THE CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Nanjing Panda Electronics Company Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

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

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南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited

(a joint stock limited company incorporated in the People’s Republic of China)

(Stock Code: 0553)

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

A letter from the board of directors of the Company is set out on pages 1 to 17 of this circular. A letter from the Independent Board Committee (as defined herein) containing its advice to the Independent Shareholders (as defined herein) is set out on pages 18 to 19 of this circular. A letter of advice from VXL Financial Services Limited containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 20 to 32 of this circular.

A notice convening the extraordinary general meeting of the Company to be held at Conference Room, Workers’ Union, 301 Zhong Shan Road East, Nanjing, the People’s Republic of China on 17 August 2006 at 9:00 a.m. is set out on pages 182 to 184 of this circular. Whether or not you are able to attend the extraordinary general meeting, please complete and return the accompanying form of proxy in accordance with the instructions printed hereon to the office of the Company as soon as possible and in any event not less than 24 hours before the time of the extraordinary general meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting at the extraordinary general meeting in person should you so wish.

30 June 2006

	Pages
Definitions ....................................................................................................................................................	ii
Letter from the Board .................................................................................................................................	1
Letter from the Independent Board Committee .......................................................................................	18
Letter from the Independent Financial Adviser .......................................................................................	20
Appendix I – Financial information of the Group ...............................................................................	33
Appendix II – Financial information of Hua Fei Group .......................................................................	101
Appendix III – Pro forma financial information of the Enlarged Group .............................................	151
Appendix IV – Property valuation of Hua Fei Group ............................................................................	158
Appendix V – Machinery and equipment valuation of Hua Fei Group ..............................................	170
Appendix VI – General Information .........................................................................................................	174
Notice of EGM ............................................................................................................................................	182

— i —

DEFINITIONS

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

“Accountants’ Report” The accountants’ report containing the financial information of Hua Fei as at 31 December 2003, 2004 and 2005 pursuant to the requirements of Chapter 4 of the Listing Rules “Accountants” Morison Heng, Chartered Accountants, Certified Public Accountants “Articles of Association” The articles of association of the Company “Assignment of The agreement (協議書) dated 9 March 2005 entered into by the Company, Debt Agreement” Panda Mobile and Jiangsu Investment Management “Assignment of Debt” The assignment of Debt pursuant to the Assignment of Debt Agreement and the Further Assignment of Debt Agreement

“Board” the board of directors of the Company

“Company” Nanjing Panda Electronics Company Limited (南京熊貓電子股份有限公司), a company incorporated in PRC with limited liability with its H shares listed on the main board of the Stock Exchange and with its A shares listed on Shanghai Stock Exchange “Debt” RMB500 million being the debt owed by Panda Mobile to the Company as at 9 March 2005 and the interest incurred thereon “Directors” the directors of the Company “EGM” The extraordinary general meeting to be held on 17 August 2006 of the Company for the approval of the Assignment of Debt and the Acquisition, the notice of which will be dispatched to the Shareholders of the Company together with the circular in relation to the Assignment of Debt and the Transfer “Enlarged Group” The Group together with Hua Fei “Equity Transfer Agreement” The equity transfer agreement (出資轉讓協議) dated 8 May 2006 entered into by the Company and Jiangsu International Trust, pursuant to which Jiangsu International Trust would transfer the JIT Shares to the Company in satisfaction of the Debt “Further Assignment of Debt” The agreement (債務轉移協議) dated 8 May 2006 entered into by the Company, Jiangsu Investment Management and Jiangsu International Trust, pursuant to which the Company agreed to the transfer of the Debt repayable by Jiangsu Investment Management to Jiangsu International Trust and Jiangsu International Trust agreed to repay the Debt to the Company.

— ii —

DEFINITIONS

“Guo Xin Group” Jiangsu Provincial Guo Xin Asset Management Group Ltd. (江蘇省國信資產管理集團有限公司), the controlling shareholder of Jiangsu Investment Management and Jiangsu International Trust and the third largest shareholder of Panda Group, holding 21.59% of the total shares of Panda Group. “Group” the Company and its subsidiaries “HK$” or “HKD” Hong Kong Dollars, the lawful currency of Hong Kong “Hua Fei Group” Hua Fei and its subsidiaries “Hua Fei” Hua Fei Colour Display Systems Company Limited （華飛彩色顯示系統有限公司）, details of which are set out in this circular “Hua Pu” Nanjing Hua Pu Electronics Company Limited（南京華浦電子有限公司）, a sino-foreign equity joint venture in PRC “IFA” or “Independent VXL Financial Services Limited, the independent financial adviser to the Financial Adviser” Independent Board Committee and the Independent Shareholders in relation to the Assignment of Debt and the Transfer and a licensed corporation by the Securities and Futures Commission to conduct type 6 (advising on corporate finance) regulated activities under the SFO “Independent Shareholders” the Shareholders who are not connected to Mr. Ma Zi Ping or his associates and are not required to abstain from voting at EGM to approve the connected transaction, namely the Assignment of Debt and the Transfer “Jiangsu International Trust” Jiangsu International Trust & Investment Corporation Limited (江蘇省國際信託投資有限責任公司), details of which are set out in the paragraph headed “The parties to the Assignment of Debt Agreement, The Further Assignment Of Debt and The Equity Transfer Agreement” of this circular “Jiangsu Investment Jiangsu Province Investment Management Company Limited (江蘇省投資 Management” 管理有限責任公司), details of which are set out in the paragraph headed “The parties to the Assignment of Debt Agreement, The Further Assignment Of Debt and The Equity Transfer Agreement” of this circular “JIT Shares” 25% equity interest in Hua Fei originally held by Jiangsu International Trust before the Transfer “Jin Hui” Nanjing Jin Hui Industry Co., Ltd. （南京錦輝實業有限公司）, a limited liability company incorporated in PRC

— iii —

DEFINITIONS

“Judicial Forceful Execution” The judicial forceful execution by the People’s Court of Xuan Wu Qu of Nanjing City on 10 March 2005 on 51% of equity interests in Panda Mobile and 95% of equity interests in Panda Communication Development Co., Ltd. held by the Company for the repayment of the debt of RMB120 million and interests accrued thereon due from the Company to Nanjing Wei Te Investment Management Company Limited (南京唯特投資管理有限責任公司), details of which were stated in the Company’s announcement dated 9 September 2005.
“Latest Practicable Date” 7 June 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information for inclusion in this circular

“Listing Rules” The rules governing the listing of securities on the Stock Exchange of Hong Kong Ltd.

“Panda Group” Panda Electronic Group Company Limited (熊貓電子集團有限公司), being the largest shareholder of the Company and holds 54.2% of the shares of the Company.
“Panda Mobile” Nanjing Panda Mobile Communication Equipment Co., Ltd. (南京熊貓移動通信設備有限公司), Panda Mobile was a non-wholly owned subsidiary of the Company and was held by the Company (as to 51%) and Mr. Ma Zi Ping (as to 49%) until the Judicial Forceful Execution when the said 51% equity interests in Panda Mobile was ruled to be transferred to Nanjing Wei Te Investment Management Company Limited (南京唯特投資管理有限責任公司)
“PRC IFA” Central China Securities Co., Limited (中原證券股份有限公司), the PRC independent financial adviser appointed by the Company in respect of the Transfer pursuant to the requirement of Shanghai Stock Exchange
“PRC” The People’s Republic of China, for the purpose of this circular, excluding Hong Kong SAR, Macau SAR and Taiwan
“RMB” Renminbi, the lawful currency of PRC “SFO” Securities and Futures Ordinance, Chapter 571 of the laws of Hong Kong “Shareholders” the shareholders of the Company “Stock Exchange” The Stock Exchange of Hong Kong Ltd. “Transfer” The transfer of JIT Shares by Jiangsu International Trust to the Company pursuant to the Equity Transfer Agreement

— iv —

DEFINITIONS

“US$” or “USD”	US dollars, the lawful currency of United States
“Valuation Reports”	The property valuation report and the machine and equipment valuation
	report dated 30 June 2006 of Hua Fei
“Valuer”	Vigers Appraisal & Consulting Ltd.
“%”	per cent.

— v —

LETTER FROM THE BOARD

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南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited

(a joint stock limited company incorporated in the People’s Republic of China)

(Stock Code: 0553)

Executive Directors Mr. Li Anjian (Chairman, General Manager) Mr. Zhang Zuzhong

Non-executive Directors Mr. Xu Guofei (Vice-chairman) Ms. Liu Ailian Mr. Zhu Lifeng Mr. Shi Qiusheng Independent Non-executive Directors Ms. Wan Hui Mr. Cai Lianglin Mr. Ma Chung Lai, Lawrence.

Registered Address: Floor 1-2 Block 5, North Wing Nanjing High and New Technology Development Zone Nanjing The PRC Office Address: 301 Zhong Shan Road East Nanjing The PRC Postal Code: 210002

30 June 2006

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

INTRODUCTION

Pursuant to the announcement of the Company dated 11 May 2006, the Board announced that the Company entered into a Further Assignment of Debt with Jiangsu International Trust & Investment Corporation Limited (江蘇省國際信託投資有限責任公司) and Jiangsu Province Investment Management Company Limited （江蘇省投資管理有限責任公司), pursuant to which Jiangsu International Trust will assume the debt of RMB 500 million owed to the Company and the interest incurred thereon. The Company also wishes to announce that on 8 May 2006, the Company entered into an Equity Transfer Agreement with Jiangsu International Trust pursuant to which Jiangsu International Trust would transfer 25% equity interest in Hua Fei to the Company in satisfaction of the Debt.

— 1 —

LETTER FROM THE BOARD

The Transfer constitutes a very substantial acquisition and connected transaction under the Listing Rules. The Assignment of Debt Agreement, the Further Assignment of Debt and Equity Transfer Agreement as a whole constitute connected transactions which are subject to Independent Shareholders’ approval at EGM by poll.

The purpose of this circular is to provide you with further details regarding the following:

(a) details of the Assignment of Debt and the Transfer;
(b) the opinion of the IFA to the Independent Shareholders and the Independent Board Committee in respect of the terms of the Assignment of Debt and the Transfer;
(c) the recommendation of the Independent Board Committee in respect of the terms of the Assignment of Debt and the Transfer;
(d) the valuation of the property and the machine and equipment of Hua Fei as at 31 March 2006 and the Valuation Reports;
(e) the financial information of the Group and Hua Fei, as well as pro forma financial information on the Enlarged Group;
(f) a notice of the EGM to consider and, if thought fit, to approve the Assignment of Debt and the Transfer and other matters stated therein.

Your attention is hereby drawn to pages 182-184 of this circular where you will find a notice of the EGM.

— 2 —

LETTER FROM THE BOARD

THE ASSIGNMENT OF DEBT AND THE TRANSFER

A. BACKGROUND AND GENERAL NATURE OF ASSIGNMENT OF DEBT AND THE TRANSFER

On 9 March 2005, the Company entered into the Assignment of Debt Agreement with Panda Mobile and Jiangsu Investment Management, pursuant to which the Company agreed to the transfer of the RMB500 million debt owing from Panda Mobile as at 9 March 2005 to Jiangsu Investment Management and Jiangsu Investment Management agreed to repay the debt of RMB500 million to the Company.
After the completion of the Assignment of Debt Agreement, the creditor/debtor relationship between Panda Mobile and the Company would cease and creditor/debtor relationship would be created between Jiangsu Investment Management and the Company.
The Assignment of Debt Agreement shall come into effect with the approval of the Company’s board of directors and Independent Shareholders at a general meeting of the Company.
Ever since the signing of the Assignment of Debt Agreement, the Company has proactively liaised with Jiangsu Investment Management for the detailed repayment terms of the Debt. It was recently proposed that 25% equity interest in Hua Fei held by Jiangsu International Trust would be transferred to the Company in satisfaction of the whole of the Debt. Therefore, on 8 May 2006, the Company entered into a Further Assignment of Debt and the Equity Transfer Agreement.
Pursuant to the Further Assignment of Debt and the Equity Transfer Agreement, Jiangsu International Trust will assume the Debt and will transfer 25% equity interest of Hua Fei from Jiangsu International Trust to the Company in satisfaction of the Debt.

— 3 —

LETTER FROM THE BOARD

B. MAJOR TERMS OF THE AGREEMENTS

1. THE FURTHER ASSIGNMENT OF DEBT

Date: 8 May 2006

Parties:

Terms:

the Company, Jiangsu International Trust and Jiangsu Investment Management The Company agreed to the transfer of the Debt repayable by Jiangsu Investment Management to Jiangsu International Trust and Jiangsu International Trust agreed to assume and repay the Debt to the Company.

After the completion of Further Assignment of Debt, the creditor/ debtor relationship between Jiangsu Investment Management and the Company would cease and creditor/debtor relationship would be created between Jiangsu International Trust and the Company.

Condition Precedent:

Completion of the Further Assignment of Debt is conditional upon the issuance of the Accountants’ Report and the Valuation Reports the contents of which are satisfactory to the Company; the coming into effect of the Equity Transfer Agreement and the approval of the Independent Shareholders of the Company in EGM in accordance with the Listing Rules.

2. THE EQUITY TRANSFER AGREEMENT

Date: 8 May 2006

Parties: The Company and Jiangsu International Trust

Terms:

Jiangsu International Trust agreed to the transfer of the JIT Shares to the Company in satisfaction of the whole of the Debt payable by Jiangsu International Trust.

— 4 —

LETTER FROM THE BOARD

Consideration and basis of determination:

The consideration for the transfer of the JIT Shares is the Debt being a total sum of RMB500 million together with interest thereon, totaling RMB522,487,000.

The consideration was determined after arm’s length negotiation among the parties which took into account the estimation of the value of JIT Shares as at 31 December 2005, namely RMB522,487,000, by the Accountants and the Valuer. The Valuer is an independent third party not connected with the Company.

The estimation of the value of JIT Shares was based on the draft accountants’ report containing the financial information of Hua Fei as at 31 December 2005 and the Valuation Reports concerning the property, plant and equipment of Hua Fei.

Condition Precedent:

The Equity Transfer Agreement is effective and conditional upon the issuance of the Accountants’ Report and the Valuation Reports the contents of which are satisfactory to the Company, the approval from the Independent Shareholders of the Company in EGM in accordance with the Listing Rules, the approval of the board of Hua Fei and the relevant PRC approving authority.

The arrangement of Within thirty days after the coming into effect of the Equity registration of the Transfer Agreement, registration of the transfer of the JIT Shares Transfer of JIT Shares: should be effected.

C. INFORMATION ON HUA FEI

Hua Fei is a sino-foreign equity joint venture incorporated in the PRC in 1988 with a registered share capital of USD289,120,000. Its principal business activities are development, design and manufacture of colour picture tubes (彩色顯像管), colour monitor tubes (彩色監視管) and other colour display system products (彩色顯示系統產品), components and materials and related electronic products, as well as sale of self-produced products (自產產品). The self-produced products relate to electronic products and the brand names of such products are 「華飛牌」 and 「樂金•飛利浦」, translated respectively as Hua Fei Brand and LG. Philips.

— 5 —

LETTER FROM THE BOARD

Apart from Jiangsu International Trust, Hua Fei has three other shareholders, namely: LG. Philips Displays (China) Limited (樂金•飛利浦顯示件中國有限公司) which holds 55% shareholding of Hua Fei, Nanjing Hua Dong Electronics Information Technology Holdings Limited (南京華東電子信息科技股份有限公司) which holds 17.79% shareholding of Hua Fei and Nanjing Hua Dong Electronics Group Limited (南京華東電子集團有限公司) which holds 2.21% shareholding of Hua Fei. These three other shareholders have given their consents to the Transfer and have agreed not to exercise their respective pre-emptive rights.

Since the incorporation of Hua Fei in 1988, it was a major corporation in the sale and manufacturing of colour picture tubes and held a leading position in relevant businesses in PRC. According to the information from the Ministry of Information Industry of PRC, Hua Fei took the fifth position in the PRC market in respect of production volume of colour picture tubes in 2004 (2004年彩色顯像管產量在全國居第五位), the sixth position in the PRC market in respect of production volume of colour tubes in 2005 (2005年彩管產量在全國居第六位), the fourth position in the PRC market in respect of production volume of colour tubes in the first quarter of 2006 (2006年第一季度彩管產量在全國居第四位). Hua Fei is renowned as “Double Wellness” enterprise (《雙優》企業) by China Association of Enterprises with Foreign Investment. (中國外商投資企業協會). In 2004, the colour picture tubes of Hua Fei (華飛牌彩色顯像管) were renowned as famous brand of Jiangsu Province (江蘇省名牌產品) by Jiangsu Promotion Commission for Famous Brand strategy. (江蘇省品牌戰略推進委員會 ). In April 2006, Hua Fei is renowned as foreign investment advanced technology enterprise (外商投資先進技術企業) by Nanjing City Foreign Trade and Economic Cooperation Bureau (南京市對外貿易經濟合作局). In 2005, Hui Fei took the lead to introduce the technology and skills for manufacturing super-slim colour picture tubes and further increase the competitiveness of its products.

MANAGEMENT DISCUSSION AND ANALYSIS ON HUA FEI

The audited financial information of Hua Fei Group prepared under the Hong Kong Financial Reporting Standards and the Hong Kong Accounting Standards for the three financial years ended 31 December immediately preceding the Transfer is as follows:

— 6 —

LETTER FROM THE BOARD

The total assets / net asset value of Hua Fei Group for the three financial years immediately preceding the Transfer were:

	31 December 2003	31 December 2004	31 December 2005
	(RMB’000)	(RMB’000)	(RMB’000)
Total assets	5,201,473	5,143,594	4,534,734
Net assets	2,024,806	2,299,578	2,089,948

The turnover, net profits/(loss) (before and after taxation) of Hua Fei Group for the three financial years immediately preceding the Transfer were:

Turnover Net profit before taxation Deduct: Impairment of goodwill Net profit/(loss) before taxation Taxation Net profit/(loss) after taxation Gearing ratio	2003 (RMB’000) 4,260,638 171,223 — 171,223 (12,524) 158,699 0.592	2004 (RMB’000) 4,218,209 283,545 — 283,545 (12,594) 270,951 0.319	2005 (RMB’000) 3,649,473 116,648 (1,056,484) (939,836) (8,814) (948,650) 0.072

The gearing ratio of the Group was calculated by dividing total external borrowings over shareholders’ equity.

With the rapid development of flat panel television technology like Plasma Display Panel（等離子顯示屏）television and Liquid Crystal Display （液晶顯示）television in recent three years, market competition is increasingly intensified and Cathode Radial Tube （陰極射線管）(“CRT”) television has been affected with degrading price. However, CRT television will still be favoured by a majority of common consumers by virtue of its competitive edges, e.g. competitive price, long useful life and reliable quality and there is the potential for the reduction of production cost of picture tube. Thus for a rather long period in coming years, CRT television will continue to be mainstream of television markets in PRC and many overseas countries.

— 7 —

LETTER FROM THE BOARD

Facing the above conditions of television market, Hua Fei have been proactively developing new products and reducing costs in the recent three years, aiming to enhance gross profit margin of products and speed up development of advanced technology for super-slim picture tube, thus strengthening product competitive edge and securing satisfactory profit in spite of severe competition and reducing prices. With bulk production of new super-slim picture tube products by Hua Fei, Hua Fei will further enhance its profitability to maintain healthy growth.

