Long Investment Corp — Proxy Solicitation & Information Statement 2005

Oct 3, 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Shui On Construction and Materials Limited, you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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(Incorporated in Bermuda with limited liability) (Stock Code: 983)

MAJOR ACQUISITION AND FORMATION OF JOINT VENTURE WITH LAFARGE IN RELATION TO PRC CEMENT OPERATIONS (VERY SUBSTANTIAL DISPOSAL) AND INCREASE IN AUTHORISED SHARE CAPITAL

Financial Adviser to Shui On Construction and Materials Limited

A letter from the board of directors of Shui On Construction and Materials Limited is set out on pages 7 to 27 of this circular.

A notice convening a special general meeting of the Company to be held at Room 103, 1/F., Shui On Centre, 6-8 Harbour Road, Wan Chai, Hong Kong on November 1, 2005 at 10:30 a.m. is set out on pages 230 to 231 of this circular. Whether or not you are able to attend the meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the head office of the Company at 34th Floor, Shui On Centre, 6-8 Harbour Road, Wan Chai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting or 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 meeting or any adjourned meeting should you so wish.

• For identification purpose only

September 30, 2005

CONTENTS

				Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			. . . . . . . .	1
**Letter from the **	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		. . . . . . . .	7
Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			. . . . . . . .	28
Appendix I	—	Accountants’ Report of SOCAM . . . . . . . . . . . . . . . . . . . . .	. . . . . . . .	31
Appendix II	—	Accountants’ Report of TH Industrial and its subsidiaries.	. . . . . . . .	104
Appendix III	—	Accountants’ Report of Sommerset . . . . . . . . . . . . . . . . . . .	. . . . . . . .	153
Appendix IV	—	Accountants’ Report of Lafarge . . . . . . . . . . . . . . . . . . . . .	. . . . . . . .	166
Appendix V	—	Unaudited Pro Forma Financial Information on the Group
		immediately after the Acquisition . . . . . . . . . . . . . . . . . .	. . . . . . . .	206
Appendix VI	—	Unaudited Pro Forma Financial Information on the Group
		immediately after the Acquisition and the Contribution	. . . . . . . .	211
Appendix VII	—	General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . .	221
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			. . . . . . . .	230

— i —

DEFINITIONS

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

“Acquisition” the acquisition of the 1,370 shares of US$1.00 each in TH Industrial, being 50% of the entire issued share capital of TH Industrial, and the Olympio Loan by SOBM from Olympio under the Olympio Agreement “associate(s)” has the meaning as ascribed to the term under the Listing Rules “Beijing” Beijing, the capital of China “Cement Business” the business of manufacturing, producing, trading, distributing cement and associated products and ready mixed concrete “Chongqing” Chongqing, a direct administered municipality of China “Combined Cement Business” the Shui On PRC Cement Business and the Lafarge PRC Cement Business “Company” or “SOCAM” Shui On Construction and Materials Limited, a company incorporated in Bermuda and listed on the main board of the Stock Exchange “Contribution” the transfer of the Shui On PRC Cement Business and the Lafarge PRC Cement Business into the Joint Venture Company by the Group and the Lafarge Group respectively, together with any cash contribution that may be required to be made by the Group and Lafarge under the Contribution Agreement, in return for the JV Shares under the Contribution Agreement “Contribution Agreement” the contribution agreement dated August 11, 2005 relating to the subscription of the JV Shares and the Contribution by Shui On SPV and Lafarge “Director(s)” the director(s) of SOCAM “Group” the Company and its subsidiaries “Guizhou” Guizhou Province of China “HK$” Hong Kong dollars, the lawful currency of Hong Kong “Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China

— 1 —

DEFINITIONS

“Independent Third Party(ies)”	independent third party or parties who is or are not connected
	with any of the Directors, chief executive or substantial
	shareholders of the Company or any of its subsidiaries or any
	of their respective associates (as defined in the Listing Rules)
“Industrial Franchise Agreement”	an agreement to be entered into by the Joint Venture Company
	and Lafarge whereby the Lafarge Group will grant a license to
	the Joint Venture Company to use various intellectual
	property rights of and access to a range of assistance from the
	Lafarge Group
“Joint Venture”	the joint venture to be established between the Company and
	Lafarge under the Joint Venture Agreement
“Joint Venture Agreement”	the joint venture agreement dated August 11, 2005 entered
	into by the Company, Shui On SPV and Lafarge, relating to
	the operation of the Joint Venture Company between the
	Company and Lafarge
“Joint Venture Company”	Lafarge Holdings Hong Kong Limited (which will be renamed
	after closing of the Contribution), being the joint venture
	company of the Joint Venture
“JV Shares”	ordinary shares of HK$1.00 each in the share capital of the
	Joint Venture Company
“Lafarge”	Financiere Lafarge, a wholly-owned subsidiary of Lafarge
	S.A.
“Lafarge Group”	Lafarge S.A. and its subsidiaries
“Lafarge JVC”	Lafarge China Offshore Holding Company Limited, the
	holding company of the Lafarge PRC Cement Business or
	such other company which will become the holding company
	of the Lafarge PRC Cement Business by closing of the
	Contribution
“Lafarge PRC Cement Business”	90.19% equity interest in Lafarge China Offshore Holding Co.
	Ltd., which holds 65% equity interest in Beijing Chinefarge
	Cement Co. Ltd., 75% equity interest in Lafarge Dujianyan
	Cement Co. Ltd., 70% equity interest in Beijing Shunfa
	Lafarge Cement Co. Ltd., 70.59% equity interest in Lafarge
	Chongqing Cement Co. Ltd. and 76.72% equity interest in
	Beijing Yicheng Lafarge Concrete Co. Ltd.
“Lafarge Receivable”	means the management fee owed by the Lafarge PRC Cement
	Business to the Lafarge Group as of the date up to which the
	adjustment amount will be made prior to closing of the
	Contribution, the amount of which as at the date of May 31,
	2005 was US$16.7 million (about RMB135.4 million)

— 2 —

DEFINITIONS

“Lafarge S.A.” Lafarge S.A., a company incorporated in France which is listed on the Paris Stock Exchange and the New York Stock Exchange and a world leader in cement industry “Latest Practicable Date” September 28, 2005, 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 “MOC” the Ministry of Commerce of the PRC “Mr. Tung” Mr. Paul Tung Shui Po “Non-Contributed Assets” the Group’s entire interests in Cement Business in PRC other than the Shui On PRC Cement Business, namely, 80% equity interest in Guizhou Zunyi Shui On Cement Co. Ltd., 80% equity interest in Guizhou Yuqing Shui On Cement Co. Ltd., 90% equity interest in Guizhou Xishui Shui On Cement Co. Ltd., 90% equity interest in Sichuan Hejiang Shui On Cement Co. Ltd., 90% equity interest in Guizhou Kaili Shui On Cement Co. Ltd., 98% equity interest in Guizhou Cengong Shui On Cement Co. Ltd., 51% equity interest in Guizhou Changda Shui On Cement Co. Ltd., 80% equity interest in Guizhou Bijie Shui On Cement Co. Ltd., 100% equity interest in Guizhou Shui On Cement Development Management Co. Ltd., 75% equity interest in Guizhou Kaili Ken On Concrete Co. Ltd., 75% equity interest in Guizhou Zunyi Ken On Concrete Co. Ltd., 60% equity interest in Chongqing T.H. White Cement Co. Ltd., 100% equity interest in Chongqing T.H. Holding Management Co. Ltd., 60% equity interest in Chongqing T.H. Desheng Engineering Co. Ltd., 55% equity interest in Chongqing T.H. Stone Development Co. Ltd., 30% equity interest in Chongqing Foreign Investment Consultation and Service Co. Ltd., 60% equity interest in Nanjing Jiangnan Cement Co. Ltd. and the entire interest in Qujiang Quarry “Olympio” Olympio Corporation, a company wholly owned by Mr. Tung and his family, and which owns 50% of the interest in TH Industrial prior to completion of the Acquisition “Olympio Agreement” the sale and purchase agreement dated August 11, 2005 relating to the Acquisition “Olympio Loan” all amounts which TH Industrial, its subsidiaries and associated companies owes to Olympio, Mr. Tung and their respective associates immediately before completion of the Acquisition

— 3 —

DEFINITIONS

“PRC” or “China” or	the People’s Republic of China, and for the purpose of this
“Chinese Mainland”	announcement, excluding Hong Kong, the Macau Special
	Administrative Region and Taiwan
“Prime Allied”	Prime Allied Enterprises Limited, a wholly-owned subsidiary
	of the Company and the holding company for the Group’s
	interest in the Yunnan JV
“Qujiang Quarry”	the limestone quarry located in Qujiang, Sichuan which
	interests will continue to be held by Guangan T.H. Cement
	Co. Ltd. for the benefit of the Company after closing of the
	Contribution pursuant to the terms of the Contribution
	Agreement and the Joint Venture Agreement
“RMB”	Renminbi, the lawful currency of the PRC
“SAIC”	the State Administration of Industry and Commerce of the
	PRC
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong)
“SGM”	special general meeting of the Company to be held on
	November 1, 2005 to consider, among other things, the
	Acquisition, the Contribution and the increase in the
	Company’s authorised share capital
“Shareholder(s)”	holder(s) of Shares
“Share(s)”	shares of HK$1.00 each in the issued share capital of the
	Company
“Shui On JVCs”	Sommerset Investments Limited and TH Industry II Limited,
	the holding companies of the Shui On PRC Cement Business
	or such other companies which will become the holding
	company of the Shui On PRC Cement Business by closing of
	the Contribution
“Shui On PRC Cement Business”	(a) 100% in Sommerset Investments Limited, which holds
	80% in Guizhou Xinpu Shui On Cement Co. Ltd., 90% in
	Guizhou Dingxiao Shui On Cement Co. Ltd. and 70% in
	Guizhou Shuicheng Shui On Cement Co. Ltd. and (b) 100% in
	TH Industry II Limited, which holds 100% in Nanchong T.H.
	Cement Co. Ltd., 90% in Suining T.H. Cement Co. Ltd., 100%
	in Chongqing T.H. Fuling Cement Co. Ltd., 100% in Guangan
	T.H. Cement Co. Ltd., 80% in Chongqing T.H. Packaging Co.
	Ltd., 75% in Chongqing New Building Materials Co. Ltd.,
	80% in Chongqing T.H. Special Cement Co. Ltd., 80% in
	Chongqing T.H. Diwei Cement Co. Ltd., 80% in Chongqing
	T.H. Logistics Co. Ltd., and 50% in Chongqing T.H. Concrete
	Co. Ltd.

— 4 —

DEFINITIONS

“Shui On SPV”	Glorycrest Holdings Limited, a wholly owned subsidiary of
	the Company
“Sichuan”	Sichuan Province of China
“SOBM”	Shui On Building Materials Limited, a wholly owned
	subsidiary of the Company
“Sommerset”	Sommerset Investments Limited
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Territory”	Sichuan, Chongqing, Guizhou, Yunnan and Beijing and such
	other provinces or autonomous regions as the Joint Venture
	Company may expand its Cement Business into
“TH Industrial”	TH Industrial Management Limited, a company owned as to
	50% by SOBM, and 50% by Olympio prior to completion of
	the Acquisition
“TH Ind. II and Its Subs”	T.H. Industry II Limited and its subsidiaries, comprising
	100% interest in Nanchong T.H. Cement Co., Ltd, 90%
	interest in Suining T.H. Cement Co., Ltd., 100% interest in
	Chongqing T.H. Fuling Cement Co., Ltd., 100% interest in
	Guangan T.H. Cement Co., Ltd., 80% interest in Chongqing
	T.H. Packaging Co., Ltd., 75% interest in Chongqing New
	Building Materials Co., Ltd., 80% interest in Chongqing T.H.
	Special Cement Co., Ltd., 80% interest in Chongqing T.H.
	Diwei Cement Co., Ltd., 80% interest in Chongqing T.H.
	Logistics Co., Ltd., 100% interest in Chongqing T.H. Holding
	Management Co., Ltd., 60% interest in Chongqing T.H. Stone
	Development Co., Ltd. and 55% interest in Chongqing T.H.
	Desheng Engineering Co., Ltd.
“Yunnan” “Yunnan JV”	Yunnan Province of China (Yunnan Shui On Construction
	Materials Investment Holding Company Limited), a
	joint venture to be established in the PRC owned as to
	80% by the Group and the remaining 20% by (Yunnan National Assets
	Operation Co. Ltd.)
“Yunnan Option”	the option granted to Lafarge S.A. in June 2004 to purchase
	50% of the Group’s interest in Yunnan JV to be expired on
	December 31, 2005

— 5 —

DEFINITIONS

For illustration purpose in this Circular, the following conversion rates were adopted:

Conversion of RMB to HK$ is based on the exchange rate of (i) RMB1.06 = HK$1.00 for any financial period ending on or before July 21, 2005 and any dates falling within such period; and (ii) RMB1.04 = HK$1.00 for any financial period commencing after July 21, 2005 and any dates falling within such period.

Conversion of US$ to HK$ is based on the exchange rate of US$1.00 = HK$7.80

For ease of reference, the names of the PRC established companies or entities have been included in this circular in both Chinese and English languages. In the event of any inconsistency, the Chinese version shall prevail.

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LETTER FROM THE BOARD

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(Incorporated in Bermuda with limited liability)

(Stock Code: 983)

Executive Directors:

Mr. Vincent Lo Hong Sui (Chairman)

Mr. Wilfred Wong Ying Wai (Vice-chairman)

Mr. Lawrence Choi Yuk Keung (Vice-chairman)

Mr. Frankie Wong Yuet Leung (Chief Executive Officer)

Mr. Raymond Wong Fook Lam

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

Mrs. Vivien Lowe Hoh Wai Wan

Non-Executive Directors:

Mr. Louis Wong Hak Wood Professor Michael John Enright

Independent Non-Executive Directors:

Mr. Anthony Griffiths

Mr. Moses Cheng Mo Chi Professor K.C. Chan

September 30, 2005

To the Shareholders

Dear Sir/Madam,

MAJOR ACQUISITION AND

FORMATION OF JOINT VENTURE WITH LAFARGE IN RELATION TO PRC CEMENT OPERATIONS (VERY SUBSTANTIAL DISPOSAL) AND INCREASE IN AUTHORISED SHARE CAPITAL

INTRODUCTION

On August 11, 2005, the Company announced that the following transactions were entered into on August 11, 2005:

• the Acquisition - SOBM, a wholly owned subsidiary of the Company, entered into the Olympio Agreement with Olympio whereby SOBM would acquire from Olympio its 50% interest in TH Industrial, being the holding company of Shui On PRC Cement Business in

• For identification purpose only

— 7 —

LETTER FROM THE BOARD

Sichuan and Chongqing in which the Group currently holds the other 50% interest, and the benefit of the Olympio Loan for a consideration of RMB270.0 million (about HK$259.6 million) pursuant to the conditions therein;

• the Contribution — the Company also entered into strategic alliance with Lafarge with the execution of the Contribution Agreement and the Joint Venture Agreement whereby the Group will make a cash contribution of initially RMB90.3 million (about HK$86.8 million) (subject to adjustment) and contribute the Shui On PRC Cement Business with an initial agreed value of RMB1,168.7 million (about HK$1,123.8 million) (subject to adjustment), into the Joint Venture Company for a 45% stake in the Joint Venture and Lafarge will contribute the Lafarge PRC Cement Business together with the Lafarge Receivable with an initial agreed value of RMB1,538.7 million (about HK$1,479.5 million) (subject to adjustment) into the Joint Venture Company for a 55% stake in the Joint Venture.

The purpose of this circular is to provide you with further information in relation to the Acquisition and the Contribution and the proposed increase in the Company’s share capital.

THE ACQUISITION — THE OLYMPIO AGREEMENT

Parties

• (1) Olympio, which is wholly owned by Mr. Tung and his family, as the vendor;

• (2) SOBM, a wholly-owned subsidiary of the Company, as the purchaser; and

• (3) Mr. Tung as guarantor of the obligations of Olympio under the Olympio Agreement.

Assets Involved

Olympio shall sell to SOBM 1,370 shares of US$1.00 each in TH Industrial, being 50% of the issued share capital of TH Industrial, and the benefit of the Olympio Loan in the amount of US$31.9 million (about HK$248.5 million), together representing the entire interest of Olympio in TH Industrial, for a consideration of RMB270.0 million (about HK$259.6 million).

SOBM currently holds the remaining 50% issued share capital in TH Industrial, and the company is accounted for in the Group as a jointly controlled entity. TH Industrial is the holding company for the Group’s Cement Business in Sichuan and Chongqing, with dry kiln and wet kiln cement plants carrying a total annual production capacity of up to about 6.1 million tonnes, and a ready mixed concrete plant with annual production capacity of up to about 0.5 million cubic metres. Expansion plans for the construction of a dry kiln of about 1.2 million tonnes annual production capacity and a plant for processing 0.8 million tonnes of steel slag annually to be used as blending material are expected to further increase the annual production capacity of the Shui On PRC Cement Business in the coming year.

— 8 —

LETTER FROM THE BOARD

The audited consolidated net assets value of TH Industrial as at December 31, 2004 was RMB49.4 million (about HK$46.6 million). The audited consolidated profit (loss) of TH Industrial for the year ended December 31, 2003 and 2004 (before taxation and extraordinary items) were RMB57.5 million (about HK$54.2 million) and RMB(40.4 million) (about HK$(38.1 million)) respectively. The audited consolidated profit (loss) of TH Industrial for the year ended December 31, 2003 and 2004 (after taxation and extraordinary items) were RMB54.1 million (about HK$51.0 million) and RMB(41.9 million) (about HK$(39.5 million)) respectively.

The Company has appointed two directors to the board of directors (now comprising four directors) of TH Industrial. The operation is currently run and managed by Olympio, and Mr. Tung is the chief executive officer of TH Industrial.

Consideration

The consideration of RMB270.0 million (about HK$259.6 million) payable for the Acquisition was arrived at after arm’s length negotiations between the Company and Olympio with reference primarily to:

• (a) the unaudited consolidated net assets value of TH Industrial as at May 31, 2005 of RMB216.7 million (about HK$208.4 million);

• (b) the outstanding amount of the Olympio Loan (which was US$31.9 million (about HK$248.5 million) as at May 31, 2005); and

• (c) the current competitive business environment and market conditions for cement business in Chongqing.

The consideration of RMB270.0 million (about HK$259.6 million) is payable in cash, 10% of which (i.e. RMB27.0 million (about HK$26.0 million)) was paid as initial deposit upon signing of the Olympio Agreement, a second 10% of which (i.e. RMB27.0 million (about HK$26.0 million)) was paid as second deposit on September 12, 2005, a third 10% of which (i.e. RMB27.0 million (about HK$26.0 million)) will be payable as third deposit on October 12, 2005, and the remaining balance (i.e. RMB189.0 million (about HK$181.6 million)) upon completion. Mr. Tung’s service agreement with TH Industrial will be terminated on September 30, 2005, upon which Olympio has agreed to provide services to TH Industrial at a rate of RMB1.0 million (about HK$1.0 million) per month until completion.

The Directors expect that the consideration for the Acquisition will be financed by internal resources and unutilized banking facilities of the Group as well as the additional banking facility which is currently under negotiations and is expected to be secured shortly. The Directors may continue to review the other more permanent source of raising funds from the equity market to re-finance this consideration for the Acquisition. In the event the Company decides to raise any funds in the equity market for this purpose, the Company would make a further announcement as and when appropriate.

— 9 —

LETTER FROM THE BOARD

Audit for the consolidated accounts of TH Industrial and its subsidiaries for the five months ended May 31, 2005 has been completed. Based on the audited consolidated net assets value of TH Industrial and its subsidiaries as at May 31, 2005 of RMB239.5 million (about HK$225.9 million) as extracted from the accountants’ report of TH Industrial and its subsidiaries in Appendix II of this circular, an estimated deficiency in the carrying amount of the Group’s 50% interest in TH Industrial of approximately HK$86.9 million was calculated when compared with the consideration payable for the Acquisition. Subject to completion of the Acquisition and the assessment of the fair value of assets and liabilities of TH Industrial and its subsidiaries at the completion date of the Acquisition, any difference between the consideration payable for the Acquisition and the fair value of net assets acquired will be accounted for in accordance with Financial Reporting Standard 3 “Business Combination”. Goodwill arising on the acquisition, representing the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired, will be measured at cost less accumulated impairment losses (if any) after initial recognition, whereas discount on acquisition, representing the excess of the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over the cost of acquisition, will be recognized immediately in the consolidated income statement of the Group in the period in which the acquisition takes place.

Conditions

The Acquisition is conditional on the following conditions having been fulfilled on or before November 30, 2005 (or such other date as the parties may agree):

• (1) the approval by the Shareholders in the SGM of the Olympio Agreement and the transactions contemplated thereunder; and

• (2) all necessary consents being granted by third parties (including any governmental, regulatory or official authorities in the PRC or elsewhere) and no statute, regulation or decision which would prohibit, restrict or materially delay the sale and purchase of shares in TH Industrial and the Olympio Loan or the operation of any of TH Industrial or its subsidiaries after completion having been proposed, enacted or taken by any such third parties (including any governmental or official authorities).

Completion

Completion will take place on the third business day after all the above conditions precedent are fulfilled, or such other date as SOBM and Olympio may agree and is expected to occur before the closing of the Contribution. The Olympio Agreement is not conditional upon closing of the Contribution. In the event all the conditions precedent are fulfilled for completion of the Acquisition but not for closing of the Contribution, SOBM will proceed with the Acquisition and the Company will not proceed with the Contribution.

THE CONTRIBUTION — THE CONTRIBUTION AGREEMENT

Parties

• (1) the Company;

— 10 —

LETTER FROM THE BOARD

• (2) Shui On SPV, a wholly owned subsidiary of the Company;

• (3) Lafarge; and

• (4) Lafarge Holdings Hong Kong Limited, i.e. the Joint Venture Company, currently a company wholly owned by Lafarge.

Subscription and contribution

The Company and Lafarge have agreed with each other that:

• (a) The Company shall contribute or procure the contribution of the entire issued share capital of each of the Shui On JVCs (i.e. the holding companies of the Shui On PRC Cement Business), representing substantially all of the Group’s Cement Business in Sichuan and Chongqing, and its dry kiln Cement Business in Guizhou and include the interest that the Company will acquire under the Olympio Agreement, into the Joint Venture Company and make a cash contribution of initially RMB90.3 million (about HK$86.8 million) (subject to adjustment) into the Joint Venture Company in return for 45% of all the issued JV Shares; and

• (b) Lafarge shall contribute or procure the contribution of the 90.19% of the issued share capital of Lafarge JVC (i.e. the holding company of the Lafarge PRC Cement Business), representing the entire interest of Lafarge in Cement Business in the PRC, into the Joint Venture Company in return for 55% of all the issued JV Shares.

The values of the Shui On PRC Cement Business and the Lafarge PRC Cement Business, were agreed initially at RMB1,168.7 million (about HK$1,123.8 million) and RMB1,538.7 million (about HK$1,479.5 million) respectively (in each case subject to adjustment) and were arrived at after arm’s length negotiations between the Company and Lafarge with reference primarily to:

• (a) the agreed value of industrial assets under the Shui On PRC Cement Business and the Lafarge PRC Cement Business, having regard to, among other things, their production capacities (taking into account the market share of the production, the technology employed, underlying limestone reserves, related revamping costs and remaining capital expenditure (subject to adjustment)) of RMB2,394.6 million (about HK$2,302.5 million) and RMB2,619.1 million (about HK$2,518.4 million) respectively;

• (b) the unaudited adjusted consolidated debts (after deducting working capital) (subject to adjustment) as at May 31, 2005 of the Shui On PRC Cement Business and the Lafarge PRC Cement Business of RMB1,004.6 million (about HK$966.0 million) and RMB439.8 million (about HK$422.9 million) respectively;

• (c) the value of the Lafarge Receivable; and

• (d) the equity interests of the Company and Lafarge in their respective companies within the Shui On PRC Cement Business and the Lafarge PRC Cement Business.

— 11 —

LETTER FROM THE BOARD

The values of each of the Shui On PRC Cement Business and the Lafarge PRC Cement Business shall be adjusted to take into account the audited amounts of working capital, debt and new facilities costs up to the last day of the last full calendar month that is at least 33 days before closing.

An adjustment account will be prepared and audited prior to closing. Each of the Company and Lafarge shall contribute such cash amount as may be necessary to the Joint Venture Company in order to maintain (a) their respective 45% and 55% shareholdings with reference to the values of the Shui On PRC Cement Business and the Lafarge PRC Cement Business (after being adjusted as aforesaid), and (b) that the consolidated net debt of the Joint Venture Company equals to US$150.0 million (about HK$1,170.0 million). The benefit of the Lafarge Receivable will be assigned from Lafarge to the Joint Venture Company on closing.

The Directors expect that the cash portion of the Contribution will be financed by internal resources and unutilized banking facilities of the Group as well as the additional banking facility which is currently under negotiations and is expected to be secured shortly. The Directors may continue to review the other more permanent source of raising funds from the equity market to re-finance this Contribution. In the event the Company decides to raise any funds in the equity market for this purpose, the Company would make a further announcement as and when appropriate.

Based on the audited adjusted consolidated net assets value of Shui On PRC Cement Business as at May 31, 2005, an estimated surplus of approximately HK$46.6 million was calculated when compared with the value of the Shui On PRC Cement Business agreed between the Company and Lafarge and the cash contribution of initially RMB90.3 million (about HK$86.8 million) (subject to adjustment) to be made by the Group to Joint Venture Company. Subject to closing of the Contribution and the assessment of the fair value of assets and liabilities of the Joint Venture Company at the closing date of the Contribution, any difference between the value of the Shui On PRC Cement Business agreed between the Company and Lafarge, together with the aforementioned cash contribution, and the fair value of net assets of the Joint Venture Company attributable to the Company will be accounted for in accordance with Financial Reporting Standard 3 “Business Combination”, which is detailed under the section headed “the Acquisition” above.

— 12 —

LETTER FROM THE BOARD

Assets Involved

Shui On PRC Cement Business

This represents substantially all of the Cement Business of the Group in Sichuan and Chongqing and its dry kiln Cement Business in Guizhou, with total annual production capacity of up to 8.2 million tonnes and one ready mixed concrete plant currently under construction in Chongqing with an annual production capacity of up to 0.5 million cubic metres. A structure chart of the companies and operations comprising the Shui On PRC Cement Business immediately after completion of the Acquisition but prior to closing of the Contribution is set out below:

The Company 100% 100% (Note 1) (Note 2) Sommerset Investments Limited TH Industry II Limited 80% in Chongqing T.H. Diwei Cement Co. Ltd. 80% in Guizhou Xinpu Shui On Cement Co. Ltd. 80% in Chongqing T.H. Special Cement Co. Ltd. 100% in Guangan T.H. Cement Co. Ltd. 100% in Chongqing T.H. Fuling Cement Co. Ltd. 90% in Guizhou Dingxiao Shui On Cement Co. Ltd. 75% in Chongqing New Building Materials Co. Ltd. 100% in Nanchong T.H. Cement Co. Ltd. 90% in Suining T.H. Cement Co. Ltd. 70% in Guizhou Shuicheng Shui On Cement Co. Ltd. 80% in Chongqing T.H. Packaging Co. Ltd. 80% in Chongqing T.H. Logistics Co. Ltd. 50% in Chongqing T.H. Concrete Co. Ltd.

To be contributed by the Company to the Joint Venture Company

Notes:

• (1) Sommerset Investments Limited will cease to be a subsidiary of the Company following the completion of the Contribution.

• (2) TH Industry II Limited is a wholly owned subsidiary of TH Industrial. The 50% interest of TH Industrial held by Olympio will be acquired by the Group under the Acquisition, the completion of which is expected to take place prior to the closing of the Contribution.

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LETTER FROM THE BOARD

Since the Cement Business under TH Industry II Limited, a wholly-owned subsidiary of TH Industrial, will form part of Shui On PRC Cement Business, the Company must complete the Olympio Agreement first before it may proceed to closing of the Contribution.

Set out below is a summary of the financial information of TH Industry II Limited and Sommerset Investments Limited:

	TH Industry II Limited	TH Industry II Limited	Sommerset Investments Limited	Sommerset Investments Limited
	RMB million	HK$ million	RMB million	HK$ Million
Audited adjusted consolidated net assets
value
As at 31 December 2004	(119.3)	(112.5)	221.7	209.2
Audited adjusted consolidated profit
(loss) before taxation and
extraordinary items
For the year ended 31 December 2004	(33.5)	(31.6)	13.7	12.9
For the year ended 31 December 2003	69.7	65.8	10.9	10.3
Audited adjusted consolidated profit
(loss) after taxation and
extraordinary items
For the year ended 31 December 2004	(35.0)	(33.0)	13.7	12.9
For the year ended 31 December 2003	66.7	62.9	10.9	10.3

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LETTER FROM THE BOARD

Lafarge PRC Cement Business

This represents the entire Cement Business interest of the Lafarge Group in the PRC, comprising four dry kiln cement plants, with two located in Beijing, one in Chongqing and one in Sichuan, and one ready mixed concrete plant in Beijing. These cement and ready mixed concrete plants carry total annual production capacities of up to 4.7 million tonnes of cement and 0.2 million cubic metres of concrete respectively. A structure chart of the companies and operations comprising the Lafarge PRC Cement Business immediately after completion of the Acquisition but prior to closing of the Contribution is set out below:

==> picture [395 x 306] intentionally omitted <==

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

Lafarge S.A.
100%
Lafarge Independent third party
9.81%
90.19%
Lafarge JVC
65% in Beijing Chinefarge Cement Co. Ltd. (Cement Business in Beijing)
75% in Lafarge Dujiangyan Cement Co. Ltd. (Cement Business in Chengdu)
70% in Beijing Shunfa Lafarge Cement Co. Ltd. (Cement Business in Beijing)
70.59% in Lafarge Chongqing Cement Co. Ltd. (Cement Business in Chongqing)
76.72% in Beijing Yicheng Lafarge Concrete Co. Ltd. (Cement and concrete business in Beijing)
----- End of picture text -----

To be contributed by Lafarge to the Joint Venture Company

The audited consolidated net assets value of Lafarge JVC as at December 31, 2004 was RMB1,336.3 million (about HK$1,260.7 million). The audited consolidated profit of Lafarge JVC for the year ended December 31, 2003 and 2004 (before taxation and extraordinary items) were RMB8.4 million (about HK$7.9 million) and RMB4.2 million (about HK$4.0 million) respectively. The audited consolidated profit of Lafarge JVC for the year ended December 31, 2003 and 2004 (after taxation and extraordinary items) were RMB12.3 million (about HK$11.6 million) and RMB4.6 million (about HK$4.3 million) respectively.

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LETTER FROM THE BOARD

The combined operations of the Joint Venture Company immediately upon closing of the Contribution is set out below:

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

The Company Lafarge S.A.
100% 100%
Shui On SPV Lafarge
45% 55%
Joint Venture Company
Shui On PRC Cement Business Lafarge PRC Cement Business
as held by Shui On JVC as held by Lafarge JVC
----- End of picture text -----

Conditions

Closing of the Contribution is conditional on, among other things, the following conditions having been fulfilled on or before November 30, 2005 (or such other date as the parties may agree):

• (1) the approval by the Shareholders in the SGM of the Contribution Agreement and the transactions contemplated thereunder;

• (2) the warranties given by the Company under the Contribution Agreement remaining true and accurate except for those warranties the breach of which will not have a material adverse impact on the Shui On PRC Cement Business or which can be remedied;

• (3) the warranties given by Lafarge under the Contribution Agreement remaining true and accurate except for those warranties the breach of which will not have a material adverse impact on the Lafarge PRC Cement Business or which can be remedied;

• (4) completion of the Olympio Agreement;

• (5) no negative response has been received within 30 business days following notification of the MOC and SAIC applicable to Completion under the Provisional Rules on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors of the PRC, or if required by the MOC or SAIC, approval, consent or clearance of the Contribution has been obtained;

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LETTER FROM THE BOARD

• (6) there being no material adverse effect on the financial condition, properties, operations, business, prospects or results of operations of the Shui On PRC Cement Business; and

• (7) there being no material adverse effect on the financial condition, properties, operations, business, prospects or results of operations of the Lafarge PRC Cement Business.

Closing

Closing of the Contribution will take place within 10 business days after all the conditions precedent to closing of the Contribution are fulfilled.

Incidental to the signing of the Contribution Agreement, the Company and Shui On SPV have also entered into the Joint Venture Agreement with Lafarge and the Joint Venture Company, in relation to the operation of the Joint Venture Company with effect from closing of the Contribution. Details of the Joint Venture Agreement are set out in the sections headed “Further Information on the Joint Venture Company” and “Relationship between the Company and the Joint Venture Company” below.

Upon Closing, the Lafarge Group will enter into the Industrial Franchise Agreement to grant the Joint Venture Company a license to use various intellectual property rights and to access a range of assistance from the Lafarge Group, and the Company will also enter into a license agreement to grant the Joint Venture Company a license to use various trademarks of the Group. Details of the Industrial Franchise Agreement and the trademarks license agreement are set out in the section headed “Further Information on the Joint Venture Company” below.

FURTHER INFORMATION ON THE JOINT VENTURE COMPANY

Background

Lafarge S.A. is a world leader in building materials and is highly regarded in manufacturing of cement, aggregates and concrete, roofing and gypsm. It has a strong international presence operating in 75 countries throughout the world. Lafarge S.A. provides a range of cement, hydraulic binders and limes for construction, renovation and public works. The Company marked the beginning of its long term relationship with the Lafarge Group with the granting of the Yunnan Option to Lafarge S.A. in June 2004, an option to purchase 50% of the Group’s interest in Yunnan JV. With the execution of the Contribution Agreement, the Joint Venture Company will form the base of the Company’s strategic alliance with Lafarge S.A.

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LETTER FROM THE BOARD

Business of the Joint Venture Company

The Joint Venture Company will be owned both by the Company and Lafarge. It will be the flagship vehicle for their Cement Business investments in the Chinese Mainland.

The Joint Venture Company will combine the Shui On PRC Cement Business located in Sichuan, Chongqing and Guizhou, the Lafarge PRC Cement Business located in Sichuan, Chongqing and Beijing and the parties’ interests in the Yunnan JV. Initially, the cooperation will cover their Cement Businesses in Sichuan, Chongqing, Guizhou, Beijing and Yunnan.

The Directors expect the Joint Venture Company to be the market leader in South-Western China. The total annual capacity of the Combined Cement Business will be about 17.4 million tonnes by the end of 2005 which places the Joint Venture Company as one of the top three cement producers in the Chinese Mainland.

Future Plans and Prospects

The demand in the PRC cement market is expected to grow to about 1,000 million tonnes in 2005, representing about 7% increase from the year before. Producers of high-grade cement such as the Joint Venture Company are expected to benefit most from this tremendous growth in demand. The growth has been fuelled by the commencement of major infrastructure projects under the framework of China’s “Go-West” policy. These infrastructure projects require substantial usage of high-grade cement. The rapid development of the ready-mixed concrete business, especially in the urban areas, and new PRC standards for construction — including new environmental regulations regarding air emissions (e.g. SO2, NO2 and dust) — have also contributed to an increased demand for production plant and process that minimise waste and pollution.

In view of the favourable general market conditions as mentioned above, the vast population located in South-Western China, its rapid pace of development and the potential extensive infrastructure build up, the Directors believe that the South-Western China, where the majority of the operations of the Joint Venture Company are located, has huge growth potential.

It is the intention of both parties that the Joint Venture Company should become one of the premier cement producers in China with state-of-the-art cement manufacturing facilities and operating in a cost efficient and environmental-friendly manner. This will enable the Joint Venture Company to seize and benefit from the growth opportunities in China and to extend its leadership position in several regions.

To achieve this, the Joint Venture Company is expected to:

• bring together the Company’s wealth of experience, strong branding and good credibility in the China cement market with Lafarge’s world-class technical and operational expertise and know-how in cement operations. Through the Industrial Franchise Agreement to be entered between Lafarge Group and the Joint Venture Company upon closing of the

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LETTER FROM THE BOARD

Contribution, the Joint Venture Company and its subsidiaries will be allowed to use various intellectual property rights and to access a range of technical assistance services from the Lafarge Group for a term to be agreed by the parties at the rate of 1.5% of the net consolidated turnover of the Joint Venture Company and its subsidiaries. The rate of service fee will be increased to 2.0% after the listing of the Joint Venture Company. The Company will, upon closing of the Contribution, also enter into a license agreement to grant the Joint Venture Company a license to use the “Shui On” trademarks of the Group for free for so long as the Company shall remain interested in not less than 30% equity interest in the Joint Venture Company. The Company will charge a rate of 0.5% of the net consolidated turnover of the Joint Venture Company and its subsidiaries after the listing of the Joint Venture Company for the continued use of the trademarks.

• achieve economies of scale and cost efficiency through the combined operations of the Shui On PRC Cement Business and the Lafarge PRC Cement Business. The Joint Venture Company will initially operate the Combined Cement Business with a total of 11 cement plants and an additional three plants upon the injection of the Yunnan JV. Revamping and modernisation of these plants are expected to be carried out on the facilities of the Combined Cement Business in order to improve cost effectiveness and increase efficiency. It is expected that the total annual capacity of the Combined Cement Business will be about 17.4 million tonnes by the end of 2005.

• adopt an environmentally sustainable approach to differentiate itself from competitors. The Joint Venture Company is expected to employ state-of-the-art environmental management systems to achieve higher product quality while being environmentally friendly.

• expand and consolidate the Cement Business in South-Western China. As the Joint Venture Company is expected to be the exclusive vehicle for both the Company and Lafarge to carry out Cement Business in the Territory, Lafarge has agreed to procure that the Yunnan Option granted to Lafarge S.A. by the Company in June 2004 will not be exercised before closing of the Contribution. The Yunnan Option will be terminated upon the closing of the Contribution and pursuant to the Contribution, the Company has also undertaken to transfer, subject to obtaining the required PRC regulatory approvals, all its interest in Prime Allied, being the holding company for the Group’ interest in the Yunnan JV, to the Joint Venture Company at the actual cost incurred in respect of the Yunnan JV plus a premium at the rate of 6.5% per annum.

It is the intention of both the Group and the Lafarge Group to list the securities of the Joint Venture Company on an internationally recognised stock exchange within the next few years from closing of the Contribution. Although no definite plans have been formulated for the listing, and there is no assurance whether and as to when the securities of the Joint Venture Company may be listed, the Directors believe that by forming this Joint Venture Company with the Lafarge Group, the Company would have made a significant step forward in positioning itself to benefit from the stronger growth in the cement and related operations in the long run.

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LETTER FROM THE BOARD

Ownership and Control

Immediately after closing of the Contribution, Shui On SPV will own 45% of the issued share capital of the Joint Venture Company. The board of directors of the Joint Venture Company will comprise eight members, four of whom will be appointed by each of Shui On SPV and Lafarge respectively. The Chairman of the board of directors of the Joint Venture Company will be Mr. Vincent Lo Hong Sui, Chairman of the Company. The Vice Chairman will be Mr. Jean Desazars de Montgailhard, Asia Regional President of Lafarge S.A.. The chief executive officer of the Joint Venture Company will be nominated by Lafarge and appointed by unanimous vote of the board of directors of the Joint Venture Company.

RELATIONSHIP BETWEEN THE COMPANY AND THE JOINT VENTURE COMPANY

Exclusivity

As mentioned above, it is expected that the Joint Venture Company will be the flagship cement company of both the Group and the Lafarge Group in the PRC. Pursuant to the terms of the Joint Venture Agreement, each of the Company and Lafarge has undertaken to the other and the Joint Venture Company that, as from closing of the Contribution:

• (1) the Joint Venture Company will be their respective exclusive vehicle to carry on any Cement Business in the Territory; and

• (2) should opportunities arise in relation to any Cement Business in the PRC outside of the Territory, they will propose such opportunities to the Joint Venture Company first, and will only take up such business opportunities if such opportunities have not been taken up by the Joint Venture Company, and to the extent that the business involved does not compete with the operations of the Joint Venture Company.

Non-Contributed Assets

Other than the Shui On PRC Cement Business, the Group also has other cement and ready mixed concrete operations in and outside the Territory in the PRC, namely the Non-Contributed Assets. The Non-Contributed Assets include six wet kiln cement plants in Guizhou carrying an annual production capacity of about 1.4 million tonnes in total, and two ready mixed concrete plants in Guizhou with total annual production capacity of about 0.4 million cubic metres, a white cement plant in Chongqing with relatively small production capacity and a plant and quarry in Xikou, Sichuan, PRC. Production of cement by wet kilns are generally less cost efficient and less environmental-friendly compared to dry kilns and premier grade cement cannot be produced cost effectively by these less technologically advanced equipment. The products produced from these kilns are usually not used in large Government infrastructure projects that require premier grade cement produced by our dry kiln plants.

Given the differentiation in cement grading and geographical locations, operations of these Non-Contributed Assets are incompatible with the business of the Joint Venture Company and are unlikely to compete directly with the Combined Cement Business in Guizhou, PRC or other locations within the Territory. In any event, the Company will explore suitable opportunities to divest them or

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LETTER FROM THE BOARD

to wind them down gradually by 2010 pursuant to the terms of the Joint Venture Agreement, and under the Joint Venture Agreement, the Joint Venture Company has a right of first refusal to purchase these Non-Contributed Assets and expand their operations. The Directors believe that, if the Company can materialise its strategic alliance with the Lafarge Group, it would be more advantageous for the Company to divert its strength and resources from these relatively less technologically advanced and less cost efficient kilns and focus its strength and resources to the development of the premier-quality cement products via the Joint Venture Company.

The Qujiang Quarry will not be contributed by the Company into the Joint Venture as it does not form part of the Shui On PRC Cement Business. The Company agrees that:

• (a) Qujiang Quarry will levy a charge of RMB2.0 per tonne of limestone supplied to the Combined Cement Business; and

• (b) if the Joint Venture Company considers it desirable to acquire the Qujiang Quarry after 3 years, the Joint Venture Company has the right to require the Company to sell it to the Joint Venture Company at a price of not more than RMB2.0 million (about HK$1.9 million).

The Company will comply with the applicable disclosure and approval requirements of the Listing Rules as and when required in respect of any disposal of these Non-Contributed Assets.

IMPACT ON THE GROUP AND REASONS FOR THE TRANSACTIONS

The Group is engaged in Cement Business in China and construction in Hong Kong and, through Shui On Land Limited, an associated corporation that it controls with Shui On Company Limited, its ultimate holding company, in property development in China.

The Group has established a strong presence in cement markets in Sichuan, Chongqing and Guizhou. It is one of the leading cement producers in Chongqing municipality and the provinces of Sichuan, Guizhou and, after the injection of the Yunnan JV, Yunnan.

The Acquisition

The Company commenced its cement and related operations in the Chinese Mainland back in 1994 to capitalise on the tremendous business opportunities brought about by the ongoing economic reform and increasing level of construction activities, particularly in infrastructure and building projects. It has enjoyed strong sales and capacity growth over the years. Following completion of the Acquisition, the Company will hold the entire share capital of TH Industrial. Accordingly, the Company will also acquire control over all the cement and concrete operations held under TH Industrial in Sichuan and Chongqing.

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LETTER FROM THE BOARD

Chongqing, which is a municipality adjacent to Sichuan province, has a population of over 30 million and has been designated as the hub of South-Western China under the “Go West” policy. Being one of the largest and fastest growing cities in China, Chongqing is expected to transform into a major industrial, commercial and financial centre within the next decade.

Under such favourable conditions, the Directors consider the Olympio Agreement as an attractive opportunity for the Company to consolidate its interest in the cement operations in Sichuan and Chongqing. The Directors also believe that the Olympio Agreement will be beneficial to the Company for the following reasons:

(a) Enhancement of operational efficiency

With the consolidation of control of TH Industrial, the Company is in a better position to control and manage the cement operations in Sichuan and Chongqing. It is more beneficial for the Company’s overall cement operations as the Company will be able to share their technical and management expertise freely between its operations in Sichuan, Chongqing and Guizhou.

(b) Potential synergies for current operations within the Group

The Company will be able to streamline its organisational structure within its operations in Sichuan and Chongqing and thus reduce its overall corporate overhead costs, resulting in a lower fixed cost base. In addition, with the Acquisition, there will be opportunities for better coordination in terms of the joint procurement of essential raw materials and fuel (e.g. slag and coal), which will give the Company greater bargaining power with its suppliers. The use of raw materials can also be more efficiently planned so that these raw materials are optimally utilised and allocated to maximise profits.

• (c) Facilitate the formation of the Joint Venture Company

TH Industrial is the holding company of the Company’s Cement Business in Sichuan and Chongqing. In order to complete the formation of the Joint Venture Company, the Company’s cement operations in Sichuan and Chongqing will have to be contributed. The proposed acquisition under the Olympio Agreement will give the Company the necessary flexibility to make such a substantial contribution. Going forward, the Group expects the Joint Venture Company to become the holding company of the Shui On PRC Cement Business.

The Directors consider the terms of the Olympio Agreement as fair and reasonable and the Acquisition is in the interest and benefit of the Company and its shareholders as a whole.

The Joint Venture with Lafarge

Following completion of the Contribution Agreement, the Company will hold 45% of the equity interest in the Joint Venture Company and will cease to have majority control over the Shui On PRC Cement Business. The Shui On PRC Cement Business is currently accounted for by the Group as jointly controlled entities and will continue to be accounted for by the Group as jointly controlled entities following closing of the Contribution.

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LETTER FROM THE BOARD

The Directors consider that the Contribution Agreement is an attractive opportunity for the Company as it is in the interest of the Company to combine its PRC Cement Business with that of a world leader in the industry. The Directors believe that the co-investment with the Lafarge Group is beneficial to the Company and its shareholders as a whole for the following reasons:

• (a) Well-complemented partnership with the Company’s strong presence in China and the Lafarge Group’s world-class operational and technical capability

The Company is a well established cement producer in the PRC market with excellent relationships with the local governments. It is an experienced market leader in the South-Western region of the PRC and has access to sources of high quality raw materials, enabling it to ensure reliability and consistency of essential supplies. e.g. limestone reserves in Sichuan and Chongqing and steel slag in Chongqing.

The Lafarge Group is an industry leader in terms of its world-class technical and operational expertise in cement production. Its contributions to the Joint Venture Company on the technical and operational aspects will greatly maximise the efficiency of the existing cement plants, thus leading to higher productivity and lower costs of production.

The good reputation and credibility that the Company has built up in the PRC as well as the wealth of its experience in the PRC will greatly complement the Lafarge Group’s world-class technical expertise. The formation of the Joint Venture Company will bring together these qualities which will provide an excellent platform for future growth and the establishment of a premier cement manufacturer in the Chinese Mainland.

• (b) Creation of a premier cement producer in China

With the contribution of the Company’s cement operations in Sichuan, Chongqing, and its largest plants in Guizhou, Lafarge’s cement operations in Beijing, Sichuan and Chongqing as well as the prospective injection of the Yunnan JV, the Joint Venture Company will be one of the largest high-grade cement producer in the South-West region of the PRC. The expected annual capacity at the end of 2005 of 17.4 million tonnes is expected to place the Joint Venture Company within the top three high-grade cement producers in China, one of the world’s largest cement markets.

• (c) Expansion of geographical reach and diversification of market risks

The formation of the Joint Venture Company will extend the geographical reach of the Shui On PRC Cement Business and give the Company a good platform to expand in Beijing and Sichuan (in particular in Chengdu) markets in future if necessary. The Shui On PRC Cement Business will be able to diversify its risks and avoid over concentration in any one particular market or region. As the demand for cement is cyclical and localised, the price for cement can vary by a significant amount between regions and during different time periods. Hence, with the

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LETTER FROM THE BOARD

wider geographical footprint, the Shui On PRC Cement Business will be able to expand in a market where prices are rising and scale back production where prices are declining. This is expected to give the Shui On PRC Cement Business the ability to achieve greater earnings stability going forward.

(d) Optimisation of production among the plants in China

The establishment of the Joint Venture Company will give the flexibility in coordinating the production utilisation rates of the cement plants of the Shui On PRC Cement Business and the Lafarge PRC Cement Business. This will give the Joint Venture Company the ability to have an influence over the cement supply within a region and hence have greater pricing power and competitiveness, leading to higher profitability compared to its peers. For example in Chongqing, the formation of the Joint Venture Company will give the Shui On PRC Cement Business the opportunity to consolidate market share in these markets and hence reduce competition and improve pricing and margins.

• (e) Realisation of economies of scale in production

The production of cement has a high fixed cost base. With the formation of the Joint Venture Company, the enlarged size of the combined operations will create an opportunity to realise significant synergies and economies of scale especially in the areas of materials sourcing, advertising and production management. This will provide the Joint Venture Company with a competitive advantage as the realisation of these economies of scale will significantly lower the overall cost of production, thus leading to higher overall profitability.

(f) Well-positioned for further market expansion in China

The Directors expect the Joint Venture Company to be a market leader in South-Western region and one of the top three cement producers in all of China. As a premier cement producer in the PRC, the Joint Venture Company will have sufficient scale and capability to bolster its leading position in the fast growing South-Western China market and to expand further into other regions in China, so as to capitalise on our market growth opportunities that are available.

There are expectations of large scale government projects coming on stream in SouthWestern China, which is one of the largest and fastest growing areas in the Chinese Mainland. These government projects usually require the usage of premier grade cement. Being the largest high-grade cement producer with the technology and capability to produce consistently premier grade cement, the Joint Venture Company will be well positioned to benefit significantly from such a potential increase in demand.

• (g) Well-positioned to become a market leader and industry consolidator

The PRC cement market is fragmented with more than 6,000 cement plants operating with an average capacity of 150,000 tonnes. With fierce competition and high fixed costs, it is expected that there will be significant opportunities for consolidation in the industry in future. The formation of the Joint Venture Company will bring together a wealth of experience and

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LETTER FROM THE BOARD

resources and a world-class management team with the necessary technical and operational expertise to act as an industry consolidator in future. The enlarged platform will put the Company in a superior position to capture opportunities for growth and expansion through acquisitions and hence achieve its goal of becoming the premier cement manufacturer in China.

The Joint Venture Company will own the Combined Cement Business, with two cement plants in Sichuan, four in Chongqing, three in Guizhou, two in Beijing and after injection of the Yunnan JV, three in Yunnan.

Since the Joint Venture Company is intended to be the flagship cement company of the Lafarge Group in the Chinese Mainland, the Contribution represents an attractive opportunity for the Company to exchange its interest in the Shui On PRC Cement Business for an interest in a much larger Cement Business in the PRC and to capitalise on a strategic alliance with the Lafarge Group.

The Directors consider that the terms of the Contribution Agreement, the Joint Venture Agreement and the transactions contemplated thereunder are fair and reasonable and the Contribution is in the interest and benefit of the Company and its shareholders as a whole.

Implications of the Listing Rules

Olympio is a company wholly owned by Mr. Tung and his family. As far as the Directors are aware, neither Mr. Tung, Lafarge nor their respective associates have any interests in the issued share capital of the Company. Save as aforesaid, neither Mr. Tung nor Lafarge is connected with any Director, chief executive or substantial shareholder of the Company or any of its subsidiaries or their respective associates (as defined under the Listing Rules).

The Olympio Agreement, the Contribution Agreement and the transactions contemplated thereunder together constitute major acquisition and very substantial disposal of the Company respectively under Chapter 14 of the Listing Rules and will be subject to the approval of the Shareholders at the SGM.

SGM

The SGM will be convened at 10:30 a.m. on November 1, 2005 at which all necessary resolutions will be proposed to approve the Olympio Agreement and the Contribution Agreement and the transactions contemplated thereunder. Notice convening the SGM is set out at the end of this Circular. Shui On Company Limited, the ultimate holding company of the Company which, together with its wholly owned subsidiary, are interested in about 68.5% of the issued share capital of the Company as at the Latest Practicable Date, has indicated to the Company that it will vote in favour of the resolutions to be proposed at the SGM to approve the Acquisition, the Contribution and the transactions contemplated thereunder.

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LETTER FROM THE BOARD

POLL PROCEDURES

In accordance with bye-law 66 of the bye-laws of the Company, a resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

• (a) by the chairman of such meeting; or

• (b) by at least three Members present in person (or in the case of a Member being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or

• (c) by a Member or Members present in person (or in the case of a Member being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Members having the right to vote at the meeting; or

• (d) by a Member or Members present in person (or in the case of a Member being a corporation by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the 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 shares conferring that right.

A demand by a person as proxy for a Member or in the case of a Member being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a Member.

INCREASE IN AUTHORISED SHARE CAPITAL

The authorised share capital of the Company currently consists of 400,000,000 Shares of which 270,184,000 Shares were in issue as at the Latest Practicable Date. The Directors propose to increase the authorised share capital of the Company from HK$400,000,000 to HK$1,000,000,000 by the creation of an additional 600,000,000 new unissued shares of HK$1.00 each in the capital of the Company. Such new shares will rank pari passu in all respects with the existing issued shares.

