LU THAI TEXTILE CO., LTD — Annual Report 2004

Feb 3, 2005

FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004

11th Floor PricewaterhouseCoopers Center 202 Hu Bin Road Shanghai 200021, P.R.C. Telephone +86 (21) 6123 8888 Facsimile +86 (21) 6123 8800

Report of the Auditors

To the Shareholders of Luthai Textile Company Limited:

We have audited the accompanying consolidated balance sheet of Luthai Textile Company Limited (the "Company ") and its subsidiaries (together, the "Group") as of 31 December 2004 and the related consolidated statements of income, cash flows and changes in shareholders' equity for the year then ended. These consolidated financial statements set out on pages 2 to 30 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 accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2004, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Zhong Tian CPAs Limited Company

2 February 2005

Business is undertaken in the registered name of , whose registered address is No. 568, DongChang Road, Pudong New District, Shanghai, P.R.C

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

(all amounts in RMB thousands)	Notes	Year ended 31 December
		2004	2003
Sales	2	1,890,862	1,270,512
Cost of sales		(1,355,375)	(852,455)
Gross profit		535,487	418,057
Other operating income		28,004	29,057
Distribution costs		(63,453)	(50,203)
Administrative expenses		(142,189)	(154,951)
Operating profit	3	357,849	241,960
Finance cost – net	4	(34,617)	(10,625)
Share of results before tax of unconsolidatedsubsidiaries	12	40	(10)
Profit from ordinary activities before tax	6	323,272	231,325
Income tax expense	6	(37,547)	(33,721)
Group profit after tax		285,725	197,604
Minority interest	21	(7,953)	(2,448)
Net profit	7	277,772	195,156
Earnings per share (basic and diluted)	7	RMB 0.66	RMB 0.46

The accounting policies on pages 8 to 14 and the notes on pages 15 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2004

		31 December		31 December
(all amounts in RMB thousands)	Notes	2004	2004	2003	2003
ASSETS
Non-current assets
Property, plant and equipment	9	2,421,823		1,403,031
Land use rights	10	140,546		96,786
Intangible assets	11	36,006		9,626
Investment in unconsolidated
subsidiaries	12	5,280		431
Available-for-sale investment	13	215		215
			2,603,870		1,510,089
Current assets
Inventories	14	597,991		458,271
Receivables and prepayments	15	423,937		413,839
Cash and cash equivalents	16	351,358		202,757
			1,373,286		1,074,867
Total assets			3,977,156		2,584,956

The accounting policies on pages 8 to 14 and the notes on pages 15 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2004

		31 December		31 December
(all amounts in RMBthousands)	Notes	2004	2004	2003	2003
SHAREHOLDERS'EQUITY
Capital and reserves
Ordinary shares	20	422,432		422,432
Share premium	20	695,390		695,390
Reserves	22	160,073		116,600
Retained earnings		287,780		211,905
			1,565,675		1,446,327
Minority interest	21		163,205		96,180
LIABILITIES
Non-currentliabilities
Borrowings	18	586,177
Deferred Income	19	5,411
Other liabilities		14,659		2,673
			606,247		2,673
Current liabilities
Trade and other
payables	17	513,608		310,144
Current tax liabilities		874		2,982
Borrowings	18	1,127,547		726,650
			1,642,029		1,039,776
Total liabilities			2,248,276		1,042,449
Total shareholders'equity and
liabilities			3,977,156		2,584,956

The accounting policies on pages 8 to 14 and the notes on pages 15 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED 31 DECEMBER 2004

(all amounts in RMB thousands)	Notes	Sharecapital	Share	premium Reserves	Retainedearnings	Total
Balance at 1 January 2003		352,027	765,795	86,878	152,051	1,356,751
Dividend relating to 2002		-	-	-	(105,608)	(105,608)
Net profit	7	-	-	-	195,156	195,156
Transfer to reserves	22	-	-	29,694	(29,694)	-
Capitalisation of share premium	20	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
Balance at 1 January 2004		422,432	695,390	116,600	211,905	1,446,327
Dividend relating to 2003		-	-	-	(158,412)	(158,412)
Net profit	7	-	-	-	277,772	277,772
Transfer to reserves	22	-	-	43,485	(43,485)	-
Currency translation difference		-	-	(12)	-	(12)
Balance at 31 December 2004		422,432	695,390	160,073	287,780	1,565,675

