LU THAI TEXTILE CO., LTD — Annual Report 2003

Apr 1, 2004

FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003

12th Floor, Shui On Plaza 333 Huai Hai Zhong Lu Shanghai 200021 People's Republic of China Telephone +86 (21) 6386 3388 Facsimile +86 (21) 6386 3300

Report of the Auditors

To the Shareholders of Luthai Textile Joint Stock Company Limited

We have audited the accompanying consolidated balance sheet of Luthai Textile Joint Stock Company Limited (the "Company") and its subsidiaries (the "Group") as of 31 December 2003 and the related consolidated income and cash flow statements for the year then ended. These consolidated financial statements set out on pages 2 to 29 are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion the consolidated financial statements present fairly in all material respects the financial position of the Group as of 31 December 2003 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Zhong Tian CPAs

28 March 2004

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003

		Year ended 31 December
(all amounts in RMB thousands)	Notes	2003	2002
Sales	1	1,270,512	950,880
Cost of sales		(852,455)	(675,602)
Gross profit		418,057	275,278
Other operating income		29,057	6,557
Distribution costs		(50,203)	(38,383)
Administrative expenses		(154,951)	(88,399)
Operating profit	2	241,960	155,053
Finance cost – net	3	(10,625)	(2,057)
Share of result in a non-consolidated subsidiary	11	(10)	(10)
Profit from ordinary activities before tax	5	231,325	152,986
Income tax expense	5	(33,721)	(21,692)
Group profit after tax		197,604	131,294
Minority interest	20	(2,448)	(2,752)
Net profit	6	195,156	128,542
Earnings per share (basic and diluted)	6	RMB 0.46	RMB 0.37

CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003

		31 December		31 December
(all amounts in RMB thousands)	Notes	2003	2003	2002	2002
ASSETS
Non-current assets
Property, plant and equipment, net	8	1,403,031		1,040,905
Land use rights	9	96,786		32,446
Intangible assets	10	9,626		11,074
Investment in a non-consolidatedsubsidiary	11	431		6,808
Available-for-sale investment	12	215		215
			1,510,089		1,091,448
Current assets
Inventories	13	458,271		283,764
Receivables and prepayments	14	413,839		239,572
Cash and cash equivalents	15	202,757		170,906
			1,074,867		694,242
Total assets			2,584,956		1,785,690

CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2003

			31 December		31 December
(all amounts in RMB thousands)	Notes	2003	2003	2002	2002
SHAREHOLDERS' EQUITY
Capital and reserves
Ordinary shares	19	422,432		352,027
Share premium	19	695,390		765,795
Reserves	21	116,600		86,878
Retained earnings		211,905		152,051
			1,446,327		1,356,751
Minority interest	20		96,180		44,621
LIABILITIES
Non-current liabilities
Borrowings	17	-		15,000
Other liabilities		2,673		-
			2,673		15,000
Current liabilities
Trade and other payables	16	310,144		237,953
Current tax liabilities		2,982		6
Borrowings	17	726,650		131,359
			1,039,776		369,318
Total liabilities			1,042,449		384,318
Total shareholders' equity
and liabilities			2,584,956		1,785,690

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003

		Share	Share		Retained
(all amounts in RMB thousands)	Notes	capital	premium	Reserves	earnings	Total
Balance at 1 January 2002		270,790	847,032	66,887	129,611	1,314,320
Dividend relating to
year 2001		-	-	-	(86,111)	(86,111)
Net profit	6	-	-	-	128,542	128,542
Transfer to reserves	21	-	-	19,991	(19,991)	-
Capitalisation of share premium
	19	81,237	(81,237)	-	-	-
Balance at 31 December 2002		352,027	765,795	86,878	152,051	1,356,751
Balance at 1 January 2003		352,027	765,795	86,878	152,051	1,356,751
Dividend relating to
year 2002		-	-	-	(105,608)	(105,608)
Net profit	6	-	-	-	195,156	195,156
Transfer to reserves	21	-	-	29,694	(29,694)	-
Capitalisation of share premium
	19	70,405	(70,405)	-	-	-
Currency translation difference		-	-	28	-	28
Balance at 31 December 2003		422,432	695,390	116,600	211,905	1,446,327

