 of the Laws of
	Hong Kong
“Share(s)”	ordinary share(s) of HK$15.0 each in the share capital of the Company
“Share Mortgages”	the share mortgages entered into (i) between the Offeror and Paul Y;
	and (ii) between the Offeror and Hanny on 24th May, 2006 charging
	to each of Paul Y and Hanny 20,250,000 Shares as security for payment
	of the balance of the consideration of HK$7,816,500, payable to each
	of them pursuant to the Share Sale Agreement
“Share Sale”	the acquisition of approximately 30.6% of the issued share capital of
	the Company from Paul Y and Hanny pursuant to the Share Sale
	Agreement
“Share Sale Agreement”	the sale and purchase agreement dated 10th March, 2005 entered into
	between the Offeror, Paul Y and Hanny for the acquisition by the
	Offeror of an aggregate of approximately 30.6% of the issued share
	capital of the Company from Paul Y and Hanny as at the date of the
	Share Sale Agreement
“Shareholder(s)”	holder(s) of the Shares
“Somerley”	Somerley Limited, a licensed corporation under the SFO to conduct
	types 1 (dealing in securities), 4 (advising on securities), 6 (advising
	on corporate finance) and 9 (asset management) regulated activities
	and the financial adviser to Hanny, which will make the GDI Offer on
	behalf of Well Orient
“Standard Registrars”	Standard Registrars Limited, the Company’s share registrar

– 5 –

DEFINITIONS

“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Takeovers Code”	the Hong Kong Code on Takeovers and Mergers
“Well Orient”	Well Orient Limited, a company incorporated in Hong Kong and an
	indirect wholly-owned subsidiary of Hanny
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Reminbi, the lawful currency of the PRC
“US$”	United States dollars, the lawful currency of the United States of America
“%”	per cent

Note: Amounts expressed in US$ have been translated into HK$ at the rate of HK$7.8=US$1.0 in this composite document for illustrative purpose.

– 6 –

EXPECTED TIMETABLE

2006

Commencement of the China Strategic Offer .............................................................Friday, 26th May

Latest time and date for acceptance of the China Strategic Offer,

if not revised or extended (Notes 1 and 2) ....................................... 4:00 p.m. on Friday, 16th June

Closing date of the China Strategic Offer if not revised or extended (Note 1) ........ Friday, 16th June

Announcement of the results of the China Strategic Offer to be posted

on the Stock Exchange’s website................................................. by 7:00 p.m. on Friday, 16th June

Announcement of the results of the China Strategic Offer to be published

in newspapers (Note 3) ..........................................................................................Monday, 19th June

Latest date for posting of remittances for the amounts

due under the China Strategic Offer in respect of valid acceptances

received (Note 4) ...................................................................................................Monday, 26th June

Notes:

The China Strategic Offer, which is unconditional, will be closed on 16th June, 2006 unless the Offeror revises or extends the China Strategic Offer in accordance with the Takeovers Code. An announcement will be issued through the Stock Exchange’s website by 7:00 p.m. on 16th June, 2006 stating whether the China Strategic Offer has been revised or extended or has expired. In the event that the Offeror decides that the China Strategic Offer will remain open until further notice, at least 14 days’ notice in writing will be given, before the China Strategic Offer is closed, to those Qualifying Shareholders who have not accepted the China Strategic Offer. For further details, please refer to the paragraph headed “Acceptance period, revisions and extensions” in Appendix I to this composite document.
Acceptance of the China Strategic Offer shall be irrevocable and not capable of being withdrawn except in the circumstances set out in Rule 19.2 of the Takeovers Code.
An announcement on the results of the China Strategic Offer will be published on 19th June, 2006 and in the event of an extension of the China Strategic Offer, on the next Business Day after the closing date of the extended China Strategic Offer.
Remittances in respect of the cash consideration payable for the Shares tendered under the China Strategic Offer will be posted as soon as practicable, but in any event within 10 days after the receipt by Standard Registrars of all relevant documents from the accepting Shareholders which render acceptance under the China Strategic Offer complete and valid.

Unless otherwise expressly stated, all time references contained in this composite document are Hong Kong time.

– 7 –

LETTER FROM THE BOARD

==> picture [44 x 44] intentionally omitted <==

CHINA STRATEGIC HOLDINGS LIMITED ��

(Incorporated in Hong Kong with limited liability) Stock code: 235

Executive Directors:

Dr. Chan Kwok Keung, Charles Dr. Yap, Allan Ms. Chau Mei Wah, Rosanna

Registered office:

8th Floor, Paul Y. Centre 51 Hung To Road, Kwun Tong Kowloon, Hong Kong

Ms. Chan Ling, Eva Mr. Li Bo

Mr. Chan Kwok Hung (alternate to Dr. Chan Kwok Keung, Charles)

Mr. Lui Siu Tsuen, Richard (alternate to Dr. Yap, Allan)

Independent non-executive Directors:

Mr. David Edwin Bussmann

Mr. Wong King Lam, Joseph Mr. Sin Chi Fai

26th May, 2006

To the Shareholders

Dear Sir or Madam,

– 8 –

LETTER FROM THE BOARD

INTRODUCTION

The Company, Hanny, GDI, Well Orient and the Offeror jointly announced on 19th April, 2005, among others, that:

the Board had been requested by Hanny and Paul Y, the then beneficial controlling Shareholders, to place before the Shareholders the Group Reorganisation resulting in the Shareholders receiving GDI Shares on the basis of one GDI Share for one Share based on their respective shareholdings in the Company;
Somerley, on behalf of Well Orient (an indirect wholly-owned subsidiary of Hanny), would make the GDI Offer to shareholders of GDI to acquire all the GDI Shares, other than those then owned by Well Orient, its associates and parties acting in concert with it (but the GDI Offer will be extended to Paul Y), on the basis (as revised by Hanny, details of which are set out in the joint announcement of Hanny and the Offeror dated 8th May, 2006) of: (i) one Hanny Share plus HK$1.8 in cash for every five GDI Shares; and/or (ii) one Hanny Bond, which is convertible into one Hanny Conversion Share at the initial conversion price of HK$9.0 per Hanny Conversion Share from time to time before the fifth anniversary from the date of issue of the Hanny Bond, with face value of HK$15.0 for every five GDI Shares;
the Board had been informed by Hanny and Paul Y that they had entered into the Share Sale Agreement with the Offeror on 10th March, 2005 pursuant to which the Offeror agreed to acquire an aggregate of 135,000,000 Shares from Paul Y and Hanny, representing approximately an aggregate of approximately 30.6% of the issued share capital of the Company as at the Latest Practicable Date, for an aggregate consideration of HK$52,110,000, equivalent to HK$0.386 per Share; and
upon completion of the Share Sale Agreement, Kingston Securities would, on behalf of the Offeror, make a mandatory unconditional cash offer to acquire all the issued Shares, other than those held by the Offeror and parties acting in concert with it, on the basis of HK$0.386 per Share.

The Group Reorganisation was completed on 19th May, 2006, and the completion of the Share Sale Agreement took place on 24th May, 2006. After completion of the Share Sale Agreement, (i) Paul Y was interested in 61,909,897 Shares, representing approximately 14.04% of the issued share capital of the Company; and (ii) Hanny was interested in 61,909,897 Shares, representing approximately 14.04% of the issued share capital of the Company as at the Latest Practicable Date. After completion of the Share Sale Agreement, the Offeror together with the parties acting in concert with it (including Paul Y and Hanny) have become interested in an aggregate of 258,819,794 Shares, representing approximately 58.72% of the issued share capital of the Company as at the Latest Practicable Date. The Offeror is obliged to make a mandatory unconditional cash offer to acquire all the issued Shares, other than those held by the Offeror and parties acting in concert with it, in accordance with the Takeovers Code.

– 9 –

LETTER FROM THE BOARD

An Independent Board Committee comprising Messrs. David Edwin Bussmann, Wong King Lam, Joseph and Sin Chi Fai, being the three independent non-executive Directors, has been established to advise the Qualifying Shareholders on the China Strategic Offer. Hercules has been appointed as the independent financial adviser to advise the Independent Board Committee thereon.

In evaluating the eligibility of Messrs. David Edwin Bussmann, Wong King Lam, Joseph and Sin Chi Fai for appointment as members of the Independent Board Committee, the Company notes that:

(i) Dr. Chan Kwok Keung, Charles, an executive Director, is also the chairman of the Company, ITC and Hanny, the chief executive officer of the Company and a non-executive director of Paul Y, and was holding 1,600,000 Hanny Shares and options to subscribe for 4,000,000 Hanny Shares granted by Hanny as at the Latest Practicable Date;
(ii) Dr. Yap, Allan is an executive director of the Company and Hanny and a director of Well Orient and was holding 1,600,000 Hanny Shares and options to subscribe for 3,250,000 Hanny Shares granted by Hanny as at the Latest Practicable Date;
(iii) Ms. Chau Mei Wah, Rosanna is an executive director of the Company and the deputy Chairman and managing director of ITC;
(iv) Ms. Chan Ling, Eva is a salaried executive Director and was holding 500 Hanny Shares as at the Latest Practicable Date;
(v) Mr. Li Bo is an executive Director and has business relationship with a potential purchaser of the Shares as described in the Company’s announcement dated 15th October, 2004;
(vi) Mr. Lui Siu Tsuen, Richard is an alternate director to Dr. Yap, Allan of the Company and an executive director of Hanny and a director of Well Orient, and was holding 3,350,000 Hanny Shares as at the Latest Practicable Date;
(vii) Mr. Chan Kwok Hung is an alternate director to Dr. Chan Kwok Keung, Charles of the Company and an executive director of ITC as at the Latest Practicable Date; and
(viii) each of Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan, Ms. Chau Mei Wah, Rosanna, Ms. Chan Ling, Eva, Mr. Lui Siu Tsuen, Richard and Mr. Chan Kwok Hung, are executive/alternate Directors and/or directors of the controlling Shareholders. Therefore, each of the aforementioned Directors is presumed to be interested in the China Strategic Offer by virtue of his/her exercise of control or direction over the business and operations of the Company.

Therefore, based on the foregoing, none of Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan, Ms. Chau Mei Wah, Rosanna, Ms. Chan Ling, Eva, Mr. Li Bo, Mr. Lui Siu Tsuen, Richard and Mr. Chan Kwok Hung is eligible for appointment as a member of the Independent Board Committee to advise the Qualifying Shareholders in relation to the China Strategic Offer.

– 10 –

LETTER FROM THE BOARD

On the other hand, each of Messrs. David Edwin Bussmann, Wong King Lam, Joseph and Sin Chi Fai, being an independent non-executive Director, declared that (a) he has not carried out any executive functions in the Company and that as at the Latest Practicable Date, (b) he was not interested in the Share Sale Agreement or any transactions contemplated under the China Strategic Offer; (c) he did not have any direct or indirect shareholding or equity-related interests in the Company, Hanny, GDI, Well Orient or any of their respective substantial or controlling shareholders, the Offeror or any party acting in concert or presumed to be acting in concert with it; (d) he did not have any direct or indirect connection or relationship with the Company, Hanny, GDI, Well Orient or any of their respective substantial or controlling shareholders, the Offeror or any party acting in concert or presumed to be acting in concert with it; and (e) he is not a salaried Director. Therefore, each of Messrs. David Edwin Bussmann, Wong King Lam, Joseph and Sin Chi Fai is eligible for appointment as a member of the Independent Board Committee.

Accordingly, Messrs. David Edwin Bussmann, Wong King Lam, Joseph and Sin Chi Fai have been appointed by the Company as members of the Independent Board Committee to advise the Qualifying Shareholders in relation to the China Strategic Offer.

The purpose of this composite document is to provide you with information in relation to the China Strategic Offer, to set out the letter of advice from Hercules containing its advice to the Independent Board Committee in respect of the China Strategic Offer and the letter from the Independent Board Committee containing its recommendation to the Qualifying Shareholders in respect of the China Strategic Offer.

THE GROUP REORGANISATION

At the request of Hanny and Paul Y, being the controlling Shareholders, who were interested in 129,409,897 Shares (as adjusted for the Capital Reorganisation and representing approximately 29.4% of the Company’s issued share capital as at the Latest Practicable Date) and 129,409,897 Shares (as adjusted for the Capital Reorganisation and representing approximately 29.4% of the Company’s issued share capital as at the Latest Practicable Date) respectively before completion of the Share Sale Agreement, the Board placed before the Shareholders a proposal for the Group Reorganisation at the extraordinary general meeting of the Company held on 6th October, 2005. Pursuant to the Group Reorganisation, the Company continues to be a public listed company with its subsidiaries concentrating on the business of manufacturing and trading of battery products, investments in securities and property and investment in unlisted investments (being the Remaining Business). All other subsidiaries of the Group carrying on property development and investment holding business and vessels for sand mining, and all other associated companies of the Group carrying on manufacturing and marketing of tires and business of providing package tour, travel and other related services and hotel operations (being the Distributed Business) have been grouped under the GDI Group and continue to be run by the existing management of the Company.

– 11 –

LETTER FROM THE BOARD

All conditions precedent of the Group Reorganisation were fulfilled by 19th May, 2006 and the Group Reorganisation was completed on 19th May, 2006.

The GDI Shares were distributed in specie to the Shareholders whose names appeared on the register of members of the Company on 19th May, 2006 on the basis of one GDI Share for one Share, but the share certificates of GDI will only be posted to those Shareholders who do not accept the GDI Offer after the close of the GDI Offer. No application has been or will be made for the listing of GDI Shares on any stock exchange. The issued GDI Shares rank pari passu in all respects with each other.

Group structure immediately after the implementation of the Group Reorganisation and upon completion of the Share Sale Agreement

The chart below shows in summary the group and shareholding structure of the Company and GDI immediately after the implementation of the Group Reorganisation and completion of the Share Sale Agreement (assuming no other changes since then):—

==> picture [454 x 311] intentionally omitted <==

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

Dr. Chan Kwok Keung, Charles
0.81% PMA Capital Management Ltd.
Public shareholders of ITC
12.0%
53.03% 34.97%
ITC (Note 1) 0.7% Public shareholders
of Hanny
27.31% 24.28%
75.02%
Paul Y (Note 1) Hanny (Note 1)
100% (Note 2)
14.045% (Note 2)
Public Shareholders
Offeror 29.358% Well Orient
(Note 2)
41.284%
30.626% 14.045%
29.358% 41.284%
The Company (Note 1) GDI
----- End of picture text -----

– 12 –

LETTER FROM THE BOARD

The Company (Note 1)

GDI

Remaining Business

Distributed Business

Manufacturing Investment in Investment in and trading of securities and unlisted securities battery products property and loan receivables

Property Manufacturing Business of Other business development and marketing providing tour and assets and of tires travel and other liabilities related services

80% interest in
Various listed

Talent Cosmos securities in Hong Limited Kong and overseas

a commercial unit in Beijing Huapu International Plaza, Chaoyang District, Beijing, the PRC
16.4% interest - Property interest - 14.4% effective - 11.1% effective - 55.22% effective in Beijing in Jing An District interest, held interest, held interest in Technology Shanghai, the through CEL, though CEL,in CEL (Note 13) Development PRC in �� Wing On Travel - 57.26% interest in Fund LDC - Property interest �� (Holdings) Limited MRI (Note 9) (Note 3) in Long Shan (Hangzhou (Note 1) - 9.8% interest in - 800,000 shares Industrial District, Zhongce Rubber Apex Quality in BNI Business Doumen District, Company Limited) Group Limited Network Corp. Zhuhai City, (Note 8) (Note 10) (Note 4) Guangdong, - 194 redeemable - 1,964,636 the PRC preference shares series B and 200 ordinary preference shares shares of Vertex in TechSpace Inc. Technology (Note 5) Fund(II) Ltd. - 4,195,122 shares (Note 11)
100% interest in �� (Guangzhou Yao Yang Industrial Co., Ltd.) and 88% interest in �� (Dongguan Shi Jiang Hai Trading Co., Ltd.) (Note 12) - Other assets and liabilities

in China VU.com Inc. (Note 6)

935,637 series D preference shares of Silicon Magic Corporation (Note 7)
Loan receivables

Notes:

Listed on the main board of the Stock Exchange
Indirect interests held by wholly-owned subsidiaries
The fund’s objective is to make direct investment in a diversified portfolio of high technology based ventures which currently have or are expected to have a connection with, or focus on, the development of high technology in the Greater China region.
The principal business is electronic publication.
The principal business is provision of full-serviced facilities and infrastructure delivering a completely integrated information technology and business process for customers.
The principal businesses include internet marketing, commerce and information service.
The principal business is in the semiconductor industry.
The principal business is the manufacturing and marketing of tires.
Listed on the Australian Stock Exchange and mainly engaged in the investment holding activities.
An investment holding company principally holding “Rosedale” branded hotels in Hong Kong, Guangzhou and Beijing and Luoyang Golden Gulf Hotel in the PRC.
The principal business is investment in emerging growth companies mainly in technology industry in the United States of America, Europe and Asia.
The principal business of these companies is the holding of vessel for sand mining.
Listed on the OTC (over-the-counter) Bulletin Board in the United States of America. CEL, through its subsidiaries, is mainly engaged in the business of property investment and development in the PRC and has substantial interests in investment holding companies, the subsidiaries of which are principally engaged in manufacturing and marketing of tires in the PRC and other countries abroad, and the business of providing package tour, travel and other related services and hotel operations.

– 13 –

LETTER FROM THE BOARD

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION OF THE GROUP REORGANISATION

A summary of the audited financial statements of the Group for the three years ended 31st December, 2005 are set out in Appendix II to this composite document.

After completion of the Group Reorganisation, the Company has become the holding company of all subsidiaries which are engaged in manufacturing and trading of battery products, investments in securities and property and investment in unlisted investments (being the Remaining Business), while all other subsidiaries engaging in property development and investment holdings business and vessels for sand mining and all other associated companies of the Group carrying on manufacturing and marketing of tires and business of providing package tour, travel and other related services and hotel operations (being the Distributed Business) had been grouped under the GDI Group and continued to be run by the existing management of the Company. On this basis, the unaudited pro forma combined financial information on the Group upon the implementation of the Group Reorganisation has been prepared, details of which are set out in Appendix III to this composite document.

COMPLETION OF THE SHARE SALE AGREEMENT

All conditions precedent to the Share Sale Agreement were fulfilled on 19th May, 2006 and the Share Sale Agreement was completed on 24th May, 2006.

– 14 –

LETTER FROM THE BOARD

THE CHINA STRATEGIC OFFER

After completion of the Share Sale Agreement, the Offeror has become interested in 135,000,000 Shares, representing approximately 30.63% of the entire issued share capital of the Company as at the Latest Practicable Date. Pursuant to the Takeovers Code, the Offeror is obliged to make a mandatory cash offer to the Shareholders to acquire all the issued Shares (other than those already held by the Offeror and parties acting in concert with it). After completion of the Share Sale Agreement, (i) Paul Y has become interested in 61,909,897 Shares, representing approximately 14.04% of the issued share capital of the Company; and (ii) Hanny has become interested in 61,909,897 Shares, representing approximately 14.04% of the issued share capital of the Company as at the Latest Practicable Date. Upon completion of the Share Sale Agreement, the Offeror together with the parties acting in concert with it (including Paul Y and Hanny) has become interested in an aggregate of 258,819,794 Shares, representing approximately 58.72% of the entire issued share capital of the Company as at the Latest Practicable Date.

Kingston Securities, on behalf of the Offeror, is making a mandatory unconditional cash offer to all Shareholders to acquire all the issued Shares, other than those held by the Offeror and parties acting in concert with it, on terms set out in this composite document and the accompanying Form of Acceptance on the following basis:

For each Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$0.386 in cash

The China Strategic Offer will not be extended to Paul Y and Hanny. The offer price for the China Strategic Offer is the same as the price per Share (as adjusted for the Capital Reorganisation) under the Share Sale Agreement, which price was fixed after taking into consideration the estimated net asset value of the Group (before and after the Group Reorganisation) and the market performance of the Shares prior to suspension of trading in the Shares on 8th March, 2005 pending the publication of the Joint Announcement. Based on the Company’s issued share capital of 440,797,543 Shares upon completion of the Group Reorganisation, the China Strategic Offer values the entire issued share capital of the Company at approximately HK$170.1 million. Excluding the 258,819,794 Shares which are held by the Offeror and parties acting in concert with it (including Paul Y and Hanny), representing approximately 58.72% of the total number of Shares in issue, 181,977,749 Shares are subject to the China Strategic Offer and the value for the China Strategic Offer amounts to approximately HK$15.0 million. Kingston Securities and Kingston Corporate Finance Limited are satisfied that the Offeror has sufficient financial resources available to it to satisfy full acceptance of the China Strategic Offer.

– 15 –

LETTER FROM THE BOARD

It is the responsibility of the Shareholders whose addresses as stated in the register of members of the Company are outside Hong Kong and who wish to accept the China Strategic Offer to satisfy themselves as to full observance of the laws of any relevant jurisdiction in connection therewith, including the obtaining of any governmental, exchange control or other consent which may be required to comply with the necessary formalities or legal requirements. Any such Shareholders will be responsible for the payment of any transfer or other taxes by whomsoever payable due in respect of that jurisdiction.

As at the Latest Practicable Date, the Company had no outstanding convertible securities, options or warrants. The Offeror and its concert parties have not entered into any agreements in relation to the issue of any convertible securities, options, warrants or derivatives of the Company.

PROPOSED NEW DIRECTORS OF THE COMPANY

As at the Latest Practicable Date, the Board was made up of ten Directors, comprising five executive Directors, two alternate Directors and three independent non-executive Directors. It is intended that four existing executive Directors, comprisingly Dr. Chan Kwok Keung, Charles (and his alternate, Mr. Chan Kwok Hung), Dr. Yap, Allan (and his alternate, Mr. Lui Siu Tsuen, Richard), Ms. Chau Mei Wah, Rosanna and Mr. Li Bo, and one independent non-executive Director, Mr. David Edwin Bussmann, will resign at the earliest time as allowed under the Takeovers Code and the Listing Rules. New Directors will be appointed by the Offeror on the date of despatch of this composite document. Biographical details of the new Directors are set out in “Letter from Kingston Securities” in this composite document.

ADDITIONAL INFORMATION

Your attention is drawn to the respective letters from the Independent Board Committee and Hercules set out on page 27 and pages 28 to 46 of this composite document containing their recommendations and advices in respect of the China Strategic Offer.

Your attention is also drawn to the “Letter from Kingston Securities” as well as the information contained in this composite document.

Yours faithfully,

For and on behalf of the Board

CHINA STRATEGIC HOLDINGS LIMITED Dr. Chan Kwok Keung, Charles Chairman

– 16 –

LETTER FROM KINGSTON SECURITIES

KINGSTON SECURITIES LIMITED

Suite 2801, 28th Floor One International Finance Centre 1 Harbour View Street, Central, Hong Kong

26th May, 2006

To the Shareholders

Dear Sir or Madam,

INTRODUCTION

The Offeror entered into the Share Sale Agreement with Paul Y and Hanny on 10th March, 2005, pursuant to which the Offeror agreed to acquire an aggregate of 135,000,000 Shares from Paul Y and Hanny, representing approximately 30.6% of the issued share capital of the Company as at the Latest Practicable Date, for an aggregate consideration of HK$52,110,000, equivalent to HK$0.386 per Share.

The Share Sale Agreement, which was subject to, among other things, the full implementation of the Group Reorganisation (which was completed on 19th May, 2006) was completed on 24th May, 2006. Details of the Group Reorganisation were set out in the Joint Announcement and the Company’s circular dated 10th September, 2005.

Immediately before entering into the Share Sale Agreement, the Offeror did not have any shareholding in the Company. Following completion of the Share Sale Agreement and up to the Latest Practicable Date, the Offeror and the parties acting in concert with it (including Paul Y and Hanny, who are presumed to be parties acting in concert with the Offeror for the purpose of the Takeovers Code) were interested in an aggregate of 258,819,794 Shares, representing approximately 58.7% of the issued

– 17 –

LETTER FROM KINGSTON SECURITIES

share capital of the Company as at the Latest Practicable Date, of which the Offeror was interested in 135,000,000 Shares, Paul Y was interested in 61,909,897 Shares and Hanny was interested in 61,909,897 Shares, representing approximately 30.63%, 14.04% and 14.04% respectively of the issued share capital of the Company as at the Latest Practicable Date. As such, the Offeror and its concert parties are required to make a mandatory unconditional cash offer for all the issued Shares not already owned or agreed to be acquired by the Offeror and parties acting in concert with it pursuant to Rule 26.1 of the Takeovers Code. The principal terms of the China Strategic Offer are set out under the section headed “The China Strategic Offer” below.

The Offeror entered into the Share Mortgages upon completion of the Share Sale Agreement in favour of Paul Y and Hanny pledging the 20,250,000 Shares to each of Paul Y and Hanny as security for payment of the balance of the consideration of HK$7,816,500 payable pursuant to the Share Sale Agreement. The charged Shares, being 40,500,000 Shares to be acquired by the Offeror pursuant to Share Sale Agreement (representing approximately 9.2% of the issued share capital of the Company), represent a continuing security for the due and punctual payment of the final balance of the consideration of HK$15,633,000. The Share Mortgages arrangement is a commercial arrangement between the Offeror, Paul Y and Hanny and has been agreed after arm’s length negotiations between them. As a result of the aforesaid Share Mortgages arrangement, Paul Y and Hanny are presumed to be parties acting in concert with the Offeror for the purpose of the Takeovers Code unless they rebut the presumption.

The Offeror also entered into an agreement with Kingston Securities regarding the provision of the Credit Facility I to satisfy part of the consideration for the acquisition of Shares by the Offeror under the Share Sale. The granting of the Credit Facility I, under which the proceeds drawn shall be applied solely for the purposes of satisfying part of the consideration of the Share Sale Agreement, is conditional upon, amongst other things, that 94,500,000 Shares acquired by the Offeror under the Share Sale shall be deposited with Kingston Securities from time to time as collateral.

This letter, together with Appendix I to this composite document and the accompanying Form of Acceptance, set out, among other things, the terms of the China Strategic Offer, procedures for acceptance of the China Strategic Offer, information on the Offeror and the intention of the Offeror regarding the Group.

– 18 –

LETTER FROM KINGSTON SECURITIES

THE CHINA STRATEGIC OFFER

The China Strategic Offer will be made in compliance with the Takeovers Code by Kingston Securities on behalf of the Offeror on the following terms:

For each Share.......................................................................................................... HK$0.386 in cash

( equivalent to HK$0.193 in cash for each share of the Company before the Capital Reorganisation has become effective (the “Old Share”))

The China Strategic Offer will not be extended to Paul Y and Hanny. The offer price for the China Strategic Offer is the same as the price per Share (adjusted for the Capital Reorganisation) under the Share Sale Agreement and was fixed after taking into consideration the estimated net asset value of the Group (before and after the Group Reorganisation) and the market performance of the Old Share prior to suspension of trading in the Old Shares on 8th March, 2005, pending the publication of the Joint Announcement.

The China Strategic Offer does not involve any issue of unlisted securities.

The China Strategic Offer is unconditional.

Comparison of value

The offer price for the China Strategic Offer, being HK$0.386 per Share, represents:

(a) a discount of approximately 62.88% to the closing price of HK$1.04 per Share (adjusted for the Capital Reorganisation) as quoted on the Stock Exchange on 14th October, 2004, being the last trading day immediately prior to the suspension of trading of the Shares of the Company pending the release of the initial announcement in relation to the China Strategic Offer;
(b) a discount of approximately 64.26% to the closing price of HK$1.08 per Share (adjusted for the Capital Reorganisation) as quoted on the Stock Exchange on 7th March, 2005, being the last trading day immediately prior to the suspension of trading of the shares of the Company pending the release of the Joint Announcement;
(c) a discount of approximately 66.26% to the average closing price of approximately HK$1.144 per Share (adjusted for the Capital Reorganisation) as quoted on the Stock Exchange for the ten consecutive trading days up to and including 7th March, 2005;

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LETTER FROM KINGSTON SECURITIES

(d) a discount of approximately 52.93% to the unaudited net tangible asset value per Share (assuming the Group Reorganisation has taken plane on 31st December, 2005) of approximately HK$0.82 (adjusted for the Capital Reorganisation) as at 31st December, 2005 (with reference to the unaudited pro forma financial information set out in Appendix III of this composite document);
(e) a discount of approximately 47.12% to the closing price of approximately HK$0.73 per Share (adjusted for the Capital Reorganisation) as quoted on the Stock Exchange on 15th May, 2006, being the first trading date of dealing in shares of the Company in ex-rights basis of entitlements of the GDI Shares;
(f) a discount of approximately 33.45% to the closing price of approximately HK$0.58 per Share as quoted on the Stock Exchange on 19th May, 2006, being the trading date on which the Capital Reorganisation becomes effective; and
(g) a premium of approximately 1.58% to the closing price of HK$0.38 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

Total consideration

As at the Latest Practicable Date, there were 440,797,543 Shares in issue. On the basis of the offer price for the China Strategic Offer being HK$0.386 per Share, the entire issued share capital of the Company is valued at approximately HK$170.1 million under the China Strategic Offer. Excluding the 258,819,794 Shares held by the Offeror and parties acting in concert with it (including Paul Y and Hanny), representing approximately 58.7% of the total number of issued Shares, 181,977,749 Shares will be subject to the China Strategic Offer and the value for the China Strategic Offer will amount to approximately HK$70.2 million.

The China Strategic Offer will be financed by (i) the Credit Facility II of up to HK$50,000,000 made available to the Offeror by Kingston Securities; and (ii) cash deposit made by the Offeror itself. The granting of the Credit Facility II, under which the proceeds drawn shall be applied solely for the purposes of satisfying the purchase price of the Shares under the China Strategic Offer, is conditional upon, amongst other things, all the Shares acquired by the Offeror in pursuance of the China Strategic Offer by use of the Credit Facility II being deposited with Kingston Securities as collateral for the Credit Facility II.

Kingston Securities and Kingston Corporate Finance Limited are satisfied that the Offeror has sufficient financial resources available to it to satisfy full acceptance of the China Strategic Offer. The Offeror confirms that repayment of the interest on or repayment of the aforesaid credit facility, or security for any liability under the aforesaid credit facility would not be dependent on the business of the Group.

– 20 –

LETTER FROM KINGSTON SECURITIES

Compulsory acquisition

The Offeror and parties acting in concert with it do not intend to exercise any right which may be available to it to acquire compulsorily any outstanding issued Shares not acquired under the China Strategic Offer after it is closed but reserve the right to do so.

Effect of accepting the China Strategic Offer

The Shares subject to the China Strategic Offer will be acquired ex-entitlement to the dividend distribution in specie of the GDI Shares but cum the right to receive all dividends or distributions declared, paid or made on or after completion of the Group Reorganisation and free from all third party rights attaching thereto on or after that date.

By accepting the China Strategic Offer, Shareholders will sell their Shares, and all rights attached to them, including the right to receive all dividends and other distributions, if any, declared, made or paid on or after the completion of the Group Reorganisation.

Stamp Duty

Seller’s ad valorem stamp duty in connection with the acceptance of the China Strategic Offer amounting to HK$1.00 for every HK$1,000 or part thereof of the consideration or the market price of the Shares, whichever is higher, will be payable by the accepting Shareholders and will be deducted by the Offeror from the consideration payable on acceptance of the China Strategic Offer. The Offeror will then pay the stamp duty on behalf of the accepting Shareholders.

INFORMATION ON THE OFFEROR AND ITS INTENTION IN RELATION TO THE COMPANY

The Offeror is a company incorporated in the BVI. It is principally engaged in investment holding. The entire issued share capital of the Offeror is beneficially owned by Mr. Gao Yang, who is also the sole director of the Offeror. Save for entering into the Share Sale Agreement, the Offeror has not conducted any business since its incorporation.

Mr. Gao Yang, aged 39, who is currently residing in Shanghai, the PRC, has been engaged in trading business between the PRC and the Republic of Austria, which mainly focused on acting as trading agents for Euro-American machine manufacturing and engineering companies in the PRC since 1990s. As at the date of the Joint Announcement and until late 2005, Mr. Gao was also managing a company with registered capital of RMB100,000,000 and with an unaudited net asset value of approximately RMB700,000,000 in 2003. Mr. Gao did not have any shareholding in this company. Such company was engaged in property development (including the development of commercial residential buildings

– 21 –

LETTER FROM KINGSTON SECURITIES

and complex in Beijing, the PRC), investment in high technology (including hydro-electric technology) and industrial enterprises (including investment in a joint venture with a renowned Korean car manufacturer) as well as investment management in the PRC. Mr. Gao remains a director of the aforesaid joint venture with the renowned Korean car manufacturer.

The Offeror intends that the Company will continue with the Remaining Business. The Offeror will review the financial position and business operations of the Company with a view to strengthening the operations and future development of the Company. The Offeror will also adopt the business strategy of making investments with good earnings potential that can complement the Remaining Business. It is the intention of the Offeror to hold the Shares acquired from the Share Sale on a long term basis. The Offeror will also explore other business opportunities and consider whether any asset disposals, asset acquisitions, business diversification will be appropriate in order to enhance the long term growth of the Company. In the event that any of disposal and/or acquisition materialises, further announcement will be made as and when required by the Listing Rules. As at the Latest Practicable Date, the Offeror had no concrete plan as to any changes to the existing business of the Company including any redeployment of the fixed assets of the Group and any injection of assets into the Group.

In view that the Group will be able to leverage on the Offeror’s background and business network in the PRC and the Republic of Austria as mentioned above to capture any possible investment opportunities, the Offeror are of the view that the China Strategic Offer is to be commercially justifiable in the long-run.

Directors and management

As at the Latest Practicable Date, the Board was made up of ten Directors, comprising five executive Directors, two alternate Directors and three independent non-executive Directors. It is intended that four existing executive Directors, comprisingly Dr. Chan Kwok Keung, Charles (and his alternate, Mr. Chan Kwok Hung), Dr. Yap, Allan (and his alternate, Mr. Lui Siu Tsuen, Richard), Ms. Chau Mei Wah, Rosanna and Mr. Li Bo, and one independent non-executive Director, Mr. David Edwin Bussmann, will resign at the earliest time as allowed under the Takeovers Code and the Listing Rules. On the date of despatch of this composite document, Mr. Gao Yang, Mr. Kwok Ka Lap, Alva, and Ms. Ching Yuen Man, Angela would be appointed to the Board and will be effective as from the date of despatch of this composite document. The biographical details of Mr. Gao Yang, Mr. Kwok Ka Lap, Alva, and Ms. Ching Yuen Man, Angela are set out below:

Mr. Gao Yang, aged 39, who is currently residing in Shanghai, the PRC, has been engaged in trading business between the PRC and the Republic of Austria, which mainly focused on acting as trading agents for Euro-American machine manufacturing and engineering companies in the PRC since 1990s. As at the date of the Joint Announcement and until late 2005, Mr. Gao was also a director of a company with registered capital of RMB100,000,000 and with an unaudited net asset value of

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LETTER FROM KINGSTON SECURITIES

approximately RMB700,000,000 in 2003. Mr. Gao did not have any shareholding in this company. Such company was engaged in property development (including the development of commercial residential buildings and complex in Beijing, the PRC), investment in high technology (including hydro-electric technology) and industrial enterprises (including investment in a joint venture with a renowned Korean car manufacturer) as well as investment management in the PRC. Mr. Gao remains a director of the aforesaid joint venture with the renowned Korean car manufacturer.

Mr. Gao Yang did not hold any directorship in other public listed company in Hong Kong or any other position with the Company and other members of the Group.

Save for being a proposed executive Director, a deemed party acting in concert with Paul Y and Hanny, and being the beneficial owner of the entire issued share capital of the Offeror, Mr. Gao Yang does not have any relationship with other directors, senior management, substantial or controlling shareholders of the Company. Furthermore, save for the acquisition of 135,000,000 Shares under the Share Sale Agreement, Mr. Gao Yang had no interest in the securities of the Company within the meaning of Part XV of the SFO as at the Latest Practicable Date. No service contract had been entered into between the Company and Mr. Gao Yang as at the Latest Practicable Date. Save as disclosed in this composite document, Mr. Gao Yang is not aware of any other matters that need to be brought to the attention of the holders of securities of the Company nor is there any information to be disclosed by the Company pursuant to any of the requirements under the provisions of Rules 13.51(2)(h) to 13.51(2)(v) of the Listing Rules.

Mr. Kwok Ka Lap, Alva, aged 57, was a marketing manager in a company engaging in the design of business administration system. Mr. Kwok has been in the insurance and investments business for over 24 years, principally in the senior managerial position.

Save for being an independent non-executive director of (i) Wing On Travel (Holdings) Limited; (ii) Hanny; and (iii) Cheung Tai Hong Holdings Limited, Mr. Kwok Ka Lap, Alva, did not hold any directorship in other public listed companies in Hong Kong or any other position with the Company and other members of the Group in the past three years.

Save for being a proposed executive Director and being an independent non-executive director of Hanny, Mr. Kwok Ka Lap, Alva, does not have any relationship with other directors, senior management, substantial or controlling shareholders of the Company. Furthermore, Mr. Kwok Ka Lap, Alva, had no interest in the securities of the Company within the meaning of Part XV of the SFO as at the Latest Practicable Date. No service contract had been entered into between the Company and Mr. Kwok Ka Lap, Alva, as at the Latest Practicable Date. Save as disclosed in this composite document, Mr. Kwok Ka Lap, Alva, is not aware of any other matters that need to be brought to the attention of the holders of securities of the Company nor is there any information to be disclosed by the Company pursuant to any of the requirements under the provisions of Rules 13.51(2)(h) to 13.51(2)(v) of the Listing Rules.

– 23 –

LETTER FROM KINGSTON SECURITIES

Ms. Ching Yuen Man, Angela, aged 39, is a solicitor in Hong Kong. Ms Ching completed her high school education in England and obtained her LLB degree at the University of Hong Kong in 1989. She is now a Partner of Messrs. Alvan Liu & Partners (“ALP”). ALP practice focuses in areas of corporate finance, commercial and corporate litigation, commercial and company law. Ms. Ching, a legal practitioner for over 13 years of experience, advises a number of UK and Hong Kong listed companies and their subsidiaries.

Ms. Ching Yuen Man, Angela did not hold any directorship in other public listed company in Hong Kong or any other position with the Company and other members of the Group in the past three years.

Save for being a proposed independent non-executive Director, Ms. Ching Yuen Man, Angela does not have any relationship with other directors, senior management, substantial or controlling shareholders of the Company. Furthermore, Ms. Ching Yuen Man, Angela had no interest in the securities of the Company within the meaning of Part XV of the SFO as at the Latest Practicable Date. No service contract had been entered into between the Company and Ms. Ching Yuen Man, Angela as at the Latest Practicable Date. Save as disclosed in this composite document, Ms. Ching Yuen Man, Angela is not aware of any other matters that need to be brought to the attention of the holders of securities of the Company nor is there any information to be disclosed by the Company pursuant to any of the requirements under the provisions of Rules 13.51(2)(h) to 13.51(2)(v) of the Listing Rules.

Further announcement will be made by the Company upon such appointment becoming effective.

The Offeror does not expect that there will be any material changes to the continual employment of the employees of the Group or to the employment terms or conditions of the employees of the Group as a result of the China Strategic Offer.

Save as disclosed above, there is no agreement between the Offeror and the existing Directors with regard to their directorships in the Company.

MAINTAINING THE LISTING STATUS OF THE COMPANY

The Stock Exchange has stated that if, at the close of the China Strategic Offer, less than the minimum prescribed percentage applicable to the Company, being 25% of the issued Shares, are held by the public, or if the Stock Exchange believes that:

a false market exists or may exist in the trading of the Shares; or
that there are insufficient Shares in public hands to maintain an orderly market

it will consider exercising its discretion to suspend dealings in the Shares.

– 24 –

LETTER FROM KINGSTON SECURITIES

The Stock Exchange has also stated that, if the Company remains a listed company, any future injections of assets into or disposals of assets of the Company will be subject to the provisions of the Listing Rules. Pursuant to the Listing Rules, the Stock Exchange has discretion to require the Company to issue a circular to its shareholders where any acquisition or disposal by the Company is proposed, irrespective of the size of such acquisition or disposal and in particular where such acquisition or disposal represents a departure from the principal activities of Company. The Stock Exchange also has the power pursuant to the Listing Rules, to aggregate a series of acquisitions or disposals by the Company and any such acquisitions or disposals may, in any event, result in the Company being treated as a new applicant for listing and subject to the requirements for new applicants as set out in the Listing Rules.

The Offeror intends to maintain the listing of the Shares on the Stock Exchange, and each of the Company, the Offeror and their respective directors and the new Directors to be appointed to the Board have jointly and severally undertaken to the Stock Exchange to take appropriate steps to ensure that 25% of the issued share capital of the Company are in the hands of the public which is in compliance with the Listing Rules. In the event that the public float is less then 25%, the Company is required to suspend trading until the public float is restored. Save for the aforesaid undertaking to the Stock Exchange and the Credit Facility II, there is no agreement to, arrangement for or understanding of any transfer, charge or pledge of the Shares acquired pursuant to the China Strategic Offer to any other person.

FURTHER TERMS OF THE CHINA STRATEGIC OFFER

Further terms and conditions of the China Strategic Offer, including procedures for acceptance and the acceptance period, are set out in Appendix I to this composite document and the Form of Acceptance.

GENERAL

To ensure equality of treatment of all Shareholders, those registered Shareholders who hold Shares as nominee for more than one beneficial owner should, as far as practicable, treat the holding of each beneficial owner separately. In order for the beneficial owners of the Shares whose investments are registered in nominee names to accept the China Strategic Offer, it is essential that they provide instructions to their nominees of their intentions with regard to the China Strategic Offer.

The attention of Overseas Shareholders is drawn to the section headed “Overseas Shareholders” in Appendix I to this composite document.

Stockbrokers, banks and others who deal in relevant securities of the Company behalf of clients have a general duty to ensure, so far as they are able, that those clients are aware of the disclosure obligations

– 25 –

LETTER FROM KINGSTON SECURITIES

attaching to associates and other persons under Rule 22 of the Takeovers Code and those clients are willing to comply with them. Principal traders and dealers who deal directly with investors should, in appropriate cases, likewise draw attention to the relevant Rules pursuant to the Takeovers Code. However, this does not apply when the total value of dealings (excluding stamp duty and commission) in any relevant security undertaken for a client during any seven day period is less than HK$1 million.

This dispensation does not alter the obligation of principals, associates and other persons themselves to initiate disclosure of their own dealings, whatever total value is involved.

Intermediaries are expected to co-operate with the Executive in its dealings enquiries. Therefore, those who deal in relevant securities should appreciate that stockbrokers and other intermediaries will supply the Executive with relevant information as to those dealings, including identities of clients, as part of that co-operation.

Qualifying Shareholders are strongly advised to consider carefully the information contained in the letter from the Board, the letter from the Independent Board Committee and the letter from Hercules set out in this composite document.

Your attention is drawn to the additional information set out in the Appendices, which form part of this composite document.

Yours faithfully, For and on behalf of

Kingston Securities Limited Nicholas Chu

Director

– 26 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [44 x 44] intentionally omitted <==

CHINA STRATEGIC HOLDINGS LIMITED ��

(Incorporated in Hong Kong with limited liability) Stock code: 235

26th May, 2006

To the Qualifying Shareholders

Dear Sir or Madam,

As the Independent Board Committee, we have been appointed to advise you in connection with the China Strategic Offer, details of which are set out in the “Letter from the Board” in the composite document of the Company dated 26th May, 2006 (the “Document”), of which this letter forms part. The terms used in this letter shall have the same meanings as given to them in the Document unless the context otherwise requires.

Your attention is drawn to the “Letter from the Board” and the “Letter from Kingston Securities” as set out on pages 8 to 16 and pages 17 to 26 respectively of the Document and the “Letter from Hercules” as set out on pages 28 to 46 of the Document containing its advice to the Independent Board Committee regarding the China Strategic Offer. Having considered the advice given in the “Letter from Hercules”, we concur with Hercules’ advice to recommend the Qualifying Shareholders to accept the China Strategic Offer.

However, Qualifying Shareholders should read the last three paragraphs contained in the “Letter from Hercules” very carefully.

Yours faithfully,

Independent Board Committee

David Edwin Bussmann Wong King Lam, Joseph Sin Chi Fai Independent non-executive Independent non-executive Independent non-executive Director Director Director

– 27 –

LETTER FROM HERCULES

The following is the text of the letter of advice prepared by Hercules to the Independent Board Committee for incorporation in this document:

1503 Ruttonjee House 11 Duddell Street Central Hong Kong 26th May, 2006

To the Independent Board Committee

Dear Sirs,

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee with respect to the terms of the China Strategic Offer, details of which are set out in the composite document dated 26th May, 2006 (the “Document”) to the Shareholders, of which this letter forms part. Terms used in this letter have the same meanings as defined elsewhere in the Document unless the context requires otherwise.

As at the Latest Practicable Date, there were a total of three non-executive Directors on the Board, namely Mr. David Edwin Bussmann, Mr. Wong King Lam, Joseph and Mr. Sin Chi Fai, all of whom are independent non-executive Directors. Pursuant to Rule 2.1 of the Takeovers Code, the Independent Board Committee comprising all the independent non-executive Directors has been formed to advise the Qualifying Shareholders on whether the terms of the China Strategic Offer are fair and reasonable and in the interest of the Qualifying Shareholders.

Hercules has been appointed to act as the independent financial adviser to advise the Independent Board Committee as to whether or not the terms of the China Strategic Offer are fair and reasonable so far as the Qualifying Shareholders are concerned, and to give our opinion in relation to the China Strategic Offer for the consideration of the Independent Board Committee in making its recommendation to the Qualifying Shareholders.

– 28 –

LETTER FROM HERCULES

In formulating our recommendations, we have reviewed, inter alia, the Document and certain related agreements and certain publicly available financial statements and other business and financial information relating to the Company. We have also reviewed certain information provided by management of the Company relating to the operations, financial condition and prospects of the Company. We have also considered the terms of the cash offers made within a twelve full month period prior to the Latest Practicable Date for companies listed on the main board of the Stock Exchange, and such other information, financial studies, analyses and investigations and financial, economic and market criteria which we deemed relevant. We have not, however, conducted an indepth review of the Company, its business, financial condition and prospects.