The accounting policies on pages 8 to 14 and the notes on pages 15 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

		Year ended 31 December
(all amounts in RMB thousands)	Notes	2004	2003
Cash flow from operating activities
Net profit		277,772	195,156
Adjustments for:
Minority interest	21	7,953	2,448
Tax	6	37,547	33,721
Depreciation	9	131,757	109,162
Amortisation of land use rights	10	6,363	4,545
Amortisation of intangible assets	11	5,382	3,777
Impairment charge of property, plant and equipment	9	1,734	10,809
Loss on disposal of property, plant and equipment	3	2,950	2,803
(Reversal of)/provision for inventory provision	3	(2,861)	10,463
(Reversal of)/provision for investment impairmentShare of results before tax in unconsolidated	3	(1,340)	2,300
subsidiaries	12	(40)	10
(Reversal of)/provision for doubtful debts provision		(153)	10,522
Interest expenses	4	47,914	16,158
Interest income	4	(3,265)	(2,844)
Dividend income		-	(8)
		511,713	399,022
Changes in working capital
Inventories		(129,793)	(177,389)
Receivables and prepayments	16	4,317	(94,645)
Restricted deposits		(58,209)	-
Trade and other payables		33,222	2,192
Cash generated from operations		361,250	129,180
Interest paid		(47,914)	(16,158)
Tax paid		(34,244)	(30,745)
Net cash generated from operating activities		279,092	82,277

The accounting policies on pages 8 to 14 and the notes on pages 15 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2004

		Year ended 31 December
(all amounts in RMB thousands)	Notes	2004	2003
Cash flow from investing activities
Acquisition of subsidiary, net of cash acquired	23	(9,678)	25,444
Proceeds from consolidation of Luthai (Hong Kong)
Textile Co., Ltd. ("Luthai HK")	12	-	6,367
Purchase of property, plant and equipment		(973,613)	(464,876)
Purchase of land use rights		(10,221)	(22,972)
Purchase of intangible assets		(10,350)	(2,329)
Proceeds from sale of property, plant and equipment		718	10,373
Proceeds from sale of investment		2,186	-
Dividend received		-	8
Interest received		3,265	2,844
Net cash used in investing activities		(997,693)	(445,141)
Cash flow from financing activities
Proceeds from borrowings		1,974,249	864,618
Repayments of borrowings		(1,030,212)	(381,327)
Dividend paid to Group shareholders		(158,412)	(106,211)
Dividend paid to minority shareholders		(2,272)	(2,365)
Proceeds from minority shareholders		25,640	20,000
Net cash generated from financing activities		808,993	394,715
Increase in cash and cash equivalents		90,392	31,851
Movement in cash and cash equivalents
At beginning of the year		202,757	170,906
Increase in cash and cash equivalents		90,392	31,851
At end of the year	16	293,149	202,757

The accounting policies on pages 8 to 14 and the notes on pages 15 to 30 form an integral part of these consolidated financial statements.

General 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 ("IFRS"). The consolidated financial statements have been prepared under the historical cost convention except those disclosed in the accounting policies below.

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current event and actions, actual results ultimately may differ from those estimates.

The Group adopted IFRS 3 Business Combination for business combinations for which the agreement date is on or after 31 March 2004. The Group also adopted IAS 36 (revised 2004) Impairment of Assets and IAS 38 (revised 2004) Intangible Assets for goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004.

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.

B. Consolidation (continued)

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

A listing of the Company 's principal subsidiaries is set out in Note 25.

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.

D. Property, plant and equipment (continued)

Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset.

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. Borrowing costs are recognised as an expense in the period in which they are incurred

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.

F. Intangible assets

(1) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets.