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003

		Year ended 31 December
(all amounts in RMB thousands)	Notes	2003	2002
Cash flow from operating activities
Net profit		195,156	128,542
Adjustment for:
Minority interest	20	2,448	2,752
Tax	5	33,721	21,692
Depreciation	8	109,162	66,479
Amortisation of land use rights	9	4,545	3,263
Amortisation of intangible assets	10	3,777	2,493
Impairment charge of property, plant and equipment	8	10,809	-
Loss on disposal of property, plant and equipment	2	2,803	231
Gain on disposal of a non-consolidated subsidiary		-	(14)
Provision for inventories	2	10,463	6,828
Impairment charge of investment	2	2,300	-
Share of result in a non-consolidated subsidiary	11	10	10
Provision for/(reversal of) doubtful debts		10,522	(218)
Interest expenses	3	16,158	6,653
Interest income	3	(2,844)	(2,959)
Dividend income		(8)	-
Changes in working capital		399,022	235,752
Inventories		(177,389)	(29,451)
Receivables and prepayments		(94,645)	(42,897)
Trading investments		-	40,000
Trade and other payables		2,192	97,551
Cash generated from operations		129,180	300,955
Interest paid		(16,158)	(6,653)
Tax paid		(30,745)	(25,114)
Net cash generated from operating activities		82,277	269,188

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2003

(all amounts in RMB thousands)Notes20032002Cash flow from investing activitiesInvestment in a non-consolidated subsidiary11-(6,367)Proceeds from consolidation of Luthai (Hong Kong)6,367Textile Co., Ltd. ("Luthai HK")11Acquisition of subsidiary Xinjiang Luthai, net of cashacquired (Note A)25,444-Purchase of property, plant and equipment(464,876)(313,388)Purchase of land use rights(22,972)(24,164)Purchase of intangible assets(2,329)(124)Proceeds from sale of property, plant and equipment10,373525Proceeds from disposal of a non-consolidatedsubsidiary-7,214Dividend received8-Interest received2,8442,959(445,141)(333,345)Net cash used in investing activitiesCash flow from financing activitiesProceeds from borrowings864,618153,867Repayments of borrowings(381,327)(7,508)Dividend paid to group shareholders(106,211)(86,126)Dividend paid to minority shareholders(2,365)-Proceeds from minority shareholders20,0002,552Net cash generated from financing activities394,71562,785Increase/(decrease) in cash and cash equivalents31,851(1,372)Movement in cash and cash equivalentsAt beginning of year170,906172,278Increase/(decrease) in cash and cash equivalents31,851(1,372)At end of year15202,757170,906		Year ended 31 December

Non-cash transactions

The principal non-cash transactions are the capitalisation of share premium (Note 19).

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2003

Note to the Cash Flow Statement

A. Acquisition Of A Subsidiary

On 18 June 2003, the group acquired 51% of the share capital of Xinjiang Luthai Harvest Cotton Co., Ltd. ("Xinjiang Luthai").

The assets and liabilities arising from the acquisition are as follows:

(all amounts in RMB thousands)

Cash	61,204
Inventory	6,074
Receivables and prepayments	85,773
Property, plant and equipment, net	82,055
Trade and other payables	(65,315)
Borrowing	(99,673)
Net assets of the subsidiary	70,118
Total purchase price at the Group's 51% shareof the net assets of the subsidiary	35,760
Less: Cash of the subsidiary acquired	(61,204)
Net cash inflow on acquisition of the subsidiary	(25,444)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

ACCOUNTING POLICIES

Background information

Luthai Textile Joint Stock Company Limited (the "Company") is a joint stock limited company established in Shandong Province of the People's Republic of China ("PRC"). The principal activities of the Company and its subsidiaries (the "Group") are the manufacture and sale of various textiles and garment products, including cotton, cotton yarn, dyed yarn, fabric and shirts. The Group mainly operates in the mainland of PRC. The address of the Company's registered office is as follows:

South Side, Nan Ying North Road Zibo High and New Technology Development Zone Zibo City, Shandong Province The People's Public of China

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below:

A. Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The consolidated financial statements have been prepared under the historical cost convention.

B. Consolidation

Subsidiary undertakings, which are those companies in which the Company, directly or indirectly has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. All inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, the accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Company.