A resolution will be proposed at the SGM to approve the increase in authorised share capital. The Directors have no present intention of issuing any part of that capital save for such fund raising that the Company may consider for re-financing the transactions mentioned above.

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LETTER FROM THE BOARD

RECOMMENDATION

The Board considers that the terms of the Acquisition and the Contribution are fair and reasonable and the entering into of the Olympio Agreement, the Contribution Agreement and the Joint Venture Agreement and the proposed increase in share capital of the Company are in the interests of the Company and its shareholders as a whole. The Directors recommend the Shareholders to vote in favour of all the ordinary resolutions to be proposed at the SGM for the approval of the Acquisition, the Contribution and the increase in authorised share capital of the Company.

OTHER INFORMATION

Your attention is drawn to the “Financial information of the Group” section, and the other additional information set out in the appendices to this circular.

Yours faithfully, By order of the Board Shui On Construction and Materials Limited Vincent Lo Hong Sui

Chairman

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FINANCIAL INFORMATION OF THE GROUP

I. STATEMENT OF INDEBTEDNESS

As at the close of business on July 31, 2005, being the latest practicable date for the purpose of this indebtedness statement, the Group had outstanding borrowings of about HK$1,618.0 million comprising unsecured bank loans and overdrafts of about HK$1,582.3 million and HK$5.6 million respectively; amounts due to jointly controlled entities of about HK$27.6 million and amount due to a related company of about HK$2.5 million.

In addition, the Group had contingent liabilities of about HK$486.8 million, comprising guarantees relating to performance bonds issued by banks of about HK$162.4 million and guarantees given to banks in respect of general facilities granted to jointly controlled entities of about HK$324.4 million.

The Directors are not aware of any material change in the indebtedness and contingent liabilities of the Group since 31 July 2005.

Save as aforesaid and apart from intra-group liabilities, no companies within the Group had outstanding at the close of business on 31 July 2005 any mortgages, charges or debentures, loan capital, bank overdrafts, loans or other similar indebtedness or any hire purchase commitments, liabilities under acceptances or acceptance credits or any guarantees or other material contingent liabilities.

II. WORKING CAPITAL

The Directors are of the opinion that, based on the expected cash flows, and taking into account the internal resources and unutilized banking facilities of the Group as well as the additional banking facility which is currently under negotiations and is expected to be secured shortly, and assuming that the existing banking facilities of the Group will not be withdrawn, the Group will have sufficient working capital for its present requirements in the absence of unforeseen circumstances.

III. FINANCIAL AND TRADING POSITION

A key feature of the Group’s performance for 2004/05 was the investment in Shui On Land Limited (SOL), established as the flagship property company of Shui On Company Limited, the Company’s controlling shareholder, in June 2004 for property development and investment on the Chinese Mainland. The injection of our Rui Hong Xin Cheng (Rainbow City) development into SOL generated a substantial gain during the year.

More importantly, as a significant minority shareholder of SOL, an entity that has a diversified real estate portfolio and a strong reputation on the Chinese Mainland, SOCAM now enjoys significant and diverse opportunities in the dynamic Mainland property market.

In April 2005, SOL acquired a 50-hectare plot in the city core of Wuhan, a major city in central China, taking its total land bank on the Chinese Mainland to approximately 8 million square metres of gross floor area. SOL’s current portfolio also includes three projects in Shanghai (Rui Hong Xin Cheng, Taipingqiao Redevelopment Project and Chuangzhi Tiandi), Xihu Tiandi in Hangzhou and Chongqing Tiandi.

— 28 —

FINANCIAL INFORMATION OF THE GROUP

All these projects made good progress during the year. Rui Hong Xin Cheng saw strong sales from two blocks of apartment in Phase 2 in October 2004. Another two blocks of apartment in Phase 2 that were put up for sale in June 2005 also met with encouraging responses. At the Taipingqiao Redevelopment, occupancy at Shanghai Xintiandi was 98% in the North Block and 92% in the South Block while approximately 94% of the office space in Phase 1 of Corporate Avenue was let to corporate tenants at the end of March 2005. Construction commenced in April 2004 at Chuangzhi Tiandi, the innovative mixed-use scheme that aims to generate Silicon Valley-style technological entrepreneurship. Phase 1 of both the Hub and Live/Work areas are expected to be completed by end of 2005. Relocation for Chongqing Tiandi progressed well and construction of the first phase is expected to commence in the fourth quarter of 2005.

The Group’s cement operations also made good progress in strengthening market penetration through acquisitions of new plants and investment in new production lines. In Chongqing, the Group completed construction of a new dry kiln at Diwei and proceeded with work on a plant for processing steel slag and a new dry kiln at Hechuan. In Guizhou, the Group acquired a large cement factory located at Shuicheng, a move that completed a cohesive network of plants around the provincial capital Guiyang.

The Group is finalising the acquisition of 80% of several key cement plants in Yunnan with a combined capacity of 4.5 million tonnes per annum. Yunnan is a fast-growing province that is sustaining high prices for cement.

Despite these advantages, the Group’s operations had a difficult year in the face of the austerity measures imposed by the Central Government in the second quarter of 2004. Investments in the cement industry were subject to tight control, and major infrastructure works and investments in property projects were postponed or significantly curtailed. Sluggish demand meant that it was not possible to pass rising coal, electricity and transportation costs on to customers. Production and sales were adversely affected, leading to adverse results in Chongqing.

There are indications that China’s Go West policy is protecting interior provinces from the full effects of the Central Government’s austerity measures. In particular, the region is likely to enjoy further development of hydroelectric and coal power, especially in Chongqing and Guizhou — two key areas for the Group’s cement operations — in the face of China’s coal and electricity shortages. Development of coal reserves in Guizhou will in turn stimulate the build-up of transport infrastructure in the province. These developments will strengthen demand for high-grade cement and the Group remains committed to expanding its investment in this sector.

The Group is also expecting more limited competition in the medium term once the Central Government implements its intended restrictions on inefficient and outmoded cement plants, which cause severe environmental pollution and significant energy wastage. This situation, when it occurs, will provide ample opportunities for well-established enterprises such as the Company.

Following the Contribution and consummation of the Yunnan JV, the Group expects to be in a leading position as cement producer in the linked markets of the Chongqing municipality and the provinces of Sichuan, Guizhou and Yunnan, constituting a valuable business triangle in southwest China.

— 29 —

FINANCIAL INFORMATION OF THE GROUP

As at 31 March 2005, the Group’s bank borrowings, net of bank balances, deposits and cash, amounted to HK$1,195.4 million (31 March 2004: HK$779.7 million).

In accordance with the terms of the relevant banking facilities, such bank borrowings will be fully repaid in 2010. The following was the maturity profile of the Group’s bank borrowings as at 31 March 2005:

Within one year 4% In the 2nd year 71% In the 3rd to 5th year 25% Total 100%

The Group’s gearing ratio, calculated on the basis of net bank borrowings (i.e. total bank borrowings less bank balances, deposits and cash) over shareholders’ equity, increased from 56% as at 31 March 2004 to 61% as at 31 March 2005.

Bank borrowings are mainly denominated in Hong Kong dollars and have been arranged on a floating rate basis. Appropriate hedging products will be utilized, if necessary, to minimize interest rate exposure. Investments in the PRC are partly financed by borrowings from Hong Kong. Given the positive outlook on Renminbi, and that income from operations in the PRC are denominated in Renminbi, the Group expects that fluctuation in the Renminbi exchange rate will not pose a substantial negative effect on the business performance and the financial status of the Group. Therefore no hedging against Renminbi exchange risk has been made.

Certain Directors and employees of the Group exercised their share options and as a result 1,344,000 shares of the Company were issued and allotted to them during the year ended 31 March 2005. Further details on the Company’s capital structure can be found in the Group’s annual report for the year ended 31 March 2005.

At 31 March 2005, the number of employees of the Group was approximately 900 (1,290 as at 31 March 2004) in Hong Kong and 11,340 (12,250 as at 31 March 2004) in subsidiaries and jointly controlled entities on the Chinese Mainland. As the Group recognises human resources to be one of the major driving forces of profitability and business growth, employees’ remuneration packages are maintained at competitive levels. Employees are rewarded on a performance-related basis within the general framework of the Group’s salary and bonus systems. Other staff benefits include provident fund schemes, medical insurance, in-house training and subsidies for job related seminars, and programmes organised by professional bodies and educational institutes. Share options are granted annually by the Board of Directors to senior management staff members as appropriate. Likewise on the Chinese Mainland, staff benefits are commensurate with market levels, with an emphasis on provision of training and development programmes and resources.

The Directors are not aware of any other material change in the financial or trading position or prospects of the Group since 31 March 2005, being the date of the latest published audited accounts of the Group.

— 30 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

==> picture [75 x 57] intentionally omitted <==

==> picture [99 x 35] intentionally omitted <==

30 September 2005

The Directors Shui On Construction and Materials Limited

Dear Sirs,

We set out below our report on the financial information relating to Shui On Construction and Materials Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) for each of the three years ended 31 March 2003, 2004 and 2005 (the “Relevant Periods”) for inclusion in the circular of the Company dated 30 September 2005 (the “Circular”) in relation to the major acquisition and formation of joint venture with Financiere Lafarge in relation to People’s Republic of China (“PRC”) cement operations (very substantial disposal) and increase in authorised share capital.

The Company was incorporated in Bermuda as an exempted company under The Company Act 1981 of Bermuda (as amended) on 3 January 1997. The principal activity of the Company is investments holding.

As at the date of this report, the Company has the following subsidiaries:

			Percentage	Percentage
		Issued and	of issued/nominal
	Date of	fully paid	**value of **	registered
	incorporation/	share capital/	**capital **	held by
Name of subsidiary	establishment	registered capital	the Company			Principal activities
			Directly	Indirectly
Construction and
building maintenance
business
Dynamic Mark Limited	7 June 1994	100 ordinary shares of	—		80%	Supply of metal gates
		HK$1 each
		3,000,000 non-voting
		deferred shares of
		HK$1 each
Eventful Time Investments	1 July 1997	1 share of US$1	—	100%		Dormant
Limited*
Keygrow Investments	8 July 2005	1 share of US$1	100%		—	Investment holding
Limited*

— 31 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

			Percentage	Percentage
		Issued and	of issued/nominal
	Date of	fully paid	**value of **	registered
	incorporation/	share capital/	**capital **	held by
Name of subsidiary	establishment	registered capital	the Company			Principal activities
			Directly	Indirectly
Kinford Enterprises	3 April 1998	2 ordinary shares of	—	100%		Investment holding
Limited		HK$1 each
P.D. (Contractors) Limited	23 May 1986	1,000,000 ordinary	—		98%	Renovation work
		shares of HK$1 each
Pacific Extend Limited	4 October 2000	10,000 ordinary shares	—		67%	Maintenance
		of HK$1 each				contractor
		6,000 special shares of
		HK$1 each
Pat Davie Limited	11 July 1978	9,400,100 ordinary	—		98%	Interior decoration,
		shares of HK$1 each				fitting out, design
		100,000 non-voting				and contracting
		deferred shares of
		HK$10 each
Pat Davie (China) Limited	1 November 1994	2 ordinary shares of	—		98%	Dormant
		HK$1 each
Pat Davie (Macau)	23 February 2005	1,000,000 ordinary	—		98%	Interior decoration,
Limited###		shares of MOP1 each				fitting out, design
						and contracting
Pat Davie (Shanghai)	21 January 2002	2 ordinary shares of	—		98%	Dormant
Company Limited		HK$1 each
Panyu Dynamic Mark	8 June 1998	Registered and paid up	—		64%	Steel fabrication
Steel & Aluminium		capital HK$4,000,000
Engineering Co.
Ltd.**@
Panyu Shui Fai Metal	22 May 1993	Registered and paid up	—		55%	Manufacture of
Works Engineering		capital HK$9,000,000				wallform and other
Company Limited**@						metal works
Pinetop Limited	13 June 1997	2 ordinary shares of	—	100%		Investment holding
		HK$1 each
Rich Development Limited	29 March 2000	2 ordinary shares of	—	100%		Dormant
		HK$1 each
Shui Fai Metal Works	24 October 1996	10,000 ordinary shares	—		55%	Sales and installation
Engineering Company		of HK$1 each				of wallform and
Limited						other metal works

— 32 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

			Percentage	Percentage
		Issued and	of issued/nominal
	Date of	fully paid	**value of **	registered
	incorporation/	share capital/	**capital **	held by
Name of subsidiary	establishment	registered capital	the Company		Principal activities
			Directly	Indirectly
Shui On Building	11 October 1963	117,000,100 ordinary	—	100%	Building construction
Contractors Limited		shares of HK$1 each			and maintenance
		33,000,100 non-voting
		deferred shares of
		HK$1 each
		50,000 non-voting
		deferred shares of
		HK$1,000 each
Shui On Construction	21 July 1972	100 ordinary shares of	—	100%	Building construction
Company Limited		HK$1 each
		69,000,000 non-voting
		deferred shares of
		HK$1 each
		1,030,000 non-voting
		deferred shares of
		HK$100 each
Shui On Contractors	2 December 1996	1 share of US$1	100%	—	Investment holding
Limited*
Shui On Granpex Limited	13 January 1997	2 ordinary shares of	—	100%	Investment holding
		HK$1 each
Shui On Graceton Limited	13 January 1997	2 ordinary shares of	—	100%	Investment holding
		HK$1 each
Shui On Plant &	24 July 1987	1,611,000 ordinary	—	100%	Owning and leasing
Equipment Services		shares of HK$1 each			of plant and
Limited		45,389,000 non-voting			machinery and
		deferred shares of			structural steel
		HK$1 each			construction work
SOCAM.com Limited	17 July 2000	2 ordinary shares of	—	100%	Provision of on-line
		HK$1 each			services for
					internal
					procurement and
					project
					management
Sino Eagle Limited	22 October 1999	2 ordinary shares of	—	100%	Dormant
		HK$1 each

— 33 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

			Percentage	Percentage
		Issued and	of issued/nominal
	Date of	fully paid	**value of **	registered
	incorporation/	share capital/	**capital **	held by
Name of subsidiary	establishment	registered capital	the Company			Principal activities
			Directly	Indirectly
Sale of construction
materials business
Asia No.1 Material Supply	30 September	100 ordinary shares	—	100%		Holding of a quarry
Limited	1983	of HK$100 each				right
		1,000 non-voting
		deferred shares of
		HK$100 each
Billion Centre Company	20 September	100 ordinary shares of	—	100%		Dormant
Limited	1985	HK$1 each
		2 non-voting deferred
		shares of HK$1 each
Equity Leader	28 April 2004	1 share of US$1	—	100%		Investment holding
International Limited*
Far East Cement Pty	15 July 2004	1 share of AUD1	—	100%		Trading of cement
Limited##
First Direction Limited	14 November	100 ordinary shares of	—	100%		Property holding
	1986	HK$1 each
		2 non-voting deferred
		shares of HK$1 each
Great Market Limited	12 July 1994	100 ordinary shares of	—	100%		Investment holding
		HK$1 each
		5 non-voting deferred
		shares of HK$1 each
Guangdong Lamma	21 August 1998	Registered and	—		60%	Manufacture of
Concrete Products		paid up capital				precast concrete
Limited**@		RMB5,000,000				facade
Honour Link Development	25 May 2001	1,200,000 ordinary	—		52%	Dormant
Limited		shares of HK$1 each
Kinscore Limited	13 January 1997	2 ordinary shares of	—	100%		Investment holding
		HK$1 each
Lamma Concrete Products	26 September	10 ordinary shares of	—		60%	Investment holding
Limited	1986	HK$1 each

— 34 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

Name of subsidiary

Percentage Issued and of issued/nominal Date of fully paid value of registered incorporation/ share capital/ capital held by establishment registered capital the Company Principal activities Directly Indirectly

• Lamma Rock Products 8 December 1978 100 ordinary shares of — 100% Investment holding Limited HK$10 each 3,500,000 non-voting deferred shares of HK$10 each

• Project Way Limited 23 March 1995 2 ordinary shares of — 100% Investment holding HK$1 each

• Shui On Building 7 September 100 ordinary shares of — 100% Investment holding Materials Limited 1982 HK$1 each and sale of 1,000,000 non-voting construction deferred shares of materials HK$1 each

• Shui On Cement (Guizhou) 16 March 2001 100,000 shares of US$1 — 99% Investment holding Limited[*] each

• Shui On Materials 2 December 1996 1 share of US$1 100% — Investment holding Limited[*]

• Shui On Rock Products 5 January 1998 2 ordinary shares of — 100% Site formation Limited HK$1 each

• Xinhui Longkoushan Rock 21 December Registered and paid up — 100% Quarrying Products Limited[**][+] 1992 capital US$1,785,700

• Guizhou Shui On Cement 19 December Registered and paid up — 99% Provision of Development 2001 capital US$420,000 consultancy Management Co., Ltd.[**][+] services

• Middleton Investments 30 April 2001 2 ordinary shares of — 99% Investment holding Limited[***] US$1 each

• Prime Allied Enterprises 30 August 2004 2 ordinary shares of — 100% Investment holding Limited[***] US$1 each

• Prime Allied Enterprises 21 April 2004 1 ordinary share of — 100% Dormant Limited[*] US$1

• Share Paradise Limited[*] 28 December 1 share of US$1 — 100% Investment holding 2000

• Sommerset Investments 30 April 2001 2 ordinary shares of — 99% Investment holding Limited[***] US$1 each

— 35 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

			Percentage	Percentage
		Issued and	of issued/nominal
	Date of	fully paid	**value of **	registered
	incorporation/	share capital/	**capital **	held by
Name of subsidiary	establishment	registered capital	the Company			Principal activities
			Directly	Indirectly
Tinsley Holdings	30 April 2001	2 ordinary shares of	—		99%	Investment holding
Limited***		US$1 each
Top Bright Investment	26 September	2 ordinary shares of	—		99%	Investment holding
Limited***	2001	US$1 each
Wealth Grand	18 February 1998	2 ordinary shares of	—	100%		Dormant
Development Limited		HK$1 each
Winway Holdings	26 September	2 ordinary shares of	—		99%	Investment holding
Limited***	2001	US$1 each
Trading of building
materials business
Asia Materials Limited	21 June 2000	2 ordinary shares of	—	100%		Dormant
		HK$1 each
AsiaMaterials.com Limited	21 June 2000	2 ordinary shares of	—	100%		Dormant
		HK$1 each
Asia Materials	25 November	Registered and paid up	—	100%		Dormant
International Trading	2002	capital HK$1,000,000
(Shenzhen) Co., Ltd.**+
Asia Materials Holdings	13 July 2000	1,000,000 shares of	100%		—	Investment holding
Limited#		US$1 each
AsiaMaterials	9 February 2001	3,000,000 ordinary	—	100%		Dormant
Technologies Limited		shares of HK$1 each
Asia Materials Trading	21 June 2000	2 ordinary shares of	—	100%		Dormant
Company Limited		HK$1 each
Asia Materials Trading	1 March 2001	Registered and paid up	—	100%		Dormant
(Shanghai) Co., Ltd.**+		capital US$200,000
Property development
business
Jade City International	16 March 1998	2 ordinary shares of	—	100%		Property holding
Limited		HK$1 each
New Rainbow Investments	5 January 2004	1 share of US$1	100%		—	Investment holding
Limited*

— 36 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

			Percentage	Percentage
		Issued and	of issued/nominal
	Date of	fully paid	**value of **	registered
	incorporation/	share capital/	**capital **	held by
Name of subsidiary	establishment	registered capital	the Company			Principal activities
			Directly	Indirectly
Property investment and
others business
Asia Trend Development	14 June 1999	2 ordinary shares of	100%		—	Investment in
Limited		HK$1 each				securities
Billion Century Limited	11 August 1999	2 ordinary shares of	—	100%		Investment in
		HK$1 each				securities
Casa Growth Limited*	31 January 2000	1 share of US$1	100%		—	Investment holding
Glorycrest Holdings	6 June 2005	1 share of US$1	—	100%		Investment holding
Limited*
Goldcrest Development	31 January 2000	1 share of US$1	100%		—	Investment holding
Limited*
Jesca Limited	6 August 1997	2 ordinary shares of	100%		—	Investment holding
		HK$1 each
Kotemax Limited	18 June 1997	2 ordinary shares of	—	100%		Dormant
		HK$1 each
Kroner Investments	22 May 1997	1 share of US$1	100%		—	Investment holding
Limited*
Landstar Development	20 September	2 ordinary shares of	—	100%		Investment holding
Limited	1999	HK$1 each
Peak Fortune Assets	16 April 2004	1 share of US$1	100%		—	Investment holding
Limited*
Shui On Corporate	20 August 1997	2 ordinary shares of	100%		—	Provision of
Services Limited		HK$1 each				secretarial services
Smartway Investment	20 February 2003	2 ordinary shares of	—		99%	Investment holding
Limited***		US$1 each
Total Trend Investments	18 March 1999	1 share of US$1	100%		—	Investment holding
Limited*

All the companies listed above were incorporated and are operating in Hong Kong except as otherwise indicated.

— 37 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

• Incorporated in the British Virgin Islands

• ** Registered and operated in other regions of the PRC

• *** Incorporated in Mauritius

• Incorporated in the Cayman Islands

• Incorporated in Australia

• Incorporated in Macau Special Administrative Region of the PRC

• • Wholly foreign owned enterprise

• @ Equity joint venture

• Note: The special shares and deferred shares, which are not held by the Group, carry practically no rights to dividends nor to receive notice of nor to attend or vote at any general meeting of the relevant companies nor to participate in any distribution on winding up.

The statutory financial statements of Shui On Construction and Materials Limited for the three years ended 31 March 2003, 2004 and 2005 were audited by us.

We have examined the audited financial statements of the Company for the Relevant Periods and have carried out such procedures as we considered necessary in accordance with the Auditing Guideline “ Prospectuses and the Reporting Accountant” as recommended by the Hong Kong Institute of Certified Public Accountants.

The financial information of the Group for the Relevant Periods set out below (“Financial Information”) has been prepared in accordance with Hong Kong Financial Reporting Standards.

The preparation of the financial statements is the responsibility of the directors of the Company. The directors of the Company are also responsible for the contents of the Circular in which this report is included. It is our responsibilities to form an independent opinion, based on our examination and review, on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information together with the notes thereon give, for the purpose of this report, a true and fair view of the Group’s state of affairs as at 31 March 2003, 2004 and 2005, and of results and cash flows for the years ended 31 March 2003, 2004 and 2005.

— 38 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

A. FINANCIAL INFORMATION

Consolidated Income Statement

		Year ended 31 March	Year ended 31 March	Year ended 31 March
		2003	2004	2005
	Notes	HK$ million	HK$ million	HK$ million
Turnover
The Company and its subsidiaries		2,311.3	3,590.9	2,232.4
Share of jointly controlled entities		526.8	725.1	856.0
		2,838.1	4,316.0	3,088.4
Group turnover	2	2,311.3	3,590.9	2,232.4
Other operating income	3	28.4	25.4	32.0
Changes in inventories of finished goods,
work in progress, contract work in progress,
properties held for sale and property under
development		30.0	(31.4)	(133.7)
Raw materials and consumables used		(483.9)	(563.7)	(460.3)
Staff costs		(364.2)	(360.4)	(297.6)
Depreciation and amortisation expenses		(45.3)	(42.0)	(34.7)
Subcontracting, external labour costs and
other operating expenses		(1,500.4)	(2,501.0)	(1,430.7)
Revaluation (decrease) increase on investment property		(14.0)	17.0	—
Revaluation (decrease) increase on land and buildings		(2.3)	0.5	3.0
Net realised (loss) gain on disposal of other
investments		(0.1)	37.9	—
Loss on disposal of investment property		—	—	(6.5)
Net unrealised holding (loss) gain on other investments		(28.8)	2.9	(0.8)
(Loss) profit from operations	4	(69.3)	176.1	(96.9)
Finance costs	5	(5.9)	(10.3)	(16.4)
Gain on disposal of subsidiaries		—	—	371.6
Share of results of jointly controlled entities		30.6	34.2	166.2
Share of results of associates		—	—	97.0
(Loss) profit before taxation		(44.6)	200.0	521.5
Taxation	9	0.1	(49.4)	(35.7)
(Loss) profit before minority interests		(44.5)	150.6	485.8
Minority interests		0.2	(2.9)	(2.9)
(Loss) profit attributable to shareholders		(44.3)	147.7	482.9
Dividends	10
Paid		39.7	—	154.5
Proposed		—	73.7	80.8
(Loss) earnings per share	11
Basic		HK$(0.17)	HK$0.55	HK$1.80
Diluted		HK$(0.17)	HK$0.54	HK$1.62

— 39 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Consolidated Balance Sheet

			At 31 March
		2003	2004	2005
	Notes	HK$ million	HK$ million	HK$ million
Non-Current Assets
Investment property	12	123.0	140.0	—
Property, plant and equipment	13	197.5	168.2	71.6
Property under development	14	706.0	591.2	—
Negative goodwill	15	(0.7)	(0.6)	(0.5)
Interests in jointly controlled entities	16	682.8	806.1	930.2
Interests in associates	17	—	—	1,713.8
Investments in securities	18	135.6	25.6	12.4
Club debenture	19	1.2	1.2	1.2
Site establishment expenditure	20	13.9	17.8	—
Defined benefit assets	28	—	—	9.3
		1,859.3	1,749.5	2,738.0
Current Assets
Inventories	21	39.7	44.1	13.5
Properties held for sale		56.1	58.0	55.5
Property under development	14	—	218.0	—
Debtors, deposits and prepayments	22	596.8	584.3	566.1
Amounts due from customers for contract work	21	221.2	98.4	73.9
Amounts due from related companies		0.4	0.2	0.5
Amount due from an associate		0.6	0.1	0.1
Amounts due from jointly controlled entities	16	375.6	339.7	491.9
Taxation recoverable		4.9	7.2	7.3
Pledged bank deposit		—	527.8	—
Bank balances, deposits and cash		89.5	111.0	58.4
		1,384.8	1,988.8	1,267.2
Current Liabilities
Creditors and accrued charges	23	630.0	728.9	540.2
Amounts due to customers for contract work	21	81.1	99.7	194.5
Amounts due to jointly controlled entities		23.0	19.4	24.1
Amounts due to related companies		0.1	0.1	—
Taxation payable		—	46.2	2.2
Bank borrowings, due within one year	24	68.9	932.5	55.8
		803.1	1,826.8	816.8
Net Current Assets		581.7	162.0	450.4
Total Assets Less Current Liabilities		2,441.0	1,911.5	3,188.4

— 40 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

			At 31 March
		2003	2004	2005
	Notes	HK$ million	HK$ million	HK$ million
Capital and Reserves
Share capital	25	264.7	268.0	269.4
Reserves	26	945.3	1,119.2	1,688.1
		1,210.0	1,387.2	1,957.5
Minority Interests		26.1	28.6	29.3
Non-Current Liabilities
Bank borrowings	24	1,194.8	486.0	1,198.0
Deferred tax liabilities	27	5.0	5.6	3.6
Defined benefit liabilities	28	5.1	4.1	—
		1,204.9	495.7	1,201.6
		2,441.0	1,911.5	3,188.4

— 41 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Consolidated Statement of Changes in Equity

		**Year **	ended 31 March	ended 31 March
	2003		2004		2005
	HK$ million		HK$ million	_HK$ _	million
At the beginning of the year	1,298.0		1,210.0		1,387.2
Revaluation (decrease) increase on land and buildings	(13.8)		0.6		3.5
Reversal of deferred tax liability arising on revaluation of
properties	2.0		—		(0.6)
Reserve arising on acquisition of an associate
(see note 26(b))	—		—		231.1
Exchange differences arising on translation of financial
statements of operations outside Hong Kong	6.9		1.9		(2.1)
Net (loss) profit not recognised in the consolidated
income statement	(4.9)		2.5		231.9
(Loss) profit attributable to shareholders	(44.3)		147.7		482.9
Dividends paid	(39.7)		—		(154.5)
Shares issued at premium upon exercise of share options	0.9		27.0		10.0
At the end of the year	1,210.0		1,387.2		1,957.5

— 42 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Consolidated Cash Flow Statement

	Year ended 31 March	Year ended 31 March	Year ended 31 March
	2003	2004		2005
	HK$ million	HK$ million	_HK$ _	million
OPERATING ACTIVITIES
(Loss) profit from operations	(69.3)	176.1		(96.9)
Adjustments for:
Interest income	(10.0)	(8.7)		(7.9)
Commitment fee for subscription of convertible redeemable
participating junior preference shares	—	—		(5.3)
Dividends from convertible redeemable participating junior
preference shares	—	—		(8.7)
Dividends from unlisted investments	—	(1.9)		(1.1)
Dividends from listed investments	(6.2)	(1.0)		(0.5)
Loss on disposal of investment property	—	—		6.5
Revaluation (increase) decrease on investment property	14.0	(17.0)		—
Revaluation increase on land and buildings	2.3	(0.5)		(3.0)
Net unrealised holding loss (gain) on other investments	28.8	(2.9)		0.8
Depreciation on property, plant and equipment	41.9	38.2		30.2
Amortisation of site establishment expenditure	3.4	3.8		4.5
Loss (gain) on disposal of property, plant and equipment	0.9	(2.4)		1.3
Write-off of site establishment expenditure	—	0.4		—
Impairment loss on property, plant and equipment	—	—		7.6
Gain on dissolution of a jointly controlled entity	(2.5)	—		—
Net realised loss (gain) on disposal of other investments	0.1	(37.9)		—
Release of negative goodwill	(0.2)	(0.1)		(0.2)
Decrease in defined benefit liabilities	(3.4)	(1.0)		(13.4)
Operating cash flows before movements in working capital	(0.2)	145.1		(86.1)
(Increase) decrease in inventories	(6.7)	(4.4)		24.6
Decrease (increase) in properties held for sale	1.0	(1.9)		1.6
Decrease in property under development	—	452.8		—
Decrease in debtors, deposits and prepayments	95.6	12.5		93.6
Decrease in amounts due from customers for contract work	44.8	122.8		24.5
(Increase) decrease in amounts due from related companies	(0.2)	0.2		(0.3)
(Increase) decrease in amount due from an associate	(0.5)	0.5		—
(Increase) decrease in amounts due from jointly controlled entities	(202.3)	35.9		(152.2)
(Decrease) increase in creditors and accrued charges	(304.4)	98.9		(43.4)
(Decrease) increase in amounts due to customers for contract work	(66.5)	18.6		94.8
(Decrease) increase in amounts due to jointly controlled entities	(0.4)	(3.6)		4.7
Decrease in amounts due to related companies	(0.8)	—		(0.1)
Cash (used in) from operations	(440.6)	877.4		(38.3)
Hong Kong Profits Tax paid	(0.1)	(2.9)		(1.8)
Hong Kong Profits Tax refunded	—	0.2		—
Income tax of other regions in the PRC refunded	0.3	0.1		—
NET CASH (USED IN) FROM OPERATING ACTIVITIES	(440.4)	874.8		(40.1)

— 43 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

	Year ended 31 March	Year ended 31 March	Year ended 31 March
	2003	2004		2005
	HK$ million	HK$ million	_HK$ _	million
INVESTING ACTIVITIES
Net cash outflow arising from disposal of subsidiaries	—	—		(478.4)
Investment in convertible redeemable participating junior
preference shares	—	—		(243.6)
Deposits paid for investment	—	—		(75.5)
Additions to property under development	(322.4)	(547.1)		(43.6)
Investments in jointly controlled entities	(83.8)	(112.4)		(50.3)
Advance to jointly controlled entities	—	(8.6)		(26.9)
Purchase of property, plant and equipment	(28.9)	(16.7)		(6.8)
Site establishment costs expended	(0.4)	(5.5)		(0.6)
Purchases of investment securities	(19.5)	—		(0.4)
(Increase) decrease in pledged bank deposit	—	(527.8)		527.8
Proceeds on sales of investment property	—	—		133.5
Amount repaid from an associate	—	—		130.0
Dividends received from jointly controlled entities	1.0	29.7		129.6
Dividends received from convertible redeemable participating
junior preference shares	—	—		8.7
Interest received	10.0	8.7		7.9
Proceeds from sale of property, plant and equipment	11.0	8.7		7.9
Commitment fee received for subscription of convertible
redeemable participating junior preference shares	—	—		5.3
Dividends received from unlisted investments	—	1.9		1.1
Dividends received from listed investments	6.2	1.0		0.5
Capital distribution from dissolution of a jointly controlled entity	15.3	—		—
Proceeds on disposal of investments in securities	34.0	150.8		—
NET CASH (USED IN) FROM INVESTING ACTIVITIES	(377.5)	(1,017.3)		26.2
FINANCING ACTIVITIES
New bank loans raised	886.5	293.8		223.4
Net proceeds received on issue of shares	0.9	27.0		10.0
Repayments of bank loans	—	(122.7)		(102.9)
Interest paid	(19.1)	(18.4)		(16.4)
Other borrowing costs paid	(3.4)	(0.8)		—
Net cash inflow (outflow) from minority interests	1.3	(0.4)		5.4
Dividends paid	(39.7)	—		(154.5)
Dividends paid to minority shareholders	(1.1)	—		(1.5)
NET CASH FROM (USED IN) FINANCING ACTIVITIES	825.4	178.5		(36.5)

— 44 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

	Year ended 31 March	Year ended 31 March	Year ended 31 March
	2003	2004		2005
	HK$ million	HK$ million	_HK$ _	million
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS	7.5	36.0		(50.4)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE YEAR	58.5	72.3		110.1
EFFECT OF FOREIGN EXCHANGE RATE CHANGES	6.3	1.8		(1.4)
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR	72.3	110.1		58.3
ANALYSIS OF THE BALANCES OF CASH AND CASH
EQUIVALENTS
Bank balances, deposits and cash	89.5	111.0		58.4
Bank overdrafts	(17.2)	(0.9)		(0.1)
	72.3	110.1		58.3

— 45 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Notes to the financial information

1. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention as modified for the revaluation of investment properties, certain land and buildings and 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:

Early Adoption of Hong Kong Financial Reporting Standards

In 2004, the Hong Kong Institute of Certified Public Accountants issued a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005, except for HKFRS 3 Business Combinations. HKFRS 3 is applicable to business combinations for which the agreement date is on or after 1 January 2005. The Group has not entered into any business combination for which the agreement date is on or after 1 January 2005. Therefore, HKFRS 3 did not have any impact on the Group for the year ended 31 March 2005.

The Group has adopted early the following HKFRSs in the preparation of the financial statements for the year ended 31 March 2005.

Hong Kong Accounting Standard 40 (“HKAS 40”) Investment Property Hong Kong Accounting Standard Interpretation 21 Income Taxes — Recovery of (“HKAS — Int 21”) Revaluated Non-Depreciable Assets

Following the adoption of HKAS 40 and HKAS — Int 21, changes in fair value of investment properties are included in the consolidated income statement and deferred tax is provided on the basis that the carrying amounts of investment properties will be recovered through use.

Basis of consolidation

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

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

All significant inter-company transactions and balances within the Group have been eliminated on consolidation.

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, associate or jointly controlled entity at the date of acquisition.

Goodwill arising on acquisitions prior to 1 April 2001 continues to be held in reserves, and will be charged to the consolidated income statement at the time of disposal of the relevant subsidiary, associate or jointly controlled entity, or at such time as the goodwill is determined to be impaired.

— 46 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

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

On the disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of unamortised goodwill/goodwill previously eliminated against reserves 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, associate or jointly controlled entity at the date of acquisition over the cost of acquisition.

Negative goodwill arising on acquisitions prior to 1 April 2001 continues to be held in reserves and will be credited to the consolidated income statement at the time of disposal of the relevant subsidiary, associate or jointly controlled entity.

Negative goodwill arising on acquisitions on or after 1 April 2001 is presented as a deduction from assets and will be released to the consolidated income statement 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 acquired identifiable depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised as income immediately.

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

Revenue recognition

Construction contracts

When the outcome of a construction contract can be estimated reliably, revenue is recognised on the percentage of completion method, measured by reference to the value of work carried out during the period. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer.

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

Development properties

Income from properties developed for sale, where there are no pre-sales prior to completion of the development, is recognised on the execution of a binding sales agreement entered into subsequent to the completion of the development.

Income from properties under pre-sale arrangements prior to completion of the development is recognised on the execution of a binding sales agreement or when the relevant completion certificates are issued by the respective government authorities, whichever is the later. Payments received from the purchasers prior to this stage are recorded as customer’s deposits received on sale of properties and presented as current liabilities.

— 47 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Others

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

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

Rental income, including rentals invoiced in advance from properties let under operating leases, is recognised on a straight-line basis over the term of the relevant lease.

Dividend income from investments is recognised when the Group’s right to receive the relevant payment has been established.

Investment properties

Investment properties, which are properties held to earn rentals and/or for capital appreciation, are stated at fair value based on professional valuations at the balance sheet date. Gains or losses arising from changes in the fair value of investment properties are recognised in the consolidated income statement.

Property, plant and equipment

Property, plant and equipment, other than land and buildings in Hong Kong, are stated at cost less accumulated depreciation and impairment losses.

Depreciation is provided to write off the cost or valuation of property, plant and equipment over their estimated useful lives on a straight-line basis at the following rates per annum and after taking into account their estimated residual value, if applicable:

Land and buildings in Hong Kong and other regions of
the PRC held under medium-term leases
Leasehold land	Over the term of the lease
Buildings	2.5%
Plant and machinery	10-25%
Motor vehicles, equipment, furniture and other assets	20-33%

No depreciation is provided on plant under construction until the assets are completed and put into operation.

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

All land and buildings in Hong Kong are stated in the balance sheet at their revalued amounts, being the fair values on the basis of their existing use at the date of revaluation, less any subsequent accumulated depreciation. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date.

Any increase arising on the revaluation of land and buildings is credited to the revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case the increase is credited to the consolidated income statement to the extent of the decrease previously charged. A decrease in net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to retained profits.

— 48 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Properties under development

Properties under development are stated at cost less any identified impairment loss.

Properties under development which are due for completion more than one year from the balance sheet date are shown as non-current assets.

Properties under development which are due for completion within one year from the balance sheet date and are intended to be held for the long term for their investment potential are shown as non-current assets.

Properties under development which are due for completion within one year from the balance sheet date and are intended to be held for sale are shown as current assets.

Interests in associates

An associate is an enterprise, other than a subsidiary or a jointly controlled entity, over which the Group is in a position to exercise significant influence, including participation in financial and operating policy decisions.

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, interests in associates are stated at the Group’s share of the net assets of the associates, less any identified impairment loss.

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

Interests in joint ventures

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and over which none of the participating parties has unilateral control.

Jointly controlled entities

Joint venture arrangements which involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities.

The Group’s interests in jointly controlled entities are included in the consolidated balance sheet at the Group’s share of the net assets of the jointly controlled entities less the negative goodwill in so far as it has not already been released to income, less any identified impairment loss. The Group’s share of the post-acquisition results of jointly controlled entities is included in the consolidated income statement.

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

Investments in securities

Investments in securities are recognised on a trade-date basis and are initially recorded at cost.

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

— 49 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

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 year.

Club debentures

Club debentures represent membership rights in recreational clubs and are stated at cost less impairment losses recognised.

Site establishment expenditure

Site establishment expenditure for quarrying rights or leased sites is stated at cost less amortisation. Amortisation is provided to write off the cost of site establishment expenditure based on the quarrying capacity or over the duration of the relevant site leases.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the first-in, first-out method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale.

Properties held for sale

Properties held for sale are stated at the lower of cost and net realisable value. Cost includes the cost of land, development expenditure incurred and, where appropriate, financial expenses capitalised. Net realisable value is determined by management based on prevailing market conditions.

Construction contracts

When the outcome of a construction contract can be estimated reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date on the same basis as the contract revenue recognised.

When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is shown as an amount due from customers for contract work. For contracts where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is shown as an amount due to customers for contract work. Amounts billed for work performed but not yet paid by the customers are included in the balance sheet under debtors, deposits and prepayments.

Borrowing costs

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

— 50 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

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

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. Impairment losses are recognised as an expense immediately, unless the relevant asset is carried at a revalued amount under another accounting standard, in which case the impairment loss is treated as a revaluation decrease under that other accounting standard.

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, unless the relevant asset is carried at a revalued amount under another accounting standard, in which case the reversal of the impairment loss is treated as a revaluation increase under that other accounting standard.

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.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or 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 taxable 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.

Leases

Rentals payable under operating leases are charged to the consolidated income statement on a straight-line basis over the term of the relevant lease.

— 51 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Foreign currencies

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

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

Retirement benefits costs

Payments to the Mandatory Provident Fund Scheme (the “MPF Scheme”) are charged as an expense as they fall due.

For defined benefit retirement plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses which exceed 10 per cent of the greater of the present value of the Group’s pension obligations and the fair value of plan assets are amortised over the expected average remaining working lives of the participating employees. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the amended benefits become vested.

The amount recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised actuarial gains and losses and unrecognised past service cost, and as reduced by the fair value of plan assets.

2. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management reporting purposes, the Group is currently organised into five operating divisions —construction and building maintenance, sale of construction materials, trading of building materials, property development and property investment and others. These divisions are the basis on which the Group reports its primary segment information.

Turnover represents the revenue arising on construction contracts and building maintenance, amounts received and receivable for goods sold by the Group to third party customers, less returns and allowances, revenue from property development projects, and rental and leasing income for the year.

— 52 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Segment information about these businesses is presented below.

2003

Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1	Construction and building maintenance Sale of construction materials Trading of building materials Property development Property investment and others Eliminations Consolidated HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million TURNOVER External sales 1,773.2 466.1 53.4 2.3 16.3 — 2,311.3 Inter-segment sales — 150.4 3.9 — 0.4 (154.7) — Group turnover 1,773.2 616.5 57.3 2.3 16.7 (154.7) 2,311.3 Share of jointly controlled entities 48.3 478.5* — — — — 526.8 Total 1,821.5 1,095.0 57.3 2.3 16.7 (154.7) 2,838.1
	1,773.2 48.3	616.5 478.5*	57.3 —	2.3 —	16.7 —	(154.7) —	2,311.3 526.8
	1,821.5	1,095.0	57.3	2.3	16.7	(154.7)	2,838.1

Inter-segment sales are charged at mutually agreed prices.

• This includes the Group’s effective share of turnover of jointly controlled entities in respect of the cement operations in Chongqing and Guizhou (HK$389.5 million) and Nanjing (HK$73.2 million).

RESULTS

Segment results Interest income Loss from operations Finance costs Share of results of jointly controlled entities Cement operations in — Chongqing and Guizhou — Nanjing Others Loss before taxation Taxation Loss before minority interests	27.0 — — 1.1	(42.5) 42.4 (8.3) (3.4)	(30.3) — — —	(1.7) — — —	(31.8)**
					— — (1.2)		10.0 (69.3) (5.9)
							42.4 (8.3) (3.5)
							30.6 (44.6) 0.1

• ** This comprises mainly unrealised holding loss of listed securities (HK$24.6 million), revaluation decrease on an investment property (HK$14.0 million) and profit from letting of the investment property (HK$7.1 million).

— 53 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

BALANCE SHEET

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	**Eliminations **	Consolidated
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
ASSETS
Segment assets	571.2	457.4	33.8	839.4	278.4	—	2,180.2
Amounts due from jointly
controlled entities/
associate	21.0	352.0	—	—	3.2	—	376.2
Interests in jointly controlled
entities	17.9	597.8	—	—	67.1	—	682.8
Inter-segment receivables	775.5	90.8	9.7	—	1,859.6	(2,735.6)	—
Unallocated assets							4.9
Consolidated total assets							3,244.1
LIABILITIES
Segment liabilities	563.7	117.8	7.4	7.5	19.9	—	716.3
Amounts due to jointly
controlled entities	15.3	0.7	—	—	7.0	—	23.0
Inter-segment payables	215.1	1,203.3	110.7	724.4	482.1	(2,735.6)	—
Unallocated liabilities							1,268.7
Consolidated total liabilities							2,008.0

OTHER INFORMATION

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	Total
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
Capital expenditure	1.2	25.5	1.1	0.7	0.8	29.3
Negative goodwill	—	(0.8)	—	—	—	(0.8)
Depreciation and amortisation	1.2	38.6	3.2	0.3	2.2	45.5
Release of negative goodwill	—	(0.1)	—	—	—	(0.1)
Other non-cash expenses	—	2.6	0.6	—	42.9	46.1

— 54 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

2004

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	Eliminations	Consolidated
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
TURNOVER
External sales	2,439.7	305.9	150.6	679.5	15.2	—	3,590.9
Inter-segment sales	—	125.4	7.7	—	0.3	(133.4)	—
Group turnover	2,439.7	431.3	158.3	679.5	15.5	(133.4)	3,590.9
Share of jointly controlled
entities	48.7	676.4*	—	—	—	—	725.1
Total	2,488.4	1,107.7	158.3	679.5	15.5	(133.4)	4,316.0

Inter-segment sales are charged at mutually agreed prices.

• This includes the Group’s effective share of turnover of jointly controlled entities in respect of the cement operations in Chongqing and Guizhou (HK$570.4 million) and Nanjing (HK$73.5 million).

RESULTS

Segment results Interest income Profit from operations Finance costs Share of results of jointly controlled entities Cement operations in — Chongqing and Guizhou — Nanjing Others Profit before taxation Taxation Profit before minority interests	5.7 — — 0.8	(102.0) 41.9 (7.0) (3.2)	(8.2) — — —	211.5 — — —	60.4**
					— — 1.7		8.7 176.1 (10.3)
							41.9 (7.0) (0.7)
							34.2 200.0 (49.4)

** This comprises mainly profit on disposal of other investments (HK$37.9 million), revaluation increase on an investment property (HK$17.0 million) and profit from letting of the investment property (HK$6.6 million).

— 55 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

BALANCE SHEET

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	**Eliminations **	Consolidated
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
ASSETS
Segment assets	490.7	403.0	52.0	1,461.9	177.6	—	2,585.2
Amounts due from jointly
controlled
entities/associates	28.1	270.7	—	—	41.0	—	339.8
Interests in jointly controlled
entities	16.5	720.8	—	—	68.8	—	806.1
Inter-segment receivables	812.9	56.9	8.6	—	2,027.3	(2,905.7)	—
Unallocated assets							7.2
Consolidated total assets							3,738.3
LIABILITIES
Segment liabilities	586.4	108.1	7.4	112.3	18.6	—	832.8
Amounts due to jointly
controlled entities	10.0	4.4	—	—	5.0	—	19.4
Inter-segment payables	176.9	1,229.8	119.5	849.4	530.1	(2,905.7)	—
Unallocated liabilities							1,470.3
Consolidated total liabilities							2,322.5

OTHER INFORMATION

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	Total
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
Capital expenditure	0.7	20.4	—	0.8	0.3	22.2
Depreciation and amortisation	1.0	35.8	2.9	0.3	2.0	42.0
Release of negative goodwill	—	(0.1)	—	—	—	(0.1)
Other non-cash expenses	—	0.4	—	—	—	0.4

— 56 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

2005

	Construction
	and	Sale of	Trading			Property
	building	construction	of building		Property	investment
	maintenance	materials	materials		development	**and others **	**Eliminations **	Consolidated
	HK$ million	HK$ million	_HK$ _	million	HK$ million	HK$ million	HK$ million	HK$ million
TURNOVER
External sales	1,855.2	240.7		124.9	1.6	10.0	—	2,232.4
Inter-segment sales	1.6	19.0		—	—	0.2	(20.8)	—
Group turnover	1,856.8	259.7		124.9	1.6	10.2	(20.8)	2,232.4
Share of jointly controlled entities	40.3	800.4*		—	—	15.3	—	856.0
Total	1,897.1	1,060.1		124.9	1.6	25.5	(20.8)	3,088.4

Inter-segment sales are charged at mutually agreed prices.

• This includes the Group’s effective share of turnover of jointly controlled entities in respect of the cement operations in Chongqing and Guizhou (HK$668.3 million) and Nanjing (HK$62.3 million).

RESULTS

Segment results Interest income Loss from operations Finance costs Gain on disposal of subsidiaries Share of results of jointly controlled entities Cement operations in — Chongqing and Guizhou — Nanjing Venture capital investments Others Share of results of associates — Property development in the PRC Profit before taxation Taxation Profit before minority interests	19.7 — — — — (6.1) —	(93.7) 25.9 1.3 (43.1) — (7.3) —	(18.7) — — — — — —	13.7 345.7 — — — — 97.0	(25.8)
					— — — 221.4 — —		7.9 (96.9) (16.4) 371.6
							1.3 (43.1) 221.4 (13.4)
							166.2 97.0 521.5 (35.7)

— 57 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

BALANCE SHEET

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	Eliminations	Consolidated
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
ASSETS
Segment assets	484.1	272.3	23.7	1.0	80.9	—	862.0
Amounts due from jointly
controlled entities	38.0	355.8	—	—	98.1	—	491.9
Interests in jointly controlled
entities/associates	31.8	673.3	—	1,713.8	225.1	—	2,644.0
Inter-segment receivables	783.5	45.2	7.9	—	2,575.1	(3,411.7)	—
Unallocated assets							7.3
Consolidated total assets							4,005.2
LIABILITIES
Segment liabilities	671.7	33.1	3.9	—	26.0	—	734.7
Amounts due to jointly
controlled entities	6.4	13.0	—	—	4.7	—	24.1
Inter-segment payables	162.9	1,350.9	130.1	1,255.9	511.9	(3,411.7)	—
Unallocated liabilities							1,259.6
Consolidated total liabilities							2,018.4

OTHER INFORMATION

	Construction	Sale of	Trading of		Property
	and building	construction	building	Property	investment
	maintenance	materials	materials	development	and others	Total
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
Capital expenditure	1.1	4.7	0.4	—	1.2	7.4
Depreciation and amortisation	0.9	29.8	2.5	—	1.5	34.7
Release of negative goodwill	—	(0.2)	—	—	—	(0.2)
Other non-cash expenses	1.3	7.6	—	—	7.3	16.2

— 58 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Geographical segments

The Group’s operations are located in Hong Kong and other regions in the PRC.