Goodwill on acquisitions that occurring on or after 31 March 2004 is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cashgenerating units represents the Group's investment in each country of operation by each primary reporting segment.

(2)Other 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	1-10 year

G. Impairment of assets

Effective from 31 March 2004, assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

H. 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.

I. Leases

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.

J. 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.

K. 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 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. The amount of the provision is recognised in the income statement.

L. Notes receivable

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

M. 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.

N. 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.

O. Dividend distribution

Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company 's shareholders.

P. 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.

Q. 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.

R. 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.

S. 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.

T. Financial risk management

(1) Financial risk factors

The Group's activities expose 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. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

(i) Foreign currency 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 currency 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.

T. Financial risk management (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 2004, 68% 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 for financial assets, less any estimated credit adjustments, and financial liabilities with a maturity period of less than one year are assumed to approximate their fair values. For disclosure purposes, the fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

U. Segment reporting

Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments.

1 Segment information

The Group is principally engaged in the manufacture and sale of various textiles and garment products. The Group mainly operates in the mainland of PRC. There is no segment information need to be disclosed for the year 2004 and 2003.

2 Sales

Sales mainly represent invoiced sales of textile products to third parties and related companies (Note 24), net of value added tax and discounts, and comprise the following:

	2004	2003
Sales outside mainland PRC
- Asia
Hong Kong SAR	269,282	278,585
Japan	216,426	160,485
Rest of Asia	517,400	382,159
	1,003,108	821,229
- Europe	263,975	139,903
- South America	27,447	31,183
- Others	29,257	11,973
Sales within mainland PRC	567,075	266,224
	1,890,862	1,270,512

3 Operating profit

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

	2004	2003
Depreciation on property, plant and equipment (Note 9)	131,757	109,162
Impairment of property, plant and equipment
(included in "Administrative expenses") (Note 9)	1,734	10,809
Loss on disposal of property, plant and equipment	2,950	2,803
Amortisation of land use rights (Note 10)	6,363	4,545
Amortisation of intangible assets
(included in "Administrative expenses") (Note 11)	5,382	3,777
(Reversal of)/provision for investments impairment (included in
"Administrative expenses")	(1,340)	2,300
Operating lease rentals payable – property	5,301	5,214
Operating lease rentals payable – machinery	-	150
Staff costs (Note 5)	208,614	144,184
Cost of inventories included in cost of sales	1,355,375	852,455
(Reversal of)/provision for doubtful debts provision	(153)	10,692
(Reversal of)/provision for inventory provision	(2,861)	10,463

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

4 Finance cost – net

	2004	2003
Interest expenses	47,914	16,158
Interest income	(3,265)	(2,844)
Net foreign exchange gains	(10,032)	(2,689)
	34,617	10,625
5Staff costs
	2004	2003
Wages and salaries	156,454	115,131
Defined contribution plan	20,336	13,479
Housing fund	3,797	3,468
Welfare	28,027	12,106
	208,614	144,184
Average number of persons employed by the Group during the year:
Full time	8,366	7,279
Part time	2,999	1,318
	11,365	8,597
6Income tax expense
	2004	2003
Current tax	37,547	33,721

As at 31 December 2004, 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 2004 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 2004 (All amounts in RMB thousands unless otherwise stated)

6 Income tax expense (continued)

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

	2004	2003
Profit before tax of the Group	323,272	231,325
Tax calculated at a tax rate of 12% (2003: 12%)	38,793	27,759
Effect of different tax rates of subsidiaries	(507)	2,826
Income not subject to tax	(1,009)	(667)
Effect of expenses not deductible for tax purposes	1,264	3,803
Amortisation of Income Tax credit for qualified purchase of
domestically manufactured equipment	(994)	-
Income tax expense	37,547	33,721

7 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.

