LU THAI TEXTILE CO., LTD — Annual Report 2006

Mar 28, 2007

LUTHAI TEXTILE COMPANY LIMITED (Registered in the People's Republic of China)

CONSOLIDATED FINANCIAL STATEMENTS AS OF 31 DECEMBER 2006 TOGETHER WITH REPORT OF THE AUDITORS

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

INDEPENDENT AUDITOR'S REPORT

2007/SH-

53/DTY/MJY

TO THE SHAREHOLDERS OF LUTHAI TEXTILE COMPANY LIMITED

Report on the financial statements

We have audited the accompanying consolidated financial statements of Luthai Textile Company Limited (the "Company") and its subsidiaries (together, the "Group") which comprise the consolidated balance sheet as of 31 December 2006 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor's responsibility

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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

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 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Zhong Tian CPAs Limited Company

26 March 2007

Shanghai, PRC

	Note	2006	2005
Revenue	6	2,857,928	2,233,104
Cost of sales	9	(2,135,233)	(1,548,918)
Gross profit		722,695	684,186
Other income	7	96,324	53,293
Distribution costs	9	(79,806)	(62,771)
Administrative expenses	9	(239,520)	(202,300)
Other gains - net	8	2,871	-
Operating profit		502,564	472,408
Finance costs - net	10	(95,477)	(85,405)
Profit before income tax		407,087	387,003
Income tax expense	12	(45,326)	(50,346)
Profit for the year		361,761	336,657
Attributable to:
Equity holders of the Company		341,830	314,531
Minority interest		19,931	22,126
		361,761	336,657

Earnings per share for profit attributable to the equity holders of the Company during the year

CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

- Basic	14	RMB 0.81	RMB 0.74
- Diluted	14	RMB 0.81	RMB 0.74

		As of 31 December
	Note	2006	2005
ASSETS
Non-current assets
Property, plant and equipment	16	3,098,389	2,797,701
Land use rights	17	126,665	134,116
Intangible assets	18	22,732	33,556
Deferred income tax assets	19	7,935	-
Available-for-sale financial assets	20	215	215
		3,255,936	2,965,588
Current assets
Inventories	21	806,409	809,444
Trade and other receivables	22	600,699	413,483
Derivative financial instruments	23	3,054	-
Cash and cash equivalents	24	268,072	192,861
Restricted deposits	25	56,267	22,273
		1,734,501	1,438,061
Total assets		4,990,437	4,403,649

CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2006 (All amounts in RMB thousands unless otherwise stated)

CONSOLIDATED BALANCE SHEET (CONTINUED)

AS OF 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

		As of 31 December
	Note	2006	2005
EQUITY
Capital and reserves attributable to equityholders of the Company
Share capital	26	422,432	422,432
Reserves		1,513,555	1,298,877
		1,935,987	1,721,309
Minority interests		191,031	196,578
Total equity		2,127,018	1,917,887
LIABILITIES
Non-current liabilities
Borrowings	28	395,928	483,965
Deferred income	29	11,466	4,417
Other liabilities		15,124	13,189
		422,518	501,571
Current liabilities
Trade and other payables	30	675,218	619,074
Current income tax liabilities		9,059	2,422
Borrowings	28	1,755,031	1,362,695
Derivative financial instruments	23	1,593	-
		2,440,901	1,984,191
Total liabilities		2,863,419	2,485,762
Total equity and liabilities		4,990,437	4,403,649

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006

A (amounts in RMB thousands unless otherwise stated)

	Note					Attributable to equity holders of the Company
				Statutor
				y	Public	Discretionary
		Share	Share	commo	Welfare	common	Currency	Retained	Minority	Total
		capital	premium	n	fund	fund	translation	earnings	interest	equity
		422,43
Balance at 1 January 2005		2	695,390	104,690	52,025	3,342	16		287,780 163,205	1,728,880
Dividend relating to 2004		-	-	-	-	-	-	(158,412)	(4,213)	(162,625)
Profit for the year		-	-	-	-	-	-	314,531	22,126	336,657
Appropriation from reserves	27	-	-	33,128	16,564	-	-	(49,692)	-	-
Addition of investment insubsidiaries		-	-	-		-	-	-	15,460	15,460
Currency translation differences		-	-	-	-	-	(485)	-	-	(485)
		422,43
Balance at 31 December 2005		2	695,390	137,818	68,589	3,342	(469)		394,207 196,578	1,917,887

		422,43
Balance at 1 January 2006		2	695,390	137,818	68,589	3,342	(469)		394,207 196,578	1,917,887
Dividend relating to 2005		-	-	-	-	-	-	(126,730) (14,147)		(140,877)
Profit for the year		-	-	-	-	-	-	341,830	19,931	361,761
Reserve reclassification	27	-	-	68,589	(68,589)	-	-	-	-	-
Appropriation from reserves	27	-	-	34,899	-	-	-	(34,899)	-	-
Capital injection by minorityshareholders		-	-	-	-	-	-	-	45,303	45,303
Disposal of shares in subsidiaries		-	-	-	-	-	-		- (56,634)	(56,634)
Currency translation differences		-	-	-	-	-	(422)	-	-	(422)
		422,43
Balance at 31 December 2006		2	695,390	241,306		3,342	(891)		574,408 191,031	2,127,018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006

