Hony Media Group — Proxy Solicitation & Information Statement 2004

Sep 20, 2004

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

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

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CHINA STRATEGIC HOLDINGS LIMITED ��������

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

VERY SUBSTANTIAL ACQUISITION

A notice convening the Extraordinary General Meeting to be held at 11th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong on 5th October, 2004 at 11:00 a.m. is set out on pages 147 to 148 of this circular. Whether or not you intend to attend the Extraordinary General Meeting in person, please complete the accompanying form of proxy for use at the Extraordinary General Meeting in accordance with the instructions printed thereon and return it to the share registrars of the Company, Standard Registrars Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as practicable but in any event not later than 48 hours before the time appointed for holding the Extraordinary General Meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the Extraordinary General Meeting should you so wish.

17th September, 2004

CONTENTS

		Page
Definitions......................................................................................................................................		1
Letter from the Board..................................................................................................................		4
Appendix I	— Financial information on the Group........................................................	16
Appendix II	— Pro forma financial information on the Group......................................	103
Appendix III	— Valuation report on the Properties...........................................................	118
Appendix IV	— Valuation report on the property interests of the Group......................	125
Appendix V	— General information...................................................................................	134
Notice of Extraordinary General Meeting................................................................................		147

– i –

DEFINITIONS

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

• “Acquisition” the proposed acquisition of the interest in the Properties by Manwide

• “Agreement” the sale and purchase agreement dated 16th June, 2004 entered into between Manwide and the Vendor in relation to the Acquisition

• “associates” has the meaning ascribed thereto under the Listing Rules

• “Banking Day” the day on which banks in the PRC open for business

• “Bank Lending Rate” the interest rate for lending, subject to the term of the loan, chargeable by banks as permitted by the PRC government from time to time

• “Board” the board of Directors “Building” the 24-storey building being erected upon the Land together with 2 levels of underground carparks, has total gross floor area of approximately 37,060.43 sq. meters

• “Certificate” the certificate in respect of the land use rights of the Land and the ownership of the Building

• “China Enterprises” China Enterprises Limited, a company incorporated in Bermuda with limited liability whose shares are traded on the OTC Bulletin Board in the United States of America, a non wholly owned subsidiary of the Company

• “Company” China Strategic Holdings Limited, a company incorporated in Hong Kong with limited liability whose shares are listed on the Stock Exchange

• “Consideration” RMB450 million, being the consideration payable by Manwide to the Vendor for the Acquisition

• “Deposit” RMB50 million, which was paid to the Vendor as deposit for the Acquisition

• “Development” the construction and development of the Properties

– 1 –

DEFINITIONS

“Director(s)”	the director(s) of the Company
“Extraordinary General	the extraordinary general meeting of the Company convened to be
Meeting”	held for the Shareholders to consider and, if thought fit, approve the
	transactions contemplated under the Agreement
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Jiu Sheng” or “Vendor”	����������(Shanghai Jiu Sheng Investment Company
	Limited), a company established in the PRC
“Land”	a parcel of land situated at Nos. 219 and 229, Jiang Ning Road, Jing
	An District, Shanghai, the PRC, has a site area of approximately
	5,493.50 sq. meters
“Latest Practicable Date”	13th September, 2004, being the latest practicable date prior to the
	printing of this circular for ascertaining certain information contained
	herein
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock Exchange
“Loan”	loan of RMB380 million to be granted by PRC banks and secured by
	the Properties with a repayment term of not less than three years and
	an annual interest rate of not more than 110% of the Bank Lending
	Rate as quoted on the date the loan is drawn down
“Manwide”	Manwide Holdings Limited, a company incorporated in the British
	Virgin Islands with limited liability, a wholly owned subsidiary of
	China Enterprises
“Properties”	the Land and the Building
“PRC”	The People’s Republic of China
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong) as amended from time to time

– 2 –

DEFINITIONS

“Shanghai Commodity	the agreement in the form of Shanghai Commodity Property Sale
Property Sale Contract”	Contract to be signed by the Vendor and Manwide upon completion
	of the Acquisition for the purpose of transferring ownership of the
	Properties from the Vendor to Manwide
“Shareholder(s)”	the holder(s) of the Share(s)
“Share(s)”	the ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“HK$”	Hong Kong Dollar, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“sq. meters”	square meters
“%”	per cent.

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LETTER FROM THE BOARD

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CHINA STRATEGIC HOLDINGS LIMITED ��������

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

Executive Directors: Chan Kwok Keung, Charles (Chairman and Chief Executive Officer) Yap, Allan (Vice Chairman) Li Wa Kin (Deputy Managing Director) Chau Mei Wah, Rosanna Chan Ling, Eva

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

Independent non-executive Directors: David Edwin Bussmann Fung Wan Yiu, Agnes

Alternate Directors:

Chan Kwok Hung (Alternate to Chan Kwok Keung, Charles) Lui Siu Tsuen, Richard (Alternate to Yap, Allan)

17th September, 2004

To the Shareholders

Dear Sir/Madam,

VERY SUBSTANTIAL ACQUISITION

INTRODUCTION

On 7th July, 2004, the Board announced that on 16th June, 2004, Manwide, an indirect non wholly owned subsidiary of the Company, entered into the Agreement, as a purchaser, with Jiu Sheng, as a vendor, in relation to the Acquisition. The Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules and is subject to the approval by the Shareholders at the Extraordinary General Meeting.

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LETTER FROM THE BOARD

The purpose of this circular is to provide the Shareholders with information as regards the Acquisition, the notice of the Extraordinary General Meeting at which an ordinary resolution will be proposed to approve the Agreement and transactions contemplated thereunder and the form of proxy for use at the Extraordinary General Meeting.

THE AGREEMENT

Parties

• Vendor : ���������� (Shanghai Jiu Sheng Investment Company Limited), a company established in the PRC. Jiu Sheng is principally engaged in property investment and development and is also allowed, under its business certificate, to carry out (i) sales of telecommunication and other electronic products; (ii) investment holdings; and (iii) investment management and consultant. Jiu Sheng is beneficially owned as to 34.0% by Li Baocheng�����, 25.5% by Li Qiming

• �����, 25.5% by Zhang Qingxian�����, 6.0% by Ma Youbin�����, 6.0% by Ding Hai����and 3.0% by Sun Lijun�����. To the best knowledge, information and belief of the Directors and after making all reasonable enquiries, as at the Latest Practicable Date, Jiu Sheng and its beneficial owners are third parties independent of the Company and the connected persons of the Company.

• Purchaser : Manwide Holdings Limited, a wholly owned subsidiary of China Enterprises, was incorporated in the British Virgin Islands with limited liability. Manwide was formed solely for the purpose of acquiring the Properties.

• China Enterprises was incorporated in Bermuda with limited liability, the shares of which are traded on the OTC Bulletin Board in the United States of America. China Enterprises is owned as to 55.2% effective equity interest and as to 88.8% effective voting interest by the Company. As at the Latest Practicable Date, the number of issued shares of China Enterprises was 9,017,310 of which 3,000,000 shares were supervoting common stocks with ten votes per share. The remaining 6,017,310 shares were ordinary common stocks with one vote per share. The Company effectively owned the entire 3,000,000 supervoting shares and 1,978,830 ordinary common shares in China Enterprises, the Company therefore has an effective equity interest of 55.2% and voting interest of 88.8% in China Enterprises.

China Enterprises is an investment holding company and has substantial interests in other investment companies, which through their subsidiaries are principally engaged in the manufacturing and marketing of tires in the PRC and other countries aboard and the business of providing package tour, travel and other related services and hotel and leisure-related-business.

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LETTER FROM THE BOARD

Assets to be acquired

Pursuant to the Agreement, Manwide agreed to acquire and the Vendor agreed to dispose of, subject to the terms and conditions of the Agreement, the Land situated at Nos. 219 and 229, Jiang Ning Road, Jing An District, Shanghai, the PRC and the Building being erected thereon which comprises two levels of underground carparks and a 24-storey building. The total site area of the Land is approximately 5,493.50 sq. meters and the total gross floor area of the Building is approximately 37,060.43 sq. meters. It is intended that the 1st to 4th levels of the Building will be used for commercial purpose and the remaining 20 stories, from the 5th to 24th levels, will be developed into service apartments.

At present, the Properties are subject to two mortgages totaling RMB340 million. The Vendor has undertaken to Manwide to discharge the Properties from these two mortgages before the transfer of the ownership of the Properties to Manwide which will take place after completion of the Acquisition. Upon completion of the Acquisition, the parties will execute the Shanghai Commodity Property Sale Contract and other procedures necessary to effect the transfer. According to the Agreement, the Properties will be transferred to Manwide free from all encumbrances.

Consideration

The Consideration of RMB450 million was arrived at after arm’s length negotiations between Manwide and the Vendor with reference to recent comparable transactions and a preliminary valuation on the Properties conducted by DTZ Debenham Tie Leung Limited, an independent third party and a firm of professional property surveyors, which indicated that the Properties are valued at RMB500 million. A full valuation was conducted by DTZ Debenham Tie Leung Limited, which also concluded that the Properties are valued at approximately RMB500 million. The full text of the letter and valuation certificate is as set out in Appendix III to this circular. The Directors consider that the Consideration is fair and reasonable.

The Consideration will be settled as follows:

• (i) RMB50 million in cash was paid to the Vendor as deposit on 16th June, 2004 by Apex Quality Group Limited, an associate of the Group, as settlement of the amount due from Apex Quality Group Limited to the Group. The Deposit will be applied to settle part of the Consideration upon signing of the Shanghai Commodity Property Sale Contract;

• (ii) RMB380 million in cash payable upon the grant of the Loan, which is more particularly described below, on or before completion of the Acquisition; and

• (iii) the remaining RMB20 million in cash, will be financed by internal resources of the Group, payable within three Banking Days after the day on which the transfer of the ownership of the Properties from the Vendor to Manwide is duly completed.

Under the Agreement, the Vendor is required to procure Manwide in obtaining the Loan to be granted by PRC banks and secured by the Properties with a repayment term of not less than three years and an annual interest rate of not more than 110% of the Bank Lending Rate as quoted on the date the Loan is drawn down.

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LETTER FROM THE BOARD

Conditions

The Agreement will take effect once it becomes unconditional which is subject to the followings:

• (i) the Shareholders having approved the transactions contemplated under the Agreement at the Extraordinary General Meeting;

• (ii) the Vendor and Manwide having obtained all necessary internal approvals including approvals from their respective boards of directors and shareholders in respect of the entering into the Agreement and the transactions contemplated thereunder;

• (iii) all the ancillary documents to the Agreements including, among other things, specifications of quality and standard of the Building, having been duly executed;

• (iv) the Vendor having provided written evidence to Manwide confirming that the Vendor has paid all interest due and has not violated any terms of the relevant loan agreements with its existing mortgagee banks;

• (v) the Vendor having provided to Manwide information on the capacity of the third party who would provide a guarantee to Manwide that the Properties are not subject to encumbrances of any kind after completion of the Acquisition;

• (vi) the Vendor having obtained consents from its existing mortgagee banks for the Vendor’s entering into the Agreement and the transactions contemplated thereunder; and

• (vii) the Stock Exchange and other regulatory bodies, if relevant, approving the release of the announcement and the issue of the circular by the Company.

None of the conditions above can be waived. If the above conditions are not fulfilled on or before 31st December, 2004, the Agreement will lapse and the Vendor shall return the Deposit, together with interest accrued therefrom calculated at the Bank Lending Rate, to Manwide within five Banking Days from the date on which the Agreement lapses.

Development of the Properties

The Vendor agrees to procure completion of the Development within 180 days after the signing of the Agreement, that is on or before 13th December, 2004. Completion of the Development is subject to Manwide having been satisfied that the Building is constructed in accordance with the specification on the quality and standard of the Building under the Agreement. In the event that completion of the

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LETTER FROM THE BOARD

Development does not take place as agreed, Manwide has the right, by giving a written notice to the Vendor, to:—

• (i) terminate the Agreement and demand for refund of the Deposit together with the interest accrued therefrom calculated from the payment date of the Deposit to the date on which the Deposit is refunded at the Bank Lending Rate within seven days from the date of such written notice of termination;

• (ii) extend the completion of the Development to any day at Manwide’s discretion and, in such circumstance, the Vendor will have to pay Manwide a fine of RMB200,000 per day calculated from the commencement date of and up to the last date of such extended period. The accumulated fine will be set off against the Consideration. In the event that Development cannot be completed at the extended date of completion, Manwide has the right to further extend the completion or to exercise its rights under all paragraphs of this section including this paragraph;

• (iii) takeover the Development and require the Vendor to settle all outstanding amounts incurred before Manwide’s takeover of the Development;

• (iv) acquire 51% of the total gross floor area of the Properties and select any levels of the Properties at its sole discretion with a consideration of RMB70 million; or

• (v) extend the completion of the Development up to the actual completion of the Development, in such circumstance, the Vendor will be subject to a fine of RMB200,000 per day up to the actual date of completion of the Development. The accumulated fine will be set off against the Consideration.

It is premature for Manwide to decide which of the rights above will be exercised. However, in the event that Manwide shall decide to extend the completion of the Development under paragraphs (ii) or (v) above and such extended completion date of the Development shall be later than the agreed completion date of the Acquisition as stated in the last paragraph of section headed “Completion of the Acquisition”, Manwide would have to agree to an extension of the completion of the Acquisition as well. Further, no provision in the Agreement provides adjustments to the Consideration in the event Manwide shall decide to exercise the right under paragraph (iii) above.

As far as the Company is aware of, the Development is in progress and is expected to be completed as agreed under the Agreement. As at the Latest Practicable Date, the Company is not aware of any incident that will lead to material delay of the Development.

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LETTER FROM THE BOARD

Completion of the Acquisition

Completion of the Acquisition is subject to fulfillment of the following terms:—

• (i) the Vendor having obtained the Certificate specifying the use of the Land and the Building, the gross floor area of the Building, and that all units as set out in the floor plan of the Building are subject to rights of strata sale;

• (ii) the Vendor having obtained an approval from the Shanghai Planning Committee that the use of the Properties be changed from office to both commercial and residential and that all relevant fees and charges arising from the sale of the Land payable to the relevant authorities including the Land Bureau of Shanghai having been settled in full;

• (iii) the Vendor having provided Manwide with a guarantee from a third party (in form and substance which is to the satisfaction of Manwide, together with all evidence confirming the capacity of such third party to act as a guarantor) that the Properties are not subject to encumbrances of any kinds, otherwise such guarantor together with the Vendor are obliged to settle all such encumbrances in full and pay to Manwide any damages it may suffer;

• (iv) the Vendor and Manwide having agreed on the specification of installation, fixture and furniture and other internal decoration of the Properties;

• (v) the Vendor having procured all the contractors engaged in the Development to enter into agreements with Manwide to bind these contractors with obligations to Manwide to rectify all defects of the Properties which may arise after completion of the Development in accordance with the terms of the Agreement; and

• (vi) the Vendor having procured the granting of the Loan to Manwide at the time or after the ownership of the Properties is transferred from the Vendor to Manwide.

All the above conditions shall be fulfilled on or before 1st June, 2005. The Vendor and Manwide will execute the Shanghai Commodity Property Sale Contract and other procedures necessary to effect the transfer of the ownership of the Properties within ten working days after fulfillment of all the above terms.

Provided that if the conditions are not fulfilled on or before 1st June, 2005, Manwide 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, Manwide shall be entitled to terminate the Agreement and the Vendor shall refund the Deposit to Manwide together with interests accrued during the period from 16th June, 2004, the date of the Agreement, to the date the Deposit is refunded and calculated on the Bank Leading Rate as quoted on the date the Deposit was paid.

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LETTER FROM THE BOARD

Other principal terms of the Agreement

Set out below are other principal terms of the Agreement:—

• (1) Pre-sale of the Properties

• (i) on the basis that Manwide will acquire the whole of the Properties, Manwide has the discretion to conduct pre-sale of the whole or part of the Properties before the ownership of the Properties is transferred to Manwide;

• (ii) the Vendor undertakes and guarantees to obtain a Permit for Pre-sale of Commercial Properties within 150 days from the date of the Agreement; and

• (iii) the Vendor should assist Manwide in the pre-sale of the Properties so long the pre-sale activities to be conducted by Manwide are permissible under the Agreement.

• (2) Management of the Properties

• (i) the Vendor undertakes that, notwithstanding that Manwide may acquire the whole or part of the Properties as agreed under the Agreement, Manwide or any party it may appoint will have the management right of the entire Properties;

• (ii) Manwide is entitled to, from the date the occupation of the Properties is transferred, assume its right to manage the Properties and to take charge of all matters in this respect including marketing and promotion, leasing, entering into tenancy agreements, etc.; and

• (iii) in the event that Manwide or any party Manwide may appoint, encounters difficulties in carrying out its rights to manage the Properties temporarily, the Vendor should provide all necessary assistance to preserve Manwide’s right in respect of the Properties management.

• (3) Change of use of the Properties

It is one of the conditions for completion of the Acquisition that the Vendor obtains 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, Manwide is entitled to either:

• (i) to proceed with the Agreement in accordance with the existing terms and conditions; or

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LETTER FROM THE BOARD

• (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 million.

In the event that Manwide opts to acquire part of the Properties as specified in paragraph (3)(ii) above under the section headed “Other principal terms of the Agreement”, the condition (iii) as set out above under the section headed “Completion of the Acquisition” together with the following revised conditions of completion should be fulfilled within 30 days after Manwide notifying the Vendor in writing its intention to acquire part of the Properties.

The revised conditions of completion are :

• (a) the Vendor having obtained the Certificate specifying the partitioning, the number of units and the gross floor area of each floor which will enable Manwide to obtain separate ownership certificates in respect of those part of the Properties which Manwide is acquiring;

• (b) the Vendor having paid all the government fee for obtaining the Land which will enable Manwide to obtain separate ownership certificates specifying those part of the Properties which Manwide is acquiring is for sale;

• (c) the Vendor having settled all the existing mortgages and is able to transfer those part of the Properties which Manwide is acquiring free from encumbrances;

• (d) the Vendor and Manwide having agreed on the specification of installation, fixture and furniture and other internal decoration of those part of the Properties which Manwide is acquiring; and

• (e) the Vendor having procured all the contactors engaged in the Development to enter into agreements with Manwide to bind these contractors with obligations to Manwide to rectify all the defects (which may arise after completion of the Development) of those part of the Properties which Manwide is acquiring in accordance with the terms of the Agreement.

If these conditions are not satisfied within 30 days from the date of notice, the Vendor is required to pay Manwide a daily fine calculated based on 0.05% of RMB50 million until all the conditions are fulfilled.

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LETTER FROM THE BOARD

The Vendor and Manwide should execute the Shanghai Commodity Property Sale Contract to effect the transfer of the ownership of those part of the Properties which Manwide is acquiring within 10 working days from the date on which all the conditions are fulfilled. The Vendor and Manwide should also enter into an agreement setting out, among other things, their respective rights on the common areas of the Properties including but not limited to the rights to use and the benefit arises from the advertising installations, the naming right of the Properties, etc.

• (4) Right to Assign

Manwide shall be entitled to set up a foreign-owned entity in Shanghai, the PRC to assume all rights and obligations of Manwide under the Agreement.

REASONS FOR THE ACQUISITION

The Company is an investment holding company. Through its subsidiaries, the Company is engaged in the manufacturing of batteries and property business; and through its associates engaged in manufacturing and marketing of tires, and the business of providing package tour, travel and other related services and hotel and leisure-related-business.

China Enterprises is an investment holding company. As at the Latest Practicable Date, China Enterprises has approximately 26% interest in Hangzhou Zhongce Rubber Co., Ltd. and approximately 32% interest in Wing On Travel (Holdings) Limited which shares are listed on the Stock Exchange. Hangzhou Zhongce Rubber Co., Ltd. is principally engaged in the manufacturing and marketing of tires in the PRC and other countries aboard. Wing On Travel (Holdings) Limited is principally engaged in the business of providing package tour, travel and other related services and hotel and leisurerelated-business. In 2003, China Enterprises disposed of its controlling interest in two tire manufacturing operations in the PRC, details of which are set out in the circulars of the Company dated 30th January, 2003 and 9th July, 2003. The board of China Enterprises has been actively seeking appropriate investment opportunities after reducing its involvement in the manufacturing and sale of tires.

According to the statistic released by Shanghai Tourism Planning Committee, up to March 2004, approximately 820,000 tourists had visited Shanghai, the PRC, representing an increase of approximately 5.86% as compared to the same period in 2003. With the increasing number of international events, e.g. the Formula 1 racing and other international exhibitions and conferences being held in Shanghai, the PRC, every year, China Enterprises is confident that the demand for hotel or service apartment accommodation will continue to increase. On these bases, the Directors are optimistic that the Acquisition could broaden the sources of income for China Enterprises and strengthen its asset base. In view of the above, the Directors consider that the Acquisition is beneficial to China Enterprises, the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

EFFECTS OF ACQUISITION

Net asset value

As set out in the pro forma assets and liabilities statement of the Group contained in Appendix II to this circular, the net asset value of the Group will remain unchanged after completion of the Acquisition.

Gearing

The gearing ratio of the Group as at 31st December, 2003 was approximately 0.009% which is calculated based on total long-term bank borrowings and other borrowing of approximately HK$0.14 million divided by total shareholders’ fund of approximately HK$1,533.4 million. As the Acquisition will be financed partly by the Loan of RMB380 million, based on the assumption that the Acquisition has been completed as at 31st December, 2003, the gearing ratio of the Group, calculated based on the long-term bank borrowings and other borrowings of approximately HK$358.3 million and divided by the shareholder’s fund of approximately HK$1,533.4 million, would increase to approximately 23.4%. Given the bank balances and cash of the Group of approximately HK$285.9 million immediately after completion of the Acquisition as set out in the pro forma assets and liabilities statement of the Group disclosed in Appendix II to this circular, the Directors consider the increase in the gearing ratio would have no material adverse impact on the Group’s cashflow or financial position.

Earnings

The intention of the Board on whether the Building is to be let or disposed of is yet to be determined, subject to the then market conditions. On this basis, the Board considers it is premature to predict the revenue to be generated from the Building hence inappropriate to estimate the effect of the Acquisition on the earnings of the Group at this moment. The Group has not obtained any bank loan or banking facilities offer letter granted by banks as at the Latest Practicable Date in relation to the financing of the Acquisition and therefore the Directors are of the opinion that the amount of finance cost related to the Loan had the Acquisition occurred at the beginning of the year ended 31st December, 2003 cannot be ascertained and accordingly, no pro forma adjustment of finance cost was made in the pro forma income statement and pro forma cash flow statement.

As advised by Shanghai JoinWay Law Firm, the legal fees comprises sales and purchase agreement notarial fee (�������) payable to Shanghai Notary Public Office (������); transaction deed tax (����) payable to Shanghai Municipal Financial Administration (������); title registration fee (�����) and transaction fee (�����) payable to Real Estate Trading Centre (�������); contract stamp duty (�����) and certificate stamp duty (�����) payable to Shanghai Municipal Administration of Local Taxation (������); and drawing fee (���) payable to Office of Land Survey Results (�������),totalling approximately HK$13,200,000. The professional fees payable to all professional parties involved in the Acquisition,

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LETTER FROM THE BOARD

as advised by the respective professional parties, will amount to approximately HK$1,930,000. However, the legal and professional fees of approximately HK$15,130,000 will be accounted for as part of the costs of the Acquisition and therefore will have no effect on the earnings of the Group.

EXTRAORDINARY GENERAL MEETING

The Agreement is subject to, among other things, the approval by the Shareholders at the Extraordinary General Meeting.

To the best knowledge, information and belief of the Directors and after making all reasonable enquiries, as at the Latest Practicable Date, no Shareholder and their respective associate has any material interest in the Acquisition, therefore no Shareholder is required to abstain from voting at the Extraordinary General Meeting.

A form of proxy for use by the Shareholders at the Extraordinary General Meeting is enclosed. Whether or not you are able to attend the Extraordinary General Meeting in person, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return it to the share registrars of the Company, Standard Registrars Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, as soon as possible but in any event, not later than 48 hours before the time appointed for holding the Extraordinary General Meeting or any adjourned meeting (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the Extraordinary General Meeting or any adjourned meeting (as the case may be) should you so wish.

PROCEDURE FOR DEMANDING A POLL

At the Extraordinary General Meeting, the ordinary resolution put to the vote of the Extraordinary General Meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands) demanded:

• (i) by the chairman of the Extraordinary General Meeting; or

• (ii) by at least three Shareholders present in person or by proxy for the time being entitled to vote at the Extraordinary General Meeting; or

• (iii) by any Shareholder or Shareholders present in person or by proxy and representing not less than one-tenth of the total voting rights of all the Shareholders having the right to vote at the Extraordinary General Meeting; or

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LETTER FROM THE BOARD

• (iv) by any Shareholder or Shareholders present in person or by proxy and holding shares in the Company conferring a right to vote at the Extraordinary General Meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

RECOMMENDATION

The Directors believe that the Acquisition is in the interest of the Company and the Shareholders as a whole and the terms and conditions of the Agreement are fair and reasonable. Accordingly, the Directors recommend the Shareholders to vote in favour of the ordinary resolution as set out in the notice of the Extraordinary General Meeting.

GENERAL

Your attention is also drawn to the additional information set out in the Appendices to this circular and the results of the Group for the six months ended 30th June, 2004 to be released by the Company on 21st September 2004.