Analysis of the Group’s turnover and contribution by geographical markets, irrespective of the origin of the goods/services, is as follows:

Turnover by geographical markets Contribution to (loss) profit from operations 2003 2004 2005 2003 2004 2005 HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Hong Kong 2,166.8 2,694.0 2,096.5 (68.1) (20.1) (76.9) Other regions in the PRC 144.5 896.9 135.9 (11.2) 187.5 (27.9) 2,311.3 3,590.9 2,232.4 (79.3) 167.4 (104.8) Interest income 10.0 8.7 7.9 (Loss) profit from operations (69.3) 176.1 (96.9)	Turnover by geographical markets Contribution to (loss) profit from operations 2003 2004 2005 2003 2004 2005 HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Hong Kong 2,166.8 2,694.0 2,096.5 (68.1) (20.1) (76.9) Other regions in the PRC 144.5 896.9 135.9 (11.2) 187.5 (27.9) 2,311.3 3,590.9 2,232.4 (79.3) 167.4 (104.8) Interest income 10.0 8.7 7.9 (Loss) profit from operations (69.3) 176.1 (96.9)	Turnover by geographical markets Contribution to (loss) profit from operations 2003 2004 2005 2003 2004 2005 HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Hong Kong 2,166.8 2,694.0 2,096.5 (68.1) (20.1) (76.9) Other regions in the PRC 144.5 896.9 135.9 (11.2) 187.5 (27.9) 2,311.3 3,590.9 2,232.4 (79.3) 167.4 (104.8) Interest income 10.0 8.7 7.9 (Loss) profit from operations (69.3) 176.1 (96.9)	Turnover by geographical markets Contribution to (loss) profit from operations 2003 2004 2005 2003 2004 2005 HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Hong Kong 2,166.8 2,694.0 2,096.5 (68.1) (20.1) (76.9) Other regions in the PRC 144.5 896.9 135.9 (11.2) 187.5 (27.9) 2,311.3 3,590.9 2,232.4 (79.3) 167.4 (104.8) Interest income 10.0 8.7 7.9 (Loss) profit from operations (69.3) 176.1 (96.9)	Turnover by geographical markets Contribution to (loss) profit from operations 2003 2004 2005 2003 2004 2005 HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Hong Kong 2,166.8 2,694.0 2,096.5 (68.1) (20.1) (76.9) Other regions in the PRC 144.5 896.9 135.9 (11.2) 187.5 (27.9) 2,311.3 3,590.9 2,232.4 (79.3) 167.4 (104.8) Interest income 10.0 8.7 7.9 (Loss) profit from operations (69.3) 176.1 (96.9)
				(104.8)
		10.0	8.7	7.9
		(69.3)	176.1	(96.9)

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and site establishment expenditure analysed by the geographical areas in which the assets are located:

								Additions to property, plant	Additions to property, plant	Additions to property, plant
								**and **	**equipment **	and site
					**Carrying **	amount of segment assets		establishment expenditure
					2003	2004	2005	2003	2004	2005
					HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
Hong	Kong				1,281.4	1,071.1	988.8	21.0	14.4		7.4
Other	regions	in	the	PRC	1,962.7	2,667.2	3,016.4	8.3	7.8		—
					3,244.1	3,738.3	4,005.2	29.3	22.2		7.4

— 59 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

3. OTHER OPERATING INCOME

Included in other operating income are as follows:

		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Interest income	10.0	8.7	7.9
	Dividends from investments in securities
	— listed	6.2	1.0	0.5
	— unlisted	—	1.9	1.1
	Dividends from convertible redeemable
	participating preference shares	—	—	8.7
	Commitment fee for subscription of convertible
	redeemable participating junior preference shares	—	—	5.3
	Gain on disposal of property, plant and equipment	—	2.4	—
	Gain on dissolution of a jointly controlled entity	2.5	—	—
4.	(LOSS) PROFIT FROM OPERATIONS
		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	(Loss) profit from operations has been arrived at
	after charging (crediting):
	Depreciation and amortisation:
	Property, plant and equipment	42.1	38.2	30.2
	Site establishment expenditure	3.4	3.8	4.5
		45.5	42.0	34.7
	Less: Amount capitalised to property under
	development	(0.2)	—	—
		45.3	42.0	34.7
	Auditors’ remuneration	2.1	2.2	2.2
	Operating lease payments in respect of rented premises	37.3	30.6	25.1
	Loss on disposal of property, plant and equipment	0.9	—	1.3
	Impairment loss on property, plant and equipment	—	—	7.6
	Write-off of site establishment expenditure	—	0.4	—
	Staff costs (including directors’ emoluments):
	Salaries and allowances	354.3	337.4	284.3
	Retirement benefits cost	19.1	25.8	13.3
	Less: Amount capitalised to property under
	development	(9.2)	(2.8)	—
		364.2	360.4	297.6
	Release of negative goodwill (included in other expenses)	(0.1)	(0.1)	(0.2)
	Gross rental revenue from an investment property and car
	park spaces
		(14.9)	(14.2)	(5.4)
	Less: Related outgoings	2.1	3.0	1.8
	Net rental income	(12.8)	(11.2)	(3.6)

— 60 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

5. FINANCE COSTS

2003 2004 2005 HK$ million HK$ million HK$ million Interest on bank loans and overdrafts and other loans wholly repayable within 5 years 18.7 18.4 16.4 Other borrowing costs 3.4 0.8 — 22.1 19.2 16.4 Less: Amount capitalised to property under development (16.2) (8.9) — 5.9 10.3 16.4	2003 2004 2005 HK$ million HK$ million HK$ million Interest on bank loans and overdrafts and other loans wholly repayable within 5 years 18.7 18.4 16.4 Other borrowing costs 3.4 0.8 — 22.1 19.2 16.4 Less: Amount capitalised to property under development (16.2) (8.9) — 5.9 10.3 16.4	2003 2004 2005 HK$ million HK$ million HK$ million Interest on bank loans and overdrafts and other loans wholly repayable within 5 years 18.7 18.4 16.4 Other borrowing costs 3.4 0.8 — 22.1 19.2 16.4 Less: Amount capitalised to property under development (16.2) (8.9) — 5.9 10.3 16.4	2003 2004 2005 HK$ million HK$ million HK$ million Interest on bank loans and overdrafts and other loans wholly repayable within 5 years 18.7 18.4 16.4 Other borrowing costs 3.4 0.8 — 22.1 19.2 16.4 Less: Amount capitalised to property under development (16.2) (8.9) — 5.9 10.3 16.4
	22.1 (16.2)	19.2 (8.9)	16.4 —
	5.9	10.3	16.4

6. DISCONTINUING OPERATIONS

• (a) Asia Materials Limited (“AML”)

The Group decided on 16 December 2004 to terminate the operation of AML. The closure process is expected to be completed in the third quarter of 2005. The loss resulting from the closure is estimated to be about HK$4 million for the year ended 31 March 2005. The results of the operation were included under “Trading of building materials” in the segmental information as set out in note 2 above.

The results of AML for the year, which have been included in the consolidated income statement, were as follows:

2003 2004 2005 HK$ million HK$ million HK$ million Turnover 57.3 158.3 124.9 Other operating income 0.1 0.9 1.5 Changes in inventories of finished goods and work in progress 4.2 (0.2) (2.7 Raw materials and consumables used (59.4) (144.2) (115.9 Staff costs (19.3) (13.1) (14.4 Depreciation and amortisation expenses (3.2) (2.9) (2.5 Other operating expenses (9.9) (6.7) (8.9 Finance costs (0.1) (1.0) (1.2 Loss before taxation (30.3) (8.9) (19.2 Taxation — — — Loss after taxation (30.3) (8.9) (19.2	2003 2004 2005 HK$ million HK$ million HK$ million Turnover 57.3 158.3 124.9 Other operating income 0.1 0.9 1.5 Changes in inventories of finished goods and work in progress 4.2 (0.2) (2.7 Raw materials and consumables used (59.4) (144.2) (115.9 Staff costs (19.3) (13.1) (14.4 Depreciation and amortisation expenses (3.2) (2.9) (2.5 Other operating expenses (9.9) (6.7) (8.9 Finance costs (0.1) (1.0) (1.2 Loss before taxation (30.3) (8.9) (19.2 Taxation — — — Loss after taxation (30.3) (8.9) (19.2	2003 2004 2005 HK$ million HK$ million HK$ million Turnover 57.3 158.3 124.9 Other operating income 0.1 0.9 1.5 Changes in inventories of finished goods and work in progress 4.2 (0.2) (2.7 Raw materials and consumables used (59.4) (144.2) (115.9 Staff costs (19.3) (13.1) (14.4 Depreciation and amortisation expenses (3.2) (2.9) (2.5 Other operating expenses (9.9) (6.7) (8.9 Finance costs (0.1) (1.0) (1.2 Loss before taxation (30.3) (8.9) (19.2 Taxation — — — Loss after taxation (30.3) (8.9) (19.2	2003 2004 2005 HK$ million HK$ million HK$ million Turnover 57.3 158.3 124.9 Other operating income 0.1 0.9 1.5 Changes in inventories of finished goods and work in progress 4.2 (0.2) (2.7 Raw materials and consumables used (59.4) (144.2) (115.9 Staff costs (19.3) (13.1) (14.4 Depreciation and amortisation expenses (3.2) (2.9) (2.5 Other operating expenses (9.9) (6.7) (8.9 Finance costs (0.1) (1.0) (1.2 Loss before taxation (30.3) (8.9) (19.2 Taxation — — — Loss after taxation (30.3) (8.9) (19.2
	(30.3) —	(8.9) —	(19.2 —
	(30.3)	(8.9)	(19.2

— 61 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

During the year ended 31 March 2005, AML had HK$15.9 million (2004: HK$20.3 million; 2003: HK$10.2 million) net operating cash outflows, received HK$1.0 million (2004: HK$0.5 million; 2003: HK$1.7 million) in respect of investing activities, and paid HK$6.3 million (2004: received HK$25.9 million; 2003: received HK$8.5 million) in respect of financing activities.

The carrying amounts of the assets and liabilities of AML as at 31 March 2005 are HK$31.4 million and HK$142.5 million respectively (2004: HK$53.0 million and HK$144.7 million respectively; 2003: HK$36.0 million and HK$119.0 million respectively).

(b) Xinhui Longkoushan Rock Products Limited (“Xinhui Ltd.”)

Xinhui Ltd. held a licence for the quarry at Xinhui in the PRC which expired in June 2004. Management decided not to continue with the operation of the quarry after the expiration of the licence. The closure was completed in December 2004. The loss resulting from the closure was HK$12.7 million for the year ended 31 March 2005. The results of the operation were included under “Sale of construction materials” in the segmental information as set out in note 2 above.

The results of Xinhui Ltd. for the year, which have been included in the consolidated financial statements, were as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Turnover	14.8	13.8	5.2
Changes in inventories of finished goods and
work in progress	1.3	—	(3.6)
Raw materials and consumables used	(6.9)	(7.6)	(4.4)
Staff costs	(1.9)	(2.0)	(2.2)
Depreciation and amortisation expenses	(3.3)	(3.2)	(1.6)
Other operating expenses	(5.8)	(4.9)	(15.8)
Loss before taxation	(1.8)	(3.9)	(22.4)
Taxation	—	—	—
Loss after taxation	(1.8)	(3.9)	(22.4)

During the year ended 31 March 2005, Xinhui Ltd. had HK$7.8 million (2004: HK$1.9 million; 2003: HK$2.2 million) net operating cash outflows, received HK$2.9 million (2004: nil; 2003: nil) in respect of investing activities, and paid HK$1.4 million (2004: received HK$4.5 million; 2003: nil) in respect of financing activities.

The carrying amounts of the assets and liabilities of Xinhui Ltd. as at 31 March 2005 are HK$2.0 million and HK$24.6 million respectively (2004: HK$41.5 million and HK$41.7 million respectively; 2003: HK$38.0 million and HK$34.2 million respectively).

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ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

7. DIRECTORS’ EMOLUMENTS

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Fees
Executive directors	0.1	0.1	0.1
Non-executive directors	—	—	0.2
Independent non-executive directors	0.1	0.1	0.4
Other emoluments
Executive directors
Salaries and allowances	13.0	9.5	13.0
Retirement benefits cost	0.8	0.9	1.1
Others	—	0.5	—
	14.0	11.1	14.8
The emoluments of the directors were within the following bands:
	2003	2004	2005
	Number of	Number of	Number of
Emolument bands	directors	directors	directors
HK$0 — HK$1,000,000	5	6	7
HK$1,500,001 — HK$2,000,000	1	1	—
HK$2,000,001 — HK$2,500,000	1	1	1
HK$2,500,001 — HK$3,000,000	2	1	1
HK$3,000,001 — HK$3,500,000	—	1	1
HK$4,500,001 — HK$5,000,000	1	—	1
	10	10	11

8. EMPLOYEES’ EMOLUMENTS

Of the five individuals with the highest emoluments in the Group, three (2004: three; 2003: four) are executive directors of the Company whose emoluments are included in the disclosures in note 7 above. The emoluments of the remaining two (2004: two; 2003: one) individuals in 2005 were as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Salaries and allowances	2.1	4.0	4.5
Retirement benefits cost	0.1	0.3	0.4
	2.2	4.3	4.9

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ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The emoluments of the highest paid employees were within the following bands:

	2003	2004	2005
	Number of	Number of	Number of
	employees	employees	employees
Emolument bands
HK$2,000,001 — HK$2,500,000	1	1	1
HK$2,500,001 — HK$3,000,000	—	1	1
	1	2	2
TAXATION
	2003	2004	2005
	HK$ million	HK$ million	HK$ million
The (credit) charge comprises:
Current taxation
Hong Kong Profits Tax	1.8	0.3	3.5
Income tax of other regions in the PRC	(0.3)	46.2	0.3
	1.5	46.5	3.8
Deferred taxation	(2.7)	0.6	(2.6)
Taxation attributable to the Company and its subsidiaries	(1.2)	47.1	1.2
Share of taxation attributable to jointly controlled entities
Hong Kong Profits Tax	0.3	0.2	—
Income tax of other regions in the PRC	0.8	2.1	2.6
	1.1	2.3	2.6
Share of taxation attributable to associates
Income tax of other regions in the PRC	—	—	31.9
	(0.1)	49.4	35.7

9. TAXATION

Hong Kong Profits Tax is calculated at 17.5% (2004: 17.5%; 2003: 16%) on the estimated assessable profits for the year.

Profits tax outside Hong Kong is calculated at the rates prevailing in the respective jurisdictions.

Details of the deferred taxation are set out in note 27.

— 64 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

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

		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	(Loss) profit before taxation	(44.6)	200.0	521.5
	Tax at Hong Kong Profits Tax rate of
	17.5% (2004: 17.5%; 2003: 16%)	(7.1)	35.0	91.3
	Effect of different tax rates of jointly controlled entities
	operating in other jurisdictions	1.1	2.3	(26.5)
	Effect of different tax rates of associates operating in other
	jurisdictions	—	—	14.9
	Effect of different tax rates on operations in other jurisdictions	(4.9)	(0.1)	(1.0)
	Tax effect of expenses not deductible for tax purposes	11.7	9.3	3.2
	Tax effect of income not taxable for tax purposes	(5.2)	(11.1)	(70.8)
	Tax effect on tax losses not recognised	12.8	15.3	28.3
	Tax effect on utilisation of tax losses previously not recognised	(0.7)	(0.2)	(3.8)
	Effect of change in tax rate	0.4	—	—
	Others	(8.2)	(1.1)	0.1
	Tax (credit) charge for the year	(0.1)	49.4	35.7
10.	DIVIDENDS
		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Dividends, paid
	Final dividend in respect of year 2003/2004: HK$0.275
	per share (2002/2003: nil; 2001/2002: HK$0.15 per
	share)	39.7	—	73.7
	Interim dividend in respect of year 2004/2005: HK$0.3
	per share (2003/2004: nil; 2002/2003: nil)	—	—	80.8
		39.7	—	154.5
	Proposed final dividend in respect of year 2004/2005 at
	HK$0.3 per share (2003/2004: HK$0.275 per share;
	2002/2003: nil)	—	73.7	80.8

The final dividend in respect of 2004/2005 of HK$0.3 per share proposed by the directors was approved by shareholders at the annual general meeting on 19 August 2005.

— 65 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

11. (LOSS) EARNINGS PER SHARE

The calculation of the basic and diluted (loss) earnings per share is based on the following data:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
(Loss) earnings for the purposes of basic (loss) earnings
per share	(44.3)	147.7	482.9
Effect of dilutive potential ordinary shares of
an associate:
Dividend income on convertible redeemable
participating preference shares	—	—	(8.7)
Adjustment to the share of results of an associate
based on dilution of its earnings per share	—	—	(27.6)
(Loss) earnings for the purposes of diluted (loss) earnings
per share	(44.3)	147.7	446.6
	Million	Million	Million
Weighted average number of ordinary shares for the
purposes of basic (loss) earnings per share	264.6	266.2	268.5
Effect of dilutive potential ordinary shares:
Share options	0.2	5.0	6.6
Weighted average number of ordinary shares for the
purposes of diluted (loss) earnings per share	264.8	271.2	275.1
INVESTMENT PROPERTY
	2003	2004	2005
	HK$ million	HK$ million	HK$ million
At valuation
At the beginning of the year	137.0	123.0	140.0
Revaluation (decrease) increase	(14.0)	17.0	—
Disposal	—	—	(140.0)
At the end of the year	123.0	140.0	—

12. INVESTMENT PROPERTY

On 15 September 2004, the Group entered into a sale and purchase agreement with an independent third party to dispose of the investment property. The transaction was completed in November 2004. A loss of HK$6.5 million has been recognised in the consolidated income statement for the year ended 31 March 2005. Details of this transaction have been set out in a circular of the Company dated 24 September 2004.

— 66 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

13. PROPERTY, PLANT AND EQUIPMENT

		Land and
	Land and	buildings in	Land and
	buildings in	other regions	buildings in
	Hong Kong	of the PRC	Hong Kong				Equipment,
	held under	held under	held under				furniture
	medium-	medium-	short-	Plant under	Plant and	Motor	and other
	term leases	term leases	term lease	construction	machinery	vehicles	assets	Total
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
AT COST/
VALUATION
At 1 April, 2002	67.5	5.8	25.7	—	493.4	39.2	53.2	684.8
Exchange realignments	—	0.1	—	—	0.6	0.2	—	0.9
Additions	—	—	—	4.1	19.2	3.1	2.5	28.9
Disposals	—	—	(25.7)	—	(84.3)	(4.1)	(3.3)	(117.4)
Transfer	—	—	—	—	(0.4)	—	0.4	—
Revaluation decrease	(17.5)	—	—	—	—	—	—	(17.5)
At 31 March, 2003	50.0	5.9	—	4.1	428.5	38.4	52.8	579.7
Comprising:
At valuation - 2003	50.0	—	—	—	—	—	—	50.0
At cost	—	5.9	—	4.1	428.5	38.4	52.8	529.7
	50.0	5.9	—	4.1	428.5	38.4	52.8	579.7
ACCUMULATED
DEPRECIATION
At 1 April, 2002	—	1.7	25.7	—	356.0	28.5	34.7	446.6
Exchange realignments	—	—	—	—	0.3	0.1	—	0.4
Charge for the year	1.4	0.4	—	—	30.6	3.3	6.4	42.1
Eliminated on disposals	—	—	(25.7)	—	(74.8)	(3.1)	(1.9)	(105.5)
Adjustment upon
valuation	(1.4)	—	—	—	—	—	—	(1.4)
Transfer	—	—	—	—	(0.4)	—	0.4	—
At 31 March, 2003	—	2.1	—	—	311.7	28.8	39.6	382.2
NET BOOK VALUES
At 31 March, 2003	50.0	3.8	—	4.1	116.8	9.6	13.2	197.5

— 67 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant under construction Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2003 50.0 5.9 4.1 428.5 38.4 52.8 579.7 Additions — — 2.0 11.5 1.9 1.3 16.7 Disposals — — — (113.8) (3.9) (3.9) (121.6 Transfer — — (3.5) 3.3 0.2 — — Transfer to site establishment — — (2.6) — — — (2.6 At 31 March 2004 50.0 5.9 — 329.5 36.6 50.2 472.2 Comprising: At valuation - 2004 50.0 — — — — — 50.0 At cost — 5.9 — 329.5 36.6 50.2 422.2 50.0 5.9 — 329.5 36.6 50.2 472.2 ACCUMULATED DEPRECIATION At 1 April 2003 — 2.1 — 311.7 28.8 39.6 382.2 Charge for the year 1.1 0.3 — 28.5 2.9 5.4 38.2 Eliminated on disposals — — — (110.2) (3.2) (1.9) (115.3 Adjustment upon valuation (1.1) — — — — — (1.1 At 31 March 2004 — 2.4 — 230.0 28.5 43.1 304.0 NET BOOK VALUES At 31 March 2004 50.0 3.5 — 99.5 8.1 7.1 168.2
	50.0 50.0 — 50.0 — 1.1 — (1.1) —	5.9 — 5.9 5.9 2.1 0.3 — — 2.4	— — — — — — — — —	329.5 — 329.5 329.5 311.7 28.5 (110.2) — 230.0	36.6 — 36.6 36.6 28.8 2.9 (3.2) — 28.5	50.2 — 50.2 50.2 39.6 5.4 (1.9) — 43.1	472.2
							50.0 422.2
							472.2
							382.2 38.2 (115.3 (1.1
							304.0
	50.0	3.5	—	99.5	8.1	7.1	168.2

— 68 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6	Land and buildings in Hong Kong held under medium- term leases Land and buildings in other regions of the PRC held under medium- term leases Plant and machinery Motor vehicles Equipment, furniture and other assets Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million AT COST/VALUATION At 1 April 2004 50.0 5.9 329.5 36.6 50.2 472.2 Additions — — 3.3 2.0 1.5 6.8 Disposals — (0.6) (128.2) (8.8) (14.7) (152.3) Disposal of subsidiaries — — (118.1) (13.3) (7.9) (139.3) Revaluation increase 5.3 — — — — 5.3 At 31 March 2005 55.3 5.3 86.5 16.5 29.1 192.7 Comprising: At valuation - 2005 55.3 — — — — 55.3 At cost — 5.3 86.5 16.5 29.1 137.4 55.3 5.3 86.5 16.5 29.1 192.7 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 April 2004 — 2.4 230.0 28.5 43.1 304.0 Charge for the year 1.2 0.3 22.1 2.3 4.3 30.2 Impairment loss — — 6.6 0.9 0.1 7.6 Eliminated on disposals — (0.3) (121.3) (8.0) (13.5) (143.1) Eliminated on disposal of subsidiaries — — (58.6) (11.5) (6.3) (76.4) Adjustment upon valuation (1.2) — — — — (1.2) At 31 March 2005 — 2.4 78.8 12.2 27.7 121.1 NET BOOK VALUES At 31 March 2005 55.3 2.9 7.7 4.3 1.4 71.6
	55.3 55.3 — 55.3 — 1.2 — — — (1.2) —	5.3 — 5.3 5.3 2.4 0.3 — (0.3) — — 2.4	86.5 — 86.5 86.5 230.0 22.1 6.6 (121.3) (58.6) — 78.8	16.5 — 16.5 16.5 28.5 2.3 0.9 (8.0) (11.5) — 12.2	29.1 — 29.1 29.1 43.1 4.3 0.1 (13.5) (6.3) — 27.7	192.7
						55.3 137.4
						192.7
						304.0 30.2 7.6 (143.1) (76.4) (1.2)
						121.1
	55.3	2.9	7.7	4.3	1.4	71.6

— 69 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

The directors have conducted a review of the Group’s assets at 31 March 2005 and determined that certain plant and machinery, motor vehicles and equipment were impaired, due to obsolescence. Accordingly, an impairment loss of HK$7.6 million (2004: nil; 2003: nil) has been recognised in the consolidated income statement for the year ended 31 March 2005.

Notes:

• (i) The land and buildings in Hong Kong held under medium-term leases have been revalued on 31 March 2003, 31 March 2004 and 31 March 2005 by Albert So Surveyors Ltd., independent professional valuers, on an open market value basis. No separate valuation was undertaken for land and buildings in other regions of the PRC under medium-term leases as their carrying value is insignificant and the directors are of the opinion that their carrying value approximates its fair value.

• (ii) Had the revalued land and buildings in Hong Kong held under medium-term leases been restated at cost less accumulated depreciation, their net book values as at 31 March 2005 would have been stated at HK$28.9 million (2004: HK$29.7 million; 2003: HK$30.4 million).

14. PROPERTY UNDER DEVELOPMENT

	Land	Development
	Costs	costs	Total
	HK$ million	HK$ million	HK$ million
At 1 April 2002	350.5	16.7	367.2
Additions	163.8	175.0	338.8
At 31 March 2003	514.3	191.7	706.0
Additions	180.2	375.8	556.0
Less: Transfer to properties held for sale	(174.2)	(278.6)	(452.8)
At 31 March 2004	520.3	288.9	809.2
Additions	—	43.6	43.6
Disposals	(520.3)	(332.5)	(852.8)
At 31 March 2005	—	—	—
	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Carrying amount analysed for reporting purposes as:
Non-current	706.0	591.2	—
Current	—	218.0	—
	706.0	809.2	—

— 70 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The property under development, which represented the property development project Rui Hong Xin Cheng (also known as the Rainbow City) situated in the Hongkou District, Shanghai, the PRC held under a long term lease, was disposed of during the year ended 31 March 2005.

Details of the transaction relating to the disposal of the project are set out in note 33(a).

15. NEGATIVE GOODWILL

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
GROSS AMOUNT
At the beginning of the year	—	(0.8)	(0.8)
Gross amount arising on acquisition of
additional interest in a subsidiary during the year	(0.8)	—	—
At the end of the year	(0.8)	(0.8)	(0.8)
RELEASED TO INCOME
At the beginning of the year	—	0.1	0.2
Released during the year	0.1	0.1	0.1
At the end of the year	0.1	0.2	0.3
CARRYING AMOUNT
At the end of the year	(0.7)	(0.6)	(0.5)

The negative goodwill is released to income on a straight-line basis over 6 years, the remaining weighted average life of the depreciable assets acquired.

— 71 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

16. INTERESTS IN JOINTLY CONTROLLED ENTITIES

		2003	2004	2005
		HK$ million	HK$ million	HK$ million
Share	of net assets	440.4	555.0	639.3
Negative goodwill		(2.9)	(2.8)	(2.7)
		437.5	552.2	636.6
Amounts due from jointly controlled entities		620.9	593.6	785.5
Less:	Amounts due within one year shown under current
	assets (note a)	(375.6)	(339.7)	(491.9)
Amount due after one year (note b)		245.3	253.9	293.6
		682.8	806.1	930.2

Negative goodwill is recognised as income on a straight-line basis over 30 years. The amortisation of negative goodwill for the year is netted off in other operating expenses.

Notes:

• (a) The amounts are unsecured and have no fixed terms of repayment. Out of the total balance, a total of HK$268.6 million (2004: HK$169.8 million; 2003: 206.2 million) bears interest at prevailing market rates. The remaining balance is interest free.

• (b) The amount due from a jointly controlled entity is unsecured, interest free and has no fixed terms of repayment. The Group will not demand repayment within 12 months from the balance sheet date. Accordingly, the amount is classified as non-current.

— 72 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

Particulars of the jointly controlled entities are set out as follows:

		Effective
		percentage
		of issued/
		registered
Indirect jointly	Issued and paid-up share	capital held
controlled entities	capital/registered capital	by the Group	Principal activities	Notes
Construction and building
maintenance business
Beijing Shui On Joint	Registered and paid up capital	50%	Buildings construction	1 and 2
Venture Construction	RMB50,000,000		and maintenance
Co. Ltd.**#
Brisfull Limited	5,000,000 ordinary shares of	50%	Sale and installation of
	HK$1 each		aluminium window
			products
City Engineering Limited	10,000 ordinary shares of	50%	Installation of mould
	HK$1 each		work
Heshan Biaofu Metal	Registered and paid up capital	50%	Manufacture of
Products Company	US$1,230,000		aluminium window
Limited**#			products
Kaiping Biaofu Metal	Registered and paid up capital	50%	Manufacture of
Products Company	US$800,000		aluminium window
Limited**#			products
**#	Registered and paid up capital	50%	Manufacture of sink units	1
	US$284,600		and cooking benches
Shanghai Shui On	Registered and paid up capital	50%	Buildings construction	1 and 2
Construction Co. Ltd.**#	RMB50,000,000		and maintenance
Super Race Limited	420,000 ordinary shares HK$1	50%	Supply of sink units and
	each		cooking benches
Sale of construction
materials business
Chongqing Foreign	Registered and paid up capital	15%	Provision of investment	2
Investment Consultation	RMB800,000		consultation
and Services Co. Ltd.**#
Chongqing TH New	Registered and paid up capital	37.5%	Pre-operating stage	2
Building Materials Co.	RMB41,500,000
Ltd.**#
Chongqing T.H. Desheng	Registered and paid up capital	30%	Trading of construction	2
Engineering Co. Ltd.**#	RMB10,000,000		equipment

— 73 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

		Effective
		percentage
		of issued/
		registered
Indirect jointly	Issued and paid-up share	capital held
controlled entities	capital/registered capital	by the Group	Principal activities	Notes
Chongqing T.H. Diwei	Registered and paid up capital	40%	Manufacture and sale of	2
Cement Co. Ltd.**#	RMB61,680,000		cement
Chongqing T.H. Fuling	Registered and paid up capital	50%	Manufacture and sale of	2
Cement Co. Ltd.**#	RMB44,000,000		cement
Chongqing T.H. Holding	Registered and paid up capital	50%	Investment holding and	2
Management Co. Ltd.**#	RMB41,500,000		provision of
			administrative services
Chongqing T.H. Logistics	Registered and paid up capital	40%	Provision of	2
Co. Ltd.**#	RMB500,000		transportation and
			logistics services
Chongqing T.H. Packaging	Registered and paid up capital	40%	Manufacture and sale of	2
Co. Ltd.**#	RMB2,890,000		knitted bags
Chongqing T.H. Special	Registered and paid up	40%	Manufacture and sale of	2
Cement Co. Ltd.**#	capital RMB160,000,000		cement
Chongqing TH	Registered and paid up capital	27.5%	Pre-operating stage	2
Stone Development	RMB10,000,000
Co., Ltd.**#
Chongqing T.H. White	Registered and paid up capital	30%	Manufacture and sale of	2
Cement Co. Ltd.**#	US$1,506,000		cement
Foremost Group Limited##	2,000 shares of US$1	50%	Investment holding	2
Guangan T.H. Cement Co.	Registered and paid up	50%	Manufacture and sale of	2
Ltd.**#	capital RMB110,000,000		cement
Guizhou Bijie Shui On	Registered and paid up capital	79%	Manufacture and sale of	1 and 2
Cement Co. Ltd.**#	RMB48,000,000		cement
Guizhou Changda	Registered and paid up	50.5%	Manufacture and sale of	1 and 2
Shui On Cement Co.	capital RMB106,000,000		cement
Ltd.**#
Guizhou Cengong Shui On	Registered capital	97%	Manufacture and sale of	1
Cement Co. Ltd.**#	RMB52,000,000		cement
Guizhou Dingxiao	Registered and paid up capital	89%	Manufacture and sale of	1 and 2
Shui On Cement Co.	RMB56,000,000		cement
Ltd.**#
Guizhou Kaili Ken On	Registered and paid up capital	74%	Supply of ready mixed	1 and 2
Concrete Co. Ltd.**#	RMB10,000,000		concrete

— 74 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

		Effective
		percentage
		of issued/
		registered
Indirect jointly	Issued and paid-up share	capital held
controlled entities	capital/registered capital	by the Group	Principal activities	Notes
Guizhou Kaili Shui On	Registered and paid up capital	89%	Manufacture and sale of	1 and 2
Cement Co. Ltd.**#	RMB60,000,000		cement
Guizhou Shuicheng Shui On	Registered and paid up capital	69.3%	Manufacture and sale of	1
Cement Co. Ltd.**#	RMB200,000,000		cement
Guizhou Xinpu	Registered and paid up capital	79%	Manufacture and sale of	1 and 2
Shui On Cement Co.	RMB60,000,000		cement
Ltd.**#
Guizhou Xishui	Registered and paid up capital	89%	Manufacture and sale of	1 and 2
Shui On Cement Co.	RMB42,800,000		cement
Ltd.**#
Guizhou Zunyi Ken	Registered and paid up capital	74%	Supply of ready mixed	1 and 2
On Concrete Co. Ltd.**#	RMB12,000,000		concrete
Guizhou Yuqing	Registered and paid up capital	79%	Manufacture and sale of	1 and 2
Shui On Cement Co.	RMB12,500,000		cement
Ltd.**#
Guizhou Zunyi Shui On	Registered and paid up capital	79%	Manufacture and sale of	1 and 2
Cement Co. Ltd.**#	RMB92,000,000		cement
Lamma Yue Jie Company	10,000 ordinary shares of	60%	Trading of construction
Limited	HK$1 each		materials
Nanchong T.H. Cement Co.	Registered and paid up capital	50%	Pre-operating stage	2
Ltd.**#	RMB15,000,000
Nanjing Jiangnan Cement	Registered and paid up	60%	Manufacture and trading	1 and 2
Company Ltd.**#	capital RMB120,000,000		of cement
Prelude Group Limited ##	2,000 shares of US$1	50%	Dormant	2
Shenzhen Lamma Yue Jie	Registered capital	60%	Manufacture of precast	1
Concrete Products Co.	RMB5,000,000		concrete facade
Ltd.**#	Paid up capital
	RMB3,000,000
Shui On (Panyu) Stainless	Registered and paid up capital	50%	Manufacture and trading	2
Steel & Aluminium	HK$2,000,000		of stainless steel and
Products Company			aluminium products
Limited**#
Shui On Sumicem	100,000 ordinary shares of	50%	Consultancy services
Consulting Limited	HK$1 each

— 75 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

		Effective
		percentage
		of issued/
		registered
Indirect jointly	Issued and paid-up share	capital held
controlled entities	capital/registered capital	by the Group	Principal activities	Notes
Sichuan Hejiang Shui On	Registered and paid up capital	89%	Plant under construction	1 and 2
Cement Co. Ltd.**#	RMB12,500,000
Solid Foundation	2,000 share of US$1	50%	Dormant	2
Management Limited##
Suining T.H. Cement Co.	Registered and paid up capital	45%	Pre-operating stage	2
Ltd.**#	RMB15,000,000
TH Industrial Management	2,740 ordinary shares of US$1	50%	Investment holding	2
Limited*	each
TH Cement Holdings	1,600 ordinary shares of US$1	50%	Investment holding	2
Limited*	each
TH Industry I Limited*	100 ordinary shares of US$1	50%	Investment holding	2
	each
TH Industry II Limited*	2,000 ordinary shares of US$1	50%	Investment holding	2
	each
TH Industry III Limited*	2,000 ordinary shares of US$1	50%	Dormant
	each
Other business
The Yangtze Ventures	1,000 ordinary shares of	65.5%	Venture capital	2
Limited***	HK$0.1 each		investments
The Yangtze Ventures II	1,000 ordinary shares of	75.4%	Venture capital	2
Limited***	HK$0.1 each		investments
On Capital China Tech	4,156 participating shares of	92.8%	Venture capital	2
Fund***	US$1,000 each		investments

All the companies listed above were incorporated and are operating in Hong Kong except as otherwise indicated.

• Incorporated in the Bahamas

• ** Registered and operated in other regions of the PRC

• *** Incorporated in the Cayman Islands

• Equity joint venture

• Incorporated in the British Virgin Islands

— 76 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Notes:

• 1 The Group is under contractual arrangements to control these jointly controlled entities with PRC partners. Accordingly, the Directors consider they are jointly controlled entities.

• 2 The results of these jointly controlled entities are accounted for by the Group based on their financial statements made up to 31 December 2004, 31 December 2003, and 31 December 2002.

The summary of aggregate financial information of the Group’s significant jointly controlled entities engaged in the manufacture and sale of cement in Chongqing, Guizhou and Nanjing, based on the adjusted financial statements prepared under the accounting principles generally accepted in Hong Kong for the years ended 31 December 2004, 31 December 2003 and 31 December 2002, is as follows:

	2002	2003	2004
	HK$ million	HK$ million	HK$ million
Results for the year ended 31 December
Turnover	939.0	1,242.1	1,400.7
Profit (loss) before taxation	52.1	54.0	(3.5)
Profit (loss) before taxation attributable to the Group	34.1	33.8	(41.8)
	2002	2003	2004
	HK$ million	HK$ million	HK$ million
Financial positions as at 31 December
Non-current assets	1,514.3	2,182.5	2,747.2
Current assets	917.6	867.5	902.7
Current liabilities	(996.8)	(1,278.9)	(1,369.9)
Non-current liabilities	(843.5)	(1,086.3)	(1,541.0)
Minority interests	(145.3)	(155.0)	(171.1)
Net assets	446.3	529.8	567.9
Net assets attributable to the Group	349.1	405.9	412.8

— 77 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The summary of aggregate financial information of the Group’s significant jointly controlled entities engaged in venture capital investments, based on the adjusted financial statements prepared under the accounting principles generally accepted in Hong Kong for the years ended 31 December 2004, 31 December 2003 and 31 December 2002, is as follows:

	2002	2003	2004
	HK$ million	HK$ million	HK$ million
Results for the year ended 31 December
Turnover	—	4.8	15.3
Profit before taxation	—	2.6	337.0
Profit before taxation attributable to the Group	—	1.6	221.4
Financial positions as at 31 December
Non-current assets	—	123.1	308.7
Current assets	—	32.6	104.1
Current liabilities	—	(0.8)	(8.2)
Non-current liabilities	—	(50.0)	(100.0)
Net assets	—	104.9	304.6
Net assets attributable to the Group	—	68.7	208.9
INTERESTS IN ASSOCIATES
	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Share of net assets	—	—	1,470.2
Convertible redeemable participating junior preference
shares (“Junior Preference Shares”)	—	—	243.6
	—	—	1,713.8

17. INTERESTS IN ASSOCIATES

— 78 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The principal terms of the Junior Preference Shares issued by Shui On Land Limited (“SOL”) include the following:

Conversion

• (i) Mandatory conversion:

SOL may, having given notice to the Group pursuant to the provisions of SOL’s Articles of Association, require that all of the Junior Preference Shares be converted into ordinary shares, provided that (a) the conversion date shall be at least 18 months after 31 May 2004; and (b) the conversion shall be effective only upon, but not before, the date on which the securities of SOL are first listed on a stock exchange in connection with the Qualifying IPO (as defined in SOL’s Articles of Association), or such earlier date as may be approved by the holders then outstanding, whereupon all the Junior Preference Shares shall automatically be converted without any further act by SOL or the members of SOL into such number of fully paid ordinary shares as determined in accordance with the then effective conversion rate.

• (ii) Optional conversion:

• (a) at the option of the Group, at any time after the date of their allotment and without the payment of any additional consideration thereof, into such number of ordinary shares as determined in accordance with the then effective conversion rate credited as fully paid; and

• (b) at the option of SOL pursuant to the Sale and Purchase Agreement and the Subscription and Shareholders’ Agreement both dated 18 February 2004 (the “Agreements”), at any time after the date falling 60 days from the date of issue of a capital call by SOL, if the Group shall continue to be in default of its obligation to subscribe for further Junior Preference Shares under such capital call and the Junior Preference Shares to be subscribed by the Group shall not have been subscribed by other members of SOL, into such number of ordinary shares as determined in accordance with the then effective conversion rate credited as fully paid.

• (iii) Conversion price:

The Junior Preference Shares are convertible into ordinary shares at an initial conversion price of US$1.07. The conversion price is subject to adjustments in accordance with SOL’s Articles of Association.

Redemption

• (i) the Group may, at any time prior to 31 May 2009, by notice in writing require SOL to redeem all or some of its shares, in multiples of not less than 100,000 shares, on 31 May 2010;

• (ii) if an Event of Default (as defined in the Agreements) has been declared in accordance with the Agreements, the holders of at least 70% of the then outstanding Junior Preference Shares may, by a written notice, require SOL to redeem all or part of their shares within 6 months from the date of the written notice; and

• (iii) subject to points (i) and (ii) above for redemption and the mandatory conversion, SOL shall redeem all of the then outstanding Junior Preference Shares on 31 May 2011.

The redemption price payable by SOL shall be a sum equal to any arrears or accruals of cash dividends payable in respect of the Junior Preference Shares calculated up to the relevant redemption date, plus the issue price paid on the preference shares, plus a premium equal to the amount derived by dividing the Equity Participation (as defined in SOL’s Articles of Association) by the total number of preference shares issued up to the relevant redemption date.

— 79 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Dividend

The Junior Preference Shares confer on the Group the entitlement to a fixed cumulative preferential cash dividend at the rate of 7% per annum of the issue price commencing from the date of issue of the Junior Preference Shares, payable semi-annually and in priority to the dividend in respect of the ordinary shares.

Particulars of the associates are set out as follows:

		Percentage
		of issued
	Issued and	capital held by
Name of associate	fully paid share capital/quota	the Company	Principal activities
		Indirectly
Biella Enterprises Limited	5 ordinary shares of HK$1.00	20%	Dormant
	each
China National New Building	2 ordinary shares of HK$1.00	50%	Dormant
Materials Industry	each
Investment Limited
Happy Way Resources Limited	5 ordinary shares of HK$1.00	20%	Dormant
	each
Mountain Mist (Barbados)	100 quotas of US$1.00 each	45%	Investment holding
SRL##
Shui On Land Limited#	431,000,000 ordinary shares of	30.16%	Property development
	US$0.01 each
	220,000,000 junior preference
	shares of US$0.01 each
	180,000,000 senior preference
	shares of US$0.01 each

All the companies listed above were incorporated and are operating in Hong Kong except as otherwise indicated.

• Incorporated in the Cayman Islands

• Incorporated in Barbados

— 80 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

A summary of the financial information of the Group’s significant associate engaged in property development in the PRC is as follows:

Results for the year ended 31 December

	2002	2003	2004
	HK$ million	HK$ million	HK$ million
Turnover	—	—	980.1
Profit before taxation	—	—	1,658.1
Profit before taxation attributable to the Group	—	—	97.0
Financial positions as at 31 December
	2002	2003	2004
	HK$ million	HK$ million	HK$ million
Non-current assets	—	—	9,929.4
Current assets	—	—	1,627.9
Current liabilities	—	—	(2,867.3)
Non-current liabilities
— Convertible redeemable participating
preference shares	—	—	(1,644.5)
— Others	—	—	(2,223.7)
Minority interests	—	—	(558.8)
Net assets	—	—	4,263.0
Net assets attributable to the Group (note)	—	—	1,470.2

The above information is derived from the audited financial statements of SOL, which was incorporated during the year ended 31 March 2005, for the year ended 31 December 2004 which have been prepared using International Accounting Standards issued by the International Accounting Standards Board.

Note: Adjustments to the audited financial statements of SOL have been made in order to conform with the Group’s accounting policies.

SOL had the following significant contingent liabilities at 31 December 2004:

• (i) Pursuant to an agreement entered into with the district government (the “Hongkou Government”) and the Education Authority of the Hongkou District, Shanghai, the PRC on 31 July 2002, guarantees of no more than approximately HK$303.0 million (equivalent to RMB324 million) would be granted by SOL to support bank borrowings arranged in the name of a company to be nominated by the Hongkou Government, as part of the financial arrangement for the site clearance work in relation to the development of a parcel of land. As at 31 December 2004, no amount has been drawn down under this arrangement.

— 81 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

• (ii) Shanghai Rui Hong Xin Cheng Co., Ltd., a subsidiary of SOL, has given guarantees amounting to approximately HK$147.9 million (equivalent to RMB156.8 million) to banks in respect of mortgage facilities granted to the buyers of its residential properties.

• (iii) No provision for land appreciation tax (“LAT”) has been made in the financial statements of Shanghai Lakeville, a subsidiary of SOL, as in the opinion of the directors of SOL, Shanghai Lakeville’s share of the development costs for tax purposes amounting to approximately HK$127.4 million (equivalent to RMB135 million) in connection with a man-made lake and the underground carpark in the Taipingqiao area in Shanghai (the “Development Costs”) can be utilised for the purpose of reducing the taxable income and the liability to LAT of Shanghai Lakeville. The Development Costs were originally paid by Shanghai Shui On Property Development Management Co., Ltd., a related company of Shanghai Lakeville, and recharged to Shanghai Lakeville. Should the relevant PRC tax authorities disapprove of the utilisation of the Development Costs in determining the amount of LAT, the estimated charge for LAT to Shanghai Lakeville would be approximately HK$33.0 million (equivalent to RMB35.0 million). Pursuant to the Taipingqiao Sale and Purchase Agreement for the reorganisation of SOL, an indemnity was granted by Shui On Investment Company Limited, a wholly owned subsidiary of SOCL, to SOL in respect of the amount of potential charge for LAT.

18. INVESTMENTS IN SECURITIES

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Other investments, at fair value:
Equity securities
— unlisted overseas	15.3	12.8	—
— listed in Hong Kong	120.3	12.8	12.4
	135.6	25.6	12.4
Market value of listed securities	120.3	12.8	12.4
CLUB DEBENTURE
	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Unlisted membership debenture in a recreational club,
at cost	1.2	1.2	1.2

19. CLUB DEBENTURE

— 82 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

20. SITE ESTABLISHMENT EXPENDITURE

		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	At the beginning of the year	16.9	13.9	17.8
	Additions	0.4	5.5	0.6
	Decrease upon disposals of subsidiaries	—	—	(13.9)
	Transfer from property, plant and equipment	—	2.6	—
	Written off during the year	—	(0.4)	—
	Amortisation for the year	(3.4)	(3.8)	(4.5)
	At the end of the year	13.9	17.8	—
21.	INVENTORIES AND CONTRACTS IN PROGRESS
		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Inventories
	Raw materials	5.6	4.6	1.8
	Work-in-progress	9.0	12.7	0.9
	Finished goods	12.2	13.4	6.8
	Spare parts	12.9	13.4	4.0
		39.7	44.1	13.5

Inventories of HK$3.9 million (2004: HK$4.2 million; 2003: HK$2.3 million) are carried at net realisable value.

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Contracts in progress
Costs incurred to date	6,013.7	3,296.8	4,360.3
Recognised profits less recognised losses	261.1	26.3	64.2
	6,274.8	3,323.1	4,424.5
Less: Progress billings	(6,134.7)	(3,324.4)	(4,545.1)
Net contract work	140.1	(1.3)	(120.6)
Represented by:
Amounts due from customers for contract work	221.2	98.4	73.9
Amounts due to customers for contract work	(81.1)	(99.7)	(194.5)
	140.1	(1.3)	(120.6)

— 83 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

22. DEBTORS, DEPOSITS AND PREPAYMENTS

The Group maintains a defined credit policy. The general credit term ranges from 30 days to 90 days.

		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Debtors (net of allowance for bad and doubtful debts)
	aged analysis:
	Within 90 days	235.5	300.3	174.8
	91 days to 180 days	19.1	16.2	8.2
	181 days to 360 days	18.0	12.4	9.0
	Over 360 days	4.7	19.9	11.3
		277.3	348.8	203.3
	Retentions receivable	124.7	99.4	100.4
	Prepayments, deposits and other receivables	194.8	136.1	262.4
		596.8	584.3	566.1
23.	CREDITORS AND ACCRUED CHARGES
		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Creditors aged analysis:
	Within 30 days	93.0	97.1	67.1
	31 days to 90 days	38.4	23.0	16.3
	91 days to 180 days	7.4	7.6	2.2
	Over 180 days	5.7	11.0	2.0
		144.5	138.7	87.6
	Retentions payable	136.5	124.0	111.2
	Accruals and other payables	349.0	466.2	341.4
		630.0	728.9	540.2

— 84 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

24. BANK BORROWINGS

		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Secured bank loan (note 31)	107.3	284.4	—
	Unsecured bank loans and bank overdrafts	1,156.4	1,134.1	1,253.8
		1,263.7	1,418.5	1,253.8
	Less: Amounts due within one year	(68.9)	(932.5)	(55.8)
		1,194.8	486.0	1,198.0
	The borrowings are repayable as follows:
	Within one year	68.9	932.5	55.8
	More than one year but not exceeding two years	1,096.8	400.7	888.0
	More than two years but not exceeding five years	98.0	85.3	310.0
		1,263.7	1,418.5	1,253.8
25.	SHARE CAPITAL
		2003	2004	2005
		HK$ million	HK$ million	HK$ million
	Authorised
	400,000,000 shares of HK$1 each	400.0	400.0	400.0
	Issued and fully paid
	At the beginning of the year	264.5	264.7	268.0
	Exercise of share options	0.2	3.3	1.4
	At the end of the year	264.7	268.0	269.4

— 85 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

26. RESERVES

Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1	Properties revaluation reserve Share premium account Translation reserve Contributed surplus Goodwill Negative goodwill Retained profits Reserve funds Other reserve Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million (Note a) (Note b) At 1 April 2002 31.2 532.3 (6.7) 197.6 (2.7) 0.5 280.5 0.8 — 1,033.5 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 6.9 — — — — — — 6.9 Premium on issue of shares — 0.7 — — — — — — — 0.7 Loss for the year — — — — — — (44.3) — — (44.3) Dividends — — — — — — (39.7) — — (39.7) Transfer (0.8) — — — — — 0.8 — — — Revaluation decrease in the year (13.8) — — — — — — — — (13.8) Reversal of deferred tax liability arising on revaluation of properties 2.0 — — — — — — — — 2.0 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2003 18.6 533.0 0.2 197.6 (2.7) 0.5 197.2 0.9 — 945.3 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — 1.9 — — — — — — 1.9 Premium on issue of shares — 23.7 — — — — — — — 23.7 Profit for the year — — — — — — 147.7 — — 147.7 Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 0.6 — — — — — — — — 0.6 Transfer to reserve funds — — — — — — (0.1) 0.1 — — At 31 March 2004 18.7 556.7 2.1 197.6 (2.7) 0.5 345.3 1.0 — 1,119.2 Exchange differences arising on translation of financial statements of operations outside Hong Kong — — (2.1) — — — — — — (2.1) Premium on issue of shares — 8.6 — — — — — — — 8.6 Profit for the year — — — — — — 482.9 — — 482.9 Dividends paid — — — — — — (154.5) — — (154.5) Transfer (0.5) — — — — — 0.5 — — — Revaluation increase in the year 3.5 — — — — — — — — 3.5 Deferred tax liability arising on revaluation of properties (0.6) — — — — — — — — (0.6) Transfer to reserve funds — — — — — — (0.3) 0.3 — — Reserve arising on acquisition of an associate — — — — — — — — 231.1 231.1 At 31 March 2005 21.1 565.3 — 197.6 (2.7) 0.5 673.9 1.3 231.1 1,688.1
	18.6 — — — (0.5) 0.6 — 18.7 — — — — (0.5) 3.5 (0.6) — —	533.0 — 23.7 — — — — 556.7 — 8.6 — — — — — — —	0.2 1.9 — — — — — 2.1 (2.1) — — — — — — — —	197.6 — — — — — — 197.6 — — — — — — — — —	(2.7) — — — — — — (2.7) — — — — — — — — —	0.5 — — — — — — 0.5 — — — — — — — — —	197.2 — — 147.7 0.5 — (0.1) 345.3 — — 482.9 (154.5) 0.5 — — (0.3) —	0.9 — — — — — 0.1 1.0 — — — — — — — 0.3 —	— 945.3 — 1.9 — 23.7 — 147.7 — — — 0.6 — — — 1,119.2 — (2.1) — 8.6 — 482.9 — (154.5) — — — 3.5 — (0.6) — — 231.1 231.1
	21.1	565.3	—	197.6	(2.7)	0.5	673.9	1.3	231.1 1,688.1

— 86 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

Included in the above is the Group’s share of post-acquisition reserves of its jointly controlled entities, as follows:

	Translation		Negative	Retained
	Reserve	Goodwill	goodwill	profits	Total
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
At 1 April 2002	(0.2)	(2.0)	0.3	2.0	0.1
Released upon dissolution of a
jointly controlled entity	—	—	—	(2.5)	(2.5)
Profit for the year	—	—	—	29.5	29.5
Dividends	—	—	—	(1.0)	(1.0)
At 31 March 2003	(0.2)	(2.0)	0.3	28.0	26.1
Profit for the year	—	—	—	31.9	31.9
Dividends	—	—	—	(29.7)	(29.7)
Addition of negative goodwill	—	—	2.5	—	2.5
Share of reserve	0.2	—	—	—	0.2
At 31 March 2004	—	(2.0)	2.8	30.2	31.0
Profit for the year	—	—	—	163.6	163.6
Dividends	—	—	—	(129.6)	(129.6)
At 31 March 2005	—	(2.0)	2.8	64.2	65.0

The retained profits of the Group as at 31 March 2005 include share of post-acquisition profit of associates of HK$65.1 million (2004: nil; 2003: nil).

Notes:

• (a) The contributed surplus of the Group represents the difference between the nominal value of the shares of the acquired subsidiaries and the nominal value of the Company’s shares issued for the acquisition at the time of the group reorganisation prior to the listing of the Company’s shares in 1997.

In addition to retained profits, under the Companies Act 1981 of Bermuda (as amended), contributed surplus is also distributable to the shareholders of the Company. However, a company cannot declare or pay a dividend, or make a distribution out of contributed surplus if:

• (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or

• (ii) the realisable value of the company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

• (b) Other reserve of the Group arose when the Group entered into agreements with its ultimate holding company, SOCL, to co-invest in SOL. Further details are set out in note 33(a).

• (c) As at 31 March 2005, the Company’s reserves, including the contributed surplus, available for distribution to shareholders amounted to HK$860.2 million (2004: HK$122.6 million; 2003: HK$157.4 million).

— 87 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

27. DEFERRED TAXATION

The following are the major deferred tax (liabilities) assets recognised by the Group and movements thereon during the current and prior reporting periods:

	Accelerated			Other
	tax	Revaluation		temporary
	depreciation	of properties	Tax losses	differences	Total
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
At 1 April 2002	(12.2)	(5.8)	6.9	1.4	(9.7)
Credit (charge) to consolidated income
statement for the year	4.3	—	(0.7)	(0.5)	3.1
Credit to equity for the year	—	2.5	—	—	2.5
Effect of change in tax rate
- (Charge) credit to consolidated income
statement	(1.1)	—	0.6	0.1	(0.4)
- Charge to equity	—	(0.5)	—	—	(0.5)
At 31 March 2003	(9.0)	(3.8)	6.8	1.0	(5.0)
Credit (charge) to consolidated income
statement for the year	(1.3)	—	0.2	0.5	(0.6)
At 31 March 2004	(10.3)	(3.8)	7.0	1.5	(5.6)
Charge to property revaluation reserve	—	(0.6)	—	—	(0.6)
Credit (charge) to consolidated income
statement for the year	7.5	—	(4.8)	(0.1)	2.6
Disposal of subsidiaries	1.0	—	(0.2)	(0.8)	—
At 31 March 2005	(1.8)	(4.4)	2.0	0.6	(3.6)

For the purposes of balance sheet presentation certain deferred tax assets and liabilities have been offset in accordance with the conditions set out in Statement of Standard Accounting Practice No. 12 (Revised).

At 31 March 2005, the Group has unused tax losses of HK$215.9 million (2004: HK$214.8 million; 2003: HK$140.8 million) available to offset against future profits. A deferred tax asset has been recognised in respect of such tax losses amounting to HK$11.4 million (2004: HK$39.9 million; 2003: HK$38.5 million). No deferred tax asset has been recognised in respect of the remaining tax losses of approximately HK$204.5 million (2004: HK$174.9 million; 2003: HK$102.3 million) due to the unpredictability of future profit streams.