A listing of the Company's principal subsidiaries is set out in Note 23.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

C. Foreign currencies

The Group maintains its books and accounting records in Renminbi ("RMB"). Foreign currency transactions in the Group companies are accounted for at the exchange rates prevailing at the date of the transactions. Foreign currency monetary assets and liabilities are translated at the applicable exchange rates prevailing at the balance sheet date. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement.

Income statement and cash flows of foreign entity are translated into the Group's reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange difference arising from the translation of the net investment in foreign entity is taken to shareholders' equity. When a foreign entity is sold, such exchange difference is recognised in the income statement as part of the gain or loss on sale.

D. Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and impairment losses.

Depreciation is calculated on the straight-line method to write off the cost of the each asset to its residual value, estimated at 10 per cent of cost, over its estimated useful life as follows:

Buildings	20 years
Plants and machinery	13 years
Electronic equipment and motor vehicles	5 years

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit.

Repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Construction in progress represents fixed assets under construction or installation. Cost comprises of the original cost of property, plant and equipment, installation costs, construction costs and other direct costs. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed.

E. Land use rights

Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which the Group's factories and buildings are situated. Amortisation of land use rights is calculated on a straight-line basis over the period of the land use rights varying from 10 to 50 years.

The land use rights will be renewed upon expiration of their present use period.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

F. Intangible assets

Expenditure on acquired intangible assets is capitalised and amortised using the straight-line method over their useful lives as stated in the contract or their estimated beneficial period as follows:

Electricity use rights	10 years
Water use rights	10 years
Computer software	10 years
Trademark and patent	1 year

G. Investments

The Group classified its debt and equity securities into the following categories: trading, held-tomaturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of purchases and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with fixed maturity that the management has the intent and ability to hold to maturity are classified as held-tomaturity and are included in non-current assets; during the year the Group did not hold any investments in this category. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; these are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets.

All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value, whilst held-tomaturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments are included in the income statement in the period in which they arise. Unrealised gain and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in equity. The fair value of investments is based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities.

H. Lease s

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

I. Inventories

Inventories are stated at the lower of cost or net realisable value. Cost is determined by the weighted-average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads, but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and estimated selling expenses.

J. Trade receivables

Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers.

K. Notes receivable

Notes receivable are carried at face value of the notes which approximate fair value.

L. Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash in hand and deposits held at call with banks.

M. Share capital

• (1) Ordinary shares with discretionary dividends are classified as equity.
• (2) External costs directly attributable to the issuance of new shares are shown as a deduction in equity from the proceeds.
• (3) Dividends on ordinary shares are recognised in equity in the period in which they are declared.

N. Borrowings

Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

O. Deferred income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The principal temporary differences arise from depreciation on property, plant and equipment, provisions for receivables, inventories and property, plant and equipment. Tax rates enacted by the balance sheet date are used to determine deferred income tax.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

P. Defined contributions to pension scheme

The Group participates in a government pension scheme. The annual contribution amount is provided based on the amount determined by the local government agency. Under this scheme, retirement benefits of existing and retired employees are assured by the National United Retirement Fund and the Group has no further obligations beyond the annual contributions. It is the directors' intention to continue making such payments in the future.

Q. Revenue recognition

Sales are recognised upon delivery of products and customer acceptance when significant risks and rewards of ownership of the goods are transferred to the customer. Sales are shown net of value added tax and discounts, and after eliminating sales within the Group.

Other revenues earned by the Group are recognised on the following bases: Interest income –on an accrual basis, unless collectibility is in doubt. Dividend income –when the right to receive payment is established.

R. Financial instruments

(1) Financial risk factors

The Group's activities expose to it to a variety of financial risks, including the effects of changes in Government Bonds Exchange quoted prices, foreign currency exchange rates and interest rates.

(i) Foreign exchange risk

The Group's sales, notes receivable and trade receivables are exposed to foreign exchange risk arising from various currency exposures primarily with respect to US Dollars and the Group's purchases and trade payables are exposed to foreign exchange risk primarily with respect to Euro, Japanese Yen and Swiss Franc. The Group hedges the foreign currency exposure of its significant contract commitments to purchase certain production parts and raw materials. The forward contracts used in its programme mature in 12 months or less, consistent with the related purchase commitments.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

R. Financial instruments (continued)

• (1) Financial risk factors (continued)
  • (ii) Interest rate risk

The Group's income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. As at 31 December 2003, 57% of the Group's borrowings were at fixed interest rates as stipulated by the People's Bank of China of PRC. Floating rates are generally lower than fixed rates.