Yours faithfully,

for and on behalf of the board of directors of

China Strategic Holdings Limited Dr. Chan Kwok Keung, Charles Chairman

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(a) THREE-YEAR FINANCIAL SUMMARY

Set out below is a summary of the audited consolidated profit and loss account and consolidated balance sheet of the Group for each of the three years ended 31st December, 2003 extracted from the relevant annual reports of the Company:

RESULTS Turnover Loss before taxation Taxation Loss before minority interests Minority interests Net loss for the year ASSETS AND LIABILITIES Total Assets Total liabilities and minority interests Shareholders’ funds

For the year ended 31st December, 2003 2002 2001 HK$’000 HK$’000 HK$’000 (restated) (Note) 2,884,493 3,601,735 3,234,404 (169,184) (695,566) (1,001,147) (10,935) (12,250) (5,982) (180,119) (707,816) (1,007,129) (9,409) 233,682 408,399 (189,528) (474,134) (598,730) As at 31st December, 2003 2002 2001 HK$’000 HK$’000 HK$’000 (restated) (Note) 2,189,244 4,764,036 6,254,576 (655,864) (3,029,983) (4,033,786) 1,533,380 1,734,053 2,220,790

Note: The amounts were restated as a result of the adoption of Statement of Standard Accounting Practice 12 (Revised) “Income Taxes” issued by the Hong Kong Society of Accountants.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE TWO YEARS ENDED 31ST DECEMBER, 2003

The following is the reproduction of the full text of the audited financial statements of the Company contained on pages 25 to 102 of the Company’s 2003 annual report:

“Consolidated Income Statement

For the year ended 31st December,

Notes Turnover 4 Cost of sales Gross profit Other operating income 6 Distribution costs Administrative expenses Other expenses 7 Profit (loss) from operations 8 Finance costs 10 Gain on disposal/dilution of interests in subsidiaries 31 (Loss) gain on disposal/liquidation of interests in associates Share of results of associates Allowance on receivables advanced to an associate Loss before taxation Taxation 11 Loss before minority interests Minority interests Net loss for the year Loss per share Basic 12	2003 HK$’000 2,884,493 (2,520,175) 364,318 145,731 (174,955) (122,587) (118,396) 94,111 (50,712) 12,344 (36,481) (175,734) (12,712) (169,184) (10,935) (180,119) (9,409) (189,528) HK$(0.23)	2002 HK$’000 (as restated) 3,601,735 (3,052,768) 548,967 153,714 (248,218) (221,624) (760,544) (527,705) (109,460) 64,193 14,980 (137,574) — (695,566) (12,250) (707,816) 233,682 (474,134) HK$(0.76)

– 17 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

At 31st December,

Notes Non-Current Assets Property, plant and equipment 13 Payment for acquisition of land development rights 14 Goodwill 15 Interests in associates 17 Receivables — due after one year 18 Investments in securities 19 Deferred tax assets 20 Current Assets Other asset 21 Inventories 22 Trade debtors 23 Receivables due from associates 17 Receivables — due within one year 18 Other receivables, deposits and prepayments Investments in securities 19 Pledged bank deposits Bank balances and cash Current Liabilities Creditors, other payables and accrued charges 24 Payables — due within one year 25 Payables due to associates 17 Income and other tax payable Bank loans and other borrowings — due within one year 30 Net Current Assets	2003 HK$’000 43,156 — 9,325 823,147 31,286 217,683 — 1,124,597 226,718 66,976 13,718 6,294 370,459 57,677 2,930 — 319,875 1,064,647 84,946 34,611 185 3,064 38,284 161,090 903,557 2,028,154	2002 HK$’000 (as restated) 746,778 14,687 30,953 839,765 22,586 325,885 13,454
		1,994,108
		— 827,744 533,959 60,535 607,022 253,069 37,363 24,839 425,397
		2,769,928
		892,164 46,155 189 52,694 996,861
		1,988,063
		781,865
		2,775,973

– 18 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes Capital and Reserves Share capital 26 Reserves Minority Interests Non-Current Liabilities Bank loans and other borrowings — due after one year 30 Payables — due after one year 25	2003 HK$’000 85,660 1,447,720 1,533,380 250,160 144 244,470 244,614 2,028,154	2002 HK$’000 (as restated) 82,947 1,651,106
		1,734,053
		728,942
		86,949 226,029
		312,978
		2,775,973

The financial statements on pages 25 to 102 were approved and authorised for issue by the Board of Directors on 23rd April, 2004 and are signed on its behalf by:

Dr. Chan Kwok Keung, Charles Director

Dr. Yap, Allan Director

– 19 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

At 31st December,

Notes Non-Current Assets Property, plant and equipment 13 Payment for acquisition of land development rights 14 Investments in subsidiaries 16 Receivables due from subsidiaries 16 Interests in associates 17 Receivables — due after one year 18 Investments in securities 19 Current Assets Receivables due from associates 17 Receivables — due within one year 18 Other receivables, deposits and prepayments Bank balances and cash Current Liabilities Creditors, other payables and accrued charges Payables — due within one year 25 Payables due to associates 17 Bank loans and other borrowings — due within one year 30 Net Current Assets Capital and Reserves Share capital 26 Reserves 29 Non-Current Liabilities Bank loans and other borrowings — due after one year 30 Payables due to subsidiaries 16 Payables — due after one year 25 Dr. Chan Kwok Keung, Charles Director	2003 HK$’000 7,082 — 224,740 1,849,184 2 19,139 9,617 2,109,764 719 14,586 15,846 8,915 40,066 3,875 5,430 185 5,142 14,632 25,434 2,135,198 85,660 1,062,276 1,147,936 13 743,971 243,278 2,135,198 Dr. Yap, Allan Director	2002 HK$’000 7,830 14,687 319,966 1,741,781 2 22,586 10,717
		2,117,569
		14 59,943 8,354 54,172
		122,483
		53,671 2,115 187 43,473
		99,446
		23,037
		2,140,606
		82,947 1,155,005
		1,237,952
		24 676,601 226,029
		2,140,606

– 20 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

Share capital HK$’000 At 1st January, 2002 — As originally stated 46,098 — Prior period adjustment (note 2) — — As restated 46,098 Exchange adjustment — Share of net reserves movement of associates — Net loss not recognised in the consolidated income statement — Issue of shares 9,200 Issue of shares by way of rights issue 27,649 Realised on disposal/dilution of interests in associates — Realised on disposal/dilution of interest in subsidiaries — Appropriated from retained profits — Net loss for the year — At 31st December, 2002 82,947 Exchange adjustment — Share of net reserves movement of associates — Net gain not recognised in the consolidated income statement — Exercise of warrants (note 26) 2,713 Realised on disposal/dilution of interests in associates — Realised on disposal/dilution of interests in subsidiaries — Appropriated from retained profits — Net loss for the year — At 31st December, 2003 85,660 Attributable to: The Company and its subsidiaries 85,660 Associates — At 31st December, 2003 85,660 The Company and its subsidiaries 82,947 Associates — At 31st December, 2002 82,947	Share premium HK$’000 1,876,729 — 1,876,729 — — — — 20,619 — — — — 1,897,348 — — — 1,628 — — — — 1,898,976 1,898,976 — 1,898,976 1,897,348 — 1,897,348	Special capital reserve HK$’000 414,881 — 414,881 — — — — — — — — — 414,881 — — — — — — — — 414,881 414,881 — 414,881 414,881 — 414,881	Capital Goodwill redemption on reserve consolidation HK$’000 HK$’000 233 191,437 — — 233 191,437 — — — — — — — — — — — 3,544 — (71,028) — — — — 233 123,953 — — — — — — — — — (20,333) — 6,852 — — — — 233 110,472 233 62,247 — 48,225 233 110,472 233 55,395 — 68,558 233 123,953	Other non- Exchange distributable reserve reserves HK$’000 HK$’000 (3,121) 35,393 — — (3,121) 35,393 (1,144) — 904 (278) (240) (278) — — — — (1,322) 86 (2,190) (2,577) — 3,215 — — (6,873) 35,839 291 — 2,090 (172) 2,381 (172) — — (128) (238) (3,848) (17,863) — 1,339 — — (8,468) 18,905 (10,011) 19,476 1,543 (571) (8,468) 18,905 (6,454) 36,000 (419) (161) (6,873) 35,839	Deficit HK$’000 (340,860) 3,934 (336,926) — — — — — — — (3,215) (474,134) (814,275) — — — — — 17,863 (1,339) (189,528) (987,279) (647,283) (339,996) (987,279) (650,013) (164,262) (814,275)	Total HK$’000 2,220,790 3,934
						2,224,724
						(1,144) 626
						(518)
						9,200 48,268 2,308 (75,795) — (474,134)
						1,734,053
						291 1,918
						2,209
						4,341 (20,699) 3,004 — (189,528)
						1,533,380
						1,824,179 (290,799)
						1,533,380
						1,830,337 (96,284)
						1,734,053

– 21 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

Included in goodwill on consolidation as at 31st December, 2003, HK$9,492,000 (2002: HK$16,344,000) represented goodwill arising on acquisition of subsidiaries. No goodwill arising on acquisition of associates were included in goodwill on consolidation.

Included in goodwill on consolidation as at 31st December, 2003, HK$71,739,000 (2002: HK$71,739,000) represented negative goodwill arising from acquisition of subsidiaries. Included in goodwill on consolidation as at 31st December, 2003, HK$48,225,000 represented negative goodwill attributable to associates (2002: HK$68,558,000).

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

– 22 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31st December,

OPERATING ACTIVITIES Profit (loss) from operations Adjustments for: Dividend income Interest income Depreciation of property, plant and equipment Amortisation of goodwill Unrealised holding loss on investments in securities Gain on disposal of investments in securities Allowances for bad and doubtful debts Allowances for amounts due from associates Impairment loss of property, plant and equipment Impairment loss of goodwill on acquisition of subsidiaries Impairment loss on properties held for sale Impairment loss on investment properties Allowances for inventories Allowances for loan and interest receivables Gain on disposal of property, plant and equipment Loss on disposal of investment property Operating cash flows before movements in working capital Decrease in properties held for sale Decrease (increase) in inventories Increase in trade debtors Increase in other receivables, deposits and prepayments Decrease in advance to contractors (Decrease) increase in creditors, other payables and accrued charges Increase in amounts due from associates Increase in payables Increase in other asset (Decrease) increase in income and other tax payable Net cash (outflow) inflow from operations Tax paid in other jurisdictions NET CASH (USED IN) FROM OPERATING ACTIVITIES	2003 HK$’000 94,111 (2,832) (48,416) 58,346 1,628 37,604 (46,368) 10,728 2,458 — 20,387 — — 4 43,810 (15,995) — 155,465 — 22,997 (10,287) (9,143) — (49,808) (29,768) 6,496 (226,718) (20,350) (161,116) (6,650) (167,766)	2002 HK$’000 (527,705) (3,732) (37,956) 136,522 1,634 232,636 (71,760) 85,741 — 345,761 — 1,185 9,069 20,347 57,232 (82) 2,000 250,892 51,796 (103,859) (95,961) (54,138) 9,439 332,428 (47,018) — — 5,112 348,691 (2,869) 345,822

– 23 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes INVESTING ACTIVITIES Repayment from receivables Repayment from receivables advanced to associates Proceeds from disposal of investments in securities Proceeds from disposal of property, plant and equipment (Increase) decrease in pledged bank deposits Interest received Proceeds from disposal/dilution of interests in associates Repayment from minority shareholders Proceeds from disposal/dilution of subsidiaries (net of cash and cash equivalents disposed of) 31 Dividend received from investments in securities Receivables advanced Receivables advanced to associates Purchase of investments in securities Investment in associates Purchase of property, plant and equipment Deposit paid for acquisition of a subsidiary Purchase of subsidiaries (net of cash and cash equivalents acquired) 32 Refund of payment for acquisition of land development rights Payment for acquisition of land development rights Costs incurred for properties under/held for development NET CASH USED IN INVESTING ACTIVITIES	2003 HK$’000 774,202 92,124 219,777 25,994 (45,259) 8,793 23,887 — (64,295) 2,832 (558,363) (260,373) (73,368) — (268,704) — (785) 16,965 (13,310) — (119,883)	2002 HK$’000 545,621 — 277,823 77,670 58,681 2,759 9,204 5,357 (38,484) 3,732 (1,226,081) — (365,544) (347,189) (327,081) (75,000) (511) — (11,960) (3,760) (1,414,763)

– 24 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCING ACTIVITIES Advance from payables New bank loans and other borrowings raised Issue of convertible notes Proceeds from issue of shares Contribution from minority shareholders Advance from deposits received Repayment of bank loans and other borrowings Repayment to payables Repayment to minority shareholders Repayment to related companies Share issue expenses Repayment to associates Repayment of obligations under finance leases Interest paid Dividends paid to minority shareholders of subsidiaries NET CASH FROM 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	2003 HK$’000 151,329 994,271 — 1,866 — — (747,264) (165,514) — — — (4) (168) (36,126) (1,432) 196,958 (90,691) 401,935 3,500 314,744 319,875 (5,131) 314,744	2002 HK$’000 986,017 1,414,478 66,000 59,873 48,816 10,795 (1,256,252) (450,851) (43,104) (7,027) (2,405) (71) (13) (96,496) (4,285) 725,475 (343,466) 744,927 474 401,935 425,397 (23,462) 401,935

– 25 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Financial Statements

For the year ended 31st December, 2003

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 Company is an investment holding company. The activities of its principal subsidiaries and associates are set out in notes 16 and 17.

2. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has adopted for the first time, Statement of Standard Accounting Practice (“SSAP”) 12 (Revised) “Income Taxes” issued by the Hong Kong Society of Accountants (“HKSA”). The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred tax. In previous years, partial provision was required to be made for deferred tax using the income statement liability method, i.e. a liability was recognised in respect of timing differences arising, except where those timing differences were not expected to reverse in the foreseeable future. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary 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, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively. Comparative amounts for 2002 have been restated accordingly. As at 1st January, 2002, deficit has been reduced by HK$3,934,000, minority interests have been increased by HK$3,729,000 and deferred tax assets have been increased by HK$7,663,000 respectively, which are the cumulative effect of the change in policy on the results for the periods prior to 2002. The effect of the change was a decreased charge to income taxes for the year ended 31st December, 2002 of HK$5,791,000. The loss shared by the minority interests for the year ended 31st December, 2002 was also decreased by HK$2,818,000.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention as modified for the valuation of investments in securities.

The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

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 and associates 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.

– 26 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition.

Goodwill arising on acquisition prior to 1st January, 2001 continues to be held in reserves, and will be charged to the income statement at the time of disposal of the relevant subsidiary or associate or at such time as the goodwill is determined to be impaired.

Goodwill arising on acquisition after 1st January, 2001 is capitalised and amortised on a straight-line basis over its useful economic life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet.

On disposal of a subsidiary or associate, the attributable amount of unamortised goodwill/goodwill previously eliminated against reserve is included in the determination of the profit or loss on disposal.

Negative goodwill

Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition over the cost of acquisition.

Negative goodwill arising on acquisition prior to 1st January, 2001 continues to be held in reserves and will be credited to income at the time of disposal of the relevant subsidiary or associate.

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.

To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised in income immediately.

Negative goodwill arising on the acquisition of an associate is deducted from the carrying value of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets.

Investments in subsidiaries

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

– 27 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Investments in associates

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, interest in associates is stated at the Group’s share of the net assets of the associates less any identified impairment loss.

The results of the associates are accounted for by the Company on the basis of dividends received and receivable during the year. Investments in associates are included in the Company’s balance sheet at cost as reduced by any identified impairment loss.

Recognition of revenue

Revenue of the Group for the year is recognised on the following bases:

Sales of goods is recognised when goods are delivered and title has passed to the customers.

Hotel revenue from rooms and other ancillary services are recognised when the services are rendered.

Sale of completed properties is recognised on the execution of a binding sale and purchase agreement.

Dividend income from investments in securities is recognised when the 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 interest rate applicable.

Rental income, including rental invoiced in advance from properties let under operating leases, is recognised on a straight-line basis over the period of the respective leases.

Toll revenue is recognised on a receipt basis.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If 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.

– 28 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Property, plant and equipment

Construction in progress

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

Other property, plant and equipment

Property, plant and equipment, other than construction in progress, is stated at cost less deprecation, amortisation and accumulated impairment losses.

The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement.

Depreciation and amortisation is provided to write off the other items of the property, plant and equipment over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method, at the following rates per annum:

Leasehold land and land use rights	Over the term of the lease or land use rights
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%

Assets held under finance leases are depreciated over their estimated useful lives on the same basis as assets owned by the Group.

Investments in securities

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.

– 29 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Capitalisation of borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset, which are assets that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. 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 capitalised.

All other borrowing costs are recognised as expenses in the period in which they are incurred.

Leased assets

Leases are classified as finance leases when the terms of the leases transfer substantially all the risks and rewards of ownership of the assets concerned to the Group. Assets held under finance leases are capitalised at their fair value at the date of acquisition. The corresponding liability to the lessor, net of interest charges, is included in the balance sheet as a finance lease obligation. Finance costs, which represent the difference between the total leasing commitments and the original principal at the inception of the respective leases, are charged to the income statement over the period of the relevant lease so as to produce a constant periodic rate of charge on the remaining balances of the obligations for each accounting year.

All other leases are classified as operating leases and the rentals payables are charged to the income statement on a straight-line basis over the relevant lease term.

Other asset

Other asset is 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.

Foreign currencies

Transactions in currencies other than Hong Kong dollars are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in currencies other than Hong Kong dollars are re-translated at the rates prevailing on the balance sheet date. Gains and losses arising on exchange are dealt with in net profit or loss for the year.

On consolidation, the assets and liabilities of the Group’s operations outside Hong Kong are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed.

– 30 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Pension/Retirement benefit scheme

The pension costs/retirement benefit scheme contributions relating to the defined contribution scheme/ mandatory provident fund scheme charged to the income statement represents contributions payable to the schemes by the Group at rates specified in the rules of the schemes. The amount of contributions payable to pension schemes in jurisdictions other than Hong Kong are charged to the income statement.

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 basis 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, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable 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.

– 31 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. TURNOVER

Sales of goods, net of returns and sales taxes Toll highway operation Sales of properties Hotel operation Rental income	2003 HK$’000 2,884,493 — — — — 2,884,493	2002 HK$’000 3,435,370 66,418 51,231 42,378 6,338
		3,601,735

The Group carries out its activities primarily in the People’s Republic of China (“PRC”) and 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 5.

5. SEGMENTAL INFORMATION

Business segments

For management purposes, the Group is currently organised into the following two major divisions — pharmaceutical products and investments in securities and advance. These divisions are the basis on which the Group reports its primary segment information.

— Pharmaceutical products

Manufacturing and trading of chinese and western medicine products

Investments in securities — and advance

Investments in securities and advance of funds

– 32 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. SEGMENTAL INFORMATION (Cont’d)

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

Discontinuing operation Tires HK$’000 (note a) For the year ended 31st December, 2003 REVENUE External 2,653,056 Inter-segment — 2,653,056 RESULT Segment result 95,847 Unallocated corporate expenses Finance costs Interest income 4,457 Dividend income — Gain on disposal/dilution of interests in subsidiaries 3,711 Loss on disposal/ liquidation of interests in associates — Share of results of associates 14,188 Allowance on receivables advanced to an associate — Loss before taxation Taxation Loss before minority interests Minority interests Net loss for the year		Continuing operation	Continuing operation	Sub-total HK$’000 325,920 984 326,904 (36,493) 43,959 2,832 8,633 (36,481) (189,922) (12,712)	Elimination Consolidated HK$’000 HK$’000 — 2,978,976 (984) — (984) 2,978,976 (984) 58,370 (15,507) (50,712) — 48,416 — 2,832 — 12,344 — (36,481) — (175,734) — (12,712) (169,184) (10,935) (180,119) (9,409) (189,528)
	Pharmaceutical products HK$’000 252,195 — 252,195 154 49 — 8,587 — 2 —	Investments in securities and advance HK$’000 46,369 — 46,369 (17,615) 40,041 2,832 — (36,481) (202,262) (12,712)	Others HK$’000 27,356 984 28,340 (19,032) 3,869 — 46 — 12,338 —

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

– 33 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. SEGMENTAL INFORMATION (Cont’d)

Discontinuing operation Tires HK$’000 (note a) Assets and liabilities at 31st December, 2003 RESULT Segment assets — Interests in associates — Unallocated total assets — Consolidated total assets LIABILITIES Segment liabilities — Unallocated corporate liabilities — Consolidated total liabilities Other information for the year ended 31st December, 2003 Capital expenditure — Property, plant and equipment 260,872 Depreciation and amortisation 47,750 Impairment loss of goodwill — Other non-cash expenses — Gain on disposal of investments in securities — Gain (loss) on disposal of property, plant and equipment 16,122	Continuing operation Investments Pharmaceutical in securities products and advance Others Sub-total Elimination Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 88,395 953,060 88,670 1,130,125 — 1,130,125 15,416 354,360 453,371 823,147 — 823,147 — — — — — 235,972 2,189,244 (56,505) (4,110) (24,516) (85,131) — (85,131) — — — — — (320,573) (405,704) 7,978 — 22 8,000 — 268,872 11,454 — 770 12,224 — 59,974 — — 20,387 20,387 — 20,387 4 107,312 — 107,316 — 107,316 — 46,368 — 46,368 — 46,368 (127) — — (127) — 15,995	Continuing operation Investments Pharmaceutical in securities products and advance Others Sub-total Elimination Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 88,395 953,060 88,670 1,130,125 — 1,130,125 15,416 354,360 453,371 823,147 — 823,147 — — — — — 235,972 2,189,244 (56,505) (4,110) (24,516) (85,131) — (85,131) — — — — — (320,573) (405,704) 7,978 — 22 8,000 — 268,872 11,454 — 770 12,224 — 59,974 — — 20,387 20,387 — 20,387 4 107,312 — 107,316 — 107,316 — 46,368 — 46,368 — 46,368 (127) — — (127) — 15,995
		2,189,244
		(85,131) (320,573)
		(405,704)
		268,872 59,974 20,387 107,316 46,368 15,995

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

– 34 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

5. SEGMENTAL INFORMATION (Cont’d)

Discontinuing operations Toll highway Consumer Electronic Property Hotel Heavy Tires operation goods products investment operation industry Sub-total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note a) (Note b) (Note b) (Note b) (Note b) (Note b) (Note b) For the year ended 31st December, 2002 REVENUE External 3,063,693 66,418 — — 57,953 42,378 131,891 3,362,333 Inter-segment — — — — — — — — 3,063,693 66,418 — — 57,953 42,378 131,891 3,362,333 RESULT Segment result (73,789) (45,968) — — (14,352) (300) 18,023 (116,386) Unallocated corporate expenses Finance costs Interest income 17,772 — 391 — — 270 — 18,433 Dividend income — — 1,369 — — — — 1,369 Gain (loss) on disposal/ dilution of interests in subsidiaries 9,812 32,768 34,912 (9,002) — — 1,679 70,169 Gain on disposal/dilution of interests in associates — — — — — — — — Share of results of associates (94,415) — — — — (151) — (94,566) Loss before taxation Taxation Loss before minority interests Minority interests Net loss for the year Assets and liabilities at 31st December, 2002 ASSETS Segment assets 2,077,663 — — — — — — 2,077,663 Interests in associates 323,530 — — — — 306,326 — 629,856 Unallocated total assets Consolidated total assets LIABILITIES Segment liabilities (838,339) — — — — — — (838,339) Unallocated corporate liabilities Consolidated total liabilities Other information for the year ended 31st December, 2002 Capital expenditure — Property, plant and equipment 272,142 1,240 — — 7,830 9,691 3,191 294,094 — Properties under/held for development — — — — 3,760 — — 3,760 Depreciation and amortisation 97,402 23,784 — — 1,659 1,338 2,063 126,246 Impairment loss 275,294 70,467 — — 10,254 — — 356,015 Other non-cash expenses 37,795 — — — — — — 37,795 Gain on disposal of investments in securities — — — — — — — — Gain on disposal of property, plant and equipment — — — — — — — — Loss on disposal of investment property — — — — — — — —

Continuing operations Investments Phar- in securities maceutical and products advance Others Sub-total Elimination Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 264,786 71,760 14,882 351,428 — 3,713,761 — — 1,840 1,840 (1,840) — 264,786 71,760 16,722 353,268 (1,840) 3,713,761 18,058 (284,532) 5,988 (260,486) (984) (377,856) (191,537) (109,460) 92 19,431 — 19,523 — 37,956 — 2,363 — 2,363 — 3,732 — (5,976) — (5,976) — 64,193 — 14,980 — 14,980 — 14,980 — (43,190) 182 (43,008) — (137,574) (695,566) (12,250) (707,816) 233,682 (474,134) 114,115 992,850 729,692 1,836,657 — 3,914,320 — 209,572 337 209,909 — 839,765 9,951 4,764,036 (96,221) — (282,293) (378,514) — (1,216,853) (1,084,188) (2,301,041) 40,204 — 13 40,217 — 334,311 — — — — — 3,760 11,090 — 820 11,910 — 138,156 — — — — — 356,015 — 358,161 — 358,161 — 395,956 — 71,760 — 71,760 — 71,760 — — 82 82 — 82 — — 2,000 2,000 — 2,000

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

– 35 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. SEGMENTAL INFORMATION (Cont’d)

Notes:

• (a) Following the disposal/dilution of interest in subsidiaries engaged in tire operation during the year ended 31st December, 2003, the tire operation was regarded as discontinuing operation during the year ended 31st December, 2003.

• (b) Following the disposal of certain subsidiaries of the Group during the year ended 31st December, 2002, these operations were regarded as discontinuing operation. Details of these are set out in the annual financial statements of the Company for the year ended 31st December, 2002 dated 23rd April, 2003.

The aggregate carrying amounts of the assets and liabilities of the discontinuing operations at the date of discontinuance during the year ended 31st December, 2002 and 2003 were as follows:

2003 Tire operation HK$’000 Total assets 2,853,657 Total liabilities (2,038,170) Operating cash in (out) flow 144,681 Cash outflow in respect of investing activities (503,710) Cash in (out) flow in respect of financing activities 286,462 Net operating cash in (out) flow (72,567)			2002		Heavy industry HK$’000 191,405 (145,319) 8,606 — (8,015) 591
	Toll highway operation HK$’000 728,010 (649,650) 44,561 (3,867) (36,442) 4,252	Consumer goods HK$’000 138,620 (46,425) — — — —	Electronic products HK$’000 27,821 (14,405) (4,782) — — (4,782)	Property investment and hotel operation HK$’000 908,670 (264,749) 80,877 (48,025) 65,068 97,920

– 36 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. SEGMENTAL 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:

The PRC Hong Kong Overseas	Turnover 2003 2002 HK$’000 HK$’000 2,683,004 2,624,238 172,080 246,372 29,409 731,125 2,884,493 3,601,735	Turnover 2003 2002 HK$’000 HK$’000 2,683,004 2,624,238 172,080 246,372 29,409 731,125 2,884,493 3,601,735
		3,601,735

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:

The PRC Hong Kong Overseas	Carrying amount of segment assets at 31st December 2003 2002 HK$’000 HK$’000 752,431 2,447,005 1,263,279 2,297,828 173,534 19,203 2,189,244 4,764,036	Capital additions for the year ended 31st December 2003 2002 HK$’000 HK$’000 260,872 279,093 8,000 58,978 — — 268,872 338,071	Capital additions for the year ended 31st December 2003 2002 HK$’000 HK$’000 260,872 279,093 8,000 58,978 — — 268,872 338,071
			338,071

6. OTHER OPERATING INCOME

Interest income Gain on disposal of investments in securities Dividend income from listed investments Gain on disposal of property, plant and equipment Net exchange gain Sale of scrap materials Others	2003 HK$’000 48,416 46,368 2,832 15,995 23,108 — 9,012 145,731	2002 HK$’000 37,956 71,760 3,732 82 8,700 18,052 13,432
		153,714

– 37 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. OTHER EXPENSES

Impairment loss on: Property, plant and equipment — toll highway — construction in progress — leasehold properties — machinery and equipment — motor vehicles Properties held for sale Investment properties Goodwill on acquisition of subsidiaries Allowances for inventories Unrealised holding loss on investments in securities Allowances for bad and doubtful debts Allowances for loan and interest receivables Allowances for amounts due from associates Loss on disposal of investment property Staff redundancy cost Others	2003 HK$’000 — — — — — — — — 20,387 4 37,604 10,728 43,810 2,458 — 1,938 1,467 118,396	2002 HK$’000 70,467 45,354 64,404 164,304 1,232
		345,761
		1,185 9,069 — 20,347 232,636 85,741 57,232 — 2,000 — 6,573
		760,544

– 38 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. PROFIT (LOSS) FROM OPERATIONS

Profit (loss) from operations has been arrived at after charging: Staff costs — directors remuneration_(note 9(a)) — other staff costs(note 9(b))_ — retirement benefits scheme contributions, excluding directors — redundancy payment Total staff costs Auditors’ remuneration Current year Overprovision in prior years Depreciation and amortisation of property, plant and equipment Amortisation of goodwill included in administrative expenses and after crediting: Net rental income in respect of premises after outgoings of HK$1,111,000	2003 HK$’000 3,217 150,543 27,196 1,938 182,894 5,427 (381) 58,346 1,628 —	2002 HK$’000 3,205 318,041 24,679 — 345,925 7,846 (380) 136,522 1,634 12,272

– 39 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. DIRECTORS’ AND EMPLOYEE REMUNERATION

(a) Directors’ Remuneration

Fees — Executive directors — Non-executive directors — Independent non-executive directors Other emoluments — Executive directors Salaries and other benefits Retirement benefits scheme contributions	2003 HK$’000 — — 228 228 2,965 24 2,989 3,217	2002 HK$’000 — — 178
		178
		2,999 28
		3,027
		3,205

The number of directors (including alternate directors) whose remuneration falls within the bands set out below is as follows:

HK$ Nil to 1,000,000 1,000,001 to 1,500,000 1,500,001 to 2,000,000	2003 Number of directors 9 1 1 11	2002 Number of directors 10 2 —
		12

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.

– 40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

(b) Employees’ Remuneration

The five highest paid individuals in the Group included two (2002: three) directors 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 HK$ Nil to 1,000,000 1,000,001 to 1,500,000	2003 HK$’000 1,551 2003 Number of employees 3 —	2002 HK$’000 1,680
		2002 Number of employees 1 1

10. FINANCE COSTS

Interest on borrowings wholly repayable within five years: Bank borrowings Other borrowings Obligations under finance leases Interest on bank borrowings not wholly repayable within five years _Less:_Amount capitalised in construction in progress	2003 HK$’000 34,455 16,246 11 50,712 — 50,712 — 50,712	2002 HK$’000 60,034 17,257 10
		77,301 36,443
		113,744 (4,284)
		109,460

Borrowing costs capitalised during the year ended 31st December, 2002 arose on the general borrowing pool and are calculated by applying a capitalisation rate of 5.87% to expenditure on qualifying assets.