The sole director of the Offeror has accepted full responsibility for the accuracy of the information contained in the Document (other than that relating to the Hanny Group (including Well Orient), Paul Y, ITC, the Group and GDI), and the Directors have jointly and severally accepted full responsibility for the accuracy of the information contained in the Document (other than that relating to the Hanny Group (including Well Orient), Paul Y, ITC and the Offeror). The directors of the Company and the Offeror have confirmed, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in the Document (other than, in the case of the director of the Offeror, those relating to the Hanny Group (including Well Orient), Paul Y, ITC, the Group and GDI and, in the case of the Directors, those relating to the Hanny Group (including Well Orient), Paul Y, ITC, and the Offeror) have been arrived at after due and careful consideration and there are no material facts not contained in the Document, the omission of which would make any statements in the Document misleading.

We have relied on, and assumed, without independent verification, the accuracy and completeness of the information reviewed by us for the purpose of this opinion. We have not, for the purpose of this exercise, conducted any independent detailed investigation or audit into the businesses, financial conditions or affairs or the future prospects of the Group. Our opinion is necessarily based on financial, economic, market and other conditions in effect, and the information made available to us as at the Latest Practicable Date.

We have not considered the tax consequences on the Qualifying Shareholders arising from acceptances or non-acceptances of the China Strategic Offer since these are particular to their individual circumstances. In particular, the Qualifying Shareholders who are residents outside of Hong Kong or subject to overseas taxes or Hong Kong taxation on securities dealings should consider their tax position with regard to the China Strategic Offer and, if in any doubt, should consult their own professional advisers.

In addition, we refer you to the letter from the Board and the letter from Kingston Securities contained in this Document, which give full details of the China Strategic Offer, and the appendices to this Document which give further information on the Company as required by the Takeovers Code. We advise that the Qualifying Shareholders read carefully the Document before they decide what action they should take.

– 29 –

LETTER FROM HERCULES

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion, we have taken into consideration the following principal factors and reasons:

1. Background to the China Strategic Offer

The Company is an investment holding company and the principal activities of its subsidiaries involve the manufacturing and trading of battery products, and investments in securities, property and unlisted investments. The Company is listed on the main board of the Stock Exchange and, as at the Latest Practicable Date, had a market capitalisation of approximately HK$167.5 million.

On 19th April, 2005, the Company announced jointly with Hanny, GDI, Well Orient and the Offeror that, inter alia, the Board had been informed by Hanny and Paul Y that they had entered into the Share Sale Agreement with the Offeror pursuant to which and subject to, inter alia, the implementation of the Group Reorganisation in full, the Offeror would acquire an aggregate of 135,000,000 Shares from Hanny and Paul Y for a total consideration of HK$52,110,000 (equivalent to about HK$0.386 per Share).

The Group Reorganisation was completed on 19th May, 2006 and resulted in (i) the Company continuing as a public listed company concentrating on the Remaining Business; (ii) GDI concentrating on the Distributed Business; and (iii) the Shareholders receiving by way of distribution in specie the GDI Shares on the basis of one GDI Share for one Share.

Completion of the Share Sale Agreement took place on 24th May, 2006. As a result, the Offeror was interested in 135,000,000 Shares as at the Latest Practicable Date, representing approximately 30.6% of the issued share capital of the Company. The Offeror is therefore obliged under Rule 26 of the Takeovers Code to make a mandatory unconditional cash offer to acquire all the issued Shares other than those already owned by the Offeror and parties acting in concert with it.

Kingston Securities is making the China Strategic Offer on behalf of the Offeror on the following basis:

For each Share ................................................................................................ HK$0.386 in cash

The China Strategic Offer price of HK$0.386 per Share is the same as the price per Share paid by the Offeror under the Share Sale Agreement to acquire the Shares from Hanny and Paul Y.

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LETTER FROM HERCULES

Hanny and Paul Y are presumed to be parties acting in concert with the Offeror for the purpose of the Takeovers Code. As such, the China Strategic Offer will not be extended to Hanny and Paul Y, which in aggregate still owned approximately 28.1% interest in the Company as at the Latest Practicable Date.

Further terms and conditions of the China Strategic Offer, including the procedures for acceptances, are set out in the letter from Kingston Securities and Appendix I to the Document.

2. Financial information of the Group

Set out in Table 1 below is a summary of the unaudited pro forma income statement of the Group upon completion of the Group Reorganisation as set out in Appendix III to the Document and in Appendix II of the Company’s circular dated 10th September, 2005.

Table 1 — Summary Pro Forma Income Statement of the Group upon completion of the Group Reorganisation

For Turnover Gross profit Gross profit margin Other income Distribution costs Administrative expenses Other expenses Allowance for loans and interest receivables Finance costs Share of results of associates Gain on partial disposal of interests in associates Loss on disposal/dilution of interests in associates Loss before taxation Taxation Net loss for the year	the year ended 31st December, 2005 2004 HK$’000 HK$’000 33,161 27,141 4,682 6,067 14.1% 22.4% 50,001 7,808 (1,609) (850) (26,146) (27,067) (44,059) (31,459) (6,329) (108,470) (17,630) (15,943) (239) 5,091 — 5 — (177) (41,329) (164,995) — (1,207) (41,329) (166,202)

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LETTER FROM HERCULES

For the year ended 31st December, 2005, turnover from the Remaining Business increased by 22.2% to HK$33.2 million. Turnover for financial years 2004 and 2005 was generated from manufacturing and trading of battery products and related accessories. The Group reported net loss of HK$41.3 million for the financial year 2005 despite the significant contribution of other income of HK$50 million (which was primarily attributable to the interest income received by the Remaining Group) and the substantial decrease in allowance for loans and interest receivables. The net loss was mainly attributable to the extensive operating expenses and finance costs incurred for the period. We have been advised by management of the Company that (i) the extensive operating expenses were primarily attributable to the one-off expenses associated with the Group Reorganisation (e.g. special audit and professional fees) of approximately HK$8 million, change in fair value of investments in securities of approximately HK$9 million and allowances for bad and doubtful debts of approximately HK$19 million; and (ii) the finance costs were primarily attributable to the operations of the business of manufacturing and trading of battery products and related accessories.

Summarised in Table 2 below is the Group’s unaudited pro forma balance sheet as set out in Appendix III to the Document and in Appendix II of the Company’s circular dated 10th September, 2005.

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LETTER FROM HERCULES

Table 2 — Unaudited Pro Forma Balance Sheet of the Remaining Group

Non-current Assets
Property, plant and equipment
Prepaid lease payments
Goodwill
Interests in associates
Receivables — due after one year
Investments in securities at fair value through profit or loss
Current Assets
Inventories
Trade receivables
Prepaid lease payments
Amounts due from associates
Loans and interest receivables — due within one year
Other receivables, deposits and prepayments
Investments in securities held for trading
Pledged bank deposits
Bank balances and cash
Current Liabilities
Trade payables, other payables and accrued charges
Amounts due to related companies — due within one year
Payables
Amount due to associates
Income and other tax payable
Bank loans and other borrowings — due within one year
Net Current Assets
Total equity
Capital and Reserves
Share capital
Reserves
Equity attributable to equity holders of the parent
Minority interests
Current ratio (times)
Interest coverage (times)
Total liabilities/equity
Long term debt/equity

As at 31st December,
2005
2004
HK$’000
HK$’000
16,146
34,587
27,763
—
25,807
25,807
—
328
—
5,407
46,572
92,967
116,288
159,096
12,307
13,708
4,773
6,980
620
—
8,008
2,790
102,093
22,735
2,237
3,775
7,552
19,849
1,036
1,012
12,319
430
150,945
71,279
38,684
15,269
556
—
2,796
—
—
3,064
1,130
1,130
8,627
42,612
51,793
62,075
99,152
9,204
215,440
168,300
44,080
44,080
157,108
125,419
201,188
169,499
14,252
(1,199)
215,440
168,300
2.9
1.1
n.a.
n.a.
24.0%
36.9%
0.0%
0.0%

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LETTER FROM HERCULES

Current assets amounted to HK$150.9 million as at 31st December, 2005, representing an increase of 111.8%. The increase was primarily attributable to the substantial increases in loans and interest receivables (from HK$22.7 million as at 31st December, 2004 to HK$102.1 million as at 31st December, 2005) and bank balances and cash (from HK$430,000 as at 31st December, 2004 to HK$12.3 million as at 31st December, 2005). Coupled with a 16.6% decrease in current liabilities, which was mainly attributable to a 79.8% decrease in bank loans and other borrowings, the net current assets as at 31st December, 2005 increased substantially by 9.8 times to approximately HK$99.2 million. Nevertheless, non current assets decreased by 26.9% to HK$116.3 million, offsetting the increase in current assets and resulted in a 28.0% increase in total equity to HK$215.4 million as at 31st December, 2005. Total liabilities to equity ratio improved to 24.0% as at 31st December, 2005 compared to 36.9% as at 31st December, 2004. The Remaining Group recorded losses before interest and tax for the two financial years 2004 and 2005 and therefore could not produce an interest coverage ratio.

3. Future prospects and outlook of the Group

(i) Manufacturing and trading of battery products

The Group acquired a 80% interest in Talent Cosmos Limited (“Talent Cosmos”) in 2004. Talent Cosmos is an investment holding company and its subsidiaries are principally engaged in the manufacturing and trading of batteries and battery-related accessories. Major products include primary battery and re-chargeable battery. According to the Directors, they also cooperated with sizeable Korean battery manufacturing companies to produce “Lithium-ion battery” which is commonly used in digital cameras. As disclosed in the Company’s 2005 interim report, an International Organisation for Standardisation quality control system had been adopted in all aspects of the products. We also note in the Company’s 2005 annual report that a new factory of over 110,000 square meters will be set up by end-2006 which will be equipped with advanced machineries based on a combination of Japanese and European technologies and facilities. In addition, there will be technical experts to provide direct and onsite supervision to ensure the achievement of the highest quality and efficiency.

According to the Freedonia Group, a US-based research firm, global demand for batteries will increase by 6.5 percent annually from 2006 through 2008. The Freedonia Group predicts that mainland China will emerge as one of the world’s biggest battery production bases. According to China Customs statistics, mainland China’s battery production volume currently represents at least 25% of the global supply.

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LETTER FROM HERCULES

The lithium-ion battery market in China is experiencing rapid growth boosted by strong demand in battery-related products such as mobile phones, laptop computers, digital cameras and other personal digital electronic products which are becoming more common in China. China Daily reported on 15th September, 2005 that the increasing popularity of digital products such as cameras and MP3 players had increased demand for batteries, especially those with a longer life. Beijing-based CCID Consulting predicted the market for batteries using new materials including solar cell, alkaline cells and fuel batteries would grow at a compound annual growth rate of 37% from 2005 to 2009.

However, we also note in the Company’s 2005 annual report that keen competition in the battery industry exerted downward pressure on prices of battery products. As advised by management of the Company, the competition led to an overall decrease in gross margin from 22.4% in 2004 to 14.1% in 2005. It was highlighted in the Company’s 2005 interim report and annual report that the battery manufacturing subsidiary of the Group had implemented a series of stringent cost control measures to enhance its cost competitiveness and operational efficiency including discontinuing non-profitable products. In order to expand its revenue base and cashflow stream, it had explored new product opportunities. The battery manufacturing subsidiary of the Group had actively engaged in new product development by introducing the latest technology into its products. In addition, the invention of “No Mercury Button Cell Battery” had obtained a patent in Beijing, the PRC.

Nevertheless, we note that the battery business of the Group reported losses for the financial years 2004 and 2005. In light of the above, we are of the view that the effectiveness of the continued attempts at cost reduction and cost competitiveness enhancement of the battery business remains doubtful. In addition, we note that the track record of Talent Cosmos is relatively short. Therefore, we wish to point out that such business is subject to high degrees of business risks and there is no certainty that this business would be able to turnaround in the near term.

(ii) Investments in listed and unlisted securities, and property

It was highlighted in our letter to the Independent Board Committee and the Qualifying Shareholders contained in the Company’s circular dated 10th September, 2005 that the Company had not formulated any investment strategies or defined its portfolio size, and this remained the case as at the Latest Practicable Date. As such, we are unable to provide an analysis on the outlook for this business. We maintain our view that the Company might be subject to higher investment risks in the absence of any stop-loss policy or maximum investment size.

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LETTER FROM HERCULES

The Group currently owns a commercial unit in Beijing Huapu International Plaza, Chaoyang District, Beijing, the PRC. The property is currently occupied by the Group as office. We were advised by the Directors that there was no plan to dispose of this property as at the Latest Practicable Date.

In light of the above, we cannot conclude that the Remaining Business on its own will provide foreseeable positive future prospects to the Group.

4. Trading performance of the Shares

Set out in Table 3 is the trading statistics of the Shares for the period from 15th May, 2006 (being the first day the Shares commenced trading on the Stock Exchange on an ex-rights basis) to the Latest Practicable Date (the “Review Period”).

Table 3: Trading Statistics for the Review Period

			Premium		As
		(discount) of the			a percentage
		China Strategic			to free
	Closing price	Offer price		Total	float Shares
	(HK$)	to closing price		trading volume	(Note 2)
2006
15th May_(Note 1)_	0.730		(47.1%)	4,647,500	2.6%
16th May_(Note 1)_	0.670		(42.4%)	2,837,500	1.6%
17th May_(Note 1)_	0.680		(43.2%)	2,308,125	1.3%
18th May_(Note 1)_	0.670		(42.4%)	741,950	0.4%
19th May	0.580		(33.4%)	747,500	0.4%
22nd May	0.430		(10.2%)	575,000	0.3%
23rd May	0.385		0.3%	211,250	0.1%
Latest Practicable Date	0.380		1.6%	221,750	0.1%
Highest	0.730		(47.1%)	4,647,500	2.6%
Lowest	0.380		(1.6%)	211,250	0.1%
Average	0.566		(31.8%)	1,536,322	0.8%

Source: the Stock Exchange website

Notes:

Adjustments made to take into account the effect of the Share Consolidation.
Based on 181,977,749 free float Shares, calculated as 440,797,543 Shares in issue less 258,819,794 Shares held by the Offeror, Hanny and Paul Y as at the Latest Practicable Date.

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LETTER FROM HERCULES

As shown in Table 3, closing prices of the Shares traded at a premium to the offer price during most of the days in the Review Period. However, we note that the trading volume of the Shares during the Review Period was relatively low, with average trading volume of approximately 0.8% of the free float Shares. As at the Latest Practicable Date, the aggregate amount of Shares owned by the Qualifying Shareholders represented approximately 118.5 times the average daily trading volume for the Review Period.

Having regard to the low level of liquidity in trading of the Shares during the Review Period and the possible reduced free float Shares as a result of the China Strategic Offer, Qualifying Shareholders would unlikely be able to sell a significant number of their Shares in the market without depressing the market price of the Shares. The China Strategic Offer as such represents an alternative exit to the open market for Qualifying Shareholders to realise their investments.

5. Indicative valuation benchmarks

(a) Price/book multiple

Based on the “Unaudited Pro Forma Balance Sheet” of the Group as set out in Appendix III to this Document, the pro forma net asset value (“NAV”) per Share amounted to approximately HK$0.456 as at 31st December, 2005. The China Strategic Offer price represents a discount of approximately 15.4% to the NAV per Share and a P/B of approximately 0.8 times.

(b) Price/earnings multiple

We note from the “Unaudited Pro Forma Income Statement” of the Group set out in Appendix III to this Document that the Remaining Group had a pro forma net loss of approximately HK$41.3 million for the year ended 31st December, 2005, the use of price/earnings multiple as reference to assess the China Strategic Offer price is therefore not applicable.

(c) Dividend yield

The Group has not declared any dividend in the past five years, the use of dividend yield as reference to assess the China Strategic Offer price is therefore not applicable either.

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LETTER FROM HERCULES

6. Cash offer precedents

For the purpose of assessing the fairness and reasonableness of the China Strategic Offer price, we have attempted to compare it with the cash offers made within a twelve full month period prior to the Latest Practicable Date for companies listed on the main board of the Stock Exchange which are engaged in comparable business to the Remaining Business. However, we were unable to identify any cash offers in the aforesaid period by companies engaged in similar business to the Group. As an alternative, we compared the China Strategic Offer with all cash offers (the “Comparable Offers”) made for companies that were listed on the main board of the Stock Exchange (the “Comparable Companies”) within a twelve full month period prior to the Latest Practicable Date.

Table 4: Comparable Offers

						Premium/
						(discount)
						of share
						offer price
						over/(to)
				Closing		closing
				price as at	Net	price as
Company		Date of	Share	the last	asset value	at the last
(stock code)	Principal activities	announcement	offer price	trading day	per share	trading day	P/B
			HK$	HK$	HK$	%	times
					(Note 1)
Geely Automobile	Manufacturing and trading of	10-May-05	0.090	0.460	0.159	(80.4)	0.6
Holdings Limited	automobile parts and related
(175)	automobile components
	in the PRC
Qingling Motors	Manufacture and sale of light-duty	20-May-05	1.920	1.480	2.729	29.7	0.7
Company Limited	trucks, multi-purposes vehicles,
(1122)	pick-up trucks, heavy duty trucks,
	other vehicles and automobile
	parts and accessories
Goldigit Atom-tech	Sales and marketing of	24-May-05	0.100	0.151	0.144	(33.8)	0.7
Holdings	chemical pesticides
Limited (2362)
Greater China	Production and sales of organic	17-Jun-05	0.500	0.430	0.558	16.3	0.9
Holdings Limited	fertilizers, property investment
(431)	and investment holding

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LETTER FROM HERCULES

						Premium/
						(discount)
						of share
						offer price
						over/(to)
				Closing		closing
				price as at	Net	price as
Company		Date of	Share	the last	asset value	at the last
(stock code)	Principal activities	announcement	offer price	trading day	per share	trading day	P/B
			HK$	HK$	HK$	%	times
					(Note 1)
Sunday	Sales of mobile phones and	22-Jun-05	0.650	0.530	0.235	22.6	2.8
Communications	accessories, mobile services,
Limited (866)	international
	telecommunications and
	other services
The Hong Kong	Investment holding, provision	06-Jun-05	1.0932	1.020	0.975	7.2	1.1
Building and	of mortgage finance and
Loan Agency	other related services and
Limited (145)	treasury investments
China Investment	Investment in listed and	05-Aug-05	0.1625	0.149	0.149	9.1	1.1
Fund Company	unlisted securities
Limited (612)
Wanji	Distribution of medical equipment	12-Aug-05	0.100	0.140	0.012	(28.6)	8.2
Pharmaceutical	and medicinal and
Holdings Limited	winery products
(835)
New Spring	Manufacturing and trading of	01-Sep-05	0.497	0.500	0.420	(0.6)	1.2
Holdings Limited	packaging products, paper gift
(690)	items and promotional products
	and investment holding
UDL Holdings	Marine engineering and provision of	07-Sep-05	0.040	0.023	n.a.	73.9	n.a.
Limited (620)	miscellaneous engineering and			(Note 2)			(Note 3)
	management services
Geo Maxima Energy	Provision of crude oil transportation,	08-Sep-05	0.0362	0.055	0.116	(34.2)	0.3
Holdings Limited	storage and unloading services,
(702)	operation of natural gas pipeline
	network and refilling stations
	supplying natural gas and liquefied
	petroleum gas (“LPG”) for vehicle
	use and sale of LPG in cylinder

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LETTER FROM HERCULES

						Premium/
						(discount)
						of share
						offer price
						over/(to)
				Closing		closing
				price as at	Net	price as
Company		Date of	Share	the last	asset value	at the last
(stock code)	Principal activities	announcement	offer price	trading day	per share	trading day	P/B
			HK$	HK$	HK$	%	times
					(Note 1)
Goldigit Atom-tech	Sales and marketing of	12-Sep-05	0.200	0.120	0.144	66.7	1.4
Holdings Limited	chemical pesticides
(2362)
China National	Securities trading and investments,	14-Sep-05	0.033	0.175	0.021	(81.1)	1.6
Resources	property investment, property
Development	management and computer
Holdings Limited	related service
(661)
China Resources	Provision of mobile voice and	20-Oct-05	4.550	3.900	1.402	16.7	3.2
Peoples Telephone	data communications services
Company Limited	in Hong Kong
(331)
MAXX Bioscience	Investment holding; manufacturing,	16-Dec-05	0.075	0.103	0.089	(27.2)	0.8
Holdings Limited	trading and distribution of health
(512)	products, health drinks and
	pharmaceutical products; research
	and development of drug products
	and bioscience related projects
China Motion	The provision of international	12-Jan-06	0.069	0.115	0.209	(39.7)	0.3
Telecom	telecommunication services,
International	mobile communications services
Limited (989)	and distribution and retail chain
China Nan Feng	Construction contractor and	26-Jan-06	0.093	0.075	0.008	24.0	11.3
Group Limited	provision of management
(979)	services
Chun Wo Holdings	Civil engineering, electrical and	22-Feb-06	0.840	0.710	1.034	18.3	0.8
Limited (711)	mechanical engineering,
	foundation and building
	construction work, property
	development and property
	investment

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LETTER FROM HERCULES

						Premium/
						(discount)
						of share
						offer price
						over/(to)
				Closing		closing
				price as at	Net	price as
Company		Date of	Share	the last	asset value	at the last
(stock code)	Principal activities	announcement	offer price	trading day	per share	trading day	P/B
			HK$	HK$	HK$	%	times
					(Note 1)
Nority International	manufactures and exports athletic	4-Apr-06	0.4700	0.410	0.751	14.6	0.6
Group Limited	and athletic-style leisure			(Note 4)
(660)	footwear and sports shoes
Cross Harbour	Operation of driver training centres,	10-Apr-06	4.083	6.750	7.04	(39.5)	0.6
(Holdings)	operations of the Western
Limited (32)	Harbour Tunnel and electronic
	toll operation, and treasury
First Pacific	Telecommunications and consumer	28-Apr-06	2.200	3.250	0.94	(32.3)	2.3
Company Limited	food products				4.210	(22.8)	0.5
(142)					(Note 5)
CMSC Technologies	Own and operate the open	12-May-06	0.420	0.400	0.457	5.0%	0.9
Corporation (597)	semiconductor foundries in				(Note 7)
	China, provide manufacturing
	services for complementary
	metal oxide silicon logic, mixed
	signal, high voltage, non-volatile
	memory, electrically erasable
	programmable read-only
	memory integrated circuits, and
	double-difussed metal oxide
	silicon integrated circuits
Maximum						73.9	11.3
Minimum						(81.1)	0.3
The Company	Manufacture and trading of battery	19-Apr-05	0.386	0.380	0.456	1.6	0.8
	products and related accessories,			(Note 6)
	and investment in securities and
	property

Source: Stock Exchange website

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LETTER FROM HERCULES

Notes:

Calculated as the audited/unaudited net assets divided by the number of shares in issue as at the latest balance sheet date prior to the respective date of announcement and n.a. denotes not applicable as these Comparable Companies recorded audited/unaudited net deficit as at their latest balance sheet date prior to the respective dates of announcement.
Being the closing prices of the shares on the date of announcement as the shares had not been suspended for trading prior to the release of the announcement.
n.a. denotes not applicable as this Comparable Company recorded audited/unaudited net deficit as at its latest balance sheet date prior to the date of announcement.
Being the closing price of the Shares on the last full trading day before the date of the announcement.
Being the adjusted net asset value per share as disclosed in First Pacific Company Limited’s annual report for the year ended 31st December, 2005.
Being the closing price on the Latest Practicable Date.
Net asset of value of approximately US$0.059 per share has been converted into HK$ at the exchange rate of US$1=HK$7.8.

As indicated in the table above, the share offer prices of the Comparable Offers to their respective closing prices as at the last trading day range from a premium of approximately 73.9% to a discount of approximately 81.1%. The China Strategic Offer price of HK$0.386 represents a premium of approximately 1.6% over the closing price of the Shares as at the Latest Practicable Date, which is within the range of the Comparable Offers.

The P/B ratios of the Comparable Offers range from 0.3 times to a maximum of approximately 11.3 times, with an average of approximately 2.1 times. As noted in Table 4, the cash offer of UDL Holdings Limited could not produce a P/B ratio as it recorded audited net deficit as at its latest balance sheet date prior to its date of announcement. The implied P/B ratio of the China Strategic Offer price of approximately 0.8 times therefore falls within the market range.

Based on the above, we are of the view that the China Strategic Offer price is fair and reasonable so far as the Qualifying Shareholders are concerned.

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LETTER FROM HERCULES

7. Trading statistics of Industry Comparables

In assessing the fairness and reasonableness of the China Strategic Offer price, we have also reviewed the trading statistics of three companies listed on the main board of the Stock Exchange (the “Industry Comparables”) whose businesses largely consist of manufacturing and trading of battery products and are considered to be broadly comparable to the principal business of the Remaining Group:

Table 5: Trading Statistics of the Industry Comparables

Industry
Comparables		Market			Dividend
(stock code)	Principal business	Capitalisation	P/E	P/B	yield
		(HK$’million)	(x)	(x)	(%)
Coslight Technology	Manufacture and sale of sealed lead	1,039.1	9.7	1.1	2.5
International	acid batteries and related
Group Ltd. (1043)	accessories, lithium ion batteries,
	and electricity control device
Gold Peak Industries	Development, manufacture and	631.7	8.9	0.5	5.2
(Holdings) Ltd.	distribution of batteries, electrical
(40)	installation products, automotive
	electronics, speciality electronics,
	parts and components, wire harness
	and cables, loudspeakers and
	LED display screens
BYD Co. Ltd.	Research, development, manufacture	7,553.0	14.8	1.8	n.a.
(1211)	and sale of Li-ion batteries,
	NiCd batteries and NiMh batteries.
Maximum			14.8	1.8	5.2
Minimum			8.9	0.5	2.5
Average			11.1	1.1	3.9
The Company		167.5	n.a.	0.8	n.a.

Notes:

Market capitalisation and valuation multiples of the Industry Comparables are quoted from Bloomberg.

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LETTER FROM HERCULES

Price to book ratio for the Company is calculated as the China Strategic Offer price divided by the unaudited pro forma net asset value of HK$0.456 per Share as at 31st December, 2005 based on the “Unaudited Pro Forma Balance Sheet” of the Group as set out in Appendix III to this Document and 440,797,543 Shares in issue as at the Latest Practicable Date.
Market capitslisation of the Company is calculated as the closing price of the Shares times 440,797,543 Shares in issue as at the Latest Practicable Date.

As illustrated in Table 5 above, the Company’s implied P/B ratio, based on the China Strategic Offer price for the Shares, of 0.8 times is in line with the range of the Industry Comparables. We are of the view that the China Strategic Offer price is fair and reasonable so far as the Qualifying Shareholders are concerned.

8. Intention of the Offeror regarding the future of the Company

As set out in the “Letter from Kingston Securities” contained in the Document, it is the intention of the Offeror to continue the Remaining Business of the Company and review the financial position and business operations of the Company with a view to strengthening the operations and future development of the Company. The Offeror will also adopt the business strategy of making investments with good earnings potential that can complement the Remaining Business. It is the intention of the Offeror to hold the Shares acquired from the Share Sale on a long term basis. The Offeror will also explore other business opportunities and consider whether any asset disposals, asset acquisitions, business diversification will be appropriate in order to enhance the long term growth of the Company. As at the Latest Practicable Date, the Offeror had no concrete plan as to any changes to the existing business of the Company including any redeployment of the fixed assets of the Group and any injection of assets into the Group. Due to lack of specific information on the future business plans of the Offeror, we can not draw the conclusion that there will be any significant change in the scale of operation of the Group in the foreseeable future.

9. Maintaining the listing status of the Company

The Letter from Kingston Securities states, inter alia, that:

(i) The Stock Exchange has stated that if, at the close of the China Strategic Offer, less than the minimum prescribed percentage applicable to the Company, being 25% of the issued Shares, are held by the public, or if the Stock Exchange believes that a false market exists or may exist in the trading of the Share or that there are insufficient Shares in public hands to maintain an orderly market, it will consider exercising its discretion to suspend dealings in the Shares.

– 44 –

LETTER FROM HERCULES

(ii) The Stock Exchange has also stated that, if the Company remains a listed company, any future injections of assets into or disposals of assets of the Company will be subject to the provisions of the Listing Rules. Pursuant to the Listing Rules, the Stock Exchange has the discretion to require the Company to issue a circular to its shareholders where any acquisition or disposal by the Company is proposed, irrespective of the size of such acquisition or disposal and in particular where such acquisition or disposal represents a departure from the principal activities of Company. The Stock Exchange also has the power pursuant to the Listing Rules, to aggregate a series of acquisitions or disposals by the Company and any such acquisitions or disposals may, in any event, result in the Company being treated as a new applicant for listing and subject to the requirements for new applicants as set out in the Listing Rules.
(iii) The Offeror has no intention to privatise the Company. The Offeror intends to maintain the listing of the Shares on the Stock Exchange, and each of the Company, the Offeror and their respective directors and the new directors to be appointed to the Board have jointly and severally undertaken to the Stock Exchange to take appropriate steps to ensure that 25% of the issued share capital of the Company is in the hands of the public which is in compliance with the Listing Rules.

Despite the intention of the Offeror, in light of the above statements made by the Stock Exchange, Qualifying Shareholders should note that, upon completion of the China Strategic Offer, there may be insufficient public float for the Shares and therefore trading in the Shares may be suspended until a sufficient level of public float is attained.

RECOMMENDATION

Having considered the principal factors discussed above, in summary:

the Group recorded a pro forma loss of HK$41.3 million from the Remaining Business for the year ended 31st December, 2005;
as noted in Appendix II to the Document and Table 1, the Group has a history of losses, there is no assurance that the Company could become profitable or its losses would not increase in the future;
the business prospects of the Remaining Business remain uncertain, in particular, the future outlook of the battery business depends on the successful implementation of effective cost reduction measures, however, such measures proved ineffective for the financial years 2004 and 2005;
the Offeror’s business plans lack specific details as to the future development of the Group;

– 45 –

LETTER FROM HERCULES

in view of the low liquidity of the Shares during the Review Period, Qualifying Shareholders may find it difficult to dispose of their Shares in the open market without adversely affecting the market price of the Shares; and
the P/B ratio of the Company based on the China Strategic Offer price is in line with the range based on the Comparable Offers and the Industry Comparables.

we are of the view that the China Strategic Offer in general (including the China Strategic Offer price) is fair and reasonable so far as the Qualifying Shareholders are concerned. We therefore recommend the Independent Board Committee to advise the Qualifying Shareholders to accept the China Strategic Offer.

However, given the fact that the Shares were trading at a premium over the China Strategic Offer price during most of the days in the Review Period and the average closing price of the Shares during the Review Period represented a premium of approximately 31.8% to the China Strategic Offer price, Qualifying Shareholders who intend to accept the China Strategic Offer should be reminded to closely monitor the market price and the liquidity of the Shares during the Offer Period and should dispose of their Shares, in whole or in part, in the open market instead of accepting the China Strategic Offer only if, by doing so, the net realisable amount would be higher than that receivable under the China Strategic Offer.

For those Qualifying Shareholders who wish to retain part or all of their investments in the Shares, they should carefully consider the future intentions of the Offeror regarding the Group and evaluate the future prospects of the Group, details of which are set out in the letter from Kingston Securities contained in the Document.

Qualifying Shareholders should read carefully the procedures for accepting the China Strategic Offer as detailed in Appendix I to the Document and are strongly advised that the decision to realise or hold their investment in the Shares is subject to individual circumstances as well as their own investment objectives and tax position.

Yours faithfully, For and on behalf of

Hercules Capital Limited Louis Koo Managing Director

– 46 –

APPENDIX I FURTHER TERMS OF THE CHINA STRATEGIC OFFER

1. PROCEDURE FOR ACCEPTANCE

If the Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title in respect of your Shares are in your name, and you wish to accept the China Strategic Offer, you must send the duly completed Form of Acceptance together with the relevant Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title and/or any indemnity or indemnities required in respect thereof, to the Company’s share registrar, Standard Registars Limited, 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong (the “Registrar”) in any event not later than 4:00 p.m. on Friday, 16th June, 2006 or such later time and/or date as the Offeror may determine and announce in accordance with the Takeovers Code.

If the Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title in respect of your Shares is in the name of a nominee company or some name other than your own, and you wish to accept the China Strategic Offer whether in full or in respect of part of your holding of Shares, you must either:

(a) lodge your Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title, with the nominee company, or other nominee, with instructions authorising it to accept the China Strategic Offer on your behalf and requesting it to deliver the relevant Form of Acceptance duly completed together with the relevant Share certificate(s) and/ or transfer receipt(s) and/or any other document(s) of title to the Registrar; or
(b) arrange for the Shares to be registered in your name by the Company through the Registrar and send the relevant Form of Acceptance duly completed together with the relevant Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title to the Registrar; or
(c) if your Shares have been lodged with your licensed securities dealer in securities/custodian bank through CCASS, instruct your licensed securities dealer in securities/custodian bank to authorise HKSCC Nominees Limited to accept the China Strategic Offer on your behalf on or before the deadline set out by HKSCC Nominees Limited. In order to meet the deadline set by HKSCC Nominees Limited, you should check with your licensed securities dealer in securities/custodian bank for the timing on processing of your instruction, and submit your instruction to your licensed securities dealer in securities/ custodian bank as required by them; or

– 47 –

APPENDIX I

FURTHER TERMS OF THE CHINA STRATEGIC OFFER

(d) if your Shares have been lodged with your investor participant’s account with CCASS, authorise your instruction via the CCASS phone system or CCASS internet system on or before the deadline set by HKSCC Nominees Limited.

If the Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title in respect of your Shares is not readily available and/or is lost and you wish to accept the China Strategic Offer, as the case may be, the relevant Form of Acceptance should nevertheless be completed and delivered to the Registrar together with a letter stating that you have lost one or more of your Share certificate(s) and/or transfer receipts and/or other document(s) of title or that it/they is/are not readily available. If you find such document(s) or if it/they become available, the relevant Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title should be forwarded to the Registrar as soon as possible thereafter. If you have lost your Share certificate(s), you should also write to the Registrar a letter of indemnity which, when completed in accordance with the instruction given, should be returned to the Registrar.

If you have lodged transfer(s) of any of your Shares for registration in your name and have not yet received your Share certificate(s), and you wish to accept the China Strategic Offer, you should nevertheless complete the relevant Form of Acceptance and deliver it/them to the Registrar together with the transfer receipt(s) duly signed by yourself. Such action will be deemed to be an irrevocable authority to any of Kingston Securities, Kingston Corporate Finance Limited, the Company, the Offeror or their respective agent(s) to collect from the Company or the Registrar on your behalf the relevant Share certificate(s) when issued and to deliver such certificates to the Registrar and to authorise and instruct the Registrar to hold such certificate(s), subject to the terms and conditions of the China Strategic Offer, as if it/they were delivered to the Registrar with the relevant Form of Acceptance.

An acceptance may not be counted as valid unless:

(a) it is received by the Registrar on or before the latest time for acceptance at 4:00 p.m. on Friday, 16th June, 2006 or such later time and/or date as the Offeror may determine and announce in accordance with the Takeovers Code and the Registrar has recorded that the acceptance has been so received; and
(b) the Form of Acceptance is duly completed and is:
(i) accompanied by Share certificate(s) in respect of the relevant Shares and, if those certificate(s) are not in the name of the acceptor, such other documents (e.g. a duly stamped transfer of the relevant Shares in blank or in favour of the acceptor executed by the registered holder) in order to establish the right of the acceptor to become the registered holder of the relevant Shares; or

– 48 –

APPENDIX I FURTHER TERMS OF THE CHINA STRATEGIC OFFER

(ii) from a registered holder or his personal representatives (but only up to the amount of the registered holding and only to the extent that the acceptance relates to the Shares which are not taken into account under another subparagraph of this paragraph (b)); or
(iii) certified by the Registrar or the Stock Exchange.

If the Form of Acceptance is executed by a person other than the registered holder, appropriate evidence of authority (e.g. grant of probate or certified copy of a power of attorney) must be produced.

No acknowledgement of receipt of any Form of Acceptance, Share certificate(s) and/or transfer receipt(s) and/or any other document(s) of title (and/or any satisfactory indemnity or indemnities required in respect thereof) will be given.

2. SETTLEMENT

Provided that the relevant Form of Acceptance and the relevant Share certificate(s) and, or transfer receipt(s) and, or any document(s) of title (and, or any satisfactory indemnity or indemnities required in respect thereof) are in complete and good order in all respects and have been received by the Registrar not later than by 4:00 p.m. on Friday, 16th June, 2006 or such later time and/or date as the Offeror may determine and announce in accordance with the Takeovers Code, a cheque for the amount representing the cash consideration due to you in respect of the Shares tendered by you under the China Strategic Offer, less seller’s ad valorem stamp duty payable by you, will be despatched to you to the address as specified on the Form of Acceptance by ordinary post at your own risk as soon as possible but in any event within 10 days of the date on which all the relevant documents which render such acceptance complete and valid are received by the Registrar.

Settlement of the consideration to which any accepting Shareholder are entitled under the China Strategic Offer will be implemented in full in accordance with the terms of the China Strategic Offer, without regard to any lien, right of set-off, counterclaim or other analogous right to which the Offeror may otherwise be, or claim to be, entitled against such accepting Shareholder.

– 49 –

APPENDIX I FURTHER TERMS OF THE CHINA STRATEGIC OFFER

3. ACCEPTANCE PERIOD, REVISIONS AND EXTENSIONS

If the China Strategic Offer is revised or extended, the announcement of such revision or extension will state the next closing date. If the China Strategic Offer is revised or extended, the China Strategic Offer will remain open for acceptance until further notice. In such case, at least 14 days’ notice in writing must be given, before the China Strategic Offer is closed, to those Shareholders who have not accepted the China Strategic Offer and an announcement will be published.

4. ANNOUNCEMENTS

(i) By 6:00 p.m. on Friday, 16th June, 2006, which is the closing date of the China Strategic Offer, the Offeror must inform the Executive and the Stock Exchange of its decisions in relation to revision, extension or expiry of the China Strategic Offer. The Offeror shall publish an announcement on the Stock Exchange’s website by 7:00 p.m. on the closing date of the China Strategic Offer stating whether the China Strategic Offer have expired, been extended or revised (as the case may be). Such announcement will be published on the next business day in accordance with paragraph (iii) below. The announcement shall specify the total number of Shares and the rights over Shares (a) which the Offeror and any person acting in concert with it, directly and indirectly, owns or controls as at the date of that announcement; (b) for which valid acceptances have been received; (c) held, controlled or directed by the Offeror or persons acting in concert with it before the offer period of the China Strategic Offer; and (d) acquired or agreed to be acquired by the Offeror or any person acting in concert with it during the offer period of the China Strategic Offer.

The announcement must specify the percentages of the relevant class of share capital and the percentages of voting rights of the Company represented by the above number of Shares.

(ii) Acceptances not complete in all respects and purchases must only be included in the totals in the announcement of results of China Strategic Offer where they could be counted towards fulfilling an acceptance condition under the Takeovers Code.

– 50 –

APPENDIX I FURTHER TERMS OF THE CHINA STRATEGIC OFFER

(iii) As required under the Takeovers Code and the Listing Rules, all announcements in relation to the China Strategic Offer, in respect of which the Executive and the Stock Exchange have confirmed that they have no further comments thereon, must be published as a paid announcement in at least one English language newspaper and one Chinese language newspaper, being in each case a newspaper which is published daily and circulated generally in Hong Kong and specified in the list of newspapers issued and published in the Gazette for the purpose of section 71A of the Companies Ordinance.

5. RIGHT OF WITHDRAWAL

Acceptances of the China Strategic Offer shall be irrevocable and will not be permitted to be withdrawn, except in the circumstances to the effect that if the Offeror is unable to comply with any of the requirements of making announcements under Rule 19 of the Takeovers Code relating to the China Strategic Offer, the Executive may require that the accepting shareholders be granted a right of withdrawal, on terms acceptable to the Executive, until such requirements are met.

6. STAMP DUTY

Stamp duty at a rate of HK$1.00 for every HK$1,000 (or part thereof) of the amount payable which is based on the number of accepted Shares and the market value of the Share or the China Strategic Offer price (subject to the discretion of Inland Revenue Department of Hong Kong) in respect of relevant acceptance will be deducted from the consideration payable to the accepting Shareholders. The Offeror will then on behalf of the accepting Shareholders pay such amount to the Inland Revenue Department of Hong Kong. The Offeror will also pay stamp duty payable by it as purchaser of the Shares pursuant to the China Strategic Offer based on the gross consideration payable to the accepting Shareholders in respect of the China Strategic Offer.

7. OVERSEAS SHAREHOLDERS

The making of the China Strategic Offer to Overseas Shareholders may be prohibited or affected by the laws of the relevant jurisdictions. Overseas Shareholders should obtain appropriate legal advice on, inform themselves about and observe any applicable legal requirement. It is the responsibility of each Overseas Shareholder who wishes to accept the China Strategic Offer to satisfy himself, herself or itself as to the full observance of the laws of the relevant jurisdiction in connection therewith, including the obtaining of any governmental, exchange control or other consents which may be required and the compliance with other necessary formalities or legal requirements.

– 51 –

FURTHER TERMS OF THE CHINA STRATEGIC OFFER

APPENDIX I

8. GENERAL

(i) The Shares subject to the China Strategic Offer will be acquired ex-entitlement to the dividend distribution in specie of the GDI Shares but cum the right to receive all dividends or distributions declared, paid or made on or after completion of the Group Reorganisation and free from all third party rights attaching thereto on or after that date. Acceptance of the China Strategic Offer by any person or persons holding Shares will be deemed to constitute a warranty by such person or persons to the Offeror that the Share(s) acquired under the China Strategic Offer are sold by any such person or persons free from all liens, charges, encumbrances, equities and third party rights and together with all rights attaching thereto, including the right to receive all dividends and distributions declared, made or paid on or after the completion of the Group Reorganisation.
(ii) All communications, notices, Forms of Acceptance, certificates, transfer receipts, other documents of title (and/or any satisfactory indemnity or indemnities required in respect thereof) and remittances to be delivered by or sent to or from the Shareholders will be delivered by or sent to or from them, or their designated agents, through post at their own risk, and none of the Offeror, the Company, Kingston Securities, Kingston Corporate Finance Limited nor the Registrar or any of their respective agents, accepts any liability for any loss in postage or any other liabilities that may arise as a result thereof.
(iii) The provisions set out in the Forms of Acceptance form part of the terms of the China Strategic Offer.
(iv) The accidental omission to despatch this composite document and/or the Form of Acceptance or any of them to any person to whom the China Strategic Offer are made will not invalidate the China Strategic Offer in any way.
(v) The China Strategic Offer and all acceptances will be governed by and construed in accordance with the laws of Hong Kong.
(vi) Due execution of a Form of Acceptance will constitute an authority to the Company, any Directors, the Offeror, any directors of the Offeror, Kingston Securities, Kingston Corporate Finance Limited or such person or persons as the Offeror may direct, to complete and execute any document on behalf of the person or persons accepting the China Strategic Offer and to do any other act that may be necessary or expedient for the purposes of vesting in the Offeror, or such person or persons as they may direct, the Shares in respect of which such person or persons has/have accepted the China Strategic Offer.

– 52 –

APPENDIX I FURTHER TERMS OF THE CHINA STRATEGIC OFFER

(vii) References to the China Strategic Offer in this composite document and in the Forms of Acceptance shall include any extension and/or revision thereof.
(viii) The English text of this composite document and of the Forms of Acceptance shall prevail over their respective Chinese text.

– 53 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

SHARE CAPITAL

Authorised and issued share capital

The authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:

HK$

Authorised:

8,000,000,000 Shares Issued and fully paid: 440,797,543 Shares	800,000,000.00

	44,079,754.30

All the existing issued Shares rank pari passu in all respects including all rights as to dividends, voting and return of capital. Save for the Capital Reorganisation, there has been no change in the authorised and issued share capital of the Company since the last financial year ended 31st December, 2005.

As at the Latest Practicable Date, the Group did not have any outstanding options, warrants or other securities carrying rights of conversion into or exchange or subscription for the Shares.

– 54 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

FINANCIAL SUMMARY

The following is a summary of the audited consolidated profit and loss accounts and consolidated balance sheet of the Group for the three years ended 31st December, 2003, 31st December, 2004 and 31st December, 2005 extracted from the relevant annual reports of the Company, which have not taken into account the effect of the Group Reorganisation on the Group. The auditors of the Company has not issued any qualified opinions toward the Company’s financial statements for each of the three years ended 31st December, 2005. Shareholders are advised to refer to “Unaudited pro forma financial information on the Group” set out in Appendix III to this composite document for the effect of the Group Reorganisation on the Group.

RESULTS
Turnover
Loss before taxation
Taxation
Loss for the year from
continuing operations
Profit for the year from
discontinued operations
Loss for the year
Attributable to:
Equity holders of the parent
Minority interests
Dividend
Loss per share
— Basic
— Diluted

Year ended 31st December,
2005
2004
2003
HK$’000
HK$’000
HK$’000
(Note 1)
(Note 2)
(Note 3)
38,459
27,141
2,884,493
(95,633)
(129,267)
(169,184)
(4,247)
(6,464)
(10,935)
(99,880)
(135,731)
(180,119)
—
1,511
—
(99,880)
(134,220)
(180,119)
(95,200)
(179,244)
(189,528)
(4,680)
45,024
9,409
(99,880)
(134,220)
(180,119)
—
—
—
HK$(0.11)
HK$(0.21)
HK$(0.23)
N/A
N/A
N/A

– 55 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Total assets Total liabilities Equity attributable to equity holders of the parent Minority interests	As at 31st December, 2005 2004 HK$’000 HK$’000 (Note 1) (Note 2) 1,958,869 1,899,356 (303,300) (295,202) 1,655,569 1,604,154 1,325,314 1,308,545 330,255 295,609 1,655,569 1,604,154	2003 HK$’000 (Note 3) 2,189,244 (405,704) 1,783,540 1,533,380 250,160 1,783,540

Notes: 1. The audited financial statements of the Group for the years ended 31st December, 2003, 2004 and 2005 have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards which are effective for accounting periods beginning on or after 1st January, 2005.

2. The amounts have been restated as a result of application of new and revised Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants.

3. The amounts have been extracted from the annual report of the Company for the year ended 31st December, 2003 and have not been restated as a result of application of new and revised Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants. The adoption of the new Hong Kong Financial Reporting Standards had no significant impact on the Group’s financial position as at 31st December, 2003.

4. There is no extraordinary or exceptional item that is required to be included in the audited consolidated income statement of the Company for each of the three years ended 31st December, 2005.