A (amounts in RMB thousands unless otherwise stated)

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

	Note	2006	2005
Cash flows from operating activities
Cash generated from operations	31	698,821	567,185
Interest paid		(108,218)	(98,172)
Income tax paid		(34,964)	(48,798)
Net cash generated from operating activities		555,639	420,215
Cash flows from investing activities
Disposal of subsidiaries, net of cash acquired		48,450	-
Purchases of property, plant and equipment		(629,375)	(540,433)
Purchases of land use rights		(96)	(534)
Purchases of intangible assets		(5,285)	(3,501)
Proceeds from disposal of property, plant and
equipment	31	8,190	4,071
Proceeds from sale of investment		-	160
Interest received		8,721	3,338
Loans granted to third parties		(100,000)	-
Purchases of shares in subsidiaries		(19,758)	(1,108)
Net cash used in investing activities		(689,153)	(538,007)
Cash flows from financing activities
Proceeds from borrowings		1,924,243	1,088,585
Repayments of borrowings		(1,619,944)	(922,832)
Dividends paid to Company's shareholders		(126,730)	(158,412)
Dividends paid to minority interests		(14,147)	(6,377)
Proceeds from minority interests		45,303	16,540
Net cash generated from financing activities		208,725	17,504
Net increase / (decrease) in cash and cash
equivalents		75,211	(100,288)
Cash and cash equivalents at beginning of the year		192,861	293,149
Cash and cash equivalents at end of the year	24	268,072	192,861

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

1 General information

Luthai Textile 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:

No. 11, Mingbo Road Zibo High and New Technology Development Zone Zibo City, Shandong Province The People's Public of China

The Group has its primary listing on Shenzhen Stock Exchange.

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a) Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

Standards, amendments and interpretations effective in 2006 but not relevant to the Group

The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2006 but are not relevant to the Group's operations:

• IAS 19 (Amendment), Employee Benefits;
• IAS 21 (Amendment), Net Investment in a Foreign Operation;
• IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions;
• IAS 39 (Amendment), The Fair Value Option;
• IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts;
• IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources;
• IFRS 6, Exploration for and Evaluation of Mineral Resources;
• IFRIC 6, Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment;
• IFRIC 4, Determining whether an Arrangement contains a Lease; and
• IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

2 Summary of significant accounting policies (continued)

(b) Consolidation

(1) Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

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 but considered an impairment indicator 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 34.

(2) Transactions and minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

(c) Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

(d) Foreign currency translation

(1) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in Renminbi ('RMB'), which is the Company's functional and presentation currency.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

2 Summary of significant accounting policies (continued)

(d) Foreign currency translation (continued)

(2) Transactions and balances

Foreign Currency transactions are translated into the functional Currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

(3) Group companies

The results and financial position of all the group entities (none of which has the Currency of a hyperinflationary economy) that have a functional Currency different from the presentation Currency are translated into the presentation Currency as follows:

(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

(iii) all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other Currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

(e) Property, plant and equipment

Property, plant and equipment are stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation is calculated using the straight-line method to write off the cost of the each asset to its residual value, estimated at 5% to 10% of cost, over its excepted useful life as follows:

Buildings	5-20 years
Plants and machinery	10-13 years
Electronic equipment and motor vehicles	5 years

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

2 Summary of significant accounting policies (continued)

(e) Property, plant and equipment (continued)

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

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

Construction in progress represents fixed assets under construction or installation. Cost comprises 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.

(f) 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.

(g) 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. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. 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. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

(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.

(h) Impairment of non-financial assets

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). Nonfinancial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

2 Summary of significant accounting policies (continued)

(i) Financial assets

The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

(1) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.

(2) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet.

(3) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method.

Investment in equity instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured, is measured at cost.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(i) Financial assets (continued)

Changes in the fair value of other monetary securities denominated in a foreign currency and classified as available for sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss; translation differences on non-monetary securities recognised in equity. Changes in the fair value of other monetary and non-monetary securities classified as available-for-sale are recognised in equity.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as 'gains and losses from investment securities'.

Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Group's right to receive payments is established.

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2(m).

(j) Derivative financial instruments

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value.

Certain derivative instruments do not qualify for hedge accounting and are accounted for at fair value through profit or loss. Changes in the fair value of these derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement within ''Other gains/(losses)-net''.

2 Summary of significant accounting policies (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(k) Leases

Leases in which 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.

(l) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using 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. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

(m) Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. 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. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the income statement.

(n) Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other shortterm highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.