— 88 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

28. PROVIDENT FUND SCHEME AND DEFINED BENEFIT PLAN

The Group participates in both a defined benefit plan (the “Plan”) which is registered under the Occupational Retirement Schemes Ordinance and a Mandatory Provident Fund Scheme (the “MPF Scheme”) established under the Mandatory Provident Fund Schemes Ordinance in December 2000. The assets of the schemes are held separately from those of the Group and are invested in securities and funds under the control of trustees. Employees who were members of the Plan prior to the establishment of MPF Scheme were offered a choice of staying within the Plan or switching to the MPF Scheme, whereas all new employees joining the Group on or after 1 December 2000 are required to join the MPF Scheme.

Mandatory Provident Fund Scheme

For members of the MPF Scheme, contributions are made by the employees at 5% of relevant income and by the Group at rates ranging from 5% to 10% of the employees’ salaries, depending on the employees’ length of service with the Group.

The Group’s contributions to the MPF Scheme charged to the consolidated income statement as staff cost during the year ended 31 March 2005 amounted to HK$3.7 million (2004: HK$5.3 million; 2003: HK$4.6 million). The amount of employer’s voluntary contributions to MPF schemes forfeited for the years ended 31 March 2005, 31 March 2004 and 31 March 2003 was immaterial and was used to reduce the existing level of contributions.

Defined Benefit Plan

Contributions to the Plan are made by the members at 5% of their salaries and by the Group at rates which are based on recommendations made by the actuary of the Plan. The current employer contribution rate is 7.5% (2004: 12.5%; 2003: 7.4%) of the members’ salaries. Under the Plan, a member is entitled to retirement benefits which comprise the sum of any benefits transferred from another scheme and the greater of the sum of employer’s basic contribution plus the member’s basic contribution accumulated with interest at a rate of no less than 6% per annum before 1 September 2003 and 1% per annum in respect of contributions made on or after 1 September 2003 or 1.8 times the final salary times the years of employment with the Group on the attainment of the retirement age of 60. For members who joined the Plan before 1997, the retirement age is 60 for male members and 55 for female members. No other post-retirement benefits are provided.

The actuarial valuations of the plan assets and the present value of the defined benefit obligation were carried out at 31 March 2005, 31 March 2004 and 31 March 2003 by Ms. Elaine Hwang of Watson Wyatt Hong Kong Limited, who is a Fellow of the Society of Actuaries. The present value of the defined benefit obligations and the related current service cost were measured using the Projected Unit Credit Method.

The principal actuarial assumptions as at the balance sheet dates used are as follows:

					2003	2004	2005
Discount	rate				4.5%	4.0%	4.5%
Expected	rate	of	salary	increase	Nil for the next four	Nil for the next three	1% p.a. for the next two
					years commencing from	years commencing from	years commencing from
					1 April 2003 and 3%	1 April 2004 and 3%	1 April 2005 and 2% p.a.
					thereafter	thereafter	thereafter

— 89 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The expected rate of return on plan assets for the year ended 31 March 2005 is 6.5% per annum (2004: 5.5%; 2003: 5.5%).

The actuarial valuation showed that the fair value of the plan assets attributable to the Group was HK$293.9 million at 31 March 2005 (2004: HK$293.7 million; 2003: HK$226.4 million), representing 107% (2004: 92%; 2003: 72%) of the benefits that had accrued to members. The surplus of the plan assets of HK$18.8 million (2004: shortfall of HK$25.2 million; 2003: shortfall of HK$88.4 million) is to be cleared over the estimated remaining service period of the current membership of 14 years (2004: 15 years; 2003: 10 years).

Amounts recognised in the consolidated income statement for the year in respect of the defined benefit plan are as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Current service cost	13.0	14.0	14.5
Interest cost	16.0	12.9	12.1
Expected return on plan assets	(14.5)	(11.6)	(19.2)
Net actuarial losses recognised in current year	—	5.2	—
Loss on curtailment settlement	—	—	2.2
Net amount charged to consolidated income statement
as staff costs	14.5	20.5	9.6

The actual return on plan assets allocated to the Group for the year ended 31 March 2005 was a gain of HK$24.5 million (2004: gain of HK$57.0 million; 2003: loss of HK$33.0 million).

The amounts included in the balance sheets arising from the Group’s obligations in respect of the Plan are as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Present value of defined benefit obligations	314.8	318.9	275.1
Unrecognised actuarial (losses) gains	(83.3)	(21.1)	9.5
Fair value of plan assets	(226.4)	(293.7)	(293.9)
Defined benefit liability (asset) included in the
balance sheet	5.1	4.1	(9.3)

Included within the fair value of plan assets is HK$3.1 million (2004: HK$8.8 million; 2003: HK$5.6 million) in respect of the equity shares of the Company.

— 90 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Movements of the defined benefit liability (asset) in the balance sheets are as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
At the beginning of the year	8.5	5.1	4.1
Net amounts charged to income Statement	14.5	20.5	9.6
Employers’ contributions	(17.9)	(21.5)	(23.0)
At the end of the year	5.1	4.1	(9.3)

29. LEASE ARRANGEMENTS

As lessor

Property rental income in respect of the investment property and car park spaces earned during the year ended 31 March 2005 was HK$5.4 million (2004: HK$14.2 million; 2003: HK$14.9 million).

At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments which fall due as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Within one year	7.9	6.0	—
In the second to fifth years inclusive	5.9	2.1	—
	13.8	8.1	—

As lessee

At the balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:

	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Within one year	13.3	12.3	1.9
In the second to fifth years inclusive	9.9	6.8	1.7
Over five years	0.1	—	—
	23.3	19.1	3.6

Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for lease terms ranging from one to ten years.

— 91 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

30. CAPITAL COMMITMENTS

• (a) As at 31 March 2004, the Group had commitments in respect of the development costs of property under development contracted but not provided for in the financial statements amounting to approximately HK$576.6 million (2003: HK$621.7 million) and authorised but not contracted for amounting to approximately HK$85.3 million (2003: nil). There were no such commitments as at 31 March 2005.

• (b) At the balance sheet date, the Group’s share of the capital commitments of its jointly controlled entities and an associate are as follows:

				2003	2004	2005
				HK$ million	HK$ million	HK$ million
Authorised	but	not	contracted for	117.2	51.6	44.1
Contracted	but	not	provided for	61.0	7.8	1,035.2

• (c) As at 31 March 2005, the Group had commitments in respect of the subscription of convertible redeemable participating preference shares to be issued by SOL amounting to US$18.8 million, equivalent to approximately HK$146.6 million (2004: US$50 million, equivalent to approximately HK$390 million; 2003: nil).

• (d) As at 31 March 2004, the Group had commitments in respect of the acquisition of property, plant and equipment contracted but not provided for in the financial statements amounting to approximately HK$0.3 million (2003: HK$1.4 million). There were no such commitments as at 31 March 2005.

• (e) As disclosed in the announcements made by the Company on 25 June 2004, 11 August 2004 and 2 March 2005, a subsidiary of the Group entered into a framework agreement on 18 June 2004, a sale and purchase agreement on 11 August 2004 and new agreements on 1 February 2005 and 28 February 2005 to invest in a sino-foreign joint venture which will be formed to acquire equity interests in a number of cement plants in Yunnan Province, the PRC.

The Group will hold 80% share of this joint venture which will have a registered capital of Rmb1,000 million (about HK$943 million). A deposit of Rmb80 million (about HK$76 million) was paid upon signing of the framework agreement. Application is being made to relevant authorities in the Central Government in relation to the establishment of this joint venture. Upon approval being granted, the Group’s further contribution to the capital of this joint venture will amount to Rmb720 million (about HK$679 million), being 80% of the Group’s share of capital less the deposit paid of Rmb80 million (about HK$76 million). The deposit is fully refundable within 10 business days if the establishment of the joint venture cannot be achieved. An option has been granted to Lafarge S.A. to acquire 50% of the Group’s interest in this joint venture, which will expire on 31 December 2005.

31. PLEDGE OF ASSETS

At 31 March 2004, the Group’s interest in property under development with a total carrying value of approximately HK$809.2 million (2003: HK$706.0 million) and bank deposits of HK$527.8 million (2003: nil) were pledged to secure certain syndicated bank loan facilities granted to a subsidiary of the Company. All these pledged assets were disposed of to SOL during the year ended 31 March 2005 as set out in note 33(a).

— 92 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

32. SHARE OPTION SCHEME

Following the amendments of Chapter 17 of the Rules Governing the Listing of Securities on the Stock Exchange on 1 September 2001, the Employee Share Option Scheme of the Company adopted on 20 January 1997 (the “Old Scheme”) has been terminated and replaced by a new share option scheme on 27 August 2002 (the “New Scheme”). Since then, no further option can be granted under the Old Scheme, but all options granted prior to such termination shall continue to be valid and exercisable.

Under the Old Scheme, the Board of Directors may offer the eligible participants options to subscribe for shares in the Company at a price equal to the higher of the nominal value of the shares and 90% of the average of the closing prices of the shares quoted on the Stock Exchange on the five trading days immediately after the preliminary announcement of the Group’s annual results, subject to a maximum of 10% of the issued share capital of the Company from time to time. Consideration paid for each grant is HK$1. The maximum entitlement of each eligible participant shall not exceed 25% of the aggregate number of ordinary shares in respect of options that may be granted under existing option schemes. Options granted are exercisable in stages within 5 years from the date of grant.

On 27 August 2002, the Company has adopted the New Scheme which shall continue in force until the 10th anniversary of such date. The principal terms of the New Scheme are summarised as below:

1. Purpose

2. (a) The New Scheme is a share incentive scheme and is established to recognise and acknowledge the contributions which the eligible participants have made or may make to the Group.

3. (b) The New Scheme will provide the eligible participants an opportunity to have a personal stake in the Company with a view to achieving the following objectives:

   • (i) motivate the eligible participants to utilise their performance and efficiency for the benefit of the Group; and

   • (ii) attract and retain or otherwise maintain on-going relationship with the eligible participants whose contributions are or will be beneficial to the long term growth of the Group.

2. Eligible participants

• (a) The Board may at its discretion invite anyone belonging to any of the following classes of persons to take up options to subscribe for shares of the Company, subject to such conditions as the Board may think fit: any director (whether executive or non-executive or independent non-executive), employee (whether full time or part time), officer, consultant, customer, supplier, agent, partner or adviser of or contractor to the Group or any invested entity and for the purpose of the New Scheme, the options may be granted to any corporation wholly-owned by any person mentioned in this paragraph.

• (b) The eligibility of any of the above persons to the grant of any option shall be determined by the Board from time to time on the basis of his contribution to the development and growth of the Group. The Company shall be entitled to cancel any option granted to a grantee but not exercised if such grantee fails to meet the eligibility criteria determined by the Board after an option is granted but before it is exercised.

— 93 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

3. Total number of shares available for issue under the New Scheme

(a) 10% limit

Subject to the following paragraphs, the total number of shares which may be issued upon exercise of all options to be granted under the New Scheme and any other share option scheme of the Company must not in aggregate exceed 10% of the shares in issue as at the date of approval of the New Scheme (excluding options which have lapsed) (the “Scheme Mandate Limit”).

The Company may, from time to time, refresh the Scheme Mandate Limit by obtaining the approval of the shareholders in general meeting. The Company may also seek separate approval of the shareholders in general meeting for granting options beyond the Scheme Mandate Limit or the refreshed limit, provided the options in excess of such limit are granted only to eligible participants specifically identified by the Company before such approval is sought.

(b) 30% limit

The overall limit on the number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the New Scheme and any other share option scheme of the Company must not exceed 30% of the shares in issue from time to time.

4. Maximum entitlement of each participant

The total number of shares issued and to be issued upon exercise of the options granted to each participant (including both exercised and outstanding options) in any 12 month period must not exceed 1% of the shares in issue. Where any further grant of options to a grantee would result in the shares issued and to be issued upon exercise of all options granted and to be granted to such person (including exercised, cancelled and outstanding options) in the 12 month period up to and including the date of such further grant representing in aggregate over 1% of the shares in issue, such further grant must be separately approved by the shareholders in general meeting with such grantee and his associates abstaining from voting.

5. Performance target

The New Scheme allows the Board, when offering the grant of any option, to impose any condition including any performance target which must be met before the option shall vest and become exercisable.

6. Minimum period for which an option must be held

The Board may at its discretion when offering the grant of any option impose any minimum period for which an option must be held.

7. Price of shares

The exercise price shall be determined by the Board but shall be at least the highest of: (a) the closing price of a share as stated in the daily quotations sheet of the Stock Exchange on the date of grant; and (b) the average closing price of the shares as shown on the daily quotations sheets of the Stock Exchange for the five business days immediately preceding the date of grant; and (c) the nominal value of a share.

8. Amount payable upon acceptance of option

HK$1.00 is payable by each eligible participant to the Company on acceptance of an offer of an option, which shall be paid within 28 days from the date of the offer.

— 94 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

The following tables disclose details of the Company’s share options held by employees (including directors) and movements in such holdings during the year.

Date of grant Subscription price per share HK$ Old Scheme 25.7.1997 7.50 15.7.1998 4.14 7.7.1999 11.21 4.7.2000 9.56 17.7.2001 9.30 New Scheme 27.8.2002 6.00 27.8.2002 6.00 Date of grant Subscription price per share HK$ Old Scheme 15.7.1998 4.14 7.7.1999 11.21 4.7.2000 9.56 17.7.2001 9.30 New Scheme 27.8.2002 6.00 27.8.2002 6.00 4.8.2003 5.80					Number of options	Number of options	Number of options	Number of options	Period during which share options outstanding at 31.3.2003 are exercisable Price of Company’s shares at exercise date of options At 31.3.2003 HK$ (Note) — 25.1.1998 to 24.7.2002 — 432,000 15.1.1999 to 14.7.2003 6.03 3,120,000 7.1.2000 to 6.7.2004 — 3,452,000 4.1.2001 to 3.7.2005 — 3,560,000 17.1.2002 to 16.7.2006 — 3,230,000 27.2.2003 to 26.8.2007 — 22,000,000 27.8.2005 to 26.8.2010 — 35,794,000 Period during which share options outstanding at 31.3.2004 are exercisable Price of Company’s shares at exercise date of options At 31.3.2004 HK$ (Note) — 15.1.1999 to 14.7.2003 4.82 3,070,000 7.1.2000 to 6.7.2004 — 2,264,000 4.1.2001 to 3.7.2005 11.39 2,412,000 17.1.2002 to 16.7.2006 11.39 2,192,000 27.2.2003 to 26.8.2007 11.06 22,000,000 27.8.2005 to 26.8.2010 — 714,000 4.2.2004 to 3.8.2008 9.10 32,652,000
		At 1.4.2002 158,000 666,000 3,190,000 3,542,000 3,670,000 — —	Granted during the year — — — — — 3,240,000 22,000,000		Exercised during the year Cancelled during the year Lapsed during the year — — (158,000) (220,000) (14,000) — — (70,000) — — (90,000) — — (110,000) — — (10,000) — — — —				At 31.3.2003 — 432,000 3,120,000 3,452,000 3,560,000 3,230,000 22,000,000
		11,226,000	25,240,000			(220,000) (294,000) Number of options		(158,000)
		At 1.4.2003 432,000 3,120,000 3,452,000 3,560,000 3,230,000 22,000,000 —		Granted during the year — — — — — — 780,000	Exercised during the year Cancelled during the year (160,000) (6,000) — (50,000) (1,108,000) (80,000) (1,048,000) (100,000) (938,000) (100,000) — — (66,000) —			Lapsed during the year (266,000) — — — — — —	At 31.3.2004 — 3,070,000 2,264,000 2,412,000 2,192,000 22,000,000 714,000
		35,794,000		780,000	(3,320,000)		(336,000)	(266,000)

— 95 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

Date of grant Subscription price per share HK$ Old Scheme 7.7.1999 11.21 4.7.2000 9.56 17.7.2001 9.30 New Scheme 27.8.2002 6.00 27.8.2002 6.00 4.8.2003 5.80 26.7.2004 7.25				Number of options	Number of options		Period during which share options outstanding at 31.3.2005 are exercisable Price of Company’s shares at exercise date of options At 31.3.2005 HK$ (Note) — 7.1.2000 to 6.7.2004 — 1,858,000 4.1.2001 to 3.7.2005 10.92 2,064,000 17.1.2002 to 16.7.2006 10.71 1,530,000 27.2.2003 to 26.8.2007 8.68 22,000,000 27.8.2005 to 26.8.2010 — 484,000 4.2.2004 to 3.8.2008 8.86 986,000 26.1.2005 to 25.7.2009 10.10 28,922,000
		At 1.4.2004 3,070,000 2,264,000 2,412,000 2,192,000 22,000,000 714,000 —	Granted during the year — — — — — — 1,030,000	Exercised during the year Cancelled during the year — (100,000) (316,000) (90,000) (230,000) (118,000) (530,000) (132,000) — — (224,000) (6,000) (44,000) —		Lapsed during the year (2,970,000) — — — — — —	At 31.3.2005 — 1,858,000 2,064,000 1,530,000 22,000,000 484,000 986,000
		32,652,000	1,030,000	(1,344,000)	(446,000)	(2,970,000)

Note: The price of the Company’s shares as disclosed is the weighted average closing price of the Company’s shares immediately before the dates on which the options were exercised during the year for each category of eligible participants.

Total consideration received during the year ended 31 March 2005 from employees, including directors, for taking up the options granted was HK$41 (2004: HK$31; 2003: HK$94).

The financial impact of share options granted is not recorded in the financial statements until such time as the options are exercised, and no charge is recognised in the consolidated income statement in respect of the value of options granted in the year. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which lapse or are cancelled prior to their exercise date are deleted from the register of outstanding options.

33. DISPOSAL OF SUBSIDIARIES

(a) Rui Hong Xin Cheng (“Rainbow City”)

On 18 February 2004, the Group entered into agreements for co-investment in SOL with the parent company, SOCL. The agreements involved the injection of a property development project Rui Hong Xin Cheng (also known as Rainbow City), held by Shanghai Rui Hong Xin Cheng Company Limited, a 99% subsidiary of the Group into SOL in return for a 30.16 % equity interest in SOL. A gain of HK$345.7 million arose on the disposal of Rainbow City and has been recognised in the consolidated income statement for the year ended 31 March 2005.

Details of these transactions were set out in a circular of the Company dated 23 March 2004.

— 96 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The completion of this transaction took effect on 31 May 2004 (the “Completion Date”). In addition, there is provision in the agreements that on injection of an amount of US$50 million by New Rainbow Investments Limited, a wholly owned subsidiary of the Group, 50 million Junior Preference Shares in SOL will be allotted to the Group. Since the Completion Date and up to 31 March 2005, a total of US$31.2 million of cash has been injected for this purpose.

The net assets of Rainbow City at the date of disposal were as follows:

	HK$ million
Property, plant and equipment	1.2
Property under development	852.8
Properties held for sale	0.9
Debtors, deposits and prepayments	24.4
Bank balances, deposits and cash	534.2
Accounts payable and accrued charges	(146.0)
Taxation payable	(46.1)
Bank loans	(284.4)
Minority interests	(6.1)
Net assets disposed of	930.9
Costs incurred in connection with the disposal	27.4
Gain on disposal	345.7
Other reserve arising on transaction (see note 26(b))	231.1
Total consideration	1,535.1
Satisfied by:
Share of net assets of an associate	1,405.1
Amount due from SOL	130.0
	1,535.1
Net cash outflow arising on disposal:
Bank balances, deposits and cash disposed of	(534.2)
Costs incurred in connection with the disposal	(27.4)
	(561.6)

The subsidiary disposed of during the year ended 31 March 2005 contributed HK$1.6 million (2004: HK$679.0 million; 2003: nil) to the Group’s turnover and incurred a loss of HK$0.2 million (2004: contributed a profit of HK$169.3 million; 2003: incurred a loss of HK$1.2 million) included in the Group’s loss from operations.

— 97 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

(b) Concrete operations in the Guangdong province

The Group entered into a sale and purchase agreement on 15 October 2004 with an independent third party to dispose of the concrete operations in the Guangdong province of the PRC at a consideration of HK$4.7 million. The operation was handed over to the purchaser in November 2004. The loss on disposal of the concrete operations, which amounted to HK$15.4 million, has been recognised in the consolidated income statement for the year ended 31 March 2005.

The results of the concrete operations were included under “Sale of construction materials” in the segmental information set out in note 2 above.

The net assets of the concrete operations at the date of disposal were as follows:

	HK$ million
Property, plant and equipment	15.4
Site establishment expenditure	2.7
Net assets disposed of	18.1
Costs incurred in connection with the disposal	2.0
Total cost of disposal	20.1
Loss on disposal	(15.4)
Total consideration	4.7
Satisfied by:
Cash	4.7
Net cash inflow arising on disposal:
Cash consideration	4.7
Costs incurred in connection with the disposal	(2.0)
	2.7

The subsidiary disposed of during the year ended 31 March 2005 contributed HK$25.5 million (2004: HK$70.6 million; 2003: HK$91.1 million) to the Group’s turnover and incurred a loss of HK$5.1 million (2004: HK$7.9 million; 2003: HK$4.1 million) included in the Group’s loss from operations.

(c) Construction materials operations in Hong Kong

On 31 December 2004, the Group entered into a sale and purchase agreement with an independent third party to dispose of the subsidiaries engaged in the production and distribution of ready mixed concrete and instant mortars and the distribution and sale of cement in Hong Kong for a consideration of HK$95 million. In addition, the Group also subcontracted the rights for the site formation work being carried out at Guishan Island, Zhuhai, the PRC, where aggregates are excavated to the purchaser, allowing it to continue to use the equipment previously used by the Group, for a term of 15 years. The consideration is HK$15 million. Details of these transactions were set out in a circular of the Company dated 26 January 2005.

— 98 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

The operation was handed over to the purchaser in February 2005. A gain of HK$41.3 million arose on the disposal of the construction materials operations that has been recognised in the consolidated income statement for the year ended 31 March 2005.

The results of the construction materials operations were included under “Sale of construction materials” in the segmental information set out in note 2 above.

The net assets of the concrete operations at the date of disposal were as follows:

	HK$ million
Property, plant and equipment	46.3
Site establishment expenditure	11.2
Inventories	6.0
Net assets disposed of	63.5
Costs incurred in connection with the disposal	14.5
Total cost of disposal	78.0
Gain on disposal	41.3
Total consideration	119.3
Satisfied by:
Cash consideration	95.0
Consideration receivable	24.3
	119.3
Net cash inflow arising on disposal:
Cash consideration	95.0
Costs incurred in connection with the disposal	(14.5)
	80.5

The subsidiaries disposed of during the year ended 31 March 2005 contributed HK$195.4 million (2004: HK$189.5 million; 2003: HK$519.2 million) to the Group’s turnover and incurred a loss of HK$30.3 million (2004: HK$48.9 million; 2003: HK$14.4 million) included in the Group’s loss from operations.

— 99 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

34. CONTINGENT LIABILITIES

The Group had contingent liabilities not provided for in the financial statements as follows:

• (a) At 31 March 2005, performance bonds established amounting to approximately HK$162.5 million (2004: HK$164.4 million; 2003: HK$143.4 million).

• (b) At 31 March 2004, Shanghai Rui Hong Xin Cheng Co. Ltd., a subsidiary of the Group, had given guarantees to banks in respect of mortgage facilities granted to the buyers of its residential properties of approximately HK$299.4 million (2003: nil). The subsidiary was disposed of during the year ended 31 March 2005.

The Company has given guarantees to banks in respect of general facilities granted to its subsidiaries and jointly controlled entities for general facilities. The extent of such facilities utilised by the subsidiaries and jointly controlled entities at 31 March 2005 amounted to approximately HK$271.4 million (2004: HK$551.8 million; 2003: HK$67.4 million) and HK$317.2 million (2004: HK$307.8 million; 2003: HK$159.0 million).

Pursuant to an agreement entered into with the Hongkou Government and the Education Authority of the Hongkou District, Shanghai, the PRC on 31 July 2002, guarantees of no more than HK$303.0 million (equivalent to RMB324 million) would be granted by the Group to support bank borrowings arranged in the name of a company to be nominated by the Hongkou Government, as part of the financial arrangement for the site clearance work in relation to the development of a parcel of land. As at 31 March 2004 and 31 March 2003, no amount was drawn down under this arrangement. The subsidiary which granted the guarantee was disposed of during the year ended 31 March 2005.

35. RELATED PARTY TRANSACTIONS

• (a) During the year, the Group had the following transactions with SOCL and its subsidiaries and associates other than those of the Group (“SOCL Group”). These transactions were to reimburse the costs and expenses incurred, or were carried out on terms similar to those applicable to transactions with unrelated parties or as mutually agreed between the parties.

Nature of transactions	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Income received:
Management and information system services	0.5	0.4	0.4
Project management services	11.8	4.1	—
Sales and marketing services	3.7	1.4	—
Procurement agency services	—	—	2.1
Cost and expenses paid:
Rental expenses	0.6	0.9	0.5
Building management fee	0.1	0.1	0.1
Balance as at 31 March
Amounts due from SOCL Group	0.4	0.2	0.5
Amounts due to SOCL Group	0.1	0.1	—

— 100 —

APPENDIX I

ACCOUNTANTS’ REPORT OF SOCAM

• (b) During the year, the Group had the following transactions with jointly controlled entities of the Group on terms meant to reimburse costs and expenses incurred and on terms similar to those applicable to transactions with unrelated parties or as mutually agreed between the parties.

Nature of transactions	2003	2004	2005
	HK$ million	HK$ million	HK$ million
Income received:
Interest income	7.6	5.4	5.2
Management fee	0.8	—	—
Rental income	—	0.2	0.2
Sales of construction materials	0.2	2.4	2.6
Capital contribution from dissolution of
a jointly controlled entity	15.3	—	—
Cost and expenses paid:
Construction/subcontracting work	82.2	71.4	37.9
Supply of construction materials	13.0	20.8	14.8
Management and information system services	0.3	—	0.1
Consultancy fee	—	0.4	0.4
Sales proceeds from disposal of property, plant and
equipment	—	0.9	—
Balances as at 31 March
Amounts due from jointly controlled entities	620.9	593.6	785.5*
Amounts due to jointly controlled entities	23.0	19.4	24.1

• Included in the amounts due from jointly controlled entities are amounts of approximately HK$206.2 million (2004: HK$169.8 million; 2003: HK$268.6 million), which are interest bearing and with no fixed repayment terms.

• (c) During the year ended 31 March 2005, the Group entered into agreements with SOCL for co-investment in SOL. Details of which are set out in note 33(a).

• (d) The Group is licensed by Shui On Holdings Limited, a wholly-owned subsidiary of SOCL, to use the trademark, trade name “Shui On”, “ ” and/or the Seagull devices on a non-exclusive, royalty-free basis for an unlimited period of time.

• (e) During the year ended 31 March 2005, the Group received dividend income amounting to HK$129.6 million (2004: HK$29.7 million; 2003: HK$1.0 million) from certain jointly controlled entities.

— 101 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

B. SUBSEQUENT EVENTS

On 11 August 2005, the Company announced the following transactions:

The Company, through a wholly owned subsidiary, entered into an agreement with Olympio Corporation (“Olympio”) whereby the Group would acquire from Olympio its 50% interest in TH Industrial Management Limited (“TH Industrial”) and the benefit of the shareholder’s loan from Olympio for a consideration of RMB270.0 million pursuant to the conditions therein (the “Acquisition”).

The Company also entered into strategic alliance with a wholly owned subsidiary of Lafarge S.A. (“Lafarge”) with the execution of a contribution agreement and a joint venture agreement whereby:

• The Company will make a cash contribution of initially RMB90.3 million (subject to adjustment) and contribute its interest in certain subsidiaries and jointly controlled entities (including the interest in certain subsidiaries of TH Industrial to be acquired under the Acquisition) which are engaged in the business of manufacturing, producing, trading and distributing cement and associated products and ready mixed concrete (Shui On PRC Cement Business) into a new joint venture company for a 45% stake; and

• Lafarge will contribute its interest in certain subsidiaries which are engaged in the same business together with certain inter-company receivable owed by these subsidiaries into the new joint venture company for a 55% stake.

The completion of the transactions are conditional on the fulfilment of certain conditions.

Included in the consolidated balance sheet of the Group as at 31 March 2005 are the assets and liabilities attributable to the entities under Shui On PRC Cement Business as follows:

	TH
	Industry II	Sommerset	Total
	HK$ million	HK$ million	HK$ million
Non-current assets	321.1	105.2	426.3
Current assets	—	116.7	116.7
Current liabilities	—	0.2	0.2
Non-current liabilities	—	—	—
Net assets attributable to minority interest	—	—	—
Net assets attributable to the Group	321.1	221.7	542.8

— 102 —

ACCOUNTANTS’ REPORT OF SOCAM

APPENDIX I

Included in the consolidated income statement of the Group for the year ended 31 March 2005 are the results attributable to the entities under Shui On PRC Cement Business as follows:

	TH
	Industry II	Sommerset	Total
	HK$ million	HK$ million	HK$ million
Turnover	—	—	—
Profit (loss) from operations	—	—	—
Finance costs	—	—	—
Share of results of jointly controlled entities	(17.1)	12.9	(4.2)
Profit (loss) before taxation	(17.1)	12.9	(4.2)
Income tax (expenses) credit	—	—	—
Profit (loss) for the year	(17.1)	12.9	(4.2)

C. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of any of the companies have been prepared in respect of any period subsequent to 31 March 2005.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

— 103 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

==> picture [75 x 57] intentionally omitted <==

==> picture [99 x 35] intentionally omitted <==

30 September 2005

The Directors

Shui On Construction and Materials Limited

Dear Sirs,

We set out below our report on the financial information regarding T.H. Industrial Management Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) for the years ended 31 December 2002, 2003 and 2004 and the five months ended 31 May 2005 (the “Relevant Periods”), for inclusion in the circular of Shui On Construction and Materials Limited (“SOCAM”) dated 30 September 2005 (the “Circular”) in relation to the major acquisition and formation of joint venture with Lafarge in relation to People’s Republic of China (“PRC”) cement operations (very substantial disposal and increase in authorised share capital).

The Company was incorporated in the Commonwealth of the Bahamas on 27 September 1993 with limited liability under the International Business Companies Act 1989 (No. 2 of 1990).

As at the date of this report, the particulars of the Company’s subsidiaries are as follows:

==> picture [429 x 280] intentionally omitted <==

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

||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Proportion|of|
|nominal|value|
|of|registered/|
|share|capital|
|Issued|and|fully|effectively|
|Country|of|Date|of|paid|registered/|held|by|the|
|Name|of|subsidiary|establishment|establishment|share|capital|Company|Principal|activities|
|TH|Cement|Holdings|Ltd.|The|Bahamas|27|September|1993|US$1,600|100%|Investment|holding|
|Foremost|Group|Limited|The|British|Virgin|4|May|1995|US$2,000|100%|Investment|holding|
|Islands|
|TH|Industry|III|Limited|The|Bahamas|11|January|1994|US$2,000|100%|Dormant|
|Solid|Foundation|The|British|Virgin|8|June|1995|US$2,000|100%|Dormant|
|Management|Limited|Islands|
|Prelude|Group|Limited|The|British|Virgin|8|June|1995|US$2,000|100%|Dormant|
|Islands|
|TH|Industry|I|Limited|The|Bahamas|5|September|1994|US$100|100%|Investment|holding|
|TH|Industry|II|Limited|The|Bahamas|11|January|1994|US$2,000|100%|Investment|holding|
|Chongqing|TH|White|PRC|8|February|1994|RMB12,800,000|60%|Production|and|sale|
|Cement|Co.,|Ltd.|of|cement|
|(|)|
|(Note|1)|
|Chongqing|TH|Special|PRC|8|May|1995|RMB210,000,000|80%|Production|and|sale|
|Cement|Co.,|Ltd.|of|cement|
|(|)|
|(Note|1)|

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— 104 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

==> picture [429 x 564] intentionally omitted <==

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

|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|Proportion|of|
|nominal|value|
|of|registered/|
|share|capital|
|Issued|and|fully|effectively|
|Country|of|Date|of|paid|registered/|held|by|the|
|Name|of|subsidiary|establishment|establishment|share|capital|Company|Principal|activities|
|Chongqing|TH|Diwei|PRC|28|August|2001|RMB61,680,000|80%|Production|and|sale|
|Cement|Co.,|Ltd.|of|cement|
|(|)|
|(Note|1)|
|Chongqing|TH|Packaging|PRC|19|February|2001|RMB2,890,000|80%|Production|and|
|Co.,|Ltd.|selling|of|knitted|
|(|)|bags|and|related|
|(Note|1)|products|
|Chongqing|TH|Logistics|PRC|26|April|2002|RMB500,000|80%|Provision|of|
|Co.,|Ltd.|logistics|services|
|(|)|
|(Note|1)|
|Chongqing|TH|Holding|PRC|7|June|2002|RMB56,460,000|100%|Investment|holding|
|Management|Co.,|Ltd.|and|provision|of|
|(|administrative|
|)|(Note|2)|services|
|Guangan|TH|Cement|PRC|2|August|2002|RMB110,000,000|100%|Production|and|sale|
|Co.,|Ltd.|of|cement|
|(|)|
|(Note|2)|
|Chongqing|TH|New|Building|PRC|31|October|2003|RMB41,500,000|75%|Pre-operating|stage|
|Materials|Co.,|Ltd.|
|(|)|
|(Note|1)|
|Suining|TH|Cement|PRC|10|December|2002|RMB15,000,000|90%|Pre-operating|stage|
|Co.,|Ltd.|
|(|)|
|(Note|1)|
|Nanchong|TH|Cement|PRC|18|June|2003|RMB15,000,000|100%|Pre-operating|stage|
|Co.,|Ltd.|
|(|)|
|(Note|2)|
|Chongqing|TH|Fuling|PRC|26|March|2003|RMB44,000,000|100%|Production|and|sale|
|Cement|Co.,|Ltd.|of|cement|
|(|)|
|(Note|2)|
|Chongqing|TH|Stone|PRC|9|August|2004|RMB10,000,000|55%|Pre-operating|stage|
|Development|Co.,|Ltd.|
|(|
|)|
|(Note|1)|
|Chongqing|TH|Desheng|PRC|16|July|2004|RMB10,000,000|60%|Trading|of|
|Engineering|Co.,|Ltd.|construction|
|(|equipment|
|)|
|(Note|1)|

----- End of picture text -----

Notes:

1. The subsidiaries are sino-foreign equity joint ventures in the PRC.

2. The subsidiaries are wholly foreign owned enterprises in the PRC.

— 105 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

The statutory financial statements of the Company’s subsidiaries for the years ended 31 December 2002, 2003 and 2004 were audited by the following certified public accountants:

Name of subsidiary Financial period

Auditors

Chongqing TH White	Years ended 31 December 2002 and 2003	KPMG Huazhen
Cement Co., Ltd.		Certified Public
		Accountants (“KPMG
		Huazhen”)
	Year ended 31 December 2004	Chongqing Boma
		Certified Public
		Accountants Co., Ltd.
		(“Chongqing Boma”)
Chongqing TH Special	Years ended 31 December 2002 and 2003	KPMG Huazhen
Cement Co., Ltd.	Year ended 31 December 2004	Chongqing Boma
Chongqing TH Diwei	Years ended 31 December 2002 and 2003	KPMG Huazhen
Cement Co., Ltd.	Year ended 31 December 2004	Chongqing Boma
Chongqing TH Packaging	Years ended 31 December 2002 and 2003	KPMG Huazhen
Co., Ltd.	Year ended 31 December 2004	Chongqing Boma
Chongqing TH Logistics	Period from 26 April 2002 (date of	KPMG Huazhen
Co., Ltd.	establishment) to 31 December 2002
	Year ended 31 December 2003	KPMG Huazhou
	Year ended 31 December 2004	Chongqing Boma
Chongqing TH Holding	Period from 7 June 2002 (date of	KPMG Huazhen
Management Co., Ltd.	establishment) to 31 December 2002
	Year ended 31 December 2003	KPMG Huazhen
	Year ended 31 December 2004	Chongqing Boma
Guangan TH Cement Co.,	Year ended 31 December 2004	Chongqing Boma
Ltd.
Chongqing TH New	Period from 31 October 2003 (date of	KPMG Huazhen
Building Materials Co.,	establishment) to 31 December 2003
Ltd.	Year ended 31 December 2004	Chongqing Boma
Suining TH Cement Co.,	Period from 10 December 2002 (date of	KPMG Huazhen
Ltd.	establishment) to 31 December 2003
	Year ended 31 December 2004	Chongqing Boma

— 106 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Name of subsidiary	Financial period	Auditors
Nanchong TH Cement	Period from 18 June 2003 (date of	KPMG Huazhen
Co., Ltd.	establishment) to 31 December 2003
	Year ended 31 December 2004	Chongqing Boma
Chongqing TH Fuling	Period from 26 March 2003 (date of	KPMG Huazhen
Cement Co., Ltd.	establishment) to 31 December 2003
	Year ended 31 December 2004	Chongqing Boma
Chongqing TH Stone	Period from 9 August 2004 (date of	Chongqing Boma
Development Co., Ltd.	establishment) to 31 December 2004
Chongqing TH Desheng	Period from 16 July 2004 (date of	Chongqing Boma
Engineering Co., Ltd.	establishment) to 31 December 2004

No audited financial statements have been prepared for TH Cement Holdings Ltd., Foremost Group Limited, TH Industry III Limited, Solid Foundation Management Limited, TH Industry I Limited and TH Industry II Limited since their respective dates of incorporation as there are no statutory requirements for these entities to prepare audited financial statements.

No audited financial statements for Guangan TH Cement Co., Ltd. since its date of establishment to 31 December 2003 as the assets and liabilities transferred into this company have not yet been formally approved by the government until 2004.

The consolidated financial statements of the Group, prepared under accounting principles generally accepted in Hong Kong, for the years ended 31 December 2002 and 2003 were audited by KPMG Hong Kong, Certified Public Accountants. We have audited the consolidated financial statements of the Group, prepared under accounting principles generally accepted in Hong Kong, for the year ended 31 December 2004.

For the purpose of this report, we have carried out independent audit procedures in accordance with Hong Kong Standards on Auditing (“SAS”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) in respect of the consolidated management accounts of the Group, prepared under accounting principles generally accepted in Hong Kong, for the five months ended 31 May 2005.

We have examined the audited consolidated financial statements of the Group for the years ended 31 December 2002, 2003, 2004 and five months ended 31 May 2005, and have carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The financial information set out below (the “Financial Information”) has been prepared in accordance with Hong Kong Financial Reporting Standards applicable to each of the year/period of the Relevant Period based on the consolidated financial statements/management accounts of the Group prepared in accordance with Hong Kong Financial Reporting Standards.

— 107 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

The preparation of the consolidated financial statements/management accounts of the Group is the responsibility of the directors of the Company. The directors of SOCAM are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on our examination and review, on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information together with the notes thereon gives, for the purpose of this report, a true and fair view of the state of affairs of the Group and state of affairs of the Company as at 31 December 2002, 2003, 2004 and 31 May 2005, and of the consolidated results and cash flows of the Group for the years ended 31 December 2002, 2003 and 2004 and for the five months ended 31 May 2005.

For the purpose of this report, we have reviewed the consolidated management accounts of the Group for the five months ended 31 May 2004 in accordance with the SAS No. 700 “Engagement to Review Interim Financial Reports” issued by the HKICPA. A review consists principally of making enquiries of the Group’s management and applying analytical procedures to the financial information and based thereon, assessing whether the accounting policies and presentation have consistently been applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the consolidated management accounts of the Group for the five months ended 31 May 2004.

On the basis of our review, which does not constitute an audit, we are not aware of any material modifications that should be made to the consolidated management accounts of the Group for five months ended 31 May 2004.

— 108 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

A. FINANCIAL INFORMATION

CONSOLIDATED INCOME STATEMENTS

Notes Turnover 5 Cost of sales Other operating income 6 Selling expenses General and administrative expenses Finance costs 7 Share of result of an associate Profit (loss) before taxation 8 Income tax (expenses) credit 10 Profit (loss) for the year/period Attributable to: Equity holders of the parent Minority interests	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 710,349 924,105 949,336 395,873 398,468 (541,500) (703,639) (836,759) (344,247) (363,808) 168,849 220,466 112,577 51,626 34,660 17,374 39,420 35,125 17,534 6,973 (41,704) (53,196) (17,145) (12,506) (6,791) (71,279) (113,444) (138,370) (65,403) (54,377) 73,240 93,246 (7,813) (8,749) (19,535) (27,157) (35,791) (32,513) (14,715) (37,651) — — (63) (53) — 46,083 57,455 (40,389) (23,517) (57,186) (1,045) (3,383) (1,546) (700) 734 45,038 54,072 (41,935) (24,217) (56,452) 36,389 40,395 (43,387) (25,241) (49,355) 8,649 13,677 1,452 1,024 (7,097) 45,038 54,072 (41,935) (24,217) (56,452)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 710,349 924,105 949,336 395,873 398,468 (541,500) (703,639) (836,759) (344,247) (363,808) 168,849 220,466 112,577 51,626 34,660 17,374 39,420 35,125 17,534 6,973 (41,704) (53,196) (17,145) (12,506) (6,791) (71,279) (113,444) (138,370) (65,403) (54,377) 73,240 93,246 (7,813) (8,749) (19,535) (27,157) (35,791) (32,513) (14,715) (37,651) — — (63) (53) — 46,083 57,455 (40,389) (23,517) (57,186) (1,045) (3,383) (1,546) (700) 734 45,038 54,072 (41,935) (24,217) (56,452) 36,389 40,395 (43,387) (25,241) (49,355) 8,649 13,677 1,452 1,024 (7,097) 45,038 54,072 (41,935) (24,217) (56,452)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 710,349 924,105 949,336 395,873 398,468 (541,500) (703,639) (836,759) (344,247) (363,808) 168,849 220,466 112,577 51,626 34,660 17,374 39,420 35,125 17,534 6,973 (41,704) (53,196) (17,145) (12,506) (6,791) (71,279) (113,444) (138,370) (65,403) (54,377) 73,240 93,246 (7,813) (8,749) (19,535) (27,157) (35,791) (32,513) (14,715) (37,651) — — (63) (53) — 46,083 57,455 (40,389) (23,517) (57,186) (1,045) (3,383) (1,546) (700) 734 45,038 54,072 (41,935) (24,217) (56,452) 36,389 40,395 (43,387) (25,241) (49,355) 8,649 13,677 1,452 1,024 (7,097) 45,038 54,072 (41,935) (24,217) (56,452)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 710,349 924,105 949,336 395,873 398,468 (541,500) (703,639) (836,759) (344,247) (363,808) 168,849 220,466 112,577 51,626 34,660 17,374 39,420 35,125 17,534 6,973 (41,704) (53,196) (17,145) (12,506) (6,791) (71,279) (113,444) (138,370) (65,403) (54,377) 73,240 93,246 (7,813) (8,749) (19,535) (27,157) (35,791) (32,513) (14,715) (37,651) — — (63) (53) — 46,083 57,455 (40,389) (23,517) (57,186) (1,045) (3,383) (1,546) (700) 734 45,038 54,072 (41,935) (24,217) (56,452) 36,389 40,395 (43,387) (25,241) (49,355) 8,649 13,677 1,452 1,024 (7,097) 45,038 54,072 (41,935) (24,217) (56,452)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 710,349 924,105 949,336 395,873 398,468 (541,500) (703,639) (836,759) (344,247) (363,808) 168,849 220,466 112,577 51,626 34,660 17,374 39,420 35,125 17,534 6,973 (41,704) (53,196) (17,145) (12,506) (6,791) (71,279) (113,444) (138,370) (65,403) (54,377) 73,240 93,246 (7,813) (8,749) (19,535) (27,157) (35,791) (32,513) (14,715) (37,651) — — (63) (53) — 46,083 57,455 (40,389) (23,517) (57,186) (1,045) (3,383) (1,546) (700) 734 45,038 54,072 (41,935) (24,217) (56,452) 36,389 40,395 (43,387) (25,241) (49,355) 8,649 13,677 1,452 1,024 (7,097) 45,038 54,072 (41,935) (24,217) (56,452)
	168,849 17,374 (41,704) (71,279) 73,240 (27,157) — 46,083 (1,045)	220,466 39,420 (53,196) (113,444) 93,246 (35,791) — 57,455 (3,383)	112,577 35,125 (17,145) (138,370) (7,813) (32,513) (63) (40,389) (1,546)	51,626 17,534 (12,506) (65,403) (8,749) (14,715) (53) (23,517) (700)	34,660 6,973 (6,791 (54,377
					(19,535 (37,651 —
					(57,186 734
	45,038	54,072	(41,935)	(24,217)
	36,389 8,649	40,395 13,677	(43,387) 1,452	(25,241) 1,024	(49,355 (7,097
	45,038	54,072	(41,935)	(24,217)

— 109 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Notes Non-current assets Intangible assets 12 Property, plant and equipment 13 Construction in progress 14 Land use rights 15 Interests in an associate 16 Interests in a jointly controlled entity 17 Long-term investment 18 Other long-term receivable 19 Current assets Inventories 20 Debtors, deposits and prepayments 21 Amounts due from minority shareholders 22 Amount due from an associate 22 Amount due from a jointly controlled entity 22 Bank balances Pledged bank deposits	As 2002 RMB’000 (45,878) 783,988 67,990 176,124 — — — —	at 31 December 2003 2004 RMB’000 RMB’000 (198,703) (180,040) 1,143,853 1,118,046 188,999 700,868 381,362 373,260 234 165 — 1,314 43,200 40,692 — —	at 31 December 2003 2004 RMB’000 RMB’000 (198,703) (180,040) 1,143,853 1,118,046 188,999 700,868 381,362 373,260 234 165 — 1,314 43,200 40,692 — —	As at 31 May 2005 RMB’000 3,249 1,534,181 342,028 369,930 165 4,380 — 18,346
	982,224 63,884 285,372 3,229 — — 106,845 — 459,330	1,558,945 124,409 225,694 1,287 3,021 — 232,278 35,883 622,572	2,054,305 131,973 210,391 754 1,913 1,208 76,486 116,591 539,316	2,272,279
				141,808 240,813 1,603 1,482 1,227 88,726 103,915
				579,574

— 110 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Notes Current liabilities Bank borrowings, due within one year 23 Creditors and accrued charges 24 Amounts due to minority shareholders 25 Amount due to a shareholder 25 Amount due to a jointly controlled entity 25 Income tax payable Net current assets (liabilities) Capital and reserves Share capital 26 Reserves Minority interests Non-current liabilities Loans from shareholders 28 Bank borrowings 23 Long-term payables 29 Deferred taxation 30	As 2002 RMB’000 169,668 172,810 4,338 — — 779	at 31 December 2003 2004 RMB’000 RMB’000 497,457 656,507 259,485 444,712 1,472 — — 3,864 — — 651 740	at 31 December 2003 2004 RMB’000 RMB’000 497,457 656,507 259,485 444,712 1,472 — — 3,864 — — 651 740	As at 31 May 2005 RMB’000 900,085 490,716 — 5,858 3,150 511 1,400,320 (820,746) 1,451,533 23 239,474 239,497 161,203 400,700 541,848 375,956 61,626 71,403 1,050,833 1,451,533
	347,595 111,735	759,065 (136,493)	1,105,823 (566,507)	1,400,320
				(820,746
	1,093,959	1,422,452	1,487,798
	23 52,352 52,375 137,508 189,883 502,511 296,478 32,734 72,353 904,076	23 92,747 92,770 147,880 240,650 532,597 476,605 100,247 72,353 1,181,802	23 49,360 49,383 164,580 213,963 529,481 557,925 114,076 72,353 1,273,835	23 239,474
				239,497
				161,203
				400,700
				541,848 375,956 61,626 71,403
				1,050,833
	1,093,959	1,422,452	1,487,798

— 111 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

BALANCE SHEETS

THE COMPANY

Notes Non-current assets Property, plant and equipment 13 Investments in subsidiaries 31 Current assets Prepayments and other receivables 21 Bank balances, deposits and cash Current liabilities Creditors and accruals 24 Amounts due to subsidiaries 32 Amount due to a shareholder 25 Bank borrowings 23 Net current assets (liabilities) Capital and reserves Share capital 26 Reserves 27 Non-current liabilities Loans from shareholders 28 Bank borrowings 23	As at 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,312 1,288 1,248 316,261 454,883 463,893	As at 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,312 1,288 1,248 316,261 454,883 463,893	As at 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,312 1,288 1,248 316,261 454,883 463,893	As at 31 May 2005 RMB’000 — 477,289 477,289 3 1,955 1,958 — 920 5,494 318,000 324,414 (322,456) 154,833 23 (21,883) (21,860) 176,693 — 176,693 154,833
	317,573 699 91 790 577 — — — 577 213	456,171 806 226 1,032 480 — — — 480 552	465,141 5 3,285 3,290 479 381 3,875 159,000 163,735 (160,445)	477,289
				3 1,955
				1,958
				— 920 5,494 318,000
				324,414
				(322,456
	317,786	456,723	304,696
	23 (27,769) (27,746) 186,411 159,121 345,532	23 (43,028) (43,005) 186,411 313,317 499,728	23 (40,738) (40,715) 186,411 159,000 345,411	23 (21,883
				(21,860
				176,693 —
				176,693
	317,786	456,723	304,696

— 112 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

						Attributable
					Accumulated	to equity
	Share	Reserve	Exchange	Capital	profits	holders of	Minority
	capital	funds	reserve	reserve	(losses)	the parent	interests	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
At 1 January 2002	23	3,545	(408)	—	12,826	15,986	134,303	150,289
Adjustment (note b)	—	(2,351)	—	—	2,351	—	—	—
Adjustment (note c)	—	—	—	—	—	—	(1,001)	(1,001)
Dividend paid	—	—	—	—	—	—	(4,443)	(4,443)
Profit for the year	—	—	—	—	36,389	36,389	8,649	45,038
Transfer to reserve funds	—	1,944	—	—	(1,944)	—	—	—
At 31 December 2002	23	3,138	(408)	—	49,622	52,375	137,508	189,883
Profit for the year	—	—	—	—	40,395	40,395	13,677	54,072
Contribution from
minority interests	—	—	—	—	—	—	439	439
Dividend paid	—	—	—	—	—	—	(3,744)	(3,744)
Transfer to reserve funds	—	4,933	—	—	(4,933)	—	—	—
At 31 December 2003	23	8,071	(408)	—	85,084	92,770	147,880	240,650
Loss for the year	—	—	—	—	(43,387)	(43,387)	1,452	(41,935)
Transfer to reserve funds	—	6,219	—	—	(6,219)	—	—	—
Contribution from
minority interests	—	—	—	—	—	—	19,775	19,775
Dividend paid	—	—	—	—	—	—	(4,527)	(4,527)
At 31 December 2004	23	14,290	(408)	—	35,478	49,383	164,580	213,963
Effect of changes of
accounting policies:
Capital contribution —
adjustments to loans
from shareholders	—	—	—	27,600	—	27,600	—	27,600
Adjustment to fair value
of long-term payable	—	—	—	—	14,880	14,880	3,720	18,600
Derecognition of negative
goodwill	—	—	—	—	183,289	183,289	—	183,289
At 1 January 2005	23	14,290	(408)	27,600	233,647	275,152	168,300	443,452
Capital contribution —
adjustment to loans
from shareholders	—	—	—	13,700	—	13,700	—	13,700
Loss for the period	—	—	—	—	(49,355)	(49,355)	(7,097)	(56,452)
At 31 May 2005	23	14,290	(408)	41,300	184,292	239,497	161,203	400,700
For the five months ended
31 May 2004:
At 1 January 2004	23	8,071	(408)	—	85,084	92,770	147,880	240,650
Loss for the period	—	—	—	—	(25,241)	(25,241)	1,024	(24,217)
At 31 May 2004	23	8,071	(408)	—	59,843	67,529	148,904	216,433

Notes:

(a) According to the relevant PRC rules and regulations applicable to foreign-owned enterprises, certain subsidiaries of the Group are required to transfer to least 10% of its profit after taxation for the year, as determined under PRC Accounting Regulations, to reserve funds.

(b) With the adoption of the Accounting Rules for Business Enterprises by certain PRC subsidiaries of the Group during the year, the amounts available for transfer from retained earnings to reserve funds have been changed and adjusted during 2002.

(c) Being adjustment for subsequent identification of liabilities of a PRC subsidiary shared by a minority shareholder.