(iii) Credit risk

The carrying amounts of cash and cash equivalents, receivables and prepayments, and trading investments represent the Group's maximum exposure to credit risk in relation to financial assets. The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Cash and trading investments transactions are limited to reputable financial institutions.

(2) Fair value estimation

Fair value of publicly traded securities is based on quoted market prices at the balance sheet date. In assessing the fair value of non-traded financial instruments, the Group uses a variety of methods, such as quoted market prices or estimated discounted value of future cash flows, and makes assumptions that are based on market conditions existing at each balance sheet date.

The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

S. Comparative figures

Where necessary, certain comparative figures have been adjusted to conform to changes in presentation in the current year.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

1 Sales

Sales mainly represent invoiced sales of textile products to third parties and related companies (Note 22), net of value added tax and discounts, and comprise the following:

	2003	2002
Sales outside mainland PRC
- Asia
Hong Kong SAR	278,585	251,448
Japan	160,485	151,859
Rest of Asia	382,159	258,337
	821,229	661,644
- Europe	139,903	83,288
- South America	31,183	19,464
- Others	11,973	5,004
Sales within mainland PRC	266,224	181,480
	1,270,512	950,880

2 Operating profit

The following items have been included in arriving at operating profit:

	2003	2002
Depreciation on property, plant and equipment (Note 8)	109,162	66,479
Impairment of property, plant and equipment
(included in "Administrative expenses") (Note 8)	10,809	-
Loss on disposal of property, plant and equipment	2,804	231
Amortisation of land use rights (Note 9)	4,545	3,263
Amortisation of intangible assets
(included in "Administrative expenses") (Note 10)	3,777	2,493
Impairment of investments (included in "Administrative expenses")	2,300	-
Operating lease rentals payable – property	5,214	5,213
Operating lease rentals payable – machinery	150	1,338
Gain on disposal of a non-consolidated subsidiary	-	(14)
Profit on sale of trading investments
(included in "Other operating income")	-	(473)
Staff costs (Note 4)	144,184	123,682
Cost of inventories included in cost of sales	852,455	675,602
Provision for /(reversal of) doubtful debts	10,692	(218)
Provision for inventories	10,463	6,828

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

3 Finance cost – net

	2003	2002
Interest expenses	16,158	6,653
Interest income	(2,844)	(2,959)
Net foreign exchange gains	(2,689)	(1,637)
	10,625	2,057

4 Staff costs

	2003	2002
Wages and salaries	115,131	101,365
Defined contribution plan	13,479	9,959
Housing fund	3,468	2,463
Welfare	12,106	9,895
	144,184	123,682

Average number of persons employed by the Group during the year: Full time 7,279 6,032 Part time 1,318 795

5 Income tax expense

	2003	2002
Current tax	33,721	21,692

8,597 6,827

As at 31 December 2003, the Group has no significant deferred tax assets and liabilities.

In accordance with the relevant statutory tax rules in the coastal open zone where the Company is located, the Company is subject to a statutory tax rate of 24 per cent.

Beginning from 1995, the Company has been granted a concessionary tax rate of 12 per cent subject to its output value of export products exceeding 70 per cent of output value of the products of the enterprise. The Local Ministry of Foreign Trade and Economic Cooperation has verified that output value of export products for the year ended 31 December 2003 had exceeded 70 per cent of output value of products of the enterprise. Accordingly, the income tax has been provided at 12 per cent.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

5 Income tax expense (continued)

The reconciliation of profit before tax and income tax expense is as follows:

	2003	2002
Profit before tax of the Group	231,325	152,986
Tax calculated at a tax rate of 12% (2002: 12%)	27,759	18,358
Effect of different tax rates of subsidiaries	2,826	2,581
Income not subject to tax	(667)	(114)
Effect of expenses not deductible for tax purposes	3,803	867
Income tax expense	33,721	21,692

6 Earnings per share

Basic and diluted earnings per share have been calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. As there are no potentially dilutive securities, there is no difference between basic and diluted earnings per share.