– 41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. TAXATION

The charge (credit) comprises: Taxation in other jurisdictions — Current year — Underprovision in prior years Hong Kong Profits Tax Deferred tax credit_(note 20)_ Taxation attributable to the Company and its subsidiaries	2003 HK$’000 11,467 238 — 11,705 (770) 10,935	2002 HK$’000 18,041 — — 18,041 (5,791) 12,250

Hong Kong Profits Tax is calculated at 17.5% (2002: 16%) of the estimated assessable profit for the year. Hong Kong Profits Tax rate was changed from 16% to 17.5% with effect from 2003/2004 year of assessment. No provision for Hong Kong Profits Tax was made in the financial statements for both years as the subsidiaries operated in Hong Kong has no assessable profit for both years.

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 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.

– 42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. 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:

Loss before taxation Tax at the average income tax rate_(Note a)_ Tax effect of income not taxable in determining taxable profit Tax effect of expenses not deductible for tax purpose Underprovision in respect of prior year Tax effect of tax losses not recognised Utilisation of tax losses previously not recognised Effect of tax exemption granted to PRC subsidiaries Effect of different tax rates of subsidiaries operating in other jurisdictions Others Tax expense and effective tax rate for the year	2003 HK$’000 % (169,184) (51,297) (30.3) (28,399) (16.8) 87,025 51.4 238 0.1 2,209 1.3 (3,084) (1.8) (13,104) (7.7) 16,570 9.8 777 0.5 10,935 6.5	2002 HK$’000 % (695,566) (206,442) (29.7) (195,401) (28.1) 364,604 52.4 — — 4,857 0.7 — — (22,738) (3.3) 67,544 9.8 (174) — 12,250 1.8

Notes:

• (a) The average income tax rate for the year ended 31st December, 2003 represents the weighted average income tax 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, 2003, the Group had unused tax loss of approximately HK$231,337,000 (2002: HK$326,873,000) available for 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.

12. LOSS PER SHARE

The calculation of the basic loss per share is based on the net loss for the year of approximately HK$189,528,000 (2002: HK$474,134,000) and on the weighted average of 829,734,016 (2002: adjusted weighted average of 620,259,682 after taking into account the effect of rights issue carried out by the Company in August 2002) ordinary shares in issue during the year.

No disclosure of the diluted loss per share has been shown for the year ended 31st December, 2003 and 2002 as the exercise of the share options and warrants would result in a decrease in loss per share.

– 43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

13. PROPERTY, PLANT AND EQUIPMENT

THE GROUP COST At 1st January, 2003 Currency realignment Reclassification Additions Transfer Disposals Disposal of subsidiaries At 31st December, 2003 DEPRECIATION, AMORTISATION AND IMPAIRMENT LOSS At 1st January, 2003 Currency realignment Provided for the year Eliminated on disposals Eliminated on disposal of subsidiaries At 31st December, 2003 NET BOOK VALUES At 31st December, 2003 At 31st December, 2002 THE COMPANY COST At 1st January, 2003 Additions At 31st December, 2003 DEPRECIATION At 1st January, 2003 Provided for the year At 31st December, 2003 NET BOOK VALUES At 31st December, 2003 At 31st December, 2002	Land and buildings HK$’000 345,297 (1,301) 138 1,778 29,417 (132) (307,253) 67,944 169,337 (485) 9,286 (5,199) (115,328) 57,611 10,333 175,960 6,824 — 6,824 532 171 703 6,121 6,292	Furniture and fixtures HK$’000 59,743 682 1,602 5,902 — (4,728) (30,105) 33,096 4,052 724 8,215 (4,020) (5,356) 3,615 29,481 55,691 1,488 — 1,488 603 285 888 600 885	Machinery and equipment HK$’000 1,028,341 (3,521) — 8,390 127,136 (27,883) (973,696) 158,767 598,776 (1,880) 38,879 (14,315) (463,927) 157,533 1,234 429,565 1,316 22 1,338 1,002 179 1,181 157 314	Construction Motor in vehicles progress HK$’000 HK$’000 33,675 118,933 72 (419) — (1,740) 2,329 250,473 — (156,553) (1,209) — (31,262) (209,934) 3,605 760 21,692 45,354 (65) — 1,966 — (419) — (20,917) (45,354) 2,257 — 1,348 760 11,983 73,579 541 — — — 541 — 202 — 135 — 337 — 204 — 339 —	Total HK$’000 1,585,989 (4,487) — 268,872 — (33,952) (1,552,250) 264,172 839,211 (1,706) 58,346 (23,953) (650,882) 221,016 43,156 746,778 10,169 22 10,191 2,339 770 3,109 7,082 7,830

– 44 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

At the balance sheet dates, the land and buildings of the Group and the Company are held under mediumterm 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$173,000 (2002: HK$237,000) in respect of assets held under finance leases.

14. PAYMENT FOR ACQUISITION OF LAND DEVELOPMENT RIGHTS

The Group And The Company

During the year ended 31st December, 2001, an agreement was entered into between the Company and � ������������(the “People’s Government of Li Qiao Town”) for the joint development project of a piece of land which is adjacent to the eastern side of Beijing Capital Airport, the PRC, under which the Company agreed to make an aggregate payment of approximately RMB230,000,000 (equivalent to HK$216,981,000) to the People’s Government of Li Qiao Town for the land development right of the project.

On 22nd July, 2003, the Group entered into an agreement with the People’s Government of Li Qiao Town for the termination of this project. In accordance with the terms of the agreement, the People’s Government of Li Qiao Town will refund the previously paid partial payment to the Group and will provide the damage claim for RMB10,000,000. Before the termination of the joint development project, partial payments of approximately RMB20,500,000, equivalent to approximately HK$19,223,000 (2002: RMB8,000,000, equivalent to approximately HK$7,441,000) was paid by the Company. The Company had also incurred consultancy fee and project management fee for this project totalling approximately HK$8,774,000 (2002: approximately HK$7,246,000) before termination of the joint development project.

Regarding the termination of the joint development project, RMB18,000,000 (equivalent to approximately HK$16,965,000) was repaid by the People’s Government of Li Qiao Town to the Group.

The remaining balance of HK$10,000,000 after allowances of HK$1,032,000 made in the financial statements during the year ended 31st December 2003, which in the opinion of the directors, will be recoverable from the People’s Government of Li Qiao Town, is classified as other receivables as at 31st December, 2003.

– 45 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. GOODWILL

COST At 1st January Arising from acquisition of subsidiaries Eliminated on disposal of subsidiaries At 31st December AMORTISATION AND IMPAIRMENT At 1st January Provided for the year Impairment loss recognised At 31st December NET BOOK VALUES At 31st December	The Group 2003 2002 HK$’000 HK$’000 33,082 33,203 387 — — (121) 33,469 33,082 2,129 495 1,628 1,634 20,387 — 24,144 2,129 9,325 30,953

Goodwill is amortised on a straight-line basis and the amortisation period for goodwill is 20 years.

As explained in note 40, the Group entered into a conditional agreement on 19th March, 2004 to dispose of its entire interests in Tung Fung 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 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 consolidated income statement accordingly.

– 46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INVESTMENTS IN SUBSIDIARIES/RECEIVABLES DUE FROM SUBSIDIARIES/PAYABLES DUE TO SUBSIDIARIES

Investments in subsidiaries Shares listed overseas, at cost Unlisted shares, at cost Market value of listed shares Receivables due from subsidiaries Amounts due from subsidiaries _Less:_Allowances Payables due to subsidiaries Amounts due to subsidiaries	2003 HK$’000 139,703 85,037 224,740 69,885 3,782,343 (1,933,159) 1,849,184 743,971	2002 HK$’000 228,703 91,263 319,966 10,530 3,876,129 (2,134,348) 1,741,781 676,601

The receivables due from and payables due to subsidiaries are unsecured, non-interest bearing and have no fixed terms of repayment. The amounts are not repayable within one year and are therefore shown as noncurrent.

– 47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INVESTMENTS IN SUBSIDIARIES/RECEIVABLES DUE FROM SUBSIDIARIES/PAYABLES DUE TO SUBSIDIARIES (Cont’d)

Particulars of the principal subsidiaries at 31st December, 2003 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	A$31,184,116	—	57.26	Investment holding
(“MRI”, formerly	(note a)
known as
Australia Net.Com
Limited)(note d)
China Pharmaceutical	Hong Kong	HK$2	—	57.26	Investment holding
Industrial Limited
(note d)
China Enterprises Limited	Bermuda	Supervoting	33.27	24.84	Investment holding
(“China Enterprises”)	(note b)	Common Stock	(note b)	(note b)
(note d)		US$30,000
		Common Stock
		US$60,173
Zhuhai Zhongce Property	British Virgin	US$1	—	100	Holding of land
Investment Limited	Islands				development
(formerly known as					project held for
Talent Shop Investment					resale
Limited)(note d)
Tung Fong Hung	British	US$10,000	—	100	Manufacture and
(notes c & d)	Virgin Islands				trading of chinese
					and western
					pharmaceutical
					products

– 48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INVESTMENTS IN SUBSIDIARIES/RECEIVABLES DUE FROM SUBSIDIARIES/PAYABLES DUE TO 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. Tung Fong Hung operates in Hong Kong, the PRC and overseas.

• d. These companies are limited liability company incorporated in the respective jurisdiction.

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 of the Company, 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 of the Company, result in particulars of excessive length.

– 49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES/RECEIVABLES DUE FROM ASSOCIATES/PAYABLES DUE TO ASSOCIATES

Interests in associates Share of net assets Goodwill At 1st January Arising from acquisition of associates Less:_amortisation Realised upon dilution of interests in associates At 31st December Negative goodwill At 1st January Release of negative goodwill Arising from acquisition of associates At 31st December Unlisted shares, at cost Unlisted convertible notes due from an associate(note i) Loans receivables due from associates(note ii)_ _Less:_Allowance	The Group 2003 2002 HK$’000 HK$’000 531,015 714,070 90,637 20,136 — 91,784 (9,178) (1,147) — (20,136) 81,459 90,637 (123,379) — 12,338 — — (123,379) (111,041) (123,379) — — 84,800 84,800 260,312 84,323 (23,398) (10,686) 321,714 158,437 823,147 839,765	The Company 2003 2002 HK$’000 HK$’000 — — — — — — — — — — — — — — — — — — — — 2 2 — — — — — — — — 2 2	The Company 2003 2002 HK$’000 HK$’000 — — — — — — — — — — — — — — — — — — — — 2 2 — — — — — — — — 2 2
			— — — —
			—
			— — —
			—
			2
			— — —
			—
			2

– 50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES/RECEIVABLES DUE FROM ASSOCIATES/PAYABLES DUE TO ASSOCIATES (Cont’d)

Notes:

• (i) The carrying value of the unlisted convertible notes at 31st December, 2003 (2002: HK$84,800,000) represented investments in convertible bond (“Wing On Bond”) issued by Wing On. The Wing On Bond is interest bearing at 2% per annum and is due for redemption on 19th April, 2004 at HK$84,800,000 with accrued interest. It entitled the holders at any time after the date of the issuance of the convertible bond and up to 19th April, 2004 to convert the Wing On Bond into shares of Wing On at an initial conversion price of HK$0.32 per share (subject to adjustment).

Subsequent to the balance sheet date, the Group entered into a new conditional convertible agreement with Wing On pursuant to which Wing On will issue the convertible bonds with principal amount of HK$155,000,000 to the Group, of which HK$84,800,000 will be settled by the cancellation of Wing On Bond. This transaction has not yet completed at the date of this report.

• (ii) The amounts are unsecured, carry interest at the prevailing market date and repayable after one year from the balance sheet date.

Goodwill is amortised on a straight-line basis and the amortisation period for goodwill is 10 years. Negative goodwill is released to income over 10 years.

The Group 2003 2002 HK$’000 HK$’000 Receivables due from associates Amounts due from associates 6,294 60,535 Payables due to associates Amounts due to associates 185 189 Market value of listed shares in associates 325,245 567,143	The Company 2003 2002 HK$’000 HK$’000 719 14 185 187 — —	The Company 2003 2002 HK$’000 HK$’000 719 14 185 187 — —
		187
		—

The amounts due from/to associates are unsecured, non-interest bearing and repayable on demand.

– 51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES/RECEIVABLES DUE FROM ASSOCIATES/PAYABLES DUE TO ASSOCIATES (Cont’d)

Particulars of the principal associates at 31st December, 2003 are as follows:

			Proportion of
			nominal value
			of issued share
	Place of		capital/registered
	incorporation/		capital held
	registration/	Place of	indirectly by
Name of associate	establishment	operation	the Company	Principal activities
			%
Apex Quality Group	British Virgin	Hong Kong	22.65	Hotel and leisure
Limited (“Apex”)	Islands	and PRC		related business
(note b)
China Velocity Group	Bermuda	Hong Kong	22.65	Property investment
Limited (“China		and PRC		and development
Velocity”, formerly				in the PRC
known as Rosedale
Hotel Group Limited)
(notes a and b)
Wing On Travel	Bermuda	Hong Kong	32.21	Business of providing
(Holdings) Limited				package tours, travel
(“Wing On”, formerly				and other related
known as Ananda				services
Wing On Travel
(Holdings) Limited)
(notes a and b)
Dong Fang Gas	Bermuda	Hong Kong	43.06	Trading of ceramic tiles
Holdings Limited		and PRC		and bathroom
(“Dong Fang Gas”)				accessories, securities
(notes a, b and d)				trading and engaged
				in the business of
				natural supply,
				storage and related
				services
Hangzhou Zhongce	PRC	PRC	26.00	Manufacturing of tires
Rubber Company
Limited_(note c)_

– 52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES/RECEIVABLES DUE FROM ASSOCIATES/PAYABLES DUE TO ASSOCIATES (Cont’d)

Notes:

• (a) The shares of China Velocity, Wing On and Dong Fang Gas 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.

• (d) On 5th March, 2004, Dong Fang Gas and PCCW Limited (“PCCW”, a company with its shares listed on the Hong Kong Stock Exchange) jointly announced that Dong Fang Gas conditionally agreed to purchase certain properties interest including shareholders’ loan due to PCCW for consideration of HK$6,557 million. Following the completion of the above transaction, the Group’s interest in Dong Fang Gas will be diluted from 43.06% to 2.83%. At the date of this report, the above transaction has not yet completed. Details of these are set out in note 40.

The following is a summary of the most recent published financial information and unaudited management account of the principal associates held by the Group as at 31st December, 2003:

Consolidated results for the year:

Turnover Net loss for the year Net loss for the year attributable to the Group	Apex 1.1.2003 to 31.12.2003 HK$’000 7,850 (1,403) (317)	China Velocity 1.1.2003 to 31.12.2003 HK$’000 132,583 (170,207) (48,604)	Wing On 1.1.2003 to 31.12.2003 HK$’000 1,416,235 (370,972) (106,078)	Dong Fang Gas 1.1.2003 to 31.12.2003 HK$’000 124,088 (88,435) (38,080)

– 53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES/RECEIVABLES DUE FROM ASSOCIATES/PAYABLES DUE TO ASSOCIATES (Cont’d)

Consolidated financial position:

Non-current assets Current assets Current liabilities Non-current liabilities Minority interests Net assets Share of net assets held by the Group: As at 31st December, 2003 Market value of listed shares in associates held by the Group	Apex At 31.12.2003 HK$’000 1,592,960 84,038 (143,811) (1,018,106) (72,058) 443,023 100,325 N/A	China Velocity At 31.12.2003 HK$’000 576,167 37,515 (122,951) (126,638) (30,930) 333,163 75,461 72,245	Wing On At 31.12.2003 HK$’000 462,838 644,513 (554,689) (229,563) (29,778) 293,321 114,041 118,000	Dong Fang Gas At 31.12.2003 HK$’000 245,434 454,057 (525,958) — (15,132) 158,401 68,207 135,000

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.

– 54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. RECEIVABLES

Loan 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	The Group 2003 2002 HK$’000 HK$’000 242,967 230,300 297,124 493,848 10 6 540,101 724,154 (138,356) (94,546) 401,745 629,608 (370,459) (607,022) 31,286 22,586	The Company 2003 2002 HK$’000 HK$’000 — — 33,725 82,529 — — 33,725 82,529 — — 33,725 82,529 (14,586) (59,943) 19,139 22,586

Notes:

• (a) Included in secured loan and interest receivables were amounts of approximately HK$128,183,000 (2002: HK$121,500,000) and approximately HK$114,784,000 (2002: HK$108,800,000) due from Danwei Ltd. (“Danwei”) and Lucklong Venture Ltd. (“Lucklong”) respectively. Ms. Chau Mei Wah, Rosanna (“Ms. Chau”), a director of the Company is the former director of Danwei and Lucklong. In addition, Mr. Lau Ko Yuen, Tom, the former alternate director to Ms. Chau, is a director of the Company’s substantial shareholder and a director of Danwei and Lucklong. Shares in certain property holding companies held by Danwei and Lucklong were pledged to the Group as securities to the loans.

The loan receivables carry interest at the prevailing market rate.

• (b) Included in unsecured loan and interest receivables were amounts of approximately HK$12,146,000 (2002: HK$40,299,000) due from a subsidiary of an investee.

The loan receivables carry interest at the prevailing market rate.

– 55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. RECEIVABLES (Cont’d)

Notes: (Cont’d)

(c) Details of the receivable due from related companies are as follows:

Paul Y. — ITC Management Limited Paul Y. — ITC Construction Holdings Limited ITC Corporation Limited	The Group 2003 2002 HK$’000 HK$’000 — 6 5 — 5 — 10 6	The Company 2003 2002 HK$’000 HK$’000 — — — — — — — —	The Company 2003 2002 HK$’000 HK$’000 — — — — — — — —
			—

The amounts are unsecured, non-interest bearing and are repayable on demand.

Paul Y. — ITC Management Limited is a wholly-owned subsidiary of substantial shareholders of the Company. Paul Y. — ITC Construction Holdings Limited (“Paul Y. — ITC”) is a substantial shareholder of the Company and ITC Corporation Limited is a shareholder of Paul Y. — ITC.

– 56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. INVESTMENTS IN SECURITIES

Equity securities: Listed Unlisted Debt securities: Unlisted Club debentures Total Total and reported as: Listed Hong Kong Elsewhere Unlisted Classified under Current Non-current Market value of listed securities	The Group Other investments 2003 2002 HK$’000 HK$’000 140,053 265,931 36,314 46,952 176,367 312,883 43,421 49,540 825 825 220,613 363,248 112,800 239,016 27,253 26,915 140,053 265,931 80,560 97,317 220,613 363,248 2,930 37,363 217,683 325,885 220,613 363,248 140,053 265,931	The Company Other investments 2003 2002 HK$’000 HK$’000 — — 8,792 9,892 8,792 9,892 — — 825 825 9,617 10,717 — — — — — — 9,617 10,717 9,617 10,717 — — 9,617 10,717 9,617 10,717 — —	The Company Other investments 2003 2002 HK$’000 HK$’000 — — 8,792 9,892 8,792 9,892 — — 825 825 9,617 10,717 — — — — — — 9,617 10,717 9,617 10,717 — — 9,617 10,717 9,617 10,717 — —
			9,892
			—
			825
			10,717
			— —
			— 10,717
			10,717
			— 10,717
			10,717
			—

The carrying value of listed securities in Hong Kong at 31st December, 2003 included an amount of HK$32,902,000 (2002: HK$52,984,800), representing 4.1% (2002: 10%) interest in Ming Pao Enterprises Corporation Limited (“Ming Pao”). Ming Pao is incorporated in Bermuda and is listed on the Hong Kong Stock Exchange.

– 57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. DEFERRED TAX ASSETS

The following are the major deferred tax assets recognised and movement during the current and prior accounting periods:

	Bad and
	doubtful debts
	and allowance
	HK$’000
At 1st January, 2002
— As previously reported	—
— Prior year adjustment	7,663
— As restated	7,663
Credit to the consolidated income statement	5,791
At 31st December, 2002	13,454
Credit to the consolidated income statement	770
	14,224
Realised on disposal of subsidiaries	(14,224)
At 31st December, 2003	—

21. OTHER ASSET

The amount represents cost incurred in connection with a land development project in the PRC. The project is a land development of �������(formerly known as ����������) 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 between themselves.

The consideration of HK$190,000,000 for obtaining the exclusive development right was paid by the Group during the year whilst RMB39,000,000 (equivalent to approximately HK$36,596,000) was already paid by the Group for 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 an independent valuer on open market value basis and no impairment loss is identified.

– 58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22. INVENTORIES

Raw materials Work in progress Finished goods	The Group 2003 2002 HK$’000 HK$’000 12,146 330,660 163 21,414 54,667 475,670 66,976 827,744	The Group 2003 2002 HK$’000 HK$’000 12,146 330,660 163 21,414 54,667 475,670 66,976 827,744
		827,744

Included above are raw materials of HK$Nil (2002: HK$330,660,000) and finished goods of HK$54,667,000 (2002: HK$475,670,000) which are carried at their net realisable value.

The cost of inventories recognised as an expense during the year was approximately HK$2,459,991,000 (2002: HK$3,052,768,000).

23. TRADE DEBTORS

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	The Group 2003 2002 HK$’000 HK$’000 12,011 387,848 762 89,724 945 56,387 13,718 533,959	The Group 2003 2002 HK$’000 HK$’000 12,011 387,848 762 89,724 945 56,387 13,718 533,959
		533,959

– 59 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24. CREDITORS, OTHER PAYABLES AND ACCRUED CHARGES

Included in creditors, other payables and accrued charges are creditors with the following aged analysis:

0-90 days 91-180 days Over 180 days _Add:_Other payables and accrued charges	The Group 2003 2002 HK$’000 HK$’000 39,468 219,156 1,413 48,641 813 109,345 41,694 377,142 43,252 515,022 84,946 892,164	The Group 2003 2002 HK$’000 HK$’000 39,468 219,156 1,413 48,641 813 109,345 41,694 377,142 43,252 515,022 84,946 892,164
		377,142 515,022
		892,164

25. 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	The Group 2003 2002 HK$’000 HK$’000 201,286 272,184 77,795 — 279,081 272,184 (34,611) (46,155) 244,470 226,029	The Company 2003 2002 HK$’000 HK$’000 198,105 228,144 50,603 — 248,708 228,144 (5,430) (2,115) 243,278 226,029	The Company 2003 2002 HK$’000 HK$’000 198,105 228,144 50,603 — 248,708 228,144 (5,430) (2,115) 243,278 226,029
			228,144 (2,115)
			226,029

– 60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. PAYABLES (Cont’d)

Notes:

(a) Details of the payables due to related companies are as follows:

Notes Nation Cheer Investment Limited (i) Hanny Magnetics Limited (i) ITC Management Limited (ii) Paul Y. Project Management International Limited (i) Mass Success International Ltd. (iii) Paul Y. — ITC Management Limited (i) Micro Tech Ltd. (i) Cycle Company Limited and Gunnell Properties Limited (i) ITC Corporation Limited (ii) Paul Y. (E & M) Company Limited (i) Paul Y. — ITC (E & M) Contractors Limited (i)	The 2003 HK$’000 192,675 1,076 519 2,314 1,251 450 270 693 744 1,014 280 201,286	Group 2002 HK$’000 122,702 104,595 42,937 1,879 71 — — — — — — 272,184	The Company 2003 2002 HK$’000 HK$’000 192,675 122,702 1,077 103,457 519 35 2,313 1,879 1,251 71 — — 270 — — — — — — — — — 198,105 228,144	The Company 2003 2002 HK$’000 HK$’000 192,675 122,702 1,077 103,457 519 35 2,313 1,879 1,251 71 — — 270 — — — — — — — — — 198,105 228,144
				228,144

All amounts are unsecured, carry interest at prevailing market rate. Except the payables due to Nation Cheer Investment Limited (2002: Payables due to Nation Cheer Investment Limited of HK$123,702,000 and Hanny Magnetics Limited of HK$103,327,000) which are repayable after one year from the balance sheet date, all remaining balances are repayable on demand.

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.

• (iii) Mass Success International Ltd. is an associate of a substantial shareholder of the Company.

• (b) The amounts are unsecured, carry interest at prevailing market rate. Except the payable of HK$51,795,000 (2002: HK$Nil) which are repayable after one year from the balance sheet date, all remaining balances are repayable on demand.

– 61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. SHARE CAPITAL

Authorised: Ordinary shares of HK$0.10 each at 31st December, 2002 and 2003 Issued and fully paid: Ordinary shares of HK$0.10 each at 1st January, 2002 Issue of shares Rights issue of shares Ordinary shares of HK$0.10 each at 31st December, 2002 Exercise of warrants At 31st December, 2003	Number of shares 8,000,000,000 460,978,942 92,000,000 276,489,471 829,468,413 27,126,674 856,595,087	Value HK$’000 800,000 46,098 9,200 27,649 82,947 2,713 85,660

During the year ended 31st December, 2003, 27,126,674 shares in the Company of HK$0.10 each were issued upon the exercise of 27,126,674 warrants at a price of HK$0.16 per share. The shares issued during the year rank pari passu with the then existing shares in all respect.

27. WARRANTS

In accordance with the conditions attached to the warrants of the Company, each of the warrants confers rights to the registered holder to subscribe for one new share of the Company in cash at an initial subscription price of HK$0.16 per share, subject to adjustment, at any time from the date of issue to 31st December, 2003 (both days inclusive). The movement in the number of warrants of the Company are set out as below:

	Number of
	outstanding warrant
At 1st January, 2003	165,893,682
Exercised during the year	(27,126,674)
Lapsed during the year	(138,767,008)
At 31st December, 2003	—

On 31st December, 2003, all of the remaining outstanding warrants, which entitled the registered holders to subscribe for 138,767,008 shares of HK$0.10 each in the Company, were lapsed.

Details of the exercise of the Company’s warrants during the year are set out in note 26.

– 62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE OPTIONS

The Company

The 1992 Scheme

In accordance with the terms of the Company’s Executive Share Option Scheme adopted on 20th July, 1992 and effective for a period of ten years after the date of the scheme, the Company granted to directors and employees of the Company and its subsidiaries share options to subscribe for its ordinary shares for a consideration of HK$1 for the primary purpose of providing incentives to directors and eligible employees. The subscription price, subject to adjustment, is based on 80% of the average of the closing prices of the shares of the Company on the five trading days immediately before the options were offered. Options granted are exercisable not later than ten years after the date the options are granted. The 1992 Scheme was terminated pursuant to an ordinary resolution passed at an extraordinary general meeting of the Company held on 4th June, 2002.

At 31st December, 2003, there was no shares issuable under the 1992 Scheme (2002: 510,000, representing approximately 0.061% of the shares of the Company in issue at that date). The total number of shares in respect of which options may be granted under the 1992 Scheme was not permitted to exceed 10% of the shares of the Company in issue excluding any share issued pursuant to the 1992 Scheme at any point in time, without prior approval from the Company’s shareholders. The number of shares in respect of which options may be granted to any individual was not permitted to exceed 25% of the aggregate number of shares of the Company in issue and issuable under the 1992 Scheme at any point in time, without prior approval from the Company’s shareholders.