	2004	2003
Net profit attributable to shareholders	277,772	195,156
Weighted average number of ordinary shares in issue (thousands)	422,432	422,432
Earnings per share (RMB per share)	0.66	0.46

8 Dividends

On 1 February 2005, the Board of Directors proposed a dividend of RMB 0.375 per share, totalling RMB 158,412,000 for the year ended 31 December 2004. 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 2005. The dividend declared in respect of 2003 and 2002 were, RMB 158,412,000 and RMB 105,608,000, respectively .

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

9 Property, plant and equipment

		Plants &	Electronicequipment &	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 3)	-	(10,588)	(221)	-	(10,809)
Depreciation charge (Note 3)	(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
CostAccumulated depreciation and	357,930	1,241,229	37,605	157,753	1,794,517
impairment provision	(49,948)	(326,533)	(15,005)	-	(391,486)
Net book amount	307,982	914,696	22,600	157,753	1,403,031
	Buildings	Plants &machinery	Electronicequipment &motor vehicles	Constructionin progress	Total
Balance at 1 January 2004	307,982	914,696	22,600	157,753	1,403,031
Additions	33,030	203,669	13,483	792,640	1,042,822
Acquisition of subsidiary (Note 23)	33,662	92,893	3,331	219	130,105
Transfer of construction in progressTransfer out due to the loss of	217,366	330,990	6,468	(554,824)	-
control of a subsidiary	(763)	(15,579)	(634)	-	(16,976)
Disposals	(1,821)	(1,750)	(97)	-	(3,668)
Impairment charge (Note 3)	-	(1,741)	7	-	(1,734)
Depreciation charge (Note 3)	(22,621)	(100,465)	(8,671)	-	(131,757)
Balance at 31 December 2004	566,835	1,422,713	36,487	395,788	2,421,823
At 31 December 2004
Cost	654,983	1,907,725	73,654	395,788	3,032,150
Accumulated depreciation andimpairment provision	(88,148)	(485,012)	(37,167)	-	(610,327)
Net book amount	566,835	1,422,713	36,487	395,788	2,421,823

Bank borrowings amounting to RMB 135,000,000 and RMB 4,500,000 are secured on equipments and buildings for the value of RMB 144,170,000 and RMB 7,053,000 respectively (2003:Nil).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

10 Land use rights

	2004	2003
Balance at 1 January	96,786	32,446
Additions	42,660	68,885
Acquisition of subsidiary (Note 23)	7,463	-
Amortisation charge (Note 3)	(6,363)	(4,545)
Balance at 31 December	140,546	96,786
At 31 December
Cost	174,062	115,130
Accumulated amortisation	(33,516)	(18,344)
Net book amount	140,546	96,786

Bank borrowings amounting to RMB 40,000,000 are secured on land use rights for the value of 41,272,000 (2003: Nil).

11 Intangible assets

	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 3)	(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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

11 Intangible assets (continued)

	Goodwill	Electricityuse rights	Water userights	Computersoftware	Trademarkand patent	Total
Balance at 1 January 2004	-	2,693	6,822	111	-	9,626
Additions	-	-	-	-	10,350	10,350
Acquisition of subsidiary
(Note 23)	15,855	4,645	912	-	-	21,412
Amortisation charge (Note 3)	-	(1,010)	(1,210)	(12)	(3,150)	(5,382)
Balance at 31 December
2004	15,855	6,328	6,524	99	7,200	36,006
At 31 December 2004
Cost	15,855	19,187	16,335	124	10,350	61,851
Accumulated amortisation	-	(12,859)	(9,811)	(25)	(3,150)	(25,845)
Net book amount	15,855	6,328	6,524	99	7,200	36,006

Impairment tests for goodwill

Goodwill is allocated to the Group's cash-generating unit (CGU) which has been identified as acquiree, Zibo Zichuan Changming Thermoelectricity Co., Ltd ("Changming") . The recoverable amount of the CGU is determined based on value-in-use calculations. The calculations use cash flow projections based on financial budget approved by management for the year 2005. Cash flows beyond this one-year period are extrapolated using the estimated growth rates stated below.