(o) Share capital

Ordinary shares are classified as equity.

Incremental cost directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(p) Dividend distribution

Dividend distribution to the Company's equity holders 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.

(q) Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(r) Borrowings

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

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(s) 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 consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income 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.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(t) Retirement scheme

The Group participates in a number of defined contribution plans in the PRC and Hong Kong. The pension plans are generally funded by payments from employees and relevant group companies. The Group pays contributions to the pension plans which are calculated as a percentage of the employee's salaries.

The Group has no legal or constructive obligations to make further payments once the required contributions have been paid, even if the plans do not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognised as employee benefit expense when they are due.

2 Summary of significant accounting policies (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(u) Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

(v) Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group's activities. Revenue is shown, net of value-added tax ("VAT"), returns, rebates and discounts and after eliminated sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group's activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

(1) Sales of goods

Sales of goods are recognised when a group entity has delivered products to the customer, the customer has accepted the products and collectibility of the related receivables is reasonably assured.

(2) Interest income

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.

(3)Dividend income

Dividend income is recognised when the right to receive payment is established.

2 Summary of significant accounting policies (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(w) Government grants

Grants from the government are recognised at their fair value when there is a reasonable assurance that the grants will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight-line basis over the expected lives of the related assets.

3 Financial risk management

(a) Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. Risk management is carried out by the Finance Department under policies approved by the Board of Directors.

• (1) Market risk
• (i) Foreign exchange risk

The Group's sales and purchases are exposed to foreign exchange risk arising from various currency exposures. Primarily with respect to the US dollar and the Japanese Yen. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. To manage their foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use forward contracts. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity's functional currency.

(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.

The Group's interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. As at 31 December 2006, no borrowings of the Group were at fixed interest rates.

(2) 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.

3 Financial risk management (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(a) Financial risk factors (continued)

(3) Liquidity risk

Prudent liquidity risk management includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining availability under committed credit lines.

(b) Fair value estimation

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to the short-term nature of trade receivables. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

4 Critical accounting estimates and judgments

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

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

(a) Estimated impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2(g). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates.

(b) Fair value of derivatives and other financial instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at each balance sheet date.

4 Critical accounting estimates and judgments (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(c) Net realisable value of inventories

Net realisable value of inventories is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These estimates are based on the current market condition and the historical experience of manufacturing and selling products of similar nature. It could change significantly as a result of competitor actions in response to severe industry cycles. Management will reassess the estimations by the balance sheet date.

(d) Estimated impairment of trade and other receivables

The Group's management determines the provision for impairment of trade and other receivables in accordance with the accounting policy stated in Note 2(m). This estimate is based on the credit history of its customers and the current market conditions. Management reassesses the provision on each of the balance sheet date.

5 Segment reporting

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 needed to be disclosed for the year 2006 and 2005.

6 Revenue

Revenue mainly represent invoiced sales of textile products to third parties and related companies (Note 33), net of value added tax and discounts, and comprise the following:

	2006	2005
Sales outside mainland PRC
- Asia, including
Hong Kong SAR	377,469	352,901
Japan	312,719	265,028
Rest of Asia	749,857	598,409
	1,440,045	1,216,338
- Europe	439,299	380,827
- North America	101,162	53,471
- Others	132,668	83,238
Sales within mainland PRC	744,754	499,230
	2,857,928	2,233,104

7 Other income

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

	2006	2005
Income from sales of materials	47,854	28,469
Subsidy income	23,558	7,200
Interest income from loans to third parties	5,617	-
Rental income	8,442	6,562
Others	10,853	11,062
	96,324	53,293

8 Other gains - net

	2006	2005
Foreign exchange forward contract:
- Held for trading	1,461	-
Net foreign exchange gains (Note 13)	1,410	-
	2,871	-

9 Expenses by nature

	2006	2005
Depreciation on property, plant and equipment (Note 16)	236,850	203,768
Impairment of property, plant and equipment
(included in "Administrative expenses") (Note 16)	-	554
Loss on disposal of subsidiaries (Note 32)	1,170	-
Loss on disposal of property, plant and equipment (Note 31)	3,936	911
Amortisation of land use rights (Note 17)	6,575	6,964
Amortisation of intangible assets
(included in "Administrative expenses") (Note 18)	15,740	5,950
Reversal of provision for investments impairment (included in
"Administrative expenses")	-	(160)
Operating lease rentals	10,023	7,698
Staff costs (Note 11)	398,730	317,784
Provision/(reversal of) for doubtful debts provision (Note 22)	(4,498)	4,686
Provision for inventory provision	14,609	186
Amortization of deferred income (Note 29)	(4,611)	(994)
Transportation expenses	20,568	16,445
Changes in inventories of finished goods and work in progress	(56,424)	137,907
VAT input non-deductible for goods exported	75,592	59,052
Raw materials and other consumables	1,696,234	1,016,444
Others	40,065	36,794
	2,454,559	1,813,989