A summary of the movements of share options under the 1992 Scheme during the year ended 31st December, 2003 are as follows:

			Number	of shares under	option
				Surrendered/
			Outstanding	lapsed	Outstanding
		Exercise	at	during	at
Date of grant	Exercisable period	price	1.1.2003	the year	31.12.2003
		HK$
12.1.2000	18.1.2000 to 17.1.2005	3.145	75,000	(75,000)	—
Total for directors			75,000	(75,000)	—
Employees
14.2.2000	16.2.2000 to 15.2.2005	3.702	435,000	(435,000)	—
Total for employees			435,000	(435,000)	—
Grand total			510,000	(510,000)	—

– 63 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE OPTIONS (Cont’d)

The Company (Cont’d)

The 1992 Scheme (Cont’d)

A summary of the movements of share options under the 1992 Scheme during the year ended 31st December, 2002 is as follows:

Exercise Date of grant Exercisable period price Notes HK$ 21.7.1997 21.7.1998 to 20.7.2002 6.060 (i) 12.1.2000 18.1.2000 to 17.1.2005 3.440 (ii) 3.145 (ii) Total for directors Employees 21.7.1997 21.7.1998 to 20.7.2002 6.060 (i) 14.2.2000 16.2.2000 to 15.2.2005 4.050 (ii) 3.702 (ii) Total for employees Grand total	Number of shares under option Surrendered/ Outstanding lapsed Adjustment at during due to the 1.1.2002 the year Rights Issue 9,750 (9,750) — 50,000 — (50,000) — — 75,000 59,750 (9,750) 25,000 27,000 (27,000) — 290,000 — (290,000) — — 435,000 317,000 (27,000) 145,000 376,750 (36,750) 170,000	Outstanding at 31.12.2002 — — 75,000
		75,000
		— — 435,000
		435,000
		510,000

Notes:

• (i) As the options lapsed before the rights issue became effective, carried out by the Company during the year ended 31st December, 2002, no adjustments were required to be made on the exercise price and number of options granted.

• (ii) Following the rights issue carried out by the Company, during the year ended 31st December, 2002 the exercise prices of the share options were adjusted to HK$3.145 and HK$3.702 from their initial exercise prices of HK$3.440 and HK$4.050 respectively. The number of share options was also adjusted as a result of the rights issue.

– 64 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE OPTIONS (Cont’d)

The Company (Cont’d)

The 2002 Scheme

On 4th June, 2002, the Company adopted a new 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 the higher of 10% of the shares of the Company in issue pursuant to the 2002 Scheme at any point in time, without prior approval for the Company’s shareholders. 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 under the 2002 Scheme.

Subsidiary

China Enterprises

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 granted options to officers and employees, and directors who are also employees, of China Enterprises and its subsidiaries to subscribe for common stock in China Enterprises 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. 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’ 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, 2003, there was no shares issuable under the above scheme (2002: 20,000 representing 0.22% of the share of China Enterprises in issue at that date). 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 in issue at any point in time, without prior approval from China Enterprises’ 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’ shareholders.

– 65 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE OPTIONS (Cont’d)

Subsidiary (Cont’d)

China Enterprises (Cont’d)

A summary of the movements of share options under the share option scheme of China Enterprises held by employees during the year is as follows:

		Outstanding	Surrendered/	Outstanding
	Exercise	at	lapsed	at
Exercisable period	price	1.1.2003	during the year	31.12.2003
	US$
3.2.2000 to 2.2.2010	9.9375	20,000	(20,000)	—

There were no options granted/lapsed under the share option scheme of China Enterprises during the year ended 31st December, 2002.

29. RESERVES

THE COMPANY At 1st January, 2002 Premium from issue of shares Net loss for the year At 31st December, 2002 Exercise of warrants Net loss for the year At 31st December, 2003	Share premium HK$’000 1,876,729 20,619 — 1,897,348 1,628 — 1,898,976	Special Capital capital redemption reserve reserve HK$’000 HK$’000 414,881 233 — — — — 414,881 233 — — — — 414,881 233	Deficit HK$’000 (1,044,907) — (112,550) (1,157,457) — (94,357) (1,251,814)	Total HK$’000 1,246,936 20,619 (112,550)
				1,155,005 1,628 (94,357)
				1,062,276

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.

At 31st December, 2003 and 2002, the Company had no reserves available for distribution to shareholders.

– 66 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. 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	The Group 2003 2002 HK$’000 HK$’000 12,991 1,046,851 175 174 5,131 23,462 20,131 13,323 38,428 1,083,810 12,438 181,715 25,990 902,095 38,428 1,083,810 38,284 996,861 33 41,752 111 45,197 38,428 1,083,810 (38,284) (996,861) 144 86,949	The Company 2003 2002 HK$’000 HK$’000 — 20,000 24 35 5,131 23,462 — — 5,155 43,497 5,155 43,497 — — 5,155 43,497 5,142 43,473 13 24 — — 5,155 43,497 (5,142) (43,473) 13 24

– 67 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

Notes:

(a)

Minimum lease payments The Group The Company 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 Amounts payable under finance leases: Within one year 45 158 14 14 In the second to fifth years inclusive 165 32 18 33 210 190 32 47 _Less:_Future finance charges (35) (16) (8) (12) Present value of lease obligations 175 174 24 35 _Less:_Amount due within one year Amount due after one year	Present value of minimum lease payments The Group The Company 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 31 150 11 11 144 24 13 24 175 174 24 35 — — — — 175 174 24 35 (31) (150) (11) (11) 144 24 13 24	Present value of minimum lease payments The Group The Company 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 31 150 11 11 144 24 13 24 175 174 24 35 — — — — 175 174 24 35 (31) (150) (11) (11) 144 24 13 24
		35 —
		35 (11)
		24

The average lease term is five (2002: five) years. For the year ended 31st December, 2003, the average effective borrowing rate was 6.7% (2002: 6%). 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) The amounts carrying interest at prevailing market rate.

– 68 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31. DISPOSAL/DILUTION OF INTERESTS IN SUBSIDIARIES

During the year, the Group disposed of its 51% interest in Yinchuan C.S.I., (Greatwall) Rubber Company Limited, 25% interest in Hangzhou Zhongche Rubber Company Limited and 50% interest in Pacific Wins Development Ltd. Details of the assets and liabilities of the subsidiaries disposed of are as follows:

Net assets disposed of: Investment properties Property, plant and equipment Property under/held for development Goodwill Deferred tax assets Interests in associates Receivables due from associates Investments in securities Loans to minority shareholders Deposits paid for acquisition of subsidiaries Properties held for sale Inventories Trade debtors Receivables Other receivables, deposits and prepayments Income and other tax recoverable Pledged bank deposits Bank balances and cash Creditors, other payables and accrued charges Income and other taxes payable Bank loans and other borrowings Obligations under finance leases Minority interests Deposits received Loans from minority shareholders Convertible note _Less:_Interest retained as interests in associates Goodwill realised Negative goodwill reserve realised Exchange reserve realised Other non-distributable reserves realised Gain on disposal/dilution	2003 HK$’000 — 901,368 — — 14,224 103,064 81,551 5,216 — — — 737,767 530,528 — 207,315 — 70,098 296,719 (757,419) (34,335) (1,274,058) — (486,909) — — — 395,129 (178,053) 217,076 6,852 — (3,848) — 220,080 12,344 232,424	2002 HK$’000 28,272 1,479,442 140,760 121 — — — 7,379 21,408 75,000 31,793 46,412 51,083 43,119 69,098 3,077 — 113,992 (461,875) (3,523) (613,258) (2,727) (411,777) (87,433) (375) (66,000) 463,988 (307,518) 156,470 — (71,028) (2,190) (2,577) 80,675 64,193 144,868

– 69 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

31. DISPOSAL/DILUTION OF INTERESTS IN SUBSIDIARIES (Cont’d)

Satisfied by: Cash Interest in a subsidiary Other receivables Analysis of the net outflow of cash and cash equivalents in connection with the disposal/dilution of subsidiaries: Cash consideration received Bank balances and cash disposed of Net outflow of cash and cash equivalents	2003 HK$’000 232,424 — — 232,424 232,424 (296,719) (64,295)	2002 HK$’000 75,508 43,199 26,161 144,868 75,508 (113,992) (38,484)

The subsidiaries disposed of during the year contributed HK$2,653,540,000 (2002: HK$298,640,000) to the Group’s turnover, and HK$90,362,000 (2002: loss of HK$42,597,000) to the Group’s profit from operations.

– 70 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. PURCHASE OF SUBSIDIARIES

Net assets acquired: Property, plant and equipment Properties held for sale Inventories Trade debtors Other receivables, deposits and prepayments Bank balances and cash Creditors, other payables and accrued charges Income and other tax payable Minority interests _Less:_Interest acquired in prior year recognised as interest in associates Goodwill arising on acquisition Satisfied by: Cash Interest in a subsidiary	2003 HK$’000 — — — — — — (12) — 410 398 — 387 785 785 — 785	2002 HK$’000 219 51,893 356 14,219 12,725 422 (25,905) (193) (1,529) 52,207 (8,075) — 44,132 933 43,199 44,132

Analysis of the net cash outflow of cash and cash equivalents in connection with the purchase of subsidiaries:

Cash consideration paid Bank balances and cash acquired Net cash outflow of cash and cash equivalents in connection with the purchase of subsidiaries	2003 HK$’000 (785) — (785)	2002 HK$’000 (933) 422 (511)

The subsidiaries acquired during the year ended 31st December, 2003 did not make significant contribution to the Group’s turnover and the Group’s profit from operations.

The subsidiaries acquired during the year ended 31st December, 2002 contributed HK$107,020,000 to the Group’s turnover, and HK$2,645,000 to the Group’s loss from operations.

– 71 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

33. MAJOR NON-CASH TRANSACTIONS

During the year ended 31st December, 2003, the major non-cash transactions are as follows:

• (a) Increase in interests in associates of approximately HK$74,989,000 arose from the disposed of 25% interest in a 51% owned subsidiary and arose from disposal of 50% interest in a wholly-owned subsidiary.

• (b) Increase in other receivables, deposits and prepayment of approximately HK$11,032,000 were as a result of reclassification from payment for acquisition of land development right upon the termination of the project stated in note 14.

• (c) 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, 2002, the major non-cash transactions were as follows:

• (a) The Group’s interest in China Velocity was diluted from approximately 65.56% to approximately 32.20%. Accordingly, increase in interest in an associate of approximately HK$307,518,000 arose from the dilution of interest in China Velocity held by the Group.

• (b) The Group’s interest in Leadership Publishing Group Limited was diluted from approximately 27.97% to approximately 19.69% following the rights issue carried out by Leadership Publishing Group Limited and dilution of the Group’s interest in China Velocity. Accordingly, interest in an associate of approximately HK$38,543,000 was decreased as a result of dilution of interest in Leadership Publishing Group Limited.

• (c) Finance lease arrangement in respect of property, plant and equipment with a capital value at the inception of the leases of approximately HK$2,727,000.

• (d) Increase in other receivable, deposits and repayment of approximately HK$10,000,000 as a result of the disposal of investment properties.

• (e) Repayment of loan receivables of HK$286,767,000 was satisfied by the same amount of loan payables under a deed of novation dated 30th September, 2002 entered into by the Group and relevant parties.

• (f) Repayment of loan receivables of HK$22,928,000 was satisfied by the same amount of loan payables under four deed of assignments dated 31st December, 2002 entered into by the Group and the relevant parties.

• (g) The Group acquired a further 65% interest in Wintime Properties Developments Limited and the shareholders’ loan to Wintime Properties Developments Limited for a total consideration of HK$43.2 million which is satisfied by the disposal of the entire interests in another subsidiary.

– 72 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

34. COMMITMENTS

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

Contracted for but not provided in the financial statements in respect of: — Land development rights — Property, plant and equipment — Construction in progress	The Group 2003 2002 HK$’000 HK$’000 — 209,540 — 137,061 — 15,531 — 362,132	The Company 2003 2002 HK$’000 HK$’000 — 209,540 — — — — — 209,540	The Company 2003 2002 HK$’000 HK$’000 — 209,540 — — — — — 209,540
			209,540

35. OPERATING LEASE COMMITMENTS

The Group has made approximately HK$26,344,000 (2002: HK$36,974,000) 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 year inclusive Over five years	The Group 2003 2002 HK$’000 HK$’000 16,216 24,899 16,930 37,094 — 155 33,146 62,148	The Company 2003 2002 HK$’000 HK$’000 577 577 — 577 — — 577 1,154	The Company 2003 2002 HK$’000 HK$’000 577 577 — 577 — — 577 1,154
			1,154

Leases are negotiated for an average term of two to three years and rentals are fixed for an average of two to three years.

The Group as lessor

Property rental income earned during the year was HK$Nil (2002: HK$13,383,000).

At the balance sheet date, the Group had no contracted tenants.

– 73 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

36. CONTINGENT LIABILITIES

The Group 2003 2002 HK$’000 HK$’000 (a) Corporate guarantee given by the Company for banking facilities granted to subsidiaries — — Other guarantees issued to: Associates 32,300 169,635 Outsiders 780 780 33,080 170,415	The Company 2003 2002 HK$’000 HK$’000 26,243 93,145 32,300 — 780 780 59,323 93,925	The Company 2003 2002 HK$’000 HK$’000 26,243 93,145 32,300 — 780 780 59,323 93,925
		93,925

• (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 the Company, and MTR for the leased properties.

37. PLEDGE OF ASSETS

• (a) At 31st December, 2003, interests in an associates with net assets value attributable to the Group of approximately HK$83,622,000 were pledged to secure credit facilities granted to the associates of the Group.

As at 31st December, 2002, certain property, plant and equipment with carrying value of HK$219,532,000, bank deposits of HK$24,839,000, and all assets of a subsidiary of the Company with a consolidated net assets value of HK$45,746,000 were also pledged to secure credit facilities granted to the Group.

• (b) At 31st December, 2003, investment in securities with a carrying value of HK$140,438,000 (2002: HK$249,990,000) were pledged to secure margin account credit facilities and banking facilities granted to the Group.

The margin loan facility amounting to HK$7,131,000 included in bank and other borrowing (2002: HK$13,323,000) were utilised by the Group.

– 74 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

38. RELATED PARTY TRANSACTIONS

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

Name of company	Nature of transactions		2003	2002
		Notes	HK$’000	HK$’000
Sing Pao Newspaper	Loan interest income received
Management Limited	and receivable by the Group	(a)	—	1,519
Sing Pao Newspaper	Loan interest income received
Company Limited	and receivable by the Group	(a)	363	—
Lucklong	Loan interest income received and
	receivable by the Group	(b)	5,984	6,120
Danwei	Loan interest income received and
	receivable by the Group	(b)	6,683	6,834
Mass Success	Rental expenses paid and payable
International Ltd.	by the Group	(g)	618	835
	Building management fee paid and
	payable by the Group		—	209
Hanny Magnetics	Management fee paid and payable
Limited	by the Group	(c)	—	290
	Loan interest expense paid and
	payable by the Group		2,606	2,143
	Rent expenses paid and payable
	by the Group		17	—
	Sale of goods made by the Group		63	—
ITC Management	Loan interest paid and payable
Limited	by the Group	(d)	1,193	1,735

– 75 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

38. RELATED PARTY TRANSACTIONS (Cont’d)

Name of company	Nature of transactions		2003	2002
		Notes	HK$’000	HK$’000
Paul Y. (E & M)	Repair and maintenance fee paid
Company Limited	and payable by the Group	(c)	58	369
	Purchase of property, plant and
	equipment by the Group		—	14
	Project management fee paid and
	payable by the Group		872	109
	Consultancy fee paid by the Group		—	327
	Secondment fee paid and payable
	by the Group		—	500
	Mechanical and electrical service
	fee paid and payable by the Group		7	800
Paul Y. — ITC	Interest paid and payable
Construction Limited	by the Group	(c)	—	410
	Project management fee paid and
	payable by the Group		—	550
Cycle Company	Rental expenses paid and payable
Limited and	by the Group	(c)	554	2,129
Gunnell Properties
Limited
Paul Y. Project	Project management fee paid
Management	and payable by the Group
International Limited		(c)	434	1,887
Paul Y. — ITC	Sale of goods made by the Group
Management
Limited		(c)	687	—
Paul Y. — ITC Interior	Leasehold improvement paid
Contractors Limited	and payable by the Group	(c)	—	400
	Project management fee paid and
	payable by the Group	(c)	15	39
Paul Y. — ITC (E & M)	Management fee paid and payable
Contractors Limited	by the Group	(c)	—	154
Nation Cheer	Interest expense paid and payable
Investment Limited	by the Group	(c)	10,270	702

– 76 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

38. RELATED PARTY TRANSACTIONS (Cont’d)

Name of company	Nature of transactions		2003	2002
		Notes	HK$’000	HK$’000
Paul Y. — ITC Plant	Hiring of plant and machinery
Hire Limited		(c)	—	59
Millennium Target	Loan interest income received
Holdings Limited	and receivable by the Group	(e)	31	130
Wing On	Loan interest income received and
	receivable by the Group	(f)	2,198	761
China Velocity	Loan interest income received and
	receivable by the Group	(f)	3,249	280
Rosedale Hotel	Management fee paid and payable
International	by the Group
Limited		(c)	—	730
Hong Kong Wing On	Air ticketing and travel service
Travel Service	expenses paid and payable
Limited	by the Group	(e)	73	248
	Sale of goods made by the Group		209	—
Chief Atlantic Profits	Loan interest income received and
Limited	receivable by the Group	(e)	306	—
Dong Fang Gas	Management fee received and
	receivable by the Group	(f)	150	—
Apex	Loan interest income received and
	receivable by the Group	(f)	248	—
Micro Tech Ltd.	Rental expense of motor vehicles
	paid and payable by the Group	(c)	216	—
Rosedale Park Limited	Sale of goods made by the Group	(e)	11	—
	Hotel expense paid and payable
	by the Group		14	—

– 77 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

38. RELATED PARTY TRANSACTIONS (Cont’d)

Notes:

• (a) Sing Pao Newspaper Company Limited and Sing Pao Newspaper Management Limited are whollyowned subsidiaries of an investee of the Group.

• (b) Danwei and Lucklong are companies of which a director of the Company’s substantial shareholder, is also a director of Danwei and Lucklong.

• (c) Hanny Magnetics Limited, Paul Y. (E & M) Company Limited, Paul Y. — ITC Construction Limited, Paul Y. Project Management International Limited, Paul Y. — ITC Management Limited, Paul Y — ITC Interior Contractors Limited, Paul Y.— ITC (E & M) Contractors Limited, Nation Cheer Investment Limited, Paul Y. — ITC Plant Hire Limited, Cycle Company Limited and Gunnell Properties and Micro Tech Ltd. and Rosedale Hotel International Limited are wholly-owned subsidiaries of a substantial shareholder of the Company.

• (d) ITC Management Limited is the shareholder of a Company’s substantial shareholder.

• (e) Millennium Target Holdings Limited, Hong Kong Wing On Travel Service Limited, Chief Atlantic Profits Limited and Rosedale Park Limited are wholly-owned subsidiaries of associates of the Group.

• (f) Wing On, China Velocity, Dong Fang Gas, Apex are associates of the Group.

• (g) Mass Success International Ltd. is an associate of a substantial shareholder of the Company.

Details of balances with related parties as at the balance sheet date are set out in the consolidated balance sheet and in notes 17, 18 and 25.

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.

– 78 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

39. 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 HK$27,196,000 (2002: HK$24,679,000) represents contribution payable to these schemes by the Group in respect of the current year.

40. POST BALANCE SHEET EVENTS

The following events occurred subsequent to the balance sheet date:

• (i) On 13th January, 2004, Wing On, entered into conditional convertible note agreements (as subsequently amended on 17th March, 2004) with China Enterprises and Hutchison International Limited (“HIL”, a wholly-owned subsidiary of Hutchison Whampoa Limited which its shares listed on the Hong Kong Stock Exchange) in relation to the issuance of the convertible notes by Wing On to each of CEL and HIL or their respective nominees for a consideration of HK$155,000,000 and HK$105,000,000 respectively. The convertible notes are unsecured, carry interest at 2% per annum and the interest is payable every six months in arrears. The convertible notes together with accrued interest can be redeemed during 3 years from the date of issuance of the convertible notes. The convertible notes entitled the convertible note holders to convert into the shares in Wing On at initial conversion price of HK$0.02, subject to adjustment, during three years from the date of issuance of the convertible notes.

The transaction has not yet completed at the date of this report.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

40. POST BALANCE SHEET EVENTS (Cont’d)

• (ii) On 5th March, 2004, Dong Fang Gas and PCCW Limited (“PCCW”, a company which its shares listed on the Hong Kong Stock Exchange) jointly announced that Dong Fang Gas conditionally agreed to purchase (i) the entire issued share capital of Ipswich Holdings Limited and its subsidiaries (“Property Group”), being the group of companies holding PCP Beijing, PCCW Tower, other investment properties and related property and facilities management companies of PCCW Limited and its subsidiaries; and (ii) the loans of approximately HK$3,529 million, in aggregate, interestbearing loans owing by the relevant members of the Property Group to PCCW (comprising of HK$2,359 million and US$150 million of such loans) and (iii) certain property interests. The consideration for the above transaction amounting to HK$6,557 million will be satisfied by (a) as to HK$2,967 million by the allotment and issue of approximately 1,648 million new shares in Dong Fang Gas to PCCW (or as it may direct) credited as fully paid at an issue price of HK$1.80 per share; and (b) as to the remaining HK$3,590 million by the issue of the convertible note by Dong Fang Gas to PCCW or as it may direct.

Following the completion of the above transaction the Group’s interest in Dong Fang Gas will be diluted from 43.06% to 2.83%. At the date of this report, the above transaction has not yet completed.

• (iii) On 19th March, 2004, the Company and Cheung Tai Hong (B.V.I.) Limited (“CTH”), a company incorporated in the British Virgin Islands and is a wholly-owned subsidiary of Cheung Tai Hong Holdings Limited (“CTHH”), a company whose shares are listed on the Hong Kong Stock Exchange, entered into a conditional agreement pursuant to which CTH agreed to acquire from the Group the entire equity interest in Tung Fong Hung Investment Limited for a consideration of HK$42 million. The consideration will be settled as to HK$6.5 million by the issue of the promissory note issued by CTHH and as to HK$35.5 million in cash.

The transaction has not yet completed at the date of this report.

• (iv) On 30th March, 2004, the Group entered into a conditional agreement to acquire 80% interest of the issued share capital of and the shareholder’s loan to Talent Cosmos Limited for the consideration of HK$30 million. Talent Cosmos Limited is an investment holding company and its subsidiaries are principally engaged in the manufacturing of batteries. This transaction has been completed.

• (v) On 30th March, 2004, the Group entered into a conditional agreement to acquire the entire interest of Asso Limited for a consideration of approximately RMB219,000,000 (equivalent to approximately HK$205,498,000). Asso Limited is an investment holding company and its subsidiaries are principally engaged in manufacturing and trading of garment and textiles products. At the date of this report, this transaction has not yet completed.”

– 80 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) STATEMENT OF INDEBTEDNESS

Borrowings

At the close of business on 30th June, 2004 (being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular), the Group had outstanding borrowings due within one year of approximately HK$236 million comprising secured bank borrowings of approximately HK$9.3 million, amount due to a related company of approximately HK$178.7 million, loan payables of approximately HK$43.6 million and secured margin loan payables of approximately HK$4.4 million.

Securities and guarantees

The short term secured bank borrowings as shown above were guaranteed and secured by personal guarantees and assets given by directors of non-wholly owned subsidiaries respectively. The secured margin loan were secured by investment securities of the Group with carrying values of approximately HK$94.7 million.

At the close of business on 30th June, 2004, the Group had contingent liabilities in respect of guarantees in favour of banks for facilities granted to an independent third party of approximately HK$59.3 million.

Debt securities

At the close of business on 30th June, 2004, the Group had no debt securities.

Commitment

At the close of business on 30th June, 2004, the Group had commitment of approximately HK$377 million, in respect of the Acquisition of the Property.

Disclaimer

Save as aforesaid and apart from intra-group liabilities, the Group did not have, at the close of business on 30th June, 2004, any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptance credits, debentures, charges, obligations under hire purchases contracts or finance leases, guarantees, or other material contingent liabilities.

Foreign currency amounts have been translated into Hong Kong dollars at the exchange rates prevailing at the close of business on 30th June, 2004.

– 81 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(d) WORKING CAPITAL STATEMENT

The Directors are of the opinion that, after taking into account the present available banking facilities, internal resources and the banking facilities to finance the Acquisition which will be procured by the Vendor, the Group has sufficient working capital for its present requirement and for the next twelve months from the date of this circular in the absence of unforeseen circumstances.

(e) MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2003, the date to which the latest published audited consolidated financial statements of the Group were made up.

(f) BUSINESS REVIEW OF THE GROUP

Set out below are the reproduction of the “management discussion and analysis” section of the Group for the year ended 31st December 2001, 2002 and 2003 contained in the Company’s annual report of the corresponding years.

For the year ended 31st December, 2001

“ Analysis of the Group’s Performance

The Group’s turnover for the year ended 31st December, 2001 totaled HK$3.234 billion, representing an increase of 2.4% from HK$3.158 billion over the last year. During the year of 2001, the revenue generated from newspaper publication and from the trading of Chinese and western pharmaceutical products become new sources of income for the Group which were accounted for the increase in revenue.

The Group’s audited consolidated loss attributable to shareholders for the year ended 31st December, 2001 amounted to HK$598.7 million, representing a decrease of approximately 18.1% from HK$730.7 million recorded in last year. The losses incurred was mainly attributable to the provision for impairment and revaluation losses on toll highway and investment properties, operating losses in the Group’s tire operations, newspaper publishing as well as provision for diminution in value of investments.

– 82 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Liquidity and Financial Resources

During the year of 2001, the Group financed its operations through cash generated from its business activities, banking facilities provided by its bankers and disposing of under-performing investments.

The Group’s short term borrowing has been reduced from HK$1,352 million as at 31st December, 2000 to approximately HK$922 million as at 31st December, 2001. Long-term borrowing has been decreased from HK$595 million as at 31st December, 2000 to approximately HK$593 million as at 31st December, 2001. As a result, the Group’s total borrowing has been reduced from HK$1,947 million as at 31st December, 2000 to approximately HK$1,515 million as at 31st December, 2001 representing a decrease of 22.2%. The gearing ratio, calculated to the total long term borrowing divided by total shareholders funds increased from 0.209 to 0.267.

Cash and bank balances amounted to approximately HK$745 million (2000: HK$885 million), most of which were denominated in Hong Kong dollars ,US dollars, Australian dollars and Renminbi. The Company was not exposed to any material exchange rate fluctuation during the year under review.

Comments on Segmental Information and Significant Investments

China Enterprises Limited

For the period under review, China Enterprises Limited (“China Enterprises”), a subsidiary of the Company listed in the New York Stock Exchange reported that persistent competition and tough operating conditions depressed overall results for the year. Tire prices in China declined by approximately 3-5% despite soften raw material prices. Despite the above, China Enterprises managed to increase revenue by RMB0.4 billion to RMB2.7 billion for the year (2000: RMB2.3 billion). This was mainly due to increased sales volume especially for domestic radial tires due to the abolishment of the 10% consumption tax effect starting from 1st January, 2001. Hangzhou Zhougce Rubber Co., Ltd (“Hangzhou Factory”) continued to be the best performer and recorded a 29% increase in its revenue to RMB2.06 billion as a result of increased sales volume. Hangzhou Factory achieved net income of RMB53.5 million for the year 2001 compared to a net loss of RMB1.6 million last year mainly due to better profit margin achieved. The Yinchuan C.S.I. (Great Wall) Rubber Co., Ltd incurred a net loss of RMB162.2 million in the year 2001 compared to a net loss of RMB47.8 million in 2000 was primarily due to the negative margin, and the increase in general provision for doubtful debts and transportation expenses.

– 83 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Loss before taxation and minority interests was RMB97.9 million (2000: RMB76.7 million) and net loss after tax and minority interest was RMB50.3 million for the year (2000: RMB58.2 million). During the year, China Enterprises decided to dispose of its entire interest in Double Happiness Tyre Industries Company Limited, a 55% subsidiary of the Company which was deemed non-performing and written off to the income statement. As a result, consolidated net loss of China Enterprises was RMB135.4 million for the year ended 31st December, 2001 (2000: RMB 79.4 million).