— 113 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

CONSOLIDATED CASH FLOW STATEMENTS

OPERATING ACTIVITIES Profit (loss) before taxation Adjustment for: Amortisation of goodwill/negative goodwill Interest income Interest expense Allowance for doubtful debts Write off of other receivable Waiver of long outstanding payable Depreciation and amortisation Share of result of associate Net (gain) loss on disposal of property, plant and equipment and construction in progress Loss on disposal of long-term investment Operating cash flow before movement in working capital Increase in inventories (Increase) decrease in debtors, deposits and prepayments (Decrease) increase in creditors and accruals Decrease (increase) in amounts due from minority shareholders Decrease in amounts due to minority shareholders (Increase) decrease in amount due from an associate Increase in amount due from a jointly controlled entity Increase in amount due to a jointly controlled entity (Decrease) increase in amounts due to a shareholder PRC income tax paid Net cash (used in) from operating activities	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 46,083 57,455 (40,389) (23,517) (57,186) (1,513) (18,656) (18,657) (7,776) — (1,419) (2,140) (3,209) (2,637) (3,974) 27,157 35,791 32,513 14,715 37,651 3,014 1,520 14,008 12,713 1,804 — — 3,625 — — — (2,474) (383) — — 67,340 101,265 77,666 29,074 37,783 — — 63 53 — (136) 869 845 — 2,250 — — — — 1,654 140,526 173,630 66,082 22,625 19,982 (16,486) (38,791) (7,564) (9,850) (9,835) (137,862) 93,271 (2,253) (32,006) (32,272) (870) (37,398) 185,610 68,761 46,004 1,080 1,942 533 (3,848) (849) (157) (2,866) (1,472) (1,472) — — (3,021) 1,108 1,030 431 — — (1,208) (1,171) (19) — — — — 3,150 (31,799) — 3,864 2,548 1,994 (45,568) 186,767 244,700 46,617 28,586 (2,260) (6,724) (1,457) (704) (445) (47,828) 180,043 243,243 45,913 28,141	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 46,083 57,455 (40,389) (23,517) (57,186) (1,513) (18,656) (18,657) (7,776) — (1,419) (2,140) (3,209) (2,637) (3,974) 27,157 35,791 32,513 14,715 37,651 3,014 1,520 14,008 12,713 1,804 — — 3,625 — — — (2,474) (383) — — 67,340 101,265 77,666 29,074 37,783 — — 63 53 — (136) 869 845 — 2,250 — — — — 1,654 140,526 173,630 66,082 22,625 19,982 (16,486) (38,791) (7,564) (9,850) (9,835) (137,862) 93,271 (2,253) (32,006) (32,272) (870) (37,398) 185,610 68,761 46,004 1,080 1,942 533 (3,848) (849) (157) (2,866) (1,472) (1,472) — — (3,021) 1,108 1,030 431 — — (1,208) (1,171) (19) — — — — 3,150 (31,799) — 3,864 2,548 1,994 (45,568) 186,767 244,700 46,617 28,586 (2,260) (6,724) (1,457) (704) (445) (47,828) 180,043 243,243 45,913 28,141	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 46,083 57,455 (40,389) (23,517) (57,186) (1,513) (18,656) (18,657) (7,776) — (1,419) (2,140) (3,209) (2,637) (3,974) 27,157 35,791 32,513 14,715 37,651 3,014 1,520 14,008 12,713 1,804 — — 3,625 — — — (2,474) (383) — — 67,340 101,265 77,666 29,074 37,783 — — 63 53 — (136) 869 845 — 2,250 — — — — 1,654 140,526 173,630 66,082 22,625 19,982 (16,486) (38,791) (7,564) (9,850) (9,835) (137,862) 93,271 (2,253) (32,006) (32,272) (870) (37,398) 185,610 68,761 46,004 1,080 1,942 533 (3,848) (849) (157) (2,866) (1,472) (1,472) — — (3,021) 1,108 1,030 431 — — (1,208) (1,171) (19) — — — — 3,150 (31,799) — 3,864 2,548 1,994 (45,568) 186,767 244,700 46,617 28,586 (2,260) (6,724) (1,457) (704) (445) (47,828) 180,043 243,243 45,913 28,141	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 46,083 57,455 (40,389) (23,517) (57,186) (1,513) (18,656) (18,657) (7,776) — (1,419) (2,140) (3,209) (2,637) (3,974) 27,157 35,791 32,513 14,715 37,651 3,014 1,520 14,008 12,713 1,804 — — 3,625 — — — (2,474) (383) — — 67,340 101,265 77,666 29,074 37,783 — — 63 53 — (136) 869 845 — 2,250 — — — — 1,654 140,526 173,630 66,082 22,625 19,982 (16,486) (38,791) (7,564) (9,850) (9,835) (137,862) 93,271 (2,253) (32,006) (32,272) (870) (37,398) 185,610 68,761 46,004 1,080 1,942 533 (3,848) (849) (157) (2,866) (1,472) (1,472) — — (3,021) 1,108 1,030 431 — — (1,208) (1,171) (19) — — — — 3,150 (31,799) — 3,864 2,548 1,994 (45,568) 186,767 244,700 46,617 28,586 (2,260) (6,724) (1,457) (704) (445) (47,828) 180,043 243,243 45,913 28,141	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 46,083 57,455 (40,389) (23,517) (57,186) (1,513) (18,656) (18,657) (7,776) — (1,419) (2,140) (3,209) (2,637) (3,974) 27,157 35,791 32,513 14,715 37,651 3,014 1,520 14,008 12,713 1,804 — — 3,625 — — — (2,474) (383) — — 67,340 101,265 77,666 29,074 37,783 — — 63 53 — (136) 869 845 — 2,250 — — — — 1,654 140,526 173,630 66,082 22,625 19,982 (16,486) (38,791) (7,564) (9,850) (9,835) (137,862) 93,271 (2,253) (32,006) (32,272) (870) (37,398) 185,610 68,761 46,004 1,080 1,942 533 (3,848) (849) (157) (2,866) (1,472) (1,472) — — (3,021) 1,108 1,030 431 — — (1,208) (1,171) (19) — — — — 3,150 (31,799) — 3,864 2,548 1,994 (45,568) 186,767 244,700 46,617 28,586 (2,260) (6,724) (1,457) (704) (445) (47,828) 180,043 243,243 45,913 28,141
	140,526 (16,486) (137,862) (870) 1,080 (157) — — — (31,799) (45,568) (2,260) (47,828)	173,630 (38,791) 93,271 (37,398) 1,942 (2,866) (3,021) — — — 186,767 (6,724) 180,043	66,082 (7,564) (2,253) 185,610 533 (1,472) 1,108 (1,208) — 3,864 244,700 (1,457) 243,243	22,625 (9,850) (32,006) 68,761 (3,848) (1,472) 1,030 (1,171) — 2,548 46,617 (704) 45,913	19,982 (9,835 (32,272 46,004 (849 — 431 (19 3,150 1,994
					28,586 (445
					28,141

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

INVESTING ACTIVITIES Decrease (increase) in pledged deposit at bank Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment and construction in progress Payment for construction in progress Interest received Payment for investment in an associate Payment for purchase of long-term investment Contributions to a jointly controlled entity Contributions from minority shareholders Payment for acquisition of a subsidiary (note 35) NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES New bank loans raised Increase (decrease) in loans from shareholders Repayment of bank loans Increase (decrease) in long-term payables Interest paid Dividend paid to minority shareholders NET CASH FROM FINANCING ACTIVITIES NET CASH (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR/PERIOD CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR/PERIOD ANALYSIS OF THE BALANCE OF CASH AND CASH EQUIVALENTS Bank balance, deposit and cash	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 38,300 (35,883) (80,708) (49,306) (134,063) (29,977) 1,128 2,227 4,260 (76,869) (170,639) (518,075) 1,979 2,140 3,209 — (240) — — (43,200) — — — (1,314) — 439 19,775 — (105,066) —	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 38,300 (35,883) (80,708) (49,306) (134,063) (29,977) 1,128 2,227 4,260 (76,869) (170,639) (518,075) 1,979 2,140 3,209 — (240) — — (43,200) — — — (1,314) — 439 19,775 — (105,066) —	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 38,300 (35,883) (80,708) (49,306) (134,063) (29,977) 1,128 2,227 4,260 (76,869) (170,639) (518,075) 1,979 2,140 3,209 — (240) — — (43,200) — — — (1,314) — 439 19,775 — (105,066) —	Five months ended 31 May 2004 2005 RMB’000 RMB’000 (36,681) 12,676 (14,936) (6,383) 1,315 2,238 (214,275) (85,774) 2,637 3,974 — — — — — (3,066) — — — — (261,940) (76,335) 334,657 250,319 (3,116) 42,167 (272,057) (188,710) 18,772 (13,158) (14,971) (30,184) (3,700) — 59,585 60,434 (156,442) 12,240 232,278 76,486 75,836 88,726 75,836 88,726	Five months ended 31 May 2004 2005 RMB’000 RMB’000 (36,681) 12,676 (14,936) (6,383) 1,315 2,238 (214,275) (85,774) 2,637 3,974 — — — — — (3,066) — — — — (261,940) (76,335) 334,657 250,319 (3,116) 42,167 (272,057) (188,710) 18,772 (13,158) (14,971) (30,184) (3,700) — 59,585 60,434 (156,442) 12,240 232,278 76,486 75,836 88,726 75,836 88,726
	(84,768) 359,477 137,990 (374,960) 14,965 (26,745) (4,443) 106,284 (26,312) 133,157	(484,285) 665,294 30,085 (222,828) — (39,132) (3,744) 429,675 125,433 106,845	(602,830) 712,693 (3,116) (472,323) 16,337 (45,269) (4,527) 203,795 (155,792) 232,278	(261,940) 334,657 (3,116) (272,057) 18,772 (14,971) (3,700) 59,585 (156,442) 232,278	(76,335
					250,319 42,167 (188,710 (13,158 (30,184 —
					60,434
					12,240 76,486
	106,845 106,845	232,278 232,278	76,486 76,486	75,836 75,836

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

NOTES TO THE FINANCIAL INFORMATION

1. GENERAL INFORMATION AND BASIS OF PREPARATION OF FINANCIAL INFORMATION

The Company is a limited company incorporated under the International Business Companies Act, 1989 (No. 2 of 1990) of the Commonwealth of the Bahamas. The address of its registered office is Bahamas International Trust Building, Bank Lane, P.O. Box N-8188 Nassau, Bahamas.

The principal business operation of the Company and its subsidiaries (“the Group”) is manufacturing and selling of cement. The Group has production facilities in PRC only.

The financial information has been prepared on a going concern basis because the shareholders have agreed to provide adequate funds to enable the Group to meet in full its financial obligations as they fall due for the foreseeable future.

2. CHANGES IN ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING POLICIES

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

Business combinations

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

Goodwill

In previous periods, goodwill arising on acquisitions after 1 January 2001 was capitalised and amortised over its estimated useful life. In accordance with the relevant transitional provisions in HKFRS 3, the Group has discontinued amortising such goodwill from 1 January 2005 onwards and goodwill will be tested for impairment at least annually / in the financial year in which the acquisition takes place. With respect to goodwill previously capitalised on the balance sheet, the Group on 1 January 2005 eliminated the carrying amount of the related accumulated amortisation of RMB943,000 with a corresponding decrease in the cost of goodwill. Goodwill arising on acquisitions after 1 January 2005 is measured at cost less accumulated impairment losses (if any) after initial recognition. As a result of this change in accounting policy, no amortisation of goodwill has been charged starting from 1 January 2005. Comparative figures for the three years ended 31 December 2004 have not been restated.

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

In accordance with HKFRS 3, any excess of the Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition (“discount on acquisition”) is recognised immediately in profit or loss in the period in which the acquisition takes place. In previous periods, negative goodwill arising on

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

acquisitions after 1 January 2001 was presented as a deduction from assets and released to income based on an analysis of the circumstances from which the balance resulted. In accordance with the relevant transitional provisions in HKFRS 3, the Group has derecognised all negative goodwill at 1 January 2005 of RMB183,289,000 previously presented as a deduction from assets with a corresponding increase to retained earnings.

Owner-occupied leasehold interest in land

In previous years, owner-occupied leasehold land and buildings were included in property, plant and equipment and measured using the cost model. The Group has applied HKAS 17 Leases starting from 1 January 2005. Under HKAS 17, the land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification, unless the lease payments cannot be allocated reliably between the land and buildings elements, in which case, the entire lease is generally treated as a finance lease. To the extent that the allocation of the lease payments between the land and buildings elements can be made reliably, the leasehold interests in land are reclassified to prepaid lease payments under operating leases, which are carried at cost and amortised over the lease term on a straight-line basis. This change in accounting policy has been applied retrospectively.

Financial assets and financial liabilities other than debt and equity securities

HKAS 32 Financial Instruments: Disclosure and Presentation requires retrospective application. The application of HKAS 32 has had no impact on how the financial instruments are presented. HKAS 39 Financial Instruments: Recognition and Measurement generally does not permit the recognition, derecognition or measurement of financial assets and liabilities on a retrospective basis. The Group has applied the relevant transitional provisions in HKAS 39 with respect to classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

Financial assets, other than debt and equity securities, are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate impairment losses for estimated irrecoverable amounts are recognized in income statement when there is objective evidence that the asset is impaired.

Financial liabilities are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

The effects of the changes in the accounting policies on the Group’s results for the current period and the Group’s equity at 1 January 2005 are as follows:

	Loss for the five
	months ended	Equity at
	31 May	1 January
	2005	2005
	RMB’000	RMB’000
Derecognition of negative goodwill and decrease in release of negative
goodwill for the period	7,863	183,289
Decrease in amortisation of goodwill	(87)	—
Capital contribution—adjustment to loans
from shareholders and imputed interest expenses	11,500	41,300
Fair value adjustment on other long-term receivables	3,654
Gain arising from changes in fair value of long-term payable	—	18,600
Increase in loss for the period and increase in equity at 1 January 2005	22,930	243,189

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

The HKICPA has also issued certain standards and INTs that are not yet effective. The Company has considered the following standards and INTs but does not expect they will have a material effect on how the results of operations and financial position of the Company are prepared and presented.

HKAS 19 (Amendment)	Actuarial Gains and Losses, Group Plans and Disclosures
HKAS 39 (Amendment)	Cash Flow Hedge Accounting of Forecast Intragroup Transactions
HKAS 39 (Amendment)	The Fair Value Option
HKFRS 6	Exploration for and Evaluation of Mineral Resources
HKFRS-Int 4	Determining whether an Arrangement Contains a Lease
HKFRS-Int 5	Rights to Interests Arising from Decommissing, Restoration and Environmental
	Rehabilitation Funds

The financial information has been prepared under the historical cost basis, except for certain financial instruments which are measured at fair value, and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial information incorporate the financial information of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

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

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

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

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

Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. For acquisition with an agreement date on or after 1 January 2005, the cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under HKFRS 3 are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with HKFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Investments in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for under HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are not recognised.

Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

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

Investments in joint ventures

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control, that is when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.

Where a group entity undertakes its activities under joint venture arrangements directly, the Group’s share of jointly controlled assets and any liabilities incurred jointly with other venturers are recognised in the financial statements of the relevant entity and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis. Income from the sale or use of the Group’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognised when it is probable that the economic benefits associated with the transactions will flow to/from the Group and their amount can be measured reliably.

Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its investments in jointly controlled entities using equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for under HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in jointly controlled entities are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the jointly controlled entity, less any impairment in the value of individual investments. Losses of a jointly controlled entity in excess of the Group’s investment in that jointly controlled entity (which includes any long-term interests that, in substance, form part of the Group’s net investment in the jointly controlled entity) are not recognised.

Any goodwill arising on the acquisition of the Group’s investment in a jointly controlled entity is accounted for in accordance with the Group’s accounting policy for goodwill arising on the acquisition of a subsidiary (see below).

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s investment in the joint venture.

Goodwill

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill arising on acquisition with an agreement date on or after 1 January 2005 is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

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

The Group’s policy for goodwill arising on the acquisition of an associate or a joint controlled entity is described under “investments in associates” and “investments in joint ventures” above.

The Group has applied the relevant transitional provisions in HKFRS3. With respect to goodwill arising on acquisitions prior to 1 January 2005 previously capitalised and amortised over its estimated useful life, the Group has discontinued amortising such goodwill from 1 January 2005 onwards and goodwill will be tested for impairment at least annually. As a result of this change in accounting policy, no amortisation of goodwill has been charged in the current period. Comparative figures for 2002, 2003 and 2004 have not been restated. With respect to negative goodwill arising on acquisitions prior to 1 January 2005 previously presented as a deduction from assets, the Group has derecognised all negative goodwill at 1 January 2005, with a corresponding increase to retained earnings.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes.

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

Service income is recognized when services are provided.

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

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

Leasing

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

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

Foreign currencies

The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial information, the results and financial position of each entity are expressed in Renminbi (“RMB”), which is the functional currency of the Company, and the presentation currency for the consolidated financial information.

In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

For the purpose of presenting consolidated financial information, the assets and liabilities of the Group’s foreign operations are expressed in RMB using exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

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

Government grants

Government grants and environmental protection subsidies are recognised in profit or loss over the periods necessary to match them with the related costs and are deducted in reported expenses or included in other operating income.

Retirement benefit costs

Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group’s obligations under the plans are equivalent to those arising in a defined contribution retirement benefit plan.

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

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

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

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

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

Property, plant and equipment

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

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Depreciation is provided to write off the cost of property, plant and equipment, other than construction in progress, over their estimated useful lives on a straight-line basis at the following rates per annum and after taking into account their estimated residual value, if applicable:

Buildings	20 - 30 years
Plant, machinery, furniture, fixtures and equipment	5 - 30 years
Motor vehicles	5 - 10 years

The Group changed the years of depreciation for some categories of property, plant and equipment from 1 January 2004. Details are as follows:

	Useful life	Useful life
Category of property, plant and equipment	(Before change)	(After change)
Buildings	10-20 years	30 years
Plant and machinery	10 years	15 years

The board of directors believes that the above accounting estimate after change can provide more reliable and relevant accounting information about its financial position, operating performance and cash flows. The above change in accounting estimate is applied prospectively and the net loss for the year ended 31 December 2004 has been decreased by RMB28,318,000 due to above change.

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

Construction in progress is stated at cost, less any recognised impairment loss. Cost comprises construction expenditures and other direct costs. No depreciation is provided on construction in progress until the relevant asset is ready for its intended use, at which time it is transferred to the appropriate categories of property, plant and equipment.

Leasehold land and land use rights

The up-front prepayments made on entering into or acquiring a leasehold land or land use right represent prepaid lease payments and it is accounted for as an operating lease. The prepaid lease payment is amortised on a straight-line basis over the lease term, or when there is impairment, the impairment is expensed in the income statement.

Impairment of tangible and intangible assets excluding goodwill

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

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

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

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but 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 (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

Financial instruments

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Receivables

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

Investments

Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.

At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised.

Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period.

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

Cash and cash equivalents

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

Financial liabilities and equity

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

Bank borrowings

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

Payables

Payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

Equity instruments

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

Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

3. CRITICAL ACCOUNTING ESTIMATES

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

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

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APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Estimated impairment of property, plant and equipment and land

The Group assesses annually whether property, plant and equipment have any indication of impairment, in accordance with the accounting policy. The recoverable amounts of property, plant and equipment have been determined based on value-in-use calculations, while that of leasehold land has been determined with reference to independent or directors’ estimated valuations. These calculations and valuations require the use of judgement and estimates.

Estimated allowance for doubtful debts

The Group makes allowance for doubtful debts based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgement and estimates. Where the expectation is different from the original estimate, such difference will impact carrying value of trade and other receivables and doubtful debt expenses in the years/periods in which such estimate has been changed.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

4. RISK MANAGEMENT

The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments.

The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts presented in the balance sheet are net of impairment losses for doubtful receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows.

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

5.

TURNOVER

Turnover represents the invoiced value of goods supplied to customers by the Group less value added tax, returns and discounts and revenue earned from provision of logistic services.

6. OTHER OPERATING INCOME

Included in other operating income are:

				**Five **	months
	**Year **	**ended 31 **	December	**ended **	31 May
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Amortisation of negative goodwill	1,723	18,871	18,873	7,864		—
Interest income	1,419	2,140	3,209	2,637	3,974
Value added tax refunded	12,943	6,249	3,453	1,481	1,582
Environmental protection subsidies	—	2,090	1,265	468		—
Waiver of long outstanding payable	—	2,474	383	—		—
Carriage income	—	2,945	—	—		—
Sales of scrap materials	—	1,609	781	470		67
Gain on disposal of property, plant and
equipment and construction in progress	136	—	—	—		10

— 126 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

7. FINANCE COSTS

Interest on bank and other borrowings — wholly repayable within five years — repayable over five years Other borrowings costs Less: amounts capitalised to construction in progress Imputed interest expenses on loans from shareholders 8. PROFIT (LOSS) BEFORE TAXATION	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 26,975 37,162 44,698 14,971 30,184 — — 571 — — 390 496 — — — (208) (1,867) (12,756) (256) (4,033)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 26,975 37,162 44,698 14,971 30,184 — — 571 — — 390 496 — — — (208) (1,867) (12,756) (256) (4,033)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 26,975 37,162 44,698 14,971 30,184 — — 571 — — 390 496 — — — (208) (1,867) (12,756) (256) (4,033)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 26,975 37,162 44,698 14,971 30,184 — — 571 — — 390 496 — — — (208) (1,867) (12,756) (256) (4,033)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 26,975 37,162 44,698 14,971 30,184 — — 571 — — 390 496 — — — (208) (1,867) (12,756) (256) (4,033)
	27,157 —	35,791 —	32,513 —	14,715 —	26,151 11,500
	27,157	35,791	32,513	14,715	37,651

				Five months	Five months
	**Year **	ended 31 December		ended 31 May
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Profit (loss) before taxation has been
arrived at after charging (crediting):
Amortisation of goodwill	210	209	210	88	—
Auditors’ remuneration	—	—	370	104	137
Depreciation and amortisation	67,340	101,265	77,666	29,074	37,783
Exchange (gain) loss	—	—	(243)	(14)	116
Loss on disposal of property,
plant and equipment	—	869	845	—	2,250
Loss on disposal of long-term investment	—	—	—	—	1,654
Impairment losses on doubtful debts	3,014	1,520	13,168	12,713	1,804
Staff costs, excluding retirement benefits
scheme contributions	41,971	62,102	52,042	26,438	29,798
Retirement benefits scheme contributions	9,244	14,901	13,310	5,485	5,646
Write off of other receivables	—	—	3,625	—	—
Cost of inventories	541,500	703,639	836,759	344,247	363,808

— 127 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

9. REMUNERATION OF DIRECTORS AND EMPLOYEES

Directors

Pursuant to a service agreement dated March 1996 between the Company and a director, that director is entitled to a service fee upon satisfaction of certain criteria as set out in the service agreement. A sum of US$1,261,833 (about RMB10,435,361) was paid to that director during the year ended 31 December 2003.

Apart from this, no remuneration was paid or payable to any directors of the Company during the Relevant Periods.

Employees

Details of the emoluments paid by the Group to the five highest paid employees (other than to a director for the year ended 31 December 2003) are as follows:

				Five months	Five months
	**Year **	ended 31 December		ended 31 May
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Salaries and other benefits	2,491	2,155	2,491	1,038	1,038
Retirement benefits scheme contributions	6	8	9	4	5
	2,497	2,163	2,500	1,042	1,043

The emolument of the director was within the following band:

							Five months
			**Year **	**ended **	31 December		ended 31 May
			2002		2003	2004	2004	2005
HK$10,000,000	to	HK$15,000,000	—		1	—	—	—

The emoluments of the five highest paid employees were within the following bands:

							Five months
			**Year **	**ended **	31 December		ended 31 May
			2002		2003	2004	2004	2005
Nil	-	HK$1,000,000	5		4	5	5	5

During the Relevant Periods, no emoluments were paid by the Group to the five highest paid individuals (included directors and employees) as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors waived any emoluments during the Relevant Periods.

— 128 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

10. INCOME TAX EXPENSE (CREDIT)

In accordance with the income tax law applicable to foreign investment enterprises in the PRC, the Group’s major subsidiaries in the PRC, except for Chongqing TH Holding Management Co. Ltd., are exempted from income tax for two years commencing from the first profit-making year and also entitled to a 50% reduction in the amount of income tax payable for the following three years. Most of these subsidiaries have agreed with the Tax Bureau and were subject to PRC income tax at the rate of 7.5% to 15% during the Relevant Periods. The other PRC subsidiaries have either not commenced business or incurred losses for income tax purposes during the Relevant Periods.

Current tax charge comprises: Enterprise income tax in the PRC Underprovision (overprovision) in prior years Deferred tax credit Profit (loss) before taxation Tax at the domestic income tax rate of 33% Tax effect of expenses that are not deductible in determining taxable profit Tax effect of income not subject to income tax Underprovision in prior years Tax effect of tax losses not recognised Share of tax effect of an associate Effect of tax exemptions granted Utilisation of tax loss previously not recognised Others Income tax expense (credit) for the year/period	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 1,045 2,788 1,595 749 20 — 595 (49) (49) 196 1,045 3,383 1,546 700 216 — — — — (950) 1,045 3,383 1,546 700 (734) Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 46,083 57,455 (40,389) (23,517) (57,186) 15,207 18,960 (13,328) (7,761) (18,871) 84 455 9,524 8,363 5,370 (38) (146) (7,445) (4,182) (29) — 595 (49) (49) 196 — — 17,481 6,573 13,706 — — 20 — — (14,208) (16,481) (4,657) (2,244) (48) — — — — (108) — — — — (950) 1,045 3,383 1,546 700 (734)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 1,045 2,788 1,595 749 20 — 595 (49) (49) 196 1,045 3,383 1,546 700 216 — — — — (950) 1,045 3,383 1,546 700 (734) Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 46,083 57,455 (40,389) (23,517) (57,186) 15,207 18,960 (13,328) (7,761) (18,871) 84 455 9,524 8,363 5,370 (38) (146) (7,445) (4,182) (29) — 595 (49) (49) 196 — — 17,481 6,573 13,706 — — 20 — — (14,208) (16,481) (4,657) (2,244) (48) — — — — (108) — — — — (950) 1,045 3,383 1,546 700 (734)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 1,045 2,788 1,595 749 20 — 595 (49) (49) 196 1,045 3,383 1,546 700 216 — — — — (950) 1,045 3,383 1,546 700 (734) Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 46,083 57,455 (40,389) (23,517) (57,186) 15,207 18,960 (13,328) (7,761) (18,871) 84 455 9,524 8,363 5,370 (38) (146) (7,445) (4,182) (29) — 595 (49) (49) 196 — — 17,481 6,573 13,706 — — 20 — — (14,208) (16,481) (4,657) (2,244) (48) — — — — (108) — — — — (950) 1,045 3,383 1,546 700 (734)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 1,045 2,788 1,595 749 20 — 595 (49) (49) 196 1,045 3,383 1,546 700 216 — — — — (950) 1,045 3,383 1,546 700 (734) Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 46,083 57,455 (40,389) (23,517) (57,186) 15,207 18,960 (13,328) (7,761) (18,871) 84 455 9,524 8,363 5,370 (38) (146) (7,445) (4,182) (29) — 595 (49) (49) 196 — — 17,481 6,573 13,706 — — 20 — — (14,208) (16,481) (4,657) (2,244) (48) — — — — (108) — — — — (950) 1,045 3,383 1,546 700 (734)	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 1,045 2,788 1,595 749 20 — 595 (49) (49) 196 1,045 3,383 1,546 700 216 — — — — (950) 1,045 3,383 1,546 700 (734) Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 46,083 57,455 (40,389) (23,517) (57,186) 15,207 18,960 (13,328) (7,761) (18,871) 84 455 9,524 8,363 5,370 (38) (146) (7,445) (4,182) (29) — 595 (49) (49) 196 — — 17,481 6,573 13,706 — — 20 — — (14,208) (16,481) (4,657) (2,244) (48) — — — — (108) — — — — (950) 1,045 3,383 1,546 700 (734)
	15,207 84 (38) — — — (14,208) — —	18,960 455 (146) 595 — — (16,481) — —	(13,328) 9,524 (7,445) (49) 17,481 20 (4,657) — —	(7,761) 8,363 (4,182) (49) 6,573 — (2,244) — —	(18,871 5,370 (29 196 13,706 — (48 (108 (950
	1,045	3,383	1,546	700

Details of unrecognised deferred tax assets for the Relevant Periods are set out in note 30.

— 129 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

11. EARNINGS PER SHARE

Earnings per share of the Group is not presented herein as such information is not considered meaningful for the purpose of this report.

12. INTANGIBLE ASSETS

THE GROUP

COST At 1 January 2002 and 31 December 2002 AGGREGATE AMORTISATION At 1 January 2002 Amortisation for the year At 31 December 2002 NET BOOK VALUE At 31 December 2002 COST At 1 January 2003 Additions through acquisition of a subsidiary At 31 December 2003 AGGREGATE AMORTISATION At 1 January 2003 Amortisation for the year At 31 December 2003 NET BOOK VALUE At 31 December 2003	Negative goodwill RMB’000 (51,700)	Goodwill RMB’000 4,192	Total RMB’000 (47,508) (117) (1,513) (1,630) (45,878) (47,508) (171,487) (218,995) (1,630) (18,662) (20,292) (198,703)
	(431) (1,723) (2,154)	314 210 524	(117 (1,513
			(1,630
	(49,546)	3,668
	(51,700) (171,487) (223,187) (2,154) (18,871) (21,025)	4,192 — 4,192 524 209 733	(47,508 (171,487
			(218,995
			(1,630 (18,662
			(20,292
	(202,162)	3,459

— 130 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

COST At 1 January 2004 and 31 December 2004 AGGREGATE AMORTISATION At 1 January 2004 Amortisation for the year At 31 December 2004 NET BOOK VALUE At 31 December 2004 COST At 1 January 2005 Derecognition against opening accumulated profits Elimination against aggregate amortisation At 31 May 2005 AGGREGATE AMORTISATION At 1 January 2005 Derecognition against opening accumulated profits Elimination against cost At 31 May 2005 NET BOOK VALUE At 31 May 2005	Negative goodwill RMB’000 (223,187)	Goodwill RMB’000 4,192	Total RMB’000 (218,995) (20,292) (18,663) (38,955) (180,040) (218,995) 223,187 (943) 3,249 (38,955) 39,898 (943) — 3,249
	(21,025) (18,873) (39,898)	733 210 943	(20,292 (18,663
			(38,955
	(183,289)	3,249
	(223,187) 223,187 — — (39,898) 39,898 — —	4,192 — (943) 3,249 943 — (943) —	(218,995 223,187 (943
			3,249
			(38,955 39,898 (943
			—
	—	3,249

For the three years ended 31 December 2004, the amortisation policies were as follows:

Positive goodwill is amortised using the straight-line method over its estimated useful life of 20 years.

Negative goodwill arising from acquisition of two subsidiaries are amortised using the straight-line method over their estimated useful lives of 10 and 30 years respectively.

— 131 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

13. PROPERTY, PLANT AND EQUIPMENT

THE GROUP

COST At 1 January 2002 Additions Disposals Transfer from construction in progress (note 14) Reclassification At 31 December 2002 DEPRECIATION At 1 January 2002 Charge for the year Eliminated on disposals Reclassification At 31 December 2002 NET BOOK VALUE At 31 December 2002 COST At 1 January 2003 Additions - through acquisition of subsidiary - others Disposals Transfer from construction in progress (note 14) At 31 December 2003 DEPRECIATION At 1 January 2003 Through acquisition of subsidiary Charge for the year Eliminated on disposals At 31 December 2003 NET BOOK VALUE At 31 December 2003	Buildings Plant, machinery, furniture, fixtures and equipment RMB’000 RMB’000 401,009 570,091 31,191 7,455 (126) (1,669) 18,281 45,616 6,431 (6,564)	Buildings Plant, machinery, furniture, fixtures and equipment RMB’000 RMB’000 401,009 570,091 31,191 7,455 (126) (1,669) 18,281 45,616 6,431 (6,564)	Motor vehicles RMB’000 39,922 4,275 (745) — 133	Total RMB’000 1,011,022 42,921 (2,540) 63,897 — 1,115,300 269,310 63,549 (1,547) — 331,312 783,988 1,115,300 469,844 134,064 (3,836) 71,962 1,787,334 331,312 220,242 92,666 (739) 643,481 1,143,853
	456,786 69,072 16,755 (43) 1,722 87,506	614,929 181,549 42,034 (1,029) (1,801) 220,753	43,585 18,689 4,760 (475) 79 23,053	1,115,300
				269,310 63,549 (1,547 —
				331,312
	369,280	394,176	20,532
	456,786 210,768 69,752 (1,169) 18,134 754,271 87,506 85,194 30,593 (96) 203,197	614,929 256,770 53,327 (2,336) 53,828 976,518 220,753 135,048 57,800 (321) 413,280	43,585 2,306 10,985 (331) — 56,545 23,053 — 4,273 (322) 27,004	1,115,300 469,844 134,064 (3,836 71,962
				1,787,334
				331,312 220,242 92,666 (739
				643,481
	551,074	563,238	29,541

— 132 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

COST At 1 January 2004 Additions Disposals Transfer from construction in progress (note 14) Reclassifications At 31 December 2004 DEPRECIATION At 1 January 2004 Charge for the year Eliminated on disposals Reclassifications At 31 December 2004 NET BOOK VALUE At 31 December 2004 COST At 1 January 2005 Reclassification Transfer from construction in progress (note 14) Additions Disposals At 31 May 2005 DEPRECIATION At 1 January 2005 Charge for the period Eliminated on disposals At 31 May 2005 NET BOOK VALUE At 31 May 2005 Pledge of property, plant and equipment	Buildings Plant, machinery, furniture, fixtures and equipment RMB’000 RMB’000 754,271 976,518 3,114 20,299 (1,530) (975) 14,571 4,391 3,566 (2,700)	Buildings Plant, machinery, furniture, fixtures and equipment RMB’000 RMB’000 754,271 976,518 3,114 20,299 (1,530) (975) 14,571 4,391 3,566 (2,700)	Motor vehicles RMB’000 56,545 6,564 (3,780) — (866)	Motor vehicles RMB’000 56,545 6,564 (3,780) — (866)
	773,992 203,197 18,269 (191) (313) 220,962	997,533 413,280 45,959 (378) 2,411 461,272	58,463 27,004 5,413 (611) (2,098) 29,708	1,829,988
				643,481 69,641 (1,180 —
				711,942
	553,030	536,261	28,755
	773,992 1,495 192,649 11 (3,245) 964,902 220,962 12,116 (387) 232,691	997,533 (1,495) 255,998 6,125 (2,566) 1,255,595 461,272 20,024 (1,138) 480,158	58,463 — — 247 (904) 57,806 29,708 2,267 (702) 31,273	1,829,988 — 448,647 6,383 (6,715
				2,278,303
				711,942 34,407 (2,227
				744,122
	732,211 775,437 At 31 December 2002 2003 RMB’000 RMB’000 456,328 455,562

— 133 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

THE COMPANY

	Leasehold	Office	Motor
	improvement	equipment	vehicles	Total
	RMB’000	RMB’000	RMB’000	RMB’000
COST
At 1 January 2002	1,519	942	702	3,163
Additions	—	7	—	7
At 31 December 2002	1,519	949	702	3,170
DEPRECIATION
At 1 January 2002	182	920	702	1,804
Charge for the year	30	24	—	54
At 31 December 2002	212	944	702	1,858
NET BOOK VALUE
At 31 December 2002	1,307	5	—	1,312
COST
At 1 January 2003	1,519	949	702	3,170
Additions	—	16	—	16
At 31 December 2003	1,519	965	702	3,186
DEPRECIATION
At 1 January 2003	212	944	702	1,858
Charge for the year	31	9	—	40
At 31 December 2003	243	953	702	1,898
NET BOOK VALUE
At 31 December 2003	1,276	12	—	1,288

— 134 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Leasehold improvement Office equipment RMB’000 RMB’000 COST At 1 January 2004 1,519 965 Additions — 3 At 31 December 2004 1,519 968 DEPRECIATION At 1 January 2004 243 953 Charge for the year 30 13 At 31 December 2004 273 966 NET BOOK VALUE At 31 December 2004 1,246 2 COST At 1 January 2005 1,519 968 Written off (1,519) (968) At 31 May 2005 — — DEPRECIATION At 1 January 2005 273 966 Written off (273) (966) At 31 May 2005 — — NET BOOK VALUE At 31 May 2005 — —	Leasehold improvement Office equipment RMB’000 RMB’000 COST At 1 January 2004 1,519 965 Additions — 3 At 31 December 2004 1,519 968 DEPRECIATION At 1 January 2004 243 953 Charge for the year 30 13 At 31 December 2004 273 966 NET BOOK VALUE At 31 December 2004 1,246 2 COST At 1 January 2005 1,519 968 Written off (1,519) (968) At 31 May 2005 — — DEPRECIATION At 1 January 2005 273 966 Written off (273) (966) At 31 May 2005 — — NET BOOK VALUE At 31 May 2005 — —	Leasehold improvement Office equipment RMB’000 RMB’000 COST At 1 January 2004 1,519 965 Additions — 3 At 31 December 2004 1,519 968 DEPRECIATION At 1 January 2004 243 953 Charge for the year 30 13 At 31 December 2004 273 966 NET BOOK VALUE At 31 December 2004 1,246 2 COST At 1 January 2005 1,519 968 Written off (1,519) (968) At 31 May 2005 — — DEPRECIATION At 1 January 2005 273 966 Written off (273) (966) At 31 May 2005 — — NET BOOK VALUE At 31 May 2005 — —	Motor vehicles RMB’000 702 — 702 702 — 702 —	Total RMB’000 3,186 3 3,189 1,898 43 1,941 1,248 3,189 (3,189) — 1,941 (1,941) — —
	1,519 (1,519) — 273 (273) —	968 (968) — 966 (966) —	702 (702) — 702 (702) —	3,189 (3,189
				—
				1,941 (1,941
				—
	—	—	—

— 135 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

14. CONSTRUCTION IN PROGRESS

At beginning of the year/period Additions - through acquisition of a subsidiary - others Transfer to property, plant and equipment (note 13) At end of the year/period	Year ended 31 December Five months ended 31 May 2002 2003 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 54,820 67,990 188,999 700,868 — 15,457 — — 77,067 177,514 530,831 89,807 (63,897) (71,962) (18,962) (448,647) 67,990 188,999 700,868 342,028	Year ended 31 December Five months ended 31 May 2002 2003 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 54,820 67,990 188,999 700,868 — 15,457 — — 77,067 177,514 530,831 89,807 (63,897) (71,962) (18,962) (448,647) 67,990 188,999 700,868 342,028
		342,028

15. LAND USE RIGHTS

COST At beginning of the year/period Additions through acquisition of a subsidiary At end of the year/period AMORTISATION At beginning of the year/period Charge for the year/period At end of the year/period NET BOOK VALUE At end of the year/period	At 2002 RMB’000 189,566 —	31 December 2003 RMB’000 189,566 213,263	At 31 May 2004 2005 RMB’000 RMB’000 402,829 402,829 — —	At 31 May 2004 2005 RMB’000 RMB’000 402,829 402,829 — —
	189,566 1,052 3,791 4,843	402,829 4,843 8,599 13,442	402,829 13,442 8,025 21,467	402,829
				21,467 3,376
				24,843
	184,723	389,387	381,362	377,986

The Group’s land use rights represent prepaid operating lease payments.

— 136 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Analysis of the carrying amounts of land use rights:

		At 31 December		At 31 May
	2002	2003	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000
Land use rights	184,723	389,387	381,362	377,986
Less: Portion to be charged to income statement in
next year included as prepayments under
current assets	(8,599)	(8,025)	(8,102)	(8,056)
Amount due after one year	176,124	381,362	373,260	369,930

All of the Group’s land use rights and buildings are situated in the PRC and are held under medium term leases. Certain land use rights were granted to a subsidiary for the purpose of quarry operations. In addition, title documents in respect of certain other land use rights have not been obtained by the Group pending the completion of the registration procedures.

						**At **	31 December		At 31 May
					2002		2003	2004	2005
					RMB’000		RMB’000	RMB’000	RMB’000
Pledge	of	land	use	right	184,723		377,357	369,573	369,492

16. INTERESTS IN AN ASSOCIATE

Share of net assets Goodwill	At 2002 RMB’000 — — —	31 December 2003 RMB’000 111 123 234	At 31 May 2004 2005 RMB’000 RMB’000 48 48 117 117 165 165	At 31 May 2004 2005 RMB’000 RMB’000 48 48 117 117 165 165
				165

The particulars of the associate are as follows:

		Particulars of	Percentage
		issued and paid	of ownership
	Country of	up/registered	interest held
Name of associate	establishment	capital	by the Group	Principal activity
Chongqing Yugang Foreign	PRC	RMB800,000	30%	Provision of
Investment Co., Ltd.				consulting services

— 137 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

17. INTERESTS IN A JOINTLY CONTROLLED ENTITY

At 2002 RMB’000 Share of net assets — The particulars of the jointly controlled entity are as follows: Name of jointly controlled entity Country of establishment Particulars of paid up/ registered capital Chongqing TH Concrete Co., Ltd. PRC RMB8,750,000 LONG-TERM INVESTMENT At 2002 RMB’000 Equity security - Unlisted — Details of the unlisted investment are as follows: Name of investment Country of establishment Particulars of issued and paid up/registered capital Chongqing TH Wuling Cement Co., Ltd. (“TH Wuling”) PRC RMB72,000,000

31 December At 31 May 2003 2004 2005 RMB’000 RMB’000 RMB’000 — 1,314 4,380 Percentage of ownership interest held by the Group Principal activity 50% Pre-operating stage 31 December At 31 May 2003 2004 2005 RMB’000 RMB’000 RMB’000 43,200 40,692 — Percentage of ownership interest held by the Group Principal activity 60% Inactive

18. LONG-TERM INVESTMENT

During 2003, Chongqing TH Diwei Cement Co., Ltd (“TH Diwei”) purchased 60% equity interest of TH Wuling from a third party for a consideration of RMB43,200,000. Pursuant to the supplemental agreement signed on 8 July 2004, the final consideration was revised to RMB40,692,000.

As the Group did not have control or actually exercise significant influence over the above company, the investment was accounted for under the cost method.

During the period ended 31 May 2005, TH Diwei disposed of its interest in TH Wuling at a consideration of RMB42,692,000.

— 138 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

19. OTHER LONG-TERM RECEIVABLE

The amount is unsecured, interest free and due after one year. The directors estimated the fair value on initial recognition by discounting its cash flows at applicable discount rate and recognised a loss of RMB3,654,000 in the income statement for the five months ended 31 May 2005.

20. INVENTORIES

THE GROUP

Raw materials Work-in-progress Finished goods Less: Provision for obsolete inventories	At 2002 RMB’000 49,726 7,303 6,974	31 December 2003 RMB’000 78,464 23,982 21,963	At 31 May 2004 2005 RMB’000 RMB’000 84,125 89,305 23,189 28,113 24,659 24,390	At 31 May 2004 2005 RMB’000 RMB’000 84,125 89,305 23,189 28,113 24,659 24,390
	64,003 (119)	124,409 —	131,973 —	141,808 —
	63,884	124,409	131,973	141,808

The inventories at 31 December 2003 and 2004 and 31 May 2005 are stated at cost. Included in finished goods at 31 December 2002 were inventories of RMB558,000, which were stated net of a provision for obsolete inventories in order to state these inventories at the lower of their cost and estimated net realisable value.

21. DEBTORS, DEPOSITS AND PREPAYMENTS

THE GROUP

The Group maintains a defined credit policy. The general credit term ranges from 30 days to 90 days.

		At 31 December		At 31 May
	2002	2003	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000
Debtors (net of allowance for bad and doubtful
debts) aged analysis:
Within 1 year	70,711	88,693	90,268	142,930
1 - 2 years	28,255	4,728	7,641	3,570
2 - 3 years	2,208	7,365	1,281	—
Over 3 years	35	543	—	—
	101,209	101,329	99,190	146,500
Prepayment, deposits and other receivables (note)	180,965	99,594	102,148	75,103
Notes receivable	3,198	24,771	9,053	19,210
	285,372	225,694	210,391	240,813

— 139 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Note:

The amounts represent receipts in advance, prepayments and other receivables. The directors expected that the prepayment, deposits and other receivables can be recovered or realized at least the net carrying amounts.

THE COMPANY

						**At **	31 December		At 31 May
					2002		2003	2004	2005
					RMB’000		RMB’000	RMB’000	RMB’000
Prepayment,	deposits	and	other	receivables	699		806	5	3

The directors consider that the carrying amounts of debtors, deposits and prepayments approximate to their fair value at 31 May 2005.

22. AMOUNTS DUE FROM MINORITY SHAREHOLDERS/AN ASSOCIATE/A JOINTLY CONTROLLED ENTITY - CURRENT

THE GROUP

The amounts are unsecured, interest free and expected to be settled within the next twelve months. The directors consider that the carrying amounts approximate to their fair value at 31 May 2005.

— 140 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

23. BANK BORROWINGS

THE GROUP The bank borrowings are repayable as follows: Within one year More than one year, but not exceeding two years More than two years, but not exceeding five years More than five years Less: Amounts due within one year included in current liabilities Due after one year Secured Unsecured THE COMPANY The bank borrowings are repayable as follows: Within one year More than one year but not exceeding two years More than two years, but not exceeding five years Less: Amounts due within one year included in current liabilities Due after one year Unsecured	At 2002 RMB’000 169,668 — 296,478 —	31 December 2003 RMB’000 497,457 278,394 198,211 —	At 31 May 2004 2005 RMB’000 RMB’000 656,507 900,085 346,395 204,247 186,890 171,709 24,640 — 1,214,432 1,276,041 (656,507) (900,085) 557,925 375,956 895,832 958,041 318,600 318,000 1,214,432 1,276,041 159,000 318,000 159,000 — — — 318,000 318,000 159,000 318,000 159,000 — 318,000 318,000	At 31 May 2004 2005 RMB’000 RMB’000 656,507 900,085 346,395 204,247 186,890 171,709 24,640 — 1,214,432 1,276,041 (656,507) (900,085) 557,925 375,956 895,832 958,041 318,600 318,000 1,214,432 1,276,041 159,000 318,000 159,000 — — — 318,000 318,000 159,000 318,000 159,000 — 318,000 318,000
	466,146 (169,668)	974,062 (497,457)	1,214,432 (656,507)	1,276,041 (900,085
	296,478	476,605	557,925
	306,857 159,289	654,945 319,117	895,832 318,600	958,041 318,000
	466,146	974,062	1,214,432
	— — 159,121 159,121 —	— 159,000 154,317 313,317 —	159,000 159,000 — 318,000 159,000	318,000 — —
				318,000 318,000
	159,121 159,121	313,317 313,317	159,000 318,000

All bank loans of the Company are denominated in Hong Kong dollars and guaranteed by the ultimate holding company of a shareholder of the Company over the Relevant Periods.

For the five months ended 31 May 2005, the Group’s bank borrowings are arranged at fixed interest rates of 5.5% per annum on average. The directors consider that the carrying amount of the bank borrowing approximate to their fair value.

— 141 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

The carrying amounts of the Group’s bank borrowings are denominated in the following currencies:

At 31 December 2002 2003 RMB’000 RMB’000 Currency: RMB 264,174 619,300 US dollar 42,851 41,445 HK dollar 159,121 313,317 466,146 974,062	At 31 May 2004 2005 RMB’000 RMB’000 882,771 944,729 13,661 13,312 318,000 318,000 1,214,432 1,276,041	At 31 May 2004 2005 RMB’000 RMB’000 882,771 944,729 13,661 13,312 318,000 318,000 1,214,432 1,276,041
		1,276,041

24. CREDITORS AND ACCRUED CHARGES

THE GROUP

Creditors aged analysis: Within 1 year 1 - 2 years 2 - 3 years Over 3 years Accruals and other payables (note) Notes payable	At 2002 RMB’000 79,829 1,841 17 —	31 December 2003 RMB’000 105,128 11,339 309 1,386	At 31 May 2004 2005 RMB’000 RMB’000 158,661 171,914 6,721 16,980 2,015 12,563 3,633 2,026	At 31 May 2004 2005 RMB’000 RMB’000 158,661 171,914 6,721 16,980 2,015 12,563 3,633 2,026
	81,687 87,123 4,000	118,162 104,801 36,522	171,030 203,047 70,635	203,483 204,417 82,816
	172,810	259,485	444,712	490,716

Note: The amounts represent payables for construction in progress, accrued charges and other payables.

THE COMPANY

					**At **	31 December		At 31 May
				2002		2003	2004	2005
				RMB’000		RMB’000	RMB’000	RMB’000
Accruals	and	other	payables	577		480	479	—

The directors consider that the carrying amounts approximate their fair value at 31 May 2005.

— 142 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

25. AMOUNTS DUE TO MINORITY SHAREHOLDERS/A SHAREHOLDER/A JOINTLY CONTROLLED ENTITYCURRENT

THE GROUP AND THE COMPANY

The amounts are unsecured, interest free and have no fixed repayment terms. The directors consider that the carrying amounts approximate to their fair value at 31 May 2005.

26. SHARE CAPITAL

		At 1 January 2002 and
		31 December 2002,
		2003 and 2004 and
		31 May 2005
		US$
Authorised:
5,000 ordinary shares of US$1 each		5,000
Issued and fully paid:
2,740 ordinary shares of US$1 each		2,740
		RMB’000
	Equivalent to	23

— 143 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

27. RESERVES

THE COMPANY

At 1 January 2002 Net loss for the year At 31 December 2002 Net loss for the year At 31 December 2003 Net profit for the year At 31 December 2004 Capital contribution — adjustment to loans from shareholders At 1 January 2005 as restated Capital contribution — adjustment to loans from shareholders Net profit for the period At 31 May 2005	Capital reserve Accumulated profits (losses) RMB’000 RMB’000 — (25,027) — (2,742)	Capital reserve Accumulated profits (losses) RMB’000 RMB’000 — (25,027) — (2,742)	Total RMB’000 (25,027) (2,742) (27,769) (15,259) (43,028) 2,290 (40,738) 9,718 (31,020) 4,049 5,088 (21,883)
	— — — — — 9,718 9,718 4,049 —	(27,769) (15,259) (43,028) 2,290 (40,738) — (40,738) — 5,088	(27,769 (15,259
			(43,028 2,290
			(40,738 9,718
			(31,020 4,049 5,088
	13,767	(35,650)

28. LOANS FROM SHAREHOLDERS

The loans from shareholders are unsecured, interest free and expected to be settled after more than one year.

THE GROUP

As at 1 January 2005 and 31 May 2005, the directors estimated the fair values of the loans from shareholders on initial recognition and at 31 May 2005, by discounting their cash flows at applicable discount rate and recognised the changes in fair values of RMB41,300,000 to equity directly. The imputed interest expenses of RMB11,500,000 was charged to income statement for the five months ended 31 May 2005.

THE COMPANY

As at 1 January 2005 and 31 May 2005, the directors estimated the fair values of the loans from shareholders on initial recognition and at 31 May 2005, by discounting their cash flows at applicable discount rate and recognised the changes in fair values of RMB13,767,000 to equity directly. The imputed interest expenses of RMB4,049,000 was charged to income statement for the five months ended 31 May 2005.

— 144 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

29. LONG-TERM PAYABLES

THE GROUP

			At 31 December		At 31 May
		2002	2003	2004	2005
	Notes	RMB’000	RMB’000	RMB’000	RMB’000
Staff compensation fund	1	16,122	16,115	13,552	12,894
Payable for long-term investment
- TH Wuling	2	—	—	20,692	—
Payable for investment in a subsidiary
- Chongqing TH Fuling Cement Co., Ltd.
(“TH Fuling”)	3	—	50,000	37,500	25,000
Payable to Chongqing Forest Station	4	—	—	32,332	13,732
Fund from Finance Bureau of Chongqing City	5	10,000	10,000	10,000	10,000
Construction deposits received		6,612	24,011	—	—
Others		—	121	—	—
		32,734	100,247	114,076	61,626

Notes:

1. Staff compensation fund represents the retirement welfare payable to the staff who retired in 1999 or before.

2. According to the investment contract, the payable balance regarding the acquisition of 60% shares of TH Wuling shall be paid to the former investors from 2003 to 2006, with an annual payment of RMB5,800,000 plus interest, which is calculated in accordance with the applicable borrowing interest rate of the PRC.

3. According to the investment contract, the payable balance regarding the acquisition of TH Fuling shall be paid to the former investor before July 2007, with an annual payment of RMB12,500,000. The amount is unsecured and non-interest bearing.

4. The payable to Chongqing Forest Station is for the compensation of mine exploitation, which will be paid by instalment by 2053. At 31 May 2005, the directors estimated the fair values of the amount on initial recognition, by discounting their cash flows at applicable discount rate and recognised the changes in fair values of RMB18,600,000 to equity at 1 January 2005 directly.

5. In 1997, the Financial Bureau of Chongqing City appropriated RMB10,000,000 to a subsidiary of the Company as special project fund. In accordance with Yucaiqi (1997) No. 112 issued by the Finance Bureau of Chongqing City, the Group shall pay to Finance Bureau of Chongqing City annual fee of 4.8% of the principal from its profit after tax.

The fair value of the Group’s long-term payables approximates to their carrying amount at 31 May 2005.