10 Finance costs - net

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

			2005
	Interest expenses	108,218	98,172
	Interest income	(3,104)	(3,338)
	Net foreign exchange gains(Note 13)	(9,637)	(9,429)
		95,477	85,405
11	Staff costs
	Wages and salaries	322,037	260,644
	Contribution to retirement scheme	43,089	33,108
	Staff welfare	33,604	24,032
		398,730	317,784
	Average number of persons employed by the Group during the year:
	Full time	15,181	12,533
	Part time	1,815	2,178
		16,996	14,711
12	Income tax expense
		2006	2005
	Current income tax expenses	53,261	50,346
	Deferred income tax credit (Note 19)	(7,935)	-
		45,326	50,346

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%.

Beginning from 1995, the Company has been granted a concessionary tax rate of 12% subject to its output value of export products exceeding 70% 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 2006 had exceeded 70% of output value of products of the enterprise. Accordingly, the income tax has been provided at 12%.

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the tax rate applicable to profits of the consolidated entities as follows:

12 Income tax expense (continued)

2006 2005

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

Profit before income tax	407,086	387,003
Tax calculated at the statutory tax rate of 12%	48,850	46,440
Effect of different tax rates of subsidiaries	(1,220)	(1,401)
Income not subject to tax	(2,620)	(994)
Expenses not deductible for tax purposes	5,687	6,301
Others	(5,371)	-
Income tax expense	45,326	50,346

Income tax on overseas profit has been calculated on the estimated assessable profit for the year at the income tax rates prevailing in the tax jurisdictions in which the Group operates.

13 Net foreign exchange gains

The exchange differences credited to the income statement are including as follows:

	2006	2005
Other gains - net(Note 8)	1,410	-
Finance cost - net(Note 10)	9,637	9,429
	11,047	9,429

14 Earnings per share

The calculation of basic earnings per share is based on the net profit for the year attributable to the equity holders of the Company of approximately RMB341,830,000 (2005: RMB314,531,000),divided by the weighted average number of ordinary shares outstanding during the year of 422,432,000 shares (2005:422,432,000 shares).

Diluted earnings per share equal to basic earnings per share as there are no potential dilutive shares outstanding.

15 Dividends per share

In accordance with the relevant regulations of the PRC and the articles of association of the Company, the Company declares dividends based on the lower of the retained earnings as reported in the PRC statutory accounts and financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with PRC GAAP, the retained earnings as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements.

The cash dividend paid in 2006 and 2005 were RMB 126,729,600 (RMB 0.3 per share) and RMB 158,412,000 (RMB 0.375 per share) respectively. A cash dividend in respect of 2006 of RMB 0.3718 per share (2005: RMB 0.3 per share), amounted to a total cash dividend of RMB 157,060,366 (2005: RMB 126,729,600) was to be proposed. In addition, by appropriation of the Company's capital reserve, the Company declared a bonus share dividend of 1 shares (2005: Nil) per share, totalling bonus shares of 422,432,400 shares (2005: Nil). The profit appropriations need to be approved by the next Annual General Meeting. These financial statements do not reflect this dividend payable.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

16 Property, plant and equipment

Plants &equipment &ConstructionBuildingsmachinerymotor vehiclesin progressTotalAt 1 January 2005Cost654,9831,907,72573,654395,7883,032,150Accumulated depreciation(88,148)(485,012)(37,167)-(610,327)Net book amount566,8351,422,71336,487395,7882,421,823Year ended 31 December 2005Opening net book value566,8351,422,71336,487395,7882,421,823Additions624,65212,710567,758585,182Transfers215,074539,7883,712(758,574)-Disposals(295)(3,676)(1,011)-(4,982)Impairment charge (Note 9)-(554)--(554)Depreciation charge (Note 9)(36,067)(155,510)(12,191)-(203,768)Closing net book value745,6091,807,41339,707204,9722,797,701At 31 December 2005Cost869,4082,446,40285,977204,9723,606,759Accumulated depreciation and(123,799)(638,989)(46,270)-(809,058)impairment provisionNet book amount745,6091,807,41339,707204,9722,797,701Year ended 31 December 2006745,6091,807,41339,707204,9722,797,701Opening net book value4,7902,3208,380603,561619,051Additions160,794270,160177(431,131)-TransfersDisposal of subsidiaries(28,078)(39,645)(908)(756)(69,387)Disposals(1,797)(9,739)(590)-(12,126)Depreciation charge (Note 9)(44,534)(181,029)(11,287)-(236,850)Balance at 31 December 2006836,7841,849,48035,479376,6463,098,389At 31 December 2006Cost996,4472,617,50287,512376,6464,078,107Accumulated depreciation andimpairment provision(159,663)(768,022)(52,033)-(979,718)				Electronic
	Net book amount	836,784	1,849,480	35,479	376,646	3,098,389