Hua Fei has a solid operating cash-flow status (please see consolidated cash flow statement of Hua Fei’s financial information as set out in Appendix II). In order to cut down financing costs, Hua Fei has repaid a great majority of bank loans in the recent three years, reducing Assets to Debt Ratio (external debt total divided by shareholder’s interests) from 59.2% as of 31 December 2003 to 7.2% as of 31 December 2005, which helps elevate Hua Fei’s profitability.

THE DECREASING TREND IN TERMS OF HUA FEI’S ASSETS, TURNOVER AND PROFIT

Hua Fei’s net assets, turnover and profit were decreasing for three years ended at 31 December 2005.

The decrease of net assets as at 31 December 2005 compared with that of 31 December 2004 is mainly attributable to (see Hua Fei’s consolidated statement of changes on page 106 in the Circular): net asset increased by RMB467,756,000 as a result of share capital increase, net asset increased by RMB489,608,000 as a result of revaluation addition, whereas the loss in 2005 reduced net assets by RMB948,668,000 and shareholder dividends reduced net assets by RMB233,000,000. Consequently, net assets recorded a decrease due to such net asset additions as outrun by decreases. Hua Fei’s share capital growth and loss in 2005 are mainly due to merger of Hua Pu.

Turnover decreased in 2005 compared with 2004, principally owing to price decrease of colour picture tubes under fierce market competition.

The net loss of Hua Fei for 2005 is mainly due to the one-off goodwill impairment of approximately RMB1,056,484,000 arising from the merger of Hua Pu and the acquisition of Jin Hui. The net profit of Hua Fei for 2005 before taxation and the one-off goodwill impairment amounted to approximately RMB116,648,000.

— 8 —

LETTER FROM THE BOARD

The merger of Hua Pu was effected as a result of the commercial consideration of the existing shareholders of Hua Fei. On 31 October 2005 (date of business combination), Hua Pu’s share capital was RMB467,756,000, net liabilities value was RMB578,498,000. As a result of the combination, the share capital of Hua Fei was increased by approximately RMB467,756,000 to satisfy the cost of combination of Hua Pu’s business. The amount of goodwill arising as a result of the merger was approximately RMB1,046,254,000. Since Hua Pu has ceased its business after the merger, the goodwill arising from the merger is to be fully provided for in accordance with the Hong Kong Financial Reporting Standard 3-Business Combination and Hong Kong Accounting Standard 36-Impairment of Assets. The goodwill impairment loss is recognized in the income statement for the year ended 31 December 2005.

The acquisition cost of Jin Hui was RMB68,459,000 and the net asset as at 30 November 2005 (the date of acquisition) was RMB58,229,000. Since Jin Hui did not receive any profit in 2005, provision of impairment of goodwill was made.

Hua Pu was principally engaged in manufacturing display tubes for computer displayers, but the business ceased after the merger.

Jin Hui is principally engaged in supplying metal parts for Hua Fei’s picture tubes.

Hua Fei will continue to develop colour picture tube business, further reduce costs, enhance the quality, develop new products and expand overseas market. Especially, it will take the lead to launch superslim picture tube products in China, so as to further strengthen competitive edge and secure stable growth. Accordingly, the directors believe that Hua Fei will achieve favourable operating results in the future.

D. THE CONSIDERATION FOR THE OBJECT OF THE TRANSACTION AND THE BASIS UPON WHICH THE CONSIDERATION WAS DETERMINED

The consideration for the transfer of the JIT Shares is the Debt being a total sum of RMB500 million together with interest thereon, totaling RMB522,487,000.

The value of JIT Shares valued at RMB522,487,000 was determined after arm’s length negotiation between the Company and Jiangsu International Trust by reference to the audited net assets value of Hua Fei as at 31 December 2005 of RMB2,089,948,000 and also the market value on Hua Fei’s Property Plant and Equipment at RMB2,419,654,000 together with the indicative value on its certain buildings and structure at RMB711,100,000 as at 31 December 2005 by Vigers Appraisal & Consulting Ltd.

— 9 —

LETTER FROM THE BOARD

E. PARTICULARS AND PRINCIPAL BUSINESS ACTIVITIES OF THE PARTIES TO THE ASSIGNMENT OF DEBT AGREEMENT, THE FURTHER ASSIGNMENT OF DEBT AND THE EQUITY TRANSFER AGREEMENT

THE COMPANY

The principal business activities carried on by the Company and its subsidiaries are investment holding and the development, production and sale of satellite communication products, mobile communication, electro-mechanical products and electronic information products.

JIANGSU INTERNATIONAL TRUST

Jiangsu International Trust is mainly engaged in entrusted operation of fund trust business, entrusted operation of trust business of chattels, real estate and other properties, etc. Jiangsu International Trust’s controlling shareholder is Guo Xin Group (江蘇省國信資產管理集團有限公司), the beneficial owner of which is Jiangsu Provincial Government. Guo Xin Group is the third largest shareholder of Panda Group and holds 21.59% of the total shares of Panda Group. Panda Group is the largest shareholder of the Company and holds 54.2% of the shares of the Company.

JIANGSU INVESTMENT MANAGEMENT

Jiangsu Investment Management is mainly engaged in industry investment, investment consulting and domestic trading businesses. At present, it mainly invests in electricity oriented projects and assets and has participated in more than thirty large scale and medium scale electricity projects within and outside Jiangsu Province. Jiangsu Investment Management’s controlling shareholder is also Guo Xin Group.

The Company confirms that, to the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, Jiangsu International Trust and Jiangsu Investment Management and their ultimate beneficial owners are not connected persons of the Company.

— 10 —

LETTER FROM THE BOARD

PANDA MOBILE

Panda Mobile was a non-wholly owned subsidiary of the Company and was held by the Company (as to 51%) and Mr. Ma Zi Ping (as to 49%) until the Judicial Forceful Execution. Since Mr. Ma Zi Ping has been a director and shareholder of Panda Mobile, holding more than 30% shareholding, Panda Mobile was a connected person to the Company. After the Judicial Forceful Execution, there is no shareholding relation between the Company and Panda Mobile.

Panda Mobile’s principal business up to 10 March 2005 was the sale of mobile phones and telecommunication products.

F. THE REASONS FOR THE FURTHER ASSIGNMENT OF DEBT AND THE TRANSFER

Panda Mobile was in financial difficulties and would be unlikely to repay the Debt to the Company. Since Jiangsu Investment Management has a higher credit rating, the Company therefore agreed to the transfer of RMB500 million owed by Panda Mobile to Jiangsu Investment Management.

Ever since the signing of Assignment of Debt Agreement, the Company has proactively liaised with Jiangsu Investment Management to finalize the detailed terms of repayment of the Debt. With the huge support from Jiangsu Provincial Government and Nanjing City Government, it was proposed that the JIT Shares would be transferred to the Company in satisfaction of the whole of the Debt. Therefore, on 8 May 2006, the Company has entered into a Further Assignment of Debt and the Equity Transfer Agreement. Besides Hua Fei, there is no other option available for the repayment of the Debt.

G. BENEFITS OF THE FURTHER ASSIGNMENT OF DEBT AND THE TRANSFER

As advised by the Company’s PRC lawyer, the Assignment of Debt and the Equity Transfer Agreement comply with the requirement of the relevant PRC laws and regulations and the Assignment of Debt Agreement and the Further Assignment of Debt contain no content or terms that are detrimental to the interest of the Company and the Shareholders and are in line with fair and just principles.

With the implementation of the Assignment of Debt Agreement and the Further Assignment of Debt, the creditor/debtor relationship between Panda Mobile and the Company would cease and creditor/ debtor relationship was created between Jiangsu International Trust and the Company.

— 11 —

LETTER FROM THE BOARD

Financial Impact

Upon completion of the Assignment of Debt and the Transfer, the Debt and interests accrued payable to the Company by Panda Mobile will be converted into equity investment in Hua Fei, resulting in a decrease in the Company’s other receivables by RMB500,000,000, an increase in other income by RMB22,487,000 and an increase in long-term equity investment by RMB522,487,000.

Set out in Appendix III to this circular is the Accountants’ Report on unaudited pro forma financial information.

The transfer of the creditor’s right and indebtedness to Jiangsu International Trust is beneficial to the Company as the Company would now be able to recover the Debt as well as broaden its investment income base. The Directors believe that Hua Fei is competitive and that the Transfer of the JIT Shares to the Company is in line with the Company’s strategy to broaden its income base with different investment opportunities of growth potential and balance its exposure to risks in different markets.

The Directors (excluding the independent non-executive Directors, whose opinion is included in the letter from the Independent Board Committee set out on pages 18 to 19 of this circular) believe that the Assignment of Debt Agreement, the Further Assignment of Debt and Equity Transfer Agreement are beneficial to the Company and the terms of the transactions are fair and reasonable and in the interest of the Shareholders as a whole.

After the completion of the Transfer, the Company will be bound by the joint venture agreement （合資經營華飛彩色顯示系統有限公司合同) and its articles of association (公司章程) already entered into between Jiangsu International Trust and the other three shareholders of Hua Fei and all the shareholders of Hua Fei would sign the said joint venture agreement and the said articles of association which would be amended with the Company, instead of Jiangsu International Trust, as a party therein. Up to the date of this circular, there is no capital commitment to Hua Fei by the Company. The future capital commitment to Hua Fei by the Company would be subject to the joint venture agreement and the articles of association of Hua Fei. After the completion of the Transfer, the Company will nominate three directors to the board of Hua Fei and Hua Fei would be accounted for as an investment in associated company of the Company in accordance with the Hong Kong Accounting Standards 28 - Investments in Associates.

The Company confirms that, to the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, these three other shareholders and their ultimate beneficial owners are third parties independent of the Company and are not connected persons of the Company.

— 12 —

LETTER FROM THE BOARD

H. FINANCIAL AND TRADING IMPACT OF THE ENLARGED GROUP

Upon completion of the Assignment of Debt and the Transfer, the Company will be able to recover the underperformed debt owed by Panda Mobile. Moreover, the Company can share Hua Fei’s desirable business results in the industry, thereby increasing investment income and contributing stable income streams to the Company.

Management Analysis of the Group’s operation and development:

The Group’s business results for the latest three financial years are set out as follows:

Turnover Continuing operations Discontinued operations Profit before taxation Continuing operations Discontinued operations Profit for the year	2003 RMB’000 607,368 3,259,430 3,866,798 4,972 157,657 162,629 145,303	2004 RMB’000 664,640 — 664,640 69,047 — 69,047 66,679	2005 RMB’000 850,817 —
			850,817
			100,165 —
			100,165
			96,989

Turnover and profit before taxation from the Group’s continuing operations demonstrated a steady growing momentum for the last three years. The decrease in the Group’s turnover and net profit for 2004 is mainly attributable to the judicial forceful execution on Panda Mobile and Panda Communication. Thereafter, the Group was committed to other continuing operations and maintained a healthy growing momentum.

— 13 —

LETTER FROM THE BOARD

The principal operations of the Group include satellite communication, mobile telecommunication, electromechanical, electronic information products and electronic manufacturing business. With the fast development of national economy, particularly the electronic information industry, the said operations are demonstrating favourable development in the recent three year. The satellite communication business of the Group takes a leading position in China and increased significantly in recent three years. Upon the judicial forceful execution of Panda mobile phone business, the Group has focused on development and manufacturing of some mobile phone for specific purposes, and successfully developed new products such as confidential mobile phone, mobile phone for the blind with greater potential. Electromechanical products and information products of the Group are demonstrating its competitive edge in the industry and a better development. Along with economy globalisation and international industry shift, the Group has put efforts in developing OEM and ODM manufacturing business in three recent three years with a rapid progress. The OEM and ODM manufacturing business is taking shape and will enjoy a promising prospect.

The joint venture Nanjing Ericsson Panda Mobile Communication Equipment Company Limited (ENC) and Beijing Sony Ericsson PUTIAN Mobile Communication Company Limited (BMC), two associates of the Group, have become Ericsson’s significant R&D and manufacturing base in the world. Capturing the opportunities from the accelerating China mobile telecommunication industry in recent three years, ENC and BMC have been speeding up introduction of new technologies and R&D, manufacturing, self-supply and localisation activities and actively exploring market, thus accomplishing continual and rapid growth with a desirable profitability. The start-up of China’s 3G mobile telecommunication construction will bring new opportunities to ENC and BMC for a further leap. Upon completion of the Transfer, the Group will acquire a new important joint venture and expanding source of investment income.

In the future, the Group will proactively continue its businesses including mobile telecommunication, satellite communication, electromechanical and information technology products and electronics manufacturing, keeping penetrating into domestic and overseas markets to foster new income stream for sound development. The Directors are confident in the Group’s prospect.

Mortgage and Pledge

Hua Fei Group’s Buildings with an aggregate net book value of approximately RMB476,965,000 were pledged as security for bank loan of the Hua Fei Group for the total amount of RMB50,000,000 at 31 December 2005. As at the Latest Practicable Date, Hua Fei has no assets under mortgage or pledge. All pledged loan were repaid as at the Latest Practicable Date.

Until the Latest Practicable Date, there is no connected transaction between the Group and Hua Fei Group.

— 14 —

LETTER FROM THE BOARD

I. LISTING RULES IMPLICATION

The Transfer constitutes a very substantial acquisition and connected transaction under the Listing Rules. The Assignment of Debt Agreement, the Further Assignment of Debt and Equity Transfer Agreement are inter-conditional of each others for the reasons stated in section F “The Reasons for the Further Assignment of Debt and the Transfer” on page 11 of the Circular. The Assignment of Debt Agreement, the Further Assignment of Debt and Equity Transfer Agreement as a whole constitute connected transactions which are subject to Independent Shareholders’ approval at EGM by poll.

Any Shareholder with a material interest in the Assignment of Debt and the Transfer and his associates and Mr. Ma Zi Ping and his associates are required to abstain from voting in the EGM regarding the approval of the Assignment of Debt Agreement, the Further Assignment of Debt and Equity Transfer Agreement. To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, no Shareholders are connected to Mr. Ma Zi Ping and his associates or are required to abstain from such voting. Having made all reasonable enquiries, the Company is not aware that there is any voting trust, other agreement, arrangement or understanding being entered into by or binding upon Mr. Ma Zi Ping and his associates in respect of his/ their beneficial interests in the Company.

J. RIGHT TO DEMAND A POLL AT A GENERAL MEETING OF THE COMPANY

Pursuant to the Article 78 of Articles of Association of the Company, unless a poll is demanded by the following persons before or after voting by show of hands, any vote shall be decided by show of hands:

(1) chairman of the meeting;
(2) at least two shareholders or proxies vested with the voting rights;
(3) shareholder or shareholders (or proxy or proxies) who is/are vested with an aggregate of not less than 10% (including 10%) of the voting rights in such meeting.

Unless a poll is demanded, the announcement made by the chairman of the meeting as to the result of the voting by show of hands and the same has been entered into the minute of the meeting shall be the final proof of the result thereof, without any proof of the number of proportion of the vote in favour or against the resolution so passed.

The demand for a poll may be withdrawn by the person(s) making such demand.

— 15 —

LETTER FROM THE BOARD

K. THE REPORT BY THE PRC IFA

The Company has appointed an independent financial advisor in the PRC to advise on the Assignment of Debt Agreement, the Further Assignment of Debt and Equity Transfer Agreement.

According to PRC IFA’s report (中原證券股份有限公司關於南京熊貓電子股份有限公司債權債務轉移與股權轉讓的獨立財務顧問報告) dated 10 May 2006 issued by PRC IFA: the Assignment of Debt and the Transfer are in compliance with the PRC relevant laws, rules and regulations on arm’s length, transparent, fair and just. The consideration of the transactions is fair and reasonable which is not only beneficial to the recovery of the Debt due to Company and the improvement of the Company’s asset quality, but are also helpful for improvement of its performance and future development in the long run. The transactions are in the interests of Company and its Shareholders. The full reproduction of the said PRC IFA’s report is available for inspection at the websites of Stock Exchange (http://www.hkex.com.hk) and Shanghai Stock Exchange (http://www.sse.com.cn).

RECOMMENDATION

Your attention is drawn to (i) the recommendation of the Independent Board Committee in respect of the terms of the Assignment of Debt and the Transfer set out on pages 18 to 19 of this circular; and (ii) the opinion of the Independent Financial Adviser to the Independent Shareholders and the Independent Board Committee in respect of, inter alia, the terms of the Assignment of Debt and the Transfer set out on pages 4 to 5 of this circular.

The Directors (excluding the independent non-executive Directors, whose opinion is included in the letter from the Independent Board Committee set out on pages 18 to 19 of this circular) consider that the terms and conditions of the the Assignment of Debt and the Transfer are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

Accordingly, the Directors recommend all Independent Shareholders to vote in favour of the resolution to be proposed at the EGM.

— 16 —

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is drawn to Appendices of this circular setting out certain additional information in relation to the Assignment of Debt, the Transfer and the general information of the Company.

Yours faithfully, By order of the Board

Li Anjian Chairman

As at the date of the circular, the Board comprises of: 1. Executive Directors: Mr. Li Anjian, Mr. Zhang Zuzhong; 2. Non-executive Directors: Mr. Xu Guofei, Ms. Liu Ailian, Mr. Zhu Lifeng, Mr. Shi Qiusheng; 3. Independent Non-executive Director: Ms. Wan Hui, Mr. Cai Lianglin, Mr. Ma Chung Lai, Lawrence.

— 17 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter from the Independent Board Committee to the Independent Shareholders prepared for incorporation in this circular.

==> picture [46 x 46] intentionally omitted <==

南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited

(a joint stock limited company incorporated in the People’s Republic of China)

(Stock Code: 0553)

30 June 2006

To the Independent Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN

HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

We refer to the circular issued by the Company to the Shareholders dated 30 June 2006 (the “Circular”) of which this letter forms part. Unless the context otherwise requires, terms used in this letter will have the same meanings as defined in the Circular.

We have been appointed by the Board as members of the Independent Board Committee for the purpose of considering and advising the Independent Shareholders in relation to the Assignment of Debt and the Transfer.

We wish to draw your attention to the letter from the Board as set out on pages 1 to 17 and the letter from the Independent Financial Adviser as set out on pages 20 to 32 of the Circular respectively.

— 18 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having considered the principal factors and reasons considered by, and the advice of Independent Financial Adviser as set out in its letter of advice, we consider that the terms of the Assignment of Debt and the Transfer are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and the Assignment of Debt and the Transfer are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution as set out in the notice of the EGM in respect the Assignment of Debt and the Transfer on pages 182 to 184 of the Circular.

Yours faithfully,

For and on behalf of the Independent Board Committee Ms. Wan Hui, Mr. Cai Lianglin, Mr. Ma Chung Lai, Lawrence. Independent Non-Executive Directors

— 19 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of the letter of advice to the Independent Board Committee and the Independent Shareholders from the Independent Financial Adviser dated 30 June 2006, prepared for the purpose of incorporation in this circular, setting out its advise in connection with the Assignment of Debt and the Transfer.