– 56 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

FINANCIAL STATEMENTS

The following is a summary of the audited consolidated financial statements of the Group for the two years ended 31st December, 2004 and 2005 as extracted from the relevant annual reports of the Company.

Consolidated Income Statement

For the year ended 31st December, 2005

Notes Turnover 7 Cost of sales Gross profit Other income 9 Distribution costs Administrative expenses Other expenses 10(a) Allowances for loans and interest receivable 10(b) Finance costs 11 Change in fair value of conversion option of unlisted convertible note 23(a)(iv) (Loss) gain on dilution/disposal of interests in associates Share of results of associates Loss before taxation Taxation 12 Loss for the year from continuing operations Profit for the year from discontinued operations 15 Loss for the year 13 Attributable to: Equity holders of the parent Minority interests Loss per share 16 From continuing and discontinued operations — Basic — Diluted	2005 HK$’000 38,459 (32,936) 5,523 83,623 (2,974) (59,948) (67,089) (37,445) (17,630) (39,743) (2,814) 42,864 (95,633) (4,247) (99,880) — (99,880) (95,200) (4,680) (99,880) (0.11) N/A	2004 HK$’000 (restated) 27,141 (21,074) 6,067 59,762 (850) (36,662) (40,325) (140,889) (17,434) — 81,631 (40,567) (129,267) (6,464) (135,731) 1,511 (134,220) (179,244) 45,024 (134,220) (0.21) N/A

– 57 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Balance Sheet

as at 31st December, 2005

Notes Non-Current Assets Property, plant and equipment 17 Prepaid lease payments 18 Deposit paid for acquisition of interest in properties 19 Payment for acquisition of subsidiaries 20 Goodwill 21 Interests in associates 23(a) Loans and interest receivables — due after one year 24 Other investments 25 Investments in securities at fair value through profit or loss 25 Current Assets Other asset 26 Inventories 27 Trade receivables 28 Prepaid lease payments 18 Amounts due from associates 23(b) Loans and interest receivable — due within one year 24 Other receivables, deposits and prepayments Other investments 25 Investments in securities held for trading 25 Pledged bank deposits 43 Bank balances and cash Current Liabilities Trade payables, other payables and accrued charges 29 Amounts due to related companies — due within one year 30 Payables 31 Amounts due to associates 23(c) Income and other tax payable Bank loans and other borrowings — due within one year 32 Net Current Assets	2005 HK$’000 125,957 27,763 55,716 — 34,930 558,738 — — 117,919 921,023 229,288 12,409 4,773 620 159,214 464,232 42,909 — 7,552 1,036 115,813 1,037,846 56,159 200,287 3,379 286 13,387 8,627 282,125 755,721 1,676,744	2004 HK$’000 (restated) 14,971 19,820 47,012 40,000 25,807 425,808 37,044 194,050 —
		804,512
		227,167 13,708 6,980 447 57,163 563,666 86,464 19,849 — 1,012 118,388
		1,094,844
		46,075 692 7,945 3,737 9,185 42,622
		110,256
		984,588
		1,789,100

– 58 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes Capital and Reserves Share capital 33 Reserves Equity attributable to equity holders of the parent Minority Interests Total equity Non-Current Liabilities Bank loans and other borrowings — due after one year 32 Amounts due to related companies — due after one year 30 Deferred tax liabilities 38	2005 HK$’000 88,160 1,237,154 1,325,314 330,255 1,655,569 — — 21,175 21,175 1,676,744	2004 HK$’000 (restated) 88,160 1,220,385
		1,308,545 295,609
		1,604,154

		3 184,943 —
		184,946
		1,789,100

– 59 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Balance Sheet

as at 31st December, 2005

Notes Non-Current Assets Property, plant and equipment 17 Prepaid lease payments 18 Amounts due from subsidiaries 22 Investments in subsidiaries 22 Interests in associates 23(a) Investments in securities at fair value through profit or loss 25 Investments in securities 25 Current Assets Prepaid lease payments 18 Amounts due from associates 23(b) Loans and interest receivables — due within one year 24 Other receivables, deposits and prepayments Bank balances and cash Current Liabilities Other payables and accrued charges Amounts due to related companies — due within one year 30 Amounts due to subsidiaries 22 Bank loans and other borrowings — due within one year 32 Net Current (Liabilities) Assets Capital and Reserves Share capital 33 Reserves 35 Non-Current Liabilities Bank loans and other borrowings — due after one year 32 Amounts due to subsidiaries 22 Amounts due to related companies — due after one year 30	2005 HK$’000 2,426 3,862 1,937,683 145,034 2 825 — 2,089,832 117 2,989 9,292 3,008 8,745 24,151 3,453 199,731 737,054 3 940,241 (916,090) 1,173,742 88,160 1,085,582 1,173,742 — — — — 1,173,742	2004 HK$’000 (restated) 2,285 3,980 1,835,579 145,034 2 — 825
		1,987,705
		117 563 6,735 3,122 43,550
		54,087
		8,013 275 — 10
		8,298
		45,789
		2,033,494

		88,160 920,163
		1,008,323
		3 840,225 184,943
		1,025,171
		2,033,494

– 60 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Statement of Changes in Equity

For the year ended 31st December, 2005

Share capital HK$’000 85,660	Share premium HK$’000 1,898,976	Special capital reserve HK$’000 414,881	Attributable to equity holders of the parent Capital Goodwill Other non- redemption on Exchange distributable reserve consolidation reserve reserves HK$’000 HK$’000 HK$’000 HK$’000 233 110,472 (8,468) 18,905	Attributable to equity holders of the parent Capital Goodwill Other non- redemption on Exchange distributable reserve consolidation reserve reserves HK$’000 HK$’000 HK$’000 HK$’000 233 110,472 (8,468) 18,905	Attributable to equity holders of the parent Capital Goodwill Other non- redemption on Exchange distributable reserve consolidation reserve reserves HK$’000 HK$’000 HK$’000 HK$’000 233 110,472 (8,468) 18,905	Attributable to equity holders of the parent Capital Goodwill Other non- redemption on Exchange distributable reserve consolidation reserve reserves HK$’000 HK$’000 HK$’000 HK$’000 233 110,472 (8,468) 18,905	Deficit Total HK$’000 HK$’000 (987,279) 1,533,380	Deficit Total HK$’000 HK$’000 (987,279) 1,533,380	Minority interests HK$’000 250,160	Total HK$’000 1,783,540
— —	— —	— —	— —	— —	(588) — — (99) (307) —			(588) (756) (1,344) (406) — (406)
—	—	—	—	—	(687) (307) —			(994) (756) (1,750)
—	—	—	—	—	—	—	(179,244) (179,244) 45,024			(134,220)
—	—	—	—	—	(687) (307) (179,244) (180,238) 44,268					(135,970)
2,500 — — —	1,940 — — —	— — — —	— — — —	— — — — — — (48,225) (825) — — 13 —			— — — —	4,440 — — 1,181 (49,050) — 13 —		4,440 1,181 (49,050) 13
88,160 —	1,900,916 —	414,881 —	233 —	62,247 (9,967) 18,598 (62,247) — —			(1,166,523) 1,308,545 155,451 93,204		295,609 21,942	1,604,154 115,146
88,160	1,900,916	414,881	233	—	(9,967) 18,598		(1,011,072) 1,401,749		317,551	1,719,300
— — —	— — —	— — —	— — —	— — —	(763) — — — 35,365 — — (15,837) —			(763) (1,027) (1,790) 35,365 — 35,365 (15,837) 15,837 —
—	—	—	—	—	(763) 19,528		—	18,765	14,810	33,575
—	—	—	—	—	—	—	(95,200) (95,200) (4,680) (99,880)
—	—	—	—	—	(763) 19,528		(95,200) (76,435) 10,130			(66,305)
—	—	—	—	—	—	—	—	—	2,574	2,574
88,160	1,900,916	414,881	233	—	(10,730) 38,126		(1,106,272) 1,325,314		330,255	1,655,569

The special capital reserve of the Group represents the amount arising from the capital reduction carried out by the Company during the year ended 31st December, 2001.

The other non-distributable reserves of the Group include statutory reserves required to be appropriated from the profit after taxation of the Company ’ s subsidiaries and associates of The People ’ s Republic of China (“PRC”) under PRC laws and regulations. The amount of the appropriation is at the discretion of the PRC subsidiaries’ board of directors.

– 61 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31st December, 2005

OPERATING ACTIVITIES Loss before taxation Adjustments for: Finance costs Change in fair value of conversion option of unlisted convertible note Loss (gain) on dilution of interests in associates Share of results of associates Profit from discontinued operations Loss on disposal of interests in subsidiaries Dividend income Interest income Amortisation of prepaid lease payments Depreciation of property, plant and equipment Amortisation of goodwill Changes in fair value on investment in securities at fair value through profit or loss Changes in fair value of investments in securities held for trading (Gain) loss on disposal of investments in securities are fair value through profit or loss Allowances for bad and doubtful debts Allowances for amounts due from associates Allowances for loan and interest receivables Loss (gain) on disposal of property, plant and equipment Operating cash flows before movements in working capital Decrease in inventories Decrease in trade receivables Decrease (increase) in other receivables, deposits and prepayments Increase (decrease) in trade payables, other payables and accrued charges Increase in amounts due from associates Decrease in payables Increase in other asset Net cash outflow from operations Tax paid in other jurisdictions NET CASH USED IN OPERATING ACTIVITIES	2005 HK$’000 (95,633) 17,630 39,743 2,814 (42,864) — — (8,402) (58,084) 519 8,102 — 34,652 9,429 (10,575) 18,575 — 37,445 128 (46,521) 1,305 2,282 23,437 9,840 (4,650) — (2,121) (16,428) (45) (16,473)	2004 HK$’000 (restated) (129,267) 17,434 — (81,631) 40,567 1,511 5,266 (1,542) (54,591) 447 3,798 1,160 — 12,549 5,478 17,286 4,989 140,889 (17) (15,674) 14,028 3,386 (43,778) (32,641) (1,611) (7,919) (449) (84,658) (313) (84,971)

– 62 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31st December, 2005

Notes INVESTING ACTIVITIES Repayment of loans and interest receivables Repayment from associates Proceeds from disposal of investments in securities Proceeds from disposal of property, plant and equipment Increase in pledged bank deposits Interest received Proceeds from disposal/dilution of interests in associates Proceeds from disposal/dilution of subsidiaries (net of cash and cash equivalents disposed of) 36 Dividend income received from investments in securities Dividend income received from associates Amount advanced to loans and interest receivables Amount advanced to associates Purchase of investments in securities Payment of prepaid lease payments Purchase of property, plant and equipment Deposit paid for acquisition of interests in property Investment in associates Purchase of subsidiaries (net of cash and cash equivalents acquired) 37 NET CASH FROM (USED IN) INVESTING ACTIVITIES	2005 HK$’000 384,736 99,500 134,734 — (24) 5,661 — — 8,402 2,427 (293,922) (107,708) (78,377) (8,635) (3,765) (8,704) (63,152) (9,651) 61,522	2004 HK$’000 (restated) 204,919 140,182 204,740 569 (1,012) 3,478 110,341 13,324 1,542 — (519,573) (163,828) (43,304) — (4,330) (326) — (26,744) (80,022)

– 63 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31st December, 2005

FINANCING ACTIVITIES Advance from payables New bank loans and other borrowings raised Proceeds from issue of shares Repayment of bank loans and other borrowings Repayment to payables (Repayment to) advance from associates Repayment of obligations under finance leases Interest paid NET CASH USED IN FINANCING ACTIVITIES NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances and cash Bank overdrafts	2005 HK$’000 469 — — (34,400) (4,611) (3,451) (10) (3,402) (45,405) (356) 111,588 (2,631) 108,601 115,813 (7,212) 108,601	2004 HK$’000 (restated) 18,979 57,257 4,440 (4,827) (111,713) 1,354 (9) (2,282) (36,801) (201,794) 314,744 (1,362) 111,588 118,388 (6,800) 111,588

– 64 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31st December, 2005

1. GENERAL

The Company is a public limited company incorporated in Hong Kong with its shares listed on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”). The address of the registered office and principal place of business of the Company are 8th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong.

The financial statements are presented in Hong Kong dollars, which is the same as the functional currency of the Company. The Company is an investment holding company. The principal activities of its subsidiaries and associates are set out in notes 46 and 23.

On 19th April, 2005, the Company announced a proposed group reorganisation (“Group Reorganisation”) which, if approved and implemented, will result in, (i) the Company continuing to be a public listed company with its subsidiaries concentrating on its business of manufacturing and trading of battery products, investments in securities and property and investment in unlisted investment; (ii) all other subsidiaries of the Group carrying on property development and investment holding business, and all other associates of the Group carrying on manufacturing and marketing of tires and business of providing package tour, travel and other related services being grouped under the Group Dragon Investments Limited (“GDI”) (a wholly-owned subsidiary of the Company) and its subsidiaries upon completion of the Group Reorganisation; and (iii) the distribution in specie of shares in GDI to the then shareholders of the Company on a record date to be fixed, on the basis of one GDI shares for every share in the Company after consolidation under the capital reorganisation (“Capital Reorganisation”) as described in note 33.

Details of the Group Reorganisation and Capital Reorganisation are set out in a circular of the Company dated 10th September, 2005. The Group Reorganisation and Capital Reorganisation have not yet been completed at the date of this report.

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES

In the current year, the Group has applied, for the first time, a number of new Hong Kong Financial Reporting Standards (“HKFRS(s)”), Hong Kong Accounting Standards (“HKAS(s)”) and Interpretations (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are effective for accounting periods beginning on or after 1st January, 2005. The application of these new HKFRSs has resulted in a change in the presentation of the consolidated income statement, consolidated balance sheet and consolidated statement of changes in equity. In particular, the presentation of minority interests have been changed. The changes in presentation has been applied retrospectively. The adoption of the new HKFRSs has resulted in changes to the Group’s accounting policies in the following areas that have an effect on how the results for the current and prior accounting periods are prepared and presented:

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APPENDIX II FINANCIAL INFORMATION ON THE GROUP

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Business combinations

In the current year, the Group has applied HKFRS 3 Business Combinations which is effective for business combinations for which the agreement date is on or after 1st January, 2005. The principal effects of the application of HKFRS 3 to the Group are summarised below:

Goodwill

In previous periods, goodwill arising on acquisitions prior to 1st January, 2001 was held in reserves, and goodwill arising on acquisitions after 1st January, 2001 was capitalised and amortised over its estimated useful life.

The Group has applied the relevant transitional provisions in HKFRS 3. Goodwill previously recognised in reserves of HK$9,492,000 have been transferred to the Group’s deficit on 1st January, 2005. With respect to goodwill previously capitalised on the balance sheet, the Group on 1st January, 2005 eliminated the carrying amount of the related accumulated amortisation of HK$1,005,000 with a corresponding decrease in the cost of goodwill (see note 21). The Group has discontinued amortising such goodwill from 1st January, 2005 onwards and goodwill will be tested for impairment at least annually or in the financial year in which the acquisition takes place. Goodwill arising on acquisitions after 1st January, 2005 is measured at cost less accumulated impairment losses after initial recognition. As a result of this change in accounting policy, no amortisation of goodwill has been charged in the current period. Comparative figures for 2004 are not required to be restated.

Excess of the Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost (previously known as “negative goodwill”)

In accordance with HKFRS 3, any excess of the Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition (“discount on acquisition”) is recognised immediately in profit or loss in the period in which the acquisition takes place. In previous periods, negative goodwill arising on acquisitions prior to 1st January, 2001 was held in reserves, and negative goodwill arising on acquisitions after 1st January, 2001 was presented as a deduction from assets and released to income based on an analysis of the circumstances from which the balance resulted. In accordance with the relevant transitional provisions in HKFRS 3, the Group derecognised all negative goodwill on 1st January, 2005, of which negative goodwill of approximately HK$71,739,000 was previously recorded in reserves and approximately HK$47,058,000 was previously presented as a deduction from interests in associates), with a corresponding decrease to deficits as at 1st January, 2005.

Contingent liabilities of acquirees

In accordance with HKFRS 3, contingent liabilities of an acquiree are recognised at the date of the acquisition if the fair value of the contingent liabilities can be measured reliably. Previously, contingent liabilities of acquirees were not recognised separately from goodwill. As no material contingent liabilities of the acquirees were identified in relation to acquisitions that took place in the current year, this change in accounting policy has had no material effect on the goodwill calculation. In addition, because the revised accounting policy has been applied prospectively to acquisitions for which the agreement date is on or after 1st January, 2005, comparative figures for 2004 have not been restated.

– 66 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Financial instruments

In the current year, the Group has applied HKAS 32 “Financial Instruments: Disclosure and Presentation” and HKAS 39 Financial Instruments: Recognition and Measurement. HKAS 32 requires retrospective application. HKAS 39, which is effective for annual periods beginning on or after 1st January, 2005, generally does not permit the recognition, derecognition or measurement of financial assets and liabilities on a retrospective basis. The adoption of HKAS 32 has had no material effect on the presentation of financial instruments in the financial statements of the Group. The principal effects on the Group as a result of implementation of HKAS 39 are summarised below:

Classification and measurement of financial assets and financial liabilities

The Group has applied the relevant transitional provisions in HKAS 39 with respect to classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

On or before 31st December, 2004, the Group classified and measured its debt and equity securities in accordance with the benchmark treatment of Statement of Standard Accounting Practice No. 24 “Accounting for Investments in Securities” issued by the HKICPA (“SSAP 24”). Under SSAP 24, investments in debt or equity securities are classified as “investment securities” or “other investments” as appropriate. “Investment securities” are carried at cost less impairment losses while other investments” are measured at fair value, with unrealised holding gains or losses included in the profit or loss. From 1st January, 2005 onwards, the Group classifies and measures its debt and equity securities in accordance with HKAS 39. Under HKAS 39, financial assets are classified as “financial assets at fair value through profit or loss”, “available-for-sale financial assets”, “loans and receivables”, or “heldto-maturity financial assets”. The classification depends on the purpose for which the assets are acquired. “Financial assets at fair value through profit or loss” and “available-for-sale financial assets” are carried at fair value with changes in fair values recognised in profit or loss and equity respectively. “Loans and receivables” and “held-tomaturity financial assets” are measured at amortised cost using the effective interest method.

From 1st January, 2005 onwards, the Group classified and measured its debt and equity securities in accordance with the requirements of HKAS 39. Other investments classified under non-current assets with carrying amounts of approximately of HK$194,050,000 were reclassified to investments in securities at fair value through profit or loss, which are designated to be stated at fair value through profit or loss. Other investments classified under current assets with carrying amount of approximately of HK$19,849,000 was also reclassified as investments in securities held for trading on 1st January, 2005.

Investments in securities of the Company classified under noncurrent assets with carrying amounts of approximately HK$825,000 were reclassified to investments in securities at fair value through profit or loss, which are designated to be stated of fair value through profit or loss on 1st January, 2005.

– 67 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

Financial assets and financial liabilities other than debt and equity securities

From 1st January, 2005 onwards, the Group classifies and measures its financial assets and financial liabilities other than debt and equity securities (which were previously outside the scope of SSAP 24) in accordance with the requirements of HKAS 39. As mentioned above, financial assets under HKAS 39 are classified as “financial assets at fair value through profit or loss”, “available-for-sale financial assets”, “loans and receivables” or “held-tomaturity financial assets”. Financial liabilities are generally classified as “financial liabilities at fair value through profit or loss” or “other financial liabilities”. Financial liabilities at fair value through profit or loss” are measured at fair value, with changes in fair value being recognised in profit or loss directly. “Other financial liabilities” are carried at amortised cost using the effective interest method after initial recognition.

Prior to the application of HKAS 39, the Company has noncurrent interest-free amounts due from subsidiaries stated at the nominal amount. HKAS 39 requires all financial assets and financial liabilities to be measured at fair value on initial recognition. Such interest-free amounts due from subsidiaries are measured at amortised cost determined using the effective interest method at subsequent balance sheet dates. The Company has applied the relevant transitional provisions in HKAS 39. As a result of this change in the accounting policy, an adjustment on HK$279,987,000 had been made on 1st January, 2005 to increase the Company’s investments in subsidiaries and to reduce the balance of amounts due from subsidiaries by the same amount, which represents the deemed capital contribution to subsidiaries upon initial recognition of advances made to them. As the directors consider that this deemed capital contribution will not be recovered, a full impairments loss was made on this deemed capital contribution as at 1st January, 2005. Accordingly, there was no impact on the results of the Company upon application of HKAS 39.

Prior to the application of HKAS 39, an interest-free noncurrent loan from the subsidiaries was stated at the nominal amount. HKAS 39 requires all financial assets and financial liabilities to be measured at fair value on initial recognition. Such interest-free loan is measured at amortised cost determined using the effective interest method at subsequent balance sheet dates. The Company has applied the relevant transitional provisions in HKAS 39. As a result of this change in the accounting policy, the carrying amount of the loan as at 1st January, 2005 has been decreased by HK$62,239,000 in order to state the loan at amortised cost in accordance with HKAS 39. The Company’s deficits as at 1st January, 2005 has been increased by HK$62,239,000.

Embedded derivatives

On or before 31st December, 2004, embedded derivatives of the conversion option of convertible note invested by the Group were not recorded on the balance sheet.

– 68 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

Embedded derivatives (Cont’d)

In accordance with HKAS 39 “Financial Instruments: Recognition and Measurement” issued by the HKICPA, the conversion option element of the convertible note represents an embedded derivative instrument which is accounted for separately from the convertible notes and, as such, to be measured at fair value when initially recorded and at subsequent reporting dates. The fair value of this conversion option, representing a discount on subscription of the convertible note, was estimated using the relevant option pricing model at the date of subscription of the convertible note, and as at subsequent reporting dates. From 1st January, 2005 onwards, the Group measured the fair value of the embedded derivatives in accordance with the requirements under HKAS 39 and recognised the changes in fair value of the conversion option of the unlisted convertible note as at 1st January, 2005 and the impact of taking into account of the portion of the conversion option exercised prior to 31st December, 2004, which increase the derivative instruments of approximately HK$64,410,000 share of net assets of HK$16,961,000 and decrease the carrying amount of unlisted convertible note of HK$13,283,000 included in interests in associates and decrease the deficit of HK$68,088,000 as at 1st January, 2005 accordingly. The impact of changes in fair value of this conversion option, taking into account the portion of the conversion option exercised during the year ended 31st December, 2005, was loss of HK$39,743,000, which have been recognised in the consolidated income statement. Comparative figures for 2004 are not required to be restated.

Owner-occupied leasehold interest in land

In previous years, owner-occupied leasehold land and buildings were included in property, plant and equipment and is stated at cost or valuation less depreciation and amortisation at the balance sheet date and any accumulated impairment losses. In the current year, the Group has applied HKAS 17 “Leases”. Under HKAS 17, the land and buildings elements of a lease of land and buildings 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 lease premium for land under operating leases, which are carried at cost and amortised over the lease term on a straightline basis. This change in accounting policy has been applied retrospectively (See note 3 for the financial impact).

Hotel properties

HK Interpretation 2 (“HK-Int 2”) “The Appropriate Accounting Policies for Hotel Properties” clarifies the accounting policy for owner-operated hotel properties. In previous periods, the self-operated hotel properties of the Group’s associate were carried at cost less impairment amounts and were not subject to depreciation. HK-Int 2 requires owner-operated properties to be classified as property, plant and equipment in accordance with HKAS 16, “Property, Plant and Equipment” and therefore be accounted for either using the cost model or the revaluation model. The Group’s associate has resolved to account for these hotel properties using the cost model. In the absence of any specific transitional provisions in HK-Int 2, the new accounting policy has been applied retrospectively. Comparative figures have been restated. An adjustment of HK$3,192,000 has been made to decrease the share of net assets of associates and to increase the deficits at 31st December, 2004 after the application of HKAS 16 by the associates.

– 69 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Discontinued operations

In accordance with the application of HKFRS 5 “Non-current assets held for sale and discontinued operations” issued by the HKICPA, certain income statement items for the year ended 31st December, 2004 have been regrouped under profit for the year from discontinued operations for the year ended as 31st December, 2004.

3. SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES

The effects of the changes in accounting policies described in note 2 on the results for the current and prior years are as follows:

(i) On results

Non-amortisation of goodwill Increase in interest income on unlisted convertible note Changes in fair value of conversion option of unlisted convertible note Share of results of associates — Decrease in release of negative goodwill to income — Non-amortisation of goodwill — Depreciation for hotel properties Increase in loss for the year On income statement line items Decrease in administrative expenses Increase in other income Changes in fair value of conversion option of unlisted convertible note Decrease in share of results of associates	2005 HK$’000 3,137 72 (39,743) (4,952) 1,153 (8,252) (48,585) 2005 HK$’000 3,137 72 (39,743) (12,051) (48,585)	2004 HK$’000 — — — — — (3,192) (3,192) 2004 HK$’000 — — — (3,192) (3,192)

(ii) On income statement line items

– 70 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

3. SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES (Cont’d)

(iii) On balance sheet items

The cumulative effects of the application of the new HKFRSs as at 31st December, 2004 and 1st January, 2005 are summarised below:

As at 31st December, 2004 (originally stated) THE GROUP HK$’000 Balance sheet items Interests in associates — Share of net assets 337,212 — Goodwill 2,006 — Negative goodwill (47,058) — Unlisted convertible note 55,000 — Derivative instrument — — Loan receivable due from an associate 81,840 429,000 Property, plant and equipment 35,238 Prepaid lease payments — non-current — Investments in securities — non-current 194,050 Other investments — current 19,849 Investments in securities at fair value through profit or loss — Investments in securities held for trading — Prepaid lease payments — current — Total effects on assets 678,137 Goodwill on consolidation (62,247) Other non-distributable reserves (18,598) Deficit 1,163,331 Minority interests — Total effects on equity 1,082,486 Minority interests (295,609)		Effect of	As at 1st January, 2005 (restated) HK$’000 350,981 2,006 — 41,717 64,410 81,840
	HK(SIC) - INT 2 HK$’000 (3,192) — — — — — (3,192) — — — — — — — (3,192) — — 3,192 — 3,192 —	HKAS 17 HK$’000 — — — — — — — (20,267) 19,820 — — — — 447 — — — — — — —
429,000			540,954
35,238 — 194,050 19,849 — — —			14,971 19,820 — — 194,050 19,849 447
678,137			790,091

(62,247) (18,598) 1,163,331 —			— (18,598) 1,011,072 (317,551)
1,082,486			674,923

(295,609)			—

– 71 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

3. SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES (Cont’d)

(iii) On balance sheet items (Cont’d)

THE COMPANY Balance sheet items Investments in subsidiaries Investment in securities Investments in securities at fair value through profit or loss Amounts due from subsidiaries Property, plant and equipment Prepaid lease payments — non-current Prepaid lease payments — current Amounts due to subsidiaries Deficit	31st December, 2004 (originally stated) HK$’000 1,980,613 825 — — 6,382 — — (840,225) 1,147,595 (1,395,867)	Effect of HKAS 1 HK$’000 (1,835,579) — — 1,835,579 — — — — — —	Effect of HKAS 17 HK$’000 — — — — (4,097) 3,980 117 — — —	As at 31st December, 2004 (restated) HK$’000 145,034 825 — 1,835,579 2,285 3,980 117 (840,225) 1,147,595 (1,395,867)	Effect of As at HKAS 39 1st January, (restated) 2005 HK$’000 HK$’000 — 145,034 (825) — 825 825 — 1,835,579 — 2,285 — 3,980 — 117 62,239 (777,986) 62,239 1,209,834 62,239 1,333,628	Effect of As at HKAS 39 1st January, (restated) 2005 HK$’000 HK$’000 — 145,034 (825) — 825 825 — 1,835,579 — 2,285 — 3,980 — 117 62,239 (777,986) 62,239 1,209,834 62,239 1,333,628
						1,209,834
						1,333,628

The financial effects of the application of the new HKFRSs to the Group’s equity on 1st January, 2004 are summarised as follows:

Share capital and other reserves Minority interests Total effects on equity Minority interests	As originally stated HK$’000 1,533,380 — 1,533,380 250,160	Effect of HKAS 1 HK$’000 — 250,160 250,160 (250,160)	As restated HK$’000 1,533,380 250,160
			1,783,540

			—

– 72 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

3. SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES (Cont’d)

(iii) On balance sheet items (Cont’d)

The Group has not early applied the following new standards and interpretations that have been issued but are not yet effective. The directors of the Group anticipate that the application of these standards or Interpretations will have no material impact on the financial statements of the Group except that HKAS 39 (Amendment) — The fair value option require the Group shall de-designate any financial asset or financial liability previously designated as at fair value through profit or loss only if it does not qualify for such designation in accordance with those new and amended paragraphs. When a financial asset or financial liability will be measured at amortised cost after de-designation, the date of de-designation is deemed to be its date of initial recognition.

HKAS 1 (Amendment) Capital disclosures[1] HKAS 19 (Amendment) Actuarial gains and losses, group plans and disclosures[2] HKAS 21 (Amendment) The effects of change in foreign exchange rates — net investment in a foreign operation[2] HKAS 39 (Amendment) Cash flow hedge accounting of forecast intragroup transactions[2] HKAS 39 (Amendment) The fair value option[2] HKAS 39 & HKFRS 4 Financial guarantee contracts[2] (Amendments) HKFRS 6 Exploration for and evaluation of mineral resources[2] HKFRS 7 Financial instruments: Disclosures[1] HK(IFRIC) — INT 4 Determining whether an arrangement contains a lease[2] HK(IFRIC) — INT 5 Rights to interests arising from decommissioning , restoration and environmental rehabilitation funds[2] HK(IFRIC) — INT 6 Liabilitiesarising 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]

Effective for annual periods beginning on or after 1st January, 2007. 2. Effective for annual periods beginning on or after 1st January, 2006. 3. Effective for annual periods beginning on or after 1st December, 2005.
Effective for annual periods beginning on or after 1st March, 2006.

– 73 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair values as explained in the accounting policies set out below. The consolidated financial statements have been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31st December each year.

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

All significant intra-group transactions and balances have been eliminated on consolidation.

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

Goodwill

Goodwill arising on acquisitions prior to 1st January, 2005

Goodwill arising on acquisition of a subsidiary or an associate for which the agreement date is before 1st January, 2005 represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of the relevant subsidiary or associate at the date of acquisition.

As explained in note 2, goodwill arising on acquisition prior to 1st January, 2001 previously recognised in reserves, have been transferred to the Group’s deficit on 1st January, 2005.

For previously capitalised goodwill arising on acquisition after 1st January, 2001, the Group has discontinued amortisation from 1st January, 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired (see the accounting policy below).

Goodwill arising on acquisitions on or after 1st January, 2005

Goodwill arising on an acquisition of a subsidiary or an associate for which the agreement date is on or after 1st January, 2005 represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the relevant subsidiary or associate at the date of acquisition. Such goodwil is carried at cost less any accumulated impairment losses.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Goodwill (Cont’d)

Goodwill arising on acquisitions on or after 1st January, 2005 (Cont’d)

Capitalised goodwill arising on an acquisition of a subsidiary is presented separately in the balance sheet. Capitalised goodwill arising on an acquisition of an associate (which is accounted for using the equity method) is included in the cost of the investment of the associate.

For the purposes of impairment testing, goodwill arising from an acquisition is allocated to each of the relevant cashgenerating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a financial year, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the income statement. An impairment loss for goodwill is not reversed in subsequent periods.

On subsequent disposal of a subsidiary or an associate, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal.

Excess of an acquirer’s interest in the net fair value of an acquiree’s identifiable assets, liabilities and contingent liabilities over cost (“discount on acquisitions”, formerly known as negative goodwill)

A discount on acquisition arising on an acquisition of a subsidiary or an associate for which an agreement date is on or after 1st January, 2005 represents the excess of the net fair value of an acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination. Discount on acquisition is recognised immediately in profit or loss. A discount on acquisition arising on an acquisition of an associate (which is accounted for using the equity method), is included as income in the determination of the investor’s share of results of the associate in the period in which the investment is acquired.

As explained in note 2 above, all negative goodwill as at 1st January, 2005 has been derecognised with a corresponding adjustment to the Group’s deficit.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss.

– 75 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Investments in associates

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the profit or loss and of changes in equity of the associate, less any identified impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Where a group entity transactions with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate.

Revenue recognition

Turnover represents the fair value of amounts received and receivable for goods sold by the Group less discount allowances, and goods returned.

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

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

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Property, plant and equipment

Property, plant and equipment (other than properties under development) are stated at cost or fair value less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment other than properties under development over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year in which the item is dereognised.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Property, plant and equipment (Cont’d)

Leasehold land and buildings under development for future owner-occupied purpose

When the leasehold land and buildings are in the course of development for production, rental or for administrative purposes, the leasehold land component is classified as a prepaid lease payment and amortised over a straight-line basis over the lease term. During the construction period, the amortisation charge provided for the leasehold land is included as part of costs of buildings under construction. Buildings under construction are carried at cost, less any identified impairment losses. Depreciation of buildings commences when they are available for use (i.e. when they are in the location and condition necessary for them to be capable of operating in the manner intended by management).

Construction in progress

Construction in progress are stated at cost, which includes land cost and the related construction cost in accordance with the Group’s accounting policies, less accumulated impairment losses. No depreciation or amortisation is provided on properties under construction and construction in progress until the construction is completed and the properties and assets are ready for use.

Leasing

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.

The Group as lessee

Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Foreign currencies (Cont’d)

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financials statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the exchange reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

Goodwill and fair value adjustments on identifiable assets acquired arising on an acquisition of a foreign operation on or after 1st January, 2005 are treated as assets and liabilities of that foreign operation and translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising are recognised in the translation reserve.

Impairment (other than goodwill)

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

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so 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 in prior years. A reversal of an impairment loss is recognised as income immediately.

Other asset

Other asset are stated at the lower of cost and net realisable value.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average cost method.

– 78 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Retirement benefit costs

Payments to state-managed retirement benefit schemes and Mandatory Provident Fund Scheme are charged as expense as they fall due.

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 net 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 the tax expected to be payable or recoverable on differences between the carrying amount 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 negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, 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 profit 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 is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Financial instruments

Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

– 79 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

Financial assets

The Group’s financial assets are classified into one of the four categories, including financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The Group’s major financial assets are category of loans and receivables and finance assets at fair value through profit or loss and the accounting policies adopted for loans and receivables and financial assets at fair value through profit or loss are set out below.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition loans and receivables (including loans and interest receivables, amounts due from associates, trade receivables, other receivables and deposits and amounts due from subsidiaries for the Company) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss has two subcategories, including financial assets held for trading and those designated at fair value through profit or loss on initial recognition. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity 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 Group’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The Group’s major financial liabilities are other financial liabilities and the accounting policies adopted are set out below.

– 80 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

Financial liabilities and equity (Cont’d)

Other financial liabilities

Other financial liabilities including trade payables, other payables and accrued charges, payables, amounts due to associates, amounts due to related companies and bank and other borrowings are subsequently measured at amortised cost, using the effective interest rate method.

Embedded derivatives

The conversion option element of the convertible note represents an embedded derivative instrument which is accounted for separately from the convertible note and, as such, to be measured at fair value when initially recorded and at subsequent reporting dates. The fair value of this conversion option is estimated using a relevant option pricing model at the date of subscription of the convertible note, and as at subsequent reporting dates. Changes in fair value of the conversion option of the unlisted convertible note are recognized directly in profit and loss.

Share-based payment transactions

Equity-settled share-based payment transactions

Share options granted to employees of the Company

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share option reserve).

At the time when the share options are exercised, the amount previously recognised in share option reserve will be transferred to share premium. When the share options are forfeited or are still not exercised at the expiry date, the amount previously recognised in share option reserve will be transferred to deficit.

5. KEY SOURCES OF ESTIMATION UNCERTAINTY

In the process of applying the Group’s accounting policies, management makes various estimates based on past experiences, expectations of the future and other information. The key sources of estimation uncertainty that may significantly affect the amounts recognised in the financial statements are disclosed below:

Estimated impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. During the year ended 31st December, 2005, management of the Group determined that there were no impairment on goodwill. Details of the impairment testing on goodwill are disclosed in note 21.

– 81 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

5. KEY SOURCES OF ESTIMATION UNCERTAINTY (Cont’d)

Estimated impairment on loans and interests receivable

Management regularly reviews the recoverability of loans and interests receivables. Appropriate impairment for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired.

In determining whether impairment for bad and doubtful debts is required, the Group takes into consideration the aged status and likelihood of collection. Specific allowance is only made for receivables that are unlikely to be collected and is recognised based the estimation of the future cash flow expected to receive and a suitable discounted rate in order to calculate the present value. During the year, allowance for loans and interest receivables of HK$37,445,000 has been made.

6. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s major financial instruments include loans and interest receivables, amounts due from associate, trade receivables, other receivables and deposits, investments in securities at fair value through profit and loss and investment in securities held for trading, trade payable, payables, amounts due to associates, amounts due to related companies and bank and other borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 31st December, 2005 is in relation to is the carrying amount of loans and interests receivables, and trade receivables as stated in the consolidated balance sheet. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

Other price risk

The Group’s investments in securities at fair value through profit or loss and investments in securities held for trading are measured at fair value at each balance sheet date. Therefore, the Group is exposed to equity security price risk. Management manages this exposure by maintaining a portfolio of investments with different risk profiles.

– 82 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

7. TURNOVER

	2005	2004
	HK$’000	HK$’000
Sales of goods, net of returns and sales taxes	38,459	27,141

The Group carries out its activities primarily in The People’s Republic of China (“PRC”) including Hong Kong, details of the analysis of the Group’s turnover and contribution to results from operations by principal business segment and geographical market are set out in note 8.

8. SEGMENT INFORMATION

Business segments

During the year, the Group acquired 88% and 100% of the issued capital of �� and ��respectively for an aggregate cash consideration of HK$50 million. The two newly acquired subsidiaries are engaged in the business of sand mining. The segment of sand mining is regarded as a new business segment of the Group upon completion of the acquisition.

For management purposes, the Group is currently organised into the following four major divisions — battery products, investment in securities and advance, sand mining and others. These divisions are the basis on which the Group reports its primary segment information.

Battery products	—	Manufacturing and trading of battery products and related
		accessories
Investments in securities and advance	—	Investments in securities holding and advance of receivables
Sand mining	—	Sand mining activities
Others	—	Corporate and investment holding

– 83 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

8. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

An analysis of the Group’s turnover and contribution to operating results and segment assets and liabilities by business segments is as follows:

Investments in securities and advance HK$’000 — 473	Battery products HK$’000 33,161 —	Sand mining HK$’000 5,298 —	Others HK$’000 — 1,200	Elimination Consolidated HK$’000 HK$’000 — 38,459 (1,673) —	Elimination Consolidated HK$’000 HK$’000 — 38,459 (1,673) —
473	33,161	5,298	1,200	(1,673) 38,459

52,423 10,575 8,402 2,888	33 — — 179	— — — 2,059	5,628 — — 1,436	— — — —	58,084 10,575 8,402 6,562
74,288	212	2,059	7,064	—	83,623

12,754	(5,907) 1,576		(64,497) (1,673) (57,747) (20,563) (39,743) (17,630) (2,814) — (2,814) 43,103 — 42,864 (95,633) (4,247) (99,880)

— —	— — (239) —		(2,814) — 43,103 —
					(95,633) (4,247)
					(99,880)

Inter-segment sales are charged at terms determined and agreed between the group companies.

– 84 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

8. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

Investments in securities Battery Sand and advance products mining Others HK$’000 HK$’000 HK$’000 HK$’000 Assets and liabilities at 31st December, 2005 ASSETS Segment assets 592,978 67,314 110,716 364,905 Interests in associates — — — 558,738 Unallocated total assets Consolidated total assets LIABILITIES Segment liabilities (33,660) (27,769) (736) (18,834) Unallocated corporate liabilities Consolidated total liabilities Other information for the year ended 31st December, 2005 Capital expenditure — Property, plant and equipment 332 2,835 113,184 598 — Deposit paid for acquisition of interest in properties — — — 8,704 — Goodwill arising from acquisition of subsidiaries — — 9,123 — — Goodwill arising from acquisition of associates — — — 10,181 Depreciation and amortisation — 2,132 5,811 678 Impairment loss on investments in securities at fair value through profit or loss 34,652 — — — Allowances for loan and interest receivables 36,933 — — 512 Change in fair value of investment in securities held for trading 9,429 — — — Allowance for bad and doubtful debts 7,823 — — 10,752	Consolidated HK$’000 1,135,913 558,738 264,218
	1,958,869

	(80,999) (222,301)
	(303,300)

	116,949 8,704 9,123 10,181 8,621 34,652 37,445 9,429 18,575

– 85 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

8. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

Investments in securities and advance HK$’000 For the year ended 31st December, 2004 REVENUE (i) Turnover — External — — Inter-segment — — (ii) Other income — Interest income 48,539 — Gain on disposal of investments in securities at fair value through profit or loss — — Dividend income from listed investment 1,542 — Others — 50,081 RESULT Segment result (110,631) Unallocated corporate expenses Finance costs Loss on disposal/dilution of interests in subsidiaries — Gain on disposal/liquidation of interests in associates — Share of results of associates — Profit (loss) before taxation Taxation Profit (loss) for the year	Continuing Battery products HK$’000 27,141 — 27,141 — — — 150 150 (2,004) — — (147)	operations Others Elimination HK$’000 HK$’000 — — 2,184 (2,184) 2,184 (2,184) 6,018 — — — — — 3,050 — 9,068 — (10,818) (2,184) — — 81,631 — (40,420) —	Discontinued operation Phar- maceutical Sub-total products Consolidated HK$’000 HK$’000 HK$’000 (Note a) 27,141 96,262 123,403 — — — 27,141 96,262 123,403 54,557 17 54,574 — — — 1,542 — 1,542 3,200 446 3,646 59,299 463 59,762 (125,637) 6,777 (118,860) (27,260) (17,434) — (5,266) (5,266) 81,631 — 81,631 (40,567) — (40,567) 1,511 (127,756) — (6,464) 1,511 (134,220)	Discontinued operation Phar- maceutical Sub-total products Consolidated HK$’000 HK$’000 HK$’000 (Note a) 27,141 96,262 123,403 — — — 27,141 96,262 123,403 54,557 17 54,574 — — — 1,542 — 1,542 3,200 446 3,646 59,299 463 59,762 (125,637) 6,777 (118,860) (27,260) (17,434) — (5,266) (5,266) 81,631 — 81,631 (40,567) — (40,567) 1,511 (127,756) — (6,464) 1,511 (134,220)
				123,403

				54,574 — 1,542 3,646
				59,762

				(118,860) (27,260) (17,434) (5,266) 81,631 (40,567)
				(127,756) (6,464)
				(134,220)

Inter-segment sales are charged at terms determined and agreed between the group companies.

– 86 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

8. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

Discontinued Continuing operations operation Investments Phar- in securities Battery maceutical and advance products Others Sub-total products HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note a) Assets and liabilities at 31st December, 2004 ASSETS Segment assets 1,095,673 79,226 62,187 1,237,086 — Interests in associates — — 425,808 425,808 — Unallocated total assets Consolidated total assets LIABILITIES Segment liabilities (4,258) (10,738) (34,816) (49,812) — Unallocated corporate liabilities Consolidated total liabilities Other information for the year ended 31st December, 2004 Capital expenditure — Property, plant and equipment — 13,674 251 13,925 1,370 — Deposit paid for acquisition of interest in properties — — 47,012 47,012 — — Goodwill arising on acquisition of interests in subsidiaries — 26,812 — 26,812 — — Goodwill arising on acquisition of interest in associates 3,931 — — 3,931 — Depreciation and amortisation — 61 1,892 1,953 1,845 Amortisation of prepaid lease payment — 447 — 447 — Amortisation of goodwill — 1,005 — 1,005 155 Loss on disposal of investments in securities 5,478 — — 5,478 — Loss on disposal of interests in subsidiaries — — — — 5,266 Allowances for loans and interest receivables 140,889 — — 140,889 — Change in fair value investment in securities held for trading 12,549 — — 12,549 — Allowance for bad and doubtful debts — — 17,286 17,286 — Allowance for amounts due from associates — — 4,989 4,989 —	Consolidated HK$’000 1,237,086 425,808 236,462
	1,899,356

	(49,812) (245,390)
	(295,202)

	15,295 47,012 26,812 3,931 3,798 447 1,160 5,478 5,266 140,889 12,549 17,286 4,989

Note:

(a) Following the disposal of Tung Fong Hung Investment Limited and its subsidiaries which are engaged in the manufacturing and trading of pharmaceutical products in May 2004, the business segment of manufacturing and trading of pharmaceutical products was regarded as discontinued operations during the year ended 31st December, 2004.

– 87 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

8. SEGMENT INFORMATION (Cont’d)

Geographical segments

The following provides an analysis of the Group’s turnover by geographic market, irrespective of the origin of the goods/services:

Continuing operations: PRC, other than Hong Kong Hong Kong Discontinued operations: PRC, other than Hong Kong Hong Kong	Turnover 2005 2004 HK$’000 HK$’000 36,519 27,141 1,940 — 38,459 27,141 — — — 96,262 — 96,262	Turnover 2005 2004 HK$’000 HK$’000 36,519 27,141 1,940 — 38,459 27,141 — — — 96,262 — 96,262
		27,141

		— 96,262
		96,262

The following is an analysis of the carrying amount of segment assets and capital additions analysed by the geographical area in which the assets are located:

PRC Hong Kong Overseas	Carrying amount of segment assets At 31st December, 2005 2004 HK$’000 HK$’000 212,960 29,012 1,021,515 1,278,734 165,656 165,802 1,400,131 1,473,548	Capital additions For the year ended 31st December, 2005 2004 HK$’000 HK$’000 135,323 91,429 9,634 1,621 — — 144,957 93,050	Capital additions For the year ended 31st December, 2005 2004 HK$’000 HK$’000 135,323 91,429 9,634 1,621 — — 144,957 93,050
			93,050

– 88 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

9. OTHER INCOME

Interest income from loans and interest receivable Interest income from banks Interest income from unlisted convertible bonds Net exchange gain Gain on disposal of investments in securities at fair value through profit or loss Dividend income from listed investments Gain on disposal of property, plant and equipment Others	2005 HK$’000 52,423 640 5,021 — 10,575 8,402 — 6,562 83,623	2004 HK$’000 47,119 3,461 3,994 3,151 — 1,542 17 478
		59,762

10. (a) OTHER EXPENSES

Changes in fair value on investment in securities at fair value through profit and loss Allowances for bad and doubtful debts Changes in fair value of investments in securities held for trading Loss on disposal of investment in securities at fair value through profit or loss Allowances for amounts due from associates Net exchange loss Others	2005 HK$’000 34,652 18,575 9,429 — — 3,709 724 67,089	2004 HK$’000 — 17,286 12,549 5,478 4,989 — 23
		40,325

(b) ALLOWANCES FOR LOANS AND INTEREST RECEIVABLE

During the year, the directors have reviewed the carrying value of the Group’s loans and interest receivables and determined that the recoverable amount of certain loans and interest receivables is below their carrying value with reference to present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Accordingly, an impairment loss at the amount of approximately HK$37,445,000 had been charged to the income statement.