As of 31 December 2006, bank borrowings amounted to RMB 61,000,000 (2005: RMB 60,000,000) are secured on equipments for the value of RMB 156,367,000 (2005: RMB 142,810,000).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

17 Land use rights

	2006	2005
At 1 January
Cost	174,596	174,062
Accumulated amortisation	(40,480)	(33,516)
Net book amount	134,116	140,546
Year ended 31 December
Opening net book amount	134,116	140,546
Additions	96	534
Disposal of subsidiaries	(972)	-
Amortisation charge (Note 9)	(6,575)	(6,964)
Closing net book amount	126,665	134,116
At 31 December
Cost	172,478	174,596
Accumulated amortisation	(45,813)	(40,480)
Net book amount	126,665	134,116

Bank borrowings amounted to RMB 85,000,000 (2005: RMB 92,350,000) are secured on land use rights for the value of RMB 38,391,000 (2005: RMB 39,831,000).

18 Intangible assets

		Electricity	Water use	Computer	Trademark
	Goodwill	use rights	rights	software	and patent	Total
At 1 January 2005
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
Year ended 31 December 2005
Opening net book amount	15,855	6,328	6,524	99	7,200	36,006
Additions	-	-	-	-	3,500	3,500
Amortisation charge (Note 9)	-	(1,191)	(1,565)	(13)	(3,181)	(5,950)
Closing net book amount	15,855	5,137	4,959	86	7,519	33,556
At 31 December 2005
Cost	15,855	19,187	16,335	124	13,850	65,351
Accumulated amortisation	-	(14,050)	(11,376)	(38)	(6,331)	(31,795)
Net book amount	15,855	5,137	4,959	86	7,519	33,556

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

18 Intangible assets (continued)

		Electricity	Water use	Computer	Trademark
	Goodwill	use rights	rights	software	and patent	Total
Year ended 31 December 2006
Opening net book amount	15,855	5,137	4,959	86	7,519	33,556
Additions	-	-	2,090	-	3,195	5,285
Disposal of subsidiaries	-	(369)	-	-	-	(369)
Amortisation charge (Note 9)	-	(4,768)	(6,769)	(86)	(4,117)	(15,740)
Net book amount	15,855	-	280	-	6,597	22,732
At 31 December 2006
Cost	15,855	19,187	18,425	124	17,045	70,636
Accumulated amortisation	-	(19,187)	(18,145)	(124)	(10,448)	(47,904)
Net book amount	15,855	-	280	-	6,597	22,732

Impairment tests for goodwill

Goodwill is allocated to the Group's cash-generating unit (CGU) which has been identified as acquiree, Zichuan Changmin Thermal Power 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 2007. 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	7%
Growth rate	6%
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 People's Bank of China for the same maturity of five years.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

19 Deferred income tax

The deferred income tax is calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary difference:

	2006	2005
Deferred income tax assets:
- Deferred income tax assets to be recovered
after more than 12 months		-
- Deferred income tax assets to be recovered
within 12 months		-
		-

The movement on the deferred income tax assets is as follows:

	2006	2005
Beginning of the year	-	-
Credit to income statement (Note 12):
- Provision for impairment of receivables	4,338	-
- Provision for impairment of inventories	1,753	-
- Provision for impairment losses of property, plant
and equipment	1,398	-
- Others	446	-
End of the year	7,935	-

20 Available-for-sale financial assets

	2006	2005
Balance at 1 January and 31 December	215	215

Available-for-sale financial assets 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 underlying fair value of these investment is not less than their carrying value as at 31 December 2006 and the investment is classified as non-current assets as it is not expected to be realized within twelve months of the balance sheet date.

There were no disposals or impairment provisions on available-for-sale financial assets in 2006 or 2005.

21 Inventories

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

	2006	2005
Raw materials	323,019	367,869
Work in progress	139,068	103,557
Finished goods	344,322	338,018
	806,409	809,444

The cost of inventories recognised as expense and included in 'cost of sales' amounted to RMB 1,639,810,000 (2005: RMB 1,154,351,000).

Bank borrowings amounted to RMB 65,000,000 (2005: RMB 10,000,000) are secured on raw materials for the value of RMB 92,000,000 (2005: RMB 29,997,000).

In 2006, the Group has recognised an inventory provision of RMB 14,609,000 (2005: RMB 186,000).

22 Trade and other receivables

	2006	2005
Trade receivables	119,923	115,552
Less: provision for impairment of receivables	(5,996)	(5,780)
Trade receivables-net	113,927	109,772
Other receivables	151,749	110,687
Less: provision for impairment of receivables	(7,388)	(12,102)
Other receivables-net	144,361	98,585
Notes receivable (a)	120,658	114,581
VAT tax refund receivable	1,006	3,978
Prepayments (b)	120,747	86,567
Loans to third parties	100,000	-
	342,411	205,126
	600,699	413,483

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

The carrying amounts of receivables approximate their fair values.