VXL Financial Services Limited Unit 3214, 32nd Floor Cosco Tower Grand Millennium Plaza (High Block) 183 Queen’s Road Central Hong Kong

30 June 2006

To the Independent Board Committee and the Independent Shareholders of Nanjing Panda Electronics Company Limited

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Assignment of Debt and the Transfer, details of which are set out in a circular issued by the Company to the Shareholders dated 30 June 2006 (the “Circular”), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

Ms. Wan Hui, Mr. Cai Lianglin and Mr. Ma Chung Lai, Lawrence, the independent non-executive Directors, have been appointed as members of the Independent Board Committee to advise the Independent Shareholders on the Assignment of Debt and the Transfer. Any vote of the Independent Shareholders at the EGM shall be taken by poll.

— 20 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the respective terms of the Assignment of Debt and the Transfer are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Independent Shareholders as a whole.

In formulating our recommendations, we have relied on the information and facts contained or referred to in the Circular and supplied to us by the Company, the financial information prepared by the Accountants set out in Appendices II and III to the Circular, the Valuation Reports prepared by the Valuer set out in Appendices IV and V to the Circular, and the opinions expressed by and the representations of the directors and management of the Company. We have assumed that all the information contained and the representations made to us or referred to in the Circular were true, accurate and complete in all respects at the time they were made and continue to be so as at the date of the Circular and may be relied upon. We have also assumed that all statements of beliefs, opinions, assumptions and intentions made by the Directors in the Circular were made reasonably after due and careful enquiry and were based on honestly-held opinion. We have also relied on the responsibility statement set out in section 1 of Appendix VI to the Circular. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Company and its directors and management, the Accountants and the Valuer, and have been confirmed by the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular.

We consider that we have reviewed sufficient information, and taken reasonable steps, to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendations. We have no reason to suspect that any relevant information or reports have been withheld, nor are we aware of any facts or circumstances which would render the information provided and the representations made to us to be untrue, inaccurate, or misleading. We have not, however, conducted any independent verification of the information included in the Circular and the information provided by the Directors and the Company, nor have we conducted any form of investigation into the businesses, affairs, financial position and the future prospects of the Company or Panda Mobile or Jiangsu Investment Management or Jiangsu International Trust or Hua Fei or any of their respective subsidiaries or associates.

— 21 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendations for the Assignment of Debt and the Transfer, we have taken into consideration the following principal factors and reasons:

1. Background to and reasons for the Assignment of Debt and the Transfer

The principal business activities of the Group are investment holding and the development, production and sale of satellite communication products, mobile communication, electro-mechanical products and electronic information products.

We note from the Company’s announcement dated 9 September 2005 (the “2005 Announcement”) that Panda Mobile was a non-wholly owned subsidiary of the Company until the Judicial Forceful Execution and owed the Company a debt of RMB500 million (the “Principal Debt”) as of 9 March 2005. As stated in the 2005 Announcement, in 2004, Panda Mobile had incurred an unaudited loss before tax of approximately RMB21.7 million and was in financial difficulties and would be unlikely to repay the Principal Debt to the Company. It has also been stated in the 2005 Announcement that Jiangsu Investment Management which has a higher credit rating decided to take over the responsibility of the repayment of the Principal Debt under the support of Jiangsu Provincial Government and Nanjing City Government. Given this and with an aim to reduce the risk of non-recovery of the Principal Debt, the Company entered into the Assignment of Debt Agreement with Panda Mobile and Jiangsu Investment Management on 9 March 2005 in relation to the transfer of the Principal Debt owed to it by Panda Mobile to Jiangsu Investment Management. We have been confirmed and ascertained by the Directors that save for the said assignment, there was no other alternative repayment arrangement for the Principal Debt proposed by Panda Mobile to the Company. We note from the “Letter from the Board” in the Circular that the Company has been liaising with Jiangsu Investment Management to finalise the detailed repayment terms of the Debt since the signing of the Assignment of Debt Agreement.

In order to settle the Debt, the Company entered into the Further Assignment of Debt with Jiangsu Investment Management and Jiangsu International Trust on 8 May 2006 pursuant to which the Company agreed to transfer the Debt repayable by Jiangsu Investment Management to Jiangsu International Trust and Jiangsu International Trust agreed to assume and repay the Debt to the Company. On the same day, the Company entered into the Equity Transfer Agreement with Jiangsu International Trust whereby Jiangsu International Trust agreed to the transfer of the JIT Shares to the Company in satisfaction of the whole of the Debt in an amount of RMB522,487,000 in aggregate repayable by Jiangsu International Trust to the Company pursuant to the Further Assignment of Debt. It is noted that save for the Transfer, there is no other option available to the Company for the repayment of the Debt.

— 22 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We note that based on the advice of the Company’s PRC lawyer, the Assignment of Debt and the Equity Transfer Agreement comply with the requirement of the relevant PRC laws and regulations and the Assignment of Debt Agreement and the Further Assignment of Debt contain no content or terms that are detrimental to the interest of the Company and the Shareholders and are in line with fair and just principles. We also note that the Company has appointed an independent financial advisor in the PRC to advise on the Assignment of Debt Agreement, the Further Assignment of Debt and the Equity Transfer Agreement. According to the PRC IFA’s report (中原證券股份有限公司關於南京熊貓電子股份有限公司債權債務轉移與股權轉讓的獨立財務顧問報告) dated 10 May 2006 issued by the PRC IFA, (i) the Assignment of Debt and the Transfer are in compliance with the PRC relevant laws, rules and regulations on arm’s length, transparent, fair and just; (ii) the consideration of the relevant transactions is fair and reasonable which is not only beneficial to the recovery of the Debt due to the Company and the improvement of the Company’s asset quality, but are also helpful for improvement of its performance and future development in the long run; and (iii) the relevant transactions are in the interests of Company and the Shareholders. Furthermore, it is noted that consents to the Transfer and agreements of not to exercise the respective pre-emptive rights have been obtained by Jiangsu International Trust from the other three existing shareholders of Hua Fei namely, LG. Philips Displays (China) Limited (樂金•飛利浦顯示件中國有限公司), Nanjing Hua Dong Electronics Information Technology Holdings Limited (南京華東電子信息科技股份有限公司) and Nanjing Hua Dong Electronics Group Limited (南京華東電子集團有限公司) (collectively the “Other Shareholders”) respectively.

In view of the foregoing, we concur with the views of the Directors that the transfer of the creditor’s right and indebtedness to Jiangsu International Trust is beneficial to the Company as the Company would now be able to recover the Debt. In this regard, we consider that the Assignment of Debt and the Transfer would be in the interests of the Company and the Independent Shareholders as a whole.

— 23 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2. Information on Hua Fei

Business of Hua Fei and future intention of the Company

Hua Fei is a sino-foreign equity joint venture incorporated in the PRC in 1988 and is principally engaged in the development, design and manufacture of colour picture tubes (彩色顯像管), colour monitor tubes (彩色監視管) and other colour display system products (彩色顯示系統產品), components and materials and related electronic products, as well as sale of self-produced products (自產產品). The self-produced products relate to electronic products and the brand names of such products are 「華飛牌」 and 「樂金•飛利浦」, translated respectively as Hua Fei Brand and LG. Philips. We note that according to the information from the Ministry of Information Industry of PRC, Hua Fei took the fourth position in the PRC market in respect of production volume of colour tubes in the first quarter of 2006 (2006年第一季度彩管產量在全國居第四位) and was also renowned as foreign investment advanced technology enterprise (外商投資先進技術企業) by Nanjing City Foregign Trade and Economic Cooperation Bureau (南京市對外貿易經濟合作局) in April 2006. It is noted that Hua Fei will continue to develop its colour picture tube business.

As advised by the Company, the board of directors of Hua Fei currently comprises a total of 11 members, of which 6 members from LG. Philips Displays (China) Limited (樂金•飛利浦顯示件中國有限公司), 3 members from Jiangsu International Trust and 2 members from each of Nanjing Hua Dong Electronics Information Technology Holdings Limited (南京華東電子信息科技股份有限公司 ) and Nanjing Hua Dong Electronics Group Limited (南京華東電子集團有限公司) respectively. We note from the “Letter from the Board” in the Circular that upon completion of the Transfer, the Company will nominate three directors to the board of directors of Hua Fei and Hua Fei would be accounted for as an investment in associated company of the Company in accordance with the Hong Kong Accounting Standards 28 - Investments in Associates.

— 24 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Furthermore, it is stated in the “Letter from the Board” in the Circular that the joint venture agreement (合資經營華飛彩色顯示系統有限公司合同) entered into among Jiangsu International Trust and the Other Shareholders on 22 November 2004 (the “Joint Venture Agreement”) would be amended with the Company, instead of Jiangsu International Trust, as a party thereof upon completion of the Transfer. As confirmed by the Directors, upon completion of the Transfer, the Company will enter into a new joint venture agreement with the Other Shareholders (the “New Joint Venture Agreement”), and each of the Company and the Other Shareholders will be bound by the terms and the conditions under the New Joint Venture Agreement thereafter. The Directors further confirmed that none of the terms of the Joint Venture Agreement is considered to be detrimental to the interest of the Company, and it is the intention of the Company and the Other Shareholders to enter into the New Joint Venture Agreement under the same terms and conditions of the Joint Venture Agreement upon completion of the Transfer. As such, save for the replacement of Jiangsi International Trust by the Company as a party to the New Joint Venture Agreement, the Directors expect that the terms and the conditions of the New Joint Venture Agreement will be the same as those of the Joint Venture Agreement. We have reviewed the principal terms of the Joint Venture Agreement provided by the Company’s PRC lawyer, and are not aware of any of such terms in substance that are detrimental to the interest of the Company. In addition, we have been confirmed and ascertained by the Company that there is no capital commitment to Hua Fei by the Company as at the date of the Circular, and the Company’s future capital commitment to Hua Fei would be subject to New Joint Venture Agreement.

Track record of Hua Fei

The table below sets out the audited turnover and profit/(loss) before and after tax of the Hua Fei Group for each of the three years ended 31 December 2005 as extracted from the Accountants’ Report in Appendix II to the Circular:

Turnover Profit/(loss) before tax Taxation Profit/(loss) for the year	For the year ended 31 December 2003 2004 2005 (RMB’000) (RMB’000) (RMB’000) 4,260,638 4,218,209 3,649,473 171,223 283,545 (939,836) (12,524) (12,594) (8,814) 158,699 270,951 (948,650)

— 25 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the audited consolidated balance sheet of the Hua Fei Group set out in Appendix II to the Circular, the audited net asset value of the Hua Fei Group amounted to RMB2,299,578,000 and RMB2,089,948,000 as at 31 December 2004 and 2005 respectively.

As shown in the table above, for the year ended 31 December 2004, the Hua Fei Group recorded a decrease in turnover of approximately RMB42.4 million and an increase in profit after taxation of approximately RMB112.3 million as compared to those for the previous year. We have been advised by the Directors that the decrease in turnover was mainly due to price reduction of Hua Fei’s product whereas the increase in profit was mainly attributable to the introduction of new products which were of higher profit margin and the adoption of better cost control measures. For the year ended 31 December 2005, the Hua Fei Group’s turnover and loss after taxation amounted to approximately RMB3,649.5 million and RMB948.7 million respectively. As stated in the “Letter from the Board” in the Circular, for the year ended 31 December 2005, the decrease in the Hua Fei Group’s turnover was mainly due to price decrease of colour picture tubes under fierce market competition whilst the loss of the Hua Fei Group was mainly attributable to the one-off impairment of goodwill of approximately RMB1,056.5 million (the “Goodwill”) arising from the merger of Hua Pu and the acquisition of Jin Hui. As noted from the “Letter from the Board” in the Circular, the merger of Hua Pu was effected as a result of the commercial consideration of the existing shareholders of Hua Fei, and Hua Pu has ceased its business being principally the manufacture of display tubes for computer displayers after the merger. In addition, we have been advised by the Company that the acquisition of Jin Hui by Hua Fei was effected as a business development strategy after taking into account the commercial benefits of vertical integration to Hua Fei’s business. It is noted that Jin Hui is principally engaged in the supply of metal parts for Hua Fei’s picture tubes. As referred to in the “Letter to the Board” in the Circular, for each of the three years ended 31 December 2005, the Hua Fei’s net profit before taxation and impairment of goodwill was approximately RMB171.2 million, RMB283.5 million and RMB116.6 million respectively. The Directors advised that the business of Hua Fei is considered to be a new business to the Group which would allow the Group to broaden its income stream, and thus consider that the Transfer could have a positve impact on the Group. Given this and taking into account the track record of the Hua Fei Group, the impairment of the Goodwill is one-off in nature and the market recognition of Hua Fei in the PRC, we consider that it is reasonable for the Directors to believe that Hua Fei is capable of achieving favourable operating results in the future and that the Transfer could have a positve impact on the Group.

— 26 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have made references to, so far as we are aware of, other companies listed on the main board of the Stock Exchange whose principal businesses are similar to those of the Hua Fei Group (the “Listed Comparables”) and noted that losses were generally incurred by the Listed Comparables and the financial performance of the Listed Comparables was in general on a declining trend for their respective financial year 2005. The following table illustrates the pattern of worsening financial performance of the Listed Comparables for their respective financial year 2005 as compared to that of the preceding year:

			Profit/(loss)	Profit/(loss)	Net profit
Name of the Listed Comparables		Sales	before tax	after tax	margin
TCL Multimedia Technology	2004	25,599,840	417,455	308,985	1.21%
Holdings Limited_(Note 1)_
(stock code: 1070)	2005	34,556,330	(584,098)	(598,893)	n/a
(HK$’ 000)
	% change	34.99%	(239.91%)	(293.83%)	n/a
	Increase/
	(decrease)
Skyworth Digital Holdings Limited_(Note 2)_	2004	9,211,000	399,000	352,000	3.82%
(stock code: 751)
(HK$’ 000)	2005	10,466,000	272,000	402,000	3.84%
	% change	13.63%	(31.83%)	14.20%	n/a
	Increase/
	(decrease)
Irico Group Electronics	2004	4,949,683	650,250	385,327	7.78%
Company Limited_(Note 3)_
(stock code: 438)	2005	3,927,500	(911,956)	(754,547)	n/a
(RMB’000)
	% change	(20.65%)	(240.25%)	(295.82%)	n/a
	Increase/
	(decrease)
A-Max Holdings Limited_(Note 4)_	2004	92,830	(10,631)	(10,631)	n/a
(stock code: 959)
(HK$’000)	2005	101,144	(18,326)	(18,326)	n/a
	% change	8.96%	n/a	n/a	n/a
	Increase/
	(decrease)

— 27 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

			Profit/(loss)	Profit/(loss)	Net profit
		Sales	before tax	after tax	margin
Hua Fei Group	2004	4,218,209	283,545	270,951	6.09%
(RMB’000)
	2005	3,649,473	116,648	(948,650)	n/a
			(Note 5)	(Note 6)
	% change	(13.48%)	(58.86%)	(450.12%)	n/a
	Increase/
	(decrease)

Notes:

TCL Multimedia Technology Holdings Limited together with its subsidiaries are principally engaged in the manufacture and sale of audio-visual products as described in its 2005 annual report.
Skyworth Digital Holdings Limited together with its subsidiaries are principally engaged in the manufacture and sale of consumer electronic products and property holding as disclosed in its 2005 annual report.
Irico Group Electronics Company Limited together with its subsidiaries are engaged in the manufacturing, distribution and sale of color picture tube for coloured television sets and color picture tube related components and materials as disclosed in its 2005 annual report.
A-Max Holdings Limited together with its subsidiaries are principally engaged in the design, manufacture and sale of electronic consumer products, liquid crystal display modules, liquid crystal display panels and liquid crystal display consumer products as described in its 2005 annual report.
Consolidated profit before taxation and impairment of the Goodwill extracted from the “Letter from the Board” in the Circular.
Consolidated profit after taxation and impairment of the Goodwill extracted from the Accountants’ Report set out in Appendix II to the Circular.
The audited financial results of the Listed Comparables are extracted from the latest published annual reports of the Listed Comparables respectively.

Given the above and the fact that the impairment of the Goodwill is of a one-off nature, and taking into account the market position of Hua Fei in the PRC and the recent financial performance of the Hua Fei Group as compared to those of the Listed Comparables, we concur with the Directors’ view that the transfer of the creditor’s right and indebtedness to Jiangsu International Trust is beneficial to the Company as the Company would now be able to broaden its investment income base. In this regard, we consider that the Assignment of Debt and the Transfer would be in the interests of the Company and the Independent Shareholders as a whole.

— 28 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. Consideration for the Transfer

Pursuant to the Equity Transfer Agreement, the consideration for the Transfer is the Debt being RMB522,487,000 in aggregate (being the total sum of RMB500 million together with accrued interest thereon) (the “Consideration”), representing 25% of the audited net asset value of the Hua Fei Group of RMB2,089,948,000 as at 31 December 2005 as shown in the audited consolidated balance sheet of the Hua Fei Group set out in Appendix II to the Circular. The Consideration was determined after arm’s length negotiation among the Company and Jiangsu International Trust after taking into account the estimation of the value of the JIT Shares as at 31 December 2005 being RMB522,487,000 with reference to the audited net assets value of Hua Fei as at 31 December 2005 and the valuation report of Hua Fei’s property, plant and equipment as at 31 December 2005 by the Valuer.

As shown in the audited consolidated balance sheet of the Hua Fei Group set out in Appendix II to the Circular, the audited consolidated total assets of the Hua Fei Group was approximately RMB4,534.7 million as at 31 December 2005, of which approximately RMB3,008.4 million was attributable to the property, plant and equipment which accounted for approximately 66.3% of the consolidated total assets of the Hua Fei Group as at 31 December 2005. In view of the Hua Fei Group’s asset backing is principally consisted of its interests in property, plant and equipment in the PRC, we consider it is appropriate to value the Hua Fei Group based on its net asset value.

As a supplement reference, we adopt the price-to-net assets analysis to assess the fair and reasonableness of the Consideration. The following table sets out the price-to-net assets ratio of the Listed Comparables:

				(3)
		(1)		Price/net
	Closing share price		(2)	assets ratio
Name of the Listed Comparables	as	at 8 May 2006	Net asset value per share	{=(1)/(2)}
		(Note 1)	(Note 2)
		(HK$)	(HK$)	(times)
TCL Multimedia Technology Holdings Limited		1.19	1.0	1.2
Skyworth Digital Holdings Limited		1.12	1.3	0.9
Irico Group Electronics Company Limited		0.375	1.1	0.3
A-Max Holdings Limited		0.201	0.3	0.7

— 29 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

		(2)
		Audited net
		asset value of
		the Hua Fei Group
		as at 31 December 2005	(3)
	(1)	as proportionally to the	Price/net
	Consideration for	25% equity interests	assets ratio
	the Transfer	to be transferred	{=(1)/(2)}
	(RMB)	(RMB)	(time)
Hua Fei Group	522,487,000	522,487,000	1

Notes:

Based on the closing price of shares of each of the Listed Comparables as at the date of the Equity Transfer Agreement, being 8 May 2006.
Based on their latest published financial statements and existing issued share capital.