– 89 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

11. FINANCE COSTS

Interest on borrowings wholly repayable within five years: Bank borrowings Other borrowings and payables Obligations under finance leases TAXATION Continuing operations 2005 2004 HK$’000 HK$’000 The charge comprises: Taxation in other jurisdictions — Current year 1,010 1,340 — Overprovision in prior years (663) — Hong Kong Profits Tax — Current year 1,300 5,124 — Underprovision in prior years 2,600 — Taxation attributable to the Company and its subsidiaries 4,247 6,464	2005 2004 HK$’000 HK$’000 613 943 17,014 16,488 3 3 17,630 17,434 Discontinued operations Consolidated 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 — — 1,010 1,340 — — (663) — — — 1,300 5,124 — — 2,600 — — — 4,247 6,464	2004 HK$’000 943 16,488 3	2004 HK$’000 943 16,488 3
		17,434

			6,464

12. TAXATION

Hong Kong Profits Tax is calculated at 17.5% (2004: 17.5%) of the estimated assessable profit for the year.

Taxation arising in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. Pursuant to the relevant laws and regulations in the PRC, certain PRC subsidiaries of the Company are exempted from PRC income tax for two years starting from their first profit-making year, followed by a 50% reduction for the next three years.

– 90 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

12. TAXATION (Cont’d)

The tax charge for the year can be reconciled to the loss before taxation as per the consolidated income statement as follows:

2005
HK$’000
Loss before taxation
— Continuing operations
(95,633)
— Discontinued operations
—
Loss before taxation
(95,633)
Tax at the average income tax rate of 18.8%
(2004: 17.7%)(note a)
(17,953)
Tax effect of share of results of associates
10,182
Tax effect of income not taxable in determining taxable profit
(37,430)
Tax effect of expenses not deductible for tax purpose
37,003
Tax effect of deductible temporary differences not recognised
10,504
Tax effect of tax losses not recognised
4
Underprovision in respect of prior year
1,937
Effect of tax exemption granted to PRC subsidiaries
—
Effect of different tax rates of subsidiaries operating in other jurisdictions
—
Others
—
Tax expense for the year
4,247

2004
HK$’000
(136,044)
6,777
(129,267)
(22,921)
6,006
(34,334)
25,679
23,849
6,280
—
(485)
2,139
251
6,464

Notes:

(a) The average income tax rate for both years represents the weighted average income tax rate of the operations in different jurisdictions on the basis of the relative amounts of net profits before taxation and the related statutory rates.
(b) As at 31st December, 2005, the Group had unused tax loss of approximately HK$29,704,000 (2004: HK$29,682,000) available to offset against future profits. No deferred tax asset has been recognised in respect of the unused tax losses due to the unpredictability of future profits streams.
(c) As at 31st December, 2005, the Group had deductible temporary differences in respect of allowances on doubtful debts of approximately HK$364,786,000 (2004: HK$308,765,000). No deferred tax asset has been recognised in relation to such deductible temporary differences as it is not probable that taxable profit will be available against which the deductible temporary differences can be utilised.

– 91 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

13. LOSS FOR THE YEAR

Loss for the year has been arrived at after charging: Staff costs — directors remuneration (note 14(a)) — other staff costs (note 14(b)) — retirement benefits scheme contributions, excluding directors Total staff costs Auditors remuneration Current year Underprovision in prior years Depreciation and amortisation of property, plant and equipment Loss on disposal of property, plant and equipment Amortisation of prepaid lease payments Amortisation of goodwill included in administrative expenses	Continuing operations 2005 2004 HK$’000 HK$’000 2,092 3,413 14,724 10,799 405 382 17,221 14,594 6,622 4,327 — — 8,102 1,953 128 — 519 447 — 1,005	Discontinued operations 2005 2004 HK$’000 HK$’000 — — — 11,619 — 469 — 12,088 — 427 — 392 — 1,845 — — — — — 155	Consolidated 2005 2004 HK$’000 HK$’000 2,092 3,413 14,724 22,418 405 851 17,221 26,682 6,622 4,754 — 392 8,102 3,798 28 — 519 447 — 1,160	Consolidated 2005 2004 HK$’000 HK$’000 2,092 3,413 14,724 22,418 405 851 17,221 26,682 6,622 4,754 — 392 8,102 3,798 28 — 519 447 — 1,160
				26,682
				4,754 392 3,798 — 447 1,160

– 92 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

14. DIRECTORS’ AND EMPLOYEE REMUNERATION

(a) Directors’ remuneration

Fees Executive directors Independent non-executive directors — Mr. David Edwin Bussman — Mr. Wong King lam, Joseph — Mr. Sin Chi Fai — Ms. Fung Wan Yiu, Agnes Other emoluments Executive directors (i) Salaries and other benefits — Dr. Chan Kwok Keung, Charles — Dr. Yap, Allan — Ms. Chau Mei Wah, Rosanna — Ms. Chan Ling, Eva — Mr. Li Bo — Mr. Chan Kwok Hung — Mr. Lui Siu Tsuen, Richard — Mr. Li Wa Kin (ii) Retirement benefits scheme contributions — Dr. Chan Kwok Keung, Charles — Dr. Yap, Allan — Ms. Chau Mei Wah, Rosanna — Ms. Chan Ling, Eva — Mr. Li Bo — Mr. Chan Kwok Hung — Mr. Lui Siu Tsuen, Richard — Mr. Li Wa Kin Independent non-executive directors Total directors emoluments	2005 HK$’000 — 257 50 47 — 354 — 229 — 1,497 — — — — 1,726 — — — 12 — — — — 12 — 1,738 2,092	2004 HK$’000 — 217 — — 100
		317
		104 117 — 1,261 — — — 1,589
		3,071
		— — — 12 — — — 13
		25
		—
		3,096
		3,413

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

– 93 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

14. DIRECTORS’ AND EMPLOYEE REMUNERATION (Cont’d)

(b) Employees’ remuneration

The five highest paid individuals in the Group included one (2004: two) director(s) of the Company, details of whose salaries and other benefits are set out above. The aggregate remuneration of the remaining highest paid individuals, who are employees of the Group, is as follows:

Salaries and other benefits Retirement benefit scheme Nil to HK$1,000,000	2005 HK$’000 1,950 48 1,998 2005 Number of employees 4	2004 HK$’000 1,482 36
		1,518

		2004 Number of employees 3

15. DISCONTINUED OPERATIONS

In May 2004, the Group disposed of the 100% interests in Tung Fong Hung Investment Limited and its subsidiaries which are engaged in the manufacturing and trading of pharmaceutical products, was regarded as discontinued operation during the year ended 31st December, 2004.

The profit for the year ended 31st December, 2004 from the discontinued operations was anlaysed as follows:

Profit of pharmaceutical products segment for the year Loss on disposal of pharmaceutical products segment	2004 HK$’000 6,777 (5,266)
	1,511

– 94 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

15. DISCONTINUED OPERATIONS (Cont’d)

The profit of pharmaceutical products segment for the period from 1st January, 2004 to 30th April, 2004, which have been included in the consolidated income statements and analysed as follows:

	1st January, 2004 to
	30th April, 2004
	HK$’000
Turnover	96,262
Cost of sales	(60,381)
Other income	419
Distribution costs	(21,056)
Administrative expenses	(8,467)
Profit before tax	6,777
Taxation	—
Profit for the period	6,777

The carrying amounts of the assets and liabilities of Tung Fong Hung Investment Limited and its subsidiaries at the date of disposal are disclosed in note 36.

16. LOSS PER SHARE

From continuing and discontinued operations

The calculation of the basic loss per share attributable to the equity holders of the parent for the year is based on the following data:

Loss for the year attributable to the equity holders of the parent for the purposes of basic loss per share Weighted average number of ordinary shares for the purposes of basic loss per share	2005 2004 HK$’000 HK$’000 (95,200) (179,244) Number of share 2005 2004 881,595,087 877,471,799

– 95 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

16. LOSS PER SHARE (Cont’d)

From continuing operations

The calculation of the basic loss per share from continuing operations attributable to equity holders of the parent for the year is based on the following data:

Loss for the year attributable to equity holders of the parent Add: Net profit for the year from discontinued operations Loss for the year for the purpose of basic loss per share from continuing operations Weighted average number of ordinary shares for the purposes of basic loss per share	2005 2004 HK$’000 HK$’000 (95,200) (179,244) — (1,511) (95,200) (180,755) Number of share 2005 2004 881,595,087 877,471,799

The calculation of the basic earnings per share for the year ended 31st December, 2005 and 2004 have been adjusted as a result of the application of new HKFRSs and details are shown below:

Reported figures before adjustments Adjustment arising from application of new HKFRSs Restated	2005 Basic earnings per share HK$ (0.06) (0.05) (0.11)	2004 Basic earnings per share HK$ (0.20) (0.01) (0.21)

For the year ended 31st December, 2005, no diluted loss per share has been presented as there were no dilutive potential ordinary shares in issue.

For the year ended 31st December, 2004, no disclosure of diluted loss per share has been shown as the exercise of the share option would result in a decrease in loss per share.

– 96 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

17. PROPERTY, PLANT AND EQUIPMENT

THE GROUP COST At 1st January, 2004 Exchange adjustments Reclassification Arising from acquisition of subsidiaries Additions Disposals Disposal of subsidiaries At 1st January, 2005 Exchange adjustments Reclassification Arising from acquisition of subsidiaries Additions Disposals At 31st December, 2005 DEPRECIATION, AMORTISATION AND IMPAIRMENT LOSS At 1st January, 2004 Provided for the year Eliminated on disposals Eliminated on disposals of subsidiaries At 1st January, 2005 Exchange adjustments Provided for the year Eliminated on disposals At 31st December, 2005 NET BOOK VALUES At 31st December, 2005 At 31st December, 2004	Buildings HK$’000 63,245 — — — — — (61,120) 2,125 — — — — — 2,125 57,126 78 — (56,932) 272 — 53 — 325 1,800 1,853	Furniture and fixtures HK$’000 33,096 8 205 614 1,011 (1,263 ) (31,389) 2,282 19 — — 3 — 2,304 3,615 2,257 (732 ) (4,061 ) 1,079 6 506 — 1,591 713 1,203	Machinery and equipment HK$’000 158,767 — — 9,800 2,206 (26 ) (1,526 ) 169,221 217 — 165 827 (171 ) 170,259 157,533 1,100 (5 ) (483 ) 158,145 31 1,483 (47 ) 159,612 10,647 11,076	Sand vessels HK$’000 — — — — — — — — 2,062 — 113,019 — — 115,081 — — — — — — 5,754 — 5,754 109,327 —	Motor vehicles HK$’000 3,605 — — 551 596 — (3,191 ) 1,561 7 — — 942 (13) 2,497 2,257 363 — (1,568 ) 1,052 1 306 (9) 1,350 1,147 509	Construction in progress HK$’000 760 — (205) — 187 — (742) — — — — 1,663 — 1,663 — — — — — — — — — 1,663 —	Buildings under development HK$’000 — — — — 330 — — 330 — — — 330 — 660 — — — — — — — — — 660 330	Total HK$’000 259,473 8 — 10,965 4,330 (1,289 ) (97,968) 175,519 2,305 — 113,184 3,765 (184) 294,589 220,531 3,798 (737 ) (63,044) 160,548 38 8,102 (56 ) 168,632 125,957 14,971

– 97 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

17. PROPERTY, PLANT AND EQUIPMENT (Cont’d)

THE COMPANY COST At 1st January, 2004 and 31st December, 2004 Additions At 31st December, 2005 DEPRECIATION, AMORTISATION AND IMPAIRMENT LOSS At 1st January, 2004 Provided for the year At 1st January, 2005 Provided for the year At 31st December, 2005 NET BOOK VALUES At 31st December, 2005 At 31st December, 2004	Buildings HK$’000 2,125 — 2,125 219 53 272 53 325 1,800 1,853	Furniture and fixtures HK$’000 1,488 — 1,488 888 285 1,173 262 1,435 53 315	Machinery and equipment HK$’000 1,338 — 1,338 1,181 109 1,290 37 1,327 11 48	Sand vessels HK$’000 — — — — — — — — — —	Motor vehicles HK$’000 541 599 1,140 338 134 472 106 578 562 69	Construction in progress HK$’000 — — — — — — — — — —	Buildings under development HK$’000 — — — — — — — — — —	Total HK$’000 5,492 599
								6,091
								2,626 581
								3,207 458
								3,665
								2,426

								2,285

The above items of property, plant and equipment were depreciated on a straight line basis at the following rates per annum:

Buildings 2% or the term of the lease or land use rights, if shorter. Furniture and fixtures 10% — 25% Machinery and equipment 10% — 20% Sand vessels 10% Motor vehicles 12.5% — 25%

At the balance sheet dates, the buildings of the Group are held under medium-term land use rights in the PRC.

As at 31st December, 2005, no property, plant and equipment were held under finance leases. The net book value of furniture and fixtures as at 31st December, 2004 included an amount of approximately HK$3,000 in respect of assets held under finance leases.

– 98 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

18. PREPAID LEASE PAYMENTS

COST At 1st January, 2004 Arising from acquisition of subsidiaries At 1st January, 2005 Additions At 31st December, 2005 AMORTISATION At 1st January, 2004 Provided for the year At 1st January, 2005 Provided for the year At 31st December, 2005 NET BOOK VALUES At 31st December, 2005 At 31st December, 2004	THE GROUP HK$’000 4,699 16,500 21,199 8,635 29,834 485 447 932 519 1,451 28,383 20,267	THE COMPANY HK$’000 4,699 —
		4,699 —
		4,699

		485 117
		602 118
		720

		3,979

		4,097

The Group

The carrying value of prepaid lease payment as at 31st December, 2005 which amounted to HK$15,840,000 (2004: HK$16,170,000) represented the amount paid to acquire a land use right with medium lease term relating to land located in the Zhuhai, the PRC for a consideration of HK$16,500,000 for the construction of a factory. The land use right has not yet been obtained by the Group as at 31st December, 2005. The directors are of the opinion that the land use right will be obtained in due course.

– 99 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

18. PREPAID LEASE PAYMENTS (Cont’d)

The Company

The prepaid lease payments are leasehold lands under mediumterm lease located in PRC.

Analysed for reporting purpose as: Current assets Non-current asset	THE 2005 HK$’000 620 27,763 28,383	GROUP 2004 HK$’000 447 19,820 20,267	THE COMPANY 2005 2004 HK$’000 HK$’000 117 117 3,862 3,980 3,979 4,097	THE COMPANY 2005 2004 HK$’000 HK$’000 117 117 3,862 3,980 3,979 4,097
				4,097

19. DEPOSIT PAID FOR ACQUISITION OF INTEREST IN PROPERTIES

During the year ended 31st December, 2004, the Group entered into a conditional agreement with a third party (“Vendor”) to acquire the properties interest in a parcel of land situated in Shanghai, the PRC (the “Land”) and the 24-storey building being erected upon the land together with 2 levels of underground carparks (the “Building”) (collectively referred to as to the “Properties”) for a consideration of RMB450,000,000 (approximately HK$424,528,000). A deposit of RMB50,000,000 (HK$47,012,000) was paid upon the entering into the conditional agreement.

According to the conditional agreement, prior to the completion of acquisition, the Vendor should (i) obtain the certificate in respect of the land use rights of the Land and the ownership of the Building; (ii) obtain an approval from �� that the use of the Properties be changed from office to both commercial and residential and that all relevant fee and charges arising from the sale of the Land payable to the relevant authorities including �� having been settled in full; (iii) agree with the Group on the specification of installation, fixtures and furniture and other internal decoration of the Properties; (iv) procure all the contractors engaged in the development/construction of the Properties to enter into agreements with the Group to bind these contractors with obligations to the Group to rectify all defects of the Properties which may arise after the completion of the development/construction; and (v) procure the granting of a loan (“Loan”) to be granted by PRC banks to the Group to finance the remaining consideration.

The remaining consideration will be settled upon the grant of the Loan and the transfer of the ownership of the Land and Buildings to the Group.

It is one of the conditions for completion of the acquisition that the Vendor should obtain approval for the change of use of the Properties from office to both commercial and residential. Should the Vendor fail to obtain such approval within 150 days from the date of the agreement, the Group is entitled to either (i) to proceed with the agreement in accordance with the existing terms and conditions; or (ii) to acquire the 1st to 7th floors and the 23rd floor of the Properties together with the two levels underground carparks for a consideration of RMB70,000,000 (HK$65,817,000).

– 100 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

19. DEPOSIT PAID FOR ACQUISITION OF INTEREST IN PROPERTIES (Cont’d)

Provided that if the conditions are not fulfilled on or before 1st June, 2005, the Group shall agree to a further extension of not less than 60 days without imposing any fine on the Vendor. If the conditions are not fulfilled within the extended period, the Group shall be entitled to terminate the agreement and the Vendor shall refund the deposit to the Group together with interests accrued during the period from the date of the agreement to the date the deposit is refunded and calculated on the relevant prevailing market interest rate.

However, the conditions stated above for the change of the use of the Properties has not yet been fulfilled within the said period and accordingly the Vendor and the Group had entered into another agreement dated 3rd February, 2005 pursuant to which, among other things, (i) the Group will pay, on behalf of the Vendor, RMB22,000,000 (approximately HK$20,663,000) to the main contractor of the Properties (the “Main Contractor”); and (ii) the amount paid by the Group in (i) will be deducted from the sales consideration.

Further, the Group had made an additional RMB8,000,000 deposit (approximately HK$7,512,000) to the Vendor pursuant to this additional agreement and the aggregate sum paid by the Group to the Vendor amounted to RMB58,000,000 (approximately HK$55,716,000) as of 31st December, 2005.

In June 2005, the Group had commenced legal proceedings against the Vendor, among other things, to demand the Vendor to fulfil its obligations under the above two agreements and applied to a PRC court an injunction order on the Properties to stop the Properties from being transferred (the “Injunction Orders”). It had also come to the attention of the Group that one of the three secured creditors of the Vendor and the Main Contractor had already applied to and being granted the Injunction Orders and they, together with the other two secured creditors, had priority over the Group on the Properties.

As a condition precedent to the application of the Injunction Order, the Group had issued a counter guarantee of RMB402,000,000 (approximately HK$377,500,000) to an institution in the PRC which provided a guarantee of the same amount to the PRC court on behalf of the Group.

At the same time, the directors of the Group are also in discussion with the Vendor for settlement of the above matters; however, there can be no assurance that such matters can be resolved and settled with the Vendor eventually. Despite the above developments, the directors of the Group have consulted its legal counsel and decided to proceed with the acquisition of the Properties in consideration of the following:

(a) the transaction can be continued with the payment of outstanding consideration of RMB392 million (approximately to HK$376 million) and the legal title of the Properties can be transferred to the Group when the debts of the Vendor owed to the three secured creditors and the Main Contractor are settled by the Group;
(b) the usage of the Properties can be changed to both commercial and residential when the Group obtains the legal title to the Properties and makes the application to the relevant authority;
(c) the acquisition of the Properties, on a completion basis, is expected to bring economic benefits to the Group taking into account of the estimated market value of the Properties as of 31st December, 2005; and the ability of the Group to meet the cash flow requirements to finance the acquisition and completion of the Properties, given the current financial position of the Group and financial resources available to the Group from internally generated funds, advances from its holding companies and/or financial institutions.

The directors of the Company are of the view that the carrying amount of deposit is not less than its recoverable amount at the balance sheet dates.

– 101 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

20. PAYMENT FOR ACQUISITION OF SUBSIDIARIES

During the year ended 31st December, 2004, the Group entered into conditional agreements with third parties (“Vendor Parties”) to acquire the entire interest in ��(“��”) and 88% interest in � ��(“��”) for an aggregate consideration of approximately HK$50,000,000. �� and �� are companies incorporated in the PRC and engaged in the business of sand mining. According to the conditional agreements, the Vendor Parties should procure the Group to obtain all necessary approval from relevant government authorities for the proper transfer of ownership in �� and ��. A deposit of HK$40,000,000 was paid upon entering into the conditional agreements. During the year, the conditions have been fulfilled and the acquisition was completed.

21. GOODWILL

COST
At 1st January, 2004
Arising from acquisition of subsidiaries
Eliminated on disposal of subsidiaries
At 31st December, 2004
Elimination of accumulation amortisation upon
the application of HKFRS 3
At 1st January, 2005
Arising from acquisition of subsidiaries
At 31st December, 2005
AMORTISATION AND IMPAIRMENT
At 1st January, 2004
Provided for the year
Eliminated on disposal of subsidiaries
At 31st December, 2004
Elimination of accumulation amortisation upon
the application of HKFRS 3
At 31st December, 2005
CARRYING VALUE
At 31st December, 2005
At 31st December, 2004

HK$’000
33,469
26,812
(33,469)
26,812
(1,005)
25,807
9,123
34,930
24,144
1,160
(24,299)
1,005
(1,005)
—
34,930
25,807

Prior to 31st December, 2004, goodwill was amortised over its estimated life of 10 years.

– 102 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

21. GOODWILL (Cont’d)

Particulars regarding impairment testing on goodwill are disclosed below:

The carrying value of goodwill as at 31st December, 2005 is attributable to the acquisition of Talent Cosmos Limited of HK$25,807,000 and acquisition of �� and �� of HK$9,123,000 respectively. Talent Cosmos Limited and its subsidiaries are engaged in the business of manufacturing and trading of battery products (“Cash Generating Unit of Battery Products”). �� and �� are engaged in the business segment of sand mining activities (“Cash Generating Unit of Sand Mining”).

During the year ended 31st December, 2005, management of the Group determines that there is no impairments of goodwill of the Group to these two cash generating units.

The basis of the recoverable amounts of these cash generating units and their major underlying assumptions are summarised below:

Cash Generating Unit of Battery Products

The recoverable amount of this unit has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a 20-year period, and discount rate of 8%. This cash generating unit’s cash flow within the first 5- year period are extrapolated using a steady 10% growth rate and no growth rate for the remaining years of the cash flows. Another key assumption for the value in use calculations is the budgeted gross margin, which is determined based on the unit’s past performance and management’s expectations for the market development. Management believes that any reasonably possible change in any of these assumptions would not cause the aggregate carrying amount of this cash generating unit to exceed the aggregate recoverable amount of this cash generating unit.

Cash Generating Unit of Sand mining

The recoverable amount of this unit has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a 10-year period, and discount rate of 8%. This cash generating unit’s cash flow within the first 5- year period are extrapolated using a steady 10% growth rate and no growth rate for the remaining years of the cash flows. Another key assumption for the value in use calculations is the budgeted gross margin, which is determined based on the unit’s past performance and management’s expectations for the market development. Management believes that any reasonably possible change in any of these assumptions would not cause the aggregate carrying amount of this cash generating unit to exceed the aggregate recoverable amount of this cash generating unit.

– 103 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

22. INVESTMENTS IN SUBSIDIARIES/AMOUNTS DUE FROM SUBSIDIARIES/AMOUNTS DUE TO SUBSIDIARIES

Investments in subsidiaries Shares listed overseas, at cost Unlisted shares, at cost Deemed capital contribution Accumulated impairment losses Market value of listed shares Amounts due from subsidiaries Amounts due from subsidiaries _Less:_Allowances Amounts due to subsidiaries Amounts due to subsidiaries — shown under current liabilities Amounts due to subsidiaries — shown under non-current liabilities	2005 HK$’000 139,703 85,037 1,858,032 (1,937,738) 145,034 15,122 2,008,674 (70,991) 1,937,683 737,054 —	2004 HK$’000 139,703 85,037 — (79,706) 145,034 37,344 3,779,832 (1,944,253) 1,835,579 — 840,225

The amounts due from subsidiaries as at 31st December, 2005 are unsecured and repayable in nine years and the amounts have been classified as non-current. Of the amounts, approximately HK$346,720,000 (2004: HK$228,449,000) bears interest at prevailing market rate and the remaining balance is non-interest bearing.

The fair values of the amounts due from subsidiaries at 31st December, 2005, determined based on the present value of the estimated future cash flows discounted using the effective interest rate of 8% at the balance sheet date, approximate to the corresponding carrying amount.

As at 31st December, 2004, the amounts due to subsidiaries were unsecured, non-interest bearing and had no fixed repayment terms. In the opinion of the directors, the amounts due to subsidiaries will not be repayable in the next twelve months accordingly, the amounts have been classified as non-current as at 31st December, 2004. As at 31st December, 2005, the amounts due to subsidiaries are unsecured, non-interest bearing and repayable on demand, the carrying value of the amounts due to subsidiaries as at 31st December, 2005 approximated to its fair value.

The principal activities of the subsidiaries are set out in note 46.

– 104 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

23. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM ASSOCIATES/AMOUNTS DUE TO ASSOCIATES

(a) Interests in associates

Notes Share of net assets Goodwill (i) Negative goodwill (ii) Unlisted convertible notes due from an associate (iii) Embedded derivative — conversion option (iv) Loans and interest receivables due from associates (v) Unlisted shares, at cost Market value of listed shares in associates	THE 2005 HK$’000 546,551 12,187 — — — — 558,738 — 317,752	GROUP 2004 HK$’000 334,020 2,006 (47,058) 55,000 — 81,840 425,808 — 311,480	THE COMPANY 2005 2004 HK$’000 HK$’000 — — — — — — — — — — — — — — 2 2 N/A N/A	THE COMPANY 2005 2004 HK$’000 HK$’000 — — — — — — — — — — — — — — 2 2 N/A N/A
				—

				2

				N/A

– 105 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

23. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM ASSOCIATES/AMOUNTS DUE TO ASSOCIATES

(Cont’d)

(a) Interests in associates (Cont’d)

Notes:

(i) The amount represented the goodwill arising on acquisitions of associates in prior years. The movement of goodwill is set out below.

COST
At 1st January, 2004
Arising on acquisitions of associates
Realised upon disposal/dilution of interests in associates
At 31st December, 2004
Arising on acquisitions of associates
At 31st December, 2005
AMORTISATION
At 1st January, 2004
Charge for the year
Realised upon disposal/dilution of interests in associates
At 31st December, 2004 and 31st December, 2005
CARRYING VALUES
At 31st December, 2005
At 31st December, 2004
Prior to 31st December, 2004, goodwill had been amortised over 10 years.

HK$’000
91,785
3,931
(93,710)
2,006
10,181
12,187
10,326
3,059
(13,385)
—
12,187
2,006

(ii) During the year, a discount on acquisition of HK$6,601,000 arising on acquisition of additional interests in Wing On has been included as income in the determination of the Group’s share of results of associates.

Negative goodwill with carrying amount of HK$47,058,000 as at 31st December, 2004 (1st January, 2004: HK$111,041,000) was presented as a deduction from the cost of investments in associates. In prior years, negative goodwill was released to income on a straightline basis of 10 years, representing the remaining weighted average useful life of the depreciable assets acquired. The amount of negative goodwill released to the income statement for the year ended 31st December, 2004 was HK$10,598,000. All negative goodwill was derecognised on 1st January, 2005 upon the application of HKFRS 3 (see note 2).

Prior to 31st December, 2004, negative goodwill is released to income over a period of 10 years.

– 106 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

23. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM ASSOCIATES/AMOUNTS DUE TO ASSOCIATES (Cont’d)

(a) Interests in associates (Cont’d)

Notes: (Cont’d)

(iii) The carrying value of the unlisted convertible notes at 31st December, 2004 represented investments in convertible note issued by Wing On Travel (Holdings) Limited (“Wing On”) (“Wing On Note”). The Wing On Note bore interest at 2% per annum and is due for redemption on 14th June, 2007 at HK$55,000,000. It also entitled the holders at any time after the date of the issuance of the Wing On Note and up to 14th June, 2007 to convert the Wing On Note into shares of Wing On at an initial conversion price of HK$0.02 per share (subject to adjustment).

The Group subscribed 8,740,000 new ordinary shares of HK$0.01 each in January and February 2005 and the Group’s interest was increased to approximately 21.1%. In April, 2005, the Group further acquired 6,967,700 ordinary shares of HK$0.01 each in Wing On and converted HK$55,000,000 convertible notes of Wing On into ordinary share of HK$1.00 each (being the par value of each share after share consolidation carried that by Wing On) in Wing On at the conversion price of HK$0.02 per share and the interest in Wing On held by the Group was increased to 27.74%. No Wing On Note were held by the Group as at 31st December, 2005.

(iv) In accordance with HKAS 39 “Financial Instruments: Recognition and Measurement” issued by the HKICPA, the conversion option element of the Wing On Note represents an embedded derivative instrument which is accounted for separately from the unlisted convertible notes and, as such, to be measured at fair value when initially recorded and at subsequent reporting dates. The fair value of this conversion option, representing a discount on subscription of the Wing On Note, was estimated using the Black-Scholes option pricing model at the date of subscription of the Wing On Note, and as at 31st December, 2004. Comparative figures for 2004 are not required to be restated. From 1st January, 2005 onwards, the Group measured the fair value of the embedded derivates in accordance with the requirements under HKAS 39 and recognised the fair value of the conversion option of the unlisted convertible note as at 1st January, 2005 of approximately HK$64,410,000, which increase the derivative instruments included in interests in associates and decrease the deficit as at 1st January, 2005 accordingly. The impact of changes in fair value of this conversion option, taking into account the portion of the conversion option exercised during the year ended 31st December, 2005, was loss of HK$39,743,000, which have been recognised in the consolidated income statement.
(v) Loans and interests receivable due from associates are unsecured, carries interest at prevailing market rate and repayable within one year. The fair value of the Group’s loans and interest receivables due from associates at 31st December, 2005 approximates to the corresponding carrying amount.

(b) Amounts due from associates

	THE	GROUP	THE	COMPANY
	2005	2004	2005	2004
	HK$’000	HK$’000	HK$’000	HK$’000
Amounts due from associates	159,214	57,163	2,989	563

The amounts due from associate are unsecured and repayable on demand. Except for amount due from associate of approximately HK$151,648,000 (2004: HK$54,247,000) are interest bearing at prevailing market rate, all remaining amount due from associates are non-interest bearing. The fair value of the Group’s amount due from associates at 31st December, 2005 approximates to the corresponding carrying amount.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

23. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM ASSOCIATES/AMOUNTS DUE TO ASSOCIATES (Cont’d)

(c) Amounts due to associates

	THE	GROUP	THE	COMPANY
	2005	2004	2005	2004
	HK$’000	HK$’000	HK$’000	HK$’000
Amounts due to associates	286	3,737	—	—

The amounts due to associates are unsecured, non-interest bearing and repayable on demand. The fair value of the Group’s amounts due to associates at 31st December, 2005 approximated to the corresponding carrying amount.

Particulars of the principal associates at 31st December, 2005 are as follows:

			Proportion of
			nominal value
			of issued share
	Place of the		capital/ registered
	incorporation/		capital held
	registration/	Place of	indirectly by
Name of associate	establishment	operation	the Company	Principal activities
			%
China Velocity Group Limited	Bermuda	Hong Kong	22.65	Property investment
(“China Velocity”)		and PRC		and development
(notes a and b)				in the PRC
Wing On_(notes a and b)_	Bermuda	Hong Kong	27.74	Business of providing
				package tours,
				travel and other
				related services
Hangzhou Zhongce Rubber	PRC	PRC	26	Manufacturing of tires
Company Limited
(“HZ Rubber”)
(note c)

Notes:

(a) The shares of China Velocity and Wing On are listed on the Hong Kong Stock Exchange.
(b) These companies are a limited liability company incorporated in the respective jurisdiction.
(c) This is a PRC sino-foreign equity joint venture.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

23. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM ASSOCIATES/AMOUNTS DUE TO ASSOCIATES

(Cont’d)

(c) Amounts due to associates

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

The summarised financial information in respect of the Group’s major associates is set out below:

Turnover Profit (loss) for the year Profit (loss) for the year attributable to the Group Total assets Total liabilities Net assets Share of net assets by the Group: As at 31st December Market value of interest held by the Group	2005 HK$’000 8,382,622 133,498 36,639 2005 HK$’000 7,431,386 (5,037,199) 2,394,187 520,772 317,752	2004 HK$’000 6,519,685 (102,198) (17,266) 2004 HK$’000 5,875,595 (4,049,781) 1,825,814 333,708 311,480

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

24. LOANS AND INTEREST RECEIVABLES

Loans and interest receivables — secured_(note a) — unsecured(note b) Promissory note and its interest receivables(note b)_ Less: Allowances Less: Amounts due within one year and repayable on demand Amounts due after one year	THE 2005 HK$’000 302,061 492,967 9,292 804,320 (340,088) 464,232 (464,232) —	GROUP 2004 HK$’000 230,105 666,513 6,735 903,353 (302,643) 600,710 (563,666) 37,044	THE COMPANY 2005 2004 HK$’000 HK$’000 — — 35,223 35,223 9,292 6,735 44,515 41,958 (35,223) (35,223) 9,292 6,735 (9,292) (6,735) — —

Notes:

(a) Included in secured loans and interests receivables were amounts of approximately HK$99,616,000 (2004: HK$109,286,000) and approximately HK$165,422,000 (2004: HK$120,819,000) due from Danwei Limited (“Danwei”) and Lucklong Venture Limited (“Lucklong”) respectively. Allowances made in the loans receivables due from Danwei and Lucklong as at 31st December, 2005 were approximately HK$180,838,000 (2004: HK$143,905,000) with reference to the market value of the collateral secured to the Group. Shares in certain property holding companies held by Danwei and Lucklong were pledged to the Group as securities to the loans receivables.

The loan receivables carry interest at the prevailing market rate ranging from 8% to 12% and repayable on demand.

(b) The amount are unsecured, carries interest at prevailing market rate ranging from 8% to 12%. Included in unsecured loan and interest receivables were amounts of approximately HK$80,308,000 (2004: HK$80,021,000) due from subsidiaries of investees.

The fair value of the Group’s loan and interest receivables as at balance sheet date approximate to the carrying amount of the receivables.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

25. INVESTMENTS IN SECURITIES AT FAIR VALUE THROUGH PROFIT OR LOSS/INVESTMENTS IN SECURITIES HELD FOR TRADING

Equity securities: Listed Unlisted Debt securities: Unlisted Club debentures Total Total and reported as: Listed Hong Kong Elsewhere Unlisted Classified under Investments in securities held for trading included in current assets Investments in securities at fair value through profit or loss included in non-current asset Market value of listed securities	THE 2005 HK$’000 38,467 61,748 100,215 24,431 825 125,471 38,467 — 38,467 87,004 125,471 7,552 117,919 125,471 38,467	GROUP 2004 HK$’000 91,081 76,909 167,990 45,084 825 213,899 80,415 10,666 91,081 122,818 213,899 19,849 194,050 213,899 91,081	THE COMPANY 2005 2004 HK$’000 HK$’000 — — — — — — — — 825 825 825 825 — — — — — — 825 825 825 825 — — 825 825 825 825 — —	THE COMPANY 2005 2004 HK$’000 HK$’000 — — — — — — — — 825 825 825 825 — — — — — — 825 825 825 825 — — 825 825 825 825 — —
				—

				—

				825

				825

				— —
				— 825
				825

				— 825
				825

				—

– 111 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

25. INVESTMENTS IN SECURITIES AT FAIR VALUE THROUGH PROFIT OR LOSS/INVESTMENTS IN SECURITIES HELD FOR TRADING (Cont’d)

The carrying value of unlisted equity securities in Hong Kong at 31st December, 2005 included an amount of HK$43,498,000 (2004: HK$43,498,000), representing 9.76% (2004: 9.76%) interest in Apex Quality Group Limited (“Apex”). Apex is incorporated in the British Virgin Islands and engaged in hotel and leisure related business. The fair value of the unlisted equity securities are determined based on the present value of the estimated future cash flow discounted using the effective interest rate at the balance sheet date, approximates to the corresponding carrying amount.

The carrying value of unlisted debt securities at 31st December, 2005 represented a convertible note issued by a company incorporated in Australia which is engaged in the business of fruit trading. The convertible note bears interest at 8% per annum and will be matured on 29th March, 2008. The fair value of the unlisted debt securities are determined based on the present value of the estimated future cash flow discounted using the effective interest rate at the balance sheet date, approximates to the corresponding carrying amount.

The fair value of the Group’s investments in securities at fair value through profit or loss and investments in securities held for trading at 31st December, 2005 approximates to the corresponding carrying amount.

The carrying value of investments in securities as at 31st December, 2004 (which previously were classified and measured under benchmark treatment in accordance with SSAP 24 issued by the HKICPA) were reclassified to appropriate categories upon application of HKAS 39 on 1st January, 2005.

26. OTHER ASSET

The amount represents cost incurred in connection with a land development project in the PRC. The project is a land development of �� located in Long Shan Development Area, Doumen District, Zhuhai City and is to be jointly developed with ��. The Group is entitled to the exclusive development right to the project and also the right to obtain the land for the development (“Other Asset”). The Group is also entitled to sell the Other Asset to investors at consideration to be agreed among themselves.

The amount of approximately HK$229,288,000 (2004: approximately HK$227,167,000) was paid by the Group for obtaining the exclusive development right to the project and in obtaining certain parts of the right for land development.

As the directors are of the opinion that the Other Asset is held for sale, the cost incurred for the Other Asset is included in current asset accordingly.

The directors has assessed the carrying value of the Other Asset with reference to the valuation performed by Norton Appraisal Limited, an independent valuer, on open market value basis and no impairment loss is identified.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

27. INVENTORIES

As cost less provision: Raw materials Finished goods	2005 HK$’000 5,358 7,051 12,409	2004 HK$’000 8,004 5,704
		13,708

Included in above are raw materials of HK$5,358,000 and finished goods of HK$7,051,000 which are carried at net realisable value (2004: Finished goods of HK$5,704,000).

The cost of inventories recognised as an expense during the year was approximately HK$26,780,000 (2004: HK$76,066,000).

28. TRADE RECEIVABLES

Trade receivables Less: accumulated impairment	2005 HK$’000 5,737 (964) 4,773	2004 HK$’000 7,441 (461)
		6,980

The Group allows its trade customers with credit period normally ranging from 90 days to 180 days. The aged analysis of the trade debtors at the balance sheet date is as follows:

0 — 90 days 91 — 180 days Over 180 days	2005 HK$’000 4,408 365 — 4,773	2004 HK$’000 6,832 114 34
		6,980

The carrying amount of the Group’s trade receivables at 31st December, 2005 approximates to the corresponding fair value.

– 113 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

29. TRADE PAYABLES, OTHER PAYABLES AND ACCRUED CHARGES

Included in trade payables, other payables and accrued charges are trade payables of HK$5,336,000 (2004: HK$4,964,000) with the following aged analysis:

HK$4,964,000) with the following aged analysis:
0 — 90 days 91 — 180 days Over 180 days	2005 HK$’000 2,980 929 1,427 5,336	2004 HK$’000 1,613 2,838 513
		4,964

The carrying amount of the Group’s trade payables at 31st December, 2005 approximates to the corresponding fair value.

30. AMOUNTS DUE TO RELATED COMPANIES

Details of the amounts due to related companies are as follows:

Notes Nation Cheer Investment Limited (i) Cycle Company Limited and Gunnell Properties Limited (i) ITC Management Limited (ii) Less: Amounts shown under current liabilities	THE 2005 HK$’000 199,126 556 605 200,287 (200,287) —	GROUP 2004 HK$’000 184,943 417 275 185,635 (692) 184,943	THE COMPANY 2005 2004 HK$’000 HK$’000 199,126 184,943 — — 605 275 199,731 185,218 (199,731) (275) — 184,943	THE COMPANY 2005 2004 HK$’000 HK$’000 199,126 184,943 — — 605 275 199,731 185,218 (199,731) (275) — 184,943
				185,218 (275)
				184,943

Notes:

(i) The companies are wholly-owned subsidiaries of substantial shareholders of the Company.

(ii) ITC Management Limited is a wholly-owned subsidiary of ITC Corporation Limited, a shareholder of the Company’s substantial shareholder.

At 31st December, 2005, all amounts are repayable on demand. At 31st December, 2004, other than HK$184,943,000 which was repayable after one year from 31st December, 2004, all remaining balances were repayable on demand.

All amounts are unsecured, carry interest at prevailing market rate ranging from 8% to 10%. The fair value of the Group’s amounts due to related companies at 31st December, 2005 approximates to the corresponding carrying amount.

– 114 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

31. PAYABLES

The amounts are unsecured, carry interest at prevailing market rate ranging from 8% to 10% per annum and are repayable on demand. The fair value of the Group’s payables at 31st December, 2005 approximates to the corresponding carrying amount.

32. BANK LOANS AND OTHER BORROWINGS

Bank loans Obligations under finance leases_(note a) Bank overdrafts Other borrowings(note b)_ Secured Unsecured Carrying amount repayable: On demand or within one year More than one year, but not exceeding two years Less: Amount due within one year shown under current liabilities	THE 2005 HK$’000 1,412 3 7,212 — 8,627 8,627 — 8,627 8,627 — 8,627 (8,627) —	GROUP 2004 HK$’000 2,245 13 6,800 33,567 42,625 42,098 527 42,625 42,622 3 42,625 (42,622) 3	THE COMPANY 2005 2004 HK$’000 HK$’000 — — 3 13 — — — — 3 13 3 13 — — 3 13 3 10 — 3 3 13 (3) (10) — 3

Bank overdrafts are repayable on demand. The bank loans carries interest at prevailing market rate ranging from 8% to 10% and were secured by the Group’s bank deposits and investment in securities. These were no undrawn facilities as at 31st December, 2005 and 2004.

The Group’s bank and other borrowings are denominated in Hong Kong Dollars.

The fair value of the Group’s bank and other borrowings at 31st December, 2005 approximates to the corresponding carrying amount.

– 115 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

32. BANK LOANS AND OTHER BORROWINGS (Cont’d)

Notes:

(a)

Amounts payable under finance leases: Within one year In the second to fifth years inclusive Less: Future finance charges Present value of lease obligations Less: Amount due within one year Amount due after one year	Minimum lease payments THE GROUP THE COMPANY 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 4 14 4 14 — 4 — 4 4 18 4 18 (1) (5) (1) (5) 3 13 3 13	Present value of minimum lease payments THE GROUP THE COMPANY 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 3 10 3 10 — 3 — 3 3 13 3 13 — — — — 3 13 3 13 (3) (10) (3) (10) — 3 — 3

The average lease term is one (2004: two) year. For the year ended 31st December, 2005, the average effective borrowing rate was 3.2% (2004: 9.4%). Interest rate is fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

The Group’s obligations under finance leases contract are secured by the lessor’s charge on the hired assets.

(b) As at 31st December, 2004, the amount was secured, carried interest at prevailing market rates ranged from 8% to 12% per annum and was fully repaid during the year.

– 116 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

33. SHARE CAPITAL

Authorised: Ordinary shares of HK$0.10 each at 31st December, 2004 and 2005 Issued and fully paid: Ordinary shares of HK$0.10 each at 1st January, 2004 Issue of shares Ordinary shares of HK$0.10 each at 31st December, 2004 and 2005	Number of shares 8,000,000,000 856,595,087 25,000,000 881,595,087	Value HK$’000 800,000

		85,660 2,500
		88,160

As explained in note 1, the Company proposed to carry out the Capital Reorganisation which involve, inter alia, the followings:

(i) cancellation of the paid-up capital of HK$0.05 on each issued share of the Company and reduction in the nominal value of each issued share from HK$0.10 to HK$0.05 (“Capital Reduction”) and the cancellation of the entire share premium account of the Company;
(ii) subdivision of each authorized but unissued share of the Company into two reduced shares of HK$0.05 each (“Subdivision”);
(iii) every two reduced shares of the Company of HK$0.05 each arising from the Capital Reduction and Subdivision will then be consolidated into one ordinary share of HK$0.10; and
(iv) the credits of approximately HK$44,079,000 and HK$1,900,916,000 resulting from the Capital Reduction and the cancellation of the share premium account, respectively to the special capital reserve account of the Company.

The Capital Reorganisation was not yet completed at the date of this report.

– 117 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

34. SHARE OPTIONS

The Company

The 2002 Scheme

On 4th June, 2002, the Company adopted a share option scheme (“2002 Scheme”) which is effective for a period of ten years for the primary purpose of providing incentives to directors and eligible employees. Under the 2002 Scheme, the Board of Directors of the Company may grant options to eligible employees, including executive directors of the Company and its subsidiaries, to subscribe for shares in the Company for a consideration of HK$1. Options granted must be taken up within 30 days of the date of grant, upon payment of HK$1 per grant. Options granted are exercisable not later than ten years after the date the options are granted. The exercise price, subject to adjustment, is determined by the Board of Directors of the Company and will not be less than the highest of (i) the closing price of the Company’s share on the date of options granted; (ii) the average closing price of the Company’s shares for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Company’s share.

The total number of shares in respect of which options may be granted under the 2002 Scheme is not permitted to exceed 46,097,894 shares, representing 10% of the issued share capital of the Company as at the date of adoption of 2002 Scheme. Subject to the issue of a circular and the approval of the shareholders of the Company in general meeting and/or such other requirements prescribed under the Rules Governing the Listing of Securities of the Stock Exchange (the “Listing Rules”) from time to time, the Board may refresh the limit at any time to 10% of the total number of shares in issue as at the date of approval by the shareholders of the Company in general meeting. The number of shares in respect of which options may be granted to any individual is not permitted to exceed 1% of the aggregate number of shares of the Company in issue and issuable under 2002 Scheme at any point in time, without prior approval from the Company’s shareholders.

There were no options granted during the year ended 31st December, 2005 under the 2002 Scheme.