	2003	2002
Net profit attributable to shareholders	195,156	128,542
Weighted average number of ordinary shares in issue (thousands)	422,432	352,027
Earnings per share (RMB per share)	0.46	0.37

7 Dividends

On 28 March 2004, the Board of Directors proposed a dividend of RMB 0.375 per share, totalling RMB 158,412,000 for the year ended 31 December 2003. The proposed dividend distribution is subject to shareholders' approval in the next general meeting. These financial statements do not reflect this dividend payable, which will be accounted for in shareholders' equity as an appropriation of retained earnings in the year ending 31 December 2004. The dividend declared in respect of 2002 and 2001 were, respectively, RMB 105,608,000 and RMB 86,111,220.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

8 Property, plant and equipment

			Electronic
		Plants &	equipment &	Construction
	Buildings	machinery	motor vehicles	in progress	Total
Balance at 1 January 2002	158,154	513,235	14,417	71,160	756,966
Additions	5,135	7,816	6,166	332,057	351,174
Transfer of construction in progress	103,606	207,858	2,976	(314,440)	-
Disposals	-	(664)	(92)	-	(756)
Depreciation charge (Note 2)	(8,536)	(53,230)	(4,713)	-	(66,479)
Balance at 31 December 2002	258,359	675,015	18,754	88,777	1,040,905
At 31 December 2002
Cost	288,693	904,135	27,498	88,777	1,309,103
Accumulated depreciation and
impairment provision	(30,334)	(229,120)	(8,744)	-	(268,198)
Net book amount	258,359	675,015	18,754	88,777	1,040,905

		Electronic
		Plants &	equipment &	Construction
	Buildings	machinery	motor vehicles	in progress	Total
Balance at 1 January 2003	258,359	675,015	18,754	88,777	1,040,905
Additions	31,102	32,269	9,271	422,634	495,276
Transfer of construction in progress	42,038	310,702	757	(353,497)	-
Disposals	(2,178)	(10,365)	(475)	(161)	(13,179)
Impairment charge (Note 2)	-	(10,588)	(221)	-	(10,809)
Depreciation charge (Note 2)	(21,339)	(82,337)	(5,486)	-	(109,162)
Balance at 31 December 2003	307,982	914,696	22,600	157,753	1,403,031
At 31 December 2003
Cost	357,930	1,241,229	37,605	157,753	1,794,517
Accumulated depreciation and
impairment provision	(49,948)	(326,533)	(15,005)	-	(391,486)
Net book amount	307,982	914,696	22,600	157,753	1,403,031

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

9 Land use rights

	2003	2002
Balance at 1 January	32,446	11,545
Additions	68,885	24,164
Amortisation charge (Note 2)	(4,545)	(3,263)
Balance at 31 December	96,786	32,446
At 31 December
Cost	115,130	46,010
Accumulated amortisation	(18,344)	(13,564)
Net book amount	96,786	32,446

10 Intangible assets

	Electricityuse rights	Water userights	Computersoftware	Trademarkand patent	Total
Balance at 1 January 2002	4,310	9,133	-	-	13,443
Additions	-	-	124	760	884
Amortisation charge (Note 2)	(808)	(1,684)	(1)	(760)	(3,253)
Balance at 31 December 2002	3,502	7,449	123	-	11,074
At 31 December 2002
Cost	8,080	11,045	124	760	20,009
Accumulated amortisation	(4,578)	(3,596)	(1)	(760)	(8,935)
Net book amount	3,502	7,449	123	-	11,074

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

10 Intangible assets (continued)

	Electricityuse rights	Water userights	Computersoftware	Trademarkand patent	Total
Balance at 1 January 2003	3,502	7,449	123	-	11,074
Additions	-	401	-	1,928	2,329
Amortisation charge (Note 2)	(809)	(1,028)	(12)	(1,928)	(3,777)
Balance at 31 December 2003	2,693	6,822	111	-	9,626
At 31 December 2003
Cost	8,080	10,686	124	1,928	20,818
Accumulated amortisation	(5,387)	(3,864)	(13)	(1,928)	(11,192)
Net book amount	2,693	6,822	111	-	9,626

11 Investment in a non-consolidated subsidiary

	2003	2002
Balance at 1 January	6,808	7,651
Share of result before tax	(10)	(10)
Addition of investment in Luthai HK	-	6,367
Consolidation of Luthai HK	(6,367)	-
Disposal of a non-consolidated subsidiary	-	(7,200)
Balance at 31 December	431	6,808

Investment in a non-consolidated subsidiary represents the Company's unquoted equity investments in Qingdao Luthai International Trading Co., Ltd. ("Qingdao Luthai") (Note 23).