— 145 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

30. DEFERRED TAXATION

At beginning of the year Credit to income statement At end of the year	At 2002 RMB’000 72,353 — 72,353	31 December 2003 RMB’000 72,353 — 72,353	At 31 May 2004 2005 RMB’000 RMB’000 72,353 72,353 — (950) 72,353 71,403	At 31 May 2004 2005 RMB’000 RMB’000 72,353 72,353 — (950) 72,353 71,403
				71,403

Deferred taxation attributable to the fair value adjustments on the property, plant and equipment in connection with an acquisition of a subsidiary in 2001.

The Group has unused tax losses for the five months ended 31 May 2005 of approximately RMB43,757,000, available for offset against future profits. No deferred tax asset has been recognised due to the unpredictability of future profit streams. The unrecognised tax losses will expire until 2010.

There were no other significant unprovided temporary differences.

31. INVESTMENTS IN SUBSIDIARIES

THE COMPANY

Unlisted investment, at cost Amounts due from subsidiaries Imputed interest in amounts due from subsidiaries	At 2002 RMB’000 13 316,248 — 316,261	31 December 2003 RMB’000 13 454,870 — 454,883	At 31 May 2004 2005 RMB’000 RMB’000 13 13 463,880 442,843 — 34,433 463,893 477,289	At 31 May 2004 2005 RMB’000 RMB’000 13 13 463,880 442,843 — 34,433 463,893 477,289
				477,289

The amounts due from subsidiaries are unsecured and interest fee. In the opinion of the directors, the amounts due from subsidiaries are not repayable within the next twelve months. Accordingly, the amounts are shown as non-current assets. As at 31 May 2005, the directors estimated the fair values of the amounts due from subsidiaries on initial recognition and at 31 May 2005, by discounting their cash flows at applicable discount rate and recognised the changes in fair values of RMB34,433,000 as investments in subsidiaries. The imputed interest income of RMB10,077,000 was charged to income statement for the five months ended 31 May 2005.

— 146 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

32. AMOUNTS DUE TO SUBSIDIARIES

THE COMPANY

The amounts are unsecured, interest free and repayable on demand. The directors consider that the carrying amounts approximate their fair value at 31 May 2005.

33. ACQUISITION OF SUBSIDIARY

On 1 January 2003, the Group acquired 100% interest in Guangan Qujiang Cement Co., Ltd. for RMB113,093,000, satisfied in cash. Guangan Qujiang Cement Co., Ltd. subsequently transferred all its assets and liabilities to Guangan T.H. Cement Co., Ltd. in 2004.

Net assets acquired: Property, plant and equipment Land use rights Construction in progress Inventory Cash at bank and in hand Trade debtors and prepayments Tax payable Other current liabilities Non-current liabilities Net identifiable assets and liabilities Negative goodwill arising on consolidation Total purchase price paid, satisfied by cash Less: Cash of subsidiary acquired Net cash outflow in respect of purchase of a subsidiary

RMB’000 249,602 213,263 15,457 21,735 8,027 35,688 (3,215) (190,527) (65,450) 284,580 (171,487) 113,093 (8,027) 105,066

34. PLEDGE OF ASSETS

Bank deposits pledged to bank to secure bank borrowings are disclosed in the consolidated balance sheets.

Details of other pledge of assets of the Group are set out in notes 13 and 15.

— 147 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

35. OPERATING LEASE COMMITMENT

At the balance sheet dates, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows:

Within one year In the second to fifth year Over five years	At 2002 RMB’000 1,983 29 254 2,266	31 December 2003 RMB’000 231 619 247 1,097	At 31 May 2004 2005 RMB’000 RMB’000 1,790 2,618 5,470 7,525 49,933 50,164 57,193 60,307	At 31 May 2004 2005 RMB’000 RMB’000 1,790 2,618 5,470 7,525 49,933 50,164 57,193 60,307
				60,307

36. CONTINGENT LIABILITIES

At the balance sheet dates, the Group and the Company had no significant contingent liabilities.

37. CAPITAL COMMITMENTS

At the balance sheet dates, the Group had capital commitments relating to the construction and acquisition of plant and machinery not provided for in the financial information as follows:

Contracted for Authorised but not contracted for	At 2002 RMB’000 49,000 32,400 81,400	31 December 2003 RMB’000 6,099 62,729 68,828	At 31 May 2004 2005 RMB’000 RMB’000 99,771 99,082 93,475 38,859 193,246 137,941	At 31 May 2004 2005 RMB’000 RMB’000 99,771 99,082 93,475 38,859 193,246 137,941
				137,941

38. RETIREMENT BENEFIT PLAN

The employees of the Group are members of state-managed retirement benefit schemes operated by the local government. The Group is required to contribute a specified percentage of their payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect to the retirement benefit schemes is to make the specified contributions.

The total costs charged to the consolidated income statements as disclosed in note 8 represent contributions payable to the schemes by the Group at rate specified in the rules of the schemes.

— 148 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

39. RELATED PARTY TRANSACTIONS

During the Relevant Periods, the Group had the following significant transactions with certain related parties:

				Five months	Five months
	**Year **	ended 31 December		ended 31 May
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Minority shareholders
Trade sales	—	—	5	—	—
Trade purchases	424	365	275	115	101
Technical consultation fee paid	336	1,400	434	181	207
Rental expenses paid	—	—	145	60	60
Other expense paid	—	—	2,681	1,128	1,328
Interest income received	—	—	22	—	—
Advancement made	950	3,305	—	—	—
Repayment received	2,030	2,281	—	—	—
Interest income received	—	—	1,157	912	—
Shareholders
Imputed interest expenses	—	—	—	—	11,500
Associate
Other expense paid	—	—	—	—	90
Interest income received	—	—	99	46	38

Trade sales and purchases were carried at cost plus a percentage markup.

Rental expenses were paid in accordance with the terms of the relevant agreements.

Technical consultation fee and other expenses were based on mutually agreed terms.

The balances with related parties at balance sheet dates are disclosed in the consolidated balance sheets and the balance sheets of the Company.

In addition to above, the ultimate holding company of a shareholder of the Company had given a corporate guarantee of HK$150,000,000 and another unconditional and irrevocable guarantee to banks to secure the banking facilities granted to the Company.

— 149 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

40. SEGMENT INFORMATION

The Group is engaged in the production and sales of cements and other cement products. Substantially all its products were sold in the PRC during the Relevant Periods. All the Group’s assets are located in the PRC as at 31 December 2002, 2003 and 2004 and 31 May 2005.

B. DISTRIBUTABLE RESERVE

The distributable reserve of the Company is the profit determined in accordance with the applicable legal requirements in the Bahamas. At 31 May 2005, the Company did not have any distributable reserve.

C. DIRECTORS’ REMUNERATIONS

Except as disclosed in note 9 to the financial statements, no remuneration has been paid or is payable to the Company’s directors by the Group during the Relevant Periods.

D. SUBSEQUENT EVENT

On 11 August 2005, SOCAM announced the following transactions:

SOCAM, through a wholly owned subsidiary, entered into an agreement with Olympio Corporation (“Olympio”) whereby SOCAM would acquire from Olympio its 50% interest in the Company and the benefit of the shareholder’s loan from Olympio for a consideration of RMB 270.0 million pursuant to the conditions therein (the “Acquisition”).

SOCAM also entered into strategic alliance with a wholly owned subsidiary of Lafarge S.A. (“Lafarge”) with the execution of a contribution agreement and a joint venture agreement whereby:

• SOCAM will make a cash contribution of initially RMB90.3 million (subject to adjustment) and contribute its interest in certain subsidiaries and jointly controlled entities (including the interest in certain subsidiaries of the Company to be acquired from the Acquisition) which are engaged in the business of manufacturing, producing, trading and distributing cement and associated products and ready mixed concrete (“Shui On PRC Cement Business in Chongqing”) into a new joint venture company for a 45% stake; and

• Lafarge will contribute its interest in certain subsidiaries which are engaged in same business together with certain inter-company receivable owed by these subsidiaries into the new joint venture company for a 55% stake.

— 150 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Including in the consolidated balance sheet of the Group as at 31 December 2004 and 31 May 2005 are the assets and liabilities attributable to the entities under Shui On PRC Cement Business in Chongqing as follows:

	As at	As at
	31 December	31 May
	2004	2005
	RMB million	RMB million
		(note)
Non-current assets	1,808.2	1,910.8
Current assets	502.4	745.1
Current liabilities	(1,687.3)	(1,983.7)
Non-current liabilities	(585.3)	(479.2)
Net assets attributable to minority interest	(157.3)	(153.4)
Net (liabilities) assets attributable to the Group	(119.3)	39.6
Capitalised amounts due to other group companies	800.1	845.9
	680.8	885.5

Note: The consolidated balance sheet of the Group as at 31 May 2005 has been prepared in accordance with new HKFRSs applicable to the accounting period from 1 January 2005, which is different in certain aspects as compared with the accounting policies adopted by the Group for the year ended 31 December 2004. Should the consolidated balance sheet of the Group as at 31 May 2005 been prepared in accordance with the same accounting policies adopted for the year ended 31 December 2004, the net tangible asset attributable to the Group after adjusting the capitalisation of amounts due from entities under Shui On PRC Cement Business in Chongqing to other entities of the Group and elimination of goodwill and negative goodwill would be approximately RMB 841.3 million.

— 151 —

APPENDIX II ACCOUNTANTS’ REPORT OF TH INDUSTRIAL AND ITS SUBSIDIARIES

Including in the consolidated income statement of the Group for the year ended 31 December 2004 and the five months ended 31 May 2005 are the results attributable to the entities under Shui On PRC Cement Business in Chongqing as follows:

		Five months
	Year ended	ended
	31 December	31 May
	2004	2005
	RMB million	RMB million
Turnover	937.3	392.2
Profit (loss) from operations	2.4	(18.1)
Finance costs	(35.9)	(23.4)
Loss before taxation	(33.5)	(41.5)
Income tax (expenses) credit	(1.5)	0.7
Loss for the year/period	(35.0)	(40.8)
Attributable to:
Equity holders of the parent	(36.2)	(33.7)
Minority interest	1.2	(7.1)
	(35.0)	(40.8)

E. SUBSEQUENT FINANCIAL STATEMENTS

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

Yours faithfully,

Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

— 152 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

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==> picture [99 x 35] intentionally omitted <==

30 September 2005

The Directors

Shui On Construction and Materials Limited

Dear Sirs,

We set out below our report on the financial information regarding Sommerset Investments Limited (the “Company”) for the years ended 31 December 2002, 2003 and 2004 and the five months ended 31 May 2005 (the “Relevant Periods”), for inclusion in the circular of Shui On Construction and Materials Limited (“SOCAM”) dated 30 September 2005 (the “Circular”) in relation to the major acquisition and formation of joint venture with Lafarge in relation to the PRC cement operations (very substantial disposal) and increase in authorised share capital.

The Company was incorporated as a private limited company in the Republic of Mauritius on 30 April 2001 and was granted a Category 1 Global Business Licence on 25 May 2001. The principal activity of the Company is investments holding.

The statutory financial statements of the Company for the year ended 31 December 2004 prepared under International Financial Reporting Standards were audited by Deloitte Touche Tohmatsu Mauritius, Public Accountants. The statutory financial statements of the Company for the years ended 31 December 2002 and 2003 were audited by KPMG Mauritius, Public Accountants.

For the purpose of this report, we have carried out independent audit procedures in accordance with Hong Kong Standards on Auditing (“SAS”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) in respect of the management accounts of the Company, prepared under accounting principles generally accepted in Hong Kong, for the five months ended 31 May 2005.

We have examined the audited statutory financial statements of the Company for the years ended 31 December 2002, 2003, 2004 and five months ended 31 May 2005 and have carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The financial information of the Company for the Relevant Periods set out below (“Financial Information”) has been prepared in accordance with Hong Kong Financial Reporting Standards based on the financial statements or management accounts of the Company prepared in accordance with International Financial Reporting Standards, after making such adjustments as we consider necessary for the purpose of preparing our report for inclusion in the Circular.

— 153 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

The preparation of the financial statements or management accounts is the responsibility of the directors of the Company. The directors of SOCAM are responsible for the contents of the Circular in which this report is included. It is our responsibilities to form an independent opinion, based on our examination and review, on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information together with the notes thereon gives, for the purpose of this report, a true and fair view of the Company’s state of affairs as at 31 December 2002, 2003, 2004 and 31 May 2005, and of its results and cash flows for the years ended 31 December 2002, 2003 and 2004 and for the five months ended 31 May 2005.

For the purpose of this report, we have reviewed the management accounts of the Company for the five months ended 31 May 2004 in accordance with the SAS No. 700 “Engagement to Review Interim Financial Reports” issued by the HKICPA. A review consists principally of making enquiries of the Company’s management and applying analytical procedures to the management accounts and based thereon, assessing whether the accounting policies and presentation have consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the management accounts of the Company for the five months ended 31 May 2004.

On the basis of our review, which does not constitute an audit, we are not aware of any material modifications that should be made to the management accounts of the Company for the five months ended 31 May 2004.

— 154 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

A. FINANCIAL INFORMATION

INCOME STATEMENTS

NOTES Turnover 3 Other operating income Administrative expenses Profit from operations 4 Finance costs 5 Net loss for the year/period	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 US$ US$ US$ US$ US$ (Unaudited) 130,598 200,908 103,677 38,160 84,617 — — 2,728 2,728 — (9,825) (5,749) (7,064) (3,805) (4,129) 120,773 195,159 99,341 37,083 80,488 (130,598) (200,908) (103,677) (38,160) (359,145) (9,825) (5,749) (4,336) (1,077) (278,657)

— 155 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

BALANCE SHEETS

					As at
			At 31 December		31 May
	NOTES	2002	2003	2004	2005
		US$	US$	US$	US$
Non-current asset
Interests in jointly controlled entities	7	15,258,518	10,770,818	17,305,662	30,257,456
Current assets
Amount due from a jointly controlled entity	8	130,598	151,425	255,084	339,701
Other receivables		500	500	—	—
Bank balance and cash		4,967	1,785	2,045	1,061
		136,065	153,710	257,129	340,762
Non-current asset held for sale	9	—	—	—	6,535,385
		136,065	153,710	257,129	6,876,147
Current liabilities
Other payables and accrued expenses		2,000	22,495	22,459	22,539
Amount due to an intermediate holding
company	12	13,854	15,903	20,741	23,806
Amount due to immediate holding company	12	130,598	151,425	240,896	325,513
		146,452	189,823	284,096	371,858
Net current (liabilities) assets		(10,387) (36,113)		(26,967)	6,504,289
		15,248,131	10,734,705	17,278,695	36,761,745
Capital and reserves
Share capital	10	2	2	2	2
Reserves		(16,176) (21,925)		(26,261)	1,510,724
		(16,174) (21,923)		(26,259)	1,510,726
Non-current liability
Loan from immediate holding company	11	15,264,305	10,756,628	17,304,954	35,251,019
		15,248,131	10,734,705	17,278,695	36,761,745

— 156 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

STATEMENTS OF CHANGES IN EQUITY

At 1 January 2002 Net loss for the year At 31 December 2002 Net loss for the year At 31 December 2003 Net loss for the period At 31 May 2004 At 1 January 2004 Net loss for the year At 31 December 2004 Capital contribution — adjustment on loan from immediate holding company At 1 January 2005 as restated Capital contribution — adjustment on loan from immediate holding company Net loss for the period At 31 May 2005	Share capital US$ 2 — 2 — 2 — 2	Capital reserve Accumulated losses US$ US$ — (6,351) — (9,825) — (16,176) — (5,749) — (21,925) — (1,077) — (23,002)	Capital reserve Accumulated losses US$ US$ — (6,351) — (9,825) — (16,176) — (5,749) — (21,925) — (1,077) — (23,002)	Total US$ (6,349) (9,825) (16,174) (5,749) (21,923) (1,077) (23,000) (21,923) (4,336) (26,259) 658,868 632,609 1,156,774 (278,657) 1,510,726
	2 —	— —	(21,925) (4,336)	(21,923 (4,336
	2	—	(26,261)
	— 2 — —	658,868 658,868 1,156,774 —	— (26,261) — (278,657)	658,868
				632,609 1,156,774 (278,657
	2	1,815,642	(304,918)

— 157 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

CASH FLOW STATEMENTS

Operating activities Net loss for the year/period Imputed interest on loan from immediate holding company Increase in amount due from a jointly controlled entity (Increase) decrease in other receivables Increase (decrease) in other payables and accrued expenses Increase in amount due to an intermediate holding company Increase in amount due to immediate holding company Net cash flows (used in) from operating activities Investing activities Investment in jointly controlled entities (Addition) repayment of loan to a jointly controlled entity Net cash flows (used in) from investing activities Cash flows from (used in) financing activities Addition (repayment) of loan from holding company Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year/period Cash and cash equivalents at the end of the year/period, represented by bank balance and cash	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 US$ US$ US$ US$ US$ (Unaudited) (9,825) (5,749) (4,336) (1,077) (278,657) — — — — 274,528 (130,598) (20,827) (103,659) (38,143) (84,617) (500) — 500 500 — 1,000 20,495 (36) (2,520) 80 8,503 2,049 4,838 4,064 3,065 130,598 20,827 89,471 23,954 84,617 (822) 16,795 (13,222) (13,222) (984) -------------- -------------- -------------- -------------- -------------- (1,138,400) — (6,535,385) (6,535,385)(16,923,077) (9,154,908) 4,487,700 541 541 (2,564,102) (10,293,308) 4,487,700 (6,534,844) (6,534,844)(19,487,179) -------------- -------------- -------------- -------------- -------------- 10,299,097 (4,507,677) 6,548,326 6,548,326 19,487,179 -------------- -------------- -------------- -------------- -------------- 4,967 (3,182) 260 260 (984) -------------- -------------- -------------- -------------- -------------- — 4,967 1,785 1,785 2,045 4,967 1,785 2,045 2,045 1,061	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 US$ US$ US$ US$ US$ (Unaudited) (9,825) (5,749) (4,336) (1,077) (278,657) — — — — 274,528 (130,598) (20,827) (103,659) (38,143) (84,617) (500) — 500 500 — 1,000 20,495 (36) (2,520) 80 8,503 2,049 4,838 4,064 3,065 130,598 20,827 89,471 23,954 84,617 (822) 16,795 (13,222) (13,222) (984) -------------- -------------- -------------- -------------- -------------- (1,138,400) — (6,535,385) (6,535,385)(16,923,077) (9,154,908) 4,487,700 541 541 (2,564,102) (10,293,308) 4,487,700 (6,534,844) (6,534,844)(19,487,179) -------------- -------------- -------------- -------------- -------------- 10,299,097 (4,507,677) 6,548,326 6,548,326 19,487,179 -------------- -------------- -------------- -------------- -------------- 4,967 (3,182) 260 260 (984) -------------- -------------- -------------- -------------- -------------- — 4,967 1,785 1,785 2,045 4,967 1,785 2,045 2,045 1,061	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 US$ US$ US$ US$ US$ (Unaudited) (9,825) (5,749) (4,336) (1,077) (278,657) — — — — 274,528 (130,598) (20,827) (103,659) (38,143) (84,617) (500) — 500 500 — 1,000 20,495 (36) (2,520) 80 8,503 2,049 4,838 4,064 3,065 130,598 20,827 89,471 23,954 84,617 (822) 16,795 (13,222) (13,222) (984) -------------- -------------- -------------- -------------- -------------- (1,138,400) — (6,535,385) (6,535,385)(16,923,077) (9,154,908) 4,487,700 541 541 (2,564,102) (10,293,308) 4,487,700 (6,534,844) (6,534,844)(19,487,179) -------------- -------------- -------------- -------------- -------------- 10,299,097 (4,507,677) 6,548,326 6,548,326 19,487,179 -------------- -------------- -------------- -------------- -------------- 4,967 (3,182) 260 260 (984) -------------- -------------- -------------- -------------- -------------- — 4,967 1,785 1,785 2,045 4,967 1,785 2,045 2,045 1,061	Year ended 31 December Five months ended 31 May 2002 2003 2004 2004 2005 US$ US$ US$ US$ US$ (Unaudited) (9,825) (5,749) (4,336) (1,077) (278,657) — — — — 274,528 (130,598) (20,827) (103,659) (38,143) (84,617) (500) — 500 500 — 1,000 20,495 (36) (2,520) 80 8,503 2,049 4,838 4,064 3,065 130,598 20,827 89,471 23,954 84,617 (822) 16,795 (13,222) (13,222) (984) -------------- -------------- -------------- -------------- -------------- (1,138,400) — (6,535,385) (6,535,385)(16,923,077) (9,154,908) 4,487,700 541 541 (2,564,102) (10,293,308) 4,487,700 (6,534,844) (6,534,844)(19,487,179) -------------- -------------- -------------- -------------- -------------- 10,299,097 (4,507,677) 6,548,326 6,548,326 19,487,179 -------------- -------------- -------------- -------------- -------------- 4,967 (3,182) 260 260 (984) -------------- -------------- -------------- -------------- -------------- — 4,967 1,785 1,785 2,045 4,967 1,785 2,045 2,045 1,061
	(822) 16,795 -------------- -------------- (1,138,400) — (9,154,908) 4,487,700		(13,222) (13,222) (984 -------------- -------------- -------------- (6,535,385) (6,535,385)(16,923,077 541 541 (2,564,102
	(10,293,308) 4,487,700 (6,534,844) (6,534,844)(19,487,179 -------------- -------------- -------------- -------------- -------------- 10,299,097 (4,507,677) 6,548,326 6,548,326 19,487,179 -------------- -------------- -------------- -------------- -------------- 4,967 (3,182) 260 260 (984 -------------- -------------- -------------- -------------- -------------- — 4,967 1,785 1,785 2,045
	4,967	1,785	2,045	2,045

— 158 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

Notes to the financial information

1. GENERAL INFORMATION AND BASIS OF PREPARATION OF FINANCIAL INFORMATION

The Company was incorporated as a private limited company in the Republic of Mauritius on 30 April 2001 and was granted a Category 1 Global Business Licence on 25 May 2001. The address of its registered office is 3rd Floor, Li Wan Po Building, 12 Remy Ollier Street, Port Louis, Mauritius. The principal activity of the Company is investments holding. The directors consider that its ultimate holding company is Shui On Company Limited, a private limited liability company incorporated in the British Virgin Islands.

The functional currency of the Company’s operation is Hong Kong dollars. The financial information of the Company is presented in United States dollars.

The financial information has been prepared on a going concern basis because the immediate holding company has agreed to provide adequate funds to enable the Company to meet in full its financial obligations as they fall due for the foreseeable future.

2. SIGNIFICANT ACCOUNTING POLICIES

In the current period, the Company has applied, for the first time, a number of new Hong Kong Financial Reporting Standards (HKFRSs), Hong Kong Accounting Standards (HKASs) and Interpretations (INTs) (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) that are effective for accounting periods beginning on or after 1 January 2005. The application of the new HKFRSs has resulted in changes to the Company’s accounting policies for financial assets and financial liabilities that have an effect on how the result for the current accounting period is prepared and presented but has no material effect on how the result for the prior accounting periods is prepared and presented.

Financial assets and financial liabilities other than debt and equity securities

HKAS 32 Financial Instruments: Disclosure and Presentation requires retrospective application. HKAS 39 Financial Instruments: Recognition and Measurement generally does not permit to recognise, derecognise or measure financial assets and liabilities on a retrospective basis. The Company has applied the relevant transitional provisions in HKAS 39 with respect to the classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

Financial assets, other than debt and equity securities, are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in income statement when there is objective evidence that the asset is impaired.

Financial liabilities are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

An adjustment to the previous carrying amount of interest free portion of loan from immediate holding company of US$658,868 on 1 January 2005 has been made to the Company’s reserves.

The HKICPA has also issued certain standards and INTs that are not yet effective. The Company has considered the following standards and INTs but does not expect they will have a material effect on how the results of operations and financial position of the Company are prepared and presented.

HKAS 19 (Amendment) Actuarial Gains and Losses, Group Plans and Disclosures

HKAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transactions HKAS 39 (Amendment) The Fair Value Option

HKFRS 6 Exploration for and Evaluation of Mineral Resources

HKFRS-Int 4 Determining whether an Arrangement Contains a Lease HKFRS-Int 5 Rights to Interests Arising from Decommissing, Restoration and Environmental Rehabilitation Funds

— 159 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

The financial statements have been prepared under the historical cost basis, except for certain financial instruments which are measured at fair value, as appropriate, and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Jointly controlled entity

A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic activity which is subject to joint control and over which none of the participating parties has unilateral control. Joint venture arrangement which involves the establishment of a separate entity in which each venturer has an interest is referred to as a jointly controlled entity.

The Company’s investments in jointly controlled entities are stated at cost less any identified impairment losses. Results of the jointly controlled entities are accounted for by the Company on the basis of distributions received and receivable during the year/period.

Non-current asset held for sale

Non-current asset and disposal group are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

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

Impairment

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

Revenue recognition

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

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/period. 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 periods and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

— 160 —

APPENDIX III

ACCOUNTANTS’ REPORT OF SOMMERSET

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

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.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Foreign currencies

In preparing the financial information of the Company, transactions in currencies other than the functional currency (foreign currencies) are initially recorded at the rates of exchange prevailing on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on the re-translation of monetary items are included in profit or loss for the year/period.

For the purpose of presenting the financial information, the assets and liabilities of the Company are translated into the presentation currency (i.e. United States dollars) at the exchange rates prevailing on the balance sheet date. Income and expenses items are translated into United States dollars at the average exchange rates for the year/period. Exchange differences arising if any, are classified as equity.

3. TURNOVER

The amount represents interest on loan to a jointly controlled entity, net of PRC withholding tax.

4. PROFIT FROM OPERATIONS

				Five months	Five months
	**Year **	**ended 31 **	December	ended 31 May
	2002	2003	2004	2004	2005
	US$	US$	US$	US$	US$
				(Unaudited)
Profit from operations has been arrived at
after charging (crediting):
Auditors’ remuneration	1,000	1,000	2,484	—	2,564
Directors’ remuneration	—	—	—	—		—
Exchange loss (gain), net	4,572	—	(2,728)	(2,728)		—
Staff cost	—	—	—	—		—

— 161 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

5. FINANCE COSTS

Interest on loan from immediate holding company Imputed interest on loan from immediate holding company	Year 2002 US$ 130,598 — 130,598	ended 31 December Five months ended 31 May 2003 2004 2004 2005 US$ US$ US$ US$ (Unaudited) 200,908 103,677 38,160 84,617 — — — 274,528 200,908 103,677 38,160 359,145	ended 31 December Five months ended 31 May 2003 2004 2004 2005 US$ US$ US$ US$ (Unaudited) 200,908 103,677 38,160 84,617 — — — 274,528 200,908 103,677 38,160 359,145
			359,145

6. TAXATION

No provision for Hong Kong Profits Tax has been made as the Company has no profit subject to the assessment of Hong Kong Profits Tax.

The Company holds a Category 1 Global Business Licence and is governed by the Income Tax Act 1995 and is subject to tax at 15%. It is however, entitled to a tax credit equivalent to the higher of the foreign tax paid and 80% of the Mauritian tax on its foreign source income. No provision has been made for the year/period under review due to the availability of foreign tax credit on foreign source income pursuant to statutory regulations.

The interest income received/receivable from the joint controlled entity is subject to 10% withholding tax in the PRC, of which the amount has been netted off in the turnover.

The nil provision for the year/period can be reconciled to the net loss for the year/period per the income statement as follows:

Net loss for the year/period Applicable Hong Kong Profits Tax rate Tax at the Hong Kong Profits Tax rate Tax effect of expenses not deductible for tax purpose Taxation for the year/period	Year 2002 US$ (9,825)	ended 31 December Five months ended 31 May 2003 2004 2004 2005 US$ US$ US$ US$ (Unaudited) (5,749) (4,336) (1,077) (278,657)	ended 31 December Five months ended 31 May 2003 2004 2004 2005 US$ US$ US$ US$ (Unaudited) (5,749) (4,336) (1,077) (278,657)	ended 31 December Five months ended 31 May 2003 2004 2004 2005 US$ US$ US$ US$ (Unaudited) (5,749) (4,336) (1,077) (278,657)	ended 31 December Five months ended 31 May 2003 2004 2004 2005 US$ US$ US$ US$ (Unaudited) (5,749) (4,336) (1,077) (278,657)
	16% (1,572) 1,572	17.5% (1,006) 1,006	17.5% (759) 759	17.5% (188) 188	17.5% (48,765) 48,765
	—	—	—	—	—

No provision for deferred tax has been made in the financial statements as there is no significant temporary difference.

— 162 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

7. INTERESTS IN JOINTLY CONTROLLED ENTITIES

		At 31 December	At 31 December		At 31 May
	2002		2003	2004	2005
	US$		US$	US$	US$
Unlisted investments, at cost	6,103,610		6,103,610	12,638,995	23,026,687
Loan to a jointly controlled entity (Note 1)	9,154,908		4,667,208	4,666,667	7,230,769
	15,258,518		10,770,818	17,305,662	30,257,456

The Company has the following jointly controlled entities which are sino-foreign equity joint ventures in the PRC:

			Proportion of
			nominal value of
		Issued and fully	registered capital
	Country and date	paid registered	held by the	Principal
Name	of establishment	capital	Company	activities
Guizhou Dingxiao	PRC	RMB56,000,000	90%	Production and
Shui On Cement Co., Ltd.	21 September 2001			sales of cement
(“Dingxiao”)
Guizhou Xinpu Shui On	PRC	RMB60,000,000	80%	Production and
Cement Co., Ltd.	22 November 2002			sales of cement
(“Xinpu”) (Note 2)
Guizhou Shuicheng	PRC	RMB200,000,000	70%	Production and
Shui On Cement Co., Ltd.	25 March 2005			sales of cement
Guizhou Changda Shui On	PRC	RMB106,000,000	51%	Production and
Cement Co., Ltd.	23 February 2004			sales of cement
(“Changda”) (Note 2)

Notes:

• 1) The loan to a jointly controlled entity is unsecured and carries interest at 3-month Hong Kong Inter-Bank Offer Rate (“HIBOR”) plus 2% per annum. No repayment of the loan will be demanded within twelve months from the balance sheet date, accordingly the amount is classified as non-current. The directors of the Company consider that the carrying amount of the loan to a jointly controlled entity approximates its fair value.

• 2) On 30 May 2005, the Company entered into an agreement with a fellow subsidiary and the PRC joint venture partners of Changda and Xinpu for the transfer of the Company’s interests in Changda to the fellow subsidiary in exchange for the fellow subsidiary’s interests in Xinpu to the Company. The transfers of interests in Changda and Xinpu were approved by relevant PRC authorities on 15 June 2005 and 21 June 2005 respectively.

— 163 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

8. AMOUNT DUE FROM A JOINTLY CONTROLLED ENTITY

The amount is unsecured, interest free and repayable on demand. The directors of the Company consider that the carrying amount approximates its fair value.

9. NON-CURRENT ASSET HELD FOR SALE

The amount at 31 May 2005 represents the Company’s cost of investment in Changda, which was exchanged for the interests in Xinpu of the Company’s fellow subsidiary as referred to in note 7. The asset has been classified as asset held for sale and is presented separately in the balance sheet.

The consideration of the exchange of assets are expected to exceed the net carrying amount of the relevant asset and, accordingly, no impairment loss has been recognised on the classification of the asset as held for sale.

10. SHARE CAPITAL

	At 1 January 2002 and
	31 December 2002, 2003 and
	2004 and 31 May 2005
	US$
Authorised:
10,000 ordinary shares of US$1 each	10,000
Issued and fully paid:
2 ordinary shares of US$1 each	2

11. LOAN FROM IMMEDIATE HOLDING COMPANY

Other than the amounts of US$9,154,908, US$4,667,208, US$4,666,667 and US$7,230,769 at 31 December 2002, 2003, 2004 and 31 May 2005 respectively in which the interest was determined based on the corresponding interest income, net of tax, received and receivable from a jointly controlled entity, the amount is unsecured and interest free. The immediate holding company has confirmed that no repayment of the loan will be demanded within twelve months from the balance sheet date, accordingly the amount is classified as non-current.

As at 31 May 2005, the directors estimated the fair value of the interest free portion of the loan from immediate holding company as the present value of all future cash flows discounted using the prevailing market rate of interest and the changes in fair value of US$1,156,774 is recognised directly to equity. The imputed interest expense of US$274,528 was charged to income statement for the five months ended 31 May 2005.

12. AMOUNTS DUE TO AN INTERMEDIATE/IMMEDIATE HOLDING COMPANY

The amounts are unsecured, interest free and repayable on demand. The directors of the Company consider that the carrying amounts approximate their fair values.

— 164 —

ACCOUNTANTS’ REPORT OF SOMMERSET

APPENDIX III

13. RELATED PARTY TRANSACTIONS

Apart from the amounts owned from/to related companies which have been disclosed in the balance sheets and relevant notes to the financial information, during the Relevant Periods, the Company had the following transactions with related companies:

Interest income from a jointly controlled entity, net of PRC withholding tax Interest expense to immediate holding company	Year ended 31 December 2002 2003 2004 US$ US$ US$ 130,598 200,908 103,677 130,598 200,908 103,677	Five months ended 31 May 2004 2005 US$ US$ 38,160 84,617 38,160 84,617	Five months ended 31 May 2004 2005 US$ US$ 38,160 84,617 38,160 84,617
			84,617

Interest income from a jointly controlled entity was charged at 3-month HIBOR plus 2% per annum on the outstanding principal.

Interest expense to immediate holding company was determined based on the corresponding interest income, net of tax, received and receivable from a jointly controlled entity.

B. DISTRIBUTABLE RESERVE

The distributable reserve of the Company is the profit determined in accordance with the applicable accounting standards in the Republic of Mauritius. At 31 December 2002, 2003, 2004 and 31 May 2005, the Company did not have any distributable reserve.

C. DIRECTORS’ REMUNERATIONS

No remuneration has been paid or is payable to the Company’s directors during the Relevant Periods.

D. SUBSEQUENT FINANCIAL STATEMENTS

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

Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

— 165 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

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==> picture [99 x 35] intentionally omitted <==

30 September 2005

The Directors

Shui On Construction and Materials Limited

Dear Sirs,

We set out below our report on the financial information regarding Lafarge China Offshore Holding Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) for each of the three years ended 31 December 2004 and the three months ended 31 March 2005 (the “Relevant Periods”), for inclusion in the circular of Shui On Construction and Materials Limited (“SOCAM”) dated 30 September 2005 (the “Circular”) in relation to the major transaction and formation of joint venture with Financiere Lafarge in relation to cement operations in the People’s Republic of China (the “PRC”) (very substantial disposal) and increase in authorised share capital.

Pursuant to the contribution agreement dated 11 August 2005 entered into among SOCAM, Glorycrest Holdings Limited, a wholly owned subsidiary of SOCAM, Financiere Lafarge, the Company’s immediate holding company, and Lafarge Holdings Hong Kong Limited (the “Joint Venture Company”), a fellow subsidiary of the Company, SOCAM shall contribute or procure the contribution of the entire issued share capital of each of Sommerset Investments Limited and T.H. Industry II Limited, the holding companies of the SOCAM PRC cement business or such other companies which will become the holding company of the SOCAM PRC cement business, representing substantially all of the cement business in Sichuan and Chongqing, and its dry kiln cement business in Guizhou of SOCAM and its subsidiaries and include the interest that SOCAM will acquire under the sale and purchase agreement dated 11 August 2005 relating to the acquisition of 50% of the entire issued share capital of T.H. Industrial Management Limited, in which SOCAM currently holds the other 50% interest, into the Joint Venture Company and make a cash contribution of initially RMB90.3 million (subject to adjustment) into the Joint Venture Company in return for 45% of all the issued share capital of the Joint Venture Company and Financiere Lafarge shall contribute or procure the contribution of the 90.19% of the issued share capital of the Company, representing the entire interest of Financiere Lafarge in the PRC cement business, into the Joint Venture Company in return for 55% of all the issued share capital of the Joint Venture Company.

The Company was incorporated on 16 April 1997 in the British Virgin Islands as an international business company.

— 166 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

As at the date of this report, the particulars of the Company’s subsidiaries, all of which are sino foreign equity joint ventures directly held by the Company with limited liabilities and established in the PRC, are as follows:

			Proportion of
			nominal value of
		Issued and fully	registered capital
	Date of	paid registered	effectively held	Principal
Name of subsidiary	establishment	capital	by Company	activities
Beijing Chinefarge	12 September 1994	RMB315,000,000	65%	Production and
Cement Co., Ltd.				sales of cement
(“Chinefarge”)				and cement
				related products
Beijing Yicheng Lafarge	29 March 1996	RMB30,340,000	76.72%	Production and
Concrete Co., Ltd.				sales of cement
(“Yicheng Lafarge”)				and cement
				related products
Lafarge Dujiangyan	9 February 1999	RMB856,839,300	75%	Production and
Cement Co., Ltd.				sales of cement
(“Lafarge Dujiangyan”)				and cement
				related products
Beijing Shunfa	14 March 2002	RMB150,000,000	70%	Production and
Lafarge Cement				sales of cement
Co., Ltd.				and cement
(“Shunfa Lafarge”)				related products
Lafarge Chongqing	5 June 2003	RMB340,000,000	70.59%	Production and
Cement Co., Ltd.				sales of cement
(“Lafarge Chongqing”)				and cement
				related products

The statutory financial statements of each of the Company’s subsidiaries for each of the three years ended 31 December 2004 or since its date of establishment if there is a shorter period were prepared in accordance with the relevant accounting principles and financial regulations applicable to enterprises established in the PRC and were audited by Deloitte Touche Tohmatsu CPA Ltd.

Deloitte Touche Tohmatsu CPA Ltd. have audited the financial statements of the Company for each of the three years ended 31 December 2004 prepared under International Financial Reporting Standards in accordance with the International Standards on Auditing.

— 167 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

For the purpose of this report, we have carried out independent audit procedures in accordance with Statements of Auditing Standards (“SAS”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) in respect of the management accounts of the Group and of the Company prepared in accordance with Hong Kong Financial Reporting Standards for the Relevant Periods.

We have examined the management accounts of the Group and of the Company for the Relevant Periods in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The financial information for the Relevant Periods (the “Financial Information”) set out in this report has been prepared from the management accounts of the Group and of the Company (the “Underlying Financial Information”) for the purpose of preparing our report for inclusion in the Circular.

The preparation of the Underlying Financial Information is the responsibility of the directors of the Company. The directors of SOCAM are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Financial Information, to form an opinion on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information together with the notes thereon give, for the purpose of this report, a true and fair view of the state of affairs of the Group and of the Company as at 31 December 2002, 2003 and 2004 and 31 March 2005 and of the consolidated results and cash flows of the Group for each of the three years ended 31 December 2004 and the three months ended 31 March 2005.

The comparative consolidated income statement, cash flow statement and statement of changes in equity of the Group for the three months ended 31 March 2004 together with the notes thereon have been extracted from the Group’s consolidated financial information for the same period (the “31 March 2004 Financial Information”) which was prepared by the directors of the Company solely for the purpose of this report. We have reviewed the 31 March 2004 Financial Information in accordance with the SAS 700 “Engagements to review interim financial reports” issued by the HKICPA. Our review consisted principally of making enquiries of group management and applying analytical procedures to the 31 March 2004 Financial Information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of control and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the 31 March 2004 Financial Information. On the basis of our review which does not constitute an audit, we are not aware of any material modifications that should be made to 31 March 2004 Financial Information.

— 168 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

A. FINANCIAL INFORMATION

CONSOLIDATED INCOME STATEMENTS

Notes Revenue 4 Cost of sales Gross profit Other income 5 Selling and distribution costs General and administrative expenses Other expenses Finance costs 6 (Loss) profit before tax 7 Income tax credit (expense) 9 (Loss) profit for the year / period Attributable to: Equity holders of the Company Minority interests (Loss) earnings per share - Basic (RMB) 10	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 342,538 623,419 858,969 155,617 186,021 (254,937) (458,684) (661,067) (127,104) (139,086) 87,601 164,735 197,902 28,513 46,935 11,405 8,048 9,697 2,582 3,023 (8,107) (11,537) (16,896) (3,612) (3,447) (81,342) (117,225) (137,982) (43,695) (28,257) (506) (8,337) (7,874) (233) (318) (22,768) (27,306) (40,599) (9,999) (9,442) (13,717) 8,378 4,248 (26,444) 8,494 1,001 3,963 389 610 (1,376) (12,716) 12,341 4,637 (25,834) 7,118 (19,770) 387 (4,288) (19,816) 3,590 7,054 11,954 8,925 (6,018) 3,528 (12,716) 12,341 4,637 (25,834) 7,118 (1.48) 0.03 (0.26) (1.20) 0.22	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 342,538 623,419 858,969 155,617 186,021 (254,937) (458,684) (661,067) (127,104) (139,086) 87,601 164,735 197,902 28,513 46,935 11,405 8,048 9,697 2,582 3,023 (8,107) (11,537) (16,896) (3,612) (3,447) (81,342) (117,225) (137,982) (43,695) (28,257) (506) (8,337) (7,874) (233) (318) (22,768) (27,306) (40,599) (9,999) (9,442) (13,717) 8,378 4,248 (26,444) 8,494 1,001 3,963 389 610 (1,376) (12,716) 12,341 4,637 (25,834) 7,118 (19,770) 387 (4,288) (19,816) 3,590 7,054 11,954 8,925 (6,018) 3,528 (12,716) 12,341 4,637 (25,834) 7,118 (1.48) 0.03 (0.26) (1.20) 0.22	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 342,538 623,419 858,969 155,617 186,021 (254,937) (458,684) (661,067) (127,104) (139,086) 87,601 164,735 197,902 28,513 46,935 11,405 8,048 9,697 2,582 3,023 (8,107) (11,537) (16,896) (3,612) (3,447) (81,342) (117,225) (137,982) (43,695) (28,257) (506) (8,337) (7,874) (233) (318) (22,768) (27,306) (40,599) (9,999) (9,442) (13,717) 8,378 4,248 (26,444) 8,494 1,001 3,963 389 610 (1,376) (12,716) 12,341 4,637 (25,834) 7,118 (19,770) 387 (4,288) (19,816) 3,590 7,054 11,954 8,925 (6,018) 3,528 (12,716) 12,341 4,637 (25,834) 7,118 (1.48) 0.03 (0.26) (1.20) 0.22	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 342,538 623,419 858,969 155,617 186,021 (254,937) (458,684) (661,067) (127,104) (139,086) 87,601 164,735 197,902 28,513 46,935 11,405 8,048 9,697 2,582 3,023 (8,107) (11,537) (16,896) (3,612) (3,447) (81,342) (117,225) (137,982) (43,695) (28,257) (506) (8,337) (7,874) (233) (318) (22,768) (27,306) (40,599) (9,999) (9,442) (13,717) 8,378 4,248 (26,444) 8,494 1,001 3,963 389 610 (1,376) (12,716) 12,341 4,637 (25,834) 7,118 (19,770) 387 (4,288) (19,816) 3,590 7,054 11,954 8,925 (6,018) 3,528 (12,716) 12,341 4,637 (25,834) 7,118 (1.48) 0.03 (0.26) (1.20) 0.22	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 342,538 623,419 858,969 155,617 186,021 (254,937) (458,684) (661,067) (127,104) (139,086) 87,601 164,735 197,902 28,513 46,935 11,405 8,048 9,697 2,582 3,023 (8,107) (11,537) (16,896) (3,612) (3,447) (81,342) (117,225) (137,982) (43,695) (28,257) (506) (8,337) (7,874) (233) (318) (22,768) (27,306) (40,599) (9,999) (9,442) (13,717) 8,378 4,248 (26,444) 8,494 1,001 3,963 389 610 (1,376) (12,716) 12,341 4,637 (25,834) 7,118 (19,770) 387 (4,288) (19,816) 3,590 7,054 11,954 8,925 (6,018) 3,528 (12,716) 12,341 4,637 (25,834) 7,118 (1.48) 0.03 (0.26) (1.20) 0.22
	87,601 11,405 (8,107) (81,342) (506) (22,768) (13,717) 1,001	164,735 8,048 (11,537) (117,225) (8,337) (27,306) 8,378 3,963	197,902 9,697 (16,896) (137,982) (7,874) (40,599) 4,248 389	28,513 2,582 (3,612) (43,695) (233) (9,999) (26,444) 610	46,935 3,023 (3,447 (28,257 (318 (9,442
					8,494 (1,376
	(12,716)	12,341	4,637	(25,834)
	(19,770) 7,054	387 11,954	(4,288) 8,925	(19,816) (6,018)	3,590 3,528
	(12,716) (1.48)	12,341 0.03	4,637 (0.26)	(25,834) (1.20)

— 169 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

CONSOLIDATED BALANCE SHEETS

Notes Non-current assets Property, plant and equipment 11 Goodwill 12 Land use rights 14 Other intangible assets 15 Deferred tax assets 27 Current assets Inventories 17 Trade and other receivables 18 Amounts due from related parties 19 Tax recoverable Pledged bank deposits 20 Bank balances, deposits and cash Current liabilities Trade and other payables 21 Amounts due to related parties 22 Borrowings, due within one year 23 Income tax payable Net current assets	At 2002 RMB’000 1,225,982 135,373 169,499 97,042 3,285	31 December 2003 2004 RMB’000 RMB’000 1,359,989 1,602,919 143,577 143,759 337,766 330,539 113,083 111,292 7,255 10,199	31 December 2003 2004 RMB’000 RMB’000 1,359,989 1,602,919 143,577 143,759 337,766 330,539 113,083 111,292 7,255 10,199	At 31 March 2005 RMB’000 1,699,353 143,728 328,732 110,694 10,566
	1,631,181 89,036 170,991 237 11,579 273,151 276,166 821,160 105,879 11,270 415,096 23 532,268 288,892	1,961,670 126,271 332,480 220 — — 173,598 632,569 186,049 15,968 159,849 30 361,896 270,673	2,198,708 122,644 378,135 2,001 — — 182,069 684,849 169,995 15,658 341,794 925 528,372 156,477	2,293,073
				164,205 397,599 886 — 3,629 151,704
				718,023
				174,918 19,339 490,294 2,668
				687,219
				30,804
	1,920,073	2,232,343	2,355,185	2,323,877

— 170 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

Notes Capital and reserves Share capital 24 Reserves Equity attributable to equity holders of the Company Minority interests Total equity Non-current liabilities Borrowings, due after one year 23 Amounts due to related parties 22 Deferred income Obligations under a finance lease, due after one year 26	At 2002 RMB’000 1,125 1,091,694	31 December 2003 2004 RMB’000 RMB’000 1,368 1,368 1,336,639 1,334,892	31 December 2003 2004 RMB’000 RMB’000 1,368 1,368 1,336,639 1,334,892	At 31 March 2005 RMB’000 1,368 1,339,249
	1,092,819 372,663 1,465,482 362,804 91,361 426 — 454,591	1,338,007 484,664 1,822,671 294,000 115,282 390 — 409,672	1,336,260 489,253 1,825,513 248,000 147,022 1,134 133,516 529,672	1,340,617 492,794
				1,833,411
				210,000 145,879 1,071 133,516
				490,466
	1,920,073	2,232,343	2,335,185	2,323,877

— 171 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

BALANCE SHEETS OF COMPANY

Notes Non-current assets Investments in subsidiaries 13 Amounts due from subsidiaries 16 Current assets Other receivables Bank balances, deposits and cash Current liability Accrued charges Net current assets Capital and reserves Share capital 24 Reserves 25 Non-current liability Amount due to a related party 22	At 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,008,932 1,287,640 1,287,640 69,767 70,910 71,264	At 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,008,932 1,287,640 1,287,640 69,767 70,910 71,264	At 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,008,932 1,287,640 1,287,640 69,767 70,910 71,264	At 31 March 2005 RMB’000 1,287,609 71,263
	1,078,699 394 42,897 43,291 66 43,225	1,358,550 — 4,005 4,005 — 4,005	1,358,904 10,029 3,673 13,702 82 13,620	1,358,872
				3,539 10,163
				13,702 146
				13,556
	1,121,924	1,362,555	1,372,524	1,372,428
	1,125 1,039,048 1,040,173 81,751	1,368 1,255,431 1,256,799 105,756	1,368 1,238,057 1,239,425 133,099	1,368 1,231,128
				1,232,496 139,932
	1,121,924	1,362,555	1,372,524	1,372,428

— 172 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Share capital RMB’000 At 1 January 2002 1,062 Issue of shares at cash 63 Contribution from a minority shareholder of a subsidiary — Exchange differences arising on translation of foreign operations not recognised in income statement — (Loss) for the year — Capital contribution — adjustment on advances from ultimate holding company — At 31 December 2002 1,125 Issue of shares at cash 243 Contribution from a minority shareholder of a subsidiary — Exchange differences arising on translation of foreign operations not recognised in income statement — Profit for the year — Capital contribution — adjustment on advances from ultimate holding company —	Share capital RMB’000 At 1 January 2002 1,062 Issue of shares at cash 63 Contribution from a minority shareholder of a subsidiary — Exchange differences arising on translation of foreign operations not recognised in income statement — (Loss) for the year — Capital contribution — adjustment on advances from ultimate holding company — At 31 December 2002 1,125 Issue of shares at cash 243 Contribution from a minority shareholder of a subsidiary — Exchange differences arising on translation of foreign operations not recognised in income statement — Profit for the year — Capital contribution — adjustment on advances from ultimate holding company —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,060,498 (333) — (13,302) 62,944 — — — — — — — — 84 — — — — — (19,770) — — 1,573 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,060,498 (333) — (13,302) 62,944 — — — — — — — — 84 — — — — — (19,770) — — 1,573 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,060,498 (333) — (13,302) 62,944 — — — — — — — — 84 — — — — — (19,770) — — 1,573 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,060,498 (333) — (13,302) 62,944 — — — — — — — — 84 — — — — — (19,770) — — 1,573 —	Total Minority interests RMB’000 RMB’000 1,047,925 320,534 63,007 — — 45,000 84 — (19,770) 7,054 1,573 75	Total Minority interests RMB’000 RMB’000 1,047,925 320,534 63,007 — — 45,000 84 — (19,770) 7,054 1,573 75	Total RMB’000 1,368,459 63,007 45,000 84 (12,716) 1,648 1,465,482 242,936 100,000 (89) 12,341 2,001
	1,125 243 — — — —	1,123,442 242,693 — — — —	(249) — — (89) — —	1,573 — — — — 1,954	(33,072) — — — 387 —	1,092,819 242,936 — (89) 387 1,954	372,663 — 100,000 — 11,954 47	1,465,482 242,936 100,000 (89 12,341 2,001

— 173 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —	Equity attributable to equity holders of the Company Share premium Translation reserve Capital reserve Accumulated profits (losses) RMB’000 RMB’000 RMB’000 RMB’000 1,366,135 (338) 3,527 (32,685) — — — — — — — (4,288) — — 2,541 —
1,368 — — —	1,366,135 — — —	(338) (30) — —	6,068 — — 797	(36,973) — 3,590 —	1,336,260 (30) 3,590 797	489,253 — 3,528 13	1,825,513 (30 7,118 810
1,368	1,366,135	(368)	6,865	(33,383)	1,340,617	492,794
1,368 — — —	1,366,135 — — —	(338) 39 — —	3,527 — — 549	(32,685) — (19,816) —	1,338,007 39 (19,816) 549	484,664 1,822,671 — 39 (6,018) (25,834 4 553

— 174 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

CONSOLIDATED CASH FLOW STATEMENTS

OPERATING ACTIVITIES (Loss) profit for the year/period Adjustments for: Interest income Interest expenses Income tax (credit) expense Write down of inventories Depreciation and amortisation Impairment loss on property, plant and equipment Allowance for bad and doubtful debts Provision for rehabilitation of mining ores Release of deferred income (Gain) loss on disposals of property, plant and equipment Operating cash flows before movements in working capital (Increase) decrease in inventories Increase in trade and other receivables Decrease (increase) in amounts due from related parties (Decrease) increase in trade and other payables Increase (decrease) in amounts due to related parties Cash (used in) generated from operations Interest received Interest paid PRC income tax (paid) refund NET CASH (USED IN) FROM OPERATING ACTIVITIES	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB RMB RMB RMB RMB (Unaudited) (12,716) 12,341 4,637 (25,834) 7,118 (6,809) (3,335) (1,996) (443) (423) 28,599 27,306 44,733 10,584 11,991 (1,001) (3,963) (389) (610) 1,376 1,889 1,742 3,105 2,089 1,674 69,708 103,597 121,376 29,847 33,838 — 4,081 16,217 16,217 — 2,981 12,245 16,297 938 5,960 — 69 181 63 — (4) (56) (105) (47) (63) (91) (286) 1,681 (4) 80 82,556 153,741 205,737 32,800 61,551 (65,058) (39,482) 1,198 (17,084) (43,235) (28,885) (170,746) (61,985) (24,806) (25,424) 773 17 (1,781) (495) 1,115 (30,598) 80,606 (16,946) (34,577) 4,923 11,270 4,698 (310) 8,627 3,681 (29,942) 28,834 125,913 (35,535) 2,611 6,809 3,335 1,996 443 423 (26,951) (25,305) (42,140) (10,031) (11,181) (13,431) 11,579 (1,660) — — (63,515) 18,443 84,109 (45,123) (8,147)	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB RMB RMB RMB RMB (Unaudited) (12,716) 12,341 4,637 (25,834) 7,118 (6,809) (3,335) (1,996) (443) (423) 28,599 27,306 44,733 10,584 11,991 (1,001) (3,963) (389) (610) 1,376 1,889 1,742 3,105 2,089 1,674 69,708 103,597 121,376 29,847 33,838 — 4,081 16,217 16,217 — 2,981 12,245 16,297 938 5,960 — 69 181 63 — (4) (56) (105) (47) (63) (91) (286) 1,681 (4) 80 82,556 153,741 205,737 32,800 61,551 (65,058) (39,482) 1,198 (17,084) (43,235) (28,885) (170,746) (61,985) (24,806) (25,424) 773 17 (1,781) (495) 1,115 (30,598) 80,606 (16,946) (34,577) 4,923 11,270 4,698 (310) 8,627 3,681 (29,942) 28,834 125,913 (35,535) 2,611 6,809 3,335 1,996 443 423 (26,951) (25,305) (42,140) (10,031) (11,181) (13,431) 11,579 (1,660) — — (63,515) 18,443 84,109 (45,123) (8,147)	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB RMB RMB RMB RMB (Unaudited) (12,716) 12,341 4,637 (25,834) 7,118 (6,809) (3,335) (1,996) (443) (423) 28,599 27,306 44,733 10,584 11,991 (1,001) (3,963) (389) (610) 1,376 1,889 1,742 3,105 2,089 1,674 69,708 103,597 121,376 29,847 33,838 — 4,081 16,217 16,217 — 2,981 12,245 16,297 938 5,960 — 69 181 63 — (4) (56) (105) (47) (63) (91) (286) 1,681 (4) 80 82,556 153,741 205,737 32,800 61,551 (65,058) (39,482) 1,198 (17,084) (43,235) (28,885) (170,746) (61,985) (24,806) (25,424) 773 17 (1,781) (495) 1,115 (30,598) 80,606 (16,946) (34,577) 4,923 11,270 4,698 (310) 8,627 3,681 (29,942) 28,834 125,913 (35,535) 2,611 6,809 3,335 1,996 443 423 (26,951) (25,305) (42,140) (10,031) (11,181) (13,431) 11,579 (1,660) — — (63,515) 18,443 84,109 (45,123) (8,147)	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB RMB RMB RMB RMB (Unaudited) (12,716) 12,341 4,637 (25,834) 7,118 (6,809) (3,335) (1,996) (443) (423) 28,599 27,306 44,733 10,584 11,991 (1,001) (3,963) (389) (610) 1,376 1,889 1,742 3,105 2,089 1,674 69,708 103,597 121,376 29,847 33,838 — 4,081 16,217 16,217 — 2,981 12,245 16,297 938 5,960 — 69 181 63 — (4) (56) (105) (47) (63) (91) (286) 1,681 (4) 80 82,556 153,741 205,737 32,800 61,551 (65,058) (39,482) 1,198 (17,084) (43,235) (28,885) (170,746) (61,985) (24,806) (25,424) 773 17 (1,781) (495) 1,115 (30,598) 80,606 (16,946) (34,577) 4,923 11,270 4,698 (310) 8,627 3,681 (29,942) 28,834 125,913 (35,535) 2,611 6,809 3,335 1,996 443 423 (26,951) (25,305) (42,140) (10,031) (11,181) (13,431) 11,579 (1,660) — — (63,515) 18,443 84,109 (45,123) (8,147)	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB RMB RMB RMB RMB (Unaudited) (12,716) 12,341 4,637 (25,834) 7,118 (6,809) (3,335) (1,996) (443) (423) 28,599 27,306 44,733 10,584 11,991 (1,001) (3,963) (389) (610) 1,376 1,889 1,742 3,105 2,089 1,674 69,708 103,597 121,376 29,847 33,838 — 4,081 16,217 16,217 — 2,981 12,245 16,297 938 5,960 — 69 181 63 — (4) (56) (105) (47) (63) (91) (286) 1,681 (4) 80 82,556 153,741 205,737 32,800 61,551 (65,058) (39,482) 1,198 (17,084) (43,235) (28,885) (170,746) (61,985) (24,806) (25,424) 773 17 (1,781) (495) 1,115 (30,598) 80,606 (16,946) (34,577) 4,923 11,270 4,698 (310) 8,627 3,681 (29,942) 28,834 125,913 (35,535) 2,611 6,809 3,335 1,996 443 423 (26,951) (25,305) (42,140) (10,031) (11,181) (13,431) 11,579 (1,660) — — (63,515) 18,443 84,109 (45,123) (8,147)
	82,556 (65,058) (28,885) 773 (30,598) 11,270 (29,942) 6,809 (26,951) (13,431) (63,515)	153,741 (39,482) (170,746) 17 80,606 4,698 28,834 3,335 (25,305) 11,579 18,443	205,737 1,198 (61,985) (1,781) (16,946) (310) 125,913 1,996 (42,140) (1,660) 84,109	32,800 (17,084) (24,806) (495) (34,577) 8,627 (35,535) 443 (10,031) — (45,123)	61,551 (43,235 (25,424 1,115 4,923 3,681
					2,611 423 (11,181 —
					(8,147

— 175 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

				Three months	Three months
	**Year **	ended 31 December		ended 31 March
	2002	2003	2004	2004	2005
	RMB	RMB	RMB	RMB	RMB
				(Unaudited)
INVESTING ACTIVITIES
Purchase of property, plant and
equipment	(130,652)	(135,816)	(252,686)	(55,236)	(127,196)
Proceeds from disposals of
property, plant and equipment	389	2,768	2,957	—	22
Addition of other intangible
assets	(3,317)	(20,085)	(2,740)	336	(773)
Addition of land use rights	(14,506)	(175,562)	—	—	—
Formation of a subsidiary	—	(8,253)	—	—	—
(Increase) decrease in pledged
bank deposits	(273,151)	273,151	—	—	(3,629)
NET CASH USED IN
INVESTING ACTIVITIES	(421,237)	(63,797)	(252,469)	(54,900)	(131,576)
FINANCING ACTIVITIES
New bank loans raised	786,949	439,775	332,000	77,770	213,500
Repayments of bank loans	(523,584)	(763,826)	(196,055)	(6,000)	(103,000)
Proceeds on issue of shares	63,007	242,936	—	—	—
Dividend paid by subsidiaries	—	—	(4,389)	—	—
Increase (decrease) in amounts
due to related parties	74,549	23,921	31,740	(2,500)	(1,143)
Government grants received	430	20	13,717	25	—
NET CASH FROM (USED IN)
FINANCING ACTIVITIES	401,351	(57,174)	177,013	69,295	109,357
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS	(83,401)	(102,528)	8,653	(30,728)	(30,366)
CASH AND CASH
EQUIVALENTS AT THE
BEGINNING OF THE YEAR	359,455	276,166	173,598	173,598	182,069
EFFECT OF FOREIGN
EXCHANGE RATE CHANGES	112	(40)	(182)	(105)	1
CASH AND CASH
EQUIVALENTS AT THE END
OF THE YEAR	276,166	173,598	182,069	142,765	151,704

— 176 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

NOTES TO THE FINANCIAL INFORMATION

1. GENERAL

The Company is a limited company was incorporated under the International Business Companies Act (CAP. 291) on 16 April 1997 in the British Virgin Islands as an international business company. The address of its registered office is Palm Beach No. 3. P. V. Box 3152, Road Town, Tortola, British Virgin Islands.