22 Trade and other receivables (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

Movements on the provision for impairment of receivables are as follows:

	2006	2005
At 1 January	17,882	13,196
Provision/(reversal) for receivables impairment	(4,498)	4,686
At 31 December	13,384	17,882

23 Derivative financial instruments

		2006	2005
	Assets	Liabilities	Assets	Liabilities
Forward foreign exchange contracts-held
for-trading	3,054	1,593	-	-
Less: Non-current portion:	-	-	-	-
Current portion	3,054	1,593	-	-

Trading derivatives are classified as a current asset or liability. The full fair value of a hedging derivative is classified as non-current asset or liability if the remaining maturity of the hedged items is more than 12 months and as a current asset or liability if the maturity of the hedge item is less than 12 months.

The notional principal amounts of the outstanding forward foreign exchange contract as of 31 December 2006 were USD 152,500,000 and Japanese Yen 1,154,650,000(2005: Nil).

24 Cash and cash equivalents

	2006	2005
Cash at bank and in handShort term bank deposits	267,172900	192,361500
	268,072	192,861

25 Restricted deposits

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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

	2006	2005
Number of shares, registered	422,432,000	422,432,0
Registered, issued and fully paid ordinary shares ofRMB 1.00 each
(a) Restricted listed
- Domestic legal person shares	59,563
- Foreign legal person shares	59,116
- Others	669
(b) Unlisted
- Domestic legal person shares	-	59,11
- Foreign legal person shares	-
- Others	-
(b) Listed
- A shares	140,844	141,59
- B shares	162,240	1
Total	422,432	4

Pursuant to the share reform notices issued by the Company in May 2006, Zibo Lucheng textile Investment Co.,Ltd.("Lucheng") offered 0.7 Domestic shares of the Company to each shareholder holding every 10 listed A shares of the Company as a consideration for the agreement.

In 2006, Lucheng increased its additional shares of the Company by cash payment. As of 31 December 2006, Lucheng holds the totalling of 59,563,000 shares of the Company.

27 Reserves

(a) Capital reserve

In accordance with the Company's articles of association, the Company shall record the followings as capital reserve: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the articles of association and relevant regulations in the PRC. Capital reserve may be utilised to offset prior years' losses or to increase the Company's share capital.

(b) Statutory reserves

In accordance with the Company Law of the PRC and the Company's articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years' losses) to the statutory common reserve fund until the balance of fund reaches 50% of the Company's share capital, and thereafter any further appropriation is optional. The fund can be utilised to offset prior years' losses or to increase the share capital. However, such statutory common reserve fund shall be maintained at a minimum of 25% of share capital after such issuance.

27 Reserves (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

(b) Statutory reserves (continued)

In accordance with the revised Company Law of the PRC and the Company's new articles of association, the Company ceased appropriating the net profit to the public welfare fund. This resolution was approved by the General meeting in June 2006. According to the Notice "Cai Qi [2006] 67"issued by the Ministry of Finance, the balance of public welfare fund at 31 December 2005 has been transferred to statutory common reserve fund.

For the year ended 31 December 2006, the board of directors of the Company proposed that 10% (2005: 10% to Statutory common reserve fund and 5% to public welfare fund) of the Company's net profit as reported in the statutory accounts be appropriated to statutory common reserve fund which totalling to approximately RMB34,899,000 (2005: RMB33,128,000 to statutory common reserve fund and RMB 16,564,000 to public welfare fund respectively). The resolution is subject to the approval by the shareholders in the coming Annual General Meeting.

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.

28 Borrowings

	2006	2005
Current
Bank borrowings – secured (a)	342,749	337,147
Bank borrowings – unsecured	642,017	1,017,013
Debentures	600,000	-
Commercial bills discounted to banks	170,265	8,535
	1,755,031	1,362,695
Non-current
Bank borrowings – secured (a)	91,000	188,791
Bank borrowings – unsecured	304,928	295,174
	395,928	483,965
Total borrowings	2,150,959	1,846,660

(a) As of 31 December 2006, bank borrowings amounted to RMB 262,749,000 (2005: RMB 363,588,000) of the Group's consolidated subsidiaries are secured by the Company. Other bank borrowings are secured over the equipments, land use rights and inventories of the Group as disclosed in Note 16, Note 17 and Note 21.

The weighted average effective interest rates of the borrowings at the balance sheet dates are as follows:

	2006	2005
Bank borrowings	6.22%	5.33%
Debentures	3.38%	-
Commercial bills discounted to banks	3.14%	2.93%

28 Borrowings (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

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

	Fair values
2006	2005
395,518	482,624

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:

	2006	2005
Between 1 and 2 years	94,514	417,965
Between 2 and 5 years	301,414	66,000
	395,928	483,965

29 Deferred income

	2006	2005
Balance at 1 January	4,417	5,411
Tax credit arising from purchase of domestically
manufactured machinery and equipment	11,660	-
Amortisation charge	(4,611)	(994)
Balance at 31 December	11,466	4,417

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.