A summary of the movements of share options under the 2002 Scheme during the year ended 31st December, 2004 were as follows:

Employees

				Number of shares	under option
			Outstanding	Granted	Exercised	Outstanding
		Exercise	at	during	during	at
Date of grant	Exercisable period	price	1.1.2004	the year	the year	31.12.2004
		HK$
8.1.2004	8.1.2004 to 7.1.2009	0.1776	—	25,000,000	(25,000,000)	—

– 118 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

34. SHARE OPTIONS (Cont’d)

Subsidiary

China Enterprises Limited

Pursuant to the Executive Share Option Scheme adopted on 7th June, 1994 and effective for a period of ten years after the date of the adoption of the scheme, China Enterprises Limited granted options to officers and employees, and directors who are also employees, of China Enterprises Limited and its subsidiaries to subscribe for common stock in China Enterprises Limited for a consideration of HK$1 for the primary purpose of providing incentives to officers, directors and eligible employees, subject to a maximum of 910,000 shares. The Executive Share Option Scheme was expired on 6th June, 2004. Shares of common stock to be issued upon the exercise of options will be authorised and unissued shares. An independent committee (the “Committee”) of China Enterprises Limited board of directors was formed to monitor and consider the granting of options under the scheme. The subscription price will be determined by the Committee, and will not be less than 80% of the average closing price of shares of common stock over the five trading days immediately preceding the date of offer of the option.

At 31st December, 2004 and 31st December, 2005, there was no shares issuable under the above scheme. The total number of shares in respect of which options may be granted under the schemes is not permitted to exceed 910,000 of the shares of China Enterprises Limited in issue at any point in time, without prior approval from China Enterprises Limited shareholders. The number of shares in respect of which options may be granted to any individual is not permitted to exceed 25% of the shares of China Enterprises in issue at any point in time, without prior approval from China Enterprises Limited shareholders.

35. RESERVES

THE COMPANY At 1st January, 2004 Exercise of share options Loss for the year At 31st December, 2004 Effect of changes in accounting policies_(note 3)_ At 1st January, 2005 (as restated) Profit for the year At 31st December, 2005	Share premium HK$’000 1,898,976 1,940 — 1,900,916 — 1,900,916 — 1,900,916	Special Capital capital redemption reserve reserve HK$’000 HK$’000 414,881 233 — — — — 414,881 233 — — 414,881 233 — — 414,881 233	Deficit HK$’000 (1,251,814) — (144,053) (1,395,867) 62,239 (1,333,628) 103,180 (1,230,448)	Total HK$’000 1,062,276 1,940 (144,053) 920,163 62,239 982,402 103,180 1,085,582

The special capital reserve of the Company represents the amount arising from the capital reduction carried out by the Company during the year ended 31st December, 2001.

– 119 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

36. DISPOSAL OF INTERESTS IN SUBSIDIARIES

During the year ended 31st December, 2004, the Group disposed of its 100% interest in Tung Fong Hong Investment Limited (“TFHI”). Details of the assets and liabilities of the subsidiaries disposed of were as follows:

Net assets disposed of:
Property, plant and equipment
Interests in associates
Inventories
Trade debtors
Other receivables, deposits and prepayments
Bank balances and cash
Trade creditors, other payables and accrued charges
Income and other taxes payable
Bank loans and other borrowings
Obligations under finance leases
Goodwill realised
Exchange reserve realised
Loss on disposal/dilution
Satisfied by:
Cash
Promissory note included in loans receivable
Analysis of the net inflow of cash and cash equivalents
in connection with the disposal/dilution of subsidiaries:
Cash consideration received
Bank balances and cash disposed of
Net inflow of cash and cash equivalents

2004
HK$’000
34,924
14,808
49,319
12,112
8,436
22,176
(43,316)
(30)
(60,197)
(149)
38,083
9,170
13
47,266
(5,266)
42,000
35,500
6,500
42,000
35,500
(22,176)
13,324

– 120 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

37. ACQUISITION OF SUBSIDIARIES

(a) On 30th June, 2005, the Group acquired 88% and 100% of the issued share capital of �� and � ��, respectively, for an aggregate cash consideration of HK$50 million. The two newly acquired subsidiaries are incorporated in the PRC and engaged in the business of sand mining. These transactions have been accounted for using the purchase method of accounting. The directors are of the view that it is impracticable to disclose the revenue and the results for the six months ended 30th June, 2005 as if the acquisition had been effected on 1st January, 2005 since such information was not provided by the vendor.

The assets acquired in the transaction, and the goodwill arising, are as follow:

Net assets acquired: Property, plant and equipment Inventories Trade receivables Other receivables, deposits and prepayments Bank balances and cash Creditors, other payables and accrued charges Amounts due to former shareholders Deferred tax liabilities Minority interests Goodwill on acquisition Satisfied by: — Cash — Deposit paid for acquisition of subsidiaries Net cash outflow arising on acquisition: Cash consideration paid Cash and cash equivalents acquired		2005	Fair value HK$’000 113,184 6 75 647 349 (244) (49,770) (20,796) 43,451 (2,574) 40,877 9,123 50,000 10,000 40,000 50,000 (10,000) 349 (9,651)
	Acquiree’s carrying amount before combination HK$’000 50,165 6 75 647 349 (244) (49,770) — 1,228 (48) 1,180	Fair value adjustments HK$’000 63,019 — — — — — — (20,796) 42,223 (2,526) 39,697

The goodwill arising on the acquisition is attributable to the anticipated profitability of the distribution of the Group’s products in the new markets and the anticipated future operating synergies from the combination.

�� and �� contributed HK$5,298,000 to the Group’s turnover and loss of HK$3,735,000 to the Group’s loss before taxation for the period between the date of acquisition and the balance sheet date.

– 121 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

37. ACQUISITION OF SUBSIDIARIES (Cont’d)

(b) During the year ended 31st December, 2004, the Group acquired a 80% interest in Talent Cosmos Limited for a consideration of HK$30 million. The effect of the acquisition is summarised as follows:

Net assets acquired: Property, plant and equipment Investment in securities Interests in associates Inventories Trade debtors Bank balances and cash Creditors, other payables and accrued charges Payables due to associates Bank loans Minority interests Goodwill arising on acquisition Satisfied by: Cash	2004 HK$’000 27,465 4,160 386 10,079 8,760 3,256 (37,086) (2,198) (10,453) (1,181) 3,188 26,812 30,000 30,000

Analysis of the net cash outflow of cash and cash equivalent in connection with acquisition of subsidiaries:

Cash consideration paid Bank balances and cash acquired Net cash outflow of cash and cash equivalent in connection with acquisition of subsidiaries	2004 HK$’000 (30,000) 3,256 (26,744)

The subsidiaries acquired during the year ended 31st December, 2004 contributed approximately HK$27,141,000 to the Group’s turnover and loss of HK$2,005,000 to the Group’s loss before taxation between the date of acquisition and the balance sheet date.

– 122 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

38. DEFERRED TAX LIABILITIES

The following are the major deferred tax liabilities provided by the Group and movements thereon during the current and prior reporting periods:

	Revaluation of
	property, plant
	and equipment
	HK$’000
At 1st January, 2004, and 31st December, 2004	—
Arising on acquisition of subsidiaries	20,796
Exchange difference	379
At 31st December, 2005	21,175

39. MAJOR NON-CASH TRANSACTIONS

During the year ended 31st December, 2005, the major non-cash transactions were as follows:

(a) Amount due to former shareholders of HK$50,000,000 were settled by the assignment of loan and interest receivable from outsiders.
(b) Additions to investment in securities of approximately HK$3,256,000 were settled by repayment of loans and interests receivables.

During the year ended 31st December, 2004, the major non-cash transaction are as follows:

(a) Increase in receivables of approximately HK$34,979,000 before allowances of HK$10,686,000 were resulted from reclassification from loans receivables due from associates included in interests in associates upon the completion of dilution of interest in associates.
(b) Addition to deposit paid for acquisition of interest in properties of approximately HK$46,686,000 were repayments of loans receivables due from associates.
(c) Addition to investment in securities of approximately HK$43,588,000 were as result of disposal/dilution of interests in associates.
(d) Loan receivables due from associates of HK$70,200,000 were settled by the issuance of convertible notes by the associates included in interests in associates.
(e) Additions to payment for acquisition of subsidiaries of HK$40,000,000 were repayments from receivables.
(f) Additions to other receivables of approximately HK$10,722,000 were proceeds from disposal of interests in associates.

– 123 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

40. COMMITMENTS

At the balance sheet date, the Group had the following commitments:

Contracted for but not provided in the financial statements in respect of: (i) Acquisition of interest in properties_(Note)_ (ii) Other assets (iii) Acquisition of subsidiaries	2005 HK$’000 — 93,301 — 93,301	2004 HK$’000 377,516 91,981 10,000
		479,497

Note:

In respect of the conditional agreement entered into by the Group in 2004 to acquire properties interest of �� located in Shanghai, PRC at a consideration of RMB450 million (of which deposit of RMB58 million was paid by the Group as at 31st December, 2005 set out in note 19), the Group has commenced legal proceedings to demand the vendor of the properties to fulfil its obligations under the agreement. Having consulted the legal counsel and under certain considerations, the Group has at present decided to exercise its discretion to proceed with the acquisition of the properties.

41. OPERATING LEASE COMMITMENTS

The Group has made approximately HK$1,133,000 (2004: HK$8,052,000) minimum lease payments under operating leases during the year in respect of office premises.

The Group as lessee

At the balance sheet date, the Group and the Company had commitments for future minimum lease payments under non-cancellable operating leases in respect of land and buildings which fall due as follows:

Within one year In the second to fifth years inclusive	THE 2005 HK$’000 1,086 1,661 2,747	GROUP 2004 HK$’000 64 — 64	THE COMPANY 2005 2004 HK$’000 HK$’000 581 — — — 581 —	THE COMPANY 2005 2004 HK$’000 HK$’000 581 — — — 581 —
				—

Leases are negotiated for an average term of one year and rentals are fixed for an average of one year.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

42. CONTINGENT LIABILITIES

(a) Corporate guarantee given by the Company for banking facilities granted to: (i) subsidiaries (ii) associates Other guarantees issued to associates	THE 2005 HK$’000 — 8,000 30,780 38,780	GROUP 2004 HK$’000 — 15,500 30,780 46,280	THE COMPANY 2005 2004 HK$’000 HK$’000 28,500 28,500 8,000 15,500 30,780 30,780 67,280 74,780	THE COMPANY 2005 2004 HK$’000 HK$’000 28,500 28,500 8,000 15,500 30,780 30,780 67,280 74,780
				74,780

(b) The Company has granted a guarantee in favour of MTR Corporation Limited (“MTR”) in respect of outstanding rent and obligations under the tenancy agreement entered into between Tung Fong Hung Medicine (Retail) Limited, a wholly-owned subsidiary of TFHI (former wholly-owned subsidiary of the Company) and MTR for the leased properties. As at 31st December, 2005 and 31st December, 2004, such guarantee has not yet been released.

43. PLEDGE OF ASSETS

(a) As at 31st December, 2005, bank deposits of HK$1,036,000 (2004: HK$1,012,000) was pledged to banks to secure credit facilities granted to the Group.
(b) At 31st December, 2005, listed equity securities with a carrying value of HK$30,861,000 (2004: HK$72,186,000) were pledged to secure margin account credit facilities and banking facilities granted to the Group. As at 31st December, 2005, no margin loan facility were utilised by the Group. As at 31st December, 2004, the margin loan facility amounting to HK$33,567,000 included in bank loans and other borrowings were utilised by the Group.

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APPENDIX II

44. RELATED PARTY TRANSACTIONS

During the year, the Group entered into the following significant transactions with related parties:

Name of company	Nature of transactions		2005	2004
		Notes	HK$’000	HK$’000
Sing Pao Newspaper	Loan interest income received	(a)	474	390
Company Limited	and receivable by the Group
Hanny Magnetics Limited	Rent expenses paid and payable	(b)	16	16
	by the Group
	Sale of goods made by the Group		—	—
ITC Management Limited	Secondment fee paid and payable	(c)	330	330
	by the Group
	Sales of goods by the Group		—	3
Paul Y (E & M)	Repair and maintenance fee paid	(b)	—	42
Company Limited	and payable by the Group
Cycle Company Limited and	Rental expenses paid and payable	(b)	138	553
Gunnell Properties Limited	by the Group
PYI Management Limited	Sale of goods made by the Group	(b)	—	338
(formerly known as
“Paul Y-ITC
Management Limited”)
Nation Cheer Investment	Interest expense paid and payable	(b)	14,183	12,428
Limited	by the Group
Wing On	Loan interest income received and	(e)	3,175	1,466
	receivable by the Group
Hong Kong Wing On	Air ticketing and travel service	(d)	185	260
Travel Service Limited	expenses paid and payable
	by the Group
	Sale of goods made by the Group		—	—

– 126 –

APPENDIX II

FINANCIAL INFORMATION ON THE GROUP

44. RELATED PARTY TRANSACTIONS (Cont’d)

Name of company	Nature of transactions		2005	2004
		Notes	HK$’000	HK$’000
Mass Success International	Rental expenses paid and	(f)	581	577
Limited	payable by the Group
Pacific Century Premium	Management fee received and	(g)	—	200
Developments Limited	receivable by the Group
(“PCPD”, formerly known
as Dong Fang Gas
Holdings Limited)
Apex	Loan interest income received and	(g)	2,931	3,280
	receivable by the Group
Micro-Tech Ltd.	Rental expense of motor vehicles		216	216
	paid and payable by the Group
Chief Altantic Profits	Loan interest income received and	(h)	—	303
Limited	receivable by the Group

Notes:

(a) Sing Pao Newspaper Company Limited is wholly-owned subsidiary of an investee of the Group.
(b) Hanny Magnetics Limited, Paul Y (E & M) Company Limited, Cycle Company Limited and Gunnell Properties Limited, PYI Management Limited, Nation Cheer Investment Limited and Micro-Tech Ltd. are wholly-owned subsidiaries of a substantial shareholder of the Company.
(c) ITC Management Limited is the shareholder of a substantial shareholder of the Company.
(d) Hong Kong Wing On Travel Service Limited is wholly-owned subsidiaries of Wing On.
(e) Wing On is an associate of the Group.
(f) Mass Success International Limited is an associate of a substantial shareholder of the Company.
(g) PCPD and Apex ceased to be associates of the Group during the year ended 31st December, 2005.
(h) China Altantic Profits Limited and Rosedale Park Limited are wholly-owned subsidiaries of PCPD and Apex.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

44. RELATED PARTY TRANSACTIONS (Cont’d)

During the years ended 31st December, 2004 and 31st December, 2005, the Company issued “all monies” guarantees and indemnity to a bank for the banking facilities granted to a non-wholly owned subsidiary and an associate of the Group and the amount of approximately HK$1,986,941 (2004: HK$1,913,000) was utilised by that non-wholly subsidiary and no amount (2004: Nil) were utilised by an associate respectively as at 31st December, 2005.

Details of balances with related parties as at the balance sheet date are set out in the consolidated balance sheet.

In the opinion of the directors, the above transactions were undertaken in the ordinary course of business transactions and the terms were mutually agreed between the Group and the related parties.

45. RETIREMENT BENEFIT SCHEME

The Group operates a Mandatory Provident Fund Scheme (“MPF Scheme”) for all qualifying employees in Hong Kong. The assets of the schemes are held separately from those of the Group, in funds under the control of trustees. The Group and employees each contribute 5% of the relevant payroll costs to the Scheme.

The retirement benefit scheme contributions relating to the MPF Scheme charged to the income statement represent contributions payable to the scheme by the Group at rates specified in the rules of the schemes.

The employees in the joint venture subsidiaries in the PRC are members of the state-sponsored pension scheme operated by the government in the PRC. The joint venture companies are required to contribute a certain percentage of their payroll to the pension scheme to fund the benefits. The only obligation of the Group with respect to the pension scheme is to make the required contributions under the scheme. The amount of contributions payable to the pension schemes are charged to the income statement.

At the balance sheet date, there were no significant forfeited contributions which arose upon employees leaving the scheme prior to their interests in the Group’s contributions becoming fully vested and which are available to reduce the contributions payable by the Group in future years.

The total cost charged to income statements of approximately HK$417,000 (2004: HK$876,000) represents contribution payable to these schemes by the Group in respect of the current year.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

46. PRINCIPAL SUBSIDIARIES

Particulars of the principal subsidiaries at 31st December, 2005 are as follows:

		Issued and	Proportion of	Proportion of
	Place of	fully paid	nominal value of
	incorporation/	ordinary	issued share capital/
	registration	share capital/	registered capital
Name of subsidiary	and operation	registered capital	held by the	Company	Principal activities
			Directly	Indirectly
			%	%
MRI Holdings Limited	Australia_(note a)_	A$31,184,116	—	57.26	Investment holding
(MRI)(note c)
China Pharmaceutical	Hong Kong	HK$2	—	57.26	Investment holding
Industrial Limited_(note c)_
China Enterprises Limited	Bermuda_(note b)_	Supervoting	33.27	24.84	Investment holding
(China Enterprises)		Common Stock	(note b)	(note b)
(note c)		US$30,000
		Common Stock
		US$60,173
Zhuhai Zhongce Property	British Virgin	US$1	—	100	Holding of land
Investment Limited	Islands				development project
(note c)	(note e)				held for resale
Talent Cosmos Limited	British Virgin	US$13,000	—	80	Investment holding
(note c)	Islands
Super Energy Group Limited	Hong Kong	HK$13,000,000	—	80	Investment holding and
(note c)					trading of battery
					products
Super Energy Battery	Hong Kong	HK$2,500,000	—	80	Investment holding
Industries Limited_(note c)_					and trading of
					battery products
��	PRC	RMB9,183,763	—	76	Manufacturing of
��(note c)				(note d)	battery products
��	PRC	RMB500,000	—	88%	Sand mining
(note f)
��	PRC	RMB1,000,000	—	100%	Sand mining
(note g)

– 129 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

46. PRINCIPAL SUBSIDIARIES (Cont’d)

Notes:

a. MRI operates both in Australia and Hong Kong and its shares are listed on the Australian Stock Exchange. MRI and its subsidiaries are mainly engaged in the investment holding activities.
b. China Enterprises operates in both Hong Kong and the PRC and its shares are trading on the Over the Counter Bulletin Board of the United States of America. The Group holds a 55.2% effective equity interest and an 88.8% effective voting interest in China Enterprises.
c. These companies are limited liability company incorporated in the respective jurisdiction.
d. �� is a 95% subsidiary of Super Energy Battery Industries Limited and the Group hold effective 76% interest in ��.
e. Zhuhai Zhongce Property Investment Limited operates in the PRC.
f. These companies are registered in form of an equity joint venture.
g. There companies are registered in the form of wholly-owned foreign investment enterprises.

None of the subsidiaries had any debt securities subsisting at the end of the year or at any time during the year.

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

47. POST BALANCE SHEET EVENTS

On 23rd March, 2006, Wing On, an associate of the Group, entered into subscription agreement with China Enterprises Limited (“CEL”, a non wholly-owned subsidiary of the Group), Hutchison International Limited (“HIL”, a wholly owned subsidiary of Hutchison Whampoa Limited whose shares are listed on The Stock Exchange of Hong Kong Limited) and other subscribers in relation to the subscription of 2% convertible exchangeable notes (the “Notes”) with principal amount of HK$1,000 million. CEL, HIL and other subscribers have conditionally agreed to subscribe for the Notes with principal amount of HK$300 million, HK$200 million and HK$500 million by cash respectively.

– 130 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

INDEBTEDNESS

The following indebtedness statement is pertinent to the Group excluding members comprising the GDI Group.

Borrowings

At the close of business on 31st March, 2006, (being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this composite document), the Group had outstanding borrowings of approximately HK$989,102,000 comprising secured bank borrowings of approximately HK$8,982,000, amounts due to related companies of approximately HK$204,015,000, amounts due to fellow subsidiaries of approximately HK$772,752,000 and payables of approximately HK$3,353,000.

Securities and guarantees

The secured bank borrowings as shown above were guaranteed by personal guarantees given by the directors of a non-wholly owned subsidiary and bank deposit of approximately HK$1,045,000. Listed securities with a carrying value of HK$52,797,000 were pledged to secure margin account credit facilities and banking facilities granted to the Group. As at 31st March, 2006, no margin loan facilities were utilised by the Group.

At the close of business on 31st March, 2006, the Group had contingent liabilities in respect of guarantees in favour of banks for facilities granted to independent third parties of approximately HK$30,780,000 and an associate of approximately HK$8,000,000.

Debt securities

At the close of business on 31st March, 2006, the Group had no debt securities.

Commitment

At the close of business on 31st March, 2006, the Group had commitment of approximately HK$17,619,000, in respect of the acquisition of property, plant and equipment and acquisition of interest in other assets.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities within the Group, the Group did not have outstanding at the close of business on 31st March, 2006 any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptable credits, debentures, mortgages, charges, hire purchases or finance lease commitments, guarantees or other material contingent liabilities.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Foreign currency amounts have been translated into Hong Kong dollars at the exchange rates prevailing at the close of business on 31st March, 2006.

MATERIAL CHANGES

Save for the Group Reorganisation, the Directors are not aware of any material changes in the financial or trading position or outlook of the Group since 31st December, 2005, the date to which the latest published audited consolidated financial statements of the Company were made up.

– 132 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

1. UNAUDITED PRO FORMA BALANCE SHEET OF THE GROUP

(A) Introduction

The unaudited pro forma balance sheet of the Group has been prepared giving effect to the Group Reorganisation.

The unaudited pro forma balance sheet of the Group has been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the Group Reorganisation as if the Group Reorganisation taken place on 31st December, 2005.

The unaudited pro forma balance sheet of the Group is based upon the audited consolidated balance sheet of the Group as at 31st December, 2005, which has been extracted from the audited consolidated financial statements of the Company for the year ended 31st December, 2005, after giving effect to the pro forma adjustments of the Group Reorganisation that are (i) directly attributable to the transaction and (ii) factually supportable, which are summarised in the accompany notes.

The unaudited pro forma balance sheet of the Group is based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying unaudited pro forma balance sheet of the Group does not purport to describe the actual financial position of the Group that would have been attained had the Group Reorganisation been completed on 31st December, 2005. The unaudited pro forma balance sheet of the Group does not purport to predict the future financial position of the Group.

The unaudited pro forma balance sheet of the Group should be read in conjunction with the historical information of the Company as set out in the audited consolidated financial statements of the Company for the year ended 31st December, 2005 and other financial information included elsewhere in this composite document.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(B) Unaudited Pro Forma Balance Sheet

As at 31st December, 2005

Pro Forma Pro Forma Pro Forma Audited Adjustments Adjustments Adjustments HK$’000 HK$’000 HK$’000 HK$’000 Note 1 Note 2 Note 3 Non-current Assets Property, plant and equipment 125,957 (109,811) Prepaid lease payments 27,763 — Deposit paid for acquisition of interest in properties 55,716 (55,716) Goodwill 34,930 (9,123) Interests in associates 558,738 (558,738) Investments in securities at fair value through profit or loss 117,919 (71,347) 921,023 (804,735) Current Assets Other asset 229,288 (229,288) Inventories 12,409 (102) Trade receivables 4,773 — Prepaid lease payments 620 — Amounts due from associates 159,214 (151,206) Loans and interest receivables -due within one year 464,232 (448,961) Other receivables, deposits and prepayments 42,909 (40,672) Amounts due from former fellow subsidiaries — (721,091) 721,091 Investments in securities held for trading 7,552 — Pledged bank deposits 1,036 — Bank balances and cash 115,813 (103,494) 1,037,846 (1,694,814) Current Liabilities Trade payables, other payables and accrued charges 56,159 (17,475) Amounts due to related companies — due within one year 200,287 — Payables 3,379 (583) Amount due to associates 286 (286) Income and other tax payable 13,387 (12,257) Amounts due to former fellow subsidiaries — (3,023,016) 3,023,016 Bank loans and other borrowings — due within one year 8,627 — 282,125 (3,053,617) Net Current Assets (Liabilities) 755,721 1,358,803 Total equity 1,676,744 554,068	Pro forma Pro Forma Pro Forma Remaining Subtotal Adjustments Adjustments Group HK$’000 HK$’000 HK$’000 HK$’000 Note 4 Note 5 16,146 16,146 27,763 27,763 — — 25,807 25,807 — — 46,572 46,572 116,288 116,288 — — 12,307 12,307 4,773 4,773 620 620 8,008 8,008 15,271 86,822 102,093 2,237 2,237 — — 7,552 7,552 1,036 1,036 12,319 12,319 64,123 150,945 38,684 38,684 200,287 (199,731) 556 2,796 2,796 — — 1,130 1,130 — — 8,627 8,627 251,524 51,793 (187,401) 99,152 (71,113) 215,440	Pro forma Pro Forma Pro Forma Remaining Subtotal Adjustments Adjustments Group HK$’000 HK$’000 HK$’000 HK$’000 Note 4 Note 5 16,146 16,146 27,763 27,763 — — 25,807 25,807 — — 46,572 46,572 116,288 116,288 — — 12,307 12,307 4,773 4,773 620 620 8,008 8,008 15,271 86,822 102,093 2,237 2,237 — — 7,552 7,552 1,036 1,036 12,319 12,319 64,123 150,945 38,684 38,684 200,287 (199,731) 556 2,796 2,796 — — 1,130 1,130 — — 8,627 8,627 251,524 51,793 (187,401) 99,152 (71,113) 215,440
		116,288
		— 12,307 4,773 620 8,008 102,093 2,237 — 7,552 1,036 12,319
		150,945
		38,684 556 2,796 — 1,130 — 8,627
		51,793
		99,152
		215,440

– 134 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

Capital and Reserves Share capital Reserves Equity attributable to equity holders of the parent Minority interests Non-Current Liability Deferred tax liabilities	Pro Forma Pro Forma Pro Forma Audited Adjustments Adjustments Adjustments HK$’000 HK$’000 HK$’000 HK$’000 Note 1 Note 2 Note 3 88,160 (10,777) 10,777 1,237,154 902,023 (2,301,925) (10,777) 1,325,314 891,246 330,255 (316,003) 1,655,569 575,243 21,175 (21,175) 21,175 (21,175) 1,676,744 554,068	Pro forma Pro Forma Pro Forma Remaining Subtotal Adjustments Adjustments Group HK$’000 HK$’000 HK$’000 HK$’000 Note 4 Note 5 88,160 (44,080) 44,080 (173,525) 44,080 286,553 157,108 (85,365) 201,188 14,252 14,252 (71,113) 215,440 — — — — (71,113) 215,440	Pro forma Pro Forma Pro Forma Remaining Subtotal Adjustments Adjustments Group HK$’000 HK$’000 HK$’000 HK$’000 Note 4 Note 5 88,160 (44,080) 44,080 (173,525) 44,080 286,553 157,108 (85,365) 201,188 14,252 14,252 (71,113) 215,440 — — — — (71,113) 215,440
			201,188 14,252
			215,440
			—
			—
			215,440

Notes to unaudited pro forma balance sheet of the Group

Pursuant to the Group Reorganisation, all subsidiaries of the Company carrying on property development, sand mining and investment holding business and all associates of the Company carrying on manufacturing and marketing of tires products, business of providing package tour, travel and other related services (“Distributing Business”) have been acquired by Group Dragon Investments Limited (“GDI”) (hereinafter collectively referred to as “the GDI Group”) and continued to be operated by the existing management of the Company. GDI has become the holding company of the GDI Group which comprises of companies carrying on Distributing Business, and the issued shares of GDI have been distributed as dividend in specie to the shareholders of the Company, details of which are set out under section “Letter from the Board” of the composite document. The Company continues to be a public listed company with its subsidiaries concentrating on the business of manufacturing and trading of batteries products and investment in securities (hereinafter collectively referred to as “Remaining Group”). The Group Reorganisation has been approved by the shareholders of the Company in an extraordinary general meeting held on 6th October, 2005 and effective on 19th May, 2006.

The unaudited pro forma balance sheet has been prepared by the directors of the Company for illustrative purposes only and because of its nature, it may not give a true picture of financial position of the Group following completion of the Group Reorganisation.

– 135 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(1) These adjustments reflect the deconsolidation of the assets and liabilities of the GDI Group which comprises the subsidiaries and associates carrying on the Distributing Business as at 31st December, 2005.
(2) The adjustment reflects the assignments of intra-group balances between the GDI Group and the Remaining Group has been taken place pursuant to the Group Reorganisation as set out below:
(a) the intra-group amount due to members of the Remaining Group by members of the GDI Group has been assigned to GDI; and
(b) the intra-group amount due to members of the GDI Group by members of the Remaining Group has been assigned to the Company.

The assignments of such loan result in no intra-group balances between the GDI Group and the Remaining Group upon the completion of the Group Reorganisation.

(3) The amounts represent the elimination of share capital of companies comprising the GDI Group, in which HK$10,777,000 was eliminated in consolidation in preparing the consolidated financial statements of the Group for the year ended 31st December, 2005.
(4) The amount represents the capital reduction in the nominal value of each issued share from HK$0.10 to HK$0.05 per share upon the completion of Group Reorganisation.
(5) These adjustments reflect the transfer of liabilities of approximately HK$199,731,000 from the Remaining Group to the GDI Group, and transfer of assets of approximately HK$86,822,000 from the GDI Group to the Remaining Group pursuant to the Group Reorganisation.

– 136 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

2. UNAUDITED PRO FORMA INCOME STATEMENT AND UNAUDITED PRO FORMA CASH FLOW STATEMENT OF THE GROUP

(A) Introduction

The unaudited pro forma income statement and unaudited pro forma cash flow statement of the Group have been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the Group Reorganisation as if the Group Reorganisation taken place on at the beginning of the year ended 31st December, 2005.

The unaudited pro forma income statement and unaudited pro forma cash flow statement of the Group are based upon the audited consolidated income statement and consolidated cash flow statement of the Group for the year ended 31st December, 2005, which have been extracted from the audited consolidated financial statements of the Company for the year ended 31st December, 2005, after giving effect to the pro forma adjustments of the Group Reorganisation that are (i) directly attributable to the transaction; (ii) expected to have continuing impact on the Group; and (iii) factually supportable, are summarised in the accompany notes.

The unaudited pro forma income statement and unaudited pro forma cash flow statement of the Group are based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying unaudited pro forma income statement and unaudited pro forma cash flow statement of the Group do not purport to describe the actual result and cash flow of the Group that would have been attained had the Group Reorganisation been completed on 1st January, 2005 or to predict the future result and cash flow of the Group.

The unaudited pro forma income statement and unaudited pro forma cash flow statement of the Group should be read in conjunction with the audited consolidated financial statements of the Company for the year ended 31st December, 2005 and other financial information included elsewhere in this composite document.

– 137 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(B) Unaudited Pro Forma Income Statement

For the year ended 31st December, 2005

Turnover Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Allowance for loans and interest receivables Finance costs Change in fair value of conversion option of unlisted convertible note Loss on disposal of interests in associates Share of results of associates Loss before taxation Taxation Loss for the year Attributable to: Equity holders of the parent Minority interests	Pro Forma Audited Adjustment HK$’000 HK$’000 Note 1 38,459 (5,298) (32,936) 4,457 5,523 (841) 83,623 (33,622) (2,974) 1,365 (59,948) 33,802 (67,089) 23,030 (37,445) 31,116 (17,630) — (39,743) 39,743 (2,814) 2,814 42,864 (43,103) (95,633) 54,304 (4,247) 4,247 (99,880) (95,200) 54,259 (4,680) 4,292 (99,880)	Pro forma Remaining Group HK$’000 33,161 (28,479) 4,682 50,001 (1,609) (26,146) (44,059) (6,329) (17,630) — — (239) (41,329) — (41,329) (40,941) (388) (41,329)

– 138 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(C) Unaudited Pro Forma Cash Flow Statement

For the year ended 31st December, 2005

Audited HK$’000 Operating Activities Loss before taxation (95,633) Adjustment for: Finance costs 17,630 Change in fair value of conversion option of unlisted convertible note 39,743 Loss on dilution of interests in associates 2,814 Dividend income (8,402) Interest income (58,084) Amortisation of prepaid lease payments 519 Share of results of associates (42,864) Depreciation of property, plant and equipment 8,102 Changes in fair value on investment in securities at fair value through profit or loss 34,652 Change in fair value of investments held for trading 9,429 Gain on disposal of investments in securities at fair value through profit or loss (10,575) Allowance for bad and doubtful debts 18,575 Allowance for loans and interest receivable 37,445 Loss on disposal of property, plant and equipment 128 Operating cash flows before movement in working capital (46,521)	Pro Forma Adjustment HK$’000 Note 1 (54,304) — 39,743 2,814 — (29,762) — (43,103) 5,865 (1,208) — 716 18,575 31,116 — (29,548)	Pro Forma Remaining Group HK$’000 (41,329) 17,630 — — (8,402) (28,322) 519 239 2,237 35,860 9,429 (11,291) — 6,329 128 (16,973)

– 139 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

Audited HK$’000 Decrease in inventories 1,305 Decrease in trade receivables 2,282 Decrease in other receivables, deposits and prepayment 23,437 Increase in trade payables, other payables and accrued charges 9,840 Increase (decrease) in amounts due to associates (4,650) Increase in other asset (2,121) 30,093 Net (outflow)/inflow from operations (16,428) Tax paid in other jurisdictions (45) Net cash (used in) generated from operating activities (16,473)	Pro Forma Adjustment HK$’000 Note 1 (96) — 19,272 (8,127) (15,551) (2,121) (6,623) (36,171) 245 (35,926)	Pro Forma Remaining Group HK$’000 1,401 2,282 4,165 17,967 10,901 — 36,716 19,743 (290) 19,453

– 140 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

Audited HK$’000 Investing activities Repayment of loans and interest receivable 384,736 Repayment from associates 99,500 Proceeds from disposal of investments in securities 134,734 Proceed from disposal of property, plant and equipment — Increase in pledged bank deposits (24) Interest received 5,661 Dividend income received from investments in securities 8,402 Dividend income received from associates 2,427 Amount advanced to loans and interest receivable (293,922) Amount advanced to associates (107,708) Purchase of investments in securities (78,377) Payment of prepaid lease payments (8,635) Purchase of property, plant and equipment (3,765) Deposit paid for acquisition of interests in property (8,704) Investment in associates (63,152) Decrease in amount due from former fellow subsidiaries — Purchase of subsidiaries (net of cash and cash equivalents acquired) (9,651) Net cash from (used in) investing activities 61,522	Pro Forma Adjustment HK$’000 Note 1 345,672 — 77,547 125 — 8,488 — 2,427 (285,122) — (78,259) — (331) (8,704) (63,152) 121,572 (9,651) 110,612	Pro Forma Remaining Group HK$’000 39,064 99,500 57,187 (125) (24) (2,827) 8,402 — (8,800) (107,708) (118) (8,635) (3,434) — — (121,572) — (49,090)

– 141 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

Audited HK$’000 Cash flows from financing activities Advance from payables 469 Repayment of bank loans and other borrowings (34,400) Interest paid (3,402) Repayment to payables (4,611) Repayment to associates (3,451) Decrease in amount due to former fellow subsidiaries — Repayment of obligations under finance leases (10) Cash outflow of dividend in specie of the GDI Group — Net cash used in financing activities (45,405) Net decrease in cash and cash equivalents (356) Cash and cash equivalents at the beginning of the year 111,588 Effect of foreign exchange rate changes (2,631) Cash and cash equivalents at the end of the year 108,601	Pro Forma Adjustment HK$’000 Note 1 — — — — — (41,964) — 72,481 30,517 105,203 — (1,709) 103,494	Pro Forma Remaining Group HK$’000 469 (34,400) (3,402) (4,611) (3,451) 41,964 (10) (72,481) (75,922) (105,559) 111,588 (922) 5,107

– 142 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Notes to unaudited pro forma income statement and unaudited pro forma cash flow statements

Pursuant to the Group Reorganisation, all subsidiaries of the Company carrying on property development, sand mining and investment holding business and all associates of the Company carrying on manufacturing and marketing of tires products, business of providing package tour, travel and other related services (“Distributing Business”) have been acquired by Group Dragon Investments Limited (“GDI”) (hereinafter collectively referred to as “the GDI Group”) and continued to be operated by the existing management of the Company. GDI, has become the holding company of the GDI Group which comprises of companies carrying on Distributing Business, and the issued shares of GDI have been distributed as dividend in specie to the shareholders of the Company, details of which are set out under section “Letter from the Board” of the composite document. The Company continues to be a public listed company with its subsidiaries concentrating on the business of manufacturing and trading of batteries products and investment in securities (hereinafter collectively referred to as “Remaining Group”). The Group Reorganisation has been approved by the shareholders of the Company in an extraordinary general meeting held on 6th October, 2005 and effective on 19th May, 2006.

The statements have been prepared by the directors of the Company for illustrative purposes only and because of their nature, they may not give a true picture of the results and cash flow of the Group had the Group Reorganisation actually occurred on 1st January, 2005 or for any future period.

(1) These adjustments reflect the result and cash flows of the GDI Group for the year ended 31st December, 2005 of which the amounts were based on the consolidation schedules which extracted from the consolidated financial statements of the Group for the year ended 31st December, 2005.

– 143 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

3. Report on unaudited Pro Forma Financial Information

==> picture [71 x 53] intentionally omitted <==

ACCOUNTANTS’ REPORT OF UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF CHINA STRATEGIC HOLDINGS LIMITED

We report on the unaudited pro forma financial information of China Strategic Holdings 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 Group Reorganisation might have affected the financial information presented, for inclusion in Appendix III (the “Unaudited Pro Forma Financial Information on the Group”) to the composite document dated 26th May, 2006 in connection with the mandatory unconditional cash offer made by Kingston Securities Limited on behalf of Nation Field Limited to acquire all the issued shares in the Company other than these already owned by Nation Field Limited and parties acting in concert with it (the “Document”). The basis of preparation of the unaudited pro forma financial information is set out in Section 1 and Section 2 of Appendix III to the Document.

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 on the Group in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants.

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the Unaudited Pro Forma Financial Information on the Group 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 on the Group beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 144 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagement 300 “Accountants” Reports on Pro Forma Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants. 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 on the Group with the directors of the Company. This engagement did not involve independent examination of any of underlying financial information.

We planned and performed our work so as to obtain 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 on the Group 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 purpose of the Unaudited Pro Forma Financial Information on the Group as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information on the Group is for illustrative purpose only, based on the judgments 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 future and may not be indicative of the financial position of the Remaining Group as at 31 December, 2005 or any future date, or may not be indicative of the results and cash flows of the Remaining Group for the year ended 31 December, 2005 or any future period.

– 145 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

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 purpose of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong, 26th May, 2006

– 146 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(E) COMFORT LETTER FROM DAO HENG SECURITIES

26th May, 2006

The Directors China Strategic Holdings Limited 8/F, Paul Y. Centre 51 Hung To Road Kwun Tong Hong Kong

Dear Sirs,

We refer to the unaudited pro forma income statement of China Strategic Holdings Limited (the “Company”) and its subsidiaries (collectively, the “Group”) contained in the paragraph headed “(B) Unaudited Pro Forma Income Statement” in Appendix III to the composite document jointly published by the Company and Nation Field Limited dated 26th May, 2006, regarding the mandatory unconditional cash offer made by Kingston Securities Limited on behalf of Nation Field Limited to acquire all the issued shares of the Company (other than those already owned by Nation Field Limited and parties acting in concert with it), of which this letter forms part.

We have discussed with you the basis upon which the unaudited pro forma income statement has been made. We have also considered the letter dated 26th May, 2006 addressed to the directors of the Company from Deloitte Touche Tohmatsu relating to the accounting policies upon which the unaudited pro forma income statement has been made.

On the basis adopted by you and the procedures performed by Deloitte Touche Tohmatsu, we are of the opinion that the unaudited pro forma income statement for which the directors of the Company are solely responsible, has been prepared after due and careful consideration.

Yours faithfully, For and on behalf of

Dao Heng Securities Limited

Venus Choi Jenny Leung Executive Director Director, Corporate Finance

– 147 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

==> picture [71 x 54] intentionally omitted <==

26th May, 2006

The Directors

China Strategic Holdings Limited

Dear Sirs,

We set out below our report on the financial information, which is presented on the basis as set out in note 1 to the financial information, regarding Group Dragon Investments Limited (“GDI”) and the companies which have become subsidiaries of GDI pursuant to the group reorganisation which became effective on 19th May, 2006 referred to below (hereinafter collectively referred to as the “GDI Group”) for the three years ended 31st December, 2005 (the “Relevant Periods”) for inclusion in the composite document dated 26th May, 2006 of China Strategic Holdings Limited (“CSH”) in connection with the voluntary mandatory unconditional cash offer made by Kingston Securities Limited on behalf of Nation Field Limited (the offeror) to acquire all the issued shares in CSH other than those already owned by Nation Field Limited and parties acting in concert with it (the “Document”).

Following the completion of group reorganisation, all subsidiaries of CSH carrying on property development, sand mining and investment holding business and all associates of CSH carrying on manufacturing and marketing of tires product, business of providing package tour, travel and other related services (“Distributing Business”) have been acquired by GDI and continues to be operated by the existing management of CSH. CSH continues to be a public listed company with its subsidiaries concentrating on the business of manufacturing and trading of batteries products and investment in securities. GDI becomes the holding company of the GDI Group which comprise of companies carrying on Distributing Business, and the issued shares of GDI have been distributed as dividend in specie to the shareholders of CSH (the “Group Reorganisation”). Details of which are set out under the section “Letter from the Board” of the Document. The Group Reorganisation was approved by the shareholders of CSH in an extraordinary general meeting on 6th October, 2005 and effective on 19th May, 2006.

GDI was incorporated on 1st March, 2005 in the British Virgin Islands (“BVI”) under the International Business Companies Act. GDI is an investment holding company and is a wholly owned subsidiary of CSH. GDI has not carried on any business since its incorporation, except that it is undergoing the Group Reorganisation which became effective on 19th May, 2006.