As illustrated in the table above, we note that the Consideration represents a price-to-net assets ratio of 1 times the 25% of the audited consolidated net asset value of the Hua Fei Group as at 31 December 2005. We also note that the price-to-net assets ratio as implied under the Consideration also falls within the range of the historic price-to-net assets ratios of the Listed Comparables of approximately 0.3 times to 1.2 times as at the date of the Equity Transfer Agreement.

While the price-to-earnings analysis is one of the most commonly used valuation methods for business enterprises, unfortunately, most of the Listed Comparables and the Hua Fei Group recorded losses for their respective latest financial year, the price-to-earnings analysis is therefore not applicable to be used to assess the fairness and reasonableness of the Consideration.

Having taking into account (i) the asset backing of the Hua Fei Group; (ii) the Consideration which has been determined after arm’s length negotiation between the parties represents 25% of the audited net asset value of the Hua Fei Group as at 31 December 2005; and (iii) the price-to-net assets ratio as implied under the Consideration falls within the range of the historic price-to-net assets ratios of the Listed Comparables, we consider that the Consideration is fair and reasonable so far as the Company and the Independent Shareholders are concerned.

— 30 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. Financial effects of the Transfer on the Group

Earnings

It is noted that upon completion of the Assignment of Debt and the Transfer, Hua Fei will be accounted for as an investment in associated company of the Company and the Debt repayable to the Company by Jiangsu International Trust will be converted into equity investment in Hua Fei. The total interest accrued of RMB22,487,000 would be recognised as other income of the Company.

According to the audited consolidated income statement of the Hua Fei Group set out in Appendix II to the Circular, Hua Fei recorded a profit after taxation of approximately RMB158.7 million and RMB271.0 million for the two years ended 31 December 2004 respectively and a loss after taxation of approximately RMB948.7 million for the year ended 31 December 2005. It is noted that the loss incurred in the year ended 31 December 2005 was mainly due to the impairment of the Goodwill which is of a one-off nature. Based on the unaudited pro forma income statement of the Enlarged Group set out in Appendix III to the Circular, the unaudited pro forma net loss of the Enlarged Group is approximately RMB117.7 million. Notwithstanding the above, the Directors expect that after taking into account the track record of Hua Fei in the recent years, the Assignment of Debt and the Transfer will have a positive impact on the earnings base of the Group.

Net tangible assets

Based on the audited consolidated balance sheet of the Group as at 31 December 2005 set out in Appendix II to the Circular, the audited consolidated net tangible assets of the Group was approximately RMB1,322.2 million. Based on the unaudited pro forma balance sheet of the Enlarged Group set out in Appendix III to the Circular, the unaudited pro forma net tangible asset of the Enlarged Group would be approximately RMB 1,344.7 million. The net assets position of the Group would be slightly improved by RMB22.5 million, representing the accrued interest on the Principal Debt.

Working capital

The Transfer is only for the purpose of repayment of the Debt by Jiangsu International Trust to the Company and the entire amount of the Consideration represents the whole of the Debt repayable by Jiangsu International Trust to the Company pursuant to the Further Assignment of Debt. As such, no financing for the Consideration by the Company is necessary.

It is noted that up to the date of the Circular, there is no capital commitment to Hua Fei by the Company, and therefore the Group will not be required to support the funding or working capital requirements of the Hei Fei Group. Given the above, there would not be any adverse impact on the working capital position of the Group as a result of the Assignment of Debt and the Transfer.

— 31 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Having considered the above principal factors and reasons, in particular,

(i) the then financial performance of Panda Mobile and the financial difficulties encountered by it to repay the Principal Debt to the Company;
(ii) Further Assignment of Debt will provide an opportunity for the Group to expedite the recovery of the Debt, after taking into account the prolonged process of negotiation for the settlement of the Debt since the entering into of the Assignment of Debt Agreement;
(iii) the comparison of the financial performance of the Hua Fei Group and the Listed Comparables as discussed in the paragraph headed “Track record of Hua Fei” above; and
(iv) the price-to-net assets ratio as implied under the Consideration is 1 times the 25% of the audited consolidated net asset value of the Hua Fei Group as at 31 December 2005, which falls within the range of the historic price-to-net assets ratios of the Listed Comparables.

we are of the view that the terms of the Assignment of Debt and the Transfer are fair and reasonable as far as the Independent Shareholders are concerned and in the interests of the Company and the Independent Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Assignment of Debt and the Transfer.

Yours faithfully,

For and on behalf of

VXL Financial Services Limited Gary Mui Director

— 32 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

A. SUMMARY OF FINANCIAL INFORMATION

An unqualified opinion in respect of the audit of the financial statements of the Group for the year ended 31 December 2003, which have been prepared in accordance with accounting principles generally accepted in Hong Kong, has been issued by the auditors.

The financial statements of the Group which have been prepared in accordance with accounting principles generally accepted in Hong Kong for the year ended 31 December 2004 and 2005 were qualified by the auditors as follows:

HIGHLIGHT OF THE AUDITORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2005

Basis of opinion

The evidence available to the Auditors was limited because on 10 March 2005, the People’s Court in Nanjing ordered the Company to surrender its equity interests in two subsidiaries of the Group and the transfer of the equity was completed on the next day. As the Company was not able to access their books and records, or to obtain or prepare their financial statements, the financial statements of these subsidiaries have not been consolidated for the period from 1 January 2005 to the date of equity transfer. There were no other satisfactory audit procedures the Auditors could adopt to ascertain with reasonable accuracy the impact on the financial position and result of the Group caused by the exclusion of these two subsidiaries from the consolidated financial statements.

In forming their opinion the Auditors also evaluated the overall adequacy of the presentation of information in the financial statements. The Auditors believe that their audit provides a reasonable basis for their opinion.

Qualified opinion arising from limitation of audit scope

In their opinion, the financial statements give a true and fair view of the state of the affairs of the Company and the Group as at 31 December 2005. Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient financial information of the subsidiaries for the period from 1 January 2005 to the date of equity transfer referred to above, in their opinion, the financial statements give a true and fair view of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

In respect alone of the limitation of their work related to the matters as stated above:

The Auditors have not obtained all the information and explanations that they considered necessary for the purpose of their audit; and
They are unable to determine whether proper books of account had been kept.

— 33 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

HIGHLIGHT OF THE AUDITORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2004

Basis of opinion

The evidence available to the Auditors was limited in the following respect:

On 10 March 2005, the People’s Court in Nanjing ordered the Company to surrender its equity interests in two subsidiaries of the Group and the transfer of the equity was completed on the next day. As the Company was not able to access their books and records, or to obtain or prepare their financial statements, the financial statements of these subsidiaries have not been consolidated. There were no other satisfactory audit procedures the Auditors could adopt to ascertain with reasonable accuracy the impact on the financial position and result of the Group caused by the exclusion of these two subsidiaries from the consolidated financial statements.
Included in the balance sheets of the Company and the Group at 31 December 2004 were investments in two unconsolidated subsidiaries referred to paragraph 1 above with a total carrying value of approximately RMB121,017,000 and a total amount of approximately RMB852,551,000 due from these two subsidiaries. The above carrying value of the investments in these two subsidiaries are stated net of a provision of approximately RMB84,033,000 made by the directors in the current year. The Auditors are unable to obtain relevant and reliable financial information of these two subsidiaries and there were no other satisfactory audit procedures that they could adopt to assess the carrying value of the investments in these two subsidiaries and amount due from them. The Auditors therefore unable to satisfy themselves as to whether the carrying value of the investments in these two subsidiaries and the amount due from them are fairly and properly stated in the financial statements.
Subsequent to the balance sheet date, the People’s Court in Nanjing has ordered the Company to surrender it’s equity interests in the two unconsolidated subsidiaries referred to paragraph 1 above as settlement of an overdue debt. The information available was not sufficient for the Auditors to fully understand the background and circumstances leading to this event. Accordingly, the Auditors are unable to assess the impact, if any, the event may have on the financial statements and the adequacy of the information disclosed.

Qualified opinion arising from limitation of audit scope

Except for any adjustments that might have been found to be necessary had the Auditors been able to obtain sufficient evidence on the matters referred to in the “Basis of opinion” paragraph, in their opinion the financial statements give a true and fair view of the state of the affairs of the Company and the Group as at 31 December 2004 or of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

— 34 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In respect alone of the limitation of their work related to the matters as stated above:

The Auditors have not obtained all the information and explanations that they considered necessary for the purpose of their audit; and
The Auditors are unable to determine whether proper books of account had been kept.

A summary of the audited consolidated income statement and the audited consolidated balance sheet of the Group for last three financial years extracted from the annual report of the Company for the year ended 31 December 2005 is set out below:

Prepared in accordance with accounting principles generally accepted in Hong Kong

Turnover Continuing operations Discontinuing operations Cost of sales Gross profit Other revenue Distribution costs Administrative expenses Profit/ (loss) from operations Finance costs Impairment losses on interests in unconsolidated subsidiaries Gain on disposal of interests in associates Share of results of associates Profit before taxation Continuing operations Discontinuing operations Income tax expenses Net profit for the year	2005 RMB’000 850,817 — 850,817 (726,720) 124,097 13,444 (24,537) (226,560) (113,556) (58,817) — 15,157 257,381 100,165 100,165 — 100,165 (3,176) 96,989	2004 RMB’000 664,640 — 664,640 (566,455) 98,185 50,382 (22,613) (158,978) (33,024) (49,983) (84,033) 13,351 222,736 69,047 69,047 — 69,047 (2,368) 66,679	2003 RMB’000 607,368 3,259,430 3,866,798 (3,421,997) 444,801 48,152 (112,640) (252,226) 128,087 (77,447) — — 111,989 162,629 4,972 157,657 162,629 (17,326) 145,303

— 35 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Attributable to: The equity holders of the Company Minority interests Net profit for the year Dividends Earnings per share (RMB) Assets and liabilities Total assets Total liabilities Net assets	As at 31 December 2005 2004 RMB’000 RMB’000 92,761 65,646 4,228 1,033 96,989 66,679 — — 0.14 0.10 As at 31 December 2005 2004 RMB’000 RMB’000 2,571,839 2,647,048 (1,245,511) (1,416,523) 1,326,328 1,230,525	2003 RMB’000 97,413 47,890 145,303 — 0.15 2003 RMB’000 3,497,311 (2,237,363) 1,259,948

— 36 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

B. SUMMARY OF AUDITED FINANCIAL STATEMENTS

Set out below are the audited consolidated income statement, audited consolidated balance sheet and notes to financial statements of the Group extracted from the annual report of the Company for the year ended 31 December 2005.

Consolidated Income Statements

For the year ended 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

Notes Turnover 5 Cost of sales Gross profit Other revenue 6 Distribution costs Administrative expenses Loss from operations 7 Finance costs 9 Impairment losses on interests in unconsolidated subsidiaries Gain on disposal of interests in associates Share of results of associates Profit before taxation Income tax expenses 10 Net profit for the year Attributable to: The equity holders of the Company Minority interests Net profit for the year Dividends 13 Earnings per share (RMB) 14	2005 RMB’000 850,817 (726,720) 124,097 13,444 (24,537) (226,560) (113,556) (58,817) — 15,157 257,381 100,165 (3,176) 96,989 92,761 4,228 96,989 — 0.14	2004 RMB’000 664,640 (566,455) 98,185 50,382 (22,613) (158,978) (33,024) (49,983) (84,033) 13,351 222,736 69,047 (2,368) 66,679 65,646 1,033 66,679 — 0.10

— 37 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheets

As at 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

Notes Assets and liabilities Non-current assets Intangible assets 16 Property, plant and equipment 17 Construction in progress 18 Land use rights 19 Interests in unconsolidated subsidiaries 21 Interests in associates 22 Current assets Inventories 23 Bills receivable Trade receivables 24 Other receivables, deposits and prepayments 25 Amounts due from fellow subsidiaries, associates and related companies 32(f) Amount due from ultimate holding company 32(g) Bank balances and cash 26 Taxation	2005 RMB’000 4,103 302,430 20,448 1,645 — 561,720 890,346 175,155 4,247 110,670 750,548 23,898 269,431 347,457 87 1,681,493	2004 RMB’000 (restated) 20,517 346,825 21,303 21,080 912,547 547,560
		1,869,832
		147,372 2,906 89,469 127,456 69,061 238,676 102,126 150
		777,216

— 38 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes Current liabilities Borrowings 27 Trade payables 24 Other payables, customers’ deposits and accrued charges Amounts due to fellow subsidiaries, associates and related companies 32(f) Net current assets/ (liabilities) Total assets less current liabilities Non-current liabilities Long term borrowings 27 Equity Share capital 28 Share premium and reserves Attributable to equity holders of the Company Minority interest Total equity	2005 RMB’000 839,135 145,808 251,112 9,456 1,245,511 435,982 1,326,328 — 1,326,328 655,015 630,561 1,285,576 40,752 1,326,328	2004 RMB’000 (restated) 955,884 103,394 319,289 37,386 1,415,953 (638,737) 1,231,095 (570) 1,230,525 655,015 537,800 1,192,815 37,710 1,230,525

The financial statements were approved and authorized for issue by the board of directors on 19 April 2006 and are signed on its behalf by:

LI Anjian Director

LIU Ailian

Director

— 39 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheets

As at 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

Notes Assets and liabilities Non-current assets Intangible assets 16 Property, plant and equipment 17 Construction in progress 18 Land use rights 19 Interests in subsidiaries 20 Interests in associates 22 Amounts due from subsidiaries Current assets Inventories 23 Bills receivable Trade receivables 24 Other receivables, deposits and prepayments 25 Dividend receivable Amounts due from fellow subsidiaries, associates and related companies 32(f) Amounts due from subsidiaries Amount due from ultimate holding company 32(g) Bank balances and cash 26	2005 RMB’000 4,103 162,018 20,390 1,645 107,120 252,145 — 547,421 56,293 79 2,408 713,034 1,811 3,974 87,096 287,569 243,011 1,395,275	2004 RMB’000 (restated) 20,517 232,579 20,484 21,080 90,121 314,065 791,555
		1,490,401
		26,674 550 4,361 264,873 3,255 43,956 — 237,893 22,725
		604,287

— 40 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes Current liabilities Borrowings 27 Trade payables 24 Other payables, customers’ deposits and accrued charges Amounts due to fellow subsidiaries, associates and related companies 32(f) Amounts due to subsidiaries Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Long term borrowings 27 Equity Share capital 28 Share premium and reserves 29 Total equity	2005 RMB’000 786,000 13,385 145,123 10,037 4,697 959,242 436,033 983,454 — 983,454 655,015 328,439 983,454	2004 RMB’000 (restated) 906,000 14,217 274,450 35,135 43 1,229,845 (625,558) 868,843 (570) 864,273 655,015 209,258 864,273

The financial statements were approved and authorized for issue by the board of directors on 19 April 2006 and are signed on its behalf by:

LI Anjian LIU Ailian Director Director

— 41 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated statement of changes in equity

For the year ended 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

Attributable to equity holders of the Company Statutory Asset Share Capital Common Revaluation Accumulated Premium Reserve Fund Reserve losses RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 389,338 5,110 189,850 37,380 (149,524) — — — — — 389,338 5,110 189,850 37,380 (149,524) — — — — 65,646 — — — — — — — — — — — — — — — — — — — — — — — (752) 752 389,338 5,110 189,850 36,628 (83,126)	Attributable to equity holders of the Company Statutory Asset Share Capital Common Revaluation Accumulated Premium Reserve Fund Reserve losses RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 389,338 5,110 189,850 37,380 (149,524) — — — — — 389,338 5,110 189,850 37,380 (149,524) — — — — 65,646 — — — — — — — — — — — — — — — — — — — — — — — (752) 752 389,338 5,110 189,850 36,628 (83,126)	Attributable to equity holders of the Company Statutory Asset Share Capital Common Revaluation Accumulated Premium Reserve Fund Reserve losses RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 389,338 5,110 189,850 37,380 (149,524) — — — — — 389,338 5,110 189,850 37,380 (149,524) — — — — 65,646 — — — — — — — — — — — — — — — — — — — — — — — (752) 752 389,338 5,110 189,850 36,628 (83,126)	Total RMB’000 1,127,169 132,779
Share Premium RMB’000 389,338 — 389,338 — — — — — — 389,338	Capital Reserve RMB’000 5,110 — 5,110 — — — — — — 5,110	Statutory Common Fund RMB’000 189,850 — 189,850 — — — — — — 189,850
			1,259,948 66,679 (107,209) 14,911 (1,500) (2,304) —
			1,230,525

— 42 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated statement of changes in equity

For the year ended 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

Attributable to equity holders of the Company (Accumulated Statutory Asset losses)/ Share Capital Common Revaluation retained Premium Reserve Fund Reserve profits RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 389,338 5,110 189,850 36,628 (83,126) — — — — — 389,338 5,110 189,850 36,628 (83,126) — (1,090) — — 1,090 389,338 4,020 189,850 36,628 (82,036) — — — — 92,761 — — — — — — — — (752) 752 389,338 4,020 189,850 35,876 11,477	Attributable to equity holders of the Company (Accumulated Statutory Asset losses)/ Share Capital Common Revaluation retained Premium Reserve Fund Reserve profits RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 389,338 5,110 189,850 36,628 (83,126) — — — — — 389,338 5,110 189,850 36,628 (83,126) — (1,090) — — 1,090 389,338 4,020 189,850 36,628 (82,036) — — — — 92,761 — — — — — — — — (752) 752 389,338 4,020 189,850 35,876 11,477	Attributable to equity holders of the Company (Accumulated Statutory Asset losses)/ Share Capital Common Revaluation retained Premium Reserve Fund Reserve profits RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 389,338 5,110 189,850 36,628 (83,126) — — — — — 389,338 5,110 189,850 36,628 (83,126) — (1,090) — — 1,090 389,338 4,020 189,850 36,628 (82,036) — — — — 92,761 — — — — — — — — (752) 752 389,338 4,020 189,850 35,876 11,477	Total RMB’000 1,192,815 37,710
Share Premium RMB’000 389,338 — 389,338 — 389,338 — — — 389,338	Capital Reserve RMB’000 5,110 — 5,110 (1,090) 4,020 — — — 4,020	Statutory Common Fund RMB’000 189,850 — 189,850 — 189,850 — — — 189,850
			1,230,525 —
			1,230,525 96,989 (1,186) —
			1,326,328

— 43 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated cash flow statements

For the year ended 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

Note Net cash (used in) / generated from operating activities 30 Investing activities Purchase of property, plant and equipment Expenditure on construction in progress Return on investment in an associate Proceeds from partial disposal of a subsidiary Proceeds from disposal of associates Proceeds from disposal of property, plant and equipment Acquisition of interest in associates Repayment from unconsolidated subsidiaries Advance to an unconsolidated subsidiary Repayment from a non-related company Placement of pledged bank deposits Interest received Dividends received from associates Net cash generated from / (used in) investing activities Financing activites New loans raised Repayment of loans Net increase in advance to ultimate holding company Shares subscribed by minority shareholders Dividends paid to minority shareholders Net cash used in financing activities	2005 RMB’000 (199,679) (36,433) (17,704) 5 — 81,883 1,145 — 291,530 — — (30,065) 2,216 172,796 465,373 1,458,980 (1,477,510) (30,755) — (1,186) (50,471)	2004 RMB’000 39,464 (29,383) (35,237) — 270 80,339 5,986 (8,001) — (277,993) 50,000 (6,779) 13,634 176,452 (30,712) 1,429,100 (1,338,000) (217,691) 14,647 (2,304) (114,248)

— 44 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Note Net increase/(decrease) in cash and cash equivalents Increase/(decrease) in cash due to consolidation/ deconsolidation of subsidiaries Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year Analysis of the balances of cash and cash equivalents Bank balances and cash Less: Pledged bank balances 26	2005 RMB’000 215,223 43 87,243 302,509 347,457 (44,948) 302,509	2004 RMB’000 (105,496) (147,379) 340,118 87,243 102,126 (14,883) 87,243

Notes to the Financial Statements

For the year ended 31 December 2005

Prepared in accordance with accounting principles generally accepted in Hong Kong

1. ORGANISATION AND OPERATIONS

The Company was established in the People’s Republic of China (the “PRC”) on 29 April 1992, as a joint stock limited company by way of private subscription with Panda Electronics Group Company, a state-owned enterprise, as the sole promoter. The Company was listed on The Stock Exchange and the Shanghai Stock Exchange on 2 May 1996 and 18 November 1996 respectively. In July 1999, Panda Electronics Group Company was re-organised into a company with limited liability and was renamed as “Panda Electronics Group Limited” (熊貓電子集團有限公司) and continued to be the Company’s ultimate holding company.