Key assumptions used for value-in-use calculation:

Gross margin	2%
Growth rate	0%
Discount rate	6.12%

These assumptions have been used for the analysis of CGU. Management determined budgeted gross margin based on past performance and its expectations. The growth rates used are determined on the special business of CGU which is impacted by government regulation. The discount rates used are pre-tax rate which are equal to the borrowing interest rate promulgate by the government bank for the same maturity of ten years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

12 Investments in unconsolidated subsidiaries

	2004	2003
Balance at 1 January	431	6,808
Acquisition of a subsidiary	4,809	-
Share of result before tax	40	(10)
Consolidation of Luthai HK	-	(6,367)
Balance at 31 December	5,280	431

Inv estment in unconsolidated subsidiaries represents the Group's unquoted equity investments in Qingdao Luthai International Trading Co., Ltd. ("Qingdao Luthai") and Zibo Luming Thermoelectricity Co., Ltd ("Luming") (Note 25).

As the financial statements of Qingdao Luthai and Luming 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.

13 Available-for-sale investment

	2004	2003
Balance at 1 January and 31 December	215	215

Available-for-sale investment represents the Company's 10.5% unquoted equity investment in Zibo Stanluian Cosmetics Co., Ltd. which 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.

There were no disposals or impairment provisions on available-for-sale financial investment in 2004 or 2003.

14 Inventories

	31 December
	2004	2003
Raw materials (at cost)	294,137	276,052
Work in progress (at cost)	88,085	120,805
Work in progress (at net realisable value)	-	552
Finished goods (at cost)	210,375	49,116
Finished goods (at net realisable value)	5,394	11,746
	597,991	458,271

Bank borrowings amounting to RMB 130,000,000 are secured on raw materials for the value of RMB 46,886,000(2003: Nil).

In 2004 the Group reversed RMB 2,861,000 being part of an inventory write down made in 2003 that was subsequently not required.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

15 Receivables and prepayments

	31 December
	2004	2003
Trade receivables	43,874	36,588
Provision for doubtful debts	(3,211)	(2,010)
	40,663	34,578
Other receivables	61,662	64,439
Provision for doubtful debts	(9,985)	(10,279)
	51,677	54,160
Notes receivable (a)	132,867	105,349
VAT tax refund receivable (b)	4,251	92,732
Prepayments (c)	154,792	115,908
Amount due from Zibo Lucheng Textile Co., Ltd.
("Lucheng") (Note 24)	20,350	-
Amount due from Dongying City Tianxin Woven Co.,
Ltd. ("Tianxin") (Note 24)	13,982	3,612
Employee housing loans	5,355	7,500
	423,937	413,839

(a) Notes receivable represent irrevocable letters of credit denominated in foreign currencies, and bills of exchange denominated in RMB receivable 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. There is no VAT tax refund receivable secured at 31 December 2004.

(c) Prepayments represent advance paid to suppliers for the purchase of raw materials and equipments.

16 Cash and cash equivalents

		31 December
	2004	2003
Cash at bank and in hand	287,511	131,665
Short term bank deposits	5,638	71,092
	293,149	202,757
Restricted deposits (a)	58,209	-
	351,358	202,757

(a) Restricted deposits are bank deposits for the issue of letter of credit and commercial bills with maturity dates within six months of balance sheet date. For the purpose of the cash flow statement, the restricted deposits are excluded from cash and cash equivalents

(b) The interest rates on short term bank deposits range from 0.1% to 6% per annum (2003: 0.1% to 6% ).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

17 Trade and other payables

	31 December
	2004	2003
Notes payable (a)	106,440	73,977
Trade payables	198,505	65,689
Advances from customers	31,793	46,100
Payroll and welfare payables	34,759	35,637
Dividend payables	3,004	496
Taxes other than income taxes payable	8,492	(1,515)
Accrued expenses	6,912	6,948
Amount due to Lucheng (Note 24)	36,377	1
Other payables	87,326	82,811
	407,168	236,167
	513,608	310,144

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

18 Borrowings

	31 December
	2004	2003
Current
Bank borrowings – secured (a)	199,500	60,000
Bank borrowings – unsecured	911,508	640,422
Inter-company commercial bills discounted to banks	16,539	26,228
	1,127,547	726,650
Non-current
Bank borrowings – secured (a)	110,000	-
Bank borrowings – unsecured	476,177	-
	586,177	-
Total borrowings	1,713,724	726,650

(a) These bank borrowings are secured over the equipments, buildings, land use rights, inventories and VAT refund receivable of the Group as disclosed in Note 9, Note 10, Note 14 and Note 15.