As the financial statements of Qingdao Luthai were not material to the Group, it had been accounted for by the equity method of accounting in the consolidated financial statements of the Group.

Included in investment in a non-consolidated subsidiary at 31 December 2002 was an amount of RMB 6,367,000 for the Company's investment in a subsidiary, Luthai (Hong Kong) Textile Co., Ltd. ("Luthai HK") incorporated in 2002 which has commenced operation in 2003 and consequently has been consolidated in the Group's financial statements during the year.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

12 Available-for-sale investment

	2003	2002
Balance at 1 January	215	215
Balance at 31 December	215	215

Available-for-sale investment represents the Company's 10.5% unquoted equity investment in Zibo Stanluian Cosmetics Co., Ltd. that was incorporated in PRC. The investment is carried at cost, as its fair value cannot be reliably determined without incurring excessive costs. The directors are of the opinion that the investment is classified as non-current assets as it is not expected to be realised within twelve months of the balance sheet date.

13 Inventories

	31 December
	2003	2002
Raw materials (at cost)	276,052	129,254
Work in progress (at cost)	120,805	92,278
Work in progress (at net realisable value)	552	-
Finished goods (at cost)	49,116	54,371
Finished goods (at net realisable value)	11,746	7,861
	458,271	283,764

14 Receivables and prepayments

	31 December
	2003	2002
Trade receivables	36,588	21,046
Provision for doubtful debts	(2,010)	(1,122)
	34,578	19,924
Other receivables	64,439	5,037
Provision for doubtful debts	(10,279)	(475)
	54,160	4,562
Notes receivable (a)	105,349	76,263
VAT tax refund receivable (b)	92,732	80,410
Prepayments	115,908	52,562
Amount due from Tianxin (Note 22)	3,612	1,782
Employee housing loans	7,500	4,069
	413,839	239,572

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

14 Receivables and prepayments (continued)

• (a) Notes receivables represent irrevocable letters of credit denominated in foreign currencies, and bills of exchange denominated in RMB received from customers, with maturity dates within one year and six months of balance sheet date, respectively.
• (b) At 31 December 2003, bank borrowings amounting to RMB 60,000,000 are secured on VAT tax refund receivable (2002: RMB 60,000,000) (Note 17).

15 Cash and cash equivalents

	31 December
	2003	2002
Cash at bank and in hand	131,665	74,834
Short term bank deposits	71,092	96,072
	202,757	170,906

The interest rates on short term bank deposits range from 0.1% to 6% per annum (2002: 0.125% to 3.5%).

16 Trade and other payables

	31 December
	2003	2002
Notes payable (a)	73,977	140,815
Trade payables	65,689	38,870
Advances from customers	46,100	8,796
Payroll and welfare payables	35,637	23,393
Dividend payables	496	1,099
Taxes other than income taxes payable	(1,515)	3,584
Accrued expenses	6,948	8,703
Amount due to shareholder – Lucheng (Note 22)	1	562
Other payables	82,811	12,131
	236,167	97,138
	310,144	237,953

(a) Notes payable represent commercial bills denominated in RMB payable to suppliers, with maturity dates within six months of balance sheet date.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

17 Borrowings

	31 December
	2003	2002
Current
Bank borrowings – secured (a)	90,000	60,000
Bank borrowings – unsecured	610,422	30,000
Inter-company commercial bills discounted to banks	26,228	41,359
	726,650	131,359
Non-current
Bank borrowings – unsecured	-	15,000
Total borrowings	726,650	146,359

(a) Included in these current bank borrowings are an amount of RMB 60,000,000 (2002: RMB 60,000,000) secured over VAT tax refund receivable (Note 14(b)), and another amount of RMB 30,000,000 guaranteed by a third party.