In the fourth quarter of 2001, China Enterprises received notification from the New York Stock Exchange (“NYSE”) that China Enterprises failed to maintain a minimum total average market capitalization of US$15 million over a consecutive 30 trading-day period. A business plan was submitted to the NYSE in early 2002 that outlined China Enterprises’ plan to comply with the listing requirement. China Enterprise will be subject to an 18-month monitoring period by the NYSE. There is no assurance that the NYSE will accept the plan and decide to allow China Enterprises to remain listed. In the event that China Enterprises’ shares cease to be listed on the NYSE, China Enterprises will consider an alternative listing venue.

China Land Group Limited

During the year, China Land Group Limited (“China Land”) reported turnover of approximately HK$114.9 million when compared to last year’s figure of approximately HK$69.7 million. The increase was mainly attributable to sale of properties in both Hong Kong and the People’s Republic of China (the “PRC”).

China Land reported a net loss of HK$394 million in 2001 compared to a net loss of HK$583 million in 2000. The operating loss for the year included provisions made for revaluation deficits of the toll road, investment properties, diminution in value of properties and investment securities totaling HK$508 million, after consideration of various underlying conditions of China Land’s assets. The loss for the year before making provisions was HK$33 million.

Barring unforseeable circumstances, China Land does not anticipate any further significant provisions for impairment and revaluation losses in the coming year.

The year under review was an eventful year to China. The economy of China was stimulated by its accession to the World Trade Organization and the exciting news that the 2008 Olympic Games will be held in Beijing. China Land was eager to increase its recurring income. The construction works of China Land’s project in Guangzhou were resumed with a view to increase the rental income from China Land’s leasing business. The construction works of the toll road project in Shenzhen were substantially completed at the end of year 2001. It is expected that Shenzhen Highway and Paul Y. Plaza will contribute significant recurring income to China Land in the forthcoming years. In July 2001, China Land was successful in raising funds through the placing and subscription of new shares.

– 84 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Australia Net.Com Limited

Australia Net.Com Limited (“ANC”), an Australia Stock Exchange listed subsidiary, recorded a consolidated loss after income tax of A$11,470,299 compared with a consolidated profit after income tax of A$1,076,988 for the preceding year. During the year, the directors of ANC continued to look at strategic investment opportunities with a view to recapitalising ANC. Unfortunately no investments were identified that were satisfied to meet the vision for the future of ANC. Given the substantial financial resources of ANC, the directors of ANC are confident that a suitable investment opportunity will ultimately be identified.

Tung Fong Hung Investment Limited (“Tung Fong Hung”)

Tung Fong Hung, a wholly-owned subsidiary of the Company since November 2001, has been playing an active role in the modernisation of Chinese medicine. Through setting up factory facilities in Zhongshan and Tai Po, Tung Fong Hung’s manufacturing facilities are advanced to “Good Manufacturing Practice” (GMP) standard for the manufacturing of health food and western pharmaceutical products. This is a break-through that will lead Tung Fong Hung to the international market. With great effort and vision to commercialise and modernise its products in the medicine industry in the local and international market, Tung Fong Hung also actively takes part in clinical researches, international conferences and exhibitions, sponsorships and joint scientific research projects.

Tung Fong Hung is working diligently in developing new products. “Chien-Ti-Qing-Hui-Wan (CTW)”, a herbal health products manufactured by Tung Fong Hung which is an ideal health product for slimming, maintaining good health and cleansing the bowels, becomes a hot seller in the year. International experts and authoritative research institutes are engaged to verify the therapeutic functions of CTW, all with positive results.

With effective well selected sales channel, Tung Fong Hung has extended its retailing business network to nearly 100 outlets spreading around Hong Kong, mainland China, Taiwan, Canada and Singapore.

Material Acquisition And Disposals

In April, 2001, the Company announced the consolidation for every ten issued and unissued shares into one consolidated share (the “Consolidated Share”) and reduction of the nominal value of each of the issued and unissued Consolidated Shares from HK$1.00 to HK$0.10 (the “Capital Reduction”) (collectively the “Capital Reorganisation”). The petition for the confirmation of the Capital Reduction was heard by the Court on Tuesday, 31st July, 2001. The Capital Reorganisation was effective from 10th August, 2001.

– 85 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

On 18th May, 2001, the Company and Star East Holdings Limited (“Star East”) entered into a conditional agreement with Upland Profits Limited, a wholly-owned subsidiary of Capital Strategic Investment Limited (“CSI”) in respect of the disposal of shares in and shareholder loans from Gold Brilliant Limited (“Gold Brilliant”), a company beneficially held as 65% by the Company and as to 35% by Star East, for the consideration of HK$206 million. Gold Brilliant holds 74.99% shareholding in Premium Land Limited (“Premium Land”) (formerly known as Sing Pao Media Group Limited). At the same time, the Company through Expert Solution Limited (“Expert Solution”), which was owned as to 65% by the Company and as to 35% by Star East, entered into a disposal agreement regarding the acquisition of the entire issued share capital of and shareholder loan to Actiwater Resources Limited (“Actiwater Resources”), a wholly-owned subsidiary of Premium Land whose principal activities are publication of Sing Pao Daily News, books and magazine publishing and an Internet portal specializing mainly in news and information in China, for a cash consideration of HK$110 million. Further details can be found in circular to shareholders dated 18th June, 2001. Completion of the aforesaid transactions took place on 9th July, 2001.

On 17th September, 2001, Hansom Eastern (Holdings) Limited (“Hansom”) (formerly known as Tung Fong Hung (Holdings) Limited) had served a notice of exercise of an option granted by See Ying Limited (“See Ying”), a wholly-owned subsidiary of the Company, to Hansom to require See Ying to purchase 5,100 shares representing 51% of the issued share capital of Tung Fong Hung within a period of two years from the date of a share purchase and option agreement dated 10th November, 2000 for the consideration of HK$45,900,000. After completion of the transaction, Tung Fong Hung became a wholly-owned subsidiary of the Company.

On 24th September, 2001, Expert Solution entered into an acquisition agreement (the “Acquisition Agreement”) with Sing Pao Media Group Limited (“Sing Pao”) (formerly known as STAREASTnet.com Corporation) regarding the disposal of the entire issued share capital of and shareholder’s loan of approximately HK$210.50 million to Actiwater Resources for consideration of HK$210 million (the “Consideration”). The Consideration will be satisfied as to HK$50 million in cash and HK$160 million by the issue of 1,600 million new shares in Sing Pao at HK$0.10 per share. Completion of the aforesaid transaction took place on 4th December, 2001.

On 1st February, 2002, Million Good Limited, a wholly-owned subsidiary of China Enterprises, and Ananda Wing On Travel (Holdings) Limited (“Ananda”) entered into a subscription agreement (the “Subscription Agreement”) in respect of the subscription of 4,800,000,000 new shares of HK$0.01 each in the capital of Ananda at an issue price of HK$0.027 per share

– 86 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

which will be paid upon completion of the Subscription Agreement. At the same time, China Enterprises and Ananda entered into a subscription agreement (the “CN Agreement”) regarding the subscription of the convertible note issued by Ananda to China Enterprises or its nominee for a consideration of HK$120,000,000 which will be paid upon completion of the CN Agreement. Further details can be found in circular to shareholders dated 4th March, 2002.

In March 2002, the Company announced to propose to raise about HK$138.3 million, before expense, by issuing not less than 921,957,884 new shares by the rights issue with the bonus issue at a price of HK$0.15 per rights share. The Company will provisionally allot two rights shares for every one existing share held by the qualifying shareholders on the record date with bonus warrants in the proportion of three units of subscription rights with initial subscription price of HK$0.17 for every ten rights shares taken up.

Number of Employees, Remuneration Policies and Share Option Scheme

As at 31st December, 2001, the Group employed approximately 16,175 (2000: 15,548) staff. Remuneration packages comprised of salary and year-end bonuses based on individual merits. No share options were granted or exercised during the year ended 31st December, 2001.

Contingent Liabilities

• (a) At 31st December, 2001, the Group had given guarantees to banks in respect of banking facilities granted to outsiders of approximately HK$181 million (31.12.2000: HK$279 million). In addition, the Group has given guarantees to banks in respect of banking facilities granted to associates amounted to approximately HK$2 million (31.12.2000: HK$2 million).

• (b) The Company 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 the Company and MTR for the leased properties.

• (c) In August 1999, the architect of Paul Y. Plaza (formerly known as Jiangnan Centre) initiated legal proceedings against Eventic Limited (“Eventic”), a wholly-owned subsidiary of China Land in respect of claim for payment of service fees and other expenses of HK$0.6 million and HK$6.6 million respectively.

Eventic has vigorously defended the claims and made a counterclaim for loss and damages suffered due to insufficient supervision services provided.

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FINANCIAL INFORMATION OF THE GROUP

In view of the counterclaim made by Eventic, the architect amended its total claims to HK$7.7 million. At the date of this report, the proceedings are still ongoing. After taking into consideration the advice of China Land’s legal counsel, the directors consider the outcome of the proceedings will not have material adverse financial effect on the Group.

• (d) In July 2001, Huizhou World Express Property Ltd. (“Huizhou World Express”), an indirect non-wholly owned subsidiary of China Land, initiated legal proceedings against the Huizhou Municipal Government of the Guangdong Province the PRC, in its capacity as the guarantor of Huizhou Jia Cheng Group Co., Ltd. (“Huizhou Jia Cheng”), the main contractor for the construction of Hongkong Macau Square, under a guarantee letter dated 7th September, 1994 executed by the Huizhou Municipal Government in favour of Huizhou World Express. The amount claimed by Huizhou World Express was approximately RMB243.6 million, being the construction costs of approximately RMB167.5 million paid by Huizhou World Express to Huizhou Jia Cheng together with the damages for the amount of approximately RMB76.1 million.

As at the date of this report, Huizhou World Express is waiting for the hearing of the case. At this stage, the outcome cannot be predicted with certainty. As the total construction costs of Hongkong Macau Square has already been written off, the directors are of the opinion that there is unlikely to be any material adverse financial impact on the Group in the event that the final judgement is not in favour of Huizhou World Express.

• (e) In November 2001, the purchasers (the “Purchasers”) on certain properties of Hongkong Macau Square, Huizhou according to the pre-sale agreements dated 7th September, 1994 initiated legal proceedings against Huizhou World Express for failure to hand over the properties of Hongkong Macau Square to the Purchasers. The amounts claimed by the Purchasers were approximately HK$76.6 million, being the pre-sale deposits together with damages of approximately RMB64.2 million and relevant legal expenses.

In January 2002, Huizhou World Express filed in its defences alleging that in accordance with the terms of the above-mentioned agreements, any disputes between the contractual parties should be resolved by means of arbitration. As at the date of the report, the Intermediate People’s Court of Huizhou, Guangdong Province, is still considering the cases. At this stage, the outcome cannot be predicted with certainty and no further provision has been made in the financial statements.

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APPENDIX I

Pledge of Assets

At 31st December, 2001, the following assets were pledged to secure credit facilities granted to the Group:

• (a) Bank loans and other borrowings - due after one year

Investment properties with a carrying value of HK$17,630,000 (2000: HK$32,130,000)

Certain property, plant and equipment with a carrying value of HK$234,462,000 (2000: HK$238,033,000)

Investment in security of HK$5,244,000 (2000: Nil).

Certain shares in associates with carrying value of approximately HK$53,194,000 (2000: Nil).

• (b) Bank loans and other borrowings - due within one year

Bank deposits of HK$83,520,000 (2000: HK$612,351,000).

Shenzhen Longchen Xinyuan Industrial Co., Ltd (“Longchen Xinyuan”) pledged its right to toll fee income to a bank to secure the credit facilities for the year ended 31st December, 2000 and 2001.

At 31st December, 2000, a subsidiary of China Land issued two debentures in favour of a bank by way of creating a first floating charge on its entire interest in Longchen Xinyuan pledged with a carrying value of HK$618,999,000 to secure the credit facilities. The debentures were released upon repayment of the bank borrowings during the year. ”

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APPENDIX I

For the year ended 31st December, 2002

“ Analysis of the Group’s Performance

The Group’s turnover for the year ended 31st December, 2002 totaled approximately HK$3,602 million, representing an increase of 11.36% as compared with HK$3,234 million for financial year 2001. The increase was mainly the result of the 15.02% increase in sales of goods (net of returns and sales taxes) to approximately HK$3,435 million for the current year (2001: approximately HK$2,987 million). Turnover for the year mainly comprised of sales of goods (including tires, pharmaceutical products and others), toll highway operation, sales of properties, hotel operation and rental income, etc.

The Group’s audited consolidated loss attributable to shareholders for the year ended 31st December 2002 was lowered by 20.3% to approximately HK$477 million from approximately HK$599 million recorded last year. The improvement in the operating performance of the Group was mainly contributed by the following:—

• i) the significant growth in the sales of tire and pharmaceutical products

• ii) the consolidated gross profit margin of the Group has increased by 87.72% over last year

• iii) the other operating income of the Group has been increased by 47.47% from approximately HK$158 million last year to approximately HK$233 million in year 2002.

However, the significant increase in finance costs and share of results of associates by 34.37% and 664.43% respectively had weakened the operating performance of the Group as a whole.

Capital Structure, Liquidity and Financial Resources

The Group generally finances its operations through cash generated from its business activities, banking facilities provided by its principal bankers and disposing of under-performing investments.

During the year, the Company successfully completed a placement in June 2002 and rights issue in August 2002 with net proceeds of approximately HK$17.8 million and HK$40 million respectively to improve the liquidity of the Group.

For the year under review, the Group’s short term bank loans and other borrowings increased from HK$922 million as at 31st December 2001 to approximately HK$997 million as at 31st December 2002. Long term bank loans and other borrowings reduced from HK$593 million as

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FINANCIAL INFORMATION OF THE GROUP

at 31st December 2001 to approximately HK$87 million as at 31st December 2002. As a result, the Group’s total bank loans and other borrowings was reduced from HK$1,515 million as at 31st December 2001 to approximately HK$1,084 million as at 31st December 2002 representing a decrease of 28.4%. The gearing ratio, calculated to the total long term bank loans and other borrowing divided by total shareholders funds decreased from 0.267 to 0.050. The Group’s total borrowings of HK$1,084 million were mainly denominated in HK dollars and Renminbi, and the maturity profile spread over a period of five years with HK$997 million repayable within one year, HK$87 million repayable two to five years. Non-HK dollar denominated loans are directly related to the Group’s businesses in the countries of the currencies concerned.

As at 31st December, 2002, total bank borrowings of the Group amounted to HK$1,070 million and over 90% of the Group’s bank borrowings bear interest at fixed rates and the remaining were at floating rates.

Capital expenditure aggregated to approximately HK$476 million for the past twelve months was used primarily for expansion of existing facilities. The Group’s capital expenditures will continue to be funded primarily from either cash generated from operations, cash on hand or by bank borrowings or a combination of both as required.

During the year, the Group has not entered into any material foreign exchange contracts, interest or currency swaps or other financial derivatives. The Company was not exposed to any material exchange rate fluctuation during the year under review.

Comments on Segmental Information and Significant investments

China Enterprises Limited

For the year under review, China Enterprises Limited (“China Enterprises”), a company whose shares being traded on the OTC (over-the-counter) Bulletin Board (“OTCBB”) in USA, which the Company beneficially owned 55.22% effective interest, reported that its operating results rebounded in year 2002 as the overall tire market in China improved. Total revenues of the company arising from continuing operations increased by 25.0% to RMB2.61 billion (2001: RMB2.09 billion). Hangzhou Zhongce Rubber Co., Limited (“Hangzhou Zhongce”), the most active subsidiary of China Enterprises, is still its major trading arm which remains one of the largest tire manufacturer in China and recorded a 13.6% increase in gross margin this year.

For the year under review, the Company disposed of two of its subsidiaries, Yantai C.S.I. Rubber Co., Limited (“Yantai CSI”) and Shandong C.S.I. Synthetic Fiber Co., Limited (“Shandong Synthetic”) and recognized a net realized gain on such disposals of RMB20.1 million.

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APPENDIX I

Consolidated net loss of China Enterprises was RMB262.8 million (2001: RMB135.4 million). It comprises a loss upon a decrease in fair value of call option associated with the convertible note of Ananda Wing On Travel (Holdings) Limited (“Ananda Wing On”), the Company’s share of losses of Ananda Wing On since its acquisition on April 19, 2002 and an impairment loss of long-lived assets from discontinued operations.

The New York Stock Exchange (the “NYSE”) notified the Company on December 31, 2002 that the Securities and Exchange Commission granted the application of the NYSE for removal of the common stock of the Company from listing and registration on the NYSE under the Securities Exchange Act of 1934 effective at December 30, 2002. On the other hand, the Company’s common shares began trading on the OTCBB under the stock symbol CSHEF on November 26, 2002.

Australia Net.Com Limited

During the year the directors of Australia Net.Com Limited continued to look at strategic investment opportunities with a view to recapitalising the Company. Unfortunately no investments were identified that the Board were satisfied met the Board’s vision for the future of the Company.

Tung Fong Hung Investment Limited (“Tung Fong Hung”)

Tung Fong Hung incurred a net loss of HK$28 million for the year. The loss is attributed to the sluggish economic performance that dampened the local sales.

Despite the grant of the official certification of the “Good Manufacturing Practice” qualification by the Department of Health of Hong Kong in late 2002, we have not seen big change in sales of western pharmaceutical products. Since time is an essence to us in the product enlistment and tendering processes, sales to the public sector cannot be materialized during the year. Confronted with the rise in production overheads and running costs caused by the expanded production capacity, the operation suffered from operating loss. However, the management believes that the operation will start to generate revenue from the new market segments in public sector and overseas markets and hence induce a favourable effect on the bottom line in the coming year.

Tung Fong Hung, through its continuing efforts to improve the operational efficiency, has successfully reduced its running expenses and thus relieved its cost burden. Notwithstanding the decrease in sales, operations in both the local and overseas retail outlets have marked improvements as a result of the implementation in the cost-cutting measures. The management will continue to place emphasis on strategies to further enhance cost saving.

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APPENDIX I

Material Acquisition and Disposals

In February 2002, Million Good Limited, a wholly-owned subsidiary of China Enterprises which is owned as to 55.2% effective equity interest and 88.8% effective voting interest by the Company, and Ananda Wing On entered into a subscription agreement (the “Subscription Agreement”) in respect of the subscription of 4,800,000,000 new shares of HK$0.01 each in the capital of Ananda Wing On at an issue price of HK$0.027 per share which will be paid upon completion of the Subscription Agreement. At the same time, China Enterprises and Ananda Wing On entered into a subscription agreement (the “CN Agreement”) regarding the subscription of the convertible note issued by Ananda Wing On to China Enterprises or its nominee for a consideration of HK$120,000,000 which will be paid upon completion of the CN Agreement. Further details can be found in the circular to shareholders dated 4th March, 2002. Completion of the aforesaid transactions took place in April 2002.

In June 2002, Calisan Developments Limited (“Calisan”) and Well Orient Limited (“Well Orient”) are substantial shareholders of the Company and have agreed to place, through Tai Fook Securities Company Limited (“Tai Fook”) on a best efforts basis, an aggregate of 92,000,000 existing shares of the Company to independent investors at a price of HK$0.20 per share. At the same date, the Company, Calisan and Well Orient as subscribers, whereby each of Calisan and Well Orient agreed to subscribe for 50% of the shares of the Company place under the placing agreement dated 6th June, 2002, entered into among Calisan, Well Orient and Tai Fook subject to a maximum of 46,000,000 new shares of the Company and 46,000,000 new shares of the Company respectively at the price of HK$0.20 per subscription share. Completion of the transaction took place in June 2002. Further details of the transaction are set out in the announcement dated 7th June, 2002.

In June 2002, the Company as the subscriber and Dong Fang Gas Holdings Limited (“Dong Fang Gas”, formerly known as Companion Building Material International Holdings Limited) entered into a subscription agreement in relation to the subscription for 20,000,000,000 shares in Dong Fang Gas at a total subscription price of HK$200,000,000. Further details of the transaction are set out in the joint announcement dated 7th June, 2002. Completion of the aforesaid transaction took place in September 2002.

In July 2002, a project management services agreement entered into between the Company and Paul Y. Project Management International Limited, a wholly-owned subsidiary of Paul Y. - ITC Construction Holdings Limited, in respect of the provision of project management services for the development of the Liqiao Industrial Park at Shunyi District, Beijing, the PRC for a term of five years and for a total remuneration of not more than HK$9,000,000. Further details of the transaction are set out in the announcement dated 9th July, 2002.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

In July 2002, the Company announced to propose to raise net proceeds of approximately HK$40 million by issuing not less than 276,489,471 new shares by the rights issue with the bonus issue at a price of HK$0.15 per rights share. The Company will provisionally allot one rights share for every two existing shares held by the qualifying shareholders on the record date with bonus warrants in the proportion of three units of subscription rights with initial subscription price of HK$0.16 for every five rights shares taken up. Completion of rights issue with bonus issue took place in August 2002.

In July 2002, the Company announced to propose an extensive group reorganization, the principal elements included the entering into of the subscription agreement, the placing agreement, the first, second and third sale and purchase agreements by Rosedale Hotel, a 65.6% owned subsidiary of the Company. Upon completion of the proposal agreements, Rosedale Hotel ceased to be a non-wholly owned subsidiary of the Company. Further details of the transaction are set out in the circular dated 5th October, 2002. Completion of foresaid transactions took place in December 2002.

In November, 2002, the Company as one of the vendors entered into a conditional sale and purchase agreement (the “S&P Agreement”) with Sun Media Group Holdings Limited (“Sun Media”) as the purchaser relating to, among others, the disposal to Sun Media of 91,635,700 shares in Leadership Publishing (the “Sale Share”), and an aggregate amount of HK$3,050,000 Leadership Publishing warrants (the “Sale Warrant”) and shareholder’s loan of approximately HK$15.5 million owing from the Leadership Publishing group to the group of the Company on the completion of the S&P Agreement (the “Sale Loan”) (the “Completion”). Sun Media would settle the consideration for the Sale Share by issuing 549,814,200 new Sun Media shares to the Company (or its nominee) and that for the Sale Warrant in cash of HK$1.00 on the Completion, and the consideration for the Sale Loan should be satisfied by Sun Media issuing 155,048,000 new Sun Media Shares to the Company (or as it may direct) at the price of HK$0.10 per Sun Media share at the expiry of two calendar years from the date of Completion. Further details of the transaction are set out in the circular dated 27th December, 2002. Completion of the aforesaid transaction took place in January 2003.

In January 2003, China Enterprises and Ningxia Yinchuan Rubber Manufacturing (“Ningxia Yinchuan”) entered into a condition sale and purchase agreement pursuant to which China Enterprises agreed to sell its entire 51% interest in Yinchuan C.S.I. (Greatwall) Rubber Company Limited to Ningxia Yinchuan for the consideration of RMB35,000,000 (equivalent to approximately HK$33 million). Further details of the transaction are set out in the circular dated 30th January, 2003. Completion of the disposal took place in February 2003.

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APPENDIX I

Contingent Liabilities

(a) Other guarantees issued to: Associates Outsiders	The Group 2002 2001 HK$’000 HK$’000 169,635 182,302 780 780 170,415 183,082	The Group 2002 2001 HK$’000 HK$’000 169,635 182,302 780 780 170,415 183,082
		183,082

• (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 the Company, and MTR for the leased properties.

Pledge of Assets

At 31st December, 2002, the following assets were pledged to secure credit facilities granted to the Group:

• No investment properties were pledged as at 31st December, 2002. As at 31st December, 2001, investment properties with carrying value of approximately HK$17,630,000.

• Certain property, plant and equipment with a carrying value of HK$219,532,000 (2001: HK$234,462,000).

• Investment in securities of HK$249,990,000 (2001: HK$5,244,000).

• No shares in associates were pledged as at 31st December, 2002. As at 31st December, 2001, certain shares in associates with carrying value of approximately HK$53,194,000.

• Bank deposits of HK$24,839,000 (2001: HK$83,520,000).

• All assets of a subsidiary of the Company with a consolidated net assets value of HK$45,746,000 (2001: Nil).

In 2001, the Group pledged its right to receive toll fee income from the toll highway to a bank to secure the credit facilities. The pledge was released from the Group following the disposal of the Group’s interest in the toll highway during the year. ”

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APPENDIX I

For the year ended 31st December, 2003

“ Analysis of the Group’s Performance

The Group’s turnover for the year ended 31st December, 2003 totaled approximately HK$2.9 billion, representing a decrease of 19.4% from approximately HK$3.6 billion compared to the financial year 2002. The turnover in toll highway operation, property investment, hotel operation and heavy industry were no longer consolidated following the disposal or restructuring of these operations. The turnover for the year mainly comprised of sales of goods (including tires and pharmaceutical products).

The Group’s audited consolidated loss for the year ended 31st December, 2003 reduced by 60.0% to approximately HK$189.5 million as compared to approximately HK$474.1 million in last financial year. The improvement in the performance of the Group reflected the positive outcomes from the continuing management efforts to dispose of and restructure non-performing businesses or assets on the one hand, as well as the streamlining and rationalisation of existing businesses and assets on the other. As a result, there was significant reduction in other expenses from approximately HK$760.5 million to approximately HK$118.4 million which included impairment loss on the Group’s assets as well as unrealised holding losses on investment in securities.

Capital Structure, Liquidity and Financial Resources

During the financial year 2003, the Group financed its operations mainly through cash generated from its business activities, banking facilities provided by its principal bankers and proceeds from disposal of investments.

For the year under review, the Group’s short-term bank loans and other borrowings decreased from approximately HK$996.9 million as at 31st December, 2002 to approximately HK$38.3 million as at 31st December, 2003. Long-term bank loans and other borrowings reduced from approximately HK$86.9 million as at 31st December, 2002 to approximately HK$0.1 million as at 31st December, 2003. As a result, the Group’s total bank loans and other borrowings decreased from approximately HK$1,083.8 million as at 31st December, 2002 to approximately HK$38.4 million as at 31st December, 2003, representing a decrease of 96.5%. The gearing ratio, calculated to the total long-term borrowing bank loans and other borrowing divided by total shareholders funds reduced from 0.050 to 0.00009. The Group’s total borrowings of approximately HK$38.4 million were mainly denominated in HK dollars, and the maturity profile spread over a period of five years with HK$38.3 million repayable within one year, HK$0.1 million repayable between two to five years.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31st December, 2003, total bank borrowings of the Group amounted to approximately HK$18.3 million and most of the Group’s bank borrowings bear interest at floating rates.

Capital expenditure aggregated to approximately HK$268.9 million for the year under review and was used primarily for expansion of existing facilities. The Group’s capital expenditures will continue to be funded primarily by internal resources or external borrowings or a combination of both as required.

Cash and bank balances amounted to approximately HK$319.9 million, and is mainly denominated in Hong Kong dollars and Australian dollars. During the year, the Company did not experience significant exposure to exchange rate and interest rate fluctuations. As a result, the Group did not enter into any material foreign exchange contracts, currency swaps or other financial derivatives.

Comments on Significant Investments

China Enterprises Limited (“China Enterprises”) (carried on business in Hong Kong as China Tire Holdings Limited)

The tire market in the People’s Republic of China (“PRC”) continued strong growth in fiscal year 2003. Along with the rapid development of the PRC economy, the construction of “five vertical and seven horizontal” National Trunks System accelerated in 2003 and resulted in increased demand for motor vehicles and vehicle related components, including tires.

For the year under review, China Enterprises disposed of all its interests in those non-performing subsidiaries, including Yinchuan C.S.I. (Greatwall) Rubber Company Limited (“Yinchuan C.S.I.”) and the remaining interests in Double Happiness Tyre Industries Corporation Limited. The disposals made China Enterprises to deploy its resources released and to seek other investment opportunity.

MRI Holdings Limited (“MRI”)

Throughout 2003, MRI continued to actively seek for suitable investment opportunities to meet the strategic goals of the Company.

In this regard, in July 2003, the shareholders of MRI approved the change in the status of MRI to that of an investment entity. The nature of MRI’s business is now focused on investment opportunities.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The first investment in its new form, being a AUD4 million convertible note with Fruit Projects Australia Limited, was approved by the shareholders of MRI in July 2003.

The structural move to an investment vehicle will allow MRI to identify, consider and invest in appropriate strategic investment opportunities that will provide an income generating investment portfolio offering maximum returns to its shareholders, within a clear investment mandate in terms of investment criteria as approved by its shareholders.