30 Trade and other payables

	2006	2005
Notes payable (a)	174,193	118,586
Trade payables	225,952	275,337
Advances from customers	26,759	29,067
Payroll and welfare payables	133,625	91,944
Dividend payables	448	449
Taxes other than income taxes payable	1,406	(21,133)
Accrued expenses	3,562	11,215
Other payables	109,273	113,609
	501,025	500,488
	675,218	619,074

30 Trade and other payables (continued)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

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

31 Cash generated from operations

	2006	2005
Profit for the year	361,761	336,657
Adjustments for:
Income Tax (Note 12)	45,326	50,346
Depreciation (Note 16)	236,850	203,768
Amortisation of land use rights (Note 17)	6,575	6,964
Amortisation of intangible assets (Note 18)	15,740	5,950
Impairment charge of property, plant and equipment	-	554
Loss on disposal of property, plant and equipment	3,936	911
Loss on disposal of subsidiaries (Note 32)	1,170	-
Provision of inventory provision	14,609	186
Reversal of provision for investment impairment	-	(160)
Provision/(Reversal) of doubtful debts provision (Note 22)	(4,498)	4,686
Fair value gains on derivative financial instruments (Note 8)	(1,461)	-
Interest expenses (Note 10)	108,218	98,172
Interest income (Note 7, Note 10)	(8,721)	(3,338)
Amortisation of deferred income (Note 29)	(4,611)	(994)
Changes in working capital
Inventories	(24,347)	(211,639)
Receivables and prepayments	(102,747)	(44,895)
Restricted deposits (Note 25)	(33,994)	35,936
Trade and other payables	85,015	84,081
Cash generated from operations	698,821	567,185
In the cash flow statement, proceeds from sale of property,plant and equipment comprise:	2006	2005
Net book amount (Note 16)	12,126	4,982
Loss on disposal of property, plant and equipment (Note 9)	(3,936)	(911)
Proceeds from disposal of property, plant and equipment	8,190	4,071

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

32 Disposal of subsidiaries

In June 2006, the Group disposed 99.62% shareholding of Zibo Liming Water Purification Co., Ltd. to Zibo Lucheng Textile Investment Co.,Ltd.(Note 33).

In October 2006, the Group disposed 65% shareholding of Dongying Luxin Textile Co., Ltd. to Dongying City Tianxin Woven Co., Ltd.(Note 33).

	2006	2005
Non-current assets	70,728	-
Current assets	65,878	-
Total assets	136,606	-
Total liabilities	(13,579)	-
Minority interests	(36,876)	-
Net assets sold	86,151	-
Proceeds received from sales	68,097	-
Proceeds receivable from sales	16,884	-
Total consideration	84,981	-
Loss on disposal of subsidiaries	1,170	-
The net cash inflow from sale is determined as follows:
Proceeds received from sales	68,097	-
Less: cash and cash equivalents in subsidiaries sold	(19,647)	-
Net cash received from sale of subsidiaries	48,450	-

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

33 Related party transactions

The Company is controlled by Zibo Lucheng Textile Investment Co.,Ltd.("Lucheng")that incorporated in PRC. Lucheng owns 14.1% 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:

Related party	Relationship
Dongying City Tianxin Woven Co., Ltd. ("Tianxin")	Minority shareholder of Dongying LuxinTextile Co., Ltd. ("Dongying Luxin"), asubsidiary of the Company (Note 34)
TAL Apparel Ltd. ("TAL")	MinorityshareholderofLufengWeaving & Dyeing Co., Ltd. ("Lufeng"),a subsidiary of the Company (Note 34)

(a) Transactions and year-end balances between the Group and Lucheng

(1) Sales of goods

	2006	2005
Slow-moving and scraped fabric and materials	186	357
Gasoline	366	-
Cotton yarn	313	91
	865	448

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

(2) Purchases of goods

	2006	2005
Fabric and fragmentary cloths	820	472
Cotton	12,046	5,438
Diesel oil	337	-
Processing fee	572	347
	13,775	6,257

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(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

33 Related party transactions (continued)

(a) Transactions and year-end balances between the Group and Lucheng (continued)

(3) Lease agreements

In January 2006, 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 122,000 and RMB 44,000 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 29,000 for the land and gasoline storage facilities constructed on it. On 12 August 2006, the Company renewed the agreement with Lucheng, with monthly lease payments of RMB 35,000.

In January 2006, Zibo Luqun Textile Co., Ltd ("Luqun"), a subsidiary of the company (Note 34) signed a lease agreement with Lucheng for 27 equipments, valuing RMB 20,067,299. The two parties agreed to renew the lease contract annually, with monthly lease payments to Lucheng of RMB 289,857. Overdue payment would be charged interest at bank loan rate.