The effective interest rates of the borrowings at the balance sheet date were as follows:

	2002
3.26%	4.80%
4.5%	2.88%
	2003

The carrying amounts of borrowings approximate their fair values.

Maturity of non-current borrowing:

31 December
2003	2002
-	15,000

18 Commitments

(a) Capital commitments

Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements is as follows:

	31 December
	2003	2002
Property, plant and equipment	76,148	166,105

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

18 Commitments (continued)

(b) Operating lease commitments – where the Group is a lessee

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

	31 December
	2003	2002
Not later than 1 year	5,161	4,970
Later than 1 year and not later than 5 years	11,321	11,838
Later than 5 years	12,570	14,555
	29,052	31,363

19 Ordinary shares and share premium

	31 December
	2003	2002
Number of shares (in thousands)	422,432	352,027
Registered, issued and fully paid ordinary shares of
RMB 1.00 each
(a) Non-tradable
- Domestic legal person shares	59,116	49,264
- Foreign legal person shares	59,116	49,263
- Employee shares		33,800
(b) Tradable
- A shares	141,960	84,500
- B shares	162,240	135,200
	422,432	352,027
Share premium	695,390	765,795
Total	1,117,822	1,117,822

All shares rank pari passu in all respects.

Pursuant to the resolution of the Annual General Meeting of the Company on 8 May 2003, the Board of Directors of the Company capitalised RMB 70,405,400 Share Premium as at 31 December 2002 on a 2-for-10 basis (2002: RMB 81,237,000). After the capitalisation, the total Share Capital of the Company increased from 352.03 million shares to 422.43 million shares.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

20 Minority interest

	2003	2002
Balance at 1 January	44,621	39,897
Addition in investment in subsidiaries	51,476	2,552
Share of net profit of subsidiaries	2,448	2,752
Dividend paid	(2,365)	(580)
Balance at 31 December	96,180	44,621

21 Reserves

	Statutorycommonreserve	Publicwelfarefund	Discretionarycommonreserve	Currencytranslationreserve	Total
Balance at 1 January 2002	42,577	20,968	3,342	-	66,887
Appropriation during the year	13,327	6,664	-	-	19,991
Balance at 31 December 2002	55,904	27,632	3,342	-	86,878
Balance at 1 January 2003	55,904	27,632	3,342	-	86,878
Appropriation during the year	19,796	9,898	-	-	29,694
Currency translation difference	-	-	-	28	28
Balance at 31 December 2003	75,700	37,530	3,342	28	116,600

The PRC laws and regulations require PRC enterprises to provide for statutory common reserve fund and statutory public welfare fund which are appropriated from net profit as reported in the statutory financial statements prepared under the PRC accounting regulations prior to any dividend appropriation. All statutory common reserve fund and statutory public welfare fund are created for specific purposes.

The Company is required to allocate at least 10 per cent of its net profit to the statutory common reserve fund until this fund reaches 50 per cent of the registered capital. The statutory common reserve fund can only be used, upon approval by the relevant authorities, to offset accumulated losses or to increase capital. However, the remaining unconverted statutory common reserve fund should be maintained at a minimum of 25 per cent of registered capital. An appropriation of 10 per cent of net profit has been allocated to the statutory common reserve fund for the year ended 31 December 2003 (2002: 10 per cent).

An appropriation of 5 per cent of net profit has been made to the statutory public welfare fund for the year ended 31 December 2003 (2002: 5 per cent). This fund should be used for the collective welfare of the employees.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

21 Reserves (continued)

According to the PRC listing rules and relevant regulations, distributions of profit should be made based on the lower of the retained earnings as stated in the statutory financial statements and the retained earnings as stated in the financial statements prepared in accordance with IFRS. On this basis, the retained earnings of the Company as of 31 December 2003 were RMB 178,510,000 (2002: RMB 120,054,000).

In accordance with the Company's Articles of Association, an appropriation to a discretionary common reserve fund can be made after the statutory appropriations, subject to shareholders' approval at the Annual General Meeting. At the Annual General Meeting to be held in May 2004, no discretionary common reserve fund is to be proposed (2002: nil).

22 Related party transactions

The Company is controlled by Zibo Lucheng Textile Co., Ltd. ("Lucheng") (Note 16) that incorporated in PRC, which owns 14% of the Company's shares. The largest shareholder of Lucheng is Mr. Liu Shizhen, the Chairman of the Board of Directors and the General Manager of the Company.