To the date of this report no further investments assessed had been considered suitable to meet MRI’s objectives, and MRI’s Directors continue to seek appropriate potential investment opportunities.

Tung Fong Hung Investment Limited (“Tung Fong Hung”)

Tung Fong Hung recorded a profit of approximately HK$4.5 million in 2003, compared with a loss of approximately HK$28.3 million in 2002, which is a significant improvement for Tung Fong Hung. In the first half of 2003, the local retail sector and most of the economies in the region were affected by the outbreak of SARS. However, Tung Fong Hung launched a product called �����, was highly accepted by the community, which helped sustaining Tung Fong Hung’s business during the outbreak. The implementation of “Individual Visit Scheme” provided a great boost in Tung Fong Hung’s travel and retail sector. This in turn resulted in stimulation of local consumption, and hence the turnover of Tung Fong Hung has sharply increased in the second half of the year. To cope with the business development in Hong Kong, 2 new outlets were opened to consolidate Tung Fong Hung’s position as a market leader. On the other hand, the measures of “cost saving” and “operational efficiency enhancement” were successfully adopted, which not only fully utilised resources in Tung Fong Hung, but also increased Tung Fong Hung’s competitiveness.

On 30th July, 2003, Tung Fong Hung disposed of its 50% interest in Pacific Wins Development Ltd., which holds entire interest in Jean-Marie Pharmacal Co., Ltd., a western pharmaceutical manufacturer, to a strategic business partner.

Corporate Developments

In January 2003, China Enterprises, a non-wholly owned subsidiary of the Company, and Ningxia Yinchuan Rubber Manufacturing (“Ningxia Yinchuan”) entered into a conditional sale and purchase agreement (as subsequently amended in September 2003) pursuant to which China Enterprises agreed to sell its entire 51% interest in Yinchuan C.S.I. to Ningxia Yinchuan for the consideration of RMB29 million (equivalent to approximately HK$27 million).

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Upon completion of the group reorganisation of the Company in 2002, the Company as the controlling shareholder of China Velocity Group Limited (“China Velocity”) (formerly known as Rosedale Hotel Group Limited) disposed of 26,500,000 consolidated shares of China Velocity at a consideration of HK$0.72 per share in May 2003 in order to maintain adequate public float of share of China Velocity. The shareholding interest in China Velocity held by the Company has reduced to approximately 22.65% of the issued shares of China Velocity, and approximately 28.1% of issued share capital of China Velocity are held in the hands of the public which was in compliance with Rule 8.08 of the Listing Rules on the Stock Exchange.

In June 2003, China Enterprises and Hangzhou Industrial & Commercial Trust & Investment Co., Ltd. (“Hangzhou I&C”) entered into an agreement, pursuant to which China Enterprises agreed to dispose of its 25% interests in Hangzhou Zhongce Rubber Co., Ltd. to Hangzhou I&C for the consideration of approximately RMB164.7 million (equivalent to approximately HK$155.2 million).

In July 2003, Hanny Holdings Limited (“Hanny”) and Paul Y. — ITC Construction Holdings Limited (“Paul Y.”) announced that Well Orient Limited (“Well Orient”) and Calisan Developments Limited (“Calisan”), each being indirect wholly-owned subsidiary of Hanny and Paul Y. respectively, to make a voluntary conditional cash offer at the price of HK$0.10 for each share of the Company (the “Shares”) and HK$0.001 for each warrant of the Company (the “Warrants”) respectively, other than those presently owned by Well Orient and Calisan (the “Offerors”) and their concert parties, in order to increase the aggregate shareholdings of the Offerors in the Company to over 50% of the issued share capital of the Company, Kingsway SW Securities Limited (“Kingsway SW Securities”) has been appointed by the Offerors to stand in the market to acquire Shares at a price of no more than HK$0.10 per Share. On 9th July, 2003, Kingsway SW Securities, on behalf of the Offerors, purchased 49,665,000 Shares, representing 5.98% of the issue share capital of the Company, at the open market at a price of HK$0.10 per Share. After the purchase on 9th July, 2003, the Offerors and their concert parties were interested in 291,675,000 Shares, representing approximately 35.16% of the issued share capital of the Company, thus triggering a mandatory offer during the offer period of a voluntary offer under Rule 26 of the Takeovers Code.

The Offerors notified the Company on 21st July, 2003 that the offer price under the Share offer would be increased from HK$0.10 to HK$0.139 per Share and the Offerors, through Kingsway SW Securities, would make a mandatory conditional cash offer at the price of HK$0.139 for each Share and HK$0.001 for each Warrant respectively, other than Shares and Warrants presently owned by the Offerors and parties acting in concert with the Offerors, and to cancel all outstanding options (the “Options”) at HK$0.001 per Option.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

In addition to the acquisition of 49,665,000 Shares on 9th July, 2003, the Offerors also jointly purchased 161,680,000 Shares, representing 19.49% of the voting rights in the Company, at a price of HK$0.139 per Share on 11th August, 2003. Including the valid acceptances of the Share offer in respect of 77,510 Shares received by the Offerors as at 11th August, 2003, the Offerors and their concert parties hold 453,432,510 Shares, representing 54.67% of the voting rights in the Company on 11th August, 2003 and thus, the condition to which the offers are subject has been satisfied and the offers have become unconditional on 11th August, 2003.

Upon close of the offers, the Offerors and their concert parties are interested in 518,329,589 Shares, representing approximately 62.49% of the existing issued shares of the Company and 48,285,900 units of Warrants, representing approximately 29.11% of the outstanding Warrants. All outstanding Options were cancelled on 29th August, 2003. The Company became an associated company of Paul Y. and Hanny.

In August 2003, China Velocity and Wing On Travel (Holdings) Limited (“Wing On”) (formerly known as Ananda Wing On Travel (Holdings) Limited), both associated companies of the Company, announced that the shareholders of China Velocity whose names appear on the register of members of China Velocity on 11th December, 2003 would receive by way of distribution in specie of shares of Apex Quality Group Limited (“Apex”) on a one Apex share for one consolidated China Velocity share basis. Upon completion, the Company received 62,821,662 Apex shares of which became an associate of the Company.

China Enterprises entered into a conditional agreement dated 13th January, 2004 with Wing On in relation to the issue of 2% convertible note to China Enterprises or its nominee for a consideration of HK$155,000,000. The convertible note provides China Enterprises with the right to convert into Wing On shares during a period of three years from the date of issue of the convertible note, at an initial conversion price of HK$0.020 per Wing On share, subject to adjustment.

In March 2004, the Company entered into the conditional sale and purchase agreement with Cheung Tai Hong (B.V.I.) Limited (“Cheung Tai Hong”) in relation to the acquisition by Cheung Tai Hong of the entire equity interest in Tung Fong Hung from the Company for a total consideration of HK$42,000,000.

As stated in the joint announcement dated 5th March, 2004 of Dong Fang Gas Holdings Limited (“Dong Fang Gas”), an associated company of the Company, and PCCW Limited (“PCCW”), Dong Fang Gas conditionally agreed to purchase (i) the entire issued share capital of Ipswich Holdings Limited and its subsidiaries (“Property Group”), being the group of companies holding PCP Beijing, PCCW Tower, other investment properties and related property and facilities management companies of PCCW Limited and its subsidiaries and (ii) the loans of approximately

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

HK$3,529 million, in aggregate, of interest-bearing loans owing by the relevant members of the Property Group to PCCW (comprising of HK$2,359 million and US$150 million of such loans) and (iii) certain property interests. The consideration for the above transaction amounting to HK$6,557 million will be satisfied by (a) as to HK$2,967 million by the allotment and issue of approximately 1,648 million new shares of Dong Fang Gas to PCCW (or as it may direct) credited as fully paid at an issue price of HK$1.80 per share; and (b) as to the remaining HK$3,590 million by the issue of the convertible notes by Dong Fang Gas to PCCW or as it may direct. Upon completion of the foresaid proposals, Dong Fang Gas will become the flagship of PCCW for property development business in Hong Kong and the PRC and thereafter Dong Fang Gas will cease to be an associate of the Company. ”

(g) GENERAL OUTLOOK OF THE GROUP’S BUSINESSES

The Group is, through its subsidiaries and associates, engaged in various businesses. Set out below are the Board’s view of the outlook of its major subsidiary, associates and the Group.

Talent Cosmos Limited

On 30th March, 2004, the Group entered into an agreement to acquired 80% interest in Talent Cosmos Limited for a consideration of HK$30 million which was paid by an independent third party as a settlement for a loan due by such independent third party to the Group. The acquisition was completed on 30th March, 2004. Talent Cosmos is a investment holding company which through its subsidiary is engaged in manufacturing of batteries. The principal operation of Talent Cosmos is situated in Taishan City, Guangdong, the PRC.

After the review on the operation and business of Talent Cosmos Limited and its subsidiaries, certain measures has been implemented to ration the resources and improve efficiency. It is the intention of the Board to conduct further review on Talent Cosmos Limited with a view to, subject to the market conditions, expanding its existing production capacity, broadening its sale and distribution network in order to improve its market shares.

There will be no variation in the aggregate remuneration payable to and benefits in kind receivable by the Directors in consequence of the aforesaid acquisition.

MRI Holdings Limited

After the restructuring carried out in July 2003, MRI successfully changed to an investment company. In July 2003 MRI subscribed for convertible note in Fruit Projects Australia Limited for a consideration of AUD4 million. A winding up petition was filed against Fruit Projects Australia Limited, the status of the winding up petition remained inconclusive as at the Latest Practicable Date.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at the Latest Practicable Date, MRI did not hold any other investment and the management of MRI has not identified any appropriate investment opportunities. The management of MRI will continue actively seeking appropriate investment opportunities in accordance with MRI’s investment mandate as approved by its shareholders.

China Enterprises Limited

After disposing of the investments in Yinchuan C.S.I. (Greatwall) Rubber Company Limited and Double Happiness Tire Industries Corporation Limited in 2003, China Enterprises maintains minimal involvement in tire manufacturing and distribution business. It is the intention of the management of China Enterprises to continue seeking appropriate investment opportunities in hotel and travel related businesses in the PRC in view of the positive outlooks in this sector in the near future.

Zhuhai Zhongce Property Investment Limited

As disclosed in the Company’s 2003 annual report, Zhuhai Zhongce Property Investment Limited, a wholly owned subsidiary of the Company, acquired the exclusive development right of a parcel of land located in Long Shan Development Area, Doumen District, Zhuhai City, Guangdong, the PRC in 2003 for a cash consideration of HK$190 million. The Group paid approximately HK$36.6 million in 2003 in return for the development right for part of the aforesaid land. The Board is optimistic that as Zhuhai will be developed into one of the central cities in the Pearl River Delta, which has been expanding rapidly economically in recent years, the development right of the aforesaid land possesses tremendous potential in making positive contribution to the Group in the near future.

General

Although there are signs of recovery of local economy after the implementation of Closer Economic Partnership Arrangement (“CEPA”), the Board is of the view that the economy will remain gloomy in the near terms due to various uncertainties, in particular, the slow down in the growth of PRC economy as a result of the macro-control measures imposed by the PRC Government and the fluctuation in oil price. The Board will maintain a cautiously optimistic attitude toward the development of the Group and would continue exercising cautions in allocating its resources in order to preserve the Shareholders long term interest and maximizing return to Shareholders.

– 102 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

1. PRO FORMA ASSETS AND LIABILITIES STATEMENT OF THE GROUP

(i) Introduction to Pro Forma Assets and Liabilities Statement

The pro forma assets and liabilities statement of the Group has been prepared giving effect to the Group’s proposed acquisition (the “Acquisition”) of a land situated at Nos. 219 and 229 Jiang Ning Road, Jing An District, Shanghai, The People’s Republic of China and the building being erected thereon which comprises two levels of underground carparks and a 24-storey building (the “Property”) at a consideration of RMB450,000,000 (equivalent to approximately HK$424,128,000), of which deposits of RMB50,000,000 (equivalent to approximately HK$47,125,000) were settled by a subsidiary of Apex Quality Group Limited, an associate of the Group as settlement of amount due from an associate, RMB20,000,000 (equivalent to approximately HK$18,850,000) shall be satisfied by cash and RMB380,000,000 (equivalent to approximately HK$358,153,000) shall be satisfied by bank borrowings.

In connection with the Acquisition of the Property, the Group will be required to incur incidental costs including stamp duty and legal and professional fee. The legal and professional fees to be incurred for the Acquisition of the Property will be approximately HK$15,130,000. As advised by Shanghai JoinWay Law Firm, the legal fees comprises sales and purchase agreement notarial fee (�������) payable to Shanghai Notary Public Office (������); transaction deed tax (����) payable to Shanghai Municipal Financial Administration (����� �); title registration fee (�����) and transaction fee (�����) payable to Real Estate Trading Centre (�������); contract stamp duty (�����) and certificate stamp duty (�����) payable to Shanghai Municipal Administration of Local Taxation ( ������); and drawing fee (���) payable to Office of Land Survey Results (��� ����),totalling approximately HK$13,200,000. The professional fees payable to all professional parties involved in the Acquisition, as advised by the respective professional parties, will amount to approximately HK$1,930,000.

The pro forma assets and liabilities statement of the Group has been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the effect of the Acquisition of the Property as if the Acquisition of the Property taken place on 31st December, 2003.

The pro forma assets and liabilities statement of the Group is based upon the audited consolidated balance sheet of the Group as at 31st December, 2003, which has been extracted from the audited consolidated financial statements of the Company for the year ended 31st December, 2003, after giving effect to the pro forma adjustments of the Acquisition of the Property that are (i) directly attributable to the transaction; and (ii) factually supportable, are summarized in the accompany notes.

– 103 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

The accompanying pro forma assets and liabilities statement has not given effect to the following events which were completed subsequent to 31st December, 2003:

• (a) the issuance of convertible notes by Wing On Travel (Holdings) Limited to a whollyowned subsidiary of China Enterprises Limited for a consideration of HK$155 million which was completed on 5th July, 2004;

• (b) the dilution of the Group’s interest in Pacific Century Premium Developments Limited (“PCPD”, formerly known as Dong Fang Gas Holdings Limited) from 43.06% to 2.83% as a result of the issue of shares by PCPD for acquisition of various property interests from PCCW Limited which was completed on 10th May, 2004;

• (c) the disposal of the Group’s entire equity interest in Tung Fong Hung Investment Limited for a consideration of HK$42 million satisfied by HK$6.5 million promissory note and HK$35.5 million in cash; and

• (d) the acquisition of 80% equity interest of the Talent Cosmos Limited for a consideration of HK$30 million.

The pro forma assets and liabilities statement of the Group is based on a number of assumptions, estimates and uncertainties stated above. Accordingly, the accompanying pro forma assets and liabilities of the Group does not purport to describe the actual financial position of the Group that would have been attained had the Acquisition of the Property been completed on 31st December, 2003, or to predict the future financial position of the Group

The pro forma assets and liabilities statement 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, 2003 and other financial information included elsewhere in this circular.

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(ii) Pro Forma Assets and Liabilities Statement

As at 31st December, 2003 Pro forma Audited adjustments HK$’000 HK$’000 Notes Non-Current Assets Properties, plant and equipment 43,156 439,258 1 Goodwill 9,325 Investment in associates 823,147 (47,125) 2 Receivables-due after one year 31,286 Investments in securities 217,683 1,124,597 Current Assets Other assets 226,718 Inventories 66,976 Trade Debtors 13,718 Receivables-due within one year 370,459 Receivables due from associates 6,294 Other receivables, deposits and prepayments 57,677 Investments in securities 2,930 Bank balances and cash 319,875 (33,980) 3 1,064,647 Current Liabilities Creditors, other payables and accrued charges (84,946) Payables-due within one year (34,611) Payables due to associates (185) Income and other taxes payable (3,064) Bank loans and other borrowings — due within one year (38,284) (161,090) Net Current Assets 903,557 2,028,154 Capital and Reserves Share capital (85,660) Reserves (1,447,720) (1,533,380) Minority Interests (250,160) Non-Current Liabilities Bank loans and other borrowings — due after one year (144) (358,153) 3 Payables-due after one year (244,470) (244,614) (2,028,154)

Pro forma HK$’000 482,414 9,325 776,022 31,286 217,683 1,516,730 226,718 66,976 13,718 370,459 6,294 57,677 2,930 285,895 1,030,667 (84,946) (34,611) (185) (3,064) (38,284) (161,090) 869,577 2,386,307 (85,660) (1,447,720) (1,533,380) (250,160) (358,297) (244,470) (602,767) (2,386,307)

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Notes to Pro Forma Assets and Liabilities Statement of the Group

The statement has been prepared by the Directors 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 Acquisition of the Property.

• (1) The Group will acquire the Property at a consideration of RMB450,000,000 (equivalent to approximately HK$424,128,000). In connection with the Acquisition, the Group will be required to incur legal and professional fees of approximately HK$15,130,000. The pro forma assets and liabilities statement adjustments reflect the increase in the carrying amount of the properties of approximately HK$439,258,000 as a result of the Acquisition of the Property as if the Acquisition of the Property had taken place on 31st December, 2003.

• (2) The consideration for the Acquisition of the Property is RMB450,000,000 (equivalent to approximately HK$424,128,000), of which deposits of RMB50,000,000 (equivalent to approximately HK$47,125,000) and RMB20,000,000 (equivalent to approximately HK$18,850,000) shall be satisfied by cash and RMB380,000,000 (equivalent to approximately HK$358,153,000) shall be satisfied by bank borrowings. The deposits of RMB 50,000,000 (equivalent to approximately HK$47,125,000) were settled by a subsidiary of Apex Quality Group Limited, an associate of the Group as settlement of the amount due from an associate and the cash consideration of RMB20,000,000 (equivalent to approximately HK$18,850,000) will be financed by internal resources.

• (3) In connection with the Acquisition of the Property, the Group will be required to pay legal and professional fees of approximately HK$15,130,000. The total payments in connection with the Acquisition of the Property will be approximately HK$439,258,000. The pro forma assets and liabilities statement adjustments reflect the decrease in interests in associates of approximately HK$47,125,000, decrease in bank balances and cash of approximately HK33,980,000 and increase in long term bank borrowings of HK$358,153,000.

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Following is the full text of the report prepared by Deloitte Touche Tohmatsu on the pro forma assets and liabilities statement of the Group for inclusion in this circular.

(iii) Report on Pro Forma Assets and Liabilities Statement of the Group

==> picture [70 x 53] intentionally omitted <==

����������� Deloitte Touche Tohmatsu ��������111� 26/F Wing On Centre ����26� 111 Connaught Road Central Hong Kong

17th September, 2004

The Directors

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

Dear Sirs,

We report on the pro forma assets and liabilities statement set out in Section 1 of Appendix II (“Pro Forma Assets and Liabilities Statement”) to the circular of China Strategic Holdings Limited (the “Company”) dated 17th September, 2004 issued by the Company in connection with the very substantial acquisition in respect of the proposed acquisition (the “Acquisition”) of a land situated at Nos. 219 and 229 Jiang Ning Road, Jing An District, Shanghai, The People’s Republic of China and the building being erected thereon which comprises two levels of underground carparks and a 24-storey building (the “Property”), which has been prepared by the directors of the Company (the “Directors”), for illustrative purposes only, to provide information about how the Acquisition might have affected the assets and liabilities of the Company and its subsidiaries (collectively referred to as the “Group”) as if the Acquisition of the Property has taken place on 31st December 2003.

Responsibilities

It is the responsibility solely of the Directors to prepare the Pro Forma Assets and Liabilities Statement in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (“Listing Rules”).

– 107 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

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

Basis of opinion

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

The Pro Forma Assets and Liabilities Statement has been complied in accordance with the basis that the Acquisition of the Property had been completed as at 31st December, 2003 for illustrative purposes only and because of its nature, it may not be an indicative of the financial position of the Group:

• (a) had the Acquisition of the Property actually occurred on 31st December, 2003 or

• (b) at any future date.

Opinion

In our opinion:

• (a) the Pro Forma Assets and Liabilities Statement has been properly compiled on the basis stated above;

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

• (c) the adjustments are appropriate for the purposes of the Pro Forma Assets and Liabilities Statement as disclosed pursuant to paragraph 29 of Chapter 4 of the Listing Rules.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

– 108 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

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

(i) Introduction to Pro Forma Income Statement and Pro Forma Cash Flow Statements

The pro forma income statement and pro forma cash flow statement of the Group have been prepared giving effect to the Group’s proposed acquisition (the “Acquisition”) of a land situated at Nos. 219 and 229 Jiang Ning Road, Jing An District, Shanghai, The People’s Republic of China and the building being erected thereon which comprises two levels of underground carparks and a 24-storey building (the “Property”) at a consideration of RMB450,000,000 (equivalent to approximately HK$424,128,000), of which deposits of RMB50,000,000 (equivalent to approximately HK$47,125,000) were settled by a subsidiary of Apex Quality Group Limited, an associate of the Group as settlement of amount due from an associate which bears an interest at Hong Kong prime rate plus 2% per annum and repayable after one year from 31st December, 2003, RMB20,000,000 (equivalent to approximately HK$18,850,000) shall be satisfied by cash and RMB380,000,000 (equivalent to approximately HK$358,153,000) shall be satisfied by bank borrowings.

The pro forma income statement and 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 effect of the Acquisition of the Property as if the Acquisition of the Property had taken place at the beginning of the year ended 31st December, 2003.

The pro forma income statement and 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, 2003, which have been extracted from the audited consolidated financial statements of the Company for the year ended 31st December, 2003, after giving effect to the pro forma adjustment of the Acquisition of the Property that are (i) directly attributable to the transaction; (ii) expected to have a continuing impact on the Group; and (iii) factually supportable, are summarised in the accompanying notes.

The accompanying pro forma income statement and pro forma cash flow statement have not given effect to the following events which were completed subsequent to 31st December, 2003:

• (a) the issuance of convertible notes by Wing On Travel (Holdings) Limited to a whollyowned subsidiary of China Enterprises Limited for a consideration of HK$155 million which was completed on 5th July, 2004;

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

• (b) the dilution of the Group’s interest in Pacific Century Premium Developments Limited (“PCPD”, formerly known as Dong Fang Gas Holdings Limited) from 43.06% to 2.83% as a result of the issue of shares by PCPD for acquisition of property interests from PCCW Limited which was completed on 10th May, 2004;

• (c) the disposal of the Group’s entire equity interest in Tung Fong Hung Investment Limited for a consideration of HK$42 million satisfied by HK$6.5 million promissory note and HK$35.5 million in cash; and

• (d) the acquisition of 80% equity interest of the Talent Cosmos Limited for a consideration HK$30 million.

The pro forma income statement and pro forma cash flow statement of Group are based on a number of assumptions, estimates and uncertainties stated above. Accordingly, the accompanying pro forma income statement and 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 Acquisition of the Property been completed at the beginning of the year ended 31st December, 2003, or to predict the future result and cash flow of the Group.

The pro forma income statement and 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, 2003 and other financial information included elsewhere in this circular.

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(ii) Pro Forma Income Statement

For the year ended 31st December, 2003 Audited Adjustments HK$’000 HK$’000 Turnover 2,884,493 Cost of sales (2,520,175) Gross profit 364,318 Other operating income 145,731 Distribution costs (174,955) Administrative expenses (122,587) Other expenses (118,396) Profit from operations 94,111 Finance costs (50,712) Gain on disposal/dilution of interests in subsidiaries 12,344 Loss on disposal/liquidation of interests in associates (36,481) Share of results of associates (175,734) Allowance on receivables advances to an associate (12,712) Loss before taxation (169,184) Taxation (10,935) Loss before minority interests (180,119) Minority interests (9,409) Net loss for the year (189,528)

Pro forma HK$’000 2,884,493 (2,520,175) 364,318 145,731 (174,955) (122,587) (118,396) 94,111 (50,712) 12,344 (36,481) (175,734) (12,712) (169,184) (10,935) (180,119) (9,409) (189,528)

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(iii) Pro Forma Cashflow Statement

For the year ended 31st December, 2003 Audited Adjustments HK$’000 HK$’000 OPERATING ACTIVITIES Profit from operations 94,111 Adjustments for: Dividend income (2,832) Interest income (48,416) Depreciation of property, plant and equipment 58,346 Amortisation of goodwill 1,628 Unrealised holding loss on investments in securities 37,604 Gain on disposal of investments in securities (46,368) Allowances for bad and doubtful debts 10,728 Allowances for amounts due from associates 2,458 Impairment loss of goodwill on acquisition of subsidiaries 20,387 Allowances for inventories 4 Allowances for loan and interest receivables 43,810 Gain on disposal of property, plant and equipment (15,995) Operating cash flows before movements in working capital 155,465 Decrease in inventories 22,997 Increase in trade debtors (10,287) Increase in other receivables, deposits and prepayments (9,143) Decrease in creditors, other payables and accrued charges (49,808) Increase in amounts due from associates (29,768) Increase in payables 6,496 Increase in other asset (226,718) Decrease in income and other tax payable (20,350) Net cash outflow from operations (161,116) Tax paid in other jurisdictions (6,650) NET CASH USED IN OPERATING ACTIVITIES (167,766)

Pro forma HK$’000 94,111 (2,832) (48,416) 58,346 1,628 37,604 (46,368) 10,728 2,458 20,387 4 43,810 (15,995) 155,465 22,997 (10,287) (9,143) (49,808) (29,768) 6,496 (226,718) (20,350) (161,116) (6,650) (167,766)

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PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

(iii) Pro Forma Cashflow Statement (Cont’d)

For the year ended 31st December, 2003 Audited Adjustments HK$’000 HK$’000 Notes INVESTING ACTIVITIES Repayment from receivables 774,202 Repayment from receivables advanced to associates 92,124 Proceeds from disposal of investments in securities 219,777 Proceeds from disposal of property, plant and equipment 25,994 Increase in pledged bank deposits (45,259) Interest received 8,793 Proceeds from disposal/dilution of interests in associates 23,887 Proceeds from disposal/dilution of subsidiaries (net of cash and cash equivalents disposed of) (64,295) Dividend received from investments in securities 2,832 Receivables advanced (558,363) Receivables advanced to associates (260,373) Purchase of investments in securities (73,368) Purchase of property, plant and equipment (268,704) (392,133) 3 Purchase of subsidiaries (net of cash and cash equivalents acquired) (785) Refund of payment for acquisition of land development rights 16,965 Payment for acquisition of land development rights (13,310) NET CASH USED IN INVESTING ACTIVITIES (119,883) FINANCING ACTIVITIES Advance from payables 151,329 New bank loans and other borrowings raised 994,271 358,153 3 Proceeds from issue of shares 1,866 Repayment of bank loans and other borrowings (747,264) Repayment to payables (165,514) Repayment to associates (4) Repayment of obligations under finance leases (168) Interest paid (36,126) Dividends paid to minority shareholders of subsidiaries (1,432) NET CASH FROM FINANCING ACTIVITIES 196,958

Pro forma HK$’000 774,202 92,124 219,777 25,994 (45,259) 8,793 23,887 (64,295) 2,832 (558,363) (260,373) (73,368) (660,837) (785) 16,965 (13,310) (512,016) 151,329 1,352,424 1,866 (747,264) (165,514) (4) (168) (36,126) (1,432) 555,111

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

(iii) Pro Forma Cashflow Statement (Cont’d)

For the year ended 31st December, 2003 Audited Adjustments HK$’000 HK$’000 Notes Decrease in cash and cash equivalents (90,691) Cash and cash equivalents at the beginning of the year 401,935 Effect of foreign exchange rate changes 3,500 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 314,744 ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances and cash 319,875 (33,980) 3 Bank overdrafts (5,131) 314,744

Pro forma HK$’000 (124,671) 401,935 3,500 280,764 285,895 (5,131) 280,764

– 114 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Notes to Pro Forma Income Statement and Pro Forma Cash Flow Statements

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 the cash flow of the Group has the Acquisition of the Property actually occurred at the beginning of the year ended 31st December, 2003 or for any future period.