The directors believe that these leases were carried out on commercial terms and conditions and at market prices. Lease payments in year 2006 amounted to RMB 5,836,000 (2005: RMB 5,811,000).

(4) Disposal of shareholding of Zibo Liming Water Purification Co.,Ltd.("Limin")

In June 2006, the Group disposed 99.62% shareholding of Limin to Lucheng. The transaction has been disclosed in Note 32.

(5) Acquisition of shareholding of Luqun

In December 2006, the Group acquired 10% shareholding of Luqun from Lucheng. The cash paid for acquisition is RMB 20,387,000. The acquisition price is based on the valuation result on net assets of Luqun, which is RMB 203,866,000.

(6) Year-end balances arising from sales/purchases

	2006	2005
Other receivables	-	5
Notes payable	1,921	1,913
Trade payables	2,152	40,685
Other payables	3	4,285

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

33 Related party transactions (continued)

(b) Transactions and year-end balances between Dongying Luxin and Tianxin

(1) Sales of goods

	2006	2005
Cotton yarns related products	1,392	2,060

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

(2) Purchases of goods and services

	Basis	2006	2005
Cotton yarns related raw materialsUtilities	Market priceCost plus 10%	7853,391	3,2868,175
		4,176	11,461

(3) Purchases 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 2006 approximated RMB 1,415,170 (2005: RMB 1,887,000).

(4) Disposal of shareholding of Dongying Luxin Woven Co., Ltd.

In October 2006, the Group disposed 65% of the share capital of Dongying Luxin Woven Co., Ltd. to Dongying City Tianxin Woven Co., Ltd. The transaction has been disclosed in Note 32.

(5) Year-end balances arising from purchases

		2006	2005
	Other receivables	16,884	-
	Prepayments	-	1,086
		16,884	1,086
(c)	Transactions between Lufeng and TAL
	(1)Sales of goods
		2006	2005
	Fabric	32,683	17,209

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(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

33 Related party transactions (continued)

(c) Transactions between Lufeng and TAL (continued)

(2) Year-end balances arising from sales of goods

	2006	2005
Trade receivables	2,419	8,740

(d) Directors and supervisory committee members' remuneration

In 2006, the total remuneration of the directors and the supervisory committee members amounted to RMB 4,774,000 (2005: RMB 5,256,000). All the remuneration of the directors and the supervisory committee members is short-term benefits.

34 Principal subsidiary undertakings

In 2006, the Group had the following consolidated subsidiaries:

Consolidated subsidiaries

Name of company	Country ofincorporation	Percentage ofequity interestheld		Principal activities
		2006	2005
Dongying Luxin Textile Co.,Ltd.	PRC	-	65%	Manufacture andsales of cotton yarnsrelated products
Beijing Sichuang Adornments Co., Ltd.	PRC	60%	65%	Manufacture andsales of shirts
Beijing Luthai Shirt Co., Ltd.	PRC	60%	60%	Manufacture andsales of textiles andgarment products
Luthai (Hong Kong) Co., Ltd.	Hong KongSAR, PRC	100%	100%	Trading, import andexport of textileproducts
Xinjiang Luthai HarvestCotton Co., Ltd.	PRC	57.01%	52.43%	Manufacture andsales of cotton andcotton yarns
Zibo Luthai HuanzhongPharmaceutical Co., Ltd.	PRC	75%	75%	Manufacture andsales of Chinesetraditional medicine
Zichuan Changmin Thermal PowerCo.,Ltd.	PRC	56.91%	56.91%	Manufacture andsales of electricity.
Zibo Liming Water Purification Co.,Ltd.	PRC	-	99.62%	Process waste water
Zibo Luqun Textile Co.,Ltd.	PRC	100%	90%	Manufacture andsales of yarns
Lufeng Weaving & Dyeing Co.,Ltd.	PRC	75%	75%	Manufacture andsales of dyeingtextile products

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006

(All amounts in RMB thousands unless otherwise stated)

35 Commitments

(a) Capital commitments

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

	2006	2005
Property, plant and equipment	358,120	233,388

(b) Operating lease commitments

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

	2006	2005
Not later than 1 year	14,675	7,743
Later than 1 year and not later than 5 years	20,354	8,725
Later than 5 years	11,877	15,878
	46,906	32,346

36 Events after the balance sheet date

At the meeting of the Board of Directors on 26 March 2007, a cash dividend in respect of 2006 of RMB0.3718 per share, amounting to a total cash dividend of RMB157,060,366 was to be proposed. In addition, by appropriation of the Company's capital reserve, the Company declared a bonus share dividend of 1 share (2005: Nil) per share, totalling bonus shares of 422,432,400 shares (2005: Nil). The profit appropriations need to be approved by the Annual General Meeting. These financial statements do not reflect this dividend payable.

37 Approval of financial statements

The financial statements were authorised for issue by the Board of Directors on 26 March 2007.