The Company acts as an investment holding company.

2. SIGNIFICANT ACCOUNTING POLICIES

The Financial Information has been prepared under the historical cost conversion and in accordance with the accounting policies set out below which conform to the Hong Kong Financial Reporting Standards issued by the HKICPA. The principal accounting policies adopted are set out below:

Basis of consolidation

The consolidated financial information incorporates the financial information of the Company and entities controlled by the Company (“its subsidiaries”). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

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

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

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

Goodwill

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair values of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition.

Goodwill is recognised as an asset at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

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

— 177 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

Revenue recognition

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

Service income is recognised when the services are rendered.

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

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

Leasing

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

Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as obligations under finance lease. Lease payments are apportioned between finance charges reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs (see below).

Rentals payable under operating leases are charged to income statement on a straight line basis over the term of the relevant lease.

Foreign currencies

The individual financial statements of each of the Group’s entity are presented in the currency of the primary economic environment in which the entity operates (“its functional currency”). For the purpose of the consolidated financial information, the results and financial position of each entity are expressed in RMB, which is the functional currency of the operating subsidiaries, and the presentation currency for the consolidated financial information.

In preparing the financial information of the individual entities, transactions in currencies other than the entity’s functional currency (“foreign currencies”) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

For the purpose of preventing consolidated financial information, the assets and liabilities of the Group’s foreign operations are expressed in RMB using exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as profit or loss in the period in which the overseas operation is disposed of.

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ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

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

Government grants

Government grants are recognised as income over the periods necessary to match them with the related costs. Where government grants are given for the purposes of immediate financial support to the Group with no further related cost to be incurred, the grants are recognised as income when they become receivable. Grants relating to assets are presented as a deduction from the cost of the relevant asset.

Retirement benefits costs

Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.

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/period. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

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

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

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

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset 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.

— 179 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

Property, plant and equipment

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

Construction in progress is stated at cost which includes all construction costs and other direct costs attributable to such projects including borrowing costs capitalised. It is not depreciated until completion of construction. Costs of completed construction works are transferred to the appropriate categories of property, plant and equipment.

Depreciation is provided to write off the cost of property, plant and equipment other than construction in progress over their estimated useful lives and after taking into account their estimated residual value, using the straight line method, as follows:

Buildings		20 years
Plant and machinery	10	- 20 years
Electronic equipment, furniture and fixtures		5 years
Motor vehicles		5 years

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

Land use rights

The prepayment made on acquiring land use rights represents prepaid lease payments and it is accounted for as an operating lease. The prepaid lease payments are amortised on a straight-line basis over the lease term, or when there is impairment, the impairment is expensed in the income statement.

Other intangible assets

Other intangible assets are measured initially at purchase cost and are amortised on a straight line basis over their estimated useful lives.

Impairment of tangible and intangible assets excluding goodwill

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

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ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

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

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution.

Financial instruments

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Trade and other receivables

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

Financial liability and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Investment in subsidiaries

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

Borrowings

Interest-bearing bank loans and loans from minority shareholders of the subsidiaries are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis to the income statement using effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

Trade and other payables

Trade and other payables are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate methods.

— 181 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

3. KEY SOURCE OF ESTIMATION UNCERTAINTY

The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets are discussed below.

Depreciation of property, plant and equipment

Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account their estimated residual value. The Group assesses annually the residual value and the useful life of the property, plant and equipment and if the expectation differ from the original estimate, such difference will impact the depreciation in the year/period in which such estimate has been changed.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

Impairment of property, plant and equipment

The Group assesses annually whether property, plant and equipment have any indication of impairment in accordance with the accounting policy. The recoverable amounts of property, plant and equipment have been determined based on value-in-use calculations. These calculations require the use of judgment and estimates.

Allowances for bad and doubtful debts

The Group makes allowances for bad and doubtful debts based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of bad and doubtful debts requires the use of judgment and estimates. Where the expectation is different from the original estimate, such difference will impact carrying value of trade and other receivables and doubtful debts expenses in the year/period in which such estimate has been changed.

4. SEGMENT INFORMATION

Revenue represents the net amount received and receivable for goods sold to customers, less returns and allowances and net of value added tax.

The Group is engaged in the production and sales of cement and cement related products. More than 90% of its products were sold in the PRC during the Relevant Periods. All the Group’s assets are located in the PRC as at 31 December 2002, 2003 and 2004 and 31 March 2005. Accordingly, no segmental analysis is presented.

— 182 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

5. OTHER INCOME

Interest income Sales of scrap materials Rental income Service income Exchange gain Gain on disposal of property, plant and equipment Local government grants Value added tax refund Others	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 6,809 3,335 1,996 443 423 207 2,309 2,943 421 314 111 111 113 29 29 121 140 164 29 54 1,802 — — — 417 91 286 — 4 — 2,058 1,547 2,182 1,089 1,329 — — 2,205 520 201 206 320 94 47 256 11,405 8,048 9,697 2,582 3,023	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 6,809 3,335 1,996 443 423 207 2,309 2,943 421 314 111 111 113 29 29 121 140 164 29 54 1,802 — — — 417 91 286 — 4 — 2,058 1,547 2,182 1,089 1,329 — — 2,205 520 201 206 320 94 47 256 11,405 8,048 9,697 2,582 3,023
		3,023

6. FINANCE COSTS

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Interest on bank loans
- wholly repayable within five years	24,751	14,414	32,057	7,511	8,661
- repayable over five years	2,200	10,891	—	—	—
Interest on loan from a minority
shareholder of a subsidiary	—	—	886	221	221
Interest on obligations under
a finance lease	—	—	9,197	2,299	2,299
Less: amounts capitalised to construction
in progress	(5,831)	—	(4,134)	(585)	(2,549)
Imputed interest expenses on advances
from ultimate holding company	1,648	2,001	2,593	553	810
	22,768	27,306	40,599	9,999	9,442

Borrowing costs capitalised for the three years ended 31 December 2004 and the three months ended 31 March 2005 arose on the general borrowing pool of respective subsidiaries and were calculated by applying a capitalisation rate of 4.3%, nil, 5.0% and 4.6%, respectively, to expenditure on the qualifying assets.

— 183 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

7. (LOSS) PROFIT BEFORE TAX

(Loss) profit before tax has been arrived at after charging:

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Allowance for bad and doubtful debts	2,981	12,245	16,297	938	5,960
Auditors’ remuneration	999	1,318	1,734	638	358
Depreciation and amortisation
Property, plant and equipment	63,969	95,246	109,550	27,458	30,660
Land use rights	3,584	4,307	7,295	1,835	1,807
Other intangible assets	2,155	4,044	4,531	554	1,371
Net foreign exchange losses	—	898	1,619	10	—
Loss on disposal of property, plant and
equipment	—	—	1,681	—	80
Provision for rehabilitation of mining ores	—	69	181	63	—
Operating lease rentals	709	1,234	1,807	204	202
Staff costs
Salaries and allowances	43,163	65,854	73,365	20,297	17,430
Retirement benefit costs	3,465	4,189	6,573	1,706	1,601
Write down of inventories	1,889	1,742	3,105	2,089	1,674
Impairment loss in respect of property,
plant and equipment	—	4,081	16,217	16,217	—

8. REMUNERATION OF DIRECTORS AND EMPLOYEES

Directors

No remuneration was paid or payable to any directors of the Company during the Relevant Periods.

Employees

Details of the emoluments paid by the Group to the five highest paid employees are as follows:

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Salaries and other benefits	4,192	4,367	4,568	1,142	1,186
Performance related incentive payments	543	595	660	—	—
	4,735	4,962	5,228	1,142	1,186

— 184 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

The emoluments of the five highest paid employees were within the following bands:

Nil - HK$1,000,000 HK$1,000,001 - HK$2,000,000	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 Number of employees Number of employees Number of employees Number of employees (Unaudited) Number of employees 3 3 3 3 3 2 2 2 2 2 5 5 5 5 5	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 Number of employees Number of employees Number of employees Number of employees (Unaudited) Number of employees 3 3 3 3 3 2 2 2 2 2 5 5 5 5 5
		5

During the Relevant Periods, no emoluments were paid by the Group to the five highest paid individuals and the directors as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors waived any emoluments during the Relevant Periods.

9. INCOME TAX (CREDIT) EXPENSE

				**Three **	months
	**Year **	ended 31 December		ended 31 March
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
PRC enterprise income tax	19	7	2,555	108	1,743
Deferred tax	(1,020)	(3,970)	(2,944)	(718)	(367)
	(1,001)	(3,963)	(389)	(610)	1,376

The Company is not subject to income tax as it incurred tax loss for the Relevant Periods.

Pursuant to relevant laws and regulations in the PRC, the subsidiaries of the Company are subject to PRC enterprise income tax as follows:

Chinefarge is exempted from PRC enterprise income tax for two years ended 31 December 2003, followed by a 50% reduction for the three years ending 31 December 2006.

The enterprise income tax in the PRC of Yicheng Lafarge is calculated at 15% of the estimated taxable profit for three years ended 31 December 2004, and 24% of the estimated taxable profit for the three months ended 31 March 2005.

Lafarge Dujiangyan is exempted from PRC enterprise income tax for two years ended 31 December 2004, followed by a 50% reduction for the three years ending 31 December 2007.

Shunfa Lafarge is entitled to a two-year exemption from PRC enterprise income tax, followed by a 50% reduction for the next three years since Shunfa Lafarge comes into profitable year. Shunfa Lafarge did not have any taxable profit for the Relevant Periods.

— 185 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

Lafarge Chongqing is exempted from PRC enterprise income tax for the two years ending 31 December 2005, followed by a 50% reduction for the three years ending 31 December 2008.

The PRC enterprise income tax rate of 15% is the domestic tax rate in the jurisdiction where the operations of the Group are substantially based.

The charge for the year/period can be reconciled to (loss) profit before tax as follows:

(Loss) profit before tax Tax at the domestic income tax rate of 15% Tax effect of expenses that are not deductible in determining taxable profit Tax effect of tax losses not recognised Effect of different tax rates of subsidiaries Income tax expense for the year/period	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) (13,717) 8,378 4,248 (26,444) 8,494 (2,058) 1,257 637 (3,967) 1,274 2,975 1,992 3,376 2,439 722 6,679 5,595 5,569 1,230 1,854 (7,577) (8,837) (7,027) 406 (2,107) 19 7 2,555 108 1,743

Details of unrecognised deferred tax assets for the Relevant Periods are set out in note 27.

— 186 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

10. (LOSS) EARNINGS PER SHARE

The calculation of the basic (loss) earnings per share attributable to the ordinary equity holders of the Company is based on the following data:

(Loss) earnings

(Loss) earnings attributable to equity holders of the Company for the purpose of basic (loss) earnings per share Number of shares Weighted average number of ordinary shares for the purpose of basic (loss) earnings per share for the (loss) profit attributable to equity holder of the Company	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) (19,770) 387 (4,288) (19,816) 3,590 Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 (’000) (’000) (’000) (’000) (’000) (Unaudited) 13,362 14,798 16,518 16,518 16,518

No diluted (loss) earnings per share had been presented because the Company had no outstanding potential ordinary shares during the Relevant Periods or at each of the balance sheet dates.

— 187 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

11. PROPERTY, PLANT AND EQUIPMENT

Construction in progress RMB’000 COST At 1 January 2002 887,545 Additions 96,930 Transfer (915,609) Capital injection from a minority shareholder of a subsidiary — Disposals — At 31 December 2002 68,866 ACCUMULATED DEPRECIATION At 1 January 2002 — Provided for the year — Eliminated on disposals — At 31 December 2002 — CARRYING AMOUNT At 31 December 2002 68,866 COST At 1 January 2003 68,866 Additions 83,471 Transfer (92,080) Capital injection from a minority shareholder of a subsidiary — Disposals — At 31 December 2003 60,257	Construction in progress RMB’000 COST At 1 January 2002 887,545 Additions 96,930 Transfer (915,609) Capital injection from a minority shareholder of a subsidiary — Disposals — At 31 December 2002 68,866 ACCUMULATED DEPRECIATION At 1 January 2002 — Provided for the year — Eliminated on disposals — At 31 December 2002 — CARRYING AMOUNT At 31 December 2002 68,866 COST At 1 January 2003 68,866 Additions 83,471 Transfer (92,080) Capital injection from a minority shareholder of a subsidiary — Disposals — At 31 December 2003 60,257	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 149,225 137,912 5,376 13,590 18,885 752 297,773 608,660 2,333 19,149 25,440 — (136) (49) (152)	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 149,225 137,912 5,376 13,590 18,885 752 297,773 608,660 2,333 19,149 25,440 — (136) (49) (152)	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 149,225 137,912 5,376 13,590 18,885 752 297,773 608,660 2,333 19,149 25,440 — (136) (49) (152)	Motor vehicles RMB’000 44,603 495 6,843 411 (953)	Total RMB’000 1,224,661 130,652 — 45,000 (1,290) 1,399,023 110,064 63,969 (992) 173,041 1,225,982 1,399,023 135,816 — 100,000 (3,864) 1,630,975
	68,866 — — — —	479,601 40,208 15,107 (33) 55,282	790,848 40,439 42,457 (22) 82,874	8,309 1,954 1,173 (87) 3,040	51,399 27,463 5,232 (850) 31,845	1,399,023
						110,064 63,969 (992
						173,041
	68,866	424,319	707,974	5,269	19,554
	68,866 83,471 (92,080) — — 60,257	479,601 — 30,576 20,458 (2,104) 528,531	790,848 44,996 55,241 79,542 (77) 970,550	8,309 559 3,935 — (270) 12,533	51,399 6,790 2,328 — (1,413) 59,104	1,399,023 135,816 — 100,000 (3,864
						1,630,975

— 188 —

APPENDIX IV

ACCOUNTANTS’ REPORT OF LAFARGE

Construction in progress RMB’000 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January 2003 — Provided for the year — Impairment loss recognised — Eliminated on disposals — At 31 December 2003 — CARRYING AMOUNT At 31 December 2003 60,257 COST At 1 January 2004 60,257 Additions 235,993 Transfer (47,045) Government grants deducted from carrying amount of the assets — Disposals — At 31 December 2004 249,205 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January 2004 — Provided for the year — Eliminated on disposals — Impairment loss recognised 16,192 At 31 December 2004 16,192 CARRYING AMOUNT At 31 December 2004 233,013	Construction in progress RMB’000 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January 2003 — Provided for the year — Impairment loss recognised — Eliminated on disposals — At 31 December 2003 — CARRYING AMOUNT At 31 December 2003 60,257 COST At 1 January 2004 60,257 Additions 235,993 Transfer (47,045) Government grants deducted from carrying amount of the assets — Disposals — At 31 December 2004 249,205 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January 2004 — Provided for the year — Eliminated on disposals — Impairment loss recognised 16,192 At 31 December 2004 16,192 CARRYING AMOUNT At 31 December 2004 233,013	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 55,282 82,874 3,040 22,451 66,133 1,585 550 3,212 — (39) (36) (208)	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 55,282 82,874 3,040 22,451 66,133 1,585 550 3,212 — (39) (36) (208)	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 55,282 82,874 3,040 22,451 66,133 1,585 550 3,212 — (39) (36) (208)	Motor vehicles RMB’000 31,845 5,077 319 (1,099)	Total RMB’000 173,041 95,246 4,081 (1,382) 270,986 1,359,989 1,630,975 386,202 — (12,867) (13,246) 1,991,064 270,986 109,550 (8,608) 16,217 388,145 1,602,919
	—	78,244	152,183	4,417	36,142	270,986
	60,257	450,287	818,367	8,116	22,962
	60,257 235,993 (47,045) — — 249,205 — — — 16,192 16,192	528,531 97,937 18,398 — (729) 644,137 78,244 28,926 (595) — 106,575	970,550 48,475 27,231 (12,867) (7,833) 1,025,556 152,183 73,240 (4,158) — 221,265	12,533 1,334 1,228 — (644) 14,451 4,417 2,191 (446) 8 6,170	59,104 2,463 188 — (4,040) 57,715 36,142 5,193 (3,409) 17 37,943	1,630,975 386,202 — (12,867 (13,246
						1,991,064
						270,986 109,550 (8,608 16,217
						388,145
	233,013	537,562	804,291	8,281	19,772

— 189 —

APPENDIX IV

ACCOUNTANTS’ REPORT OF LAFARGE

Construction in progress RMB’000 COST At 1 January 2005 249,205 Additions 127,176 Transfer (13,756) Disposals — At 31 March 2005 362,625 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January 2005 16,192 Provided for the period — Eliminated on disposals — At 31 March 2005 16,192 CARRYING AMOUNT At 31 March 2005 346,433	Construction in progress RMB’000 COST At 1 January 2005 249,205 Additions 127,176 Transfer (13,756) Disposals — At 31 March 2005 362,625 ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January 2005 16,192 Provided for the period — Eliminated on disposals — At 31 March 2005 16,192 CARRYING AMOUNT At 31 March 2005 346,433	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 644,137 1,025,556 14,451 — — 20 4,537 7,894 555 — (50) (192)	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 644,137 1,025,556 14,451 — — 20 4,537 7,894 555 — (50) (192)	Buildings Plant and machinery Electronic equipment, furniture and fixtures RMB’000 RMB’000 RMB’000 644,137 1,025,556 14,451 — — 20 4,537 7,894 555 — (50) (192)	Motor vehicles RMB’000 57,715 — 770 (289)	Total RMB’000 1,991,064 127,196 — (531)
	362,625 16,192 — — 16,192	648,674 106,575 7,361 — 113,936	1,033,400 221,265 21,523 (18) 242,770	14,834 6,170 571 (151) 6,590	58,196 37,943 1,205 (260) 38,888	2,117,729
						388,145 30,660 (429)
						418,376
	346,433	534,738	790,630	8,244	19,308	1,699,353

The Group’s property interests are situated in the PRC and are held under medium-term land use rights.

The Group assesses the recoverable amounts of the property, plant and equipment based on value-in-use calculations and accordingly, impairment of RMB4,081,000 and RMB16,217,000 were recognised for the year ended 31 December 2003 and 2004.

The carrying amount of the Group’s property, plant and equipment held under a finance lease is analysed as follows:

Buildings Plant and machinery Electronic equipment, furniture and fixtures Motor vehicles Total	At 2002 RMB’000 — — — — —	31 December 2003 RMB’000 — — — — —	At 2004 RMB’000 86,494 40,737 12 665 127,908	31 March 2005 RMB’000 85,416 38,029 11 629
				124,085

— 190 —

APPENDIX IV

ACCOUNTANTS’ REPORT OF LAFARGE

The carrying amount of the Group’s property, plant and equipment pledged to secure the bank loans granted to the Group are analysed as follows:

		At 31 December		At 31 March
	2002	2003	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000
Construction in progress	5,098	7,351	17,888	6,711
Buildings	343,213	318,954	303,327	302,614
Plant and machinery	603,140	612,600	625,407	614,767
Electronic equipment, furniture and fixtures	3,223	3,618	2,682	2,851
Motor vehicles	12,131	10,390	7,537	7,345
Total	966,805	952,913	956,841	934,288

12. GOODWILL

CARRYING VALUE At beginning of the year/period Exchange differences Arising on formation of a subsidiary At end of the year/period	At 2002 RMB’000 135,401 (28) — 135,373	31 December 2003 RMB’000 135,373 (49) 8,253 143,577	At 2004 RMB’000 143,577 182 — 143,759	31 March 2005 RMB’000 143,759 (31) —
				143,728

Goodwill is allocated to the cash generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill had been allocated as follows:

		At 31 December		At 31 March
	2002	2003	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000
Cement products:
Chinefarge (single CGU)	125,998	125,940	126,099	126,073
Yicheng Lafarge (single CGU)	9,375	9,391	9,403	9,400
Lafarge Chongqing (single CGU)	—	8,246	8,257	8,255
	135,373	143,577	143,759	143,728

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

— 191 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates and expected changes to selling prices and direct costs during the period. Management estimates discount rate using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next ten years and the rate used to discount the forecast cash flows is 8.5%.

13. INVESTMENT IN SUBSIDIARIES

Unlisted investments, at cost Exchange differences LAND USE RIGHTS CARRYING VALUE At beginning of the year/period Additions Released to income statement At end of the year/period Less: Portion to be charged to income statement in next year included as prepayments under current assets Amount due after one year	At 2002 RMB’000 1,009,786 (854) 1,008,932 At 2002 RMB’000 162,884 14,506 (3,584)	31 December 2003 RMB’000 1,288,595 (955) 1,287,640 31 December 2003 RMB’000 173,806 175,562 (4,307)	At 2004 RMB’000 1,288,595 (955) 1,287,640 At 2004 RMB’000 345,061 — (7,295)	31 March 2005 RMB’000 1,288,595 (986) 1,287,609 31 March 2005 RMB’000 337,766 — (1,807) 335,959 7,227 328,732
	173,806 4,307	345,061 7,295	337,766 7,227	335,959 7,227
	169,499	337,766	330,539

14. LAND USE RIGHTS

The amount represents the prepayment of rentals for land use rights situated in the PRC for a period of 38 - 50 years.

The Group has pledged land use rights having a total carrying amount of approximately RMB92,987,000, RMB90,989,000, RMB88,991,000 and RMB88,491,000 as at 31 December 2002, 2003 and 2004 and 31 March 2005, respectively, to secure the bank loans granted to the Group.

— 192 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

15. OTHER INTANGIBLE ASSETS

Mining rights RMB’000 COST At 1 January 2002 95,122 Additions 1,391 At 31 December 2002 96,513 ACCUMULATED AMORTISATION At 1 January 2002 29 Charge for the year 1,758 At 31 December 2002 1,787 CARRYING AMOUNT At 31 December 2002 94,726 COST At 1 January 2003 96,513 Additions 19,921 At 31 December 2003 116,434 ACCUMULATED AMORTISTION At 1 January 2003 1,787 Charge for the year 3,389 At 31 December 2003 5,176 CARRYING AMOUNT At 31 December 2003 111,258 COST At 1 January 2004 116,434 Additions — At 31 December 2004 116,434	Mining rights RMB’000 COST At 1 January 2002 95,122 Additions 1,391 At 31 December 2002 96,513 ACCUMULATED AMORTISATION At 1 January 2002 29 Charge for the year 1,758 At 31 December 2002 1,787 CARRYING AMOUNT At 31 December 2002 94,726 COST At 1 January 2003 96,513 Additions 19,921 At 31 December 2003 116,434 ACCUMULATED AMORTISTION At 1 January 2003 1,787 Charge for the year 3,389 At 31 December 2003 5,176 CARRYING AMOUNT At 31 December 2003 111,258 COST At 1 January 2004 116,434 Additions — At 31 December 2004 116,434	Software RMB’000 527 1,926	Technical know-how RMB’000 1,025 —	Total RMB’000 96,674 3,317
	96,513 29 1,758 1,787	2,453 296 294 590	1,025 469 103 572	99,991
				794 2,155
				2,949
	94,726	1,863	453	97,042
	96,513 19,921 116,434 1,787 3,389 5,176	2,453 164 2,617 590 553 1,143	1,025 — 1,025 572 102 674	99,991 20,085
				120,076
				2,949 4,044
				6,993
	111,258	1,474	351	113,083
	116,434 — 116,434	2,617 2,740 5,357	1,025 — 1,025	120,076 2,740
				122,816

— 193 —

APPENDIX IV

16 AMOUNTS DUE FROM SUBSIDIARIES

ACCOUNTANTS’ REPORT OF LAFARGE

Mining rights RMB’000 ACCUMULATED AMORTISATION At 1 January 2004 5,176 Charge for the year 3,800 At 31 December 2004 8,976 CARRYING AMOUNT At 31 December 2004 107,458 COST At 1 January 2005 116,434 Additions — Disposals — At 31 March 2005 116,434 ACCUMULATED AMORTISATION At 1 January 2005 8,976 Charge for the period 994 Disposals — At 31 March 2005 9,970 CARRYING AMOUNT At 31 March 2005 106,464	Mining rights RMB’000 ACCUMULATED AMORTISATION At 1 January 2004 5,176 Charge for the year 3,800 At 31 December 2004 8,976 CARRYING AMOUNT At 31 December 2004 107,458 COST At 1 January 2005 116,434 Additions — Disposals — At 31 March 2005 116,434 ACCUMULATED AMORTISATION At 1 January 2005 8,976 Charge for the period 994 Disposals — At 31 March 2005 9,970 CARRYING AMOUNT At 31 March 2005 106,464	Software RMB’000 1,143 628	Technical know-how RMB’000 674 103	Total RMB’000 6,993 4,531 11,524 111,292 122,816 773 (244) 123,345 11,524 1,371 (244) 12,651 110,694
	8,976	1,771	777	11,524
	107,458	3,586	248
	116,434 — — 116,434 8,976 994 — 9,970	5,357 773 (244) 5,886 1,771 352 (244) 1,879	1,025 — — 1,025 777 25 — 802	122,816 773 (244
				123,345
				11,524 1,371 (244
				12,651
	106,464	4,007	223

The other intangible assets included above have finite useful lives, over which the assets are amortised. The amortisation period for mining rights, software and technical know-how is 20-30 years, 3-5 years and 10 years respectively.

The Group has pledged mining rights and software having a total carrying amount of approximately RMB95,104,000, RMB91,442,000, RMB87,759,000 and RMB86,719,000 as at 31 December 2002, 2003 and 2004 and 31 March 2005, respectively, to secure the banking facilities granted to the subsidiaries.

THE COMPANY

The amounts are interest free, unsecured and repayable on demand. The directors consider the Company would not demand for settlement in the next twelve months from the balance sheet dates and accordingly, the amounts are classified as non-current.

The directors consider the carrying amount approximates its fair value.

— 194 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

17. INVENTORIES

Raw materials Work-in-progress Finished goods Consumables	At 2002 RMB’000 63,282 15,182 10,129 443 89,036	31 December 2003 RMB’000 77,852 36,517 11,249 653 126,271	At 2004 RMB’000 85,937 24,816 11,236 655 122,644	31 March 2005 RMB’000 102,959 47,956 12,502 788
				164,205

18. TRADE AND OTHER RECEIVABLES

The Group normally allows a credit period 90 days to their major customers. The aging analysis of trade receivables is as follows:

Within 90 days 91 - 180 days 181 - 270 days 271 - 365 days Over 365 days Trade receivables Bills receivable Prepayment, deposits and other receivables	At 31 December 2002 2003 RMB’000 RMB’000 48,386 112,966 17,002 75,658 29,816 20,758 3,898 19,436 27,425 48,457	At 31 December 2002 2003 RMB’000 RMB’000 48,386 112,966 17,002 75,658 29,816 20,758 3,898 19,436 27,425 48,457	At 2004 RMB’000 144,532 48,176 19,857 11,403 20,116	31 March 2005 RMB’000 100,726 82,342 30,712 17,353 33,397
	126,527 28,651 15,813	277,275 28,591 26,614	244,084 102,990 31,061	264,530 55,267 77,802
	170,991	332,480	378,135	397,599

The directors consider that the carrying amount of trade and other receivables approximates to their fair values.

Credit risk

The Group’s principal financial assets are bank balances, deposit and cash, pledged bank deposits and trade and other receivables, which represent the Group’s maximum exposure to credit risk in relation to the financial assets.

The credit risk is limited because the majority of the counterparties are banks with high credit-ratings in the PRC.

The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, an allowance for impairment is made where there is an identified loss event which, based on previous experience is evidence of a reduction in the recoverability of the cash flow.

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

— 195 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

19. AMOUNTS DUE FROM RELATED PARTIES

Ultimate holding company Fellow subsidiaries Minority shareholders of subsidiaries	At 31 December 2002 2003 RMB’000 RMB’000 — — 21 220 216 — 237 220	At 2004 RMB’000 410 594 997 2,001	31 March 2005 RMB’000 682 191 13
			886

Amounts are interest free, unsecured and repayable on demand. The directors consider the carrying amount of amounts due from related parties approximate its fair value.

20. PLEDGED BANK DEPOSITS

Amount represents the Group’s bank deposits pledged to banks to secure the bank facilities granted to the Group.

21. TRADE AND OTHER PAYABLES

The aging analysis of trade payables is as follows:

Within 90 days 91 - 180 days 181 - 270 days 271 - 365 days Over 365 days Trade payables Bills payable Other payables and accrued charges	At 31 December 2002 2003 RMB’000 RMB’000 22,666 50,103 2,742 15,008 413 687 383 641 242 483 26,446 66,922 — 35,000 79,433 84,127 105,879 186,049	At 2004 RMB’000 33,104 5,414 4,567 4,421 2,493 49,999 9,400 110,596 169,995	31 March 2005 RMB’000 62,170 6,031 1,769 1,193 1,287
			72,450 2,000 100,468
			174,918

The directors consider that the carrying amount of trade and other payables approximates their fair value.

— 196 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

22. AMOUNTS DUE TO RELATED PARTIES

THE GROUP

Current Fellow subsidiaries Minority shareholders of subsidiaries Amount are interest free, unsecured and payable on deman Non-current Minority shareholders of subsidiaries Ultimate holding company	At 31 December 2002 2003 RMB’000 RMB’000 — 272 11,270 15,696 11,270 15,968	At 31 December 2002 2003 RMB’000 RMB’000 — 272 11,270 15,696 11,270 15,968	At 31 March 2004 2005 RMB’000 RMB’000 1,687 8,952 13,971 10,387 15,658 19,339	At 31 March 2004 2005 RMB’000 RMB’000 1,687 8,952 13,971 10,387 15,658 19,339
				19,339
	d. — 91,361	— 115,282	1,764 145,258	4,119 141,760
	91,361	115,282	147,022	145,879

Amounts are interest free, unsecured and repayable on demand. The directors consider the ultimate holding company would not demand for payment in the next twelve months from the balance sheet dates and accordingly, the amount due to ultimate holding company is classified as non-current.

The directors estimated the fair value of the amount due to the ultimate holding company as the present value of discounting the future cash flows at prevailing market rate of interest and recognised the changes in fair value to equity directly. The imputed interest expenses of RMB1,648,000, RMB2,001,000, RMB2,594,000 and RMB810,000 were charged to income statement for the Relevant Periods.

The directors consider the carrying amount of amounts due to fellow subsidiaries and minority shareholders of subsidiaries approximate its fair value.

THE COMPANY

				**At **	31 December		At 31 March
			2002		2003	2004	2005
			RMB’000		RMB’000	RMB’000	RMB’000
Ultimate	holding	company	81,751		105,756	133,099	139,932

The directors estimated the fair value of the amount due to the ultimate holding company by discounting the cash flows at applicable discount rate and recognised the changes in fair value to equity directly. The notional interest expenses of RMB1,396,000, RMB1,856,000, RMB2,419,000 and RMB768,000 were charged to income statement for the Relevant Periods.

— 197 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

23. BORROWINGS

Bank loans Loan from a minority shareholder of a subsidiary The borrowings are repayable as follows: Within one year More than one year, but not exceeding two years More than two years, but not exceeding five years More than five years Less: Amount due within one year included in current liabilities Amount due after one year Secured Unsecured	At 2002 RMB’000 741,143 36,757 777,900	31 December 2003 RMB’000 438,000 15,849 453,849	At 2004 RMB’000 574,500 15,294 589,794	31 March 2005 RMB’000 685,000 15,294
				700,294
	415,096 76,079 226,218 60,507 777,900 415,096	159,849 106,000 183,500 4,500 453,849 159,849	341,794 121,500 126,500 — 589,794 341,794	490,294 30,000 180,000 —
				700,294 490,294
	362,804	294,000	248,000	210,000
	735,143 42,757	420,000 33,849	426,000 163,794	300,000 400,294
	777,900	453,849	589,794	700,294

The bank loans at 31 December 2002, 2003 and 2004 and 31 March 2005 carry interests at rates ranging from 4.1% to 5.3%, 4.8% to 5.5%, 4.5% to 5.5% and 4.5% to 5.5% respectively.

Except for a loan from a minority shareholder of a subsidiary of approximately RMB15,177,000 which bears interest at 5.8% per annum since 2004, the loans from the minority shareholders of the subsidiaries are interest free, unsecured and repayable on demand.

The directors estimate the fair value of the Group’s borrowings due after one year, by discounting their future cash flows at the market rate, amounting to RMB305,860,000, RMB259,856,000, RMB222,759,000 and RMB185,982,000 as at 31 December 2002, 2003 and 2004 and 31 March 2005.

The directors consider the carrying amount of borrowings due within one year approximate its fair value.

— 198 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

24. SHARE CAPITAL

Ordinary shares of US$0.01 each.

“A” shares	“B” shares	“A” shares	“B” shares	Total
_No. of shares _	No. of shares	RMB’000	RMB’000	RMB’000

Authorised:
At 1 January 2002, 31 December
2002, 31 December 2003,
31 December 2004 and
31 March 2005		5,000,000	20,000,000	414	1,654	2,068
Issued and fully paid:
At 1 January 2002		4,937,165	7,884,783	409	653	1,062
Issue of shares	(1)	—	761,200	—	63	63
At 31 December 2002		4,937,165	8,645,983	409	716	1,125
Issue of shares	(2)	—	2,935,000	—	243	243
At 31 December 2003,
31 December 2004 and
31 March 2005		4,937,165	11,580,983	409	959	1,368

Notes:

• (1) On 16 April 2002, the Company issued 761,200 “B” shares of US$0.01 each at US$10 per share to the Parties (as defined below) at a consideration of approximately RMB63,007,000. The proceeds were used for formation of Shunfa Lafarge in which the Company has 70% equity interests.

• (2) On 13 June 2003 and 5 August 2003, the Company issued 2,835,000 “B” shares and 100,000 “B” shares respectively, of US$0.01 each at US$10 per share to the Parties (as defined below) at a consideration of approximately RMB242,936,000. The proceeds were used for formation of Lafarge Chongqing in which the Company has 70.59% equity interests.

Theses shares rank pari passu with the then existing shares in issue in all respects.

Pursuant to the shareholders agreement entered into between the ultimate holding company and Citicorp Everbright China Fund Limited (collectively refer to as the “Parties”) dated 20 June 1997, “A” shares were issued exclusively to the Parties in remuneration for their initial contribution to the Company. “B” shares shall be issued thereafter by the Company in remuneration for the subsequent contributions in cash of the Parties aimed at financing the establishment or the acquisition of the new businesses in the PRC.

Except for the voting rights in which “B” shares are not entitled to, “A” shares and “B” share are entitled to same rights.

— 199 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

25. RESERVES

THE COMPANY

At 1 January 2002 Issue of shares at cash Loss for the year Imputed interest expenses on advances from ultimate holding company At 31 December 2002 Issue of shares at cash Loss for the year Imputed interest expenses on advances from ultimate holding company At 31 December 2003 Loss for the year Imputed interest expenses on advances from ultimate holding company At 31 December 2004 Loss for the period Imputed interest expenses on advances from ultimate holding company At 31 March 2005	Share premium RMB’000 1,060,498 62,944 — —	Capital reserve Accumulated losses RMB’000 RMB’000 — (62,377) — — — (23,413) 1,396 —	Capital reserve Accumulated losses RMB’000 RMB’000 — (62,377) — — — (23,413) 1,396 —	Total RMB’000 998,121 62,944 (23,413) 1,396 1,039,048 242,693 (28,166) 1,856 1,255,431 (19,793) 2,419 1,238,057 (7,697) 768 1,231,128
	1,123,442 242,693 — — 1,366,135 — — 1,366,135 — —	1,396 — — 1,856 3,252 — 2,419 5,671 — 768	(85,790) — (28,166) — (113,956) (19,793) — (133,749) (7,697) —	1,039,048 242,693 (28,166 1,856
				1,255,431 (19,793 2,419
				1,238,057 (7,697 768
	1,366,135	6,439	(141,446)

— 200 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

26. OBLIGATIONS UNDER A FINANCE LEASE

			Present value of	Present value of
	**Minimum lease **	payments	minimum lease payments
	31/12/2004	31/3/2005	31/12/2004	31/3/2005
	RMB’000	RMB’000	RMB’000	RMB’000
Amounts payable under a finance lease:
Within one year	9,197	9,197	—	—
In the second to fifth years inclusive	36,786	36,786	7,172	7,172
After five years	305,412	303,113	126,344	126,344
	351,395	349,096	133,516	133,516
Less: future finance charges	(217,879)	(215,580)	N/A	N/A
Present value of lease obligations,
due for settlement after one year	133,516	133,516	133,516	133,516

Pursuant to a joint venture contract and its supplemental agreements signed between the Company and the minority shareholder of Lafarge Chongqing effective 1 January 2004, the Group leases certain of its property, plant and equipment under a finance lease with the lease term of 38 years. The settlement of lease payment commences on the period which is determined in accordance the calculation of earnings before interest, tax, depreciation and amortisation per each ton of cement for each year of Lafarge Chongqing and accordingly, the directors consider the first settlement will be due in year 2009.

— 201 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

27. DEFERRED TAX ASSETS

The following are the major deferred tax assets (liabilities) recognised by the Group and the movements thereon during the Relevant Periods:

Allowance for doubtful debts RMB’000 At 1 January 2002 — Credit to income for the year 77 At 31 December 2002 77 Credit to income for the year 3,219 At 31 December 2003 3,296 Credit to income for the year 1,931 Charge to income for the year — At 31 December 2004 5,227 Credit to income for the period 408 Charge to income for the period — At 31 March 2005 5,635	Allowance for doubtful debts RMB’000 At 1 January 2002 — Credit to income for the year 77 At 31 December 2002 77 Credit to income for the year 3,219 At 31 December 2003 3,296 Credit to income for the year 1,931 Charge to income for the year — At 31 December 2004 5,227 Credit to income for the period 408 Charge to income for the period — At 31 March 2005 5,635	Allowance for doubtful debts RMB’000 At 1 January 2002 — Credit to income for the year 77 At 31 December 2002 77 Credit to income for the year 3,219 At 31 December 2003 3,296 Credit to income for the year 1,931 Charge to income for the year — At 31 December 2004 5,227 Credit to income for the period 408 Charge to income for the period — At 31 March 2005 5,635	Prepaid expenses RMB’000 2,265 943	Others Total RMB’000 RMB’000 — 2,265 — 1,020 — 3,285 217 3,970 217 7,255 538 3,121 (81) (177) 674 10,199 6 1,935 — (1,568) 680 10,566	Others Total RMB’000 RMB’000 — 2,265 — 1,020 — 3,285 217 3,970 217 7,255 538 3,121 (81) (177) 674 10,199 6 1,935 — (1,568) 680 10,566
			3,208 534 3,742 652 (96) 4,298 1,521 (1,568)	— 217 217 538 (81) 674 6 —	3,285 3,970
					7,255 3,121 (177
	5,227 408 —				10,199 1,935 (1,568
	5,635		4,251	680

The Group has unused tax losses as at 31 December 2002, 2003, 2004 and 31 March 2005 of approximately RMB44,527,000, RMB81,827,000, RMB118,954,000 and RMB131,314,000 respectively available for offset against future profits. No deferred tax asset has been recognised due to unpredictability of future profit streams.

The Group also has unrecognised other deductible temporary differences mainly in respect of allowance for bad and doubtful debts at 31 December 2002, 2003, 2004 and 31 March 2005 of approximately RMB2,562,000, RMB7,274,000, RMB3,930,000 and RMB3,960,000 respectively. No deferred tax asset has been recognised in relation to these deductible temporary differences as it is not probable that taxable profit will be available against which the deductible temporary differences can be utilised.

28. MAJOR NON-CASH TRANSACTIONS

During the Relevant Periods, the Group entered into the following major non-cash transactions:

• (i) For the year ended 31 December 2002, a minority shareholder made an asset contribution of RMB45,000,000 upon formation of Shunfa Lafarge in return for 30% equity interests in Shunfa Lafarge.

• (ii) For the year ended 31 December 2003, a minority shareholder made an asset contribution of RMB100,000,000 upon formation of Lafarge Chongqing in return for 29.41% equity interests in Lafarge Chongqing.

• (iii) For the year ended 31 December 2004, the Group entered into a finance lease arrangement in respect of property, plant and equipment with a total capital value at the inception of the lease of RMB133,516,000.

— 202 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

29. OPERATING LEASE COMMITMENTS

At the balance sheet dates, the Group has outstanding commitments under operating leases, which fall due as follows:

Within one year In the second year to fifth years inclusive After five years	At 2002 RMB’000 1,367 2,010 — 3,377	31 December 2003 RMB’000 1,640 1,479 852 3,971	At 2004 RMB’000 4,007 10,249 72,448 86,704	31 March 2005 RMB’000 3,805 10,420 73,596
				87,821

Operating lease payments represent rentals payable by the Group for certain of its office properties and land use right in Chongqing. Rentals are fixed for an average of three years for the two years ended 31 December 2003 and for an average of thirty-eight years for the year ended 31 December 2004 and the three months ended 31 March 2005.

The Company has no significant operating lease commitments at the balance sheet dates.

30. CAPITAL COMMITMENTS

		At 31 December		At 31 March
	2002	2003	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000
Capital expenditure of the Group in respect of
acquisition of property, plant and equipment
contracted for but not provided in the financial
statements	10,663	3,226	110,795	153,927

The Company has no significant capital commitments at the balance sheet dates.

31. CONTINGENT LIABILITIES

Pursuant to an agreement on repayment of electricity fee by Chongqing Cement Plant (“CCP”), the minority shareholder of Shunfa Lafarge, entered into among Lafarge Chongqing, CCP and Chongqing Nanan Electricity Bureau dated 27 February 2004, Lafarge Chongqing agreed to settle the overdue electricity expenses owed by CCP in the amount of approximately RMB11,904,000 in the event that CCP defaults on the payment. The agreement will expire on 31 December 2009.

— 203 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

32. RETIREMENT BENEFIT PLAN

The PRC employees of the Group are members of state-managed retirement benefit scheme operated by the local government. The Group is required to contribute a specified percentage of their payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions.

The contributions payable to the scheme by the Group at rate specified in the rules of the scheme included in staff costs are disclosed in note 7.

33. RELATED PARTY TRANSACTIONS

Except the balances with related parties at the balance sheet dates which are disclosed in notes 19 and 22 to the consolidated balance sheets, the Group had the following significant related party transactions:

• (i) Transactions with certain related companies which are under the common control of the ultimate holding company

Nature of transactions Sales of goods Technology service fee expenses Trademark license fee expenses Management fee expenses	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 2,023 1,820 1,632 142 171 10,119 15,738 22,147 1,188 4,100 — 282 1,709 — 436 22,028 24,313 27,344 6,742 6,867	Year ended 31 December Three months ended 31 March 2002 2003 2004 2004 2005 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) RMB’000 2,023 1,820 1,632 142 171 10,119 15,738 22,147 1,188 4,100 — 282 1,709 — 436 22,028 24,313 27,344 6,742 6,867
		4,100
		436
		6,867

• (ii) Transactions with the minority shareholders of subsidiaries

				Three months ended	Three months ended
Nature of transactions	**Year **	ended 31 December		**31 **	March
	2002	2003	2004	2004	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Sales of goods	341	211	1,769	968	59
Operating rental expenses	496	495	2,721	680	2,345
Interest on obligations under a
finance lease	—	—	9,197	2,299	2,299

— 204 —

ACCOUNTANTS’ REPORT OF LAFARGE

APPENDIX IV

• (iii) Pursuant to an agreement on repayment of electricity fee by CCP, the minority shareholder of Lafarge Chongqing, entered into among Lafarge Chongqing, CCP and Chongqing Nanan Electricity Bureau dated 27 February 2004, Lafarge Chongqing agreed to settle the overdue electricity expenses owed by CCP in the amount of approximately RMB11,904,000 in the event that CCP defaults on the payment. The agreement will expire on 31 December 2009.

• (iv) Pursuant to a joint venture contract and its supplemental agreements signed between the Company and the minority shareholder of Lafarge Chongqing effective 1 January 2004, the Group leased property, plant and equipment of RMB139,170,000 from the minority shareholder of Lafarge Chongqing.

34. POTENTIAL IMPACT ARISING FROM THE RECENTLY ISSUED ACCOUNTING STANDARDS

In 2005, the HKICPA issued a number of new or revised Hong Kong Accounting Standards (“HKAS”) and Hong Kong Financial Reporting Standards (“HKFRSs”) (herein collectively referred to as “new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2006. There has been no early adoption of these new HKFRSs in the preparation of the financial information of the Group for the Relevant Periods.

The Company has commenced considering the potential impact of these new HKFRSs but is not yet in a position to determine whether these new HKFRSs have a significant impact on how the results of operations and financial position of the Group are prepared and presented. The new HKFRSs may result in changes in the future as to how the results and financial position are prepared and presented.

B. DISTRIBUTABLE RESERVE

At 31 March 2005, the Company did not have any distributable reserve.

C. DIRECTORS’ REMUNERATION

No remuneration has been paid or is payable to the Company’s directors by the Company or any of its subsidiaries during the Relevant Periods.

D. ULTIMATE HOLDING COMPANY

The directors of the Company consider Lafarge SA as its ultimate holding company.

E. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the Group, the Company or any of its subsidiaries have been prepared in respect of any period subsequent to 31 March 2005.

Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

— 205 —

APPENDIX V UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

COMFORT LETTER FROM THE REPORTING ACCOUNTANTS ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

The followings is the text of a report received from the reporting accountants, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong for the purpose of incorporation in this circular. As there is no specific guidance on the reporting on pro forma financial information under the Auditing Guidelines issued by the Hong Kong Institute of Certified Public Accountants, this report is prepared with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in United Kingdom.