– 148 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

Particulars of the subsidiaries acquired by GDI pursuant to the Group Reorganisation are as follows:

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
Acrow Limited_(note 1)_	8th August, 1996		US$1	—	100	Inactive
	BVI
APEC.com Limited_(note 2)_	15th October, 1992		HK$2	—	100	Inactive
	Hong Kong
B2B Limited_(note 2)_	18th August, 1992		HK$2	—	100	Holding license
	Hong Kong
Capital Canton Limited	2nd May, 2001		US$1	—	55.22	Investment holding
(note 1)	BVI				(note 5(b))
Capital Passion Limited	15th December, 2000		US$1	—	100	Inactive
(note 1)	BVI
Carling International Limited	24th September, 1991		US$1	—	100	Investment holding
(note 1)	BVI
Century Lead Limited	2nd May, 2001		US$1	—	55.22	Investment holding
(note 1)	BVI				(note 5(b))
China Advertising Holdings	5th December, 1991		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Audio & Communications	15th January, 1997		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Automobile (Holdings)	16th January, 1992		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong

– 149 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
China B2B Net.com Limited	5th February, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Barter Trade.com	10th January, 1997		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Broadcasts (Holdings)	16th January, 1992		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Cable (BVI) Limited	18th July, 1995		US$3	—	100	Inactive
(note 1)	BVI
China Cement Holdings	9th February, 1988		HK$20	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Computer Limited	21st August, 1987		HK$20	—	100	Inactive
(note 2)	Hong Kong
China Data Center Limited	4th June, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Digital Corporation	15th January, 1997		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China e-Barter.com Limited	15th October, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong
China eBay.com Limited	19th December, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong

– 150 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
China e-commerce.com	5th December, 1991		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China e-Link.com Limited	11th October, 1989		HK$2	—	100	Inactive
(note 2)	Hong Kong
China e-printing.com	23rd December, 1992		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Electric Corporation	10th January, 1997		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Electronics Industries	3rd December, 1991		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Enterprises Limited	28th January, 1993		Super voting	—	55.22	Investment holding
(“CEL”)(note 5(a))	Bermuda		common stock		(note 5(a))
			US$30,000
			Common stock
			US$60,173
China Grains.com Limited	3rd December, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong
China I.T. Net.com Limited	8th February, 1994		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Internet Capital Group	3rd December, 1991		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China Internet Global Alliance	12th November, 1991		HK$10,000	—	100	Investment holding
Limited_(note 2)_	Hong Kong

– 151 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
China Logistic.com Limited	16th January, 1992		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Micro Systems Limited	3rd January, 1997		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Pharmaceutical Industrial	24th March, 1992		HK$2	—	57.26	Investment holding
Limited_(note 2)_	Hong Kong				(note 4(b))
China Pharmaceutical Pty	17th December, 1993		A$1	—	57.26	Inactive
Limited_(note 6)_	Australia				(note 4(b))
China Resources Holdings	15th June, 1994		US$1	—	57.26	Inactive
Limited_(note 1)_	BVI				(note 4(b))
China Strategic (B.V.I.) Limited	5th July, 2001		US$1	100	—	Investment holding
(note 1)	BVI
China Strategic Investments	17th December, 1993		A$2	—	57.26	Inactive
Pty Ltd_(note 6)_	Australia				(note 4(b))
China Technologies Limited	10th January, 1997		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Telecom International	12th January, 1993		HK$2	—	51	Inactive
Limited_(note 2)_	Hong Kong
China Television (Holdings)	5th February, 1991		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
China University Online	12th November, 1991		HK$2	—	100	Investment holding
Limited_(note 2)_	Hong Kong

– 152 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
China VU.com Limited	5th February, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong
China Wireless Limited	10th January, 1997		HK$2	—	100	Inactive
(note 2)	Hong Kong
China WTO.com Limited	18th August, 1992		HK$2	—	100	Investment holding
(note 2)	Hong Kong
China Youth Net.com	23rd December, 1993		US$1,000	—	100	Inactive
Limited_(note 1)_	Cayman Islands
Citybest Limited_(note 1)_	3rd January, 1997		US$1	—	100	Inactive
	BVI
Com.com Limited_(note 2)_	10th January, 1997		HK$2	—	100	Inactive
	Hong Kong
Container Limited_(note 1)_	22nd January, 1998		US$1	—	55.22	Inactive
	BVI				(note 5(b))
Crown Dragon Limited	2nd November, 2000		US$1	—	100	Inactive
(note 1)	BVI
CSI Land Group Limited	19th December, 1991		HK$2	—	100	Inactive
(note 2)	Hong Kong
Dom.com Limited_(note 2)_	3rd November, 1966		HK$737,680	—	100	Inactive
	Hong Kong
Earnfull Industrial Limited	23rd January, 1987		HK$10,000,000	—	90	Inactive
(note 2)	Hong Kong

– 153 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
eAsia Limited_(note 2)_	18th August, 1992		HK$2	—	100	Inactive
	Hong Kong
Ease Wealth Limited_(note 1)_	12th December, 2001		US$1	—	100	Investment holding
	BVI
Easy Legend Limited_(note 1)_	5th July, 2001		US$1	—	55.22	Inactive
	BVI				(note 5(b))
Ever Excellent Limited	15th December, 2000		US$1	—	100	Investment holding
(note 1)	BVI
Evergrowth Properties Limited	1st December, 2000		US$1	—	100	Investment holding
(note 1)	BVI
Expert Commerce Limited	8th March, 2000		US$1	—	100	Investment holding
(note 1)	BVI
Expert Solution Limited	26th April, 2001		US$1	—	100	Inactive
(note 1)	BVI
Fast Settle Development	2nd March, 1993		HK$2	—	100	Inactive
Company Limited_(note 2)_	Hong Kong
Favour Leader Limited	8th March, 1994		US$1	—	100	Investment holding
(note 1)	BVI
Future Returns Limited	28th February, 2001		US$1	—	100	Investment holding
(note 1)	BVI
Glory Eagle Limited_(note 1)_	18th September, 1996		US$1	—	100	Investment holding
	BVI

– 154 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
Gold Label Investments	1st April, 1992		US$1	—	100	Inactive
Limited_(note 1)_	BVI
Golden Flower Limited_(note 1)_	3rd January, 1997		US$1	—	100	Investment holding
	BVI
Good Trend Enterprises	18th October, 2000		US$1	—	100	Investment holding
Limited_(note 1)_	BVI
Great Joint Profits Limited	29th January, 2002		US$1	—	100	Investment holding
(note 1)	BVI
Group Dragon Limited	12th December, 2003		US$1	—	100	Investment holding
(note 1)	BVI
Great Windfall Agents	28th November, 2001		US$1	—	55.22	Investment holding
Limited_(note 1)_	BVI				(note 5(b))
Grotto Profits Limited	6th January, 2000		US$1	—	100	Inactive
(note 1)	BVI
Happy Access Limited	15th December, 2000		US$1	—	100	Inactive
(note 1)	BVI
Hollywood & Co., Limited	5th December, 1991		HK$2	—	100	Investment holding
(note 2)	Hong Kong
Honest Map Limited_(note 1)_	15th November, 2001		US$1	—	55.22	Inactive
	BVI				(note 5(b))
Honest Sincere Limited	28th February, 2001		US$1	—	100	Investment holding
(note 1)	BVI

– 155 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
Hongkong Macau Telecom	3rd December, 1991		HK$2	—	100	Inactive
Holdings Limited_(note 2)_	Hong Kong
Hong Kong Pharmaceutical	5th December, 1991		HK$2	—	100	Inactive
Industries Corporation	Hong Kong
Limited_(note 2)_
Kamthorn Limited_(note 1)_	23rd July, 1996		US$1	—	100	Investment holding
	BVI
Katmon Limited_(note 1)_	10th November, 1992		US$1	—	100	Investment holding
	BVI
Keen Strategic Limited	26th November, 2003		US$1	—	100	Investment holding
(note 1)	BVI
Leading Returns Limited	12th June, 2001		US$1	—	55.22	Inactive
(note 1)	BVI				(note 5(b))
Longnew Ltd.(note 1)	19th September, 1997		US$1	—	100	Investment holding
	BVI
Manwide Holdings Limited	3rd March, 2004		US$1	—	55.22	Investment holding
(note 1)	BVI				(note 5(b))
Million Good Limited	28th November, 2001		US$1	—	55.22	Investment holding
(note 1)	BVI				(note 5(b))
MRI Holdings Limited	7th August, 1925		A$31,184,116	—	57.26	Investment holding
(“MRI”)(note 4(a))	Australia				(note 4(b))
MRI Infrastructure Holdings	3rd January, 1995		US$12,000	—	57.26	Inactive
Limited_(note 1)_	Bermuda				(note 4(b))

– 156 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
MRI Services (Overseas)	8th January, 1999		US$1	—	57.26	Inactive
Limited_(note 1)_	BVI				(note 4(b))
Orion (B.V.I.) Tire	14th February, 1994		US$100	—	60	Inactive
Corporation_(note 1)_	BVI				(note 5(c))
Orion Tire Corporation	7th March, 1994		N/A	—	60	Inactive
(note 1)	USA				(note 5(c))
Perfect City Limited	28th November, 2001		US$1	—	100	Inactive
(note 1)	BVI
Pioneer Honour Limited	11th August, 2001		US$1	—	100	Investment holding
(note 1)	BVI
Premier Zhou En Lai	28th February, 1991		HK$2	—	100	Inactive
Foundation Limited	Hong Kong
(note 2)
Quality Best Limited_(note 1)_	28th February, 2001		US$1	—	100	Investment holding
	BVI
Regal Tender Limited	5th July, 2001		US$1	—	100	Investment holding
(note 1)	BVI
Rosedale Luxury Hotel &	28th August, 2004		US$20,000,000	—	55.22	Property holding
Suites Ltd.(note 5(d))	PRC				(note 5(d))
Ruby Services Limited	21st February, 1995		US$1	—	100	Inactive
(note 1)	BVI
Ruby Uniforms Limited	8th April, 1988		HK$10,000	—	90	Inactive
(note 2)	Hong Kong

– 157 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
See Ying Limited_(note 1)_	1st September, 1997		US$1	—	100	Investment holding
	BVI
Sheen Trade Limited	3rd December, 2004		US$1	—	100	Investment holding
(note 1)	BVI
Shine Brilliant Limited	2nd June, 2005		US$1	—	100	Investment holding
(note 1)	BVI
Sifford Limited_(note 1)_	24th September, 1991		US$1	—	100	Investment holding
	BVI
Sincere Ocean Limited	12th June, 2001		US$1	—	55.22	Investment holding
(note 1)	BVI				(note 5(b))
Strawberg Limited_(note 1)_	8th August, 1996		US$1	—	100	Inactive
	BVI
Super Plus Limited_(note 1)_	8th November, 2001		US$1	—	100	Inactive
	BVI
Supreme Solutions Limited	16th May, 2002		US$1	—	55.22	Investment holding
(note 1)	BVI				(note 5(b))
Treasure Way Services	6th August, 1991		HK$10,000	100	—	Secretarial services
Limited_(note 2)_	Hong Kong
United China Internet	25th July, 1991		HK$10,000,000	—	100	Inactive
Capital Limited_(note 2)_	Hong Kong

– 158 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

			Issued and	Proportion of	Proportion of
	Date and place		fully paid up	share	capital/
	of incorporation/		share capital/	registered capital
Name of subsidiary	registration	registered capital		held	by GDI	Principal activities
				Directly	Indirectly
				%	%
Union Money International	14th August, 2002		HK$2	—	100	Inactive
Limited_(note 2)_	Hong Kong
Ventures Kingdom Limited	12th June, 2001		US$1	—	55.22	Inactive
(note 1)	BVI				(note 5(b))
Venture Leader Limited	28th March, 2001		US$1	—	100	Investment holding
(note 1)	BVI
Vision Leader Limited_(note 1)_	26th June, 2002		US$1	—	100	Investment holding
	BVI
Wai Cheong Limited_(note 1)_	1st December, 2000		US$1	—	100	Investment holding
	BVI
Wealth Faith Limited_(note 1)_	18th October, 2001		US$1	—	55.22	Inactive
	BVI				(note 5(b))
Wealthy Mark Limited_(note 1)_	5th July, 2001		US$1	—	100	Investment holding
	BVI
Widecheer Limited_(note 1)_	2nd June, 2005		US$1	—	100	Investment holding
	BVI
Winning Effort Limited	28th March, 2001		US$1	—	100	Inactive
(note 1)	BVI
Zhuhai Zhongce Property	16th December, 2002		US$1	—	100	Property development
Investment Limited_(note 1)_	BVI

– 159 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

Issued and Proportion of Date and place fully paid up share capital/ of incorporation/ share capital/ registered capital Name of subsidiary registration registered capital held by GDI Principal activities Directly Indirectly % % �� 14th July, 1997 RMB500,000 — 88 Vessel for sand mining �� (note 3) The People’s Republic of China (the “PRC”) �� 9th December, 2004 RMB1,000,000 — 100 Vessel for sand mining �� (note 3) PRC

Note 1: No audited financial statements have been issued for these companies, which are incorporated in a country where there are no statutory audit requirements. For the purpose of this report, we have carried out independent audit procedures in accordance with the Hong Kong Standards on Auditing (“HKSA”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) on the management accounts of these companies for each of the Relevant Periods, or since their respective dates of incorporation or acquisition, where this is a shorter period, which were prepared in accordance with HKFRS.

Note 2: We have acted as auditors of these companies for each of the Relevant Periods or since their respective dates of incorporation or acquisition, where this is a shorter period. Audited financial statements have been prepared in accordance with HKFRS for these companies for each of the three years ended 31st December, 2005, or from their respective date of incorporation, where this is a shorter period.

Note 3: No statutory financial statements for the year ended 31st December, 2005 of �� and�� since there are no statutory audit requirements. We have undertaken an independent audit in accordance with the HKSA issued by the HKICPA on the financial statements of�� and��for the period from its acquisition to 31st December, 2005 which were prepared in accordance with HKFRS.

Note 4 (a): MRI is a company listed on The Australian Stock Exchange and operates in both Hong Kong and Australia. The statutory financial statements of MRI were audited by Deloitte Touche Tohmatsu Australia, which is a member firm of Deloitte Touche Tohmatsu. The statutory financial statements of MRI were prepared in accordance with the relevant accounting principles and financial regulations applicable in Australia. For the purpose of this report, we have undertaken an independent audit in accordance with the HKSA issued by the HKICPA on the financial statements of MRI for each of the three years ended 31st December, 2005 which were prepared in accordance with HKFRS.
(b): These companies are wholly owned subsidiaries of MRI and the GDI Group holds a 57.26% effective equity interest in MRI.

– 160 –

APPENDIX IV

ACCOUNTANTS’ REPORT ON THE GDI GROUP

Note 5 (a): CEL is a company with its shares trading on the Over the Counter Bulletin Board of the United States of America and operates in both Hong Kong and PRC. The GDI Group will hold 55.22% effective equity interest and 88.8% effective voting interest in CEL. We have audited the financial statements of CEL for each of the three years ended 31st December, 2005. The statutory financial statements of CEL were prepared in accordance with the relevant accounting principles and financial regulation applicable in the United States of America. For the purpose of this report, we have undertaken an independent audit in accordance with HKSA issued by the HKICPA on the financial statements of CEL for each of the three years ended 31st December, 2005, which were prepared in accordance with HKFRS.
(b): These companies are wholly-owned subsidiaries of CEL and the GDI Group holds 55.22% effective equity interest in CEL.
(c): Orion (B.V.I.) Tire Corporation and Orion Tire Corporation are 60% subsidiaries of CEL and the GDI Group holds 55.22% effective equity interest in CEL.
(d): The statutory financial statements of Rosedale Luxury Hotel & Suites Ltd was audited by Shanghai Justiword Associated Certified Public Accountants. For the purpose of this report, we have undertaken an independent audit in accordance with the HKSA issued by the HKICPA for each of the three years ended 31st December, 2005 which were prepared in accordance with HKFRS.
Note 6: China Pharmaceutical Pty Limited and China Strategic Investments Pty Ltd. are subsidiaries of MRI. MRI is a 57.26% owned subsidiary of the GDI Group. The statutory financial statements of China Pharmaceutical Pty Limited and China Strategic Investments Pty Ltd. were audited by Deloitte Touche Tohmatsu Australia, which is a member firm of Deloitte Touche Tohmatsu. The statutory financial statements of China Pharmaceutical Pty Limited and China Strategic Investments Pty Ltd. were prepared in accordance with the relevant accounting principles and financial regulations applicable in Australia. For the purpose of this report, we have undertaken an independent audit in accordance with the HKSA issued by the HKICPA on the financial statements of China Pharmaceutical Pty Limited and China Strategic Investments Pty Ltd. for each of the three years ended 31st December, 2005 which were prepared in accordance with HKFRS.

No audited financial statements have been prepared for GDI since the date of incorporation as it is newly incorporated in a country where there is no statutory requirement and has not carried on any business. We have, however, reviewed all relevant transactions of GDI since incorporation.

– 161 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

We have examined the audited financial statements or, where appropriate, management accounts (the “Underlying Financial Statements”) of the companies comprising the GDI Group for the Relevant Periods or since their respective dates of incorporation or acquisition to 31st December, 2005. Our examination was made in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The combined income statements and combined cash flow statements of the GDI Group for the Relevant Periods and the combined balance sheets of the GDI Group as at 31st December, 2003, 2004 and 2005 as set out in this report have been prepared from the Underlying Financial Statements of the companies comprising the GDI Group on the basis set out in note 1 to the financial information, after making such adjustments as we consider appropriate for the purpose of preparing our report for inclusion in the Document.

The Underlying Financial Statements are the responsibility of the directors of those companies who approved their issue. The directors of CSH are responsible for the contents of the Document in which this report is included. It is our responsibility to compile the financial information set out in this report from the Underlying Financial Statements, to form an independent opinion on the financial information and to report our opinion to you.

In our opinion, on the basis of presentation set out in note 1 below, the financial information together with the notes thereon gives, for the purpose of this report, a true and fair view of the state of affairs of the GDI Group as at 31st December, 2003, 2004 and 2005 and of the combined results and combined cash flows of the GDI Group for each of the three years ended 31st December, 2005.

– 162 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

I. FINANCIAL INFORMATION

The following are the financial information of the GDI Group and GDI as at 31st December, 2003, 2004 and 2005 and of the GDI Group for the Relevant Periods prepared on the basis set out in note 1 to the financial information.

COMBINED INCOME STATEMENTS

Notes
Turnover
6
Cost of sales
Gross profit
Other income
8
Distribution costs
Administrative expenses
Other expenses
9
Allowances for loans and interest
receivable
10
Change in fair value of conversion
option of unlisted convertible note
21(iii)
Finance costs
13
Gain (loss) on disposal of interests
in associates
Loss on deemed disposal of associate
Share of results of associates
Allowance on receivables advanced
to an associate
Gain on disposal of interests
in subsidiaries
(Loss) profit before taxation
11
Taxation
14
(Loss) profit for the year from
continuing operations
Profit for the year from discontinued
operations
15
(Loss) profit for the year
(Loss) profit attributable to:
Equity holders of the parent
Minority interests
(Loss) profit for the year

Year ended 31st December,
2003
2004
2005
HK$’000
HK$’000
HK$’000
—
—
5,298
—
—
(4,457)
—
—
841
55,879
52,660
33,622
—
—
(1,365)
(35,639)
(9,852)
(33,802)
(40,782)
(9,020)
(23,030)
(50,645)
(32,419)
(31,116)
—
76,959
(39,743)
(55)
(1,491)
—
—
57,542
(2,814)
(36,480)
—
—
(189,887)
(37,521)
43,103
(12,712)
—
—
11
—
—
(310,310)
96,858
(54,304)
(567)
(5,257)
(4,247)
(310,877)
91,601
(58,551)
104,075
1,511
—
(206,802)
93,112
(58,551)
(216,323)
21,619
(54,259)
9,521
71,493
(4,292)
(206,802)
93,112
(58,551)

– 163 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

COMBINED BALANCE SHEETS

GDI Group
As at 31st December,
Notes
2003
2004
2005
HK$’000
HK$’000
HK$’000
NON-CURRENT ASSETS
Property, plant and equipment
17
36,074
220
109,811
Deposit paid for acquisition of
interest in properties
18
—
47,012
55,716
Deposit for acquisition of subsidiaries
19
—
40,000
—
Goodwill
20
9,325
—
9,123
Interests in associates
21
508,110
309,149
558,738
Unlisted convertible notes and loans
receivable due from an associate
21(ii) & 21(iv)
320,674
187,967
—
Loans and interest receivables
— due after one year
22
—
28,283
—
Investment in securities
24
26,164
71,959
—
Investment in securities at fair value through
profit or loss
24
—
—
71,347
900,347
684,590
804,735
CURRENT ASSETS
Other asset
28
226,718
227,167
229,288
Inventories
29
66,976
—
102
Trade receivables
30
13,718
—
—
Amounts due from associates
21
129
54,373
151,206
Loans and interest receivables
— due within one year
22
251,691
540,931
448,961
Other receivables, deposits and prepayments
23
35,861
79,800
40,672
Other investments
24
1,142
—
—
Amounts due from former fellow
subsidiaries
26
756,570
878,028
721,091
Bank balances and cash
27
310,946
72,481
103,494
1,663,751
1,852,780
1,694,814
CURRENT LIABILITIES
Trade payables, other payables and
accrued charges
31
78,834
25,497
17,475
Payables — due within one year
32
29,180
444
583
Amounts due to associates
21
—
673
286
Income and other tax payable
3,150
8,144
12,257
Amounts due to former fellow subsidiaries
26
3,040,386
3,064,980
3,023,016
Bank loans and other borrowings
— due within one year
33
26,014
—
—
3,177,564
3,099,738
3,053,617
NET CURRENT LIABILITIES
(1,513,813)
(1,246,958)
(1,358,803)
(613,466)
(562,368)
(554,068)
CAPITAL AND RESERVES
Share capital
34
10,777
10,777
10,777
Reserves
(874,892)
(893,489)
(902,023)
Equity attributable to equity holders
of the parent
(864,115)
(882,712)
(891,246)
Minority interests
249,327
320,344
316,003
(614,788)
(562,368)
(575,243)
NON-CURRENT LIABILITIES
Bank loans and other borrowings
— due after one year
33
129
—
—
Payables — due after one year
32
1,193
—
—
Deferred tax liabilities
25
—
—
21,175
1,322
—
21,175
(613,466)
(562,368)
(554,068)

GDI
As at 31st
December,
2005
HK$’000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
—
—
—
4
—
—
—
—
14
—
14
(10)
(10)
—
(10)
(10)
—
(10)
—
—
—
—
(10)

– 164 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

COMBINED STATEMENTS OF CHANGES IN EQUITY

GDI GROUP At 1st January, 2003 Exchange adjustment Share of reserves movement of associates Net income (expense) recognised directly in equity Loss for the year Realised on disposal of interests in associates Realised on disposal of interests in subsidiaries Total recognised income and expense for the year Acquisition from minority interests Dividend paid to minority interests Appropriation At 31st December, 2003 Exchange adjustment Share of reserves movement of associates Net income (expense) recognised directly in equity Profit for the year Realised on disposal of interests in associates Realised on disposal of interests in subsidiaries Total recognised income and expense for the year At 31st December, 2004 Effect of changes in accounting policies_(Note 2(b))_ At 1st January, 2005 — as restated Exchange adjustment Net expense recognised directly in equity Loss for the year Total recognised income and expense for the year Arising on acquisition of subsidiaries At 31st December, 2005	Share capital HK$’000 10,777 — — — — — — — — — — 10,777 — — — — — — — 10,777 — 10,777 — — — — — 10,777	Contributions from shareholders HK$’000 (Note a) 191,479 — — — — — — — — — — 191,479 — — — — — — — 191,479 — 191,479 — — — — — 191,479	Goodwill on consolidation HK$’000 121,049 — — — — (20,333) 6,852 (13,481) — — — 107,568 — — — — (48,225) — (48,225) 59,343 (59,343) — — — — — — —	Exchange reserve HK$’000 (5,160) 301 2,090 2,391 — (128) (3,848) (1,585) — — — (6,745) (611) (99) (710) — (825) 13 (1,522) (8,267) — (8,267) (1,333) (1,333) — (1,333) — (9,600)	Other non- distributable reserve HK$’000 (Note b) 39,942 — (172) (172) — (238) (17,863) (18,273) — — 1,339 23,008 — 9,531 9,531 — — — 9,531 32,539 — 32,539 — — — — — 32,539	Accumulated losses HK$’000 (990,403) — — — (216,323) — 17,863 (198,460) — — (1,339) (1,190,202) — — — 21,619 — — 21,619 (1,168,583) 106,401 (1,062,182) — — (54,259) (54,259) — (1,116,441)	Sub-total HK$’000 (632,316) 301 1,918 2,219 (216,323) (20,699) 3,004 (231,799) — — — (864,115) (611) 9,432 8,821 21,619 (49,050) 13 (18,597) (882,712) 47,058 (835,654) (1,333) (1,333) (54,259) (55,592) — (891,246)	Minority interests HK$’000 722,277 553 — 553 9,521 — (481,183) (471,109) (410) (1,431) — 249,327 (476) — (476) 71,493 — — 71,017 320,344 — 320,344 (2,623) (2,623) (4,292) (6,915) 2,574 316,003	Total HK$’000 89,961 854 1,918
									2,772
									(206,802) (20,699) (478,179)
									(702,908)
									(410) (1,431) —
									(614,788) (1,087) 9,432
									8,345
									93,112 (49,050) 13
									52,420
									(562,368) 47,058
									(515,310) (3,956)
									(3,956)
									(58,551)
									(62,507)
									2,574
									(575,243)

Note:

(a) The amount represents the investments in subsidiaries contributed to the GDI Group by GDI pursuant to the Group Reorganisation on the basis that the Group Reorganisation had been effected on 1st January, 2003 and it represents the investments directly made by GDI in companies to be acquired by GDI in previous years.

(b) The other non-distributable reserves of the GDI Group include statutory reserves required to be appropriated from the profit after taxation of the GDI’s subsidiaries and associates of the PRC under PRC laws and regulations. The amount of the appropriation is at the discretion of the PRC subsidiaries’ board of directors.

– 165 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

COMBINED CASH FLOW STATEMENTS

OPERATING ACTIVITIES
(Loss) profit before taxation
Adjustments for:
Dividend income
Interest income
Interest expenses
Depreciation of property, plant
and equipment
Amortisation of goodwill
Changes in fair value on investments
in securities at fair value through
profit or loss
(Gain) loss on disposal of interests
in associates
(Gain) loss on disposal of interests
in subsidiaries
Loss (gain) on disposal of investments
in securities through profit or loss
Loss on deemed disposal of associate
Allowances for bad and doubtful debts
Allowances for amounts due
from associates
Allowance on receivables advanced
to an associate
Impairment loss of goodwill on
acquisition of subsidiaries
Write-down for inventories
Allowances for loans and
interest receivable
Change in fair value of conversion
option of unlisted convertible note
Gain on disposal of property, plant
and equipment
Share of results of associates
Profit from discontinued operations
Operating cash flows before
movements in working capital
Decrease (increase) in inventories
Increase in trade receivables
(Increase) decrease in other receivables,
deposits and prepayments
Increase (decrease) in trade payables,
other payables and accrued charges
Increase in amounts due from associates
Increase (decrease) in amounts
due to associates
Increase in other asset
Decrease in income and other
tax payable
Net cash outflow from operations
Tax (paid) refunded in other jurisdictions
NET CASH USED IN OPERATING
ACTIVITIES

Year ended 31st December,
2003
2004
2005
HK$’000
HK$’000
HK$’000
(310,310)
96,858
(54,304)
(60)
—
—
(33,202)
(46,148)
(29,762)
34,096
1,491
—
57,576
2,031
5,865
1,628
155
—
8,121
(70)
(1,208)
—
(57,542)
2,814
(12,309)
5,266
—
1,774
(2,959)
716
36,480
—
—
6,919
1,724
18,575
2,458
4,099
—
12,712
—
—
20,387
—
—
4
—
—
50,645
32,419
31,116
—
(76,959)
39,743
(15,995)
—
—
175,697
37,521
(43,103)
114,442
1,511
—
151,063
(603)
(29,548)
22,997
17,657
(96)
(10,287)
(118)
—
(214)
(41,655)
19,272
43,903
(10,021)
(8,127)
(29,065)
(4,097)
(15,164)
—
673
(387)
(226,718)
(449)
(2,121)
(19,493)
—
—
(67,814)
(38,613)
(36,171)
(7,420)
(233)
245
(75,234)
(38,846)
(35,926)

– 166 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

Notes
INVESTING ACTIVITIES
Repayment from loans
and interest receivables
Repayment from associates
Proceeds from disposal of
investments in securities
Proceeds from disposal of property,
plant and equipment
Increase in pledged bank deposits
Interest received
Proceeds from disposal of interests
in associates
Proceeds from disposal of interest
in subsidiaries (net of cash
and cash equivalents disposed of)
35
Dividend received from investments
in securities
Dividend income received
from associates
Investment in associates
Amount advanced to loans
and interest receivables
Amount advanced to associates
Purchase of investments in securities
Purchase of property, plant
and equipment
Purchase of subsidiaries (net of cash
and cash equivalents acquired)
36
Payment for acquisition of
interests in property
(Increase) decrease in amounts due
from former fellow subsidiaries
NET CASH (USED IN) FROM
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Advance from third parties/related parties
New bank loans and other
borrowings raised
Increase (decrease) in payables
due to former fellow subsidiaries
Repayment of bank loans and
other borrowings
Repayment of third parties/related parties
Dividend paid to minority interests
Repayment of obligations under
finance leases
Interest paid
NET CASH FROM (USED IN)
FINANCING ACTIVITIES

Year ended 31st December,
2003
2004
2005
HK$’000
HK$’000
HK$’000
697,425
160,903
345,672
92,267
143,214
—
16,711
152,642
77,547
25,994
771
125
(45,259)
—
—
4,506
7,200
8,488
23,887
110,341
—
(58,564)
13,324
—
60
—
—
—
—
2,427
—
—
(63,152)
(553,342)
(501,146)
(285,122)
(260,373)
(163,828)
—
(23,278)
(26,250)
(78,259)
(268,682)
(1,864)
(331)
(785)
—
(9,651)
—
(326)
(8,704)
(229,601)
(121,456)
121,572
(579,034)
(226,475)
110,612
29,193
13,000
—
994,271
39,033
—
380,907
24,596
(41,964)
(721,048)
(4,827)
—
(44,108)
(43,537)
—
(1,431)
—
—
(181)
(1)
—
(32,848)
(883)
—
604,755
27,381
(41,964)

– 167 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances and cash Bank overdrafts	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 (49,513) (237,940) 32,722 356,829 310,944 72,481 3,628 (523) (1,709) 310,944 72,481 103,494 310,946 72,481 103,494 (2) — — 310,944 72,481 103,494

– 168 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

NOTES TO THE FINANCIAL INFORMATION

1. BASIS OF PRESENTATION OF FINANCIAL INFORMATION

The combined income statements, combined statements of changes in equity, and combined cash flow statements of the companies comprising the GDI Group for the Relevant Periods are prepared as if they had been formed as a single reporting entity throughout the Relevant Periods, or since their respective dates of incorporation or acquisition or up to the effective dates of disposal, where this is a shorter period of the individual company. The combined balance sheets as at 31st December, 2003, 2004 and 2005 have been prepared to present the assets and liabilities of the GDI Group as at the respective dates as if they had been formed as a single reporting entity at those dates.

The financial information of Relevant Periods has been prepared in accordance with the accounting policies adopted by China Strategic Holdings Limited (“CSH”).

The financial information has been prepared on the going concern basis because CSH has committed to provide continuing financial support to the companies comprising the GDI Group to enable the GDI Group to meet its financial obligations as they fall due in the foreseeable future.

The financial statements are presented in Hong Kong dollars, which is the same as the functional currency of the GDI.

All significant intra-group transactions and balances have been eliminated on combination.

2(a). APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES

In preparation of the financial information for the year ended 31st December, 2005 the GDI Group has applied a number of new Hong Kong Financial Reporting Standards (“HKFRS(s)”), Hong Kong Accounting Standards (“HKAS(s)”) and Interpretations (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are effective for accounting periods beginning on or after 1st January, 2005. The application of these new HKFRSs has resulted in a change in the presentation of the combined income statement, combined balance sheet and combined statement of changes in equity. In particular, the presentation of minority interests have been changed. The changes in presentation has been applied retrospectively. The adoption of the new HKFRSs has resulted in changes to the GDI Group’s accounting policies in the following areas that have an effect on how the results for the current and prior accounting periods are prepared and presented:

Business combinations

During the year ended 31st December, 2005, the GDI Group has applied HKFRS 3 Business Combinations which is effective for business combinations for which the agreement date is on or after 1st January, 2005. The principal effects of the application of HKFRS 3 to the GDI Group are summarised below:

Goodwill

Prior to 31st December, 2004, goodwill arising on acquisitions prior to 1st January, 2001 was held in reserves, and goodwill arising on acquisitions after 1st January, 2001 was capitalised and amortised over its estimated useful life.

– 169 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(a). APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Business combinations (Cont’d)

The GDI Group has applied the relevant transitional provisions in HKFRS 3. Goodwill arising on acquisitions after 1st January, 2005 is measured at cost less accumulated impairment losses after initial recognition. As a result of this change in accounting policy, no amortisation of goodwill has been charged in the current period. Comparative figures for 2004 are not required to be restated.

Excess of the GDI Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost (previously known as “negative goodwill”)

In accordance with HKFRS 3, any excess of the GDI Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition (“discount on acquisition”) is recognised immediately in profit or loss in the period in which the acquisition takes place. In previous periods, negative goodwill arising on acquisitions prior to 1st January, 2001 was held in reserves, and negative goodwill arising on acquisitions after 1st January, 2001 was presented as a deduction from assets and released to income based on an analysis of the circumstances from which the balance resulted. In accordance with the relevant transitional provisions in HKFRS 3, the GDI Group derecognised all negative goodwill on 1st January, 2005, of which negative goodwill of approximately HK$59,343,000 was previously recorded in reserves and approximately HK$47,058,000 was previously presented as a deduction from interests in associates), with a corresponding decrease to accumulated loss as at 1st January, 2005.

Contingent liabilities of acquirees

Financial instruments

During the year ended 31st December, 2005, the GDI Group has applied HKAS 32 “Financial Instruments: Disclosure and Presentation” and HKAS 39 Financial Instruments: Recognition and Measurement. HKAS 32 requires retrospective application. The adoption of HKAS 32 has had no material effect on the presentation of financial instruments in the financial statements of the GDI Group. The principal effects on the GDI Group as a result of implementation of HKAS 39 are summarised below:

– 170 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(a). APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

Classification and measurement of financial assets and financial liabilities

The GDI Group has applied the relevant transitional provisions in HKAS 39 with respect to classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

On or before 31st December, 2004, the GDI Group classified and measured its debt and equity securities in accordance with the benchmark treatment of Statement of Standard Accounting Practice No. 24 “Accounting for Investments in Securities” issued by the HKICPA (“SSAP 24”). Under SSAP 24, investments in debt or equity securities are classified as “investment securities” or “other investments” as appropriate. “Investment securities” are carried at cost less impairment losses while “other investments” are measured at fair value, with unrealised holding gains or losses included in the profit or loss. From 1st January, 2005 onwards, the GDI Group classifies and measures its debt and equity securities in accordance with HKAS 39. Under HKAS 39, financial assets are classified as “financial assets at fair value through profit or loss”, “availablefor-sale financial assets”, “loans and receivables”, or “held-to-maturity financial assets”. The classification depends on the purpose for which the assets are acquired. “Financial assets at fair value through profit or loss” and “available-for-sale financial assets” are carried at fair value with changes in fair values recognised in profit or loss and equity respectively. “Loans and receivables” and “held-to-maturity financial assets” are measured at amortised cost using the effective interest method.

From 1st January, 2005 onwards, the GDI Group classified and measured its debt and equity securities in accordance with the requirements of HKAS 39. Other investments classified under non-current assets with carrying amounts of approximately of HK$71,959,000 at 31st December, 2004 were reclassified to investments in securities at fair value through profit or loss, which are designated to be stated at fair value through profit or loss.

Embedded derivatives

In accordance with HKAS 39 “Financial Instruments: Recognition and Measurement” issued by the HKICPA, the conversion option element of the convertible note represents an embedded derivative instrument which is accounted for separately from the convertible notes and, as such, to be measured at fair value when initially recorded and at subsequent reporting dates. The fair value of this conversion option, representing a discount on subscription of the convertible note, was estimated using the relevant option pricing model at the date of subscription of the convertible note, and as at subsequent reporting dates. Prior to 1st January, 2005, the GDI Group measured the fair value of the embedded derivatives in accordance with the requirement under HKAS 39 and therefore, no adjustments was made on 1st January, 2005. During the Relevant Periods, the GDI Group measured the fair value of the embedded derivatives in accordance with the requirements and recognised the changes in fair value of the conversion option of the unlisted convertible note as at balance sheet dates and the impact of changes in fair value of this conversion option, taking into account the portion of the conversion option exercised during the year ended 31st December, 2003, 31st December, 2004 and 31st December, 2005 was nil, gain of approximately HK$76,959,000 and loss of approximately HK$39,743,000 respectively, which have been recognised in the combined income statement.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(b). SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES

The effects of the changes in accounting policies described in Note 2(a) on the results for the Relevant Periods are as follows:

(i) On results Non-amortisation of goodwill Changes in fair value of conversion option of unlisted convertible note Share of results of associates — Depreciation on hotel properties Increase in (loss) profit for the year (ii) On income statement line items Decrease in administrative expenses Change in fair value of conversion option of unlisted convertible note Decrease in share of results of associates	2003 HK$’000 — — — — 2003 HK$’000 — — — —	2004 HK$’000 — 76,959 (3,192) 73,767 2004 HK$’000 — 76,959 (3,192) 73,767	2005 HK$’000 456 (39,743) (8,252) (47,539) 2005 HK$’000 456 (39,743) (8,252) (47,539)

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(b). SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES (Cont’d)

(iii) On balance sheet items

The cumulative effects of the application of the new HKFRSs as at 31st December, 2004 and 1st January, 2005 are summarised below:

As at 31st December, 2004 THE GDI GROUP (original stated) HK$’000 Balance sheet items Interests in associates — Negative goodwill (47,058) (47,058) Investments in securities — non-current 71,959 Investments in securities at fair value through profit or loss — Total effects on assets 24,901 Goodwill on consolidation (59,343) Accumulated losses 1,168,583 Total effects on equity 1,109,240	Effect of HKFRS 3 HKAS 39 HK$’000 HK$’000 47,058 — 47,058 — — (71,959) — 71,959 47,058 — 59,343 — (106,401) — (47,058) —	As at 1st January, 2005 (restated) HK$’000 —
		—
		— 71,959
		71,959

		— 1,062,182
		1,062,182

2(c). SIGNIFICANT ACCOUNTING POLICIES

The financial information has been prepared under the historical cost basis except for investments in securities and financial instruments, which are measured at fair values as explained in the accounting policies set out below. The financial information has been prepared in accordance with HKFRS(s) issued by HKICPA.

Recognition of revenue

Turnover represents the fair value of amounts received and receivable for goods sold by the GDI Group less discount allowances and goods returned.

Revenue of the GDI Group for the Relevant Periods is recognised on the following bases:

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

Dividend income from investments in securities is recognised when the GDI Group’s rights to receive payment have been established.

Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that’s net carrying amount.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Goodwill

Goodwill arising on acquisitions prior to 1st January, 2005

Goodwill arising on acquisition of a subsidiary or an associate for which the agreement date is before 1st January, 2005 represents the excess of the cost of acquisition over the GDI Group’s interest in the fair value of the identifiable assets, liabilities of the relevant subsidiary or associate at the date of acquisition.

Goodwill arising on acquisitions prior to 1st January, 2001 previously recognised in reserves, and have been transferred to the GDI Group’s accumulated losses at 1st January, 2005.

For previous capitalised goodwill arising on acquisitions after 1st January, 2001, the GDI Group has discontinued amortisation from 1st January, 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired (see the accounting policy below).

Goodwill arising on acquisitions on or after 1st January, 2005

Goodwill arising on an acquisition of a subsidiary or an associate for which the agreement date is on or after 1st January, 2005 represents the excess of the cost of acquisition over the GDI Group’s interest in the fair value of the identifiable assets and liabilities of the relevant subsidiary or associate at the date of acquisition. Such goodwill is carried at cost less any accumulated impairment losses.

For the purposes of impairment testing, goodwill arising from an acquisition of a subsidiary is allocated to each of the relevant cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition. A cash-generating unit to which the goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition of a subsidiary in a financial year, the cash-generating unit to which the goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash-generating unit is less than the carrying amount of that unit, the impairment loss is allocated to reduce the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the combined income statement. An impairment loss for goodwill is not reversed in subsequent periods.

On subsequent disposal of a subsidiary or an associate, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Goodwill (Cont’d)

Excess of acquirer’s interest in the net fair value of acquirer’s identifiable assets, liabilities and contingent liabilities over cost (“discount on acquisition”)

A discount on acquisition arising on an acquisition of a subsidiary or an associate for which an agreement date is on or after 1st January, 2005 represents the excess of the net fair value of an acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination. Discount on acquisition of an associate (which is accounted for using the equity method) is included as income in determination of the investor’s share of results of the associate in the Relevant Periods in which the investment is acquired.

Negative goodwill arising on acquisition after 1st January, 2001 is presented as deduction from assets and will be released to income based on an analysis of the circumstances from which the balance resulted.

All negative goodwill as at 1st January, 2005 has been derecognised with a corresponding adjustment to the GDI Group’s accumulated losses.

Interests in associates

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investment in associates are carried in the combined balance sheet at cost as adjusted for post-acquisition changes in the GDI Group’s share of the profit or loss and of changes in equity of the associate, less any identified impairment loss. When the GDI Group’s share of losses of an associate equals or exceeds its interest in that associate (which include any long-term interests that, in substance, form part of the GDI Group’s net investment in the associate), the GDI Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the GDI Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Goodwill (included in interests in associates) are tested for impairment annually by comparing its carrying amount with its recoverable amount, irrespective of whether there is any indication that it may be impaired. If the recoverable amount of goodwill is estimated to be less than its carrying amount. The carrying amount is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

When the GDI Group transacts with an associate, profits and losses are eliminated to the extent of the GDI Group’s interest in the relevant associate.

Impairment losses (other than goodwill (see the accounting policy in respect of goodwill above))

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

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Property, plant and equipment

Construction in progress

Construction in progress are stated at cost, which includes amortisation of land cost, the related construction costs, less accumulated impairment losses. No depreciation is provided on construction in progress until the construction is completed and the properties and assets are available for use.

Other property, plant and equipment

Property, plant and equipment, other than construction in progress are stated at cost less subsequent accumulated depreciation, accumulated amortisation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the combined income statement in the year in which the item is derecognised.

Non-current assets held for sales

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition.

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets’ (disposal groups’) previous carrying amount and fair value less costs to sell.

Capitalisation of borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, are capitalised as part of the cost of those assets. Capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the Relevant Periods in which they are incurred.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Leasing

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

The GDI Group as lessee

Assets held under finance leases are recognised as assets of the GDI Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the combined balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

Rentals payable under operating lease are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefit received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the Relevant Periods in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the Relevant Periods except for the differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Foreign currencies (Cont’d)

For the purpose of presenting the combined financial information, the assets and liabilities of the GDI Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average rates for the year, unless exchange rates fluctuate significantly during the Relevant Periods, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the exchange reserve). Such exchange differences are recognised in profit or loss in the Relevant Periods in which the foreign operation is disposed of.

Goodwill and fair value adjustments arising on acquisitions of foreign operations prior to 1st January, 2005 are treated as non-monetary foreign currency items of the acquirer and reported using the historical exchange rate prevailing at the date of the acquisition.

Retirement benefit costs

Payment to state-managed retirement benefit schemes and Mandatory Provident Fund Scheme are charged as an expense as they fall due.

Financial instruments

Prior to 1st January, 2005, investments in securities are recognised on a trade date basis and are initially measured at cost.

Investments other than held-to maturity debt securities are classified as investment securities and other investments.

Investment securities, which are securities held for an identified long-term strategic purpose, are measured at subsequent reporting dates at cost, as reduced by any impairment loss that is other than temporary.

Other investments are measured at fair value, with unrealised gains and losses included in net profit or loss for the period.

– 178 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

From 1st January, 2005 onwards, financial assets and financial liabilities are recognised on the balance sheet when the GDI Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are add to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The GDI Group’s financial assets are classified into one of the three categories, including financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade day basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted are set out below.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss has two categories , including financial assets held for trading and those designated at fair value through profit or loss on initial recognition. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognised directly in profit or loss in the Relevant Periods in which they arise.

Embedded derivatives

– 179 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Financial instruments (Cont’d)

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including receivables, trade receivables, amounts due from associates, amounts due from former fellow subsidiaries) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity

Financial liabilities and equity instruments issued by the GDI Group 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 GDI Group after deducting all of its liabilities. The GDI Group’s major financial liabilities are generally other financial liabilities. The accounting policy adopted are set out below.

Other financial liabilities

Other financial liabilities including trade payables, other payables and accrued charges, payables, amounts due to associates, amounts due to former fellow subsidiaries, bank loans and other borrowings are subsequently measured at amortised cost, using the effective interest rate method.

Equity instruments

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

– 180 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

2(c). SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

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 combined 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 GDI 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 the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the combined 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 affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the GDI Group as a parent 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.

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

3. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARDS

The GDI Group has not early applied the following new standards and interpretations that have been issued but are not yet effective. The directors of the GDI Group anticipate that the application of these standards or Interpretations will have no material impact on the financial statements of the GDI Group except that HKAS 39 (Amendment) — The fair value option require the GDI Group shall de-designate any financial asset or financial liability previously designated as at fair value through profit or loss only if it does not qualify for such designation in accordance with those new and amended paragraphs. When a financial asset or financial liability will be measured at amortised cost after de-designation, the date of de-designation is deemed to be its date of initial recognition.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

3. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARDS (Cont’d)

HKAS 1 (Amendment) HKAS 19 (Amendment) HKAS 21 (Amendment) HKAS 39 (Amendment) HKAS 39 (Amendment) HKAS 39 & HKFRS 4

(Amendments) HKFRS 6 HKFRS 7 HKFRS — INT 4 HKFRS — INT 5

HK(IFRIC) — INT 6 HK(IFRIC) — INT 7 HK(IFRIC) — INT 8 HK(IFRIC) — INT 9

Capital disclosures[1]

Actuarial gains and losses, group plans and disclosures[2] Net investment in a foreign operation[2] Cash flow hedge accounting of forecast intragroup transactions[2] The fair value option[2]

Financial guarantee contracts[2]

Exploration for and evaluation of mineral resources[2] Financial instruments: Disclosures[1] Determining whether an arrangement contains a lease[2] Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds[2] Liabilities arising from participating in a specific marketwaste electrical and electronic equipment[3] Applying the restatement approach under HKAS 29

Financial Reporting in Hyperinflationary Economies[4] Scope of HKFRS 2[5] Reassessment of Embedded Derivatives[6]

1 Effective for annual periods beginning on or after 1st January, 2007.
2 Effective for annual periods beginning on or after 1st January, 2006.
3 Effective for annual periods beginning on or after 1st December, 2005.
4 Effective for annual periods beginning on or after 1st March, 2006.
5 Effective for annual periods beginning on or after 1st May, 2006.
6 Effective for annual periods beginning on or after 1st June, 2006.

4. KEY SOURCES OF ESTIMATION UNCERTAINTY

In the process of applying the GDI Group’s accounting policies, management makes various estimates based on past experiences, expectations of the future and other information. The key sources of estimation uncertainty that may significantly affect the amounts recognised in the financial information are disclosed below:

Estimated impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the GDI Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. During the three years ended 31st December, 2005, management of the GDI Group determined that there were no impairment on goodwill. Details of the impairment testing on goodwill are disclosed in note 20.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

4. KEY SOURCES OF ESTIMATION UNCERTAINTY (Cont’d)

Estimated impairment on loan and interest receivables

The assessment of the impairment loss on loan and interest receivables of the GDI Group is based on the evaluation of collectability and aging analysis of accounts and on management’s judgment. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness of each borrowers or debtors. If the financial conditions of borrowers or debtors of the GDI Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Allowances made in the loans and interest receivables as at 31st December, 2003, 2004 and 2005 were approximately HK$50,645,000, HK$32,419,000 and HK$31,116,000 respectively.

5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The GDI Group’s major financial instruments include loans and interest receivables, amounts due from associate, trade receivables, other receivables and deposits, investments in securities at fair value through profit and loss, trade payables, payables, amounts due to associates, amounts due to related companies and bank and other borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Credit risk

The GDI Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at the balance sheet dates is in relation to the carrying amount of such item on balance sheet and other class of financial assets as stated in the combined balance sheet. In order to minimise the credit risk, the management of the GDI Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the GDI Group reviews the recoverable amount of each individual debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the GDI Group’s credit risk is significantly reduced.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned in international credit-rating agencies.

The GDI Group has no significant concentration of credit risk, with exposure spread over a number of counterparties and customers.

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Cont’d)

Currency risk

Several subsidiaries of the Company have foreign currency sales, which expose the GDI Group to foreign currency risk. Also, certain trade receivables, trade payables, bank balances and bank borrowings of the GDI Group are denominated in foreign currencies. The GDI Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

Other price risk

The GDI Group’s investments in securities at fair value through profit or loss is measured at fair value at each balance sheet date. Therefore, the GDI Group is exposed to equity security and debt price risk. Management manages this exposure by maintaining a portfolio of investments with different risk profiles.

Liquidity risk

The GDI Group’s objective is to maintain a balance between continuity of funding and flexibility through the funds generated from its operations. The Directors have given careful consideration on the measures currently undertaken by the GDI Group in respect of the GDI Group’s liquidity position. During the year, the GDI Group has continued to tighten cost controls over operating costs to improve the cash flows, profitability and operations of the GDI Group. The directors believe that the Group will have sufficient working capital for its future operational requirements.

6. TURNOVER

Turnover represents the net amount received and receivable from outside customers net of sales and business tax during the Relevant Periods and is analysed as follows:

	Year	ended 31st December,	ended 31st December,
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Sales of goods, net of returns and sales taxes	—	—	5,298

– 184 –

APPENDIX IV ACCOUNTANTS’ REPORT ON THE GDI GROUP

7. SEGMENT INFORMATION

Business segments

Pursuant to the Group Reorganisation, companies carrying on property development, sand mining and investment holding will be acquired by GDI, which represent the GDI Group’s current main business segment. For the purpose of the presentation of the business segments and except for the segment of sand mining business which commenced in 2005, the segment of property development and investment holding during the Relevant Periods are grouped under “Others” segment.