The principal activities of the Group are the development, manufacture and sale of electronic manufacturing products, electronic information products, satellite communication system and electromechanical products.

— 45 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. ADOPTION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has adopted all of the new and revised Hong Kong Financial Reporting Standards (“HKFRS”) and Hong Kong Accounting Standards (“HKAS”) (collectively “HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) which are relevant to its operations and effective for accounting periods beginning on or after 1st January, 2005. The applicable HKFRSs are set out below and the 2004 comparatives have been restated in accordance with the relevant requirements.

HKAS 1 Presentation of Financial Statements HKAS 2 Inventories HKAS 7 Cash Flow Statements HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events after the Balance Sheet Date HKAS 12 Income Taxes HKAS 14 Segment Reporting HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 18 Revenues HKAS 19 Employee Benefits HKAS 21 The Effects of Changes in Foreign Exchange Rates HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 33 Earnings per Share HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement HKFRS 3 Business Combinations HKAS-Int 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

— 46 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The effects of the adoption of these HKFRSs on the Group’s accounting policies and on amount disclosed in the financial statements are summarised as follows:

(a) HKAS 1 has affected the presentation of minority interest, share of net after-tax results of associates and other disclosures.
(b) HKASs 2, 7, 8, 10, 12, 14, 16, 18, 19, 23, 27, 28, 33, 37 and HKAS-Int 27 had no material effect on the Group’s policies.
(c) HKAS 21 had no material effect on the Group’s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency and presentation currency.
(d) HKAS 24 has affected the identification of related parties and the disclosure of related party transactions.
(e) HKAS 38 had no material effect on the Group’s policy. The Group has reassessed the useful lives of its intangible assets in accordance with the provisions of HKAS 38. No adjustment resulted from this reassessment.
(f) Leasehold land and buildings held for own use (HKAS 17 – Lease)

In prior years, leasehold land and buildings held for own use were stated at cost less accumulated depreciation and accumulated impairment losses.

With adoption of HKAS 17 as from 1st January, 2005, the leasehold interest in the land and buildings as held for own use is separated into leasehold land and leasehold buildings. Leasehold land is accounted for as being held under an operating lease if the fair value of the interest in any buildings situated on the leasehold land could be separately identified from the fair value of the leasehold interest in the land at the time the lease was first entered into by the Group, or taken over from the previous lessee, or at the date of construction of those buildings. Land lease prepayments under operating leases is initially stated at cost and subsequently amortised on the straight-line basis over the lease term.

As a result of the change in accounting policy, land use rights on the balance sheets as at 31st December, 2005 and comparative amount as at 31st December, 2004 have been restated to reflect the reclassification of leasehold land.

— 47 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(g) Amortisation of positive and negative goodwill (HKFRS 3 – Business combinations and HKAS 36 – Impairment of assets)

In prior periods:

positive goodwill was amortised on a straight-line basis over its useful life and was subject to impairment testing when there were indications of impairment; and
negative goodwill was amortised over the weighted average useful life of the depreciable/amortisable non-monetary assets acquired, except to the extent it related to identified expected future losses as at the date of acquisition. In such cases it was recognised in the profit and loss account as those expected losses were incurred.

With effect from 1st January, 2005, in accordance with HKFRS 3 and HKAS 36, the Group no longer amortises positive goodwill. Such goodwill is tested annually for impairment, including in the year of its initial recognition, as well as when there are indications of impairment. Impairment losses are recognised when the carrying amount

Amortisation of the cash generating unit to which the goodwill had been allocated exceeds its recoverable amount.

Also with effect from 1st January, 2005 and in accordance with HKFRS 3, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill under the previous accounting policy) after reassessment, the excess is recognised immediately in the profit and loss account as it arises.

In accordance with the transitional arrangements under HKFRS 3, on 1 January, 2005, the Group eliminated the carrying amount of accumulated amortisation with a corresponding entry to the positive goodwill, comparative amounts have not been restated and no amortisation charge for goodwill has been recognised in the profit and loss account for the year ended 31 December, 2005. This has increased the Group’s net profit for the year ended 31 December 2005 by approximately RMB1,722,000.

The transitional arrangement also required the Group to derecognise at 1 January 2005 the carrying amounts of negative goodwill (including the remaining in consolidated capital reserve) against the opening balance of retained profits. This arrangement reduced the Group’s capital reserve at 31 December 2005 by approximately RMB1,090,000, with a corresponding increase to the retained profits.

— 48 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(h) Financial instruments (HKAS 32 – Financial Instruments: Disclosure and Presentation and HKAS39 – Financial Instruments: Recognition and Measurement)

In prior year, receivables are recognised initially at cost and subsequently provision is made to the extent the receivables are considered to be doubtful.

In accordance with HKAS 32 and HKAS 39, receivables are recognized initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the company 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 asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate and is recognised in the profit and loss account. The change in accounting policy has no impact on the result of the Group for the year ended 31st December, 2005.

The Group has not early adopted the following new standards or interpretations that have been issued but are not yet effective.

	Effective	for accounting periods
		beginning on or after
HKAS 1 (Amendment)	Capital Disclosures	1st January, 2007
HKAS 39 (Amendment)	The Fair Value Option	1st January, 2006
HKFRS 7	Financial Instruments: Disclosures	1st January, 2007
HK (IFRIC) – Int 4	Determining Whether an	1st January, 2006
	Arrangement Contains a Lease

The Group is in the process of making an assessment of what the impact of these new or revised standards or interpretations is expected to be in the period of initial application.

— 49 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. Significant accounting policies

The principal accounting policies which have been adopted in preparing the financial statements are as follows:

(a) Basic of preparation

The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the HKICPA and the disclosures requirement by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. The financial statements have been prepared under the historical cost convention as modified except for certain property, plant and equipment, intangible assets and other investment, which are modified by revaluation and financial instruments, which are stated at fair values.

(b) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year. The results of the subsidiaries acquired and disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. All significant intercompany transactions , balances and unrealised gains on transaction between group enterprises are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provide evidence of an impairment of the asset transferred.

Minority interest at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and statement of changes in equity within equity, separately from equity attributable to the equity shareholders of the company. Minority interest in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interest and the equity shareholders of the company.

Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the Group’s interest until the minority’s share of losses previously absorbed by the Group has been recovered.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities assumed in a business combination are recognised at their values at the acquisition date.

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

(d) Goodwill

Goodwill represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or an associate recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill on acquisitions of associates is included in investments in associates.

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

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

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Subsidiaries

A subsidiary is an enterprise in which the Group has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

Interests in subsidiaries are included in the Company’s balance sheet at cost less any impairment losses. The results of the subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

Details of the Company’s subsidiaries as of 31 December 2005 are set out in Note 20 of the financial statements.

(f) Associated companies

An associate is an enterprise, not being a subsidiary nor an interest in a joint venture, over which the group is in a position to exercise significant influence, through participation in the financial and operating policy decisions of the investee.

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for postacquisition changes in the Group’s share of the net assets of the associate, less impairment in the value of individual investments. Losses of an associate in excess of the group’s interest in that associate are not recognised. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment.

Where a group enterprise transacts with an associate of the Group, unrealized gains and losses are eliminated to the extent of the Group’s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the assets transferred.

In the Company’s balance sheet, its investments in associates are stated at cost less impairment losses. The results of associates are accounted for by the company on the basis of dividends received and receivable.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(g) Property, plant and equipment

Property, plant and equipment is stated at cost or valuation less depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhead costs, is charged to income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalised as an additional cost of the asset.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Where the recoverable amount of an asset has declined below its carrying amount, the carrying amount is reduced to reflect the decline in value. In determining the recoverable amount of assets, expected future cash flows are discounted to their present values.

It is the Group’s policy to determine the carrying amount of the property, plant and equipment on the historical cost basis. However, in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, property, plant and equipment of the Group were revalued in 1995 in connection with the listing the Company’s shares on The Hong Kong Stock Exchange and stated in the financial statements at such valuation.

The Group does not intend to revalue these assets in the future and they will continue to be carried at their 1995 valuation less subsequent depreciation.

The surplus arising on the 1995 revaluation of these assets was credited to the asset revaluation reserve. Any future decrease in value of these assets will be charged to the income statement to the extent that it exceeds the balance, if any, on the revaluation reserve relating to the previous revaluation of the same asset. On the subsequent disposal or retirement of such assets, the attributable revaluation surplus not yet transferred to retained profits in prior years will be transferred to retained profits.

Depreciation is provided to write off the cost of property, plant and equipment over their anticipated useful lives on a straight-line basis at the following annual rates:

Buildings	15 to 35 years
Plant, machinery and equipment	5 to 11 years
Transportation equipment and motor vehicles	5 to 10 years

— 53 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(h) Land use rights

Land use rights represent land use rights payments to the PRC’s government authorities. Land use rights are carried at cost less impairment loss and are amortised to the profit and loss account on a straight-line basis over the respective periods of the rights.

(i) Construction in progress

Construction in progress represents buildings and machinery under construction or installation and is stated at cost less any impairment. Cost comprises direct and indirect costs of acquisition or construction as well as borrowing costs capitalised. Construction in progress is transferred to property, plant and equipment when they are completed. No depreciation is provided on construction in progress.

(j) Impairment of assets excluding goodwill

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

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

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

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cashgenerating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit and loss account, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

— 54 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(k) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost which comprises all costs of purchase and, where applicable, costs of conversion and other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average cost method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the year in which the related revenue is recognised. The amount of any write down of inventories to net realisable value and all losses of inventories are recognised as an expense in the year the write down or losses occur. The amount of any reversal of any write down of inventories, arising from an increase in net realizable value, is recognised as a reduction in the amount of inventories recognised as an expense in the year in which the reversal occurs.

(l) Financial instruments

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

(i) Trade and other receivables

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

— 55 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) Investments

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

Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in profit and loss account for the period. Impairment losses recognised in profit or loss for equity investments classified as availablefor-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

(iii) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. In preparing cash flow statement, cash and cash equivalents include bank loans which require immediate repayment on demand .

— 56 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(iv) Borrowings

Interest-bearing bank loans are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs (note 3(p)).

(v) Trade and other payables

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

(vi) Equity instruments

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

(m) Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the profit and loss account because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax liabilities 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. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However, such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Tax rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

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

— 57 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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

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

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

(n) Provisions and contingencies

A provision is recognised when there is a present obligation, legal or constructive, as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed regularly and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditure expected to be required to settle the obligation.

Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable.

(o) Translation of foreign currencies

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

In preparing the financial statements of the individual entities, foreign currency transactions are translated into RMB being the functional currency at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit and loss account for the period.

— 58 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(p) Borrowings costs

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

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

(q) Retirement benefit scheme

According to the relevant regulation in the PRC, the Group contributes to pension funds based on the standard rates fixed by the PRC Government. The Group remits all pension fund contributions to respective social security offices, which are responsible for the payment and liabilities relating to the pension funds. Payments to retirement benefits scheme are charged to the profit and loss account.

(r) Research and development costs

Expenditure on research and development is charged to the profit and loss account in the year in which it is incurred except where a major project is undertaken and it is reasonably anticipated that development costs will be recovered through future commercial activity. Such development costs are deferred and written off over the life of the project from the date of commencement of commercial operation.

(s) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessors are accounted for as operating leases. Rentals payable under operating leases are charged to the profit and loss account on a straight-line basis over the term of the relevant lease.

(t) Trademarks

Trademarks are stated at cost or valuation less accumulated amortisation and provision, if necessary, for any impairment loss.

— 59 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(u) Recognition of income

Sales are recognised when goods are delivered to customers. Interest income from bank deposits is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Dividend income from unlisted investments is recognised when the shareholders’ right to receive payment is established.

(v) Related parties

Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions, or vice versa, or where the Group and the other party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.

(w) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal financial reporting, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, results, assets, and liabilities are determined before intragroup balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, corporate and financing expenses and minority interest.

— 60 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. Critical accounting and other key sources of estimation uncertainty

Judgements

In the process of applying the Group’s accounting policies, management has made the judgements in relation to impairment of assets apart from those involving estimation as discussed below, which have the most significant effect on the amounts recognised in the financial statements.

In determining whether an asset is impaired or the event previously causing the impairment no longer exists, the Group has to exercise judgement in the area of asset impairment, particularly in assessing: (1) whether an event has occurred that may effect the asset value or such event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by net present value of future cash flows which are estimated based upon the continued use of the asset or derecognition; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the impairment test.

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of the Group’s assets and liabilities within the next financial year are in respect of impairment test of assets.

The Group determines whether an asset is impaired at least on an annual basis or where an indication of impairment exists. This requires an estimation of the value in use of the asset. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the assets and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

5. Turnover

Turnover represents the invoiced value of goods sold and services provided to outside customers, net of sales taxes and discounts.

— 61 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. Other revenue

2005 RMB’000 Other revenue Rental income 4,188 Technology license income 3,289 Bank and other interest income 2,216 Net exchange gains 158 Interest income from a related company — Sundry income 3,593 13,444 7. Loss from operations 2005 RMB’000 Loss from operations has been arrived at after charging/(crediting): Bad debt written off 5,234 Depreciation (restated) 30,294 Amortization of land use rights 43 Provision for bad and doubtful debts (included in administrative expenses) 56,720 Provision for inventories (included in administrative expenses) 3,133 Staff costs (excluding directors’ and supervisors’ emoluments) Salaries, bonus and allowances 39,801 Retirement benefit scheme contributions 5,909 Auditors’ remuneration Audit fees 1,734 Non-audit fees 187 Operating lease rentals in respect of land and buildings 4,209 Gain on disposal of property, plant and equipment (2,462)	2004 RMB’000 4,817 828 13,634 — 25,837 5,266
	50,382

	2004 RMB’000 — 33,046 527 43,475 3,441 31,511 6,673 1,618 — 1,997 (2,680)

— 62 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. Directors’, Supervisors’ and senior management’s emoluments

(a) Directors’ and Supervisors’ emoluments

The emoluments paid or payable to each of the sixteen (2004:forteen) Directors and Supervisors were as follows:

Year ended 31 December 2005

Basic salaries, housing allowances, other allowance and benefits Name Fees in kind RMB’000 RMB’000 Executive Directors: Li Anjian — 240 Zhang Zuzhong — 240 — 480 Non-executive Directors: Li Ailian 180 — Zhu Lifeng 180 — Xu Guofel (Note 1) 90 — Shi Qiusheng (Note 1) 90 — Zhou Zhenyu (Note 2) 90 — Tang Hongqing (Note 2) 90 — 720 — Independent Non-Executive Directors: Wan Hui — — Cai Lianglin — — Ma Chung Lai, Lawrence 83 — 83 —	Retirement benefit scheme contribution RMB’000 10 10 20 — — — — — — — — — — —	Total RMB’000 250 250
		500
		180 180 90 90 90 90
		720
		— — 83
		83

— 63 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Name Supervisors: Zhang Zhengping Chen Ning Zhong Youxiang Independent Supervisors: Wu Shiyuan Sun Suhua Total Year ended 31 December 2004	Basic salaries, housing allowances, other allowance and benefits Fees in kind RMB’000 RMB’000 — 180 — 50 — 100 — 330 — — — — 803 810	Retirement benefit scheme contribution RMB’000 12 4 8 24 — — 44	Total RMB’000 192 54 108
			354
			— —
			1,657

Name Executive Directors: Li Anjian Zhang Zuzhong Non-executive Directors: Li Ailian Zhu Lifeng Zhou Zhenyu Tang Hongqing	Basic salaries, housing allowances, other allowance and benefits Fees in kind RMB’000 RMB’000 — 240 — 240 — 480 180 — 180 — 180 — 180 — 720 —	Retirement benefit scheme contribution RMB’000 10 10 20 — — — — —	Total RMB’000 250 250
			500
			180 180 180 180
			720

— 64 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Basic salaries, housing allowances, other allowance and benefits Name Fees in kind RMB’000 RMB’000 Independent Non-Executive Directors: Wan Hui — — Cai Lianglin — — Ma Chung Lai, Lawrence 88 — 88 — Supervisors: Zhang Zhengping — 180 Chen Ning — 100 Zhong Youxiang — 100 — 380 Independent Supervsiors: Wu Shiyuan — — Sun Suhua — — Total 808 860	Retirement benefit scheme contribution RMB’000 — — — — 12 8 8 28 — — 48	Total RMB’000 — — 88
		88
		192 108 108
		408
		— —
		1,716

Notes:

Appointment effective on 30 June 2005
Resigned on 30 June 2005

No Director or Supervisor waived any emoluments in the years ended 31 December 2005 and 2004.

The aggregate emoluments of each of the Directors and Supervisors during the relevant periods were under HK$ 1,000,000

— 65 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) The five highest paid individuals:

The five highest paid individuals included:

Five highest paid individuals Directors Supervisors Employees	2005 Number of Individuals — — 5 5	2004 Number of Individuals — — 5
		5

All of the five individuals with highest emoluments in the Group were employees of the Company each with emoluments during the relevant periods under HK$ 1,000,000. The aggregate emoluments of the five individuals during the relevant periods were as follows:

Salaries and other benefits Retirement benefit scheme contributions 9. Finance costs Interests on bank and other loans wholly repayable within five years Bank and other charges	2005 RMB’000 1,580 46 1,626 2005 RMB’000 57,687 1,130 58,817	2004 RMB’000 1,510 44
		1,554

		2004 RMB’000 49,014 969
		49,983

— 66 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. Income tax expenses

	2005	2004
	RMB’000	RMB’000
Taxation charge comprises:
PRC income tax	3,176	2,368

In 1995, the Company changed the place of its registration to Pukou, Nanjing, which is a High and New Technology Development Zone. On 29 August, 1995, the Company was recognised by the Jiangsu Science and Technology Commission as a High and New Technology Enterprise and such status has enabled the Company to pay income tax at the rate of 15% of its assessable profit with effect from 1 January 1995.