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

	2004	2003
Bank borrowings	4.53%	3.26%
Inter-company commercial bills discounted to banks	3.72%	4.5%

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

18 Borrowings (continued)

The carrying amounts and fair value of certain non-current borrowings are as follows:

	Carrying amounts		Fair values
	2004	2003	2004	2003
Non-current bank borrowings	586,177	-	582,825	-

The fair values are based on discounted cash flows at the current market interest rate available to the Group for similar financial instruments. The carrying amounts of short-term borrowings approximate their fair value.

Maturity of non-current borrowing is as follows:

		31 December
	2004	2003
Between 1 and 2 years	44,677	-
Between 2 and 5 years	541,500	-
	586,177	-

19 Deferred income

Deferred income represents investment tax credit granted to the Company on purchases of certain qualified equipments. It is recognized as income over the periods and in the proportions in which depreciation on those assets is charged.

20 Shares and share premium

	31 December
	2004	2003
Number of shares (in thousands)	422,432	422,432
Registered, issued and fully paid ordinary shares of
RMB 1.00 each
(a) Non-tradable
- Domestic legal person shares	59,116	59,116
- Foreign legal person shares	59,116	59,116
(b) Tradable
- A shares	141,960	141,960
- B shares	162,240	162,240
	422,432	422,432
Share premium	695,390	695,390
Total	1,117,822	1,117,822

All shares rank pari passu in all respects.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004 (All amounts in RMB thousands unless otherwise stated)

21 Minority interest

	2004	2003
Balance at 1 January	96,180	44,621
Addition of investment in subsidiaries	61,344	51,476
Share of net profit of subsidiaries	7,953	2,448
Dividend paid	(2,272)	(2,365)
Balance at 31 December	163,205	96,180

22 Reserves

	Statutorycommonreserve	Publicwelfarefund	Discretionarycommonreserve	Currencytranslationreserve	Total
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
Balance at 1 January 2004	75,700	37,530	3,342	28	116,600
Appropriation during the year	28,990	14,495	-	-	43,485
Currency translation difference	-	-	-	(12)	(12)
Balance at 31 December 2004	104,690	52,025	3,342	16	160,073

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 2004 (2003: 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 2004 (2003: 5 per cent). This fund should be used for the collective welfare of the employees.

22 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 2004 were RMB 292,814,000 (2003: RMB 178,510,000).

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 April 2005, no discretionary common reserve fund is to be proposed (2003: nil).

23 Business combinations

On 9 Sep 2004, the Group acquired 56.91% of the share capital of Changming. The acquired subsidiary contributed revenues of RMB 33,553,000 and net loss of RMB 1,586,000 to the Group for the period from 9 September 2004 to 31 December 2004. If the acquisition had occurred on 1 January 2004, the acquired subsidiary would have contributed revenues of RMB 120,909,000 and net loss of RMB 4,084,000 to the Group.

Details of net assets acquired and goodwill are as follows:

Purchase consideration:
- Cash paid	20,000
Fair value of net assets acquired	(4,145)
Goodwill (Notes 11)	15,855

The goodwill is attributable to the significant synergies expected to arise after the Group's acquisition of Changming. The assets and liabilities arising from the acquisition are as follows:

	Fair value
Cash and cash equivalents	10,322
Inventory	8,572
Trade and other receivables	26,102
Property, plant and equipment	130,105
Intangible assets	5,557
Land use right	7,463
Trade and other payables	(116,689)
Borrowings	(43,037)
Minority interest	(21,110)
Net assets	7,285
Minority interest (43.09%)	(3,140)
Net assets acquired	4,145
Purchase consideration settled in cash	20,000
Cash and cash equivalents in subsidiary acquired	(10,322)
Cash outflow on acquisition	9,678