During the Relevant Periods, certain companies under the GDI Group were engaged in the operations of manufacturing and trading of chinese and western medicine products, tire operation, consumer goods, electronic products and heavy industry which were discontinued upon the disposal of these operations held by these companies. Details of these discontinuing operations are set out below.

An analysis of the GDI Group’s turnover segment results and segment assets and liabilities by business segments is presented below:

For the year ended 31st December, 2003 (i) TUROVER — External (ii) OTHER INCOME — Interest income — Dividend income — Gain on disposal of property, plant and equipment — Others RESULT Segment result Unallocated corporate expenses Finance costs Gain on disposal of interests in subsidiaries Loss on deemed disposal of associate Share of results of associates Allowance on receivables advanced to an associate Profit/(loss) before taxation Taxation Profit/(loss) for the year	Discontinued operation Pharmaceutical Tires products Sub-total HK$’000 HK$’000 HK$’000 2,635,235 249,258 2,884,493 4,457 49 4,506 — — — 15,573 — 15,573 2,248 2,937 5,185 22,278 2,986 25,264 100,304 (20,184) 80,120 (31,689) (2,352) (34,041) 3,711 8,587 12,298 — — — 14,188 2 14,190 — — — 114,442 (10,367) 104,075	Continuing operation Investments in securities and advance Others Sub-total HK$’000 HK$’000 HK$’000 — — — 25,175 3,521 28,696 60 — 60 — 422 422 — 26,701 26,701 25,235 30,644 55,879 19,548 (18,097) 1,451 (55) — (55) — 11 11 (36,480) — (36,480) (202,262) 12,375 (189,887) (12,712) — (12,712) (310,310) (567) (310,877)	Continuing operation Investments in securities and advance Others Sub-total HK$’000 HK$’000 HK$’000 — — — 25,175 3,521 28,696 60 — 60 — 422 422 — 26,701 26,701 25,235 30,644 55,879 19,548 (18,097) 1,451 (55) — (55) — 11 11 (36,480) — (36,480) (202,262) 12,375 (189,887) (12,712) — (12,712) (310,310) (567) (310,877)	Combined HK$’000 2,884,493 33,202 60 15,995 31,886 81,143 81,571 (30,763) (34,096) 12,309 (36,480) (175,697) (12,712) (195,868) (10,934) (206,802)
	Pharmaceutical Tires products HK$’000 HK$’000 2,635,235 249,258 4,457 49 — — 15,573 — 2,248 2,937 22,278 2,986 100,304 (20,184) (31,689) (2,352) 3,711 8,587 — — 14,188 2 — —	Investments in securities and advance HK$’000 — 25,175 60 — — 25,235 19,548 (55) — (36,480) (202,262) (12,712)	Others HK$’000 — 3,521 — 422 26,701 30,644 (18,097) — 11 — 12,375 —

– 185 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

7. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

			Investments
		Pharmaceutical	in securities
	Tires	products	and advance	Others	Combined
	HK$’000	HK$’000	HK$’000	HK$’000		HK$’000
Assets and liabilities
at 31st December, 2003
ASSETS
Segment assets	—	88,395	1,335,051	70,324		1,493,770
Interests in associates	—	15,416	—	492,694		508,110
Unlisted convertible notes and loans
receivable due from an associate	—	—	—	320,674		320,674
Unallocated total assets						241,544
Combined total assets						2,564,098

LIABILITIES
Segment liabilities	—	(56,505)	(4,110)	(16,232)		(76,847)
Unallocated corporate liabilities					(3,102,039)
Combined total liabilities					(3,178,886)

Other information for the
year ended 31st December, 2003
Capital expenditure
— Property, plant and equipment	260,872	7,978	—	—		268,850
Depreciation and amortisation	47,750	11,454	—	—		59,204
Impairment loss of goodwill on
acquisition of subsidiaries	—	—	—	20,387		20,387
Allowances for loans and interest
receivable	—	—	50,645	—		50,645
Allowances on receivables advanced
to an associate	—	—	12,712	—		12,712
Allowance for bad and doubtful debts	—	—	—	6,919		6,919
Change in fair value on investments in
securities at fair value through
profit or loss	—	—	8,121	—		8,121
Allowances for amounts due from
associates	2,458	—	—	—		2,458
Write-down for inventories	—	4	—	—		4
Loss on disposal of investments
in securities	—	—	1,774	—		1,774

– 186 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

7. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

Discontinued operation Pharmaceutical products HK$’000 For the year ended 31st December, 2004 (i) TURNOVER — External 96,262 — Inter-segment — 96,262 (ii) OTHER INCOME — Interest income 17 — Others 446 463 RESULT Segment result 6,777 Unallocated corporate expenses Finance costs — Change in fair value of conversion option of unlisted convertible note — Loss on disposal of interests in subsidiaries (5,266) Gain on disposal of interests in associates — Share of results of associates — Profit before taxation 1,511 Taxation — Profit for the year 1,511	Continuing operation Investments in securities and advance Others Sub-total HK$’000 HK$’000 HK$’000 — — — — 1,200 1,200 — 1,200 1,200 40,622 5,509 46,131 6,529 — 6,529 47,151 5,509 52,660 20,217 2,758 22,975 (486) (1,005) (1,491) — 76,959 76,959 — — — — 57,542 57,542 — (37,521) (37,521) 96,858 (5,257) 91,601	Continuing operation Investments in securities and advance Others Sub-total HK$’000 HK$’000 HK$’000 — — — — 1,200 1,200 — 1,200 1,200 40,622 5,509 46,131 6,529 — 6,529 47,151 5,509 52,660 20,217 2,758 22,975 (486) (1,005) (1,491) — 76,959 76,959 — — — — 57,542 57,542 — (37,521) (37,521) 96,858 (5,257) 91,601	Elimination HK$’000 — (1,200) (1,200) — — — — — — — — —	Combined HK$’000 96,262 — 96,262 46,148 6,975 53,123 29,752 (21,606) (1,491) 76,959 (5,266) 57,542 (37,521) 98,369 (5,257) 93,112
	Investments in securities and advance HK$’000 — — — 40,622 6,529 47,151 20,217 (486) — — — —	Others HK$’000 — 1,200 1,200 5,509 — 5,509 2,758 (1,005) 76,959 — 57,542 (37,521)

Inter-segment sales are charged at terms determined and agreed between the GDI Group’s companies.

– 187 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

7. SEGMENT INFORMATION (Cont’d)

Business segments (Cont’d)

Investments
Pharmaceutical
in securities
products
and advance
Others
HK$’000
HK$’000
HK$’000
Assets and liabilities
at 31st December, 2004
ASSETS
Segment assets
—
300,009
231,803
Interests in associates
—
—
309,149
Unlisted convertible notes and loans
receivables due from an associate
—
—
187,967
Unallocated total assets
Combined total assets
LIABILITIES
Segment liabilities
—
(580)
(25,590)
Unallocated corporate liabilities
Combined total liabilities
Other information
for the year ended 31st December, 2004
Capital expenditure
— Property, plant and equipment
1,370
—
494
— Deposit paid for acquisition of
interest in properties
—
—
47,012
Depreciation and amortisation
2,000
—
31
Allowances for loans and interest receivable
—
32,419
—
Allowance for bad and doubtful debts
—
—
1,724
Allowances for amounts due from associates
—
—
4,099
Loss on disposal of interests in subsidiaries
5,266
—
—

Combined
HK$’000
531,812
309,149
187,967
1,508,442
2,537,370
(26,170)
(3,073,568)
(3,099,738)
1,864
47,012
2,031
32,419
1,724
4,099
5,266

– 188 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

7. SEGMENT INFORMATION (Cont’d)

Investments in securities and advance HK$’000 For the year ended 31st December, 2005 (i) TURNOVER — External — (ii) OTHER INCOME — Interest income 24,395 — Others 1,124 25,519 RESULT Segment result (25,528) Unallocated corporate expenses Loss on disposal of investments in securities at fair value through profit or loss (716) Change in fair value of conversion option of unlisted convertible note — Loss on disposal of interests in associates Share of results of associates Loss before taxation Taxation Loss for the year	Sand mining HK$’000 (Note) 5,298 — 2,059 2,059 1,576 — —	Others HK$’000 — 5,367 677 6,044 (26,984) — (39,743)	Combined HK$’000 5,298 29,762 3,860 33,622 (50,936) (3,198) (716) (39,743) (2,814) 43,103 (54,304) (4,247) (58,551)

Note: During the year, the GDI Group acquired 88% and 100% of the issued capital of �� and �� for an aggregate cash consideration of HK$50 million respectively. The two newly acquired subsidiaries are engaged in the business of sand mining. The segment of sand mining is regarded as a new business segment of the GDI Group upon completion of the acquisition.

– 189 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

7. SEGMENT INFORMATION (Cont’d)

Investments
in securities
Sand
and advance
mining
Others
HK$’000
HK$’000
HK$’000
Assets and liabilities
at 31st December, 2005
ASSETS
Segment assets
440,935
110,716
114,151
Interests in associates
—
—
558,738
Unallocated total assets
Combined total assets
LIABILITIES
Segment liabilities
(6,674)
(736)
(18,796)
Unallocated corporate liabilities
Combined total liabilities
Other information
for the year ended
31st December, 2005
Capital expenditure
— Property, plant and equipment
331
113,183
—
— Goodwill arising from
acquisition of subsidiaries
—
9,123
—
— Goodwill arising from
acquisition of associates
—
—
10,181
Depreciation and amortisation
40
5,811
14
Allowance for bad and
doubtful debts
7,823
—
10,752
Allowance for loans and
interest receivable
31,116
—
—

Combined
HK$’000
665,802
558,738
1,275,009
2,499,549
(26,206)
(3,048,586)
(3,074,792)
113,514
9,123
10,181
5,865
18,575
31,116

– 190 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

7. SEGMENT INFORMATION (Cont’d)

An analysis of the GDI Group’s turnover by geographical market, irrespective of the origin of the goods and services is presented below:

PRC Hong Kong Overseas	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 — — 5,298 — — — — — — — — 5,298	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 — — 5,298 — — — — — — — — 5,298
		5,298

The following is an analysis of the carrying amount of segment assets and capital additions, analysed by the geographical area in which the assets are located:

PRC Hong Kong Overseas	Carrying amount of assets As at 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 752,431 — 118,579 1,638,133 2,371,568 2,126,456 173,534 165,802 165,656 2,564,098 2,537,370 2,410,691	Capital additions	Capital additions
		Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 260,872 47,012 113,183 7,978 1,864 331 — — — 268,850 48,876 113,514
			113,514

– 191 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

8. OTHER INCOME

Interest income from loans receivable Interest income from banks Interest income from unlisted convertible notes Net exchange gain Change in fair value on investments in securities at fair value through profit or loss Gain on disposal of investments in securities Dividend income from listed investments Gain on disposal of property, plant and equipment Others 9. OTHER EXPENSES	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 24,579 38,637 24,390 3,274 3,197 350 843 4,297 5,022 22,352 3,072 — — 70 1,208 — 2,959 — 60 — — 422 — — 4,349 428 2,652 55,879 52,660 33,622	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 24,579 38,637 24,390 3,274 3,197 350 843 4,297 5,022 22,352 3,072 — — 70 1,208 — 2,959 — 60 — — 422 — — 4,349 428 2,652 55,879 52,660 33,622
		33,622

Impairment loss of goodwill on acquisition of subsidiaries_(Note)_ Allowances for bad and doubtful debts Change in fair value on investments in securities at fair value through profit or loss Loss on disposal of investment in securities through profit or loss Allowances for amounts due from associates Net exchange loss Others	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 20,387 — — 6,919 1,724 18,575 8,121 — — 1,774 — 716 2,458 4,099 — — — 3,739 1,123 3,197 — 40,782 9,020 23,030	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 20,387 — — 6,919 1,724 18,575 8,121 — — 1,774 — 716 2,458 4,099 — — — 3,739 1,123 3,197 — 40,782 9,020 23,030
		23,030

Note:

On 19th March, 2004, the GDI Group entered into a conditional agreement to dispose of its entire interests in Tung Fong Hung Investment Limited (“Tung Fong Hung”) to a third party subsequent to 31st December, 2003. The directors have considered the consideration receivable from the said disposal and operating losses of Tung Fong Hung and have identified the impairment loss attributable to the goodwill arising from acquisition of Tung Fong Hung amounting to approximately HK$20 million. The amount was charged to the combined income statement accordingly.

– 192 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

10. ALLOWANCES FOR LOANS AND INTEREST RECEIVABLE

As at 31st December, 2003, 2004 and 2005, the directors have reviewed the carrying value of the GDI Group’s loans and interest receivables and determined that the recoverable amount of certain loans and interest receivables is below their carrying value with reference to present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Accordingly, an impairment loss of approximately HK$50,645,000, HK$32,419,000 and HK$31,116,000 had been charged to the income statement for the year ended 31st December, 2003, 31st December, 2004 and 31st December, 2005 respectively.

11. (LOSS) PROFIT BEFORE TAXATION

	Discontinued operation	Discontinued operation	Discontinued operation	Continuing operation	Continuing operation	Continuing operation		Combined
	2003	2004	2005	2003	2004	2005	2003	2004	2005
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
(Loss) profit before taxation has been arrived
at after charging:
Staff costs
— directors’ remuneration_(note 12(a))_	—	—	—	77	117	458	77	117	458
— other staff costs_(note 12(b))_	144,530	11,619	—	525	618	1,306	145,055	12,237	1,306
— retirement benefit scheme contributions,
excluding directors	26,925	469	—	23	26	50	26,948	495	50
— redundancy payment	1,938	—	—	—	—	—	1,938	—	—
Total staff costs	173,393	12,088	—	625	761	1,814	174,018	12,849	1,814
Auditors’ remuneration
Current year	725	427	—	3,174	3,286	4,721	3,899	3,713	4,721
Underprovision in prior years	—	392	—	—	—	—	—	392	—
Depreciation of property, plant and equipment	57,576	2,000	—	—	31	5,865	57,576	2,031	5,865
Amortisation of goodwill included in
administrative expenses	1,628	155	—	—	—	—	1,628	155	—

– 193 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

12. DIRECTORS’ AND EMPLOYEE’S REMUNERATION

(a) Directors’ remuneration

The emoluments of the directors for the Relevant Periods are as follows:

Basic salaries and allowance Name of director Chan Kwok Keung, Charles Yap, Allan Chau Mei Wah, Rosanna Chan Ling, Eva Li Bo Chan Kwok Hung Lui Siu Tsuen, Richard	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 77 117 458 77 117 458 — — — 77 117 229 — — — — — 229 — — — — — — — — — 77 117 458	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 77 117 458 77 117 458 — — — 77 117 229 — — — — — 229 — — — — — — — — — 77 117 458
		458

		— 229 — 229 — — —
		458

The directors’ emoluments are presented as if the directors of GDI Group had been appointed throughout the Relevant Periods, or since their respective dates of appointment, where this is a shorter period, and the emoluments had been paid for their appointment as GDI Group’s directors.

During the Relevant Periods, no emoluments were paid by the GDI Group to any director as an inducement to join or upon joining the GDI Group or as compensation for loss of office.

None of the directors waived any emoluments during the Relevant Periods.

– 194 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

12. DIRECTORS’ AND EMPLOYEE’S REMUNERATION (Cont’d)

(b) Employees’ remuneration

Of the five individuals with the highest emoluments in the GDI Group, none, none and two was director of the Company for the three years ended 31st December, 2005, whose emolument is included in the disclosures in note 12(a) above. The emoluments of the remaining five, five and three individuals are as follows:

Salaries and other benefits Retirement benefit scheme Bonus Nil to HK$1,000,000	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 4,732 3,535 1,306 — 20 50 — — — 4,732 3,555 1,356 Number of employees Year ended 31st December, 2003 2004 2005 5 5 3

During the Relevant Periods, no emoluments were paid by the GDI Group to the five highest paid individuals as an inducement to join or upon joining the GDI Group or as compensation for loss of office.

– 195 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

13. FINANCE COSTS

Interest on: Bank borrowings wholly repayable within five years Other borrowings and payables	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 — 482 — 55 1,009 — 55 1,491 —	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 — 482 — 55 1,009 — 55 1,491 —
		—

14. TAXATION

The charge comprises: Taxation in other jurisdictions — Current year — Under(over)provision in prior years Hong Kong Profits Tax — Current year — Under provision in prior years Deferred tax credit_(note 25)_ Taxation attributable to the GDI Group	Discontinued operation 2003 2004 2005 HK$’000 HK$’000 HK$’000 11,137 — — — — — — — — — — — (770) — — 10,367 — —	Discontinued operation 2003 2004 2005 HK$’000 HK$’000 HK$’000 11,137 — — — — — — — — — — — (770) — — 10,367 — —	Continuing operation	Continuing operation	Continuing operation		Combined
	2003 HK$’000 11,137 — — — (770) 10,367	2004 HK$’000 — — — — — —	2003 HK$’000 329 238 — — — 567	2004 HK$’000 1,340 — 3,917 — — 5,257	2005 HK$’000 1,010 (663) 1,300 2,600 — 4,247	2003 HK$’000 11,466 238 — — (770) 10,934	2004 HK$’000 1,340 — 3,917 — — 5,257	2005 HK$’000 1,010 (663) 1,300 2,600 —
								4,247

Hong Kong Profits Tax was calculated at 17.5% of the estimated assessable profit for the year ended 31st December, 2003, 2004 and 2005. No provision for Hong Kong Profits Tax was made in the financial statements for the year ended 31st December, 2003 as GDI and companies comprising the GDI Group had no assessable profit for those years.

– 196 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

14. TAXATION (Cont’d)

Taxation arising in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. Pursuant to the relevant laws and regulations in the PRC, certain companies comprising the GDI Group are exempted from PRC income tax for two years starting from their first profit-making year, followed by a 50% reduction for the next three years (“Tax Reduction”). Since these companies were disposed of during the year ended 31st December, 2003, no companies comprising the GDI Group were exempted from Tax Reduction.

The tax charge for the year can be reconciled to the (loss) profit before taxation as per the combined income statements as follows:

(Loss) profit before taxation
Tax at the average income tax rate_(Note a)_
Tax effect of share of results of associates
Tax effect of income not taxable for tax purpose
Tax effect of expenses not deductible
for tax purpose
Underprovision in respect of prior year
Tax effect of deductible temporary differences
not recognised
Tax effect of tax losses not recognised
Utilisation of tax losses previously
not recognised
Tax expense for the year

Year ended 31st December,
2003
2004
2005
HK$’000
HK$’000
HK$’000
(310,310)
96,858
(54,304)
(73,113)
18,258
(20,293)
—
5,899
10,182
(27,389)
(50,770)
(31,142)
92,749
29,636
35,373
238
—
1,937
12,546
1,979
8,410
—
255
—
(4,464)
—
(220)
567
5,257
4,247

Notes:

(a) The average income tax rate for the Relevant Periods represents the weighted average income tax rate of the operations in different jurisdictions on the basis of the relative amounts of profits before taxation and the related statutory rates.

(b) As at 31st December, 2003, 2004 and 2005, the GDI Group had unused tax loss of approximately HK$8,364,000, HK$9,214,000 and HK$8,480,000 respectively available to offset against future profits. No deferred tax asset has been recognised in respect of the unused tax losses due to the unpredictability of future profits streams.

– 197 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

15. DISCONTINUED OPERATIONS

During year 2003, the GDI Group disposed of its 51% interest in Yinchuan C.S.I., (Greatwall) Rubber Company Limited, 25% in Hangzhou Zhongce Rubber Company Limited and 50% interest in Pacific Wins Development Ltd, which are engaged in the manufacturing of tires, the business segment of manufacturing of tires was regarded as discontinued operation during the year ended 31st December, 2003.

During year 2004, the GDI Group disposed of the 100% interests in Tung Fong Hung Investment Limited and its subsidiaries which are engaged in the manufacturing and trading of pharmaceutical products, the business segment of manufacturing and trading of pharmaceutical products was regarded as discontinued operation during the year ended 31st December, 2004.

The profits for the year ended 31st December, 2003 and 31st December, 2004 from the discontinued operations were analysed as follows:

Profits of tires and pharmaceutical products segment for the year Gains/(losses) on disposal of tires and pharmaceutical products segment	2003 HK$’000 91,777 12,298 104,075	2004 HK$’000 6,777 (5,266) 1,511

– 198 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

15. DISCONTINUED OPERATIONS (Cont’d)

The profit of tire and pharmaceutical products segment for the year 31st December, 2003 and 31st December, 2004, which have been included in the combined income statements and analysed as follows:

	1st January, 2003	1st January, 2004
	to	to
	31st December, 2003	30th April, 2004
	HK$’000	HK$’000
Turnover	2,884,493	96,262
Cost of sales	(2,520,175)	(60,381)
Other income	25,264	419
Distribution costs	(174,955)	(21,056)
Administrative expenses	(90,187)	(8,467)
Finance costs	(34,041)	—
Other expenses	(2,445)	—
Share of results of associates	14,190	—
Profit before tax	102,144	6,777
Taxation	(10,367)	—
Profit for the period	91,777	6,777

The carrying amounts of the assets and liabilities of Yinchuan C.S.I., (Greatwall) Rubber Company Limited, Hangzhou Zhongce Rubber Company Limited, Pacific Wins Development Ltd. and Tung Fong Hung Investment Limited and its subsidiaries at the date of disposal are disclosed in note 35.

16. LOSS PER SHARE

Loss per share had not been presented as such information is not required for disclosure for a private company.

– 199 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

17. PROPERTY, PLANT AND EQUIPMENT

COST At 1st January, 2003 Currency realignment Reclassification Additions Transfer Disposals Disposal of subsidiaries At 31st December, 2003 Currency realignment Additions Reclassification Disposals Disposal of subsidiaries At 31st December, 2004 Currency realignment Additions Arising from acquisition of subsidiaries Disposals At 31st December, 2005 DEPRECIATION, AMORTISATION AND IMPAIRMENT LOSS At 1st January, 2003 Currency realignment Provided for the year Eliminated on disposals Disposal of subsidiaries At 31st December, 2003 Provided for the year Eliminated on disposals Disposal of subsidiaries At 31st December, 2004 Provided for the year At 31st December, 2005 NET BOOK VALUES At 31st December, 2005 At 31st December, 2004 At 31st December, 2003	Buildings HK$’000 281,943 (1,301) 138 1,778 29,417 (132) (307,253) 4,590 — — — — (4,590) — — — — — — 112,275 (485) 9,115 (5,199) (115,328) 378 24 — (402) — — — — — 4,212	Furniture and fixtures HK$’000 58,253 682 1,602 5,902 — (4,728) (30,105) 31,606 8 828 205 (1,258) (31,389) — — — — — — 3,448 724 7,930 (4,020) (5,356) 2,726 1,822 (487) (4,061) — — — — — 28,880	Machinery and equipment HK$’000 871,103 (3,514) — 8,368 127,136 (27,883) (973,696) 1,514 — 12 — — (1,526) — 4 12 164 (124) 56 441,861 (1,880) 38,700 (14,315) (463,927) 439 44 — (483) — 10 10 46 — 1,075	Motor vehicles HK$’000 32,918 72 — 2,329 — (1,209) (31,262) 2,848 — 837 — — (3,191) 494 — 319 — — 813 21,271 (65) 1,831 (419) (20,917) 1,701 141 — (1,568) 274 101 375 438 220 1,147	Sand vessels HK$’000 — — — — — — — — — — — — — — 2,062 — 113,019 — 115,081 — — — — — — — — — — 5,754 5,754 109,327 — —	Construction in progress HK$’000 118,933 (419) (1,740) 250,473 (156,553) — (209,934) 760 — 187 (205) — (742) — — — — — — 45,354 — — — (45,354) — — — — — — — — — 760	Total HK$’000 1,363,150 (4,480) — 268,850 — (33,952) (1,552,250) 41,318 8 1,864 — (1,258) (41,438) 494 2,066 331 113,183 (124) 115,950 624,209 (1,706) 57,576 (23,953) (650,882) 5,244 2,031 (487) (6,514) 274 5,865 6,139 109,811 220 36,074

– 200 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

17. PROPERTY, PLANT AND EQUIPMENT (Cont’d)

The above items of property, plant and equipment were depreciated on a straight-line basis at the following rates per annum:

Buildings 2% or the term of the lease or land use rights, if shorter Furniture and fixtures 10% – 25% Machinery and equipment 10% – 20% Motor vehicles 12.5% – 25% Sand vessels 10%

At 31st December, 2003, buildings of the GDI Group were held under medium-term land use rights in the PRC.

The net book value of motor vehicles and furniture and fixtures as at 31st December, 2003 included an amount of approximately HK$154,000 respectively in respect of assets held under finance leases.

18. DEPOSIT PAID FOR ACQUISITION OF INTEREST IN PROPERTIES

During the year ended 31st December, 2004, the GDI Group entered into a conditional agreement with a third party (“Vendor”) to acquire the properties interest in a parcel of land situated in Shanghai, the PRC (the “Land”) and the 24-storey building being erected upon the land together with 2 levels of underground carparks (the “Building”) (collectively referred to as to the “Properties”) for a consideration of RMB450,000,000 (approximately HK$424,528,000). A deposit of RMB50,000,000 (HK$47,012,000) was paid upon the entering into the conditional agreement.

According to the conditional agreement, prior to the completion of acquisition, the Vendor should (i) obtain the certificate in respect of the land use rights of the Land and the ownership of the Building; (ii) obtain an approval from �� that the use of the Properties be changed from office to both commercial and residential and that all relevant fee and charges arising from the sale of the Land payable to the relevant authorities including �� having been settled in full; (iii) agree with the GDI Group on the specification of installation, fixtures and furniture and other internal decoration of the Properties; (iv) procure all the contractors engaged in the development/construction of the Properties to enter into agreements with the GDI Group to bind these contractors with obligations to the GDI Group to rectify all defects of the Properties which may arise after the completion of the development/construction; and (v) procure the granting of a loan (“Loan”) to be granted by PRC banks to the GDI Group to finance the remaining consideration.

The remaining consideration will be settled upon the grant of the Loan and the transfer of the ownership of the Properties to the GDI Group.

It is one of the conditions for completion of the acquisition that the Vendor should obtain approval for the change of use of the Properties from office to both commercial and residential. Should the Vendor fail to obtain such approval within 150 days from the date of the agreement, the GDI Group is entitled to either (i) to proceed with the agreement in accordance with the existing terms and conditions; or (ii) to acquire the 1st to 7th floors and the 23rd floor of the Properties together with the two levels underground carparks for a consideration of RMB70,000,000 (HK$65,817,000).

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ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

18. DEPOSIT PAID FOR ACQUISITION OF INTEREST IN PROPERTIES (Cont’d)

Provided that if the conditions are not fulfilled on or before 1st June, 2005, the GDI Group shall agree to a further extension of not less than 60 days without imposing any fine on the Vendor. If the conditions are not fulfilled within the extended period, the GDI Group shall be entitled to terminate the agreement and the Vendor shall refund the deposit to the GDI Group together with interests accrued during the period from the date of the agreement to the date the deposit is refunded and calculated on the relevant prevailing market interest rate.

However, the conditions stated above for the change of the use of the Properties has not yet fulfilled within the said period and accordingly the Vendor and the GDI Group had entered into another agreement dated 3rd February, 2005 pursuant to which, among other things, (i) the GDI Group will pay, on behalf of the Vendor, RMB22,000,000 (equivalent to approximately HK$20,663,000) to the main contractor of the Properties (the “Main Contractor”); and (ii) the amount paid by the GDI Group in (i) will be deducted from the sales consideration.

Further, the GDI Group had advanced an additional RMB8,000,000 (equivalent to approximately HK$7,512,000) to the Vendor pursuant to this additional agreement and the aggregate sum paid by the GDI Group to the Vendor amounted to RMB58,000,000 (approximately HK$55,716,000) as of 31st December, 2005.

In June 2005, the GDI Group had commenced legal proceedings against the Vendor, among other things, to demand the Vendor to fulfil its obligations under the above two agreements and applied to a PRC court an injunction order on the Properties to stop the Properties from being transferred (the “Injunction Orders”). It had also come to the attention of the GDI Group that one of the three secured creditors of the Vendor and the Main Contractor had already applied to and being granted the Injunction Orders and they, together with the other two secured creditors, had priority over the GDI Group on the Properties.

As a condition precedent to the application of the Injunction Orders, the GDI Group had issued a counter guarantee of RMB402,000,000 (approximately HK$377,500,000) to an institution in the PRC which provided a guarantee of the same amount to the PRC court on behalf of the GDI Group.

At the same time, the directors of the GDI Group are also in discussion with the Vendor for settlement of the above matters; however, there can be no assurance that such matters can be resolved and settled with the Vendor eventually. Despite the above developments, the directors of the GDI Group have consulted its legal counsel and decided to proceed with the acquisition of the Properties in consideration of the following:

(a) the transaction can be continued with the payment of outstanding consideration of RMB392 million (approximately to HK$376 million) and the legal title of the Properties can be transferred to the GDI Group when the debts of the Vendor owed to the three secured creditors and the Main Contractor are settled by the GDI Group;

– 202 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

18. DEPOSIT PAID FOR ACQUISITION OF INTEREST IN PROPERTIES (Cont’d)

(b) the usage of the Properties can be changed to both commercial and residential when the GDI Group obtains the legal title to the Properties and makes the application to the relevant authority;
(c) the acquisition of the Properties, on a completion basis, is expected to bring economic benefits to the GDI Group taking into account of the estimated market value of the Properties as of 31st December, 2005; and the ability of the GDI Group to meet the cash flow requirements to finance the acquisition and completion of the Properties, given the current financial position of the GDI Group and financial resources available to the GDI Group from internally generated funds, advances from its holding companies and/or financial institutions.

The directors of GDI are of the view that the carrying amount of deposit is not less than its recoverable amount at the balance sheet dates.

19. DEPOSIT FOR ACQUISITION OF SUBSIDIARIES

During the year ended 31st December, 2004, the GDI Group entered into conditional agreements with third parties (“Vendor Parties”) to acquire the entire interest in �� and 88% interest in �� for consideration of approximately RMB27,300,000 (approximately HK$25,756,000) and RMB25,700,000 (approximately HK$24,244,000) respectively. �� and �� are companies incorporated in the PRC and engaged in the business of sand mining. As one of the conditions according to the conditional agreements, the Vendor Parties should procure the GDI Group to obtain all necessary approval from relevant government authorities for the proper transfer of ownership in �� and ��. Deposits of RMB21,200,000 (approximately HK$20,000,000) and RMB21,200,000 (approximately HK$20,000,000) were paid upon entering into the conditional agreements. If the conditions are not fulfilled, the GDI Group shall be entitled to terminate the agreements and the Vendor Parties shall refund the deposit to the GDI Group. During the year ended 31st December, 2005, the conditions have been fulfilled and the acquisition was completed and details in note 36.

– 203 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

20. GOODWILL

COST
At 1st January, 2003
Arising from acquisition of subsidiaries
At 31st December, 2003
Disposal of subsidiaries
At 31st December, 2004
Arising from acquisition of subsidiaries
At 31st December, 2005
AMORTISATION AND IMPAIRMENT
At 1st January, 2003
Provided for the year
Impairment loss recognised
At 31st December, 2003
Provided for the year
Eliminated on disposal of subsidiaries
At 31st December, 2004 and 31st December, 2005
NET BOOK VALUES
At 31st December, 2005
At 31st December, 2004
At 31st December, 2003

HK$’000
33,082
387
33,469
(33,469)
—
9,123
9,123
2,129
1,628
20,387
24,144
155
(24,299)
—
9,123
—
9,325

On 19th March, 2004, the GDI Group entered into a conditional agreement to dispose of its entire interests in Tung Fong Hung to a third party subsequent to 31st December, 2003. The directors have considered the consideration receivable from the said disposal and have identified the impairment loss attributable to the goodwill arising from acquisition of Tung Fong Hung amounting to approximately HK$20 million. The amount was charged to the combined income statement accordingly.

Prior to 31st December, 2004, goodwill was amortised on a straight-line basis and the amortisation period for goodwill is 10 years.

– 204 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

20. GOODWILL (Cont’d)

Particulars regarding impairment testing on goodwill are disclosed below:

The carrying value of goodwill as at 31st December, 2005 is attributable to the acquisition of �� and �� of HK$9,123,000. �� and �� are engaged in the business segment of sand mining activities (“Cash Generating Unit of Sand Mining”).

During the year ended 31st December, 2005, management of the GDI Group determines that there is no impairment of goodwill of the GDI Group to the cash generating unit.

The basis of the recoverable amount of the Cash Generating Unit of Sand Mining and the major underlying assumptions are summarised below:

The recoverable amount of this unit has been determined based on a value in use calculation. This calculation uses cash flow projections based on financial budgets approved by management covering a 10-year period, and discount rate of 8%. This cash generating unit’s cash flow within the first 5-year period are extrapolated using a steady 10% growth rate and no growth rate for the remaining years of the cash flows. Another key assumption for the value in use calculation is the budgeted gross margin, which is determined based on the unit’s past performance and management’s expectations for the market development. Management believes that any reasonable possible change in any of these assumptions would not cause the aggregate carrying amount of this cash generating unit to exceed the aggregate recoverable amount of this cash generating unit.

– 205 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

21. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM (TO) ASSOCIATES

Interests in associates Share of net assets Goodwill_(note (i)) At beginning of year Accumulated amortisation at beginning of year Arising from acquisition of associates Less: amortisation provided for the year Realised upon deemed disposal of interest in associates As at year ended Negative goodwill(note (i))_ At beginning of year Accumulated release of negative goodwill at beginning of year Release of negative goodwill during the year Derecognition of negative goodwill to retained profit as at 1st January, 2005 Release upon disposal of interests in associates As at year ended	2003 HK$’000 537,692 91,785 (1,148) — (9,178) — 81,459 (123,379) — 12,338 — — (111,041) 508,110	As at 31st December, 2004 2005 HK$’000 HK$’000 354,201 546,551 91,785 2,006 (10,326) — 3,931 10,181 (3,059) — (80,325) — 2,006 12,187 (123,379) (69,994) 12,338 22,936 10,598 — — 47,058 53,385 — (47,058) — 309,149 558,738

– 206 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

21. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM (TO) ASSOCIATES (Cont’d)

Notes:

(i) Prior to 31st December, 2004, goodwill was amortised on a straight-line basis and the amortisation period for goodwill is 10 years. Negative goodwill was released to income over 10 years. No amortisation of goodwill or release of negative goodwill is provided for on or after 1st January, 2005.
(ii) The carrying value of the unlisted convertible notes as at 31st December, 2003 represented investments in convertible note issued by Wing On Travel (Holdings) Limited (“Wing On”) (“Wing On Note”). The Wing On Note carried interest at 2% per annum and was due for redemption on 19th April, 2004 at HK$84,800,000 with accrued interest. It also entitled the holders at any time after the date of the issuance of the Wing On Note and up to 19th April, 2004 to convert the Wing On Note into shares of Wing On at an initial conversion price of HK$0.032 per share (subject to adjustment). The effective interest rate for the unlisted convertible notes during the Relevant Periods is 8%.

In January 2004, the GDI Group entered into a new convertible note agreement with Wing On pursuant to which Wing On issued the convertible notes with principal amount of HK$155,000,000 (“New Wing On Note”) to the GDI Group, of which HK$84,800,000 were used to settle the Wing On Note and HK$70,200,000 were used to settle the receivables due from Wing On. The New Wing On Note carried interest at 2% per annum and is due for redemption on 14th June, 2007 at HK$155,000,000 with accrued interest. The New Wing On Note entitles the holders at any time after the date of the issuance of the New Wing On Note and up to 14th June, 2007 to convert the New Wing On Note into shares in Wing On at an initial conversion price of HK$0.020 per share (subject to adjustment).

In October and November, 2004, the GDI Group converted HK$100,000,000 convertible notes of Wing On into ordinary shares of HK$0.01 each in Wing On at the conversion price of HK$0.020 per share. Certain convertible notes holders also converted their convertible notes of Wing On into ordinary shares of HK$0.01 each in Wing On at conversion price of HK$0.020 per share. The interest in Wing On held by the GDI Group increased from approximately 32.21% to approximately 38.16% upon the conversion of the convertible notes into shares of HK$0.01 each in Wing On by the GDI Group and other convertible note holder. The GDI Group also disposed of approximately 7.88% interest in Wing On for a consideration of approximately HK$45 million and the interest in Wing On held by the GDI Group was decreased to approximately 30.28%.

On 30th November, 2004, the GDI Group further entered into two placing and subscription agreements with Wing On and placing agent pursuant to which the placing agent agreed to place 6,000 million ordinary shares of HK$0.01 each in Wing On on behalf of the GDI Group at the price of HK$0.028 per share and the GDI Group would subscribe up to 6,000 million new ordinary shares in Wing On at HK$0.028 per share. The placing of 6,000 million ordinary shares of HK$0.01 each in Wing On and subscription of 3,660 million new ordinary shares of HK$0.01 each in Wing On were completed in December, 2004 and the GDI Group’s interest in Wing On was decreased to approximately 19.58% as at 31st December, 2004.

The GDI Group further subscribed 8,740 million new ordinary shares of US$0.01 each in January and February 2005 and the GDI Group’s interest was increased to approximately 21.1%. In April, 2005, the GDI Group further acquired 6,967,700 ordinary shares of HK$0.01 each in Wing On and further converted HK$55,000,000 convertible notes of Wing On into ordinary share of HK$0.01 each in Wing On at the conversion price of HK$0.02 per share and the interest in Wing On held by the GDI Group was increased to 27.74%

– 207 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

21. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM (TO) ASSOCIATES (Cont’d)

Notes: (Cont’d)

(iii) In accordance with HKAS 39 “Financial Instruments: Recognition and Measurement” issued by HKICPA, the conversion option element of the Wing On Note and New Wing On Note represents an embedded derivative instrument which must be accounted for separately from the unlisted convertible notes and, as such, to be measured at fair value when initially recorded and at subsequent reporting dates. The fair value of this conversion option, representing a discount on subscription of the Wing On Note and the New Wing On Note, was estimated using the Black-Scholes option pricing model at the date of subscription of the Wing On Note and the New Wing On Note, and as at 31st December, 2003, 2004 and 2005. The impact of changes in fair value of this conversion option, taking into account the portion of the conversion option exercised during the year ended 31st December, 2003, 2004 and 2005 were nil, gain of HK$76,959,000 and loss of HK$39,743,000 respectively, which have been recognised in the combined income statement.
(iv) Loans and interest receivables due from associates are unsecured, carries interest at prevailing market rate (effective interest rate ranged from 5% – 8% per annum) and repayable after one year from balance sheet date. The fair value of the GDI Group’s loans and interest receivables due from associates at each balance sheet dates approximates to the corresponding carrying amount at respective balance sheet dates.
(v) In March 2004, Pacific Century Premium Development Limited (“PCPD”, formerly known as Dong Fang Gas Holdings Limited whose shares are listed on The Stock Exchange of Hong Kong Limited (“the Hong Kong Stock Exchange”), a then 43.06% owned associate of the GDI Group, entered into agreements with PCCW Limited (“PCCW”, a company whose shares are listed on the Hong Kong Stock Exchange) to acquire various property interests from PCCW for a consideration of approximately HK$6,557 million which was satisfied by the issue of new shares and convertible notes by PCPD to PCCW or as it may direct. The above transaction was completed in May 2004 and the GDI Group’s interest in PCPD was decreased from 43.06% to 2.83% and PCPD ceased to be an associate of the GDI Group accordingly and resulted in gain in deemed disposal of associates of approximates HK$28,510,000. The GDI Group further disposed of all its 2.83% interest in PCPD and no interest in PCPD was held by the GDI Group as at 31st December, 2004.

Amounts due from associates Amounts due to an associate	2003 HK$’000 129 —	As at 31st December, 2004 2005 HK$’000 HK$’000 54,373 151,206 673 286	As at 31st December, 2004 2005 HK$’000 HK$’000 54,373 151,206 673 286

			286

During the year ended 31st December, 2003, all receivables due from associates were unsecured, noninterest bearing and repayable on demand. During the year ended 31st December, 2004 and 2005, all amounts are repayable on demand and except for amount due from an associate of approximately HK$54,247,000 and HK$151,073,000 respectively are interest bearing at prevailing interest rate ranged from 5% to 8% per annum, all remaining amounts due from associates were non-interest bearing. The fair value of the amounts due from associates at balance sheet dates approximates to the corresponding carrying amount at respective balance sheet dates. The amounts due to an associate is unsecured, non-interest bearing and repayable on demand. The fair value of the amounts due to an associate at balance sheet dates approximates to the corresponding carrying amount at respective balance sheet dates.

– 208 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

21. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM (TO) ASSOCIATES (Cont’d)

Particulars of the principal associates to be acquired by GDI pursuant to Group Reorganisation are as follows:

			Proportion of
			nominal value
			of issued share
	Place of the		capital/registered
	incorporation/		capital held
	registration/	Place of	indirectly by
Name of associate	establishment	operation	the GDI Group	Principal activities
			%
China Velocity Group	Bermuda	Hong Kong	22.65	Property investment
Limited (“China Velocity”,		and PRC		and development in
formerly known as Rosedale				the PRC
Hotel Group Limited and
China Land Group Limited)
(notes a and b)
Wing On (formerly known	Bermuda	Hong Kong	27.74	Business of
as Ananda Wing On				providing package
Travel (Holdings)				tours, travel and
Limited)(notes a and b)				other related
				services
Hangzhou Zhongce	PRC	PRC	26.0	Manufacturing of
Rubber Company				tires
Limited (“HZ Rubber”)
(note c)

Notes:

(a) The shares of China Velocity and Wing On are listed on the Hong Kong Stock Exchange.
(b) These companies are a limited liability company incorporated in the respective jurisdiction.
(c) This is a sino-foreign equity joint venture.

The above table lists the associates of the GDI Group which, in the opinion of the directors, constituted a substantial portion of the share of results or of net assets of the associates. To give details of other associates would, in the opinion of the directors, result in particulars of excessive length.

– 209 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

21. INTERESTS IN ASSOCIATES/AMOUNTS DUE FROM (TO) ASSOCIATES (Cont’d)

The summarised financial information in respect of the GDI Group’s associates is set out below:

Turnover
(Loss) profit for the year
(Loss) profit for the year attributable to
the GDI Group
Total assets
Total liabilites
Net assets
Share of net assets by the GDI Group:
As at 31st December
Market value of interest held
by the GDI Group

For the year ended 31st December,
2003
2004
2005
HK$’000
HK$’000
HK$’000
1,680,756
6,519,685
8,382,622
(631,017)
(102,198)
133,498
(175,697)
(37,521)
43,103
As at 31st December,
2003
2004
2005
HK$’000
HK$’000
HK$’000
4,097,522
5,875,595
7,431,386
(2,721,716)
(4,049,781)
(5,037,199)
1,375,806
1,825,814
2,394,187
2003
2004
2005
HK$’000
HK$’000
HK$’000
508,110
309,149
523,373
323,245
311,480
317,752

– 210 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

22. LOANS AND INTEREST RECEIVABLES

Loans and interest receivables — secured_(note a) — unsecured(note b) Receivable due from related companies(note c)_ Less: Allowances Less: Amounts due within one year and shown under current assets Amounts due after one year	2003 HK$’000 114,784 190,723 10 305,517 (53,826) 251,691 (251,691) —	As at 31st December, 2004 2005 HK$’000 HK$’000 120,819 121,223 558,038 355,709 — — 678,857 476,932 (109,643) (27,971) 569,214 448,961 (540,931) (448,961) 28,283 —	As at 31st December, 2004 2005 HK$’000 HK$’000 120,819 121,223 558,038 355,709 — — 678,857 476,932 (109,643) (27,971) 569,214 448,961 (540,931) (448,961) 28,283 —
			476,932 (27,971)
			448,961 (448,961)
			—

The directors consider that the carrying amount of receivables due after one year approximates their fair value.

Notes:

(a) The secured loans and interest receivables represented the amount due from Lucklong Venture Limited (“Lucklong”). Ms. Chau Mei Wah, Rosanna, director of the CSH, was also a director of Lucklong during the year ended 31st December, 2003. Allowances made in the loans receivables due from Lucklong as at 31st December, 2003, 2004 and 2005 were approximately HK$24,000,000, HK$50,619,000 and HK$81,222,000 respectively with reference to the market value of the collateral secured to the GDI Group. Shares in certain property holding companies were pledged to the GDI Group as securities to the loans receivables.
(b) The loans receivables carry interest at the prevailing market rate ranging from 8% to 12% and repayable on demand.
(c) Details of the receivables due from related companies are as follows:

PYI Corporation Limited (“Paul Y”) (formerly known as “Paul Y.-ITC Construction Holdings Limited”) ITC Corporation Limited	2003 HK$’000 5 5 10	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — —	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — —
			—

– 211 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

22. LOANS AND INTEREST RECEIVABLES (Cont’d)

The amounts were unsecured, non-interest bearing and were repayable on demand.

Paul Y is a substantial shareholder of CSH and ITC Corporation Limited is a shareholder of Paul Y.

The fair value of the GDI Group’s loan and interest receivables at each balance sheet date approximated to the carrying amount of the receivables.

23. OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

The carrying amount of the other receivables, deposits and prepayments at each balance sheet date approximate the corresponding fair value at respective balance sheet date.

24. INVESTMENTS IN SECURITIES AT FAIR VALUE THROUGH PROFIT OR LOSS/OTHER INVESTMENTS

Equity securities: Listed Unlisted Debt securities: Unlisted Total Total and reported as: Listed Hong Kong Elsewhere Unlisted	2003 HK$’000 2,761 125 2,886 24,420 27,306 835 1,926 2,761 24,545 27,306	As at 31st December, 2004 2005 HK$’000 HK$’000 2,252 3,297 43,623 43,619 45,875 46,916 26,084 24,431 71,959 71,347 — — 2,252 3,297 2,252 3,297 69,707 68,050 71,959 71,347	As at 31st December, 2004 2005 HK$’000 HK$’000 2,252 3,297 43,623 43,619 45,875 46,916 26,084 24,431 71,959 71,347 — — 2,252 3,297 2,252 3,297 69,707 68,050 71,959 71,347
			46,916

			24,431

			71,347

			— 3,297
			3,297 68,050
			71,347

– 212 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

24. INVESTMENTS IN SECURITIES AT FAIR VALUE THROUGH PROFIT OR LOSS/OTHER INVESTMENTS (Cont’d)

INVESTMENTS(Cont’d)
Classified under Current Non-current	2003 HK$’000 1,142 26,164 27,306	As at 31st December, 2004 2005 HK$’000 HK$’000 — — 71,959 71,347 71,959 71,347
			71,347

The fair values of the listed securities at balance sheet date are determined based on the quoted market bid prices available on the relevant exchanges.