All subsidiaries of the Company pay income tax at the rates between 15% and 33%.

The taxation on the Group’s profit before taxation differs from the theoretical amount that would arise using the taxation rate of the home country of the Company as follows:

Profit before taxation Tax calculated at the statutory PRC tax rate of 33% Exemption / reduction of income tax under preferential tax treatment Tax effect of: Income not subject to taxation Expenses not deductible for taxation purposes Deferred tax benefits arising from tax losses not recognised Utilisation of previously unrecognised tax loss Over provision in the prior years Others Income tax for the year Tax effect of share of profit of associates	2005 RMB’000 100,165 33,054 (5,686) (78,729) 24,872 34,057 — (311) (4,081) 3,176 84,936	2004 RMB’000 69,047 27,786 (1,272) (49,049) 23,323 2,838 (2,447) (311) 1,500 2,368 73,503

— 67 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. Deferred taxation

The major component of the net deferred tax asset unprovided for at the balance sheet date represents unutilised tax losses computed under the PRC accounting standards. No provision for deferred taxation has been recognised in the financial statements as it is not certain that the benefits of the deferred tax asset will be utilised in the foreseeable future.

12. Profit attributable to equity holders of the Company

The consolidated profit attributable to equity holders of the Company includes a profit of RMB119,181,000 (2004: profit of RMB71,524,000) which has been dealt with in the financial statements of the Company.

13. Dividends

No interim dividend was paid (2004 : RMBNil) and no final dividend is proposed for the year (2004 : RMBNil).

14. Earning per shares

The calculation of the earnings per share is based on profit attributable to the Company’s shareholders of RMB92,761,000 (2004 : RMB65,646,000) and 655,015,000 shares in issue throughout 2005 and 2004.

— 68 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. Segment reporting

Business segment

For management purposes, the Group is currently organised into four operating businesses. The principal activities of the businesses are as follows:

Electronic manufacturing Development, production and sale of electronic products: manufacturing products Electromechanical products: Development, production and sale of electromechanical products, equipment and appliances Satellite telecommunications Development, manufacture and sale of satellite products: telecommunication products Electronic Information Development, manufacture and sale of electronic Products: information products

The following tables provide an analysis of the Group’s turnover, results and certain assets, liabilities and expenditure information by business segments:-

Year ended 31 December 2005

Revenue External sales Results Segment result Unallocated corporate expenses Interest income Interest expenses Gain on disposal of interests in associates Share of results of associates Income tax expense Net profit	Electronic manufacturing products RMB’000 222,806 16,636	Electromechanical products RMB’000 198,464 (612)	Satellite telecommunication products RMB’000 176,710 26,281	Electronic Information Products RMB’000 215,281 (3,054)	Other operations RMB’000 37,556 (24,506)	Consolidated RMB’000 850,817

						14,745 (131,647) 2,216 ( 57,687) 15,157 257,381 (3,176)
						96,989

— 69 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Year ended 31 December 2005

Satellite Assets Segment assets Interests in associates Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities Unaloocated corporate liabilities Consolidated total liabilities Other information Depreciation Year ended 31 December 2004 Revenue External sales Result Segment result Unallocated corporate expenses Interest income Interest expenses Gain on disposal of interests in associates Impairment loss on investments in unconsolidated subsidiaries Share of results of associates Income tax expenses Net profit	Electronic manufacturing products RMB’000 255,262 150,617 11,176 Electronic manufacturing products RMB’000 102,664 2,999	Electromechanical products RMB’000 134,656 134,041 3,209 Electromechanical products RMB’000 172,774 (4,122)	Satellite telecommunication products RMB’000 161,913 105,418 — Satellite telecommunication products RMB’000 104,094 18,025	Electronic Information Products RMB’000 177,980 173,837 9,688 Electronic Information Products RMB’000 229,216 (3,725)	Other operations RMB’000 76,096 47,760 1,802 Other operations RMB’000 55,892 4,125	Consolidated RMB’000 805,907 561,720 1,204,212
						2,571,839

						611,673 633,838
						1,245,511

						Consolidated RMB’000 664,640

						17,302 (90,766) 39,471 (49,014) 13,351 (84,033) 222,736 (2,368)
						66,679

— 70 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Year ended 31 December 2004

Assets Segment assets Interests in unconsolidated subsidiaries Interests in associates Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities Other information Depreciation	Electronic manufacturing products RMB’000 173,883 110,703 15,547	products RMB’000 154,241 113,986 3,788	Satellite Electromechanical telecommunication products RMB’000 55,200 9,626 —	Electronic Information Products RMB’000 188,364 184,195 502	Other operations RMB’000 121,484 135,229 —	Consolidated RMB’000 693,172 912,547 547,560 493,769
						2,647,048

						553,739 862,784
						1,416,523

Geographical segment

In 2005, over 90% of the Group’s sales are generated from sales in PRC.

— 71 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. Intangible assets

The Group Cost or valuation: At January 1, 2004 Transfer out in respect of unconsolidated subsidiaries At 31 December 2004 and 2005 Amortisation At January 1, 2004 Amortisation for the year Transfer out in respect of unconsolidated subsidiaries At 31 December 2004 Amortisation for the year At 31 December 2005 Net book value At 31 December 2005 At 31 December 2004	Trademark RMB’000 90,273 — 90,273 53,343 16,413 — 69,756 16,414 86,170 4,103 20,517	Development Costs RMB’000 41,581 (41,581) — 26,901 —- (26,901) — — — — —	Total RMB’000 131,854 (41,581) 90,273 80,244 16,413 (26,901) 69,756 16,414 86,170 4,103 20,517

— 72 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Company Cost or valuation: At January 1, 2004 31 December 2004 and 2005 Amortisation At January 1, 2004 Amortisation for the year At 31 December 2004 Amortisation for the year At 31 December 2005 Net book value At 31 December 2005 At 31 December 2004	Trademark RMB’000 90,273
	53,343 16,413
	69,756 16,414
	86,170
	4,103

	20,517

The trademark, which the Company acquired from PEGC in 1996 at a consideration of RMB155,140,000, was revalued on 30 September 2000 at RMB155,140,000, was revalued on 30 September 2000 at RMB90,273,000 on an open market value basis by Sallmanns (Far East) Limited (“Sallmanns’), Chartered Surveyors, Property Consultants, Plant and Machinery Valuers and Financial and Intangible Asset Valuers.

— 73 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. Property, Plant and equipment

The Group Cost or valuation At 1 January 2004 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Additions Transfer from construction in progress Transfer out in respect of unconsolidated subsidiaries Disposals At 31 December 2004 At 1 January 2005 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Additions Transfer from construction in progress Transfer – in in respect of unconsolidated subsidiaries Disposals At 31 December 2005	Land use rights RMB’000 26,500 (26,500) — — — — — — 26,500 (26,500) — — — — — —	Buildings RMB’000 333,342 — 333,342 2,820 80 (907) (335) 335,000 335,000 — 335,000 641 168 907 (98,967) 237,749	Plant, Transportation machinery equipment and and equipment motor vehicles RMB’000 RMB’000 174,459 11,101 — — 174,459 11,101 26,089 474 14,792 — (20,630) (3,876) (35,472) (169) 159,238 7,530 159,238 7,530 — — 159,238 7,530 35,014 778 7,642 — 3,750 40 (5,364) (943) 200,280 7,405	Total RMB’000 545,402 (26,500)
				518,902 29,383 14,872 (25,413) (35,976)
				501,768
				528,268 (26,500)
				501,768 36,433 7,810 4,697 (105,274)
				445,434

— 74 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group Depreciation At 1 January 2004 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Charge for the year Transfer out in respect of unconsolidated subsidiaries Written back on disposals At 31 December 2004 At 1 January 2005 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Charge for the year Transfer-in in respect of consolidated subsidiary Written back on disposals At 31 December 2005 Net book value At 31 December 2005 At 31 December 2004	Land use rights RMB’000 4,893 (4,893) — — — — — 5,420 (5,420) — — — — — — —	Buildings RMB’000 69,053 — 69,053 11,438 (256) (335) 79,900 79,900 — 79,900 8,846 286 (40,358) 48,674 189,075 255,100	Plant, Transportation machinery equipment and and equipment motor vehicles RMB’000 RMB’000 88,445 4,200 — — 88,445 4,200 21,023 585 (12,833) (719) (25,510) (148) 71,125 3,918 71,125 3,918 — — 71,125 3,918 20,806 642 3,426 38 (4,838) (787) 90,519 3,811 109,761 3,594 88,113 3,612	Total RMB’000 166,591 (4,893)
				161,698 33,046 (13,808) (25,993)
				154,943
				160,363 (5,420)
				154,943 30,294 3,750 (45,983)
				143,004
				302,430

				346,825

Note: All the Group’s buildings are located in the PRC.

— 75 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Company Cost or valuation At 1 January 2004 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Additions Disposal At 31 December 2004 At 1 January 2005 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Additions Disposals At 31 December 2005 Depreciation At 1 January 2004 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Charge for the year Written back on disposals At 31 December 2004	Land use rights RMB’000 26,500 (26,500) — — — — 26,500 (26,500) — — — — 4,893 (4,893) — — — —	Buildings RMB’000 296,369 — 296,369 — — 296,369 296,369 — 296,369 — (98,072) 198,297 60,419 — 60,419 11,713 — 72,132	Plant, Transportation machinery equipment and and equipment motor vehicles RMB’000 RMB’000 78,860 891 — — 78,860 891 687 — (26,567) (15) 52,980 876 52,980 876 — — 52,980 876 420 94 (1,854) (106) 51,546 864 57,044 375 — — 57,044 375 5,882 70 (17,845) (12) 45,081 433	Total RMB’000 402,620 (26,500)
				376,120 687 (26,582)
				350,225
				376,725 (26,500)
				350,225 514 (100,032)
				250,707
				122,731 (4,893)
				117,838 17,665 (17,857)
				117,646

— 76 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Company At 31 December 2004 – As previously stated – Reclassified to land use rights upon adoption of HKAS17 As restated Charge for the year Written back on disposals At 31 December 2005 Net book value At 31 December 2005 At 31 December 2004	Land use rights RMB’000 5,420 (5,420) — — — — — —	Buildings RMB’000 72,132 — 72,132 8,635 (40,084) 40,683 157,614 224,237	Plant, Transportation machinery equipment and and equipment motor vehicles RMB’000 RMB’000 45,081 433 — — 45,081 433 4,294 64 (1,778) (88) 47,597 409 3,949 455 7,899 443	Total RMB’000 123,066 (5,420)
				117,646 12,993 (41,950)
				88,689
				162,018

				232,579

Note: All the Company’s buildings are located in the PRC.

— 77 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. Construction in progress

At 1 January Add: Additions Less: Transfer to property, plant and equipment Impairment Disposals At 31 December	The Group 2005 2004 RMB’000 RMB’000 21,303 5,938 17,704 35,237 39,007 41,175 (7,810) (14,872) (5,722) (5,000) (5,027) — 20,448 21,303	The Company 2005 2004 RMB’000 RMB’000 20,484 5,895 10,265 19,669 30,749 25,564 — (80) — (5,000) (10,359) — 20,390 20,484

Construction in progress does not include capitalisation of interest.

19. Land use rights

Net book value at 1 January – As previously stated – Reclassified from property, plant and equipment upon adoption of HKAS17 As restated Amortisation Disposals Net book value at 31 December	The Group and The company 2005 2004 RMB’000 RMB’000 — — 21,080 21,607 21,080 21,607 (43) (527) (19,392) — 1,645 21,080

The Company’s land use rights are located in the PRC and have remaining lease terms of approximately 40 years. The cost of the land use rights was RMB 2,122,000 (2004: RMB 26,500,000).

— 78 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. Interests in subsidiaries

Unlisted shares, at cost Impairment loss recognized	2005 RMB’000 151,632 (44,512) 107,120	2004 RMB’000 221,602 (131,481) 90,121

Particulars of the subsidiaries, all of which are limited liability companies established/registered and operating in the PRC and directly held by the Company, are as follows:-

			Proportion of
			nominal value
	Date of		of issued capital/
Name of	establishment/	Registered	registered capital		Principal
subsidiary	registration	capital	directly held		activities
Nanjing Panda Electronics	27 April 1998	RMB530,000	94.34%		Sourcing of raw materials,
Company					components and parts.
					equipment and machinery
					for production
Shenzhen Panda	21 December 1992	RMB6,500,000	95%		Trading of electronic
Electronics Company					products and components
Nanjing Panda Technology	15 October 1999	RMB5,000,000	70%		Manufacture and sale of
Equipment Co Ltd					equipment for production of
					television sets
Nanjing Panda Information	20 July 1998	US$3,400,000	72%	Development, production and
Industry Co Ltd					sale of electronic
					information products
Panda International	12 October 1993	US$ 1,240,000	72%		Sale and distribution of
Telecommunication System					cellular mobile telephones
Company Limited, Nanjing					and pagers
(‘International Telecommunication)
Nanjing Guanghua Electronics	20 December 1984	RMB11,497,600	71.94%		Manufacture and sale of
Plastic Casings Factory					plastic and spare parts
(Note (a))

— 79 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

			Proportion of
			nominal value
	Date of		of issued capital/
Name of	establishment/	Registered	registered capital Principal
subsidiary	registration	capital	directly held	activities
Nanjing Panda Mechanical	12 May 1995	RMB45,000,000	99.11%	Manufacture and sale of
Engineering Plant				communication and
				electronic equipment
Nanjing Panda Accurate	10 Feb 1999	RMB5,000,000	70%	Manufacture and sale of
Machinery Co., Ltd				specialised electronic equipment
Nanjing Panda	29 September 2000	RMB1,000,000	70%	Development and production of
Appliance & Apparatus				electromechanical products and
Co. Ltd.				installation of electronic
				communications systems
Nanjing Panda Mechanical	28 June 2001	RMB5,000,000	70%	Manufacture of raw materials,
Manufacturing Co. Ltd				components and parts
				for production
Nanjing Panda Hua Ge	26 December 2001	RMB5,000,000	60%	Manufacture and sale of
Electronics Plastic Co. Ltd				plastic products and spare parts
Nanjing Panda	24 January 2002	RMB3,000,000	70%	Manufacture and
Mechanical				subcontracting of
Co., Ltd.				mechanical parts
Nanjing Electronic	October 2002	RMB1,000,000	70%	Inspection of
Clibration Co Ltd				electromechanical products
Nanjing Panda Network	18 October 2002	RMB10,000,000	50%	Data communication
Technology Co., Ltd.				and network
(“Panda Network”)				communication products
(Note (b))
Nanjing Panda System	30 September 2002	RMB3,000,000	51%	Development and sale
Integration Co., Ltd.				of computer software
Nanjing Panda Power Supply	1 December 2004	RMB11,000,000	79.55%	Design, manufacture and
Technology Co., Ltd.				sale of UPS and special
				power supply systems
				and converters
Nanjing Panda Electronic	23 June 2004	US$10,000,000	75%	Development and production
Manufacture Co., Ltd.				of electronic components

— 80 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) Nanjing Guanghua Electronics Plastic Casings Factory is a subsidiary of the Company.

The principal activity of this subsidiary is the manufacture of plastic products and

spare parts. Under the joint venture agreement entered into between the Company and joint venture partner in 1987, the joint venture partner has agreed to receive a guaranteed return on an annual basis of RMB350,000 with an annual increase of RMB20,000 up to RMB750,000 in the year of 2007. The Company is entitled to 100% of all profits and will bear 100% of all losses remaining after payment of the annual guaranteed return to the joint venture partner. Upon expiry of the joint venture agreement, the Company and joint venture partners will be entitled to share the net assets, after excluding the retained earnings to which the Company is entitled, in accordance with their respective shareholding.

(b) This subsidiary has ceased business and are insignificant to the Group. Accordingly, its financial statements are not consolidated in the Group’s financial statements.

21. Interests in unconsolidated subsidiaries

Unlisted shares, at cost Impairment loss Amounts due from unconsolidated subsidiaries Amounts due to unconsolidated subsidiaries	2005 RMB’000 — — — — — —	2004 RMB’000 205,050 (84,033) 121,077 857,913 (66,383) 912,547

In February 2005, the Company obtained short term loan of approximately RMB120,000,000 from an independent third party (the “Lender”). As the loan was not repaid by the due date, the Lender commenced legal proceedings against the Company through the People’s Court of Nanjing City. On 10March 2005, a judicial forceful execution order was issued ordering the settlement of the loan by a transfer of the 51% and 95% equity interests in Nanjing Panda Mobile Communication Equipment Co., Ltd (“Panda Mobile”) and Nanjing Panda Communications Development Co., Ltd.(“Panda Communications”) respectively to the Lender. On 11March 2005, the transfer was complete. Accordingly, Panda Mobile and Panda Communications were deconsolidated from the Group’s financial statements with effect from 1 January2004 and the carrying value of the investments in these two subsidiaries are stated net of provision as at 1 January 2004.

On 9 March 2005, the debt owed by Panda Mobile to the Company in the amount of RMB500,000,000 was assigned to Jiangsu Province Investment Management Co., Ltd (“Jiangsu Investment”). The remaining balance of amounts due from unconsolidated subsidiaries were repaid during the year.

— 81 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22. Interests in associates

Unlisted investments, at cost Impairment loss recognized Share of net assets Premium on acquisition	The Group 2005 2004 RMB’000 RMB’000 — — — — 558,277 544,117 3,443 3,443 561,720 547,560	The Company 2005 2004 RMB’000 RMB’000 294,628 355,995 (42,483) (41,930) — — — — 252,145 314,065

Particulars of the principal associates of the Group, all of which were established/registered in the PRC, are as follows:

	Date of	Equity interest
Name of	establishment/	attributable to
associates	registration	the Group	Principal activities
Nanjing Ericsson	15 September 1992	27%	Manufacture and sale of
Panda Communication			cellular mobile telephone system
Company Limited (“ENC”)			and digitals switching
			system product
Nanjing Flextronics Panda	20 November 1998	35%	Production, development and
Mobile Terminals Co., Ltd.			sale of data communication
(Formerly known as Nanjing			terminal equipment
Microcell Mobile
Terminals Co., Ltd.)
Nanjing Sharp Electronics	29 March 1996	30%	Design, development, manufacture
Co., Ltd.			and sale of televisions
Shenzhen Jinghua Electronic	9 July 1993	38.03%	Development, manufacture and
Company Limited			sale of communication equipment
			and electronic equipment
Beijing Ericsson	8 August 1995	20%	Manufacture and sale of
Mobile Communication			mobile communication products
Co., Ltd (‘BMC’)

— 82 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

	Date of	Equity interest
Name of	establishment/	attributable to
associates	registration	the Group	Principal activities
Nanjing Panda Tamura	29 July 2001	50%	Development, manufacture and
Communications Power			sale of power supply machines
Supply Co., Ltd.
Nanjing Panda Hitachi	13 November 2001	49%	Manufacture and sale of
Techno Co., Ltd.			SMT printer and provision
			of maintenance services
Nanjing Thales	9 December 2004	40%	Design, research and development
Panda Transportation			and production of electronic
Company Limited			equipment of auto billing system

Note 1: The financial statements of all the above associates are not audited by Horwath Hong Kong CPA Limited.