1. As explained in Note 2 to the pro forma assets and liabilities statement as at 31st December, 2003, it is proposed that the Acquisition of the Property will be financed by bank borrowings in the sum of RMB380,000,000 (equivalent to approximately HK$358,153,000). According to the agreement for the Acquisition of Property entered into by the Group and the Vendor, the Vendor is required to procure the Group in obtaining a loan of RMB380,000,000 (equivalent to approximately HK$358,153,000) to be granted by PRC banks or financial institutions and secured by the Property with a repayment term of not less than three years and an annual interest rate of not more than 110% of the basic lending rate quoted for bank/financial institutions on the date the loan is drawn down.

The Group has not obtained any bank loan or banking facilities offer letter granted by banks at the date of this report in relation to the financing of the Acquisition of the Property and therefore the directors of the Company are of the opinion that they are unable to estimate the amount of finance cost related to the pro forma bank borrowings had the Acquisition of the Property occurred at the beginning of the year ended 31st December, 2003 and, accordingly, no pro forma adjustment of finance cost was made in the pro forma income statement and pro forma cash flow statement.

1. The Directors of the Company have considered that no tax or deferred tax charge should be recognised for the year ended 31st December, 2003 in the pro forma income statement since there were no assessable profit or deferred taxation impact arising from the Property or Acquisition of the Property for the year ended 31st December, 2003.

2. As explained in Note 2 to the Pro Forma Assets and Liabilities Statement, the deposits of RMB50,000,000 (equivalent to HK$47,125,000) for the Acquisition of the Property were settled by a subsidiary of Apex Quality Group Limited, an associate of the Group as settlement of amount due from an associate of the Group, the cash consideration of RMB20,000,000 (equivalent to approximately HK$18,850,000) will be financed by internal resources and RMB380,000,000 (equivalent to approximately HK$358,153,000) shall be satisfied by bank borrowings. Incidental costs for legal and professional fees amounted to approximately HK$15,130,000. The pro forma cash flow statement adjustments reflect the cash outflow in respect of acquisition of property, plant and equipment of HK$392,133,000 and cash inflow from bank borrowings of HK$358,153,000. This pro forma adjustment will not have continuing impact on the Group.

– 115 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Following is the full text of the report prepared by Deloitte Touche Tohmatsu on the pro forma income statement and pro forma cash flow statement of the Group for inclusion in this circular.

(iv) Report on Pro Forma Income Statement and Pro Forma Cash Flow Statement of the Group

==> picture [70 x 53] intentionally omitted <==

����������� ��������111� ����26�

Deloitte Touche Tohmatsu 26/F Wing On Centre 111 Connaught Road Central Hong Kong

17th September, 2004

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

Dear Sirs,

We report on the pro forma income statement and pro forma cash flow statement set out in Section 2 of Appendix II (“Pro forma Income Statement and Pro Forma Cash Flow Statement”) to the circular of China Strategic Holdings Limited (the “Company”) dated 17th September, 2004 issued by the Company in connection with the very substantial acquisition in respect of the proposed acquisition (the “Acquisition”) of a land situated at Nos. 219 and 229 Jiang Ning Road, Jing An District, Shanghai, The People’s Republic of China and the building being erected thereon which comprises two levels of underground carparks and a 24-storey building (the “Property”), which has been prepared by the directors of the Company (the “Directors”), for illustration purposes only, to provide information about how the Acquisition of the Property might have affected the results and cash flow of the Company and its subsidiaries (collectively referred to as the “Group”) as if the Acquisition of the Property has taken place at the beginning of the year ended 31st December, 2003.

Responsibilities

It is the responsibility solely of the Directors to prepare the Pro Forma Income Statement and Pro Forma Cash Flow Statement in accordance with paragraph 29 of Chapter 4 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”).

It is our responsibility to form an opinion on the Pro Forma Income Statement and Pro Forma Cash Flow Statement and to report our opinion to you. We do not accept any responsibility for any report previously given by us on any financial information used in the compilation of the

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APPENDIX II PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Pro Forma Income Statement and Pro Forma Cash Flow Statement beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of Opinion

We conducted our work in accordance with the Unaudited Statement of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in the United Kingdom. Our work, which involved no independent examination of any of the underlying financial information, consisted primary of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Income Statement and Pro Forma Cash Flow Statement and the explanatory notes with the Directors.

The Pro Forma Income Statement and Pro Forma Cash Flow Statement has been compiled in accordance with the basis that the Acquisition of the Property had been completed at the beginning of the year ended 31st December, 2003 for illustrative purposes only and, because of their nature, they may not be indicative of the results and the cash flows of the Group:

• (a) had the Acquisition of Property actually occurred at the beginning of the year ended 31st December, 2003; or

• (b) for any future period.

Qualified opinion

In our opinion:

• (a) the pro forma income statement and pro forma cash flow statement have been properly compiled on the basis stated above;

Except for the failure to recognise the finance costs in respect of pro forma bank borrowings had the Acquisition of the Property occurred at the beginning of the year ended 31st December 2003 as explained in note 1 to the pro forma income statement and pro forma cash flow statement:

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

• (c) the adjustments are appropriate for the purposes of the pro forma income statement and pro forma cash flow statement as disclosed pursuant to paragraph 29 of Chapter 4 of the Listing Rules.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

– 117 –

APPENDIX III

VALUATION REPORT ON THE PROPERTIES

The following is the full text of letter and valuation certificate prepared for the purpose of incorporation in this circular received from DTZ Debenham Tie Leung Limited in connection with the valuation of the Properties as at 30th June, 2004.

==> picture [134 x 59] intentionally omitted <==

10th Floor, Jardine House, 1 Connaught Place, Central, Hong Kong

17th September, 2004

The Directors

China Strategic Holdings Limited 8th Floor

Paul Y. Centre 51 Hung To Road Kwun Tong Kowloon Hong Kong

Dear Sirs,

Re: The proposed Building, Nos. 219 and 229 Jiang Ning Road, Jing An District, Shanghai, the People’s Republic of China

Instructions, Purpose In accordance with the instruction to carry out open market valuation & Date of Valuation of the “Capital Value When Completed” of the captioned property interest situated in the People’s Republic of China (“the PRC”), we confirm that we have carried out site inspection, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you (the “Company”) with our opinion of value of such property interest as at 30th June, 2004.

Basis of Valuation

Our valuation of the property interest represents its open market value which we would define as intended to mean “an opinion of the best price at which the sale of an interest in a property would have been completed unconditionally for cash consideration on the date of valuation, assuming:—

(a) a willing seller;

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VALUATION REPORT ON THE PROPERTIES

APPENDIX III

• (b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of the price and terms and for the completion of the sale;

• (c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;

• (d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and

• (e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion”.

Valuation Assumptions

Our valuation has been made on the assumption that the owner sells the property interest on the open market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to increase the value of the property interest.

In the course of our valuation of the property interest, we have assumed that transferable land use rights in respect of the property interest for its specific term at nominal annual land use fees have been granted and that any land premium payable has already been fully settled. We have relied on the advice given by the Company and its legal adviser, Shanghai JoinWay Law Firm���������, regarding the title to the property interest and the interest of Shanghai Jiu Sheng Investment Company Limited ���������� (“Jiu Sheng”) in the property.

In valuing the property interest, we have assumed that the grantee or the user of the property interest have an enforceable title to the property interest and have free and uninterrupted rights to use or to assign or lease the property interest for the whole of the unexpired terms as granted.

We have prepared our valuation on an entire interest basis in respect of the property interest.

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VALUATION REPORT ON THE PROPERTIES

APPENDIX III

No allowance has been made in our valuation for any charges, mortgages or amounts owing on the property interest nor for any expenses or taxation, which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property interest is free from encumbrances, restrictions and outgoing of an onerous nature which could affect its value.

Method of Valuation

Source of Information

In valuing the property interest, we have valued the property interest assuming it will be completed in accordance with the latest development proposals provided to us. We have valued it by comparison approach by making reference to the comparable sale evidences in the relevant locality.

We have relied to a very considerable extent on information given by the Company and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, scheduled completion date, identification of property interest, particulars of occupancy, development schemes, number of car parks, site and floor areas and all other relevant matters.

Dimensions, measurements and areas included in the valuation certificate are based on information contained in the documents provided to us and are therefore only approximations. We have had no reason to doubt the truth and accuracy of the information provided to us which is material to the valuation. We were also advised by the Company that no material facts have been omitted from the information supplied.

We would point out that the copies of documents provided to us are mainly complied in Chinese characters and the transliteration into English represents our understanding of the contents. We would therefore advise the Company to make reference to the original Chinese edition of the documents and consult your legal adviser regarding the validity and legality as well as the interpretation of the documents.

Title Investigation

The Company has provided us with some documents in relation to the title to the property interest. However, we have not searched the original documents to verify ownership or to ascertain any amendments which may not appear on the copies handed to us.

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VALUATION REPORT ON THE PROPERTIES

APPENDIX III

Site Inspection

We have inspected the exterior and, where possible, the interior of the property. However, no structural survey had been made and no tests had been carried out on any of the services. In the course of our inspection, we did note any serious defects. We are not, however, able to report whether the property is free of rot, infestation or any other structural defect.

We have not been able to carry out detailed on-site measurements to verify the site and floor areas of the property and we have assumed that the areas shown on the copies of documents handed to us are correct.

Exchange Rate

Unless otherwise stated all money amounts stated are in Renminbi, the official currency of the PRC. Our valuation of the property interest as at 30th June, 2004 was RMB500,000,000 (equivalent to approximately HK$471,700,000). The exchange rate adopted in our valuation was HK$1=RMB1.06 which was the approximate exchange rate prevailing as at the date of valuation and there has been no significant fluctuation in such rate between that date and the date of this letter.

Yours faithfully, for and on behalf of

DTZ Debenham Tie Leung Limited

Philip C. Y. Tsang

Registered Professional Surveyor (GP) China Real Estate Appraiser MSc., M.H.K.I.S., M.R.I.C.S

Associate Director

Notes: Mr. Philip C. Y. Tsang is a registered professional surveyor with 12 years of experience in the property valuation in the PRC.

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VALUATION REPORT ON THE PROPERTIES

APPENDIX III

PROPERTY INTENDED TO BE ACQUIRED

VALUATION CERTIFICATE

Property

The proposed Building, Nos. 219 and 229 Jiang Ning Road, Jing An District, Shanghai, the People’s Republic of China

Description and tenure

The property comprises the proposed building which is being erected on a piece of land with a site area of approximately 5,493.50 sq.m. (59,132 sq.ft.).

According to the area schedule provided, the gross floor area of the 24-storey plus basement commercial/residential building is as follows:—

Level/Uses Levels 5-24/ Apartment Levels 1-4/ commercial Sub-total B1 & B2/ 112 car parks , plant room & refugee Total:	Approximate Gross Floor Area sq.m. sq.ft. 22,843.60 245,889 7,836.49 84,352 30,680.09 330,241 6,380.34 68,678 37,060.43 398,919	Approximate Gross Floor Area sq.m. sq.ft. 22,843.60 245,889 7,836.49 84,352 30,680.09 330,241 6,380.34 68,678 37,060.43 398,919
	30,680.09	330,241
	6,380.34	68,678
	37,060.43	398,919

(Please see note (2) below)

Particulars of occupancy

The property is currently under construction and is scheduled to be completed in the end of 2004.

Capital Value When Completed as at 30th June, 2004

RMB500,000,000

(The owner of the property would hand over the property on completion basis. The ow n e r w o u l d b e responsible to apply for the charge of land use to commercial/residential uses and pay the supplemental land premium. We have therefore prepared our valuation on the assumption that the property has been granted for commercial/ residential uses, and the supplemental land premium for change of land use has been settled in full.

We have disregarded the Agreement dated 16th June, 2004 in respect of the acquisition of the property as stated on p.4 of this circular.)

According to the Realty Title Certificate, the land use rights of the property is transferred for office uses (Please see note (1) below).

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VALUATION REPORT ON THE PROPERTIES

APPENDIX III

Notes:—

• (1) Realty Title Certificate No. (2004) 004245 dated 21st May, 2004 contains the following salient conditions:—

Owner : Shanghai Jiu Sheng Investment Company Limited ���������� (“Jiu Sheng”) Site area : 5,493.50 sq.m. Location : Nos. 219 and 229 Jiang Ning Road Uses : Office Origin of Land Use Rights : Transfer Land Use term : Unspecified Remark : The gross floor area of the construction project is 37,060.43 sq.m.

As instructed, we have valued the property on the assumption that the property has been granted for commercial/residential uses, and the supplemental land premium for change of land use has been settled in full.

• (2) According to Construction Permit No. 952EL002D01 issued by Shanghai Construction Committee, the construction works of the proposed building can be carried out.

According to Area Calculation by Jing An District Land Survey Office��������, the property is planned to have a total gross floor area of 37,060.43 sq.m.

• (3) According to Business Licence No. 3101062013253 dated 25 September 2002, Jiu Sheng was established with a registered capital of RMB230,000,000.

• (4) The PRC legal opinion of Shanghai JoinWay Law Firm contains, inter alia, the following:—

• (i) Jiu Sheng is duly established and is validly existing under the PRC laws;

• (ii) Jiu Sheng legally owns the land use rights of the property with a site area of 5,493.50 sq.m. and a gross floor area of 37,060.43 sq.m. for office use. The origin of the land use rights of the property is transfer. According to the relevant PRC law, the land use term for office use is 50 years.

• (iii) Jiu Sheng has obtained the relevant approval for the land use, planning, construction and selling of the property;

• (iv) Jiu Sheng has the right to transfer and mortgage the property and would pay the supplemental land premium for the change of land use from office to commercial/residential uses, if any; and

• (v) The property is subject to two mortgages in favour of China Construction Bank Beijing Chaoyang Branch and China Mensheng Bank Stock Company Limited respectively.

• (5) We have based on the PRC legal opinion of Shanghai JoinWay Law Firm and prepared our valuation on the following assumptions:—

• (i) Jiu Sheng is in possession of a proper legal title to the property interest and is entitled to transfer the property interest with the residual term of its land use rights at no extra land premium or other onerous payment payable to the government;

• (ii) all land premium and costs of urban facilities (if any) have been settled in full;

• (iii) the proposed design and construction of the property as set out in this valuation certificate are in compliance with the local planning regulations; and

• (iv) the property interest can be disposed of freely to third parties.

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APPENDIX III

VALUATION REPORT ON THE PROPERTIES

• (6) In accordance with the PRC legal opinion and the information provided by the Company, the status of title and grant of major approvals and licences are as follows:—

Realty Title Certificate Yes (in respect of office use, to be changed to commercial/residential use) Red-line Drawing (site plan) Yes Land Use Rights Grant Contract No Construction Permit Yes Pre-sale Permit Yes Business Licence Yes

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APPENDIX IV VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

The following is the full text of letter and valuation certificates prepared for the purpose of incorporation in this circular received from Norton Appraisals Limited in connection with the valuation of the Group’s property interests as at 1st August, 2004.

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Norton Appraisals

Registered Professional Surveyors, Valuers & Property Advisers

Room 3830-32, Sun Hung Kai Centre 30 Harbour Road Wanchai Hong Kong Tel: (852) 2810 7337 Fax: (852) 2810 6337

17th September, 2004

The Directors China Strategic Holdings Limited 8th Floor, Paul Y. Centre No. 51 Hung To Road Kwun Tong Kowloon Hong Kong

Dear Sirs,

In accordance with your instructions for us to value all the property interests held by China Strategic Holdings Limited (hereinafter referred to as the “Company”) and its subsidiaries (hereinafter together referred to as the “Group”) as specified in the attached Summary of Values, we confirm that we have made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of values of such property interests as at 1st August, 2004 (“the date of valuation”).

Our valuations are our opinion of the open market value which we would define as intended to mean “the best price at which the sale of an interest in a property would have been completed unconditionally for cash consideration on the date of valuation, assuming:

• (a) a willing seller;

• (b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;

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APPENDIX IV VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

• (c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;

• (d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and

• (e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

Our valuations have been made on the assumption that the owner sells the property interests on the open market without the benefit of a deferred terms contract, leaseback, management agreement or any similar arrangement which could serve to affect the values of such property interests.

In the course of our valuations, we have assumed that transferable land use rights of the properties for the specific term at nominal annual land use fees have been granted and that any premium payable has already been fully settled.

In valuing the property interests, we have also adopted Direct Comparison Approach assuming such property interests are capable of being sold in their existing states on a strata-titled basis with the benefit of vacant possession and by making reference to comparable sales evidence as available in the relevant markets.

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the relevant property interests but have assumed that the site areas shown on the documents and official site plans handed to us are correct. All documents and contracts have been used as reference only and all dimensions, measurements and areas in the valuation certificates are based on information contained in the documents provided to us by the Group and are therefore only approximations.

We have inspected the exterior, wherever possible the interior, of the property included in the attached valuation certificates, in respect of which we have been provided with such information for the purpose of our valuations. However, no structural survey has been made, and in the course of our inspections we did not note any apparent serious defects. We are not, however, able to report that the property interests are free from rot, infestation or any other structural defects. No tests were carried out to any of the services.

We have relied to a considerable extent on the information provided to us by the Group and the legal opinion of the Group’s PRC legal adviser, GFE Law Office �����������, and have accepted advice on such matters as planning approvals, statutory notices, easements, tenures, completion dates of buildings, particulars of occupancy, lettings, floor areas and all other relevant matters in the identification of the property interests.

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APPENDIX IV VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

We have had no reason to doubt the truth and accuracy of the information provided to us by the Group. We have also been advised by the Group that no material factors have been omitted from the information to reach an informed view, and have no reason to suspect that any material information has been withheld.

No allowance has been made in our valuations for any charges, mortgages or amounts owing on the property interests nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property interests are free from encumbrances, restrictions and outgoings of any onerous nature which could affect their values.

Unless otherwise stated, all sums stated in our valuations are in Hong Kong dollars. The exchange rate adopted in our valuations is approximately HK$1=RMB1.06 which was approximately the prevailing exchange rate as at the date of valuation.

In our valuations, we have complied with all the requirements contained in Practice Note 12 to the Rules Governing the Listing of Securities on the Main Board of the Stock Exchange of Hong Kong Limited and the Hong Kong Guidance Notes on the Valuation of Property Assets (2nd Edition) published by the Hong Kong Institute of Surveyors in March 2000.

Our summary of values and valuation certificates are attached herewith.

Yours faithfully, For and on behalf of

Norton Appraisals Limited

Paul M. K. Wong

MRICS, MHKIS, RPS (G.P.)

Director

Note: Mr. M. K. Wong is a Registered Professional Surveyor who has more than 11 years of experience in valuation of properties in the PRC.

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VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX IV

SUMMARY OF VALUES Attributable Capital value in Interest existing state as at to the Group Property 1st August, 2004 in percentage HK$ Group I: Property interests held by the Group for future development 1 A development site located at the junction of Zhugang Road and Huangyang Road in the Longshan Industrial District, Doumen District, Zhuhai City, Guangdong Province, the PRC 593,000,000 100% 2 A development site located at the eastern side of Zhugang Road in the Sancun Industrial District, Doumen District, Zhuhai City, Guangdong Province, the PRC 16,500,000 80% Group II: Property interest held and occupied by the Group 3 Unit 28 on 9th Floor, Beijing Huapu International Plaza, Chaoyangmenwaidajei, Chaoyang District, Beijing, the PRC 5,300,000 100% Total: 614,800,000

Capital Value Attributable to the Group as at 1st August, 2004 HK$ 593,000,000 13,200,000 5,300,000

611,500,000

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APPENDIX IV

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

VALUATION CERTIFICATE

Group I: Property interests held by the Group for future development

Property

Description and tenure

Capital value in Particulars of existing state as at occupancy 1st August, 2004

• 1 A development site The property, known as Longshan China located at the Strategic Industrial Park, comprises a junction of roughly triangular-shaped vacant site with Zhugang Road and an area of approximately 7,000,000 sq.m. Huangyang Road (75,348,000 sq.ft.). in the Longshan Industrial District, The property is planned to be developed Doumen District, into a comprehensive industrial Zhuhai City, development in various phases. Guangdong Province, the PRC The land use rights of the property are assumed to have been granted for a term of 50 years for industrial use.

The construction works HK$593,000,000 for site formation and provisions of servicing/ (100% interest utilities of the property attributable are in progress and are to the Group: scheduled to be completed HK$593,000,000) in mid- 2006.

Notes:

• (1) Pursuant to the Co-operation Agreement entered into between ������������� (Zhuhai City Longshan Industrial District Administration Committee) (hereinafter referred to as “Party A”) and Talent Shop Investment Limited, a wholly-owned subsidiary of the Company, (hereinafter referred to as “Party B”) on 28th January, 2003, both parties agreed to develop the property, the salient conditions are summarized as follows:

i)	Location	:	Longshan Industrial District	Longshan Industrial District	Longshan Industrial District
ii)	Site area	:	7,000,000 sq.m.
iii)	Use	:	Industrial
iv)	Terms	:	50 years
v)	Phasing	:	1st Stage	:	3 phases (each phase 1,000,000 sq.m.)
			2nd Stage	:	To be confirmed
vi)	Building covenant	:	the development		should be completed within 5 years
vii)	Responsibilities	:	Party A	:	responsible for the provisions of the ancillary facilities to the subject site
			Party B	:	responsible for the provisions of the site formation and basic facilities within
					the subject site and marketing
viii)	Profit sharing	:	1st Stage (3 phases) : Party B (100%)
			2nd Stage		: Party A (20%)
					Party B (80%)

• (2) Pursuant to the Supplementary Co-operation Agreement entered into between Party A and Party B on 17th October, 2003, Party B agreed to pay RMB30,000,000 to Party A for the land acquisition cost, site formation and other related costs of 1st Stage (1st Phase), having a site area of 1,000,000 sq.m., of the property.

• (3) Pursuant to the Supplementary Co-operation Agreement entered into between Party A and Party B on 1st December, 2003, Party B agreed to pay RMB30,000,000 to Party A for the land acquisition cost, site formation and other related costs of 1st Stage (2nd Phase), having a site area of 1,000,000 sq.m., of the property.

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APPENDIX IV VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

• (4) We have been provided with a legal opinion on the property prepared by the Group’s PRC legal adviser, which contains, inter alia, the following information:

• i) the said agreements as stated in the Notes (1) to (3) above are valid and legally binding.

• ii) For the obtaining the Certificate for State-owned Land Use Rights of the property, Talent Shop Investment Limited should make application and pay relevant land premium and other related costs to the authority/government.

• iii) Pursuant to the agreement as stated in Note (1) and the fulfillment of Note(4)ii) above, the land use rights of the property can be freely transferable by way of transfer, mortgage or letting.

• (5) We have prepared our valuation on the following assumptions and basis:

• i) Talent Shop Investment Limited is in possession of a proper legal title to the property and free from encumbrances, and is entitled to transfer the property with the residual term of its land use rights at no extra land premium or other onerous payment payable to the government.

• ii) All land premium and other costs for the provisions of the ancillary utility services to the property and the profit payable to Party A have been settled in full.

• iii) The design and construction of the proposed development are in compliance with local planning regulations and have been approved by the relevant authorities.

• iv) The property, whether as a whole or on strata-titled basis, may be disposed of freely to both local and overseas purchasers.

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APPENDIX IV

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

VALUATION CERTIFICATE

Description and tenure

Property

• 2 A development site The property comprises a roughly located at the rectangular-shaped vacant site with an area eastern side of of approximately 133,716.17 sq.m. Zhugang Road (1,439,321 sq.ft.) within the Zhuhai Hanny in the Sancun Industrial Park (the “Development”). Industrial District, Doumen District, The property is planned to be developed Zhuhai City, into a comprehensive industrial complex Guangdong Province, with a total gross floor area of the PRC approximately 133,700 sq.m..

Capital value in Particulars of existing state as at occupancy 1st August, 2004 The construction works HK$16,500,000 for site formation and provisions of servicing/ (80% interest utilities of the property attributable are in progress. to the Group: HK$13,200,000)

The land use rights of the property are to be granted for a term of 50 years for industrial use.

Notes:

• (1) Pursuant to the Contract for Grant of State-owned Land Use Rights entered into between ������������ (Zhuhai City Sancun Industrial District Administration Committee) (hereinafter referred to as “Party A”) and ���������� (Zhuhai City Chaoliang Battery Company Limited), a subsidiary of the Company, (hereinafter referred to as “Party B”) on 4th January, 2004, Party A agreed to grant the land use rights of the property to Party B and the salient conditions are summarized as follows:

• i) Location : Sancun Industrial District ii) Site area : 133,716.17 sq.m. iii) Use : Industrial iv) Terms : 50 years v) Plot ratio : not exceeding 1.0 vi) Site coverage : not exceeding 35% vii) Height restriction : not exceeding 24 metres viii) Greenery ratio : not less than 30% ix) Building covenant : 1st phase to be completed before 30th April, 2005 2nd phase to be completed before 30th April, 2006

• x) Responsibilities : Party A is responsible for the provisions of the ancillary facilities (ie. road, electricity and water) to the Development, whereas the provisions of the public utility and ancillary facilities to the property are responsible by Zhuhai Hanny Property Investment Limited.

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APPENDIX IV VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

(2) We have been provided with a legal opinion on the property prepared by the Group’s PRC legal adviser, which contains, inter alia, the following information:

• i) Pursuant to the Contract for Grant of owned Land Use Rights as stated in Note (1) above, Party A should assist Zhuhai City Chaoliang Battery Company Limited for the application of the Certificate for state-owned Land Use Rights of the property upon the land premium have been fully paid by Zhuhai City Chaoliang Battery Company Limited.

• ii) The land use rights of the property can be freely transferable by way of transfer, mortgage or letting upon the Certificate for State-owned Land Use Rights has been issued by relevant authority or department in the PRC.

• (3) We have prepared our valuation on the following assumptions and basis:

• i) Zhuhai City Chaoliang Battery Company Limited is in possession of a proper legal title to the property and free from encumbrances, and is entitled to transfer the property with the residual term of its land use rights at no extra land premium or other onerous payment payable to the government.

• ii) All land premium and other costs for the provisions of the ancillary utility services to the property have been settled in full.

• iii) The design and construction of the proposed development are in compliance with local planning regulations and have been approved by the relevant authorities.

• iv) The property, whether as a whole or on strata-titled basis, may be disposed of freely to both local and overseas purchasers.

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APPENDIX IV

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

VALUATION CERTIFICATE

Group II: Property interest held and occupied by the Group

Property Description and tenure 3 Unit 28 on The property comprises an office unit on 9th Floor, the 9th Floor of a 14-storey (plus basement Beijing Huapu levels) commercial building completed in International Plaza, about 1996. Chaoyangmenwaidajei, Chaoyang District, The gross floor area of the property is Beijing, 338.57 sq. m. (3,644 sq.ft.). the PRC The land use right of the building have been granted for a term of 50 years expiring on 20th January, 2044.

Capital value in Particulars of existing state as at occupancy 1st August, 2004 The property is currently HK$5,300,000 occupied by the Group as office. (100% interest attributable to the Group: HK$5,300,000)

Notes:

• (1) According to a Deed of Pre-sale entered into between ������������ (Beijing Huapu International Plaza Co., Ltd.) and �������� (China Strategic Holdings Limited) on 24th January, 1996 and an Amendment Agreement dated 28th September, 1996, the property was pre-sold to China Strategic Holdings Limited.

• (2) We have been provided with a legal opinion on the property prepared by the Group’s legal adviser, which contains, inter alia, the following information:

• i) The Deed of Pre-sale and the Amendment Agreement as stated in Note (1) above are valid and legally binding.

• ii) The application for the Building Ownership Certificate of the property is in process and the land use rights of the property can be freely transferable by way of transfer, mortgage or letting upon the Building Ownership Certificate has been issued by relevant authority or department in the PRC.

• (3) We have prepared our valuation on the following assumptions:

• i) China Strategic Holdings Limited is in possession of proper legal title to the property and is entitled to transfer the property with the residual term at no extra premium or other onerous charges payable to the government;

• ii) All consents, approval and licences required for the subject development have been granted by the relevant government and authorities without any onerous conditions or undue delay; and

iii) The property, whether as a whole or on strata-title-basis, may be disposed of freely to both the local and overseas purchasers.