The carrying value of unlisted securities in Hong Kong at 31st December, 2004 and 31st December, 2005 included an amount of HK$43,498,000, representing 9.77% interest in Apex Quality Group Limited (“Apex”). Apex is incorporated in the British Virgin Islands and engaged in hotel and leisure related business. Apex was a 22.65% associate of the GDI Group as at 31st December, 2003. Upon the completion of disposal of approximately 12.88% interest of Apex by the GDI Group in September 2004, Apex ceased to be the GDI Group’s associate during the year ended 31st December, 2004. The fair value of the unlisted equity securities are determined based on the present value of the estimated future cash flow discounted using the effective interest rate at the balance sheet date, approximate to the corresponding carrying amount.

The carrying value of unlisted debt securities at balance sheet dates represented a convertible note issued by a company incorporated in Australia which is engaged in the trading of fruit business. The convertible note bears interest at 8% per annum and will be matured on 29th March, 2008. The fair value of the unlisted equity securities are determined based on the present value of the estimated future cash flow discounted using the effective interest rate at the balance sheet date, approximate to the corresponding carrying amount.

25. DEFERRED TAXATION

The following are the major deferred tax assets (liabilities) recognised and movement during the Relevant Periods:

Bad and Revaluation of doubtful debts property, plant and allowance and equipment HK$’000 HK$’000 At 1st January, 2003 13,454 — Credit to the combined income statement 770 — 14,224 — Realised on disposal of subsidiaries (14,224) — At 31st December, 2003 and 2004 — — Arising on acquisition of subsidiaries — (20,796) Exchange difference — (379) At 31st December, 2005 — (21,175)	Total HK$’000 13,454 770
	14,224 (14,224)
	— (20,796) (379)
	(21,175)

– 213 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

26. AMOUNTS DUE FROM/TO FORMER FELLOW SUBSIDIARIES

Following the completion of the Group Reorganisation, CSH has remained as the holding company of the companies carrying on manufacturing and trading of batteries products and investment in securities. The amounts due from (to) former fellow subsidiaries represent balances due from (to) the subsidiaries held under CSH and are investing in nature. All amounts are unsecured, non-interest bearing and repayable on demand.

The amounts due from (to) former fellow subsidiaries has been assigned to GDI upon the completion of Group Reorganisation.

The carrying value of the amounts due from former fellow subsidiaries at each balance sheet dates approximates to the corresponding fair value at respective balance sheet dates.

The carrying value of amount due to former fellow subsidiaries at each balance sheet date approximates to the corresponding fair value at respective balance sheet dates.

27. BANK BALANCES AND CASH

Bank balances and cash comprises cash held by the GDI Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximated their fair value. The average interest rate ranged from 2.3% to 4.0% for the three years ended 31st December, 2005.

The bank balances and cash of the GDI Group are mainly denominated in Australia dollars, Renminbi, Hong Kong dollars and United States dollars. Included in the bank balances and cash as at the three years ended 31st December, 2005 were an amount in Australia dollars approximately of A$9,884,000, A$8,041,000 and A$8,286,000.

28. OTHER ASSET

The amount represents cost incurred in connection with a land development project in the PRC. The project is a land development of �� located in Long Shan Development Area, Doumen District, Zhuhai City and is to be jointly developed with ��. The GDI Group is entitled to the exclusive development right to the project and also the right to obtain the land for the development (“Other Asset”). The GDI Group is also entitled to sell the Other Asset to investors at consideration to be agreed among themselves.

The amount of approximately HK$226,718,000, HK$227,167,000 and HK$229,288,000 as at 31st December, 2003, 2004 and 2005 respectively was paid by the GDI Group for obtaining the exclusive development right to the project and in obtaining certain parts of the right for land development.

As at the date of this report, the GDI Group has appointed property agent to negotiate with potential investors and the directors considered that the other asset will be sold in the next year, and the directors do not expect material further cost will be incurred for the sale of Other Asset.

At respective balance sheet dates, the directors of CSH has assessed the carrying value of the Other Asset with reference to the valuation performed by Norton Appraisal Limited, an independent valuer, on open market value basis and no impairment loss is identified during the Relevant Periods.

– 214 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

29. INVENTORIES

Raw materials Work in progress Finished goods	2003 HK$’000 12,146 163 54,667 66,976	As at 31st December, 2004 2005 HK$’000 HK$’000 — 102 — — — — — 102	As at 31st December, 2004 2005 HK$’000 HK$’000 — 102 — — — — — 102
			102

The cost of inventories recognised as an expense during the year ended 31st December, 2003 and 2005, were approximately HK$2,459,991,000 and HK$4,457,000 respectively.

30. TRADE RECEIVABLES

The GDI Group allows its trade customers with credit period normally ranging from 90 days to 180 days. The aged analysis of the trade debtors at the balance sheet dates is as follows:

0 - 90 days 91 - 180 days Over 180 days	2003 HK$’000 12,011 762 945 13,718	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — — — —	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — — — —
			—

The carrying amount of the GDI Group’s trade receivables for the three years ended 31st December, 2005 approximates to the corresponding fair value.

– 215 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

31. TRADE PAYABLES, OTHER PAYABLES AND ACCRUED CHARGES

Included in trade payables, other payables and accrued charges are trade payables with the following aged analysis:

0 - 90 days 91 - 180 days Over 180 days Add: Other payables and accrued charges	2003 HK$’000 39,468 1,413 622 41,503 37,331 78,834	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — 293 299 293 299 25,204 17,176 25,497 17,475	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — 293 299 293 299 25,204 17,176 25,497 17,475
			299 17,176
			17,475

The carrying amount of the GDI Group’s trade payables at each balance sheet dates approximates to the corresponding fair value at respective balance sheet dates.

32. PAYABLES

Details of the payables are as follows:

Notes Payables due to related companies (a) Payables due to third parties (b) Less: Amounts shown under current liabilities	2003 HK$’000 3,181 27,192 30,373 (29,180) 1,193	As at 31st December, 2004 2005 HK$’000 HK$’000 417 556 27 27 444 583 (444) (583) — —	As at 31st December, 2004 2005 HK$’000 HK$’000 417 556 27 27 444 583 (444) (583) — —
			583 (583)
			—

– 216 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

32. PAYABLES (Cont’d)

Notes:

(a) Details of the payables due to related companies are as follows:

2003 Notes HK$’000 PYI Management Limited (formerly known as “Paul Y.-ITC Management Limited”) (i) 450 Cycle Company Limited and Gunnell Properties Limited (i) 693 ITC Corporation Limited (ii) 744 Paul Y. (E&M) Company Limited (formerly known as “Paul Y.-ITC (E&M) Company Limited”) (i) 1,014 Paul Y. (E&M) Contractors Limited (formerly known as “Paul Y.-ITC (E&M) Contractors Limited”) (i) 280 3,181	As at 31st December, 2004 2005 HK$’000 HK$’000 — — 417 556 — — — — — — 417 556	As at 31st December, 2004 2005 HK$’000 HK$’000 — — 417 556 — — — — — — 417 556
		556

Notes:

(i) These companies are non wholly-owned subsidiaries of the substantial shareholders of CSH.
(ii) ITC Corporation Limited is a shareholder of the CSH’s substantial shareholder.

The amounts are unsecured, carry interest at prevailing market rate ranging from 8% to 10% per annum and are repayable on demand. The fair value of the GDI Group’s payables at three years ended 31st December, 2005 approximates to the corresponding carrying amount.

Except for the payable of HK$1,193,000 as at 31st December, 2003 which was repayable after one year from the balance sheet date, all remaining balances are repayable on demand.

(b) The amounts are unsecured, carry interest at prevailing market rate ranging from 8% to 10% per annum and are repayable on demand. The fair value of the GDI Group’s payables at balance sheet dates approximates to the corresponding carrying amount at respective balance sheet date.

The fair value of the GDI Group’s payables at each balance sheet dates approximates to the corresponding carrying amount at respective balance sheet dates.

– 217 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

33. BANK LOANS AND OTHER BORROWINGS

Bank loans Obligations under finance leases_(note a) Bank overdrafts Other borrowings(note b)_ Secured Unsecured Repayable as follows: Within one year Between one and two years Between two and five years Less: Amount due within one year included under current liabilities Amount due after one year	2003 HK$’000 12,990 151 2 13,000 26,143 151 25,992 26,143 26,014 21 108 26,143 (26,014) 129	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — —	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — —
			—

			— —
			—

			— — —
			— —
			—

Bank overdrafts are repayable on demand. The bank loans carry interest at prevailing market rate ranging from 8% to 10% and were secured by the GDI Group’s bank deposits and investment in securities. There were no undrawn facilities for the three years ended as at 31st December, 2005.

The GDI Group’s bank and other borrowings are denominated in Hong Kong Dollars.

The fair value of the GDI Group’s bank and other borrowings at 31st December, 2003 approximates to the corresponding carrying amount.

– 218 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

33. BANK LOANS AND OTHER BORROWINGS (Cont’d)

Notes:

(a)

Amounts payable under finance leases: Within one year In the second to fifth years inclusive Less: Future finance charges Present value of lease obligations Less: Amount due within one year Amount due after one year	Minimum lease payments As at 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 31 — — 147 — — 178 — — (27) — — 151 — —	Present value of minimum lease payments As at 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 20 — — 131 — — 151 — — — — — 151 — — (22) — — 129 — —	Present value of minimum lease payments As at 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 20 — — 131 — — 151 — — — — — 151 — — (22) — — 129 — —
			— —
			— —
			—

The average lease term was five years. The average effective borrowing rate was 6.7% for the year ended 31st December, 2003. Interest rate was fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

The GDI Group’s obligations under finance leases contract are secured by the lessor’s charge on the hired assets.

(b) As at 31st December, 2003, the amount was secured, carried interest at prevailing market rates ranged from 8% to 12% per annum and was fully repaid during the year 2004.

34. SHARE CAPITAL

For the purpose of the preparation of the combined balance sheets, the balances of share capital at 31st December, 2003, 2004 and 2005, respectively represent share capital of companies now comprising the GDI Group.

– 219 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

35. DISPOSAL OF INTERESTS IN SUBSIDIARIES

Year ended 31st December, 2003

The GDI Group disposed of its 51% interest in Yinchuan C.S.I., (Greatwall) Rubber Company Limited, 25% interest in Hangzhou Zhongce Rubber Company Limited (a 51% owned subsidiary of GDI Group) and 50% interest in Pacific Wins Development Ltd. at an aggregate consideration of approximately HK$206,000,000.

Year ended 31st December, 2004

The GDI Group disposed of its 100% interest in Tung Fong Hung Investment Limited for a consideration of HK$42,000,000.

Details of the assets and liabilities of the subsidiaries disposed of during the year ended 31st December, 2003 and 2004 were as follows:

Net assets disposed of:
Property, plant and equipment
Deferred tax assets
Interests in associates
Receivables due from associates
Investments in securities
Inventories
Trade receivables
Other receivables, deposits and prepayments
Pledged bank deposits
Bank balances and cash
Trade payables, other payables and accrued charges
Income and other taxes payable
Bank loans and other borrowings
Obligations under finance leases
Minority interests
Less: Interest retained as interests in associates
Goodwill realised
Exchange reserve realised
Gain (loss) on disposal

Year ended 31st December,
2003
2004
HK$’000
HK$’000
901,368
34,924
14,224
—
103,064
14,808
81,551
—
5,216
—
737,767
49,319
530,528
12,112
207,315
8,436
70,098
—
282,356
22,176
(757,379)
(43,316)
(34,335)
(30)
(1,274,058)
(60,197)
—
(149)
(481,183)
—
386,532
38,083
(178,053)
—
208,479
38,083
6,852
9,170
(3,848)
13
211,483
47,266
12,309
(5,266)
223,792
42,000

– 220 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

35. DISPOSAL OF INTERESTS IN SUBSIDIARIES (Cont’d)

Satisfied by: Cash Promissory note included in receivables Analysis of the net (outflow) inflow of cash and cash equivalents in connection with the disposal of subsidiaries: Cash consideration received Bank balances and cash disposed of Net (outflow) inflow of cash and cash equivalents	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 223,792 35,500 — — 6,500 — 223,792 42,000 — 223,792 35,500 — (282,356) (22,176) — (58,564) 13,324 —	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 223,792 35,500 — — 6,500 — 223,792 42,000 — 223,792 35,500 — (282,356) (22,176) — (58,564) 13,324 —
		—

		— —
		—

The subsidiaries disposed of during the Relevant Periods contributed the following approximately amount to the GDI Group’s turnover and the GDI Group’s loss before taxation:

Amount contributed to the GDI Group’s turnover (Loss) profit contributed to the GDI Group’s loss before taxation	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 2,653,540 92,262 — (90,362) 6,778 —	Year ended 31st December, 2003 2004 2005 HK$’000 HK$’000 HK$’000 2,653,540 92,262 — (90,362) 6,778 —

		—

– 221 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

36. PURCHASE OF SUBSIDIARIES

Year ended 31st December, 2005

On 30th June, 2005, the GDI Group acquired 88% and 100% of the issued share capital of ��and ��, respectively, for an aggregate cash consideration of HK$50 million. The two newly acquired subsidiaries are incorporated in the PRC and engaged in the business of sand mining. These transactions have been accounted for using the purchase method of accounting. The directors are of the view that it is impracticable to disclose the revenue and the results for the six months ended 30th June, 2005 as if the acquisition had been effected on 1st January, 2005 since such information was not provided by the vendor.

Year Acquiree’s carrying amount before combination HK$’000 Net assets acquired: Property, plant and equipment 50,165 Inventories 6 Trade receivables 75 Other receivables, deposits and prepayments 647 Bank balances and cash 349 Trade payables, other payables and accrued charges (244) Amounts due to former shareholders (49,770) Deferred tax liabilities — 1,228 Minority interests (48) 1,180 Goodwill arising on acquisition Satisfied by: — Cash — Deposit paid for acquisition of subsidiaries in 2004 Net cash outflow arising or acquisition Cash consideration paid Cash and cash equivalents acquired	Year	ended 31st December, 2005 Fair value adjustments Fair value HK$’000 HK$’000 63,019 113,184 — 6 — 75 — 647 — 349 — (244) — (49,770) (20,796) (20,796) 42,223 43,451 (2,526) (2,574) 39,697 40,877 9,123 50,000 10,000 40,000 50,000 (10,000) 349 (9,651)
		Fair value adjustments HK$’000 63,019 — — — — — — (20,796) 42,223 (2,526) 39,697

– 222 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

36. PURCHASE OF SUBSIDIARIES (Cont’d)

Year ended 31st December, 2003 and 2004

Net assets acquired: Trade payables, other payables and accrued charges Minority interests Goodwill arising on acquisition Satisfied by: Cash Analysis of the net cash outflow of cash and cash equivalents in connection with the purchase of subsidiaries: Cash consideration paid Net cash outflow of cash and cash equivalents in connection with the purchase of subsidiaries	Year ended 31st December, 2003 2004 HK$’000 HK$’000 (12) — 410 — 398 — 387 — 785 — 785 — (785) — (785) —	Year ended 31st December, 2003 2004 HK$’000 HK$’000 (12) — 410 — 398 — 387 — 785 — 785 — (785) — (785) —
		— —
		—
		—

		—
		—

The goodwill arising on the acquisition is attributable to the anticipated profitability of the distribution of the GDI Group’s products in the new markets.

�� and �� contributed HK$5,298,000 to the GDI Group’s turnover and loss before taxation of HK$3,735,000 to the GDI Group’s loss before taxation for the period between the date of acquisition and 31st December, 2005.

– 223 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

37. MAJOR NON-CASH TRANSACTIONS

During the year ended 31st December, 2003, the major non-cash transaction was the finance lease arrangement in respect of property, plant and equipment with a capital value at the inception of the leases of approximately HK$168,000.

During the year ended 31st December, 2004, the major non-cash transactions were as follows:

(a) Addition to deposit paid for acquisition of interest in properties of approximately HK$46,686,000 were transferred from loans receivables due from associates.
(b) Addition to investment in securities of approximately HK$43,588,000 were as result of disposal of interests in associates.
(c) Loan receivables due from associates of HK$70,200,000 were settled by the issuance of convertible notes by the associates included in interests in associates.
(d) Additions to deposits paid for acquisition of subsidiaries of HK$40,000,000 were repayments from receivables.

During the year ended 31st December, 2005, the major non-cash transaction was amount due to former shareholders of approximately HK$50,000,000 was settled by the assignment of loans and interest receivable from outsiders.

38. COMMITMENTS

At the balance sheet date, the GDI Group had the following capital commitments:

Contracted for but not provided in the financial information in respect of (i) Acquisition of interest in properties_(note) (ii) Other assets (iii) Acquisition of subsidiaries(note 18)_	2003 HK$’000 — 91,489 — 91,489	As at 31st December, 2004 2005 HK$’000 HK$’000 377,516 — 91,981 93,301 10,000 — 479,497 93,301	As at 31st December, 2004 2005 HK$’000 HK$’000 377,516 — 91,981 93,301 10,000 — 479,497 93,301
			93,301

Note:

In respect of the conditional agreement entered into by the GDI Group in 2004 to acquire properties interest of �� located in Shanghai, PRC at a consideration of RMB450 million (of which deposit of RMB58 million was paid by the GDI Group as at 31st December, 2005), the GDI Group has commenced legal proceedings in 2005 to demand the vendor of the properties to fulfil its obligations under the agreement. Having consulted the legal counsel and under certain considerations, the GDI Group has at present decided to exercise its discretion to proceed with the acquisition of the properties.

– 224 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

39. OPERATING LEASE COMMITMENTS

Lessee

The GDI Group made minimum lease payments in respect of office premises of approximately HK$25,707,000, HK$7,460,000 and $Nil under operating leases for the years ended 31st December, 2003, 2004 and 2005, respectively.

At the balance sheet dates, the GDI Group had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive	2003 HK$’000 15,639 16,930 32,569	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — —	As at 31st December, 2004 2005 HK$’000 HK$’000 — — — — — —
			—

Leases were negotiated for an average term of one year and rentals were fixed for an average of one year.

40. PLEDGE OF ASSETS

As at 31st December, 2004 and 2005, the GDI Group had no pledge of assets.

As at 31st December, 2003:

(a) Interests in an associates with net assets value attributable to the GDI Group of approximately HK$83,622,000 were pledged to secure credit facilities granted to the associates of the GDI Group.
(b) Investment in securities with a carrying value of HK$29,046,000 were pledged to secure margin account credit facilities and banking facilities granted to the GDI Group.

The margin loan facility amounting to approximately HK$3,000 included in bank loans and other borrowings were utilised by the GDI Group.

– 225 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

41. RELATED PARTY TRANSACTIONS

During the Relevant Periods, the GDI Group entered into the following significant transactions with related parties:

			Year ended 31st December,	Year ended 31st December,	Year ended 31st December,
Name of company	Nature of transactions	Notes	2003	2004	2005
			HK$’000	HK$’000	HK$’000
Lucklong	Loan interest income received	(a)	5,984	—	—
	and receivable by the GDI Group
Hanny Magnetics Limited	Sale of goods made by the GDI Group	(b)	63	—	—
PYI Management	Loan interest paid and payable by	(b)	1,193	—	—
Limited (formerly known as	the GDI Group
“Paul Y.-ITC Manngement Limited”)	Sales of goods by the GDI Group		687	3	—
Paul Y. (E & M)	Repair and maintenance fee paid	(b)	58	42	—
Company Limited	and payable by the GDI Group
(formerly known as “Paul Y.-ITC	Project management fee paid		872	—	—
(E&M) Company Limited”)	and payable by the GDI Group
	Mechanical and electrical service fee		7	—	—
	paid and payable by the GDI Group
Cycle Company Limited and	Rental expenses paid and payable	(b)	554	553	138
Gunnell Properties Limited	by the GDI Group
Paul Y. Interior	Project management fee paid	(b)	15	—	—
Contractors Limited (formerly	and payable by the GDI Group
known as “Paul Y.-ITC Interior
Contractors Limited”)
Millennium Target Holdings	Loan interest income received	(c)	31	—	—
Limited	and receivable by the GDI Group
Wing On	Loan interest income received and	(d)	2,198	1,466	3,175
	receivable by the GDI Group
China Velocity	Loan interest income received and	(d)	3,249	—	—
	receivable by the GDI Group
Rosedale Park Limited	Sale of goods made by the GDI Group	(f)	11	—	—
	Hotel expense paid and payable		14	—	—
	by the GDI Group

– 226 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

41. RELATED PARTY TRANSACTIONS (Cont’d)

			Year ended 31st December,	Year ended 31st December,	Year ended 31st December,
Name of company	Nature of transactions	Notes	2003	2004	2005
			HK$’000	HK$’000	HK$’000
Hong Kong Wing On Travel	Air ticketing and travel service	(c)	73	260	—
Service Limited	expenses paid and payable by
	the GDI Group
	Sale of goods made by the GDI Group		209	—	—
Apex	Loan interest income received and	(e)	248	3,280	2,931
	receivable by the GDI Group
Chief Altantic Profits	Loan interest income received and	(g)	306	303	—
Limited	receivable by the GDI Group

Notes:

(a) Ms. Chau Mei Wah, Rosanna (“Ms. Chau”), a director of CSH, ceased to be a director of Lucklong during the year ended 31st December, 2004. Mr. Lau Ko Yuen, the former alternate director to Ms. Chau, is a director of substantial shareholder of CSH and a director of Lucklong.
(b) Hanny Magnetics Limited, PYI Management Limited, Paul Y. (E & M) Company Limited, Cycle Company Limited and Gunnell Properties Limited, Paul Y. Interior Contractors Limited are wholly-owned subsidiaries of a substantial shareholder of CSH.
(c) Millennium Target Holdings Limited and Hong Kong Wing On Travel Service Limited are wholly-owned subsidiaries of Wing On.
(d) Wing On and China Velocity are associates of the GDI Group.
(e) Apex ceased to be associate of the GDI Group during the year ended 31st December, 2004.
(f) Rosedale Park Limited is a wholly-owned subsidiary of Apex.
(g) China Altantic Profits Limited is a wholly owned subsidiary of PCPD and PCPD ceased to be an associate of GDI Group during the year ended 31st December, 2004.

Details of balances with related parties as at the balance sheet dates are set out in the combined balance sheet and in note 21, 22 and 32.

In the opinion of the directors of CSH, the above transactions were undertaken in the ordinary course of business transactions and the terms were mutually agreed between the GDI Group and the related parties.

– 227 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

42. RETIREMENT BENEFIT SCHEME

The GDI Group/CSH operates a Mandatory Provident Fund Scheme (“MPF Scheme”) for all qualifying employees in Hong Kong. The assets of the schemes are held separately from those of the GDI Group, in funds under the control of trustees. The GDI Group and employees each contribute 5% of the relevant payroll costs to the Scheme.

The retirement benefit scheme contributions relating to the MPF Scheme charged to the income statement represent contributions payable to the scheme by the GDI Group at rates specified in the rules of the schemes.

The employees in the joint venture subsidiaries in the PRC are members of the state-sponsored pension scheme operated by the government in the PRC. The joint venture companies are required to contribute a certain percentage of their payroll to the pension scheme to fund the benefits. The only obligation of the GDI Group with respect to the pension scheme is to make the required contributions under the scheme. The amount of contributions payable to the pension schemes are charged to the income statement.

At the balance sheet dates, there were no significant forfeited contributions which arose upon employees leaving the scheme prior to their interests in the GDI Group’s contributions becoming fully vested and which are available to reduce the contributions payable by the GDI Group in future years.

– 228 –

ACCOUNTANTS’ REPORT ON THE GDI GROUP

APPENDIX IV

II. DISTRIBUTABLE RESERVES

GDI was incorporated on 1st March, 2005 and accordingly, GDI has no reserve available for distribution to the shareholders as at 31st December, 2005.

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the GDI Group, GDI or any of its subsidiaries have been prepared in respect of any period subsequent to 31st December, 2005.

Yours faithfully

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

– 229 –

GENERAL INFORMATION

APPENDIX V

RESPONSIBILITY STATEMENT

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this composite document other than those relating to the Hanny Group (including Well Orient), Paul Y, ITC and the Offeror and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in this composite document other than those relating to the Hanny Group (including Well Orient), Paul Y, ITC, and the Offeror, have been arrived at after due and careful consideration and there are no other facts not contained in this composite document, the omission of which would make any statement in this composite document misleading.

The sole director of the Offeror accepts full responsibility for the accuracy of the information contained in this composite document other than those relating to the Hanny Group (including Well Orient), Paul Y, ITC, the Group and GDI and confirms, having made all reasonable enquiries, that to the best of his knowledge and belief, opinions expressed in this composite document other than those relating to the Hanny Group (including Well Orient), Paul Y, ITC, the Group and GDI, have been arrived at after due and careful consideration and there are no other facts not contained in this composite document, the omission of which would make any statement in this composite document misleading.

The information (including the GDI Offer, the respective shareholding and the board composition) in this composite document relating to the Hanny Group (including Well Orient), Paul Y and ITC have been extracted or summarised from the Joint Announcement and their respective announcements and annual reports. The Directors and the sole director of the Offeror have made all reasonable enquiries and jointly and severally accept responsibility for the correctness and fairness of its reproduction or presentation and the accuracy of extracts or summaries of such information.

DISCLOSURE OF INTERESTS

(I) Interests of Directors

As at the Latest Practicable Date, none of the Directors or chief executive of the Company has any interest or short position in the Shares, underlying Shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange.

– 230 –

GENERAL INFORMATION

APPENDIX V

(II) Interests of Shareholders discloseable pursuant to the SFO

As at the Latest Practicable Date, so far as is known to the Directors or chief executive of the Company and according to the list of substantial Shareholders extracted from the website of the Stock Exchange (www.hkex.com.hk), the following persons had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO:—

(a) Interests in the Shares

						Approximate
	Long position/			Nature	Number	percentage of
Name	Short position	Capacity	Notes	of interest	of Shares	shareholding
The Offeror	Long position	Beneficial owner	1	Personal interest	135,000,000	30.63%
Mr. Gao Yang	Long position	Interest held by	1	Corporate interest	135,000,000	30.63%
		controlled
		corporation
Calisan	Long position	Beneficial owner	2	Personal interest	61,909,897	14.04%
Developments
Limited
(“Calisan”)
Great Decision	Long position	Interest held by	2	Corporate interest	61,909,897	14.04%
Limited		controlled
(“GDL”)		corporation
PYI	Long position	Interest held by	2	Corporate interest	61,909,897	14.04%
Investments		controlled
Group Limited		corporation
(“PYIIG”)
Paul Y	Long position	Interest held by	2	Corporate interest	61,909,897	14.04%
		controlled
		corporation

– 231 –

APPENDIX V

GENERAL INFORMATION

						Approximate
	Long position/			Nature	Number	percentage of
Name	Short position	Capacity	Notes	of interest	of Shares	shareholding
Well Orient	Long position	Beneficial owner	3	Personal interest	61,909,897	14.04%
Powervote	Long position	Interest held by	3	Corporate interest	61,909,897	14.04%
Technology		controlled
Limited		corporation
Hanny	Long position	Interest held by	3	Corporate interest	61,909,897	14.04%
Magnetics		controlled
(B.V.I.)		corporation
Limited
Hanny	Long position	Interest held by	3	Corporate interest	61,909,897	14.04%
		controlled
		corporation
Christian Emil	Long position	Beneficial owner		Personal interest	31,966,250	7.25%
Toggenburger

Notes:

The 135,000,000 Shares represent the Shares acquired by the Offeror pursuant to the Share Sale Agreement. Mr. Gao Yang is beneficially interested in the entire issued share capital of the Offeror. Accordingly, he is deemed to be interested in the Shares acquired by the Offeror under the SFO. Pursuant to the Share Mortgages entered into between the Offeror and Hanny, 20,250,000 Shares were charged to Hanny. Pursuant to the Share Mortgages entered into between the Offerer and Paul Y, 20,250,000 Shares were charged to Paul Y. Pursuant to an agreement between the Offeror and Kingston Securities regarding the provision of the Credit Facility I, 94,500,000 Shares were deposited with Kingston Securities as collateral.
Paul Y owns the entire interest of PYIIG. PYIIG owns the entire interest of GDL which in turn owns the entire interest in Calisan. Accordingly, GDL, PYIIG and Paul Y are deemed to be interested in 61,909,897 Shares which are held by Calisan.
Well Orient is wholly-owned by Powervote Technology Limited (“PTL”) which is in turn owned by Hanny Magnetics (B.V.I.) Limited (“Hanny Magnetics”). Hanny Magnetic is wholly-owned by Hanny. PTL, Hanny Magnetics and Hanny were deemed to be interested in 61,909,897 Shares which were held by Well Orient.

– 232 –

GENERAL INFORMATION

APPENDIX V

(b) Substantial Shareholders of other members of the Group

So far as is known to the Directors or chief executive of the Company, the following person(s) is 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 other members of the Group as at the Latest Practicable Date:—

		Percentage of shareholding	Percentage of shareholding
Name of subsidiary	Name of shareholder	(No. of shares)
			Other
		The Group	shareholder(s)
Principal Diamond Limited	Wonder Wealth Limited	80%	20%
		8 shares	2 shares
Talent Cosmos Limited	Cheung Kwok Keung, So So	80%	20%
	Chung Tat Yan	10,400 shares	246 shares
	Wong Leung Ngai		163 shares
	Happy Trade Ltd.		328 shares
	Wong Kwok Chu		1,734 shares
			129 shares

Save as disclosed above, the Directors or chief executive of the Company are not aware that there is any other persons who, as at the Latest Practicable Date, had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying right to vote in all circumstances at general meeting of any other members of the Group or had any options in respect of such shares.

– 233 –

GENERAL INFORMATION

APPENDIX V

(III) Offeror’s interests in the securities of the Company

As at the Latest Practicable Date, the interests of the Offeror in the securities of the Company were as follows:

			Approximate
			shareholding
Name	Capacity	Number of Shares	Percentage (%)
Offeror	Beneficial owner	135,000,000	30.63

Save as the aforesaid, the Offeror did not have any interests in the securities of the Company as at the Latest Practicable Date.

(IV) Save for (i) the 129,409,897 Shares (adjusted for the Capital Reorganisation) held by each of Paul Y and Hanny (presumed parties acting in concert with the Offeror) before the Share Sale; (ii) the 135,000,000 Shares acquired by the Offeror under the Share Sale Agreement (out of which 20,250,000 Shares were pledged to each of Paul Y and Hanny as security and 94,500,000 Share were deposited with Kingston Securities as collateral for the Credit Facility I); and (iii) the 61,909,897 Shares held by each of Paul Y and Hanny, as at the Latest Practicable Date, none of the Offeror, any person acting in concert with the Offeror or Mr. Gao Yang, who is the sole director of the Offeror, had any interest in the securities of the Company as at the Latest Practicable Date nor had any of them dealt for value in such securities during the period beginning six months prior to the commencement of the Offer Period and ending with the Latest Practicable Date.
(V) Neither the Company nor any Director had any interest in the securities of the Offeror as at the Latest Practicable Date nor had any of them dealt for value in such securities during the period beginning six months prior to the commencement of the Offer Period and ending with the Latest Practicable Date.
(VI) None of the subsidiaries of the Company, any pension fund of the Company or its subsidiaries, nor any of the advisers to the Company as specified in class (2) of the definition of associate under the Takeovers Code but excluding exempt principal traders had any interest in the securities of the Company as at the Latest Practicable Date nor had any of them dealt for value in such securities beginning six months prior to the commencement of the Offer Period and ending with the Latest Practicable Date.
(VII) As at the Latest Practicable Date, no Shares were managed on a discretionary basis by fund managers connected with the Company. No fund managers connected with the Company had dealt for value in any securities of the Company beginning six months prior to the commencement of the Offer Period and ending with the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX V

(VIII)No person had irrevocably committed, in respect of his/her/its own shareholding, to accept or to reject the China Strategic Offer as at the Latest Practicable Date.
(IX) As at the Latest Practicable Date, none of the Directors directly held or owned any securities in the Company.
(X) Save for (i) the Share Mortgages; (ii) the Credit Facility I; (iii) the Credit Facility II; and (iv) the appointment of Kingston Securities by the Company as it agent for matching odd lot Shares (the “Appointment”), no person had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Offeror or any person acting in concert with it as at the Latest Practicable Date.
(XI) As at the Latest Practicable Date, no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with (i) the Company; and (ii) any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate under the Takeovers Code.
(XII) As at the Latest Practicable Date, there was no agreement, arrangement or understanding existing between the Offeror or any persons acting in concert with it and any of the directors, recent directors, shareholders or recent shareholders of the Company which has connection with, is conditional on or dependent upon the outcome of the China Strategic Offer.
(XIII)As at the Latest Practicable Date, there was no agreement or arrangement to which the Offeror was a party which relate to circumstances in which it might or might not invoke or seek to invoke a condition to the China Strategic Offer, for the China Strategic Offer is unconditional.

DEALINGS IN SECURITIES

Save as disclosed in the paragraphs headed “Disclosure of interests” in this appendix, the acquisition of 67,500,000 Shares by the Offeror from each of Paul Y and Hanny pursuant to the Share Sale Agreement and the Group Reorganisation, neither of the Directors, including their respective spouses, children under the age of 18, related trusts and companies controlled by them, nor Dao Heng Securities, Hercules, Kingston Securities, Kingston Corporate Finance and Deloitte Touche Tohmatsu, or any other advisers to the Company as specified in class (2) of the definition of associate (excluding exempt principal traders) under the Takeovers Code, had dealt for value in the securities of the Company during the period beginning six months prior to the commencement of the Offer Period and ending with the Latest Practicable Date.

– 235 –

GENERAL INFORMATION

APPENDIX V

MARKET PRICES

The table below shows the closing prices of the Shares (adjusted for the Capital Reorganisation) on the Stock Exchange on the (i) last day on which trading took place in each of the six calendar months immediately preceding 15th October, 2004, being the date of the initial announcement relating to the China Strategic Offer, and that of the calendar months up to the Latest Practicable Date; (ii) 14th October, 2004, being the last trading day immediately preceding the date of such initial announcement; and (iii) 7th March, 2005, being the last trading day immediately preceding the Joint Announcement:

	HK$ per Share
30th April, 2004	0.94
31st May, 2004	0.88
16th June, 2004	0.76
30th July, 2004	0.79
31st August, 2004	0.72
30th September, 2004	0.94
14th October, 2004	1.04
29th October, 2004	1.20
25th November, 2004	1.12
31st December, 2004	1.10
31st January, 2005	1.20
28th February, 2005	1.14
7th March, 2005	1.08
29th April, 2005	1.70
31st May, 2005	1.62
30th June, 2005	1.60
29th July, 2005	1.56
31st August, 2005	1.66
30th September, 2005	1.66
31st October, 2005	1.86
30th November, 2005	1.72
30th December, 2005	1.70
27th January, 2006	2.00
28th February, 2006	1.92
31st March, 2006	2.00
28th April, 2006	1.68
Latest Practicable Date	0.38

The trading of the Shares was suspended from 17th June, 2004 to 7th July, 2004, 26th November, 2004 to 30th November, 2004 and 8th March, 2005 to 19th April, 2005. The highest and lowest closing prices of Shares (adjusted for the Capital Reorganisation) recorded on the Stock Exchange between 16th April, 2004, being the date falling six months prior to the date of the initial announcement relating to the China Strategic Offer, and the Latest Practicable Date were HK$2.12 on 23rd February, 2006 and HK$0.38 on 24th May, 2006 respectively.

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GENERAL INFORMATION

APPENDIX V

ARRANGEMENTS AFFECTING DIRECTORS

There is no benefit (other than statutory compensation) to be given to any Director as compensation for loss of office or otherwise in connection with the China Strategic Offer.

There is no agreement or arrangement between any Director and any other person which is conditional on or dependent upon the outcome of the China Strategic Offer or is otherwise connected with the China Strategic Offer.

There is no material contract entered into by the Offeror in which any Director has a material personal interest.

SERVICE CONTRACTS

None of the Directors has entered into any service contract with any member of the Group or associated companies of the Company which are in force and which are continuous contracts with a notice period of 12 months or more, or which has been entered into or amended within six months prior to 15th October, 2004, being the commencement date of the Offer Period, or which are fixed term contracts with more than 12 months to run irrespective of the notice period.

EXPERTS AND CONSENTS

The following are the qualifications of the experts whose letters or reports are contained in this composite document:

Qualifications

Name Qualifications Dao Heng Securities a licensed corporation under the SFO Hercules a licensed corporation under the SFO Kingston Securities a licensed corporation under the SFO Kingston Corporate Finance a licensed corporation under the SFO Limited (“Kingston Corporate Finance”) Deloitte Touche Tohmatsu certified public accountants

– 237 –

APPENDIX V

GENERAL INFORMATION

Each of Dao Heng Securities, Hercules, Kingston Securities, Kingston Corporate Finance and Deloitte Touche Tohmatsu has given and has not withdrawn their written consents to the issue of this composite document with the inclusion of their respective letters or reports and the references to their respective names in the form and context in which they respectively appear.

As at the Latest Practicable Date, save for the deposit of 94,500,000 Shares acquired by the Offeror in pursuance of the Share Sale with Kingston Securities from time to time as collateral, Dao Heng Securities, Hercules, Kingston Securities, Kingston Corporate Finance and Deloitte Touche Tohmatsu were not interested beneficially or otherwise in any Shares or shares in any of the Company’s subsidiaries or associated companies and did not have any right, whether legally enforceable or not, or option to subscribe for or to nominate persons to subscribe for any Shares or shares in any of the Company’s subsidiaries or associated companies nor did they have any interest, either direct or indirect, in any assets which have been, since 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.

LITIGATION

No member of the Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against any member of the Group as at the Latest Practicable Date.

MATERIAL CONTRACTS

As at the Latest Practicable Date, the following contracts, not being contracts entered into in the ordinary course of business, entered into by any members of the Group within the two years immediately preceding 15th October, 2004, being the date of the initial announcement relating to the China Strategic Offer which are, or may be, material:

(a) on 18th March, 2004, the Company entered into a sale and purchase agreement with Mr. Wang Yung-Tyng, an independent third party, in respect of the disposal of 12.88% interests in the share capital of Apex Quality Group Limited at a consideration of HK$10,722,600. On 5th August, 2004, the Company entered into a supplemental agreement to extend the completion date of transaction. The disposal was completed in September 2004;
(b) a sale and purchase agreement dated 19th March, 2004 entered into between the Company and Cheung Tai Hong (BVI) Limited in relation to the disposal of the entire issued shares capital of Tung Fong Hung Investment Limited by the Company for a consideration of HK$42,000,000. Completion of the transaction took place in May 2004.

– 238 –

APPENDIX V

GENERAL INFORMATION

(c) an agreement dated 4th October, 2004 entered into between the Company and Mr. Ling Yao Ping and Mr. Chan Chung Chiu, both are independent third parties, in respect of the acquisition of the entire interest in ��(Guangzhou Yao Yang Industrial Co. Ltd), a company incorporated in the PRC, for a consideration of approximately RMB27,300,000; and
(d) an agreement dated 6th October, 2004 entered into between the Company and ��, an independent third party, in respect of the acquisition of 88% interest in �� (Dongguan Shi Jiang Hai Trading Co. Ltd), a company incorporated in the PRC, for a consideration of approximately RMB25,700,000;

MISCELLANEOUS

(a) The registered office of the Company is at 8th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong. The share registrar and transfer office of the Company is Standard Registrars Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(b) The registered office of the Offeror is at Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands.
(c) The registered office of Kingston Securities and Kingston Corporate Finance is Suite 2801, 28/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong.
(d) The principal members of the Offeror concert group include (i) the Offeror and Mr. Gao Yang, being the sole beneficial owner and director of the Offeror; (ii) Paul Y, which was beneficially owned as to approximately 28.15% by ITC and Dr. Chan Kwok Keung, Charles as at the Latest Practicable Date and has a board of directors comprising one executive director, namely Mr. Lau Ko Yuen, Tom, one non-executive director, namely Dr. Chan Kwok Keung, Charles and three independent non-executive directors, namely Dr. Chow Ming Kuen, Joseph, Mr. Kwok Shiu Keung, Ernest and Mr. Chan Shu Kin; (iii) ITC, which was beneficially owned as to approximately 34.97% of the issued ordinary share capital by Dr. Chan Kwok Keung, Charles as at the Latest Practicable Date and its board of directors comprised five executive directors, namely Dr. Chan Kwok Keung, Charles, Ms. Chau Mei Wah, Rosanna, Mr. Chan Kwok Hung, Mr. Chan Fut Yan and Mr. Cheung Hon Kit and three independent non-executive directors, namely Mr. Chuck Winston Calptor, Mr. Lee Kit Wah and Mr. Wong Kam Cheong, Stanley; and (iv) Hanny, which was beneficially owned as to approximately 24.28% by ITC as at the Latest Practicable Date and its board of directors comprised three executive directors, namely Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan and Mr. Lui Siu Tsuen, Richard and four independent non-executive directors, namely Mr. Yuen Tin Fan, Francis, Mr. Kwok Ka Lap, Alva, Mr. Wong King Lam, Joseph and Mr. Sin Chi Fai.

– 239 –

GENERAL INFORMATION

APPENDIX V

(e) The company secretary of the Company is Ms. Chan Yan Yan, Jenny, who is an associate member of the Institute of Chartered Secretaries and Administrators and the Hong Kong Institute of Company Secretaries.
(f) The English texts of this composite document and the accompanying Form of Acceptance shall prevail over their respective Chinese texts.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection (i) during business hours at the register office of the Company at 8th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong; (ii) on the transaction specific website (www.irasia.com/listco/hk/chinastrategic/ comoffdoc.htm); and (iii) the website of the SFC (www.sfc.hk) from the date of this composite document up to and including the closing date of the China Strategic Offer:

(a) the memorandum of association and the articles of association of the Company;
(b) the memorandum of association and the articles of association of the Offeror;
(c) the letter from the Independent Board Committee to the Qualifying Shareholders, the text of which is set out on page 27 to this composite document;
(d) the letter of advice from Hercules, the text of which is set out on pages 28 to 46 to this composite document;
(e) the letter from Kingston Securities, the text of which is set out on pages 17 to 26 to this composite document;
(f) the letters of consent referred to in the section headed “Experts and consents” in this appendix;
(g) the annual reports of the Company for the three years ended 31st December, 2005;
(h) the unaudited pro forma balance sheet, income statement and cash flow statement of the Group upon completion of the Group Reorganisation as contained in Appendix III to this composite document;
(i) the accountants’ report on the GDI Group as contained in Appendix IV to this composite document;
(j) the material contracts referred to in the section headed “Material contracts” in this appendix;
(k) the comfort letters from Deloitte Touche Tohmatsu and Dao Heng Securities as contained in Appendix III to this composite document;
(l) Credit Facility I;
(m) Credit Facility II; and
(n) the Share Mortgages.

– 240 –

AI assistant

Hony Media Group — Merger & Acquisition 2006

49204_rns_2006-05-26_aba4d0bd-449d-40bd-bd5d-d9086cd50811.pdf

CHINA STRATEGIC HOLDINGS LIMITED ��������

NATION FIELD LIMITED

CONTENTS

Appendices

Accompanying document — Form of Acceptance

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

EXPECTED TIMETABLE

CHINA STRATEGIC HOLDINGS LIMITED ��������

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

THE GROUP REORGANISATION

Group structure immediately after the implementation of the Group Reorganisation and upon completion of the Share Sale Agreement

Notes:

LETTER FROM THE BOARD

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION OF THE GROUP REORGANISATION

COMPLETION OF THE SHARE SALE AGREEMENT

LETTER FROM THE BOARD

THE CHINA STRATEGIC OFFER

LETTER FROM THE BOARD

PROPOSED NEW DIRECTORS OF THE COMPANY

ADDITIONAL INFORMATION

CHINA STRATEGIC HOLDINGS LIMITED Dr. Chan Kwok Keung, Charles Chairman

KINGSTON SECURITIES LIMITED

INTRODUCTION

LETTER FROM KINGSTON SECURITIES

THE CHINA STRATEGIC OFFER

Comparison of value

LETTER FROM KINGSTON SECURITIES

Total consideration

Compulsory acquisition

Effect of accepting the China Strategic Offer

Stamp Duty

INFORMATION ON THE OFFEROR AND ITS INTENTION IN RELATION TO THE COMPANY

LETTER FROM KINGSTON SECURITIES

Directors and management

LETTER FROM KINGSTON SECURITIES

LETTER FROM KINGSTON SECURITIES

MAINTAINING THE LISTING STATUS OF THE COMPANY

LETTER FROM KINGSTON SECURITIES

FURTHER TERMS OF THE CHINA STRATEGIC OFFER

GENERAL

LETTER FROM KINGSTON SECURITIES

Qualifying Shareholders are strongly advised to consider carefully the information contained in the letter from the Board, the letter from the Independent Board Committee and the letter from Hercules set out in this composite document.

CHINA STRATEGIC HOLDINGS LIMITED ��������

Yours faithfully,

INTRODUCTION

LETTER FROM HERCULES

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background to the China Strategic Offer

2. Financial information of the Group

Table 1 — Summary Pro Forma Income Statement of the Group upon completion of the Group Reorganisation

LETTER FROM HERCULES

Table 2 — Unaudited Pro Forma Balance Sheet of the Remaining Group

LETTER FROM HERCULES

3. Future prospects and outlook of the Group

LETTER FROM HERCULES

(ii) Investments in listed and unlisted securities, and property

LETTER FROM HERCULES

4. Trading performance of the Shares

LETTER FROM HERCULES

5. Indicative valuation benchmarks

6. Cash offer precedents

Table 4: Comparable Offers

LETTER FROM HERCULES

7. Trading statistics of Industry Comparables

Table 5: Trading Statistics of the Industry Comparables

LETTER FROM HERCULES

8. Intention of the Offeror regarding the future of the Company

9. Maintaining the listing status of the Company

LETTER FROM HERCULES

RECOMMENDATION

Hony Media Group Merger & Acquisition 2006

CHINA STRATEGIC HOLDINGS LIMITED ��

CHINA STRATEGIC HOLDINGS LIMITED ��

CHINA STRATEGIC HOLDINGS LIMITED ��