ENC and BMC are the most significant associates of the Group. The details as set out below were extracted from the 2005 financial statements of the companies which were audited by Pricewaterhouse Coopers Zhong Tian CPA Limited:

Turnover Profit before taxation Taxation Profit after taxation Profit after taxation attributable to the Group Financial position Non-current assets Current assets Current liabilities Net assets Net assets attributable to the Group	2005 ENC BMC RMB’000 RMB’000 10,845,510 22,499,041 489,473 840,509 (64,376) (148,974) 425,097 691,535 114,776 138,307 428,027 147,662 6,400,522 3,701,659 (5,850,342) (2,885,011) 978,207 964,310 264,116 192,862	2004 ENC BMC RMB’000 RMB’000 12,048,874 13,258,121 611,274 477,379 (94,198) (130,591) 517,076 346,788 139,611 69,358 196,280 160,244 6,081,490 2,735,375 (5,407,602) (2,234,870) 870,168 660,749 234,945 132,150

— 83 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

23. Inventories

Raw materials Work in progress Finished goods Spare parts and consumables	The Group 2005 2004 RMB’000 RMB’000 37,308 57,991 89,708 35,870 47,907 53,004 232 507 175,155 147,372	The Company 2005 2004 RMB’000 RMB’000 8,721 4,677 47,527 19,840 13 2,151 32 6 56,293 26,674	The Company 2005 2004 RMB’000 RMB’000 8,721 4,677 47,527 19,840 13 2,151 32 6 56,293 26,674
			26,674

24. Trade receivables and payables

The Group allows a credit period ranging from 30 to 180 days to its trade customers.

The following is an aged analysis of trade receivables net of allowances for bad and doubtful debts at 31 December 2005:

Within 1 year 1 to 2 years 2 to 3 years Over 3 years	The Group 2005 2004 RMB’000 RMB’000 100,050 76,054 7,916 10,206 1,965 1,552 739 1,657 110,670 89,469	The Company 2005 2004 RMB’000 RMB’000 1,603 3,980 630 35 37 247 138 99 2,408 4,361	The Company 2005 2004 RMB’000 RMB’000 1,603 3,980 630 35 37 247 138 99 2,408 4,361
			4,361

The following is an aged analysis of trade payables at 31December 2005:

Within 1 year 1 to 2 years 2 to 3 years Over 3 years	The Group 2005 2004 RMB’000 RMB’000 113,788 87,649 20,095 2,576 3,807 3,520 8,118 9,649 145,808 103,394	The Company 2005 2004 RMB’000 RMB’000 7,179 10,572 5,498 1,147 247 302 461 2,196 13,385 14,217	The Company 2005 2004 RMB’000 RMB’000 7,179 10,572 5,498 1,147 247 302 461 2,196 13,385 14,217
			14,217

— 84 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. Other receivables, deposits and prepayments

The balance included an amount of RMB500,000,000 due from Jiangsu Investment. As disclosed in Note 21, the debt owed by Panda Mobile to the Company in the amount of RMB500,000,000 was assigned to Jiangsu Investment on 9March 2005. As of 19 April 2006, Jiangsu Investment is in the process of transferring a specific asset to the Company for the repayment of the debt. The Company has performed a preliminary valuation and is performing an assessment on the said asset in order to make a final decision.

26. Bank balances and cash

Bank balances of RMB44,948,000 as at 31 December 2005 were pledged to banks to secure the banking facilities granted to the Group.

27. Borrowings

Bank borrowings – Short term loans unsecured Secured – Bills payable, secured Other loan, unsecured Less: Amount due within one year shown under current liabilities Borrowings repayable in the second to fifth years	The Group 2005 2004 RMB’000 RMB’000 585,070 643,600 210,000 290,000 44,065 22,284 — 570 839,135 956,454 (839,135) (955,884) — 570	The Company 2005 2004 RMB’000 RMB’000 556,000 616,000 210,000 290,000 20,000 — — 570 786,000 906,570 (786,000) (906,000) — 570

The above bank borrowings are secured by the Group’s land and buildings with a net book value of approximately RMB150,575,307 (2004: RMB222,231,000) as at the balance sheet date.

Bills payable were issued with a term of 6 months and are secured by pledges over the Group’s bank balances of RMB35,513,000.

As at balance sheet date, the average interest rates of bank borrowings was 6.53%.

Other unsecured loan represents State special project fund applied by the Company’s ultimate holding company. During the year, the company has obtained the approved from the government and the fund was charged against the cost of the project.

— 85 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. Share capital

Registered, issued and paid up capital of RMB1.00 each at beginning and end of year: State-owned legal person shares A shares (held by PRC public investors) H shares	2005 RMB’000 355,015 58,000 242,000 655,015	2004 RMB’000 355,015 58,000 242,000
		655,015

As at 31 December 2005, Panda Electronic Group Ltd.(“PEGL”), the controlling shareholder which is holding355,015,000 State-owned legal person shares of the Company, representing 54.2% of its total share capital, had a total of 182,525,000 shares,representing 27.9% of total share capital of the Company being judicially frozen owing to contractual disputes between the Company and certain of its bankers. PEGL had also pledged 72,500,000 shares, representing 11.1% of total share capital as securities 15.3% of total share capital were pledged to banks and at the same time judicially frozen by the banks.

— 86 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

29. Share premium and reserves

Balance at January 1, 2004 Profit for the year Reserve realised on amortisation of intangible assets Balance at 31 December 2004 Profit for the year Reserve realised on amortisation of intangible assets Balance at 31 December 2005	Share premium RMB’000 389,338 — — 389,338 — — 389,338	Capital reserve RMB’000 3 — — 3 — — 3	Statutory Asset common Revaluation Accumulated funds reserve losses RMB’000 RMB’000 RMB’000 181,468 28,073 (461,148) — — 71,524 — (752) 752 181,468 27,321 (388,872) — — 119,181 — (752) (752) 181,468 26,569 (268,939)	Total RMB’000 137,734 71,524 —
				209,258 119,181 —
				328,439

Statutory common funds are part of shareholders’ equity and comprise:

(a) The statutory common reserve fund which represents the appropriation of 10% of profit after taxation calculated in accordance with PRC accounting standards and the Company’s Articles of Association. Appropriation will no longer be required if the balance of the statutory common reserve fund has reached 50% of the Company’s registered capital. According to the Company’s Articles of Association, statutory common reserve fund can be used to offset prior year losses, to expand production and operation facilities of the company or to increase share capital. Except for the reduction of losses incurred, other usage should not result in the statutory surplus reserve falling below 25% of the registered capital.

— 87 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) The statutory public welfare fund which represents the appropriation of profit after taxation according to the requirements of the Company’s Articles of Association and Company Law in the PRC. According to the requirements, the Company will transfer 5% to 10% of profit after taxation calculated in accordance with PRC accounting standards. The fund can only be utilised for capital expenditure on employees’ collective welfare facilities. Such employee welfare facilities are owned by the Company. The public welfare fund is not distributable to shareholders. There has been no utilisation of the public welfare fund during the year. As at the balance sheet date, statutory public welfare fund amounted to approximately RMB38,426,000(2004: RMB38,426,000) was included in the statutory common funds.

In accordance with the Company’s Articles of Association, the profit available for distribution is the lesser of the profit determined in accordance with PRC accounting standards and profit determined in accordance with accounting principles generally accepted in Hong Kong. There was no distributable reserve available for distribution as at 31December 2004 and 2005.

30. Notes to the consolidated cash flows statement

Reconciliation of profit before taxation to net cash (used in)/generated from operating activities

	2005	2004
		(Restated)
	RMB’000	RMB’000
Profit before taxation	100,165	69,047
State special project fund recognised
to offset the cost of project	(570)	—
Write off of construction in progress	5,027	—
Share of results of associates	(257,381)	(222,736)
Interest income	(2,216)	(39,471)
Interest expenses	57,687	49,014
Impairment loss on long
term investment	3,956	810
Impairment losses on investments in
unconsolidated subsidiaries	—	84,033
Depreciation and amortisation	46,751	54,114
Gain on disposal of property, plant and
equipment and construction in progress	(2,462)	(2,680)
Impairment loss on construction in progress	5,722	5,000
Gain on disposal of interests in associates	(15,157)	(13,351)
Gain on partial disposal of a subsidiary	—	(6)

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Operating loss before working capital changes carried forward Increase in inventories Increase in trade and other receivables, deposits and prepayments and amounts due from related parties Increase in bills receivable Increase in bills payable (Decrease) / increase in trade and other payables, customers’ deposits and accrued charges and amounts due to related parties Cash (used in)/generated from operations Interest paid Income tax paid Net cash (used in)/generated from operating activities	2005 RMB’000 (58,478) (27,659) (13,482) (1,341) 21,781 (59,700) (138,879) (57,687) (3,113) (199,679)	2004 (Restated) RMB’000 (16,226) (50,011) (24,209) (884) 4,562 181,197 94,429 (49,014) (5,951) 39,464

31. Financial risk management

(a) Financial risk factors

The main risks arising from the Group’s financial instruments are credit risk, foreign exchange risk, liquidity risk and interest rate risk. After the Group’s principal mobile operation had been judicially executed, the Company strengthens the internal management and risk control. Generally, the Group adopts conservative strategies on its risk management. The Group has not used any derivatives and other instruments for hedging purposes nor does it hold or issue derivative financial instruments for trading purposes.

(i) Credit risk

The carrying amounts of trade receivables, other receivables, amounts due from fellow subsidiaries, associates and related companies and amount due from ultimate holding company represent the Group’s maximum exposure to credit risk in relation to financial assets. No other financial assets carry a significant exposure to credit risk.

The Group has no significant concentration of credit risk with any single counterparty except for the amount due from ultimate holding company.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) Foreign exchange risk

The Group’s main operations are in the PRC and has no significant exposure to any specific foreign currency other than RMB.

(iii) Liquidity risk

The Group will consistently maintain a prudent financial policy and ensure that it maintains sufficient cash to meet its liquidity requirements.

(iv) Fair value and cash flow interest rate risk

The Group has no significant interest-bearing assets, as such its income and operating cash flows are substantially independent of changes in market interest rates.

As at balance sheet date, all borrowings of the Group were short term borrowings. The interest rates of the bank borrowings are set out in note 27 to the consolidated financial statements.

(b) Fair values estimation

All financial instruments are carried at amounts not materially different from their fair values as at 31December, 2005

— 90 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. Related party transaction

(a) During the year, the Group entered into the following transactions with related parties:

	Fellow	subsidiaries		Associates	Ultimate	holding company
	2005	2004	2005	2004	2005	2004
		(Restated)		(Restated)		(Restated)
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Sale of components and parts (Note 1)	8,019	27,165	102,459	42,274	9,194	—
Purchase of components and parts (Note 1)	9,475	2,626	34,879	20,204	3,025	2,739
Fees paid for welfare, support and
sub-contracting services (Note 2)	13,636	3,030	7,545	—	3,678	2,545
Income for welfare, support, and
sub-contracting services (Note 2)	14,470	11,609	16,272	24,972	13,738	8,272
Rental income (Note 1)	230	—	—	—	—	800
Rental expenses (Note 1)	71	—	2,339	—	—	—
Trademark income (Note 2)	—	853	—	—	—	—

Note 1: The above transactions were carried out at market price.

Note 2: The transactions were carried out at cost plus a percentage profit mark-up.

(b) During the year, no interest income was received from unconsolidated subsidiary (2004:RMB25,837,000), interest income was calculated by reference to bank loan rate.
(c) During the year, Nanjing Panda Hua Ge Electronic Plastics Co., Ltd., a subsidiary of the Company, discounted bills of its fellow sucsidiary to banks on its behalf. As at 31 December 2005, the outstanding discounted bills amounted to RMB157,850,000. All costs incurred for the discounted bills were borne by the fellow subsidiary.
(d) As at balance sheet date, the Company had acceptance of guarantees provided by the ultimate holding company and its fellow subsidiary in the amount of RMB596,000,000. (2004: RMB596,000,000), and RMBNil (2004: RMB20,000,000) respectively.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) The remuneration of directors and other members of key management during the year was as follows:

Salaries and other short term benefits Retirement benefit scheme contributions	2005 RMB’000 3,798 199 3,997	2004 RMB’000 3,848 190
		4,038

(f) The amounts due from/(to) fellow subsidiaries, associates and related companies are unsecured, interest free and are repayable within the next twelve months.
(g) The amount due from ultimate holding company is unsecured and bears interest at standard banking rate. Except for the amount of RMB225,842,000 (before provision for bad and doubtful debt) which is repayable within the next twelve months, the reminding has no fixed repayment terms.

33. Contingent liabilities

At the balance sheet date, the Group and the Company had the following outstanding contingent liabilities t provided for in the financial statements in respect of:

Guarantees given in respect of banking facilities made available to subsidiaries Guarantees given in respect of banking facilities made available to third parties	The Group 2005 2004 RMB’000 RMB’000 — — — 71,514 — 71,514	The Company 2005 2004 RMB’000 RMB’000 29,070 4,741 — 71,154 29,070 76,255	The Company 2005 2004 RMB’000 RMB’000 29,070 4,741 — 71,154 29,070 76,255
			76,255

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

34. Commitments

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

Contracted but not provided for – property, plant and equipment – investments in subsidiaries	The Group 2005 2004 RMB’000 RMB’000 5,372 — — — 5,372 —	The Company 2005 2004 RMB’000 RMB’000 5,372 — 24,833 52,763 30,205 52,763	The Company 2005 2004 RMB’000 RMB’000 5,372 — 24,833 52,763 30,205 52,763
			52,763

INDEBTEDNESS

At the close of business on 30 April 2006, the Group has a total borrowing of approximately RMB929,627,000. These borrowings comprised of secured borrowings of RMB210,000,000 and other unsecured loans of RMB685,070,000 and bills payable of RMB34,557,000.

As at 30 April 2006, the Group had capital commitment of approximately RMB37,375,000.

As at 30 April 2006, the Group had the outstanding contingent liabilities of approximately RMB39,376,000 which are not provided for in the financial statements in relation to the guarantees given in respect of banking facilities made available to subsidiaries.

As at 30 April 2006, certain assets with a net book value of RMB148,536,000 were pledged to secure borrowing facilities granted to the Group. Bills payable are secured by pledges over the Group’s bank balances of RMB29,403,904.

Save as disclosed herein, the Group did not have any mortgages, charges, debt securities or loan capital, issued or outstanding or authorised or otherwise, created but unissued, or other borrowings or indebtedness, mortgages and charges or contingent liabilities as at 30 April 2006.

WORKING CAPITAL

As the acquisition of 25% equity interest does not involve the outflow of fund from the Company, the Directors are of the opinion that after taking into account the internal resources and the banking and other facilities available to the Group, the Group will have sufficient working capital in the absence of unforeseen circumstances for at least the next 12 months from the date of this circular.

MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial position of the Group since 2006, the date to which the latest published audited consolidated financial statements of the Group were made up.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

C MANAGEMENT DISCUSSION AND ANALYSIS

1. For the year ended 31 December 2005

Business Review

Following the judicial forceful execution of Panda Mobile and Panda Communication in 2005, the Group took efforts in ongoing operations of satellite communication, electromechanical, information technology and electronic manufacturing businesses. During the year, the Group recorded revenue from principal operations amounting to RMB851 million, representing an increase of 27.97% as compared with that of last year. Profit of principal operations of the Group for the year amounted to RMB124 million, representing an increase of 26.39% as compared with that of last year. Net profit attributable to shareholders amounted to RMB92.76 million, representing an increase of 41.30% as compared with that of last year. The growth of turnover and profit mainly resulted from the development of principal operations and the considerable increase in results of associated companies.

Liquidity and Financial Resources

The Group’s working capital for the 2005 mainly derived from cash generated from operating activities, dividends from associates, borrowings from principal banks and income from disposal of investment.

The gearing ratio of the Group (the ratio between total liabilities and total assets), net current assets, liquidity ratio and quick ratio were 48.40%, RMB436 million, 1.35 and 1.21 respectively as at 31 December 2005.

Cash: the Group had bank balances and cash amounting to RMB347 million as at 31 December 2005.

Loans: the Group had short-term bank loans amounting to RMB839 million and basic interest rate per annum was approximately 5.58% as at 31 December 2005.

Directors believed that the Group can maintain its existing bank facilities to meet various financial obligations.

Capital Structure

There was no change on the capital structure of the Company in 2005.

Foreign Exchange Risk

The Company’s foreign exchange risk was minimal as the business was mainly dominated with RMB.

— 94 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Investments and their performance

In 2005, the operating results of the Group’s two investee companies were quite satisfying. Nanjing Ericsson Panda Communication Co. Ltd (“ENC”), which is held as to 27% by the Company, recorded net profit of RMB415 million, representing a decrease of 19.72% as compared with that of last year. Beijing Sony Ericsson Mobile Communication Limited (“BMC”) which is held as to 20% by the Company, recorded net profit of RMB692 million, representing an increase of 99.42% as compared with that of last year. With the start-up and development of 3G mobile communication in the PRC, a cheerful prospect is opened up before the said two companies.

Judicial Forceful Execution of Panda Mobile and Panda Communication

On 10 March 2005, the People’s Court of Xuan Wu Qu of Nanjing City ruled to take judicial forceful execution on 51% equity interests valued at RMB19.9932 million in Nanjing Panda Mobile Communication Equipment Co., Ltd. (“Panda Mobile”) held by the Company and 95% of equity interests valued at RMB100.0242 million in Nanjing Panda Communication Development Co. Ltd.(“Panda Communication”) held by the Company be used to set off for an amount of RMB120 million of debt and interests accrued thereon owed to Nanjing Wei Te Investment Management Company Limited (“Wei Te”). Upon the judicial forceful execution, Panda Mobile and Panda Communication are not the subsidiaries of the Company thereafter.

Disposal of Equity Interests in Nanjing Sharp Electronics Co. Ltd.

On 10 October 2005, the Company and Japan Sharp Co., Ltd. (“Sharp”) entered into an agreement to transfer 8.72% equity interests in Nanjing Sharp Electronics Co., Ltd. (“NSEC”), being the entire shareholding held by the Company, at a consideration of US$10.146 million (approximately RMB82.282 million). The consideration of the object of the transaction was determined on arm’s length of the Company and Sharp based on the appraised value in the valuation report issued on 22 September 2005.

Pursuant to the said agreement, the Company has recovered the investment of RMB82,282,000 and realized a gain on disposal of investment totaling RMB6,366,300 which will be used for development of the Company’s principal operations.

Staff Costs

As of 31 December 2005, the Company had a total of 2,025 employees, and 735 staff members having retired to which the Company had to bear the related expenses. The salary, allowance and welfare packages to staff for the whole year (excluding the remuneration of Directors and Supervisors) amounted to RMB39,800,000, and the contribution to retirement scheme amounted to RMB5,909,000.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Material Guarantees

As of 31 December 2005, the Company granted guarantees respectively to bank loan totaling RMB8.0702 million (originally: US$1 million) to Nanjing Panda Information Industry Co., Ltd., bank loan of RMB5 million to Nanjing Panda Mechnical Machinery Co. Ltd. and bank loan of 16 million to Nanjing Panda Accurate Machinery Co., Ltd., all of which are its controlling subsidiaries. The said guarantees totaling RMB29.072 million, are provided to controlling subsidiaries.