==> picture [75 x 57] intentionally omitted <==

==> picture [99 x 35] intentionally omitted <==

30 September 2005

The Directors

Shui On Construction and Materials Limited

Dear Sirs,

We report on the unaudited pro forma consolidated balance sheet of Shui On Construction and Materials Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 208 to 210 of the circular dated 30 September 2005 in relation to the major acquisition (the “Acquisition”) and formation of joint venture with Financiere Lafarge in relation to People’s Republic of China (“PRC”) cement operations. The unaudited pro forma consolidated balance sheet has been prepared, for illustrative purposes only, to provide information about how the Acquisition might have affected the financial information presented.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma consolidated balance sheet in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on this unaudited pro forma consolidated balance sheet and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma consolidated balance sheet beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— 206 —

APPENDIX V UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

Basis of opinion

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

Our work does not constitute an audit or a review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants and accordingly we do not express any such assurance on the unaudited pro forma consolidated balance sheet.

The unaudited pro forma consolidated balance sheet has been prepared on the basis set out on page 208 of the circular for illustrative purpose only and, because of its nature, it may not be indicative of the financial position of the Group as at 31 March 2005 or at any future date.

Opinion

In our opinion:

• a) the unaudited pro forma consolidated balance sheet has been properly compiled on the basis stated;

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

• c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong

— 207 —

APPENDIX V UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

Unaudited pro forma Consolidated Balance Sheet

The accompanying unaudited pro forma consolidated balance sheet of SOCAM immediately after the completion of the acquisition of 50% interest in TH Industrial has been prepared to illustrate the effect of the Acquisition to the financial position of SOCAM, based on the consolidated balance sheet of SOCAM as at 31 March, 2005, and after making certain pro forma combination adjustments in respect of the Acquisition. The unaudited pro forma consolidated balance sheet has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of SOCAM following the Acquisition.

			Adjustments for
			change to old		Unaudited
			HKFRSs for		pro forma
	Consolidated	Consolidated	consolidated	Adjustments for	consolidated
balance sheet per		balance sheet of	balance sheet of	acquisition of	balance sheet
	SOCAM	TH Industrial	TH Industrial	50% interest in	immediately after
as at 31.3.2005		as 31.5.2005	as 31.5.2005	TH Industrial	the Acquisition
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
	(Note 1)	(Note 2)	(Note 3)	(Note 4)
Non-Current Assets
Intangible assets	—	3.1	—	(3.1)	—
Property, plant and
equipment	71.6	1,447.3	356.6	—	1,875.5
Construction in progress	—	322.6	—	—	322.6
Land use rights	—	349.0	(349.0)	—	—
Negative goodwill	(0.5)	—	(165.5)	165.5	(0.5)
Interests in jointly
controlled entities
— TH Industrial	324.3	4.1	—	(324.3)	4.1
— Guizhou Xinpu &
Dingxiao	105.2	—	—	—	105.2
— others	500.7	—	—	—	500.7
Interests in associates	1,713.8	0.2	—	—	1,714.0
Investments in securities	12.4	—	—	—	12.4
Other long-term receivable	—	17.3	3.5	—	20.8
Club debenture	1.2	—	—	—	1.2
Defined benefit assets	9.3	—	—	—	9.3
	2,738.0	2,143.6	(154.4)	(161.9)	4,565.3
Current Assets
Inventories	13.5	133.8	—	—	147.3
Properties held for sale	55.5	—	—	—	55.5
Debtors, deposits and
prepayments	566.1	227.2	(7.6)	—	785.7
Amounts due from
customers for contract work	73.9	—	—	—	73.9
Amounts due from related
companies	0.5	1.5	—	—	2.0
Amount due from an
associate	0.1	1.4	—	—	1.5
Amounts due from jointly
controlled entities	491.9	1.1	—	—	493.0
Taxation recoverable	7.3	—	—	—	7.3
Bank balances, deposits
and cash	58.4	181.8	—	—	240.2
	1,267.2	546.8	(7.6)	—	1,806.4

— 208 —

APPENDIX V UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

			Adjustments for
			change to old		Unaudited
			HKFRSs for		pro forma
	Consolidated	Consolidated	consolidated	Adjustments for	consolidated
	balance sheet per	balance sheet of	balance sheet of	acquisition of	balance sheet
	SOCAM	TH Industrial	TH Industrial	50% interest in	immediately after
	as at 31.3.2005	as 31.5.2005	as 31.5.2005	TH Industrial	the Acquisition
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
	(Note 1)	(Note 2)	(Note 3)	(Note 4)
Current Liabilities
Creditors and accrued
charges	540.2	462.8	—	—	1,003.0
Amounts due to customers
for contract work	194.5	—	—	—	194.5
Amounts due to jointly
controlled entities	24.1	2.9	—	—	27.0
Amounts due to related
companies	—	5.6	—	(5.6)	—
Taxation payable	2.2	0.5	—	—	2.7
Bank borrowings, due
within one year	55.8	849.2	—	254.7	1,159.7
	816.8	1,321.0	—	249.1	2,386.9
Net Current Assets
(Liabilities)	450.4	(774.2)	(7.6)	(249.1)	(580.5)
Total Assets Less Current
Liabilities	3,188.4	1,369.4	(162.0)	(411.0)	3,984.8
Capital and Reserves
Share capital	269.4	—	—	—	269.4
Reserves	1,688.1	225.9	(204.2)	128.1	1,837.9
	1,957.5	225.9	(204.2)	128.1	2,107.3
Minority Interests	29.3	152.1	(3.5)	—	177.9
Non-Current Liabilities
Other borrowings	—	569.3	45.7	(539.1)	75.9
Bank borrowings	1,198.0	354.7	—	—	1,552.7
Deferred tax liabilities	3.6	67.4	—	—	71.0
	1,201.6	991.4	45.7	(539.1)	1,699.6
	3,188.4	1,369.4	(162.0)	(411.0)	3,984.8

Note 1: Being the consolidated balance sheet of SOCAM as at 31 March 2005 extracted from Appendix I.

Note 2: Being the consolidated balance sheet of TH Industrial as at 31 May 2005 extracted from Appendix II (as translated at HK$1 = RMB1.06).

— 209 —

APPENDIX V UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

• Note 3: The consolidated balance sheet as at 31 May 2005 of TH Industrial as set out in Appendix II is prepared in accordance with new/revised Hong Kong Financial Reporting Standards effective for accounting periods beginning on or after 1 January 2005, which is different to the accounting policies adopted by SOCAM in the preparation of the financial statements for the year ended 31 March 2005. Adjustments and reclassifications are made to reverse the effects of HKAS 39 on accounting for other long-term receivable and other borrowings, FRS 3 on negative goodwill, HKAS 17 on classification of land use right and FRS 5 on non-current assets held for sale.

• Note 4: Being adjustment for acquisition of 50% interest in TH Industrial and the shareholder’s loan by the Group from Olympio at a consideration of RMB 270 million (about HK$259.6 million).

— 210 —

APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

COMFORT LETTER FROM THE REPORTING ACCOUNTANTS ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION

The followings is the text of a report received from the reporting accountants, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong for the purpose of incorporation in this circular. As there is no specific guidance on the reporting on pro forma financial information under the Auditing Guidelines issued by the Hong Kong Institute of Certified Public Accountants, this report is prepared with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in United Kingdom.

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30 September 2005

The Directors

Shui On Construction and Materials Limited

Dear Sirs,

We report on the unaudited pro forma financial information of Shui On Construction and Materials Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 213 to 220 of the circular dated 30 September 2005 in relation to the major acquisition (the “Acquisition”) and formation of joint venture with Financiere Lafarge in relation to People’s Republic of China (“PRC”) cement operations (the “Contribution”). The unaudited pro forma financial information has been prepared, for illustrative purposes only, to provide information about how the Acquisition and the Contribution might have affected the financial information presented.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on this unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

Basis of opinion

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

Our work does not constitute an audit or a review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants and accordingly we do not express any such assurance on the unaudited pro forma financial information.

The unaudited pro forma financial information has been prepared on the basis set out on page 213 of the circular for illustrative purpose only and, because of its nature, it may not be indicative of:

• the financial position of the Group as at 31 March 2005 or at any future date

• the financial results and the cash flow of the Group for the year ended 31 March 2005 or for any future period.

Opinion

In our opinion:

• a) the unaudited pro forma financial information has been properly compiled on the basis stated;

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

• c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully,

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

Unaudited pro forma Consolidated Balance Sheet, Consolidated Income Statement and Consolidated Cash Flow Statement

The accompanying unaudited pro forma financial information of SOCAM, as defined below, has been prepared to illustrate the effect of the Acquisition and Contribution to the financial position, result and cash flow of SOCAM, based on the audited financial statements of SOCAM for the year ended 31 March 2005 after making certain pro forma combination adjustments in respect of the Acquisition and Contribution.

The unaudited pro forma consolidated balance sheet is prepared on the basis as if the Acquisition and the Contribution had been completed on 31 March 2005.

The unaudited pro forma consolidated income statement and consolidated cash flow statement are prepared on the basis as if the Acquisition and the Contribution had been completed on 1 April 2004.

The unaudited pro forma financial information has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of SOCAM following the Acquisition and Contribution and the results and cash flow for the period presented or for any future period.

Unaudited Pro Forma Consolidated Balance Sheet

Unaudited pro forma consolidated balance sheet immediately after the Acquisition Transfer out certain subsidiaries of TH Industrial to the New JV Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million HK$ million HK$ million (Note 1) (Note 2) (Note 3) (Note 4) Non-Current Assets Property, plant and equipment 1,875.5 (1,598.0) — — Construction in progress 322.6 (292.2) — — Negative goodwill (0.5) — — — Interests in jointly controlled entities — TH Industrial 4.1 (4.1) — — — Guizhou Xinpu & Dingxiao 105.2 — (105.2) — — other jointly controlled entities 500.7 — — — — New JV — 793.7 221.7 132.1 Interests in associates 1,714.0 — — — Investments in securities 12.4 — — — Other long-term receivable 20.8 (20.8) — — Club debenture 1.2 — — — Defined benefit assets 9.3 — — — 4,565.3 (1,121.4) 116.5 132.1	Unaudited pro forma consolidated balance sheet immediately after the Acquisition Transfer out certain subsidiaries of TH Industrial to the New JV Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million HK$ million HK$ million (Note 1) (Note 2) (Note 3) (Note 4) Non-Current Assets Property, plant and equipment 1,875.5 (1,598.0) — — Construction in progress 322.6 (292.2) — — Negative goodwill (0.5) — — — Interests in jointly controlled entities — TH Industrial 4.1 (4.1) — — — Guizhou Xinpu & Dingxiao 105.2 — (105.2) — — other jointly controlled entities 500.7 — — — — New JV — 793.7 221.7 132.1 Interests in associates 1,714.0 — — — Investments in securities 12.4 — — — Other long-term receivable 20.8 (20.8) — — Club debenture 1.2 — — — Defined benefit assets 9.3 — — — 4,565.3 (1,121.4) 116.5 132.1	Unaudited pro forma consolidated balance sheet immediately after the Acquisition Transfer out certain subsidiaries of TH Industrial to the New JV Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million HK$ million HK$ million (Note 1) (Note 2) (Note 3) (Note 4) Non-Current Assets Property, plant and equipment 1,875.5 (1,598.0) — — Construction in progress 322.6 (292.2) — — Negative goodwill (0.5) — — — Interests in jointly controlled entities — TH Industrial 4.1 (4.1) — — — Guizhou Xinpu & Dingxiao 105.2 — (105.2) — — other jointly controlled entities 500.7 — — — — New JV — 793.7 221.7 132.1 Interests in associates 1,714.0 — — — Investments in securities 12.4 — — — Other long-term receivable 20.8 (20.8) — — Club debenture 1.2 — — — Defined benefit assets 9.3 — — — 4,565.3 (1,121.4) 116.5 132.1	Unaudited pro forma consolidated balance sheet immediately after the Acquisition Transfer out certain subsidiaries of TH Industrial to the New JV Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million HK$ million HK$ million (Note 1) (Note 2) (Note 3) (Note 4) Non-Current Assets Property, plant and equipment 1,875.5 (1,598.0) — — Construction in progress 322.6 (292.2) — — Negative goodwill (0.5) — — — Interests in jointly controlled entities — TH Industrial 4.1 (4.1) — — — Guizhou Xinpu & Dingxiao 105.2 — (105.2) — — other jointly controlled entities 500.7 — — — — New JV — 793.7 221.7 132.1 Interests in associates 1,714.0 — — — Investments in securities 12.4 — — — Other long-term receivable 20.8 (20.8) — — Club debenture 1.2 — — — Defined benefit assets 9.3 — — — 4,565.3 (1,121.4) 116.5 132.1	Unaudited pro forma consolidated balance sheet immediately after the Acquisition Transfer out certain subsidiaries of TH Industrial to the New JV Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million HK$ million HK$ million (Note 1) (Note 2) (Note 3) (Note 4) Non-Current Assets Property, plant and equipment 1,875.5 (1,598.0) — — Construction in progress 322.6 (292.2) — — Negative goodwill (0.5) — — — Interests in jointly controlled entities — TH Industrial 4.1 (4.1) — — — Guizhou Xinpu & Dingxiao 105.2 — (105.2) — — other jointly controlled entities 500.7 — — — — New JV — 793.7 221.7 132.1 Interests in associates 1,714.0 — — — Investments in securities 12.4 — — — Other long-term receivable 20.8 (20.8) — — Club debenture 1.2 — — — Defined benefit assets 9.3 — — — 4,565.3 (1,121.4) 116.5 132.1	Cash contribution HK$ million (Note 5) — — — — — — 86.8 — — — — —	Option granted on Qujiang Quarry Unaudited pro forma consolidated balance sheet immediately after the Acquisition and the Contribution HK$ million HK$ million (Note 7) (71.6) 205.9 — 30.4 — (0.5) — — — — — 500.7 — 1,234.3 (note 8) — 1,714.0 — 12.4 — — — 1.2 — 9.3 (71.6) 3,707.7	Option granted on Qujiang Quarry Unaudited pro forma consolidated balance sheet immediately after the Acquisition and the Contribution HK$ million HK$ million (Note 7) (71.6) 205.9 — 30.4 — (0.5) — — — — — 500.7 — 1,234.3 (note 8) — 1,714.0 — 12.4 — — — 1.2 — 9.3 (71.6) 3,707.7
	4,565.3	(1,121.4)	116.5	132.1	86.8	(71.6)	3,707.7

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

Unaudited pro forma consolidated balance sheet immediately after the Acquisition HK$ million (Note 1) Current Assets Inventories 147.3 Properties held for sale 55.5 Debtors, deposits and prepayments 785.7 Amounts due from customers for contract work 73.9 Amounts due from related companies 2.0 Amount due from an associate 1.5 Amounts due from jointly controlled entities 493.0 Taxation recoverable 7.3 Bank balances, deposits and cash 240.2 1,806.4 Current Liabilities Creditors and accrued charges 1,003.0 Amounts due to customers for contract work 194.5 Amounts due to jointly controlled entities 27.0 Taxation payable 2.7 Bank borrowings, due within one year 1,159.7 2,386.9 Net Current Assets (Liabilities) (580.5) Total Assets Less Current Liabilities 3,984.8 Capital and Reserves Share capital 269.4 Reserves 1,837.9 2,107.3 Minority Interests 177.9 Non-Current Liabilities Other borrowings 75.9 Bank borrowings 1,552.7 Deferred tax liabilities 71.0 1,699.6 3,984.8	Unaudited pro forma consolidated balance sheet immediately after the Acquisition HK$ million (Note 1) Current Assets Inventories 147.3 Properties held for sale 55.5 Debtors, deposits and prepayments 785.7 Amounts due from customers for contract work 73.9 Amounts due from related companies 2.0 Amount due from an associate 1.5 Amounts due from jointly controlled entities 493.0 Taxation recoverable 7.3 Bank balances, deposits and cash 240.2 1,806.4 Current Liabilities Creditors and accrued charges 1,003.0 Amounts due to customers for contract work 194.5 Amounts due to jointly controlled entities 27.0 Taxation payable 2.7 Bank borrowings, due within one year 1,159.7 2,386.9 Net Current Assets (Liabilities) (580.5) Total Assets Less Current Liabilities 3,984.8 Capital and Reserves Share capital 269.4 Reserves 1,837.9 2,107.3 Minority Interests 177.9 Non-Current Liabilities Other borrowings 75.9 Bank borrowings 1,552.7 Deferred tax liabilities 71.0 1,699.6 3,984.8	Transfer out certain subsidiaries of TH Industrial to the New JV HK$ million (Note 2) (131.3) — (190.1) — — — 166.1 — (175.3)	Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million (Note 3) (Note 4) — — — — — — — — — — — — (116.7) — — — — —	Transfer out Sommerset to the New JV Acquisition of Shuicheng HK$ million HK$ million (Note 3) (Note 4) — — — — — — — — — — — — (116.7) — — — — —	Cash contribution HK$ million (Note 5) — — — — — — — — —	Option granted on Qujiang Quarry Unaudited pro forma consolidated balance sheet immediately after the Acquisition and the Contribution HK$ million HK$ million (Note 7) — 16.0 — 55.5 — 595.6 — 73.9 — 2.0 — 1.5 — 542.4 — 7.3 — 64.9	Option granted on Qujiang Quarry Unaudited pro forma consolidated balance sheet immediately after the Acquisition and the Contribution HK$ million HK$ million (Note 7) — 16.0 — 55.5 — 595.6 — 73.9 — 2.0 — 1.5 — 542.4 — 7.3 — 64.9
	1,806.4 1,003.0 194.5 27.0 2.7 1,159.7 2,386.9 (580.5)	(330.6) (415.4) — 91.4 (0.5) (497.8) (822.3) 491.7	(116.7) — — (0.2) — — (0.2) (116.5)	— — — — — 132.1 132.1 (132.1)	— — — — — 86.8 86.8 (86.8)	— — — — — — — —	1,359.1
							587.6 194.5 118.2 2.2 880.8
							1,783.3
							(424.2
	3,984.8	(629.7)	—	—	—	(71.6)	3,283.5
	269.4 1,837.9 2,107.3 177.9 75.9 1,552.7 71.0 1,699.6	— — — (131.7) (75.9) (354.7) (67.4) (498)	— — — — — — — —	— — — — — — — —	— — — — — — — —	— (71.6) (71.6) — — — — —	269.4 1,766.3
							2,035.7
							46.2
							— 1,198.0 3.6
							1,201.6
	3,984.8	(629.7)	—	—	—	(71.6)	3,283.5

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

• Note 1: Being the pro forma consolidated balance sheet of SOCAM immediately after the Acquisition as shown in Appendix V.

• Note 2: Immediately after the completion of the Acquisition, TH Industrial and its subsidiaries (including those which are under the Shui On PRC Cement Business) will become subsidiaries of SOCAM. The injection of those subsidiaries of TH Industrial under the Shui On PRC Cement Business into the Joint Venture will result in deconsolidation of their assets and liabilities, and equity accounting for as interest in jointly controlled entities.

• Note 3: Sommerset Investments Limited is a 100% owned subsidiary of SOCAM. The injection of this company into the Joint Venture will result in deconsolidation of its assets and liabilities, and equity accounting for as interest in jointly controlled entities. The interest in Guizhou Xinpu Shui On Cement Co. Ltd. and Guizhou Dingxiao Shui On Cement Co. Ltd. of SOCAM has been accounted for as jointly controlled entities. The injection of these companies into the JV will continue to be accounted for as interest in jointly controlled entities.

• Note 4: Being the investment cost of RMB140 million in 70% interest in Guizhou Shuicheng Shui On Cement Co., Ltd., which will be injected into the Joint Venture.

• Note 5: Being the cash contribution of initially RMB90.3 million (about HK$86.8 million) into the Joint Venture pursuant to the Contribution Agreement.

• Note 6: Included in debtors, deposits and prepayments is RMB 80 million (about HK$77 million) deposit paid by Prime Allied Enterprises for the acquisition of Yunnan JV. As of the date of this circular, the acquisition of Yunnan JV is not yet completed and accordingly, there is no adjustment/reclassification for this deposit as a result of the formation of the Joint Venture.

• Note 7: SOCAM has agreed not to contribute the Qujiang Quarry into the Joint Venture pursuant to the Contribution Agreement. However, SOCAM has granted a right to the Joint Venture to require SOCAM to sell it to the Joint Venture at a consideration of RMB2 million after 3 years. An adjustment is made to reduce the carrying value of the Qujiang Quarry to such amount.

• Note 8: The amount of HK$1,234.3 million represents the net assets of Shui On PRC Cement Business and the cash to be contributed by SOCAM to the Joint Venture, calculated with reference to their historical costs of assets and liabilities recorded in the consolidated financial statements of SOCAM for the year ended 31 March 2005.

With reference to the net assets of Lafarge China Offshore Holdings Company Limited and its subsidiaries as at 31 March 2005, as set out in Appendix IV, of RMB1,335.6 million, the net assets to be contributed based on the historical costs of assets and liabilities recorded in its consolidated financial statements can be calculated as follows:

Net asset as of 31 March 2005 Less: goodwill Interest owned by Lafarge (90.19% thereof) Capitalisation of Lafarge Receivable Net assets to be contributed by Lafarge	million RMB1,340.6 (143.7) 1,196.9 1,079.5 135.4 1,214.9 HK$1,146.1

Total net assets of the Joint Venture, as calculated, would be HK$2,380.4 million, and the portion attributable to SOCAM’s 45% stake would be HK$1,071.2 million. Accordingly, an excess of net assets contributed by SOCAM over its share of the total net assets of the Joint Venture of HK$163.1 million would be resulted.

The final amount of SOCAM’s share of net assets of the Joint Venture immediately after the Contribution will be determined based on the fair value of assets and liabilities to be contributed by SOCAM and Lafarge at the completion date. Any excess or deficit of the fair value of net assets contributed by SOCAM over 45% of the fair value of net assets of the Joint Venture immediately after the Contribution will be accounted for in accordance with FRS 3.

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

Unaudited Pro Forma Consolidated Income Statement

				Consolidation of
				result of TH
	Consolidated		Exclusion of	Industrial and
	income		share of results	its subsidiaries			Unaudited
	statement of	Exclusion of	of Sommerset	(other than			pro forma
	SOCAM for the	share of	and its jointly	those under Shui	Share of results	Option granted	consolidated
	year ended	results of TH	controlled	On PRC Cement	of Joint Venture	on Qujiang	income
	31.3.2005	Industrial	entities	Business)	with Lafarge	Quarry	statement
	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million	HK$ million
	(Note 1)	(Note 2)	(Note 3)	(Note 4)	(Note 5)	(Note 7)
Turnover	2,232.4	—	—	11.3	—	—	2,243.7
Other operating income	32.0	—	—	16.9	—	—	48.9
Change in inventories of
finished goods, work
in progress, contract
work in progress,
properties held for
sales and property
under development	(133.7)	—	—	—	—	—	(133.7)
Raw materials and
consumable used	(460.3)	—	—	—	—	—	(460.3)
Staff costs	(297.6)	—	—	(1.5)	—	—	(299.1)
Depreciation and
amortisation expenses	(34.7)	—	—	(9.1)	—	—	(43.8)
Subcontracting, external
labour costs and other
operating expenses	(1,430.7)	—	—	(10.9)	—	—	(1,441.6)
Revaluation (decrease)
increase on land and
buildings	3.0	—	—	—	—	—	3.0
Loss on disposal of
investment property	(6.5)	—	—	—	—	—	(6.5)
Net unrealised holding
loss on other
investments	(0.8)	—	—	—	—	—	(0.8)
Loss from operations	(96.9)	—	—	6.7	—	—	(90.2)
Finance costs	(16.4)	—	—	(13.1)	—	—	(29.5)
Gain on disposal of
subsidiaries	371.6	—	—	—	—	—	371.6
Result on Option granted
Quijiang Quarry	—	—	—	—	—	(71.6)	(71.6)
Share of results of jointly
controlled entities	166.2	20.4	(12.9)	—	(10.7)	—	163.0
Share of results of
associates	97.0	—	—	(0.1)	—	—	96.9
Profit before taxation	521.5	20.4	(12.9)	(6.5)	(10.7)	(71.6)	440.2
Taxation	(35.7)	—	—	—	—	—	(35.7)
Profit before minority
interests	485.8	20.4	(12.9)	(6.5)	(10.7)	(71.6)	404.5
Minority interests	(2.9)	—	—	(0.2)	—	—	(3.1)
Profit (loss) attributable
to shareholders	482.9	20.4	(12.9)	(6.7)	(10.7)	(71.6)	401.4

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

• Note 1: Being the consolidated income statement of SOCAM for the year ended 31 March 2005 extracted from Appendix I.

• Note 2: The amount represents 50% of the loss attributable to the equity holders of TH Industrial for the year ended 31 December 2004 of RMB43.3 million (equivalent to HK$40.9 million) as disclosed in the Accountants’ report of TH Industrial as set out in Appendix II.

• Note 3: The amount represents SOCAM’s share of the results of Guizhou Xinpu and Dingxiao for the year ended 31 December 2004 as disclosed in the section B of the Accountants’ report of SOCAM as set out in Appendix I

• Note 4: Being adjustment to consolidate the results of TH Industrial and its subsidiaries other than those companies which under Shui On PRC Cement Business, which will become subsidiaries of SOCAM after the Acquisition and the Contribution.

	RMB million	HK$ million
Loss attributable to the equity holders of TH Industrial	43.3	40.8
Loss attributable to companies under Shui On PRC Cement Business as
disclosed in section B of the Accountants’ report of TH Industrial in
Appendix II	(36.2)	(34.1)
	7.1	6.7

• Note 5: Being adjustment to equity accounting for SOCAM’s 45% share of the combined result of Shui On PRC Cement Business and Lafarge PRC Cement Business for the year ended 31 December 2004. The result of Shui On PRC Cement Business represents (1) HK$34.1 million loss of the subsidiaries of TH Industrial which would be injected into the Joint Venture; and (2) HK$12.9 million profit of Sommerset Investments Limited, 80% of Guizhou Xinpu Shui On Cement Co. Ltd. and 90% of Guizhou Dingxiao Shui On Cement Co. Ltd.. The result of Lafarge PRC Cement Business of HK$2.6 million represents 90.19% of the loss attributable to the equity holder of Lafarge China Offshore and its subsidiaries for the year ended 31 December 2004 as extracted from Appendix IV, i.e. 90.19% of RMB3,118,000 translated at HK$1 = RMB1.06.

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

Unaudited Pro Forma Consolidated Cash Flow Statement

		Adjustments for
		consolidation of
		the cash flows of
		TH Industrial and	Adjustments for
	Consolidated cash	its subsidiaries	the cash flows in	Unaudited
	flow statement of	(other than those	connection with	pro forma
	SOCAM for the	under Shui On	the formation of	consolidated
	year ended	PRC Cement	the Joint Venture	cash flow
	31.3.2005	Business)	with Lafarge	statement
	HK$ million	HK$ million	HK$ million	HK$ million
	(Note 1)	(Note 2)	(Note 3)
OPERATING ACTIVITIES
Loss from operations	(96.9)	6.7	—	(90.2)
Adjustments for:
Interest income	(7.9)	(9.4)	—	(17.3)
Commitment fee for subscription of
convertible redeemable participating
junior preference shares	(5.3)	—	—	(5.3)
Dividends from convertible redeemable
participating junior preference shares	(8.7)	—	—	(8.7)
Dividends from unlisted investments	(1.1)	—	—	(1.1)
Dividends from listed investments	(0.5)	—	—	(0.5)
Loss on disposal of investment property	6.5	—	—	6.5
Revaluation increase on land and buildings	(3.0)	—	—	(3.0)
Net unrealised holding loss on other
investments	0.8	—	—	0.8
Depreciation on property, plant and
equipment	30.2	9.1	—	39.3
Amortisation of site establishment
expenditure	4.5	—	—	4.5
Loss on disposal of property, plant and
equipment	1.3	—	—	1.3
Impairment loss on property, plant and
equipment	7.6	—	—	7.6
Release of negative goodwill	(0.2)	—	—	(0.2)
Decrease in defined benefit liabilities	(13.4)	—	—	(13.4)
Operating cash flows before movements
in working capital	(86.1)	6.4	—	(79.7)
Decrease in inventories	24.6	(0.7)	—	23.9
Decrease in properties held for sale	1.6	—	—	1.6
Decrease in debtors, deposits and
prepayments	93.6	(1.6)	—	92.0
Decrease in amounts due from customers
for contract work	24.5	—	—	24.5
Increase in amounts due from related
companies	(0.3)	—	—	(0.3)
Decrease in amounts due from associates	—	1.0	—	1.0
Decrease in amounts due from jointly
controlled entities	(152.2)	(110.8)	—	(263.0)
Decrease in creditors and accrued charges	(43.4)	56.4	—	13.0
Increase in amounts due to customers for
contract work	94.8	—	—	94.8

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

		Adjustments for
		consolidation of
		the cash flows of
		TH Industrial and	Adjustments for
	Consolidated cash	its subsidiaries	the cash flows in	Unaudited
	flow statement of	(other than those	connection with	pro forma
	SOCAM for the	under Shui On	the formation of	consolidated
	year ended	PRC Cement	the Joint Venture	cash flow
	31.3.2005	Business)	with Lafarge	statement
	HK$ million	HK$ million	HK$ million	HK$ million
	(Note 1)	(Note 2)	(Note 3)
Increase in amounts due to jointly
controlled entities	4.7	—	—	4.7
Decrease in amounts due to related
companies	(0.1)	—	—	(0.1)
Cash used in operations	(38.3)	(49.3)	—	(87.6)
Hong Kong Profits Tax paid	(1.8)	—	—	(1.8)
NET CASH USED IN OPERATING
ACTIVITIES	(40.1)	(49.3)	—	(89.4)
INVESTING ACTIVITIES
Net cash outflow arising from disposal
of subsidiaries	(478.4)	—	—	(478.4)
Investment in convertible redeemable
participating junior preference shares	(243.6)	—	—	(243.6)
Deposits paid for investment	(75.5)	—	—	(75.5)
Additions to property under development	(43.6)	—	—	(43.6)
Additions to construction in progress	—	(0.5)	—	(0.5)
Investments in jointly controlled entities	(50.3)	35.9	(473.6)	(488.0)
Advance to jointly controlled entities	(26.9)	—	—	(26.9)
Purchase of property, plant and equipment	(6.8)	(8.7)	—	(15.5)
Site establishment costs expended	(0.6)	—	—	(0.6)
Purchases of investment securities	(0.4)	—	—	(0.4)
Decrease in pledged bank deposit	527.8	—	—	527.8
Proceeds on sales of investment property	133.5	—	—	133.5
Amount repaid from an associate	130.0	—	—	130.0
Dividends received from jointly controlled
entities	129.6	—	—	129.6
Dividends received from convertible
redeemable participating junior
preference shares	8.7	—	—	8.7
Interest received	7.9	9.4	—	17.3
Proceeds from sale of property, plant and
equipment	7.9	—	—	7.9
Commitment fee received for subscription of
convertible redeemable participating junior
preference shares	5.3	—	—	5.3
Dividends received from unlisted investments	1.1	—	—	1.1
Dividends received from listed investments	0.5	—	—	0.5
NET CASH FROM INVESTING
ACTIVITIES	26.2	36.1	(473.6)	(411.3)

— 219 —

APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP IMMEDIATELY AFTER THE ACQUISITION AND THE CONTRIBUTION

		Adjustments for
		consolidation of
		the cash flows of
		TH Industrial and	Adjustments for
	Consolidated cash	its subsidiaries	the cash flows in	Unaudited
	flow statement of	(other than those	connection with	pro forma
	SOCAM for the	under Shui On	the formation of	consolidated
	year ended	PRC Cement	the Joint Venture	cash flow
	31.3.2005	Business)	with Lafarge	statement
	HK$ million	HK$ million	HK$ million	HK$ million
	(Note 1)	(Note 2)	(Note 3)
FINANCING ACTIVITIES
New bank loans raised	223.4	30.0	—	253.4
Net proceeds received on issue of shares	10.0	—	—	10.0
Additions (repayments) of bank loans	(102.9)	—	473.6	370.7
Interest paid	(16.4)	(13.1)	—	(29.5)
Net cash inflow from minority interests	5.4	8.5	—	13.9
Dividends paid	(154.5)	—	—	(154.5)
Dividends paid to minority shareholders	(1.5)	(0.8)	—	(2.3)
NET CASH USED IN FINANCING
ACTIVITIES	(36.5)	24.6	473.6	461.7
NET DECREASE IN CASH AND CASH
EQUIVALENTS	(50.4)	11.4	—	(39.0)
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF THE YEAR	110.1	—	—	110.1
EFFECT OF FOREIGN EXCHANGE
RATE CHANGES	(1.4)	—	—	(1.4)
CASH AND CASH EQUIVALENTS AT
THE END OF THE YEAR	58.3	11.4	—	69.7
ANALYSIS OF THE BALANCES OF
CASH AND CASH EQUIVALENTS
Bank balances, deposits and cash	58.4	11.4	—	69.8
Bank overdrafts	(0.1)	—	—	(0.1)
	58.3	11.4	—	69.7

Note 1: Being the consolidated cash flow statement of SOCAM for the year ended 31 March 2005 extracted from Appendix I.

Note 2: Being adjustment to consolidate the cash flows of TH Industrial and its subsidiaries which would not be injected into the Joint Venture.

Note 3: Being adjustment to account for the cash flow effect to SOCAM as a result of the completion of the Acquisition and the Contribution as of 1 April 2004.

— 220 —

GENERAL INFORMATION

APPENDIX VII

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(a) Interests of Directors and chief executive

As at the Latest Practicable Date, the interests and short positions of the Directors and the Company’s chief executive in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), the Model Code for Securities Transactions by Directors of Listed Companies and which were required to be entered in the register required to be kept under section 352 of the SFO were as follows:

Interests in the Shares

	Number of ordinary	Number of ordinary
	shares in SOCAM
	Personal	Other
Name of Director	Interests	Interests
Vincent Lo Hong Sui	—	185,183,000 (Note)
Wilfred Wong Ying Wai	120,000		—
Lawrence Choi Yuk Keung	492,000		—
Frankie Wong Yuet Leung	—		—
Raymond Wong Fook Lam	—		—
Vivien Lowe Hoh Wai Wan	290,000		—
Louis Wong Hak Wood	228,000		—
Michael John Enright	—		—
Anthony Griffiths	—		—
Moses Cheng Mo Chi	—		—
K. C. Chan	—		—

— 221 —

GENERAL INFORMATION

APPENDIX VII

Note: The 185,183,000 shares are held as to 166,148,000 shares and 19,035,000 shares by the ultimate holding company, Shui On Company Limited (“SOCL”) and Shui On Finance Company Limited respectively, which is an indirect wholly-owned subsidiary of SOCL. SOCL is owned by the Bosrich Unit Trust. The units of the Bosrich Unit Trust are the property of a discretionary trust of which Mr. Lo Hong Sui, Vincent is a discretionary beneficiary. Accordingly, Mr. Lo Hong Sui, Vincent is deemed to be interested in such shares.

(b) Share Options of the Company

Following the amendments of Chapter 17 of the Listing Rules on September 1, 2001, the employee share option scheme adopted on January 20, 1997 (the “Old Scheme”) has been terminated and replaced by a new share option scheme on August 27, 2002 (the “New Scheme”). All options granted previously under the Old Scheme continue to be valid and exercisable.

As at the Latest Practicable Date, the following Directors has interests in right of options granted under the Old Scheme and the New Scheme.

			Period during	Number of
		Subscription	which options	ordinary shares
		price per	outstanding are	subject to the
Name of Director	Date of grant	share	exercisable	options
		HK$
Wilfred Wong Ying Wai	27.08.2002	6.00	27.02.2003	80,000
			to 26.08.2007
	27.08.2002	6.00	27.08.2005	3,500,000**
			to 26.08.2010
Lawrence Choi Yuk Keung	17.07.2001	9.30	17.01.2002	140,000
			to 16.07.2006
	27.08.2002	6.00	27.02.2003	168,000
			to 26.08.2007
	27.08.2002	6.00	27.08.2005	3,375,000**
			to 26.08.2010
Frankie Wong Yuet Leung	17.07.2001	9.30	17.01.2002	200,000
			to 16.07.2006
	27.08.2002	6.00	27.02.2003	160,000
			to 26.08.2007
	27.08.2002	6.00	27.08.2005	1,600,000**
			to 26.08.2010

— 222 —

GENERAL INFORMATION

APPENDIX VII

			Period during	Number of
		Subscription	which options	ordinary shares
		price per	outstanding are	subject to the
Name of Director	Date of grant	share	exercisable	options
		HK$
Raymond Wong Fook Lam	17.07.2001	9.30	17.01.2002	160,000
			to 16.07.2006
	27.08.2002	6.00	27.02.2003	110,000
			to 26.08.2007
	27.08.2002	6.00	27.08.2005	1,300,000**
			to 26.08.2010
Vivien Lowe Hoh Wai Wan	17.07.2001	9.30	17.01.2002	160,000
			to 16.07.2006
	27.08.2002	6.00	27.02.2003	66,000
			to 26.08.2007
	27.08.2002	6.00	27.08.2005	900,000**
			to 26.08.2010
Louis Wong Hak Wood	17.07.2001	9.30	17.01.2002	280,000
			to 16.07.2006
	27.08.2002	6.00	27.02.2003	88,000
			to 26.08.2007
	27.08.2002	6.00	27.08.2005	1,000,000**
			to 26.08.2010

• ** These options were granted under the mega grant as stipulated in the circular dated July 30, 2002 and vested on July 18, 2005.

As at the Latest Practicable Date, 19,063,000 Shares may be issued upon exercise of all outstanding options granted. This represents about 7.1% of the Shares in issue.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or the Company’s chief executive, had, under Divisions 7 and 8 of Part XV of the SFO, nor were they taken to or deemed to have under such provisions of the SFO, any interests or short positions in the shares, underlying shares or debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) or any interests which are required to be entered into the register kept by the Company pursuant to section 352 of the SFO or any interests which are required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in the Listing Rules.

— 223 —

GENERAL INFORMATION

APPENDIX VII

(c) Interests of shareholders discloseable pursuant to the SFO

The Directors are not aware of any other person (other than a Director or chief executive of the Company or his/her respective associate(s)) who, as at the Latest Practicable Date, had an interest or short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

(d) Substantial shareholding in other members of the Group

Save as disclosed below, the Directors are not aware of any other person (other than a Director or chief executive of the Company or his/her respective associate(s)) who, as at the Latest Practicable Date, was directly or indirectly interested in 10 per cent. 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:

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

||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|Name|of|owner|of|shares|Effective|%|
|or|equity|interest|equity|interest|
|(as|the|case|may|be)|Name|of|subsidiary|held|
|Panyu|Dynamic|Mark|Steel|&|20%|
|(Panyu|Guang|Lu|Enterprise|Co.|Ltd.)|Aluminium|Engineering|Co.|Ltd.|
|Eversound|Enterprise|Ltd.|Panyu|Dynamic|Mark|Steel|&|16%|
|Aluminium|Engineering|Co.|Ltd.|
|Metro|Materials|Engineering|Lamma|Concrete|Products|Ltd.|40%|
|Company|Limited|
|Metro|Materials|Engineering|Guangdong|Lamma|Concrete|40%|
|Company|Limited|Products|Limited|
|Panyu|Shui|Fai|Metal|Works|22.5%|
|(Panyu|Guang|Lu|Enterprise|Co.|Ltd.)|Engineering|Company|Limited|
|Hip|Kwan|Engineering|Co.|Ltd.|Panyu|Shui|Fai|Metal|Works|22.5%|
|Engineering|Company|Limited|
|Eversound|Enterprise|Ltd.|Dynamic|Mark|Limited|20%|
|Guang|Rui|Construction|25%|
|(Panyu|Guang|Lu|Enterprise|Co.|Ltd.)|Materials|(Panyu)|Ltd.|
|Hip|Kwan|Engineering|Co.|Ltd.|Shui|Fai|Metal|Works|Engineering|22.5%|
|Co.|Ltd.|
|Eversound|Enterprise|Ltd.|Shui|Fai|Metal|Works|Engineering|22.5%|
|Co.|Ltd.|
|Central|Success|Ltd.|Pacific|Extend|Ltd.|33%*|

----- End of picture text -----

• The 33% equity interest held by Central Success Ltd. carries voting right of 20.625%.

— 224 —

GENERAL INFORMATION

APPENDIX VII

(e) Material Interests

Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors had any direct or indirect interests in any assets which have since March 31, 2005 (being the date to which the latest published audited consolidated accounts of the Group were made up) been acquired or disposed of by or leased to the Company or any of its subsidiaries, or are proposed to be acquired or disposed of by or leased to the Company or any of its subsidiaries.

Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement entered into by the Company or any of its subsidiaries, which was subsisting and was significant in relation to the business of the Group.

3. COMPETING INTEREST

As at the Latest Practicable Date, none of the Directors and their respective associates have any interest in a business apart from the Group’s business, which competes or is likely to compete, directly or indirectly, with the Group’s business and would require disclosure under Rule 8.10 of the Listing Rules.

4. MATERIAL CHANGES

The Directors are not aware of any material adverse change in the financial or trading position of the Group since March 31, 2005, the date to which the latest published audited financial statements of the Company were made up.

5. EXPERTS

• (a) The following are the qualifications of the experts who have given their opinions or advices which are contained in this circular:

Name

Qualifications

Deloitte Touche Tohmatsu Certified Public Accountants, Hong Kong

• (b) As at the Latest Practicable Date, Deloitte Touche Tohmatsu does not have any shareholding, directly or indirectly, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

• (c) As at the Latest Practicable Date, Deloitte Touche Tohmatsu has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which they are included.

— 225 —

GENERAL INFORMATION

APPENDIX VII

• (d) As at the Latest Practicable Date, Deloitte Touche Tohmatsu does not have any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any member of the Group, nor which are proposed to be acquired or disposed of by or leased to any member of the Group since March 31, 2005, the date to which the latest published audited financial statements of the Company were made up.

• (e) The accountants’ reports prepared by Deloitte Touche Tohmatsu set out in Appendices I, II, III and IV and the letters on the unaudited pro forma financial information on the Group set out in Appendices V and VI are given for incorporation in this circular.

6. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

7. SERVICE CONTRACTS

There is no existing or proposed service contracts between any of the Directors and the Company or any of its subsidiaries respectively, other than contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation).

8. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Group within the two years immediately prior to the date of this circular:

• (1) sale and purchase agreement dated February 18, 2004 relating to the sale of the entire issued share capital of Foresight Profits Limited, an indirect wholly owned subsidiary of the Company, and the amount of about HK$763 million owed to the Company by a subsidiary of Foresight Profits Limited entered into between the Company and Shui On Land Limited (“SOL”);

• (2) subscription and shareholders’ agreement dated February 18, 2004 relating to the subscription of the 400 million preference shares of SOL at the subscription price of US$1.00 each (about HK$7.80) and the operations of SOL entered into by SOL, NRI Limited, Shui On Properties Limited, Shui On Company Limited and the Company;

• (3) conditional joint operation agreement dated June 18, 2004 made between Prime Allied Enterprises Limited (“Prime Allied (BVI)”), an indirect wholly owned subsidiary of the Company, and (Yunnan National Assets Operations Co. Ltd.) (“YNAOL”) in relation to the co-investment in Yunnan JV;

• (4) agreement dated June 18, 2004 between the Company and Lafarge S.A. in relation to the Yunnan Option and the Technical Assistance Agreement (as defined below);

— 226 —

GENERAL INFORMATION

APPENDIX VII

• (5) technical assistance agreement dated July 2, 2004 entered into between Lafarge S.A. and the Group in relation to the free technical assistance to be provided by Lafarge S.A. to the Group (or to Yunnan Cement or to Yunnan JV (as appropriate) on behalf of the Group) (“Technical Assistance Agreement”);

• (6) conditional formal sale and purchase agreement dated August 11, 2004 entered into between Prime Allied (BVI) and YNAOL in relation to the acquisition by Prime Allied Enterprises Limited (“Prime Allied (Mauritius)”), an indirect wholly owned subsidiary of the Company, of an 80% equity interest in (Yunnan State Property Cement Company Limited) (“Yunnan Cement”) with 100% of its subsidiaries;

• (7) a joint venture agreement entered into between Shui On Construction Company Limited (“SOC”), an indirect wholly owned subsidiary of the Company, and Focus Top Limited on September 13, 2004 to form a joint venture, namely “Shui On Joint Venture”, to undertake a project in relation to the design and construction of Independent Commission Against Corruption Headquarters Building at Java Road, North Point, Hong Kong;

• (8) sale and purchase agreement dated September 15, 2004 relating to the disposal of On King Building, Nos. 54 and 56, Tsun Yip Street, Kwun Tong, Kowloon between Kotemax Limited, an indirect wholly owned subsidiary of the Company, and an Independent Third Party;

• (9) framework agreement entered into between Sommerset Investments Limited, an indirect wholly owned subsidiary of the Company, Guizhou Shuicheng Cement Co., Ltd. and Guizhou Wumengshan Development Co., Ltd. on December 20, 2004 to form a cement joint venture in Shuicheng, Guizhou;

• (10) agreement entered into between SOBM and Maxking Investments Limited on December 31, 2004 to sell the entire issued share capital of Ken On Concrete Co. Ltd., Instant Mortars Ltd., Shui On Cement Co. Ltd. and Honest China Limited;

• (11) new joint venture agreement dated February 1, 2005 between Prime Allied (Mauritius) and YNAOL as further supplemented by the Tri-Party Agreement (as defined below) in relation to the establishment of and investment in Yunnan JV which supersedes any inconsistent provisions on the same matter in any pervious documents executed by the same parties (“New JV Agreement”);

• (12) new transfer and capital injection agreement dated February 1, 2005 between Prime Allied (Mauritius) and YNAOL as supplemented by the Tri-Party Agreement (as defined below) on the acquisition of 80% equity interest in Yunnan Cement and the further capital injection in Yunnan JV, as further supplemented from time to time, and which supersedes any inconsistent provisions on the same matter in any previous documents executed by the same parties;

• (13) tri-party agreement dated February 28, 2005 among YNAOL, Prime Allied (Mauritius) and Prime Allied (BVI) in relation to the legal effect of the JO Agreement and the S & P Agreement and of, and further supplements, the New JV Agreement and the New Transfer Agreement (“Tri-Party Agreement”);

— 227 —

GENERAL INFORMATION

APPENDIX VII

• (14) the Olympio Agreement;

• (15) the Contribution Agreement;

• (16) the Joint Venture Agreement;

• (17) quotaholders agreement entered into by Keygrow Investments Limited, an indirect wholly owned subsidiary of the Company, Rich Resources Investments Limited, Hyundai Engineering and Construction Co., Limited and Silver Summit (Delaware) LLC on August 29, 2005 to form a joint venture to co-invest in a property project in Dalian, the PRC; and

• (18) agreement entered into between SOC and Focus Well Limited on September 2, 2005 for the provision of project management services by SOC to a property development project in Guangzhou.

9. GENERAL

• (a) The Qualified Accountant of the Company is Mr. Evans Li Chi Keung, a fellow of the Association of Chartered Certified Accountants and an associate of the Hong Kong Institute of Certified Public Accountants.

• (b) The secretary of the Company is Ms. Janice Tam Ching Wah, holder of a master’s degree in science, a fellow of the Association of Chartered Certified Accountants and an associate of the Institute of Chartered Accountants in England and Wales and the Hong Kong Institute of Certified Public Accountants.

• (c) The principal share registrar and the transfer office of the Company is the Bank of Bermuda Limited, 6 Front Street, Hamilton HM 11, Bermuda.

• (d) The Hong Kong branch share registrar and transfer office is Standard Registrars Limited, 28th Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

• (e) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The head office and principal place of business of the Company is at 34th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong.

• (f) The English text of this circular shall prevail over the Chinese text.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours up to 4:00 p.m. on October 31, 2005 at the principal office of the Company at 34th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong:

• (a) memorandum of association and bye-laws of the Company;

— 228 —

GENERAL INFORMATION

APPENDIX VII

• (b) the material contracts referred to in the paragraph 8 in this Appendix;

• (c) the letters from Deloitte Touche Tohmatsu in relation to the pro forma financial information, the texts of which are set out in Appendices V and VI;

• (d) the accountants’ reports of Deloitte Touche Tohmatsu, the texts of which are set out in Appendices I, II, III and IV;

• (e) the letters of adjustments from Deloitte Touche Tohmatsu in relation to (i) the accountants’ report of TH Industrial and its subsidiaries and (ii) the accountants’ report of Sommerset;

• (f) the annual reports of the Company for the three financial years ended March 31, 2005;

• (g) the interim report of the Company for the six months ended September 30, 2004;

• (h) the written consent referred to in paragraph 5 in this Appendix; and

• (i) the circular of the Company dated April 6, 2005.

— 229 —

NOTICE OF SPECIAL GENERAL MEETING

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==> picture [149 x 32] intentionally omitted <==

==> picture [7 x 6] intentionally omitted <==

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


----- End of picture text -----*

(Incorporated in Bermuda with limited liability)

(Stock Code: 983)

NOTICE is HEREBY GIVEN that the Special General Meeting of the Shareholders will be held at Room 103, 1/F., Shui On Centre, 6-8 Harbour Road, Wan Chai, Hong Kong at 10:30 a.m. on November 1, 2005 for the purpose of considering, if thought fit, passing with or without amendments, the following resolutions as ordinary resolution of the Company:

ORDINARY RESOLUTIONS

1. “ THAT

2. (a) the Olympio Agreement (as defined in the circular to shareholders of the Company dated September 30, 2005 (the “Circular”) and a copy of which has been produced to this meeting marked “A” and signed by the chairman of this meeting for the purpose of identification), the Acquisition and other transactions contemplated thereunder be and are hereby approved, confirmed and ratified; and

3. (b) any one of the directors of the Company (“Director(s)”) be and is hereby authorised to do all such further acts and things and execute such further documents and take all steps which in his opinion may be necessary, desirable or expedient to implement and/or give effect to the Olympio Agreement, the Acquisition and all other transactions of the Company which arise following completion of the Olympio Agreement, the Acquisition and all other transactions contemplated thereunder with any changes as such Director may consider necessary, desirable or expedient.”

4. “ THAT

5. (a) the Contribution Agreement (as defined in the Circular and a copy of which has been produced to this meeting marked “B” and signed by the chairman of this meeting for the purpose of identification), the Contribution and other transactions contemplated thereunder be and are hereby approved, confirmed and ratified;

6. (b) the Joint Venture Agreement (as defined in the Circular and a copy of which has been produced to this meeting marked “C” and signed by the chairman of this meeting for the purpose of identification), the Joint Venture and other transactions contemplated thereunder be and are hereby approved, confirmed and ratified; and

7. (c) any one of the Directors be and is hereby authorised to do all such further acts and things and execute such further documents and take all steps which in his opinion may be necessary, desirable or expedient to implement and/or give effect to the Contribution Agreement, the Joint Venture Agreement, the Contribution, the Joint Venture and all other transactions of the Company which arise following completion of the Contribution Agreement, the Joint Venture Agreement, the Contribution, the Joint Venture and all other transactions contemplated thereunder with any changes as such Director may consider necessary, desirable or expedient.”

— 230 —

NOTICE OF SPECIAL GENERAL MEETING

3. “ THAT

the authorised share capital of the Company be increased from HK$400,000,000 to HK$1,000,000,000 by the creation of an additional 600,000,000 new unissued shares of HK$1.00 each in the capital of the Company.”

By Order of the Board Shui On Construction and Materials Limited Tam Ching Wah, Janice Company Secretary

Hong Kong, September 30, 2005

• for identification purpose only

Notes:

• (1) Any member entitled to attend and vote at the above meeting is entitled to appoint one or more proxies to attend and, on a poll, vote in his stead. A proxy need not be a member of the Company.

• (2) To be valid, a form of proxy, together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy thereof, must be lodged with the head off ice of the Company at 34th Floor, Shui On Centre, 6-8 Harbour Road, Hong Kong not less than 48 hours before the time fixed for holding the meeting.

• (3) The register of members of the Company will be closed from Tuesday, October 25, 2005 to Tuesday, November 1, 2005, both days inclusive, during which period no transfer of shares will be effected.

• (4) The Directors have no present intention to issue any part of the increased share capital save for such fund raising which may be made to re-finance the consideration for the Acquisition and the Contribution mentioned in the Circular.

The Directors of the Company as at the date of this circular are as follows:

Executive Directors:

Mr. Vincent Lo Hong Sui (Chairman), Mr. Wilfred Wong Ying Wai (Vice-chairman), Mr. Lawrence Choi Yuk Keung (Vice-chairman), Mr. Frankie Wong Yuet Leung (Chief Executive Officer), Mr. Raymond Wong Fook Lam and Mrs. Vivien Lowe Hoh Wai Wan

Non-Executive Directors:

Mr. Louis Wong Hak Wood and Professor Michael John Enright

Independent Non-Executive Directors:

Mr. Anthony Griffiths, Mr. Moses Cheng Mo Chi and Professor K.C. Chan

— 231 —