24 Related party transactions

The Company is controlled by Lucheng that incorporated in PRC. Lucheng owns 14% of the Company's shares, whose largest shareholder 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:

	Relationship
Tianxin (Note 15)	Minority shareholder of Dongying LuxinWoven Co., Ltd. ("Dongying Luxin"), asubsidiary of the Company (Note 25)

(a) Transactions between the Company and Lucheng

(i) Sales of goods

	2004	2003
Slow-moving and scraped fabric and fragmentary cloths	238	166
Cotton	18,008	-
	18,246	166

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

(ii) Purchases

	2004	2003
Fabric and fragmentary cloths	304	-
Other garment products	-	38
Cotton	25,176	-
Cotton yarn	23,651	-
Buildings and equipment	145,874	-
	195,005	38

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 2004 (All amounts in RMB thousands unless otherwise stated)

24 Related party transactions (continued)

• (a) Transactions between the Company and Lucheng (continued)
• (iii) Salaries of temporary staff

There are no salaries paid to Lucheng for temporary staff (2003: RMB 6,862,000).

(iv) Lease agreements

On 1 January 2004, 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 2004 amounted to RMB 2,333,000 (2003: RMB 2,333,000).

• (b) Transactions between Dongying Luxin and Tianxin
• (i) Sales of goods

	2004	2003
Cotton yarns related products	3,191	1,671

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

(ii) Purchases of goods and services

	Basis	2004	2003
Cotton yarns related raw materials	Market price	2,726	1,976
Cotton yarns related semi-finished goods	Market price	192	154
Tools and auxiliary materials	Cost	102	3,443
Utilities	Cost plus 10%	9,523	8,968
		12,543	14,541

24 Related party transactions (continued)

• (b) Transactions between Dongying Luxin and Tianxin (continued)
• (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 2004 approximated RMB 1,887,000 (2003: RMB 1,887,000).

(c) Directors' and supervisory committee members' remuneration

In 2004, the total remuneration of the directors and the supervisory committee members amounted to RMB 5,037,000 (2003: RMB 4,560,000).

25 Principal subsidiary undertakings

Particulars of the Company's subsidiaries are as follows:

Name	Country ofincorporation	% Interest heldand proportionof voting rights2004	2003	Principal activities
Consolidated subsidiariesDongying Luxin (Note 24)	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
Luthai (Hong Kong) Textile Co., Ltd	Hong KongSAR	100%	100%	Trading, import andexport of textileproducts
Xinjiang Luthai Harvest Cotton Co.,Ltd	PRC	51%	51%	Manufacture andsales of cotton andcotton yarns
Shandong Luthai HuanzhongPharmacy Co., Ltd.	PRC	75%	75%	Manufacture andsales of Chinesetraditional medicine
Changming (Note 11)	PRC	56.91%	-	Manufacture andsales of electricityand Xanthan Gum
Liming Water Purification Co.,Ltd	PRC	99.62%	-	Process waste water
Zibo Luqun Textile Co., Ltd	PRC	90%	-	Manufacture andsales of yarns
Lufeng Co., Ltd	PRC	75%	-	Manufacture andsales of dy eingtextile products

25 Principal subsidiary undertakings (continued)

Unconsolidated subsidiaries

Name	Country ofincorporation	% Interest heldand proportionof voting rights	Principal activities
Qingdao Luthai (Note 12)	PRC	75%75%	General trading
Luming (Note 12)	PRC	50%-	Manufacture andsales of electricity

26 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
	2004	2003
Property, plant and equipment	93,110	76,148

(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
	2004	2003
Not later than 1 year	5,548	5,161
Later than 1 year and not later than 5 years	12,402	11,321
Later than 5 years	10,585	12,570
	28,535	29,052

27 Approval of financial statements

The financial statements were authorised for issue by the Board of Directors on 2 February 2005.