In addition to the related party information shown elsewhere in the financial statements, the following significant transactions between the Group and related parties took place during the financial year at terms agreed between the parties as set out below:

Related party	Relationship
Dongying City Tianxin Woven Co., Ltd. ("Tianxin")(Note 14)	Minority shareholder of Dongying LuxinWoven Co., Ltd. ("Dongying Luxin"), a
	subsidiary of the Company (Note 23)

(a) Transactions between the Company and Lucheng

(i) Sales of goods

	2003	2002
Slow-moving and scraped fabric and fragmentary cloths	166	143

The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

22 Related party transactions (continued)

• (a) Transactions between the Company and Lucheng (continued)
• (ii) Purchases of goods

	2003	2002
Fabric and fragmentary clothsOther garment products	-38	707975
	38	1,682

The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices.

(iii) Salaries of temporary staff

Salaries paid to Lucheng for the temporary staff provided on commercial terms and conditions and at market prices, approximated RMB 6,862,000 (2002: RMB 6,721,000).

(iv) Lease agreements

On 1 January 2003, the Company renewed a lease agreement with Lucheng for a piece of land and certain buildings on this land. Lucheng has guaranteed a lease term of 15 years, which is renewable annually, with monthly lease payments of RMB 121,854 and RMB 43,541 for the land and certain buildings respectively. The areas of the land and building leased are 61,424.03 m2 and 6,484.07 m2 respectively. The Company has constructed its Luthai Industrial Park on this land in the year 2001.

On 12 August 2001, the Company signed a lease agreement with Lucheng for a gasoline station. The lease term is 5 years with monthly lease payment of Rmb 28,986 for the land and gasoline storage facilities constructed on it.

The directors believe that these leases were carried out on commercial terms and conditions and at market prices. Lease payments in year 2003 amounted to RMB 2,333,000 (2002: RMB 2,333,000).

(b) Transactions between Dongying Luxin and Tianxin

(i) Sales of goods

	2003	2002
Cotton yarns related products	1,671	323

The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

22 Related party transactions (continued)

(b) Transactions between Dongying Luxin and Tianxin (continued)

(ii) Purchases of goods and services

	Basis	2003	2002
Cotton yarns related raw materials	Market price	1,976	-
Cotton yarns related semi-finished goods	Market price	154	491
Tools and auxiliary materials	Cost	3,443	693
Utilities	Cost plus 10%	8,968	6,845
		14,541	8,029

(iii) Purchase of general services

On 24 February 2001, Dongying Luxin signed an agreement with Tianxin related to the rental of buildings and daily services from Tianxin. The directors believe that this agreement was carried out on commercial terms and conditions and on market prices. Relevant payments in year 2003 approximated RMB 1,887,000 (2002: RMB 1,887,000).

(c) Directors' and supervisory committee members' remuneration

In 2003, the total remuneration of the directors and the supervisory committee members amounted to RMB 4,560,000 (2002: RMB 4,272,000).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated)

23 Principal subsidiary undertakings

Particulars of the Company's subsidiaries are as follows:

Name	% Interest heldCountry ofand proportionincorporationof voting rights			Principal activities
		2003	2002
Consolidated subsidiaries
Dongying Luxin (Note 22)	PRC	65%	65%	Manufacture andsales of cotton yarnsrelated products
Beijing Innovative Garment Co., Ltd.("Beijing Innovative")	PRC	65%	65%	Manufacture andsales of shirts
Beijing Luthai Shirt Co., Ltd.("Beijing Luthai")	PRC	60%	60%	Manufacture andsales of textiles andgarment products
Lutai HK	Hong KongSAR	100%	100%	Trading, import andexport of textileproducts
Xinjiang Luthai	PRC	51%	-	Manufacture andsales of cotton andcotton yarns
Shandong Luthai HuanzhongPharmacy Co., Ltd.	PRC	75%	-	Manufacture andsales of Chinesetraditional medicine
Non-consolidated subsidiary
Qingdao Luthai (Note 11)	PRC	75%	75%	General trading

24 Approval of financial statements

The financial statements were authorised for issue by the Board of Directors on 28 March 2004.