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GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular concerning the Group and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts concerning the Group not contained herein the omission of which would make any statement herein concerning the Group misleading.

2. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests or short positions of the Directors or chief executives of the Company in the Shares, underlying Shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which require notification 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 any such Director or chief executive is taken or deemed to have under such provisions of the SFO) or which are required, pursuant to Section 352 of the SFO, to be entered in the register maintained by the Company under Section 352 of the SFO or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

(a) Long position

(i) The Company

Number of Shares

				Approximately
	Personal	Family	Corporate	shareholdings
	interests	interests	interests	percentage
Dr. Chan Kwok Keung,
Charles_(Note)_	—	—	258,819,795	29.36%

Note: Dr. Chan Kwok Keung, Charles is deemed to be interested in 258,819,795 Shares held by Calisan Developments Limited (“Calisan”) by virtue of his interest in Chinaview International Limited (“Chinaview”). Dr. Chan Kwok Keung, Charles owns the entire interest of Chinaview which in turn owns the entire interest in Galaxyway Investments Limited (“Galaxyway”). Galaxyway owns more than one-third of the entire issued ordinary share capital of ITC Corporation Limited (“ITC”). ITC owns the entire interest of ITC Investment Holdings Limited (“ITC Investment”). ITC Investment owns the entire interest in Hollyfield Group Limited (“Hollyfield”). Hollyfield owns more than one-third of the entire issued share capital of Paul Y. — ITC Construction Holdings Limited (“Paul Y. — ITC”). Paul Y. — ITC owns the entire interest of Paul Y. — ITC Investments Group Limited (“PYITCIG”). PYITCIG owns the entire interest of Great Decision Limited (“GDL”) which in turn owns the entire interest in Calisan. Accordingly, GDL, PYITCIG, Paul Y. — ITC, Hollyfield, ITC Investment, ITC, Galaxyway, Chinaview and Dr. Chan Kwok Keung, Charles, are deemed to be interested in 258,819,795 Shares which are held by Calisan.

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GENERAL INFORMATION

APPENDIX V

(ii) Associated Corporation

			Number of	Approximately
Name of	Name of		ordinary	shareholding
Director	Corporation	Capacity	shares held	percentage
Dr. Chan Kwok Keung,	Wing On Travel	Beneficial	17,280,000	0.09%
Charles	(Holdings)	owner
	Limited
	(“Wing On”)

Save as disclosed above, none of the Directors or chief executives of the Company or their respective associates have, as at the Latest Practicable Date, any interests or short position in the Shares, underlying Shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which require notification 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 any such Director or chief executive is taken or deemed to have under such provisions of the SFO) or which are required, pursuant to Section 352 of the SFO, to be entered in the register maintained by the Company under Section 352 of the SFO or which are required, pursuant to the Model Code for Securities Transaction by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company or the Stock Exchange.

(b) Directors’ interest in assets of the Group

As at the Latest Practice Date, none of the Directors has any direct or indirect interests in any assets which have been acquired or disposed of by, or leased to, or which are proposed to be acquired or disposed of by, or leased to the Company or any of its subsidiaries since 31st December, 2003, the date to which the latest published audited consolidated financial statements of the Group were made up.

(c) Directors’ interest in contracts of the Group

As at the Latest Practice Date, none of Directors is materially interested in any contract or arrangement entered into by any member of the Group subsisting as at the date of this circular which is significant in relation to the business of the Group.

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APPENDIX V

(d) Directors’ interest in competing business

As at the Latest Practicable Date, the interests of Directors or their respective associates in the businesses which are considered to compete or are likely to compete, either directly or indirectly, with the businesses of the Group as required to be disclosed pursuant to the Listing Rules were as follows:

Name of Director	Name of company	Nature of interest	Note
Dr. Chan Kwok	ITC	As substantial shareholder	2
Keung, Charles		and chairman of ITC
	Paul Y. — ITC	As substantial shareholder	1
		and chairman of Paul Y. — ITC
	Hanny Holdings	As substantial shareholder,	3
	Limited (“Hanny”)	chairman and executive
		director of Hanny
	Wing On	As executive director of	4
		Wing On
Dr. Yap, Allan	Hanny	As managing director	3
		of Hanny
	Wing On	As executive director of	4
		Wing On
Ms. Chau Mei Wah,	ITC	As managing director of ITC	2
Rosanna
	Paul Y. — ITC	As executive director of	1
		Paul Y. — ITC
Ms. Chan Ling, Eva	Wing On	As director of subsidiaries of	4
		Wing On
Mr. Chan Kwok Hung	ITC	As executive director of ITC	2
	Hanny	As executive director of Hanny	3
Mr. Lui Siu Tsuen,	Hanny	As deputy managing	3
Richard		director of Hanny
	Wing On	As executive director of	4
		Wing On

Notes:

• (1) Paul Y. — ITC is principally engaged in the business of building construction, civil engineering, specialist works, property development and investment, development and investment in infrastructure projects, and manufacturing and trading of construction materials. Paul Y. — ITC owns two parcel of land in the PRC which is valued at approximately HK$41.5 million. By virtue of Paul Y. — ITC’s interest in a parcel of land in the PRC, the directors of Paul Y. — ITC who are also the Directors are considered to have interest in the business which are or are likely to compete either directly or indirectly with the property business of the Group. However given the parcel of land holds by Paul Y. — ITC is not in the proximity of the properties the Group owns, the Board considers the competition between property business of Paul Y. — ITC and that of the Group is minimal.

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GENERAL INFORMATION

• (2) In addition to the business carried out through Paul Y. — ITC, the principal activities of ITC comprises investment holding, the provision finance, the provision of management services and trading of building materials and machinery. ITC has no interest in any properties in the PRC, however, by virtue of its interest in approximately 55.1% of the total issued share capital of Paul Y. — ITC as at the Latest Practicable Date, ITC is deemed to have interest in the property business of Paul Y. — ITC, as such, the directors of ITC who are also the Directors are therefore deemed to have interest in business which are or are likely to compete either directly or indirectly with the business of the Group. However given the parcel of land holds by Paul Y. — ITC is not in the proximity of the properties the Group owns, the Board considers the competition between property business of ITC and that of the Group is minimal.

• (3) Hanny is principally engaged in trading of computer related products, consumer electronic products, distribution and marketing of computer accessories and storage media drives, scanners, audio and video cassettes, minidiscs, household electronic products and telecommunication accessories, securities trading and land development in the PRC. Up to August 2004, a total of approximately of HK$155.4 million was paid by Hanny to obtain certain parts of the land use right for land development, site formation and the exclusive development right for a parcel of land in Zhuhai, the PRC. By virtue of its interest in the parcel of land in Zhuhai, the PRC, which is in the proximity of the properties the Group owns, the directors of Hanny who are also the Directors are considered to have interest in the business which are or are likely to compete either directly or indirectly with the property business of the Group.

• (4) Wing On is principally engaged in the business of provision of package tours, travel and other related services. It also engaged in hotel and leisure-related-business. Wing On owns a parcel of land with buildings and structures erected therein, in Guangxi Zhuang Nationality Autonomous Region, the PRC for hotel development, including a hotel building, a staff-quarter building and a boiler room valued at approximately HK$38.6 million as at 29th February, 2004. By virtue of its interest in the parcel of land in Guangxi Zhueng Nationality Autonomous Region, the PRC, the directors of Wing On who are also the Directors are considered to have interest in the business which are or are likely to compete either directly or indirectly with the property business of the Group. However given the parcel of land holds by Wing On is not in the proximity of the properties the Group owns, the Board considers the competition between property business of Wing On and that of the Group is minimal.

The aforesaid competing businesses, in which Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan, Ms. Chau Mei Wah, Rosanna, Ms. Chan Ling, Eva, Mr. Chan Kwok Hung and Mr. Lui Siu Tsuen, Richard are regarded to be interested, are managed by companies with independent management and administration with the diligence of independent nonexecutive directors and audit committee of those companies. Further, the Board has established procedures to identify any conflict of interests due to the respective directorships of Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan, Ms. Chau Mei Wah, Rosanna, Ms. Chan Ling, Eva, Mr. Chan Kwok Hung and Mr. Lui Siu Tsuen, Richard in those companies. If conflict of interests arises, Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan, Ms. Chau Mei Wah, Rosanna, Ms. Chan Ling, Eva, Mr. Chan Kwok Hung or Mr. Lui Siu Tsuen, Richard, as the case may be, will abstain from participating in making the relevant decisions for the Group. Therefore, the Group is capable of carrying on its business independently of, and at arm’s length from, the said competing businesses.

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APPENDIX V

3. SUBSTANTIAL SHAREHOLDERS

• (a) So far as is known to the Directors or chief executives of the Company, the following Shareholders have an interest or a 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 as at the Latest Practicable Date:

				Approximate
			Number of	shareholding
Name	Capacity	Notes	shares	percentage
Calisan	Beneficial owner	1	258,819,795	29.36%
GDL	Interest held by	1	258,819,795	29.36%
	controlled corporation
PYITCIG	Interest held by	1	258,819,795	29.36%
	controlled corporation
Paul Y. — ITC	Interest held by	1	258,819,795	29.36%
	controlled corporation
Hollyfield	Interest held by	1	258,819,795	29.36%
	controlled corporation
ITC Investment	Interest held by	1	258,819,795	29.36%
	controlled corporation
ITC	Interest held by	1	258,819,795	29.36%
	controlled corporation
Galaxyway	Interest held by	1	258,819,795	29.36%
	controlled corporation
Chinaview	Interest held by	1	258,819,795	29.36%
	controlled corporation
Dr. Chan Kwok Keung,	Interest held by	1	258,819,795	29.36%
Charles	controlled corporation
Ms. Ng Yuen Lan, Macy	Interest held by family	2	258,819,795	29.36%
Well Orient Limited	Beneficial owner	3	258,819,794	29.36%
Powervote Technology	Interest held by	3	258,819,794	29.36%
Limited	controlled corporation
Hanny Magnetics (B.V.I.)	Interest held by	3	258,819,794	29.36%
Limited	controlled corporation
Hanny	Interest held by	3	258,819,794	29.36%
	controlled corporation

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GENERAL INFORMATION

APPENDIX V

Note:

1. Dr. Chan Kwok Keung, Charles owns the entire interest of Chinaview which in turn owns the entire interest in Galaxyway. Galaxyway owns more than one-third of the entire issued ordinary share capital of ITC. ITC owns the entire interest of ITC Investment which owns the entire interest of Hollyfield. Hollyfield owns more than one-third of the entire issued share capital of Paul Y. — ITC. Paul Y. — ITC owns the entire interest of PYITCIG. PYITCIG owns the entire interest in GDL which in turn owns the entire interest in Calisan. Accordingly, GDL, PYITCIG, Paul Y. — ITC, Hollyfield, ITC Investment, ITC, Galaxyway, Chinaview and Dr. Chan Kwok Keung, Charles are deemed to be interested in 258,819,795 Shares which are held by Calisan.

2. Ms. Ng Yuen Lan, Macy is a spouse of Dr. Chan Kwok Keung, Charles and deemed to be interested in 258,819,795 Shares held by Calisan.

3. Well Orient Limited (“WOL”) is wholly-owned by Powervote Technology Limited (“PTL”) which is in turn owned by Hanny Magnetics (B.V.I.) Limited (“Hanny Magnetics”). Hanny Magnetics is wholly-owned by Hanny. PTL, Hanny Magnetics and Hanny are deemed to be interested in 258,819,794 Shares which are held by WOL.

4. (b) So far as is known to the Directors or chief executives of the Company, the following entities are, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the subsidiaries of the Company or any options in respect of such capital as at the Latest Practicable Date:

		Proportion of	Proportion of
		nominal value of
Name of subsidiary	Name of	issued capital/
of the Company	other shareholder(s)	registered capital held by:
			Other
		The Group	shareholder(s)
China Telecom	China Telecom Investment	51%	49%
International Limited	Corporation
Earnfull Industrial Limited	Wang Ming Jian	90%	10%
Orion (B.V.I.) Tire	Coronada Holding Limited	60%	40%
Corporation
Orion Tire Corporation	Coronada Holding Limited	60%	40%

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GENERAL INFORMATION

APPENDIX V

		Proportion of	Proportion of
		nominal value of
Name of subsidiary	Name of	issued capital/
of the Company	other shareholder(s)	registered capital held by:
			Other
		The Group	shareholder(s)
Principal Diamond Limited	Wonder Wealth Limited	80%	20%
Ruby Uniforms Limited	Frederick Poon Chuan Ki	90%	10%
Talent Cosmos Limited	Cheung Kwok Keung, So So	80%	20%
	Chung Tat Yan
	Wong Leung Ngai
	Happy Trade Ltd.
	Wong Kwok Chu
	Power Guard Holdings Limited

• (c) Save as disclosed above, so far as is known to the Directors or chief executives of the Company, there is no other person who has an interest or a short position in the Shares and underlying Shares (including interests in options, if any) in the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, is, directly or indirectly, interested in 5%. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or any options in respect of such capital.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into, or was proposing to enter into, any service contracts with the Company or any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

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GENERAL INFORMATION

APPENDIX V

5. PROFESSIONAL QUALIFICATION AND CONSENT

• (a) The followings are the qualifications of the experts who have given opinions or advice which are contained in this circular.

Name

Qualification

Deloitte Touche Tohmatsu Certified public accountants DTZ Debenham Tie Leung Limited a firm of professional surveyors Norton Appraisals Limited a firm of professional surveyors Shanghai JoinWay Law Firm PRC attorney-at-law GFE Law Office PRC attorney-at-law

• (b) As at the Latest Practicable Date, none of DTZ Debenham Tie Leung Limited, Norton Appraisals Limited, Deloitte Touche Tohmatsu, GFE Law Office nor Shanghai JoinWay Law Firm has any holding, directly or indirectly, of any securities in the Company or any of its subsidiaries or associated corporations or any right or option (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for any securities of the Company or any of its subsidiaries or associated corporations.

• (c) As at the Latest Practicable Date, none of DTZ Debenham Tie Leung Limited, Norton Appraisals Limited, Deloitte Touche Tohmatsu, GFE Law Office nor Shanghai JoinWay Law Firm has any direct or indirect interest in any asset which has been acquired or disposed of by, or leased to, or which is proposed to be acquired or disposed of by, or leased to, the Company or any of its subsidiaries since 31st December, 2003, the date to which the latest published audited consolidated financial statements of the Group were made up.

• (d) DTZ Debenham Tie Leung Limited, Norton Appraisals Limited, Deloitte Touche Tohmatsu, GFE Law Office and Shanghai JoinWay Law Firm have given and have not withdrawn their written consents to the issue of this circular with inclusion of their respective letters or reports and the references to their names in the form and context in which they respectively appear.

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APPENDIX V

6. MATERIAL CONTRACTS

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

• (a) a conditional sale and purchase agreement (the “S&P Agreement”) dated 23rd November, 2002 entered into between the Company, Hanny and SMI Corporation Limited (formerly known as Star East Holdings Limited) (“SMI”) as vendors and Sun Media Group Holdings Limited (“Sun Media”) as purchaser in relation to the Company’s disposal of 91,635,700 shares of Leadership Publishing Group Limited (“Leadership”) (the “Sale Shares”), Leadership warrants in the aggregate amount of HK$3,050,000 (the “Sale Warrants”) and the shareholder’s loan in the amount of HK$15,504,800 (the “Sale Loan”) being part of the remaining indebtedness owed by the Leadership group to Glory Dynamic Limited (“Glory Dynamic”), a wholly-owned subsidiary of the Company, upon completion of the S&P Agreement. Sun Media settled the consideration for the Sale Shares by issuing 549,814,200 new Sun Media shares to the Company (or its nominee) and that for the Sale Warrants in cash of HK$1.00 on completion, and the consideration of the Sale Loan should be satisfied by Sun Media issuing 155,048,000 new Sun Media shares to the Company (or as it may direct) at the price of HK$0.10 per Sun Media shares at the expiry of two calendar years from the date of completion. Completion of the transaction took place in January 2003. Further details of the transaction are set out in the announcement of the Company dated 9th December, 2002;

• (b) a conditional sale and purchase agreement dated 8th January, 2003 entered into between China Enterprises as the vendor and Ningxia Yinchuan Rubber Manufacturing as the purchaser in relation to the proposed disposal of 51% entire equity interests in Yinchuan C.S.I. (Greatwall) Rubber Company Limited held by China Enterprises for the consideration of RMB35,000,000 (equivalent to approximately HK$33 million). Completion of the transaction took place in February 2003. Further details of the transaction are set out in the announcement of the Company dated 9th January, 2003;

• (c) a deed of settlement (the “Deed of Settlement”) dated 24th January, 2003 entered into among Glory Dynamic, Genius Ideas Limited, Star East Management Limited, SMI, Sing Pao Newspaper Company Limited (“Sing Pao Newspaper”) and Leadership relating to certain settlement and waiver of shareholders’ loans in the amount of HK$40 million owing by Leadership (and/or its subsidiaries) to, among others, Glory Dynamic and variation of the terms of such loans in accordance with the terms and condition stated in the Deed of Settlement. Further details of the transaction are set out in the announcement of the Company dated 9th December, 2002;

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APPENDIX V

GENERAL INFORMATION

• (d) an assignment deed (the “Deed of Assignment”) dated 24th January, 2003 entered into, among Sing Pao Newspaper, Sun Media and Glory Dynamic whereby Glory Dynamic agreed to sell and assign to Sun Media and Sun Media agreed to purchase and take an assignment from Glory Dynamic the full rights, title, benefits and interests of Glory Dynamic in and to the Sale Loan in the amount of HK$15,504,800 on the terms set out in the Deed of Assignment. Further details of the transaction are set out in the announcement of the Company dated 9th December, 2002;

• (e) an agreement dated 30th January, 2003 entered into between Regal Tender Limited (“Regal Tender”) and Wing On in respect of the provision of loan facility for the amount of HK$80,000,000 by Regal Tender for working capital of Wing On. The loan was unsecured, bore interest at HK Dollars prime rate and was repayable within two years from the date of this agreement;

• (f) an agreement (“Facility Agreement”) dated 10th June, 2003 entered into between Million Good Limited (“Million Good”) and Wing On in respect of the provision of loan facility for the amount of HK$25,000,000 by Million Good for working capital of Wing On. The loan was unsecured, bore interest at HK Dollars prime rate and was repayable within two years from the date of this agreement;

• (g) a supplement agreement dated 21st October, 2003 entered into between Million Good and Wing On in respect of the change of the amount of the loan facility to HK$100,000,000 under the Facility Agreement;

• (h) an agreement dated 15th June, 2003 entered into between China Enterprises as the vendor and Hangzhou Industrial & Commercial Trust & Investment Co., Ltd. as the purchaser in relation to the proposed disposal of 25% equity interests in Hangzhou Zhongce Rubber Co., Ltd. held by China Enterprises for the consideration of RMB164,659,656.90 (equivalent to approximately HK$155,178,265). Further details of the transaction are set out in the announcement of the Company dated 17th June, 2003;

• (i) a deed of settlement dated 25th July, 2003 entered into among the Company, Macau Success Limited (formerly known as China Development Corporation Limited) (“Macau Success”) and Grand Orient Limited (“Grand Orient”) for the purpose of discharging and releasing each others from all their respective obligations and liabilities under all indebtedness for the amount of approximately HK$52.4 million as at 31st March, 2003 owing by Macau Success to Grand Orient up to the payment of HK$20 million;

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APPENDIX V

• (j) a guarantee dated 11th April, 2003 executed by the Company in favour of Wing Hang Bank, Ltd. in respect of the banking facilities provided by Wing Hang Bank, Ltd. to Tung Fong Hung Foods Ltd., an indirect wholly owned subsidiary of the Company at that time;

• (k) an agreement dated 30th July, 2003 entered into between Jean-Marie Wellness Biotech Corporation Limited (“Jean-Marie Wellness”), an indirect wholly-owned subsidiary of the Company at that time, and Chelson Limited in respect of the disposal of 50% equity interests in Pacific Wins Development Ltd. (“Pacific Wins”) by Jean-Marie Wellness for a consideration of HK$24 million. Pacific Wins became an associate of the Group upon completion of the transaction which took place in July, 2003;

• (l) an agreement dated 30th September, 2003 entered into between Vision Leader Limited (“Vision Leader”), and an independent third party in relation to the acquisition of the entire issued share capital of Zhuhai Zhongce Property Investment Limited (formerly known as Talent Shop Investment Limited) by Vision Leader for the consideration of HK$190,000,000. Completion of the transaction took place in October, 2003;

• (m) an agreement dated 16th December, 2003 and a supplemental agreement dated 2nd January, 2004 entered into between Future Returns Limited (“Future Returns”) and Apex Quality Group Limited (“Apex Quality”) in respect of the loan facility for the amount of HK$76,215,406.33. The loan was unsecured, bore interest at 2% over and above Hong Kong Dollars prime rate per annum and was repayable on 2nd January, 2006;

• (n) an agreement dated 16th December, 2003 and a supplemental agreement dated 2nd January, 2004 entered into between Future Returns and Apex Quality in respect of the loan facility for the amount of RMB5,544,065.68. The loan was unsecured, bore interest rate of 6% per annum and was repayable on 2nd January, 2006;

• (o) a conditional agreement dated 13th January, 2004 entered into between China Enterprises and Wing On in respect of the subscription of convertible note in the amount of HK$155,000,000 attaching with conversion rights to convert the note into shares of Wing On at an initial conversion price of HK$0.02 per share by China Enterprises. Completion of the transaction took place in May 2004;

• (p) a subscription agreement dated 2nd February, 2004 entered into among Grotto Profits Limited (“Grotto Profits”), a wholly owned subsidiary of the Company, SIIS Treasury Limited and Softbank Investment International (Strategic) Limited (“Softbank”) in respect of the subscription of the 5% convertible guarantee note in the amount of HK$3,000,000 attaching with conversion rights to convert the note into shares of Softbank at an initial conversion price of HK$0.10 per share by Grotto Profits. Completion of the transaction took place in February 2004;

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APPENDIX V

• (q) 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;

• (r) a sale and purchase agreement dated 30th March, 2004 entered into among Deep Growth Investments Limited (“Deep Growth”), a wholly-owned subsidiary of the Company, Cheung Kwok Keung, So So, Chung Tat Yan, Wong Leung Ngai, Happy Trade Ltd, Wong Kwok Chu and Power Guard Holdings Limited in relation to the acquisition of 80% issued share capital of and shareholder’s loan to Talent Cosmos Limited by Deep Growth for a consideration of HK$30,000,000. The transaction has been completed;

• (s) an agreement dated 30th March, 2004 entered into among Group Dragon Limited (“Group Dragon”), a wholly-owned subsidiary of the Company, and independent third parties relating to the acquisition of the entire issued share capital of Asso Limited by Group Dragon for a consideration RMB219,000,000, subject to the condition of due diligence results being satisfactory and acceptable to Group Dragon. The condition was not fulfilled on or before the agreed long stop date, i.e. 31st July, 2004, and the agreement was therefore lapsed; and

• (t) the Agreement.

7. LITIGATION

As at the Latest Practicable Date, neither the Company nor any member of the Group was engaged in any litigation or arbitration of material importance and there was no litigation or arbitration or claim or material importance known to the Directors to be pending or threatened by or against the Company or any member of the Group.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on any weekday (except for public holidays) at the registered office of the Company at 8th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong up to and including 5th October, 2004:

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

• (b) the audited financial statements of the Group for the two years ended 31st December, 2003;

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GENERAL INFORMATION

APPENDIX V

• (c) the report issued by Deloitte Touche Tohmatsu in connection with the pro forma assets and liabilities statement, pro forma income statement and the pro forma cashflow statement of the Group after completion of the Acquisition as set out in Appendix II to this circular;

• (d) copies of the contracts as disclosed under the section headed “Material Contracts” on this appendix;

• (e) the valuation report on the Properties prepared by DTZ Debenham Tie Leung Limited as set out in Appendix III to this circular;

• (f) the valuation report on the property interests of the Group prepared by Norton Appraisals Limited as set out in Appendix IV to this circular;

• (g) the consent letter given by each of DTZ Debenham Tie Leung Limited and Norton Appraisals Limited for incorporation of the valuation reports and reference of their names in this circular;

• (h) the consent letter given by Deloitte Touche Tohmatsu for incorporation of the letter in connection with the pro forma assets and liabilities statement, pro forma income statement and pro forma cashflow statement of the Group in this circular and reference of its name in this circular; and

• (i) the consent letter given by each of Shanghai JoinWay Law Firm and GFE Law Office for making reference of their names and opinions in this circular.

9. GENERAL

• (a) The qualified accountant of the Company is Ms. Cheung Sze Man, who is a member of the Hong Kong Society of Accountants and CPA Australia.

• (b) The secretary of the Company is Ms. Chan Yan Yan, Jenny, who is an associate member of the Institute of Chartered Secretary and Administrators and the Hong Kong Institute of Company Secretary.

• (c) The registered office of the Company is situated at 8/F., Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong.

• (d) The share registrars of the Company is Standard Registrars Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

• (e) In any event of inconsistency, the English language text of this circular shall prevail over the Chinese language text.

– 146 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

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

CHINA STRATEGIC HOLDINGS LIMITED ��������

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

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of CHINA STRATEGIC HOLDINGS LIMITED (the “ Company ”) will be held at 11th Floor, Paul Y. Centre, 51 Hung To Road, Kwun Tung, Kowloon, Hong Kong on 5th October, 2004 at 11:00 a.m. for the purpose of considering and, if thought fit, passing, with or without modification, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT the execution of the agreement dated 16th June, 2004 (“ Agreement ”) made between Manwide Holdings Limited (“ Manwide ”), an indirect non wholly owned subsidiary of the Company, as the purchaser, and ���������� (Shanghai Jiu Sheng Investment Company Limited), as the vendor, for the acquisition of certain interest in a parcel of land situated at Nos. 219 and 229, Jiang Ning Road, Jing An District, Shanghai, the People’s Republic of China and the 24-storey building together with the 2 levels of underground carparks being erected thereupon at a consideration of RMB450 million subject to variations according to the terms of the Agreement, and the transactions contemplated under the Agreement and the performance by Manwide thereof be and are hereby confirmed, ratified and approved and that any one or more of the directors of the Company be and are hereby authorized to sign, seal, execute, perfect and deliver such other documents or supplemental agreements or deeds on behalf of the Company and to do all such things and take all such action as he or she or they may consider necessary or desirable for the purpose of giving effect to the Agreement and completing the transactions contemplated by the Agreement with such changes as any such director(s) may consider necessary, desirable or expedient.”

By order of the board

China Strategic Holdings Limited Dr. Chan Kwok Keung, Charles Chairman

Hong Kong, 17th September, 2004

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

• (1) Any shareholder entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and to vote instead of him. A proxy need not be a shareholder of the Company.

• (2) In order to be valid, a form of proxy in the prescribed form together with the power of attorney or other authority (if any) under which it is signed must be deposited at the share registrars of the Company, Standard Registrars Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong not less than 48 hours before the time fixed for holding the meeting.

• (3) Delivery of an instrument appointing a proxy should not preclude a member from attending and voting in person at the above meeting or any adjournment thereof and in such event, the instrument appointing a proxy shall be deemed to be revoked.

• (4) In the case of joint holders of a share, any one of such joint holders may vote, either in person or by proxy, in respect of such share as if he/she were solely entitled thereto to if more than one of such joint holders are present at the above meeting, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For this purpose, seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.

• (5) As at the date hereof, the board of directors of the Company comprises Dr. Chan Kwok Keung, Charles, Dr. Yap, Allan, Mr. Li Wa Kin, Ms. Chau Mei Wah, Rosanna, Ms. Chan Ling, Eva as executive directors, Mr. Chan Kwok Hung and Mr. Lui Siu Tsuen, Richard as alternate directors to Dr. Chan Kwok Keung, Charles and Dr. Yap, Allan respectively and Mr. David Edwin Bussmann and Ms. Fung Wan Yiu, Agnes as independent non-executive directors.

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