Pledge

The Company pledged properties located at 301 Zhong Shan Dong Lu, Xuan Wu District, Nanjing with certificates of title to the property (Xuan Bian Zi No.102156) with assessed value of RMB306,100,000.00 for a loan of RMB70,000,000.00, RMB100,000,000.00 and RMB40,000,000.00 respectively from Nanjing Han Fu Branch of Industrial and Commercial Bank of China.

2. For the year ended 31 December 2004

Business Review

Revenues from principal operations of the Group for the year 2004 amounted to RMB665,000,000, representing a decrease of 82.8% from last year; net profits amounted to RMB65,640,000, representing a decrease of 32.6% from last year. Such significant decreases in turnover and profit were mainly due to the Judicial Forceful Execution of two subsidiaries Panda Mobile and Panda Communication. After the Judicial Forceful Execution, the Group ceased Panda’s mobile phone business, while ongoing operating businesses such as satellite communication, electro-mechanical products, information technology and electronic manufacturing business kept a promising momentum.

Liquidity and Financial Resources

The Group’s working capital for the 2004 mainly derived from cash generated from operating activities, dividends from associates, borrowings from principal banks and income from disposal of investment.

As at 31 December 2004, gearing ratio of the Company was approximately 53.5% (the ratio between total liabilities and total assets), and net current liabilities amounted to RMB639,000,000.

Cash: As at 31 December 2004, bank balances and cash of the Group amounted to RMB102,000,000.

Borrowings: As at 31 December 2004, short-term bank loans of the Group amounted to RMB956,000,000 at monthly interest rate around 4.65‰.

Directors believed that the Group can maintain its existing bank facilities to meet various financial obligations.

— 96 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Capital Structure

There was no change on the capital structure of the Company in 2004.

Foreign Exchange Risk

The Company’s foreign exchange risk was minimal as the business was mainly dominated with RMB.

Performance of Investments

In 2004, two major joint ventures invested by the Group achieved favourable operating results, among which Nanjing Ericsson Panda Communication Co., Ltd. (“ENC”, 27% held by the Company) achieved a net profit of RMB517,000,000, representing an increase of 32.94% as compared with last year; and Beijing Sony Ericsson PUTIAN Mobile Communication Co., Ltd. (“BMC”, 20% held by the Company) achieved a net profit of RMB347,000,000, representing an increase of 97.16% as compared with last year.

The said two associates represented a major income source of the Company.

Disposal of the equity interest in Jiangsu Provincial Software Industry Company Limited

The Company entered into interests transfer agreement with Nanjing Jiangning Economic and Technological Development Corporation and Nanjing Xincheng Company Limited respectively on 12 May 2004, pursuant to which 35% equity interests in aggregation in Jiangsu Provincial Software Industry Company Limited held by the Company was disposed in consideration of RMB80,339,490.

The Company had received all payment for consideration from the transaction parties under the terms of agreement before 11 June 2004. The transfer of “Jiangsu Software Park” by the Company amounted to 35% equity interests in aggregation, whereby the Company had recovered RMB80,339,490 and had a gain from investment totalling RMB13,351,960. The cash flow generated from the transfer will be utilised in development of the Company’s principal operations.

Staff Costs

As of 31 December 2004, the Company had a total of 2,087 employees, and 793 staff members having retired to which the Company had to bear the related expenses. The salary, allowance and welfare packages to staff for the whole year (excluding the remuneration of Directors and Supervisors) amounted to RMB31,510,000, and the contribution to retirement scheme amounted to RMB6,673,000.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Material Guarantees

As of 31 December 2004, as far as guarantee granted to the controlling subsidiaries were concerned, the Company provided letter of credit and bank acceptance bills to Nanjing Panda Information Industry Co. Ltd. amounted to RMB19.81 million in total; bank loans to Nanjing Panda Mechanical Manufacturing Co. Ltd. amounted to RMB5 million; bank loans to Nanjing Panda Accurate Machinery Co. Ltd. amounted to RMB5 million; bank loans to Nanjing Huage Dian Qi Plastic Industrial Co. Ltd. amounted to RMB17.6 million; bank loans and bank (commercial) acceptance bills to Nanjing Panda Mobile Communications Equipment Co. Ltd. (“Panda Mobile”) amounted to RMB356 million in total; bank loans and bank (commercial) acceptance bills and letter of credit to Nanjing Panda Communication Development Co. Ltd. (“Panda Communication”) amounted to RMB359.14 million. The above guarantees amounted to RMB762.55 million in total.

Pledge

The Company pledged properties located at 301 Zhong Shan Dong Lu, Nanjing with certificates of title to the property (Xuan Bian Zi No.241065, valued at RMB386,680,000.00) for a loan of RMB80,000,000.00 from Industrial and Commercial Bank of China (Jiangsu Branch).

The Company pledged properties located at 301 Zhong Shan Dong Lu, Nanjing with certificates of title to the property (Xuan Bian Zi No.102156) with assessed value of RMB306,100,000.00 for a loan of RMB20,000,000.00 from business department of Industrial and Commercial Bank of China (Jiangsu Branch).

3. For the year ended 31 December 2003

Business Review

The income from the principal business of the Group in 2003 was RMB3,867 million and net profit was RMB101 million. The income was mainly derived from mobile phone business, which accounted for 84% of the overall turnover.

Liquidity and Financial Resources

The Group’s working capital for the 2003 was mainly derived from cash generated from operating activities, dividends from associates, borrowings from principal banks.

The gearing ratio of the Group (the ratio between total liabilities and total assets) and net current assets were 63.64% and RMB296 million as at 31 December 2003.

Cash: the Group had bank balances and cash amounting to RMB788 million as at 31 December 2003.

Loans: the Group had short-term bank loans amounting to RMB1,627 million and basic interest rate per month was approximately 3.91‰ as at 31 December 2003.

Directors believed that the Group can maintain its existing bank facilities to meet various financial obligations.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Capital Structure

There was no change on the capital structure of the Company in 2003.

Foreign Exchange Risk

The Company’s foreign exchange risk was minimal as the business was mainly dominated with RMB.

Investments and their performance

In 2003, the operating results of the Group’s two investee companies were quite satisfying. Nanjing Ericsson Panda Communication Co. Ltd (“ENC”), which is held as to 27% by the Company, recorded net profit of RMB404 million, representing a decrease of 93.3% as compared with that of last year. Beijing Sony Ericsson Mobile Communication Limited (“BMC”) which is held as to 20% by the Company, recorded net profit of RMB176 million, representing an increase of 17.2% as compared with that of last year. However, another joint venture of the Company, Nanjing Microcell Panda Mobile Terminals Co., Ltd. (“MPC”), which is held as to 35% by the Company recorded net loss of RMB212 million. The Company undertook the responsibility according to its interest in MPC.

Staff Costs

As of 31 December 2003, the Company had a total of 2,045 employees, and 440 staff members having retired to which the Company had to bear the related expenses. The salary, allowance and welfare packages to staff for the whole year (excluding the remuneration of Directors and Supervisors) amounted to RMB38,517,000, and the contribution to retirement scheme amounted to RMB8,938,000.

Material Guarantees

As at 31 December 2003, the Company provided guarantees in respect of the following facilities: the bank loan of RMB50 million for Nanjing Zhongda Mode (Group) Co., Ltd, an independent third party of the Company; the discounted bills of RMB1,615,500 for Nanjing Pande Juneng Small Home Appliance Co., Ltd., a subsidiary of the Company; the discounted bills of RMB12,939,900 for Nanjing Panda Information Industry Co., Ltd; the bank loan of RMB12.5 million for Nanjing Huage Electric Plastics Industry Co., Ltd; the bank loan and discounted bills of RMB130 million in aggregation for Nanjing Panda Mobile Telecommunication Components Company Limited; the bank loan and discounted bills of RMB165 million in aggregation for Nanjing Panda Telecommunication Development Company Limited. The total amount for the said guarantees was RMB372,055,400.

Pledge

The Company pledged properties located at 301 Zhong Shan Dong Lu, Nanjing with certificates of title to the property (Xuan Bian Zi No.031463, No.031464 and No.031485; Xuan Chu No.102154 and No.102155, valued at RMB114,490,000.00) for a loan of RMB74,000,000.00 from Industrial and Commercial Bank of China (Jiangsu Branch).

— 99 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Company pledged properties located at 301 Zhong Shan Dong Lu, Nanjing with certificates of title to the property (Xuan Bian Zi No.031486, No.031487, No.031488, No.031489, No.031490 and No.031491) for a loan of RMB180,000,000.00 from Industrial and Commercial Bank of China (Jiangsu Branch).

4. Outlook

In the future, the Group will proactively continue its businesses including mobile telecommunication, satellite communication, electromechanical and information technology products and electronics manufacturing, keeping penetrating into domestic and overseas markets to foster new income stream and further develop Sino-foreign joint ventures for sound development. The Directors are confident in the Group’s prospect.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

A. ACCOUNTANT’S REPORT

The following is the text of report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Morison Heng, Chartered Accountants, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix VI, a copy of the following report is available for inspection.

Morison Heng Morison Heng Chartered Accountants 17/F., One Hysan Avenue, Certified Public Accountants Causeway Bay, Hong Kong 30 June 2006

The Directors

Nanjing Panda Electronics Company Limited 301 Zhong Shan Road East, Nanjing, PRC.

Dear Sirs,

We set out below our report on the financial information relating to Hua Fei Colour Display Systems Co., Ltd (“Hua Fei”) and its subsidiary (hereinafter collectively referred to as the “Hua Fei Group”) for each of the three years ended 31 December 2003, 2004 and 2005 (the “Relevant Periods”) for inclusion in the circular of Nanjing Panda Electronics Company Limited (“the Company”) dated 30 June 2006 in connection with the proposed transfer of 25% equity interest in Hui Fei from Jiangsu International Trust to the Company in satisfaction of the debt.

Hua Fei is a sino-foreign joint venture incorporated in the PRC in 1988 with a registered share capital of USD289,120,000. Hua Fei’s principal business activities are the development, design and manufacture of colour picture tubes and colour monitor tubes.

At the date of this report, Hua Fei has the following subsidiary:

	Place and	Issued and	Attributable
	date of	fully paid	equity interest of	Principal
Name of subsidiary	establishment	share capital	Hua Fei	activities
Nan Jing Jin Hui	PRC 1993	RMB43,686,000	Directly	Manufacturing
Industry Co., Ltd			99.9%	of electronics
(南京錦輝實業有限公司)				products

All companies now comprising the Hua Fei Group have adopted 31 December as the financial year end date and their statutory financial statements were prepared in accordance with the relevant accounting principles and financial regulations applicable to companies established in the PRC and were audited by the following Certified Public Accountants registered in the PRC.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Name of company	Financial year	Name of auditors
Hua Fei Colour Display	Each of the three years	Jiangsu Talent Certified
Systems Co., Ltd	ended 31 December 2005	Public Accountants
(華飛彩色顯示系統有限公司)		(江蘇天衡會計師
		事務所有限公司)
Nan Jing Jin Hui Industry Co., Ltd	Year ended 31	Jiangsu Talent Certified
(南京錦輝實業有限公司)	December 2005	Public Accountants
		(江蘇天衡會計師
		事務所有限公司)

The financial information of the consolidated result, consolidated statement of changes in equity and consolidated cash flows of the Hua Fei Group for the Relevant Periods and the consolidated balance sheets of the Hua Fei Group and the balance sheets of Hua Fei as at 31 December 2003, 2004 and 2005 together with the notes thereto (the “Financial Information”) set out in this report have been prepared based on the audited financial statements of the companies comprising the Hua Fei Group, after making such adjustments as are appropriate to comply with the Hong Kong Financial Reporting Standards (“HKFRS”), and are presented on the basis set out in Section 1 below.

For the purpose of this report, we have carried out additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants.

Management of Hua Fei is responsible for the Financial Information which gives a true and fair view. In preparing the Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. The directors of the Company are responsible for the contents of the Circular in which the report is included. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of the Hua Fei Group as at 31 December 2003, 2004 and 2005 and the consolidated results and cash flows of Hua Fei Group for the Relevant Periods.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

I. FINANCIAL INFORMATION

CONSOLIDATED INCOME STATMENTS

Notes
TURNOVER
4
Cost of sales
Gross profit
Other revenue
4
Administrative expenses
Other operating expenses
PROFIT FROM OPERATING ACTIVITIES
5
Finance costs
6
Impairment loss on goodwill
25(iii)
SHARE OF PROFITS/(LOSS) OF ASSOCIATES
PROFIT/ (LOSS) BEFORE TAX
Taxation
8
PROFIT/ (LOSS) FOR THE YEAR
ATTRIBUTABLE TO:
Equity holders of the parent
Minority Interests

Year ended 31 December
2003
2004
2005
RMB’000
RMB’000
RMB’000
4,260,638
4,218,209
3,649,473
(3,606,626)
(3,468,436)
(3,172,972)
654,012
749,773
476,501
88,540
86,808
48,557
(274,213)
(323,481)
(270,011)
(218,816)
(152,897)
(116,777)
249,523
360,203
138,270
(78,300)
(82,791)
(17,056)
—
—
(1,056,484)
—
6,133
(4,566)
171,223
283,545
(939,836)
(12,524)
(12,594)
(8,814)
158,699
270,951
(948,650)
158,699
270,951
(948,668)
—
—
18
158,699
270,951
(948,650)

— 103 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

CONSOLIDATED BALANCE SHEETS

Notes NON-CURRENT ASSETS Property, plant and equipment 11 Construction in progress 12 Land use rights 13 Available for sale financial assets 14 Interests in associates 16 CURRENT ASSETS Inventories 17 Bills receivables Trade receivables 18 Other receivables, deposits and prepayments Land use rights 13 Taxation Amounts due from fellow subsidiaries, associates, and related companies 19 Cash and bank balances CURRENT LIABILITIES Trade payables 20 Bills payable Other payables and accruals Amounts due to fellow subsidiaries, associates, and related companies 21 Amounts due to a shareholder 22 Borrowings 23 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON CURRENT LIABILITIES Long-term borrowings 23 Deferred taxation 24 CAPITAL AND RESERVES Capital 26 Reserves Retained profits/(loss Shareholders’ funds Minority interests	2003 RMB’000 2,746,137 51,216 66,205 9,951 16,554 2,890,063 203,542 466,138 422,646 11,862 1,388 — 1,049,670 156,164 2,311,410 1,098,118 734,297 129,749 2,650 — 577,531 2,542,345 (230,935) 2,659,128 (621,798) (12,524) (634,322) 2,024,806 1,643,709 249,153 131,944 2,024,806 — 2,024,806	At 31 December 2004 RMB’000 2,535,893 24,799 64,816 9,951 89,875 2,725,334 159,143 582,655 680,349 35,526 1,388 29,530 841,740 87,929 2,418,260 876,504 1,041,638 158,191 16,270 — 364,032 2,456,635 (38,375) 2,686,959 (368,837) (18,544) (387,381) 2,299,578 1,643,709 252,974 402,895 2,299,578 — 2,299,578	2005 RMB’000 3,008,436 34,328 63,427 9,951 85,308 3,201,450 134,778 332,522 659,383 9,624 1,388 7,828 82,280 105,481 1,333,284 738,674 949,357 195,591 253,310 42,350 62,762 2,242,044 (908,760) 2,292,690 (88,983) (113,759) (202,742) 2,089,948 2,111,465 780,788 (802,345) 2,089,908 40 2,089,948

— 104 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

BALANCE SHEET

Notes NON-CURRENT ASSETS Property, plant and equipment 11 Construction in progress 12 Land use rights 13 Available for sale financial assets 14 Interests in subsidiaries 15 Interests in associates 16 CURRENT ASSETS Inventories 17 Bills receivables Trade receivables 18 Other receivables, deposits and prepayments Land use rights 13 Taxation Amounts due from fellow subsidiaries, associates, and related companies 19 Cash and bank balances CURRENT LIABILITIES Trade payables 20 Bills payable Other payables and accruals Amounts due to fellow subsidiaries, associates, and related companies 21 Amounts due to a shareholder 22 Borrowings 23 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON CURRENT LIABILITIES Long-term borrowings 23 Deferred taxation CAPITAL AND RESERVES Capital 26 Reserves Retained profits/(loss)	2003 RMB’000 2,746,137 51,216 66,205 9,951 — 16,554 2,890,063 203,542 466,138 422,646 11,862 1,388 — 1,049,670 156,164 2,311,410 1,098,118 734,297 129,749 2,650 — 577,531 2,542,345 (230,935) 2,659,128 (621,798) (12,524) (634,322) 2,024,806 1,643,709 249,153 131,944 2,024,806	At 31 December 2004 RMB’000 2,535,893 24,799 64,816 9,951 — 89,875 2,725,334 159,143 582,655 680,349 35,526 1,388 29,530 841,740 87,929 2,418,260 876,504 1,041,638 158,191 16,270 — 364,032 2,456,635 (38,375) 2,686,959 (368,837) (18,544) (387,381) 2,299,578 1,643,709 252,974 402,895 2,299,578	2005 RMB’000 2,991,783 34,328 63,427 9,951 66,038 85,308 3,250,835 103,443 332,522 659,226 7,034 1,388 7,828 82,280 97,637 1,291,358 729,405 957,196 194,887 253,310 42,350 62,762 2,239,910 (948,552) 2,302,283 (88,983) (113,759) (202,742) 2,099,541 2,111,465 780,788 (792,712) 2,099,541

— 105 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Attribute to equity holders of the Hua Fei

At 1 January 2003 Profit for the year Transfer to/(from) reserves Staff bonus and welfare Dividend paid At 31 December 2003 At 1 January 2004 Profit for the year Income recognized directly in equity At 31 December 2004 At 1 January 2005 Capital contribution Profit/ (Loss) for the year Income recognized directly in equity Transfer to/(from) reserves Staff bonus and welfare Surplus on revaluation Dividend paid At 31 December 2005	Registered capital RMB’000 1,643,709 — — — — 1,643,709 1,643,709 — — 1,643,709 1,643,709 467,756 — — — — — — 2,111,465	Assets revaluation reserve RMB’000 — — — — — — — — — — — — — — — — 489,608 — 489,608	Statutory reserves RMB’000 324,127 — 8,026 — (83,000) 249,153 249,153 — 3,821 252,974 252,974 — — 20,527 17,679 — — — 291,180	Retained profits/(loss) RMB’000 (10,704) 158,699 (8,026) (8,025) — 131,944 131,944 270,951 — 402,895 402,895 — (948,668) — (17,679) (5,893) — (233,000) (802,345)	Total RMB’000 1,957,132 158,699 - (8,025) (83,000) 2,024,806 2,024,806 270,951 3,821 2,299,578 2,299,578 467,756 (948,668) 20,527 — (5,893) 489,608 (233,000) 2,089,908

— 106 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

CONSOLIDATED CASH FLOW STATEMENTS

Notes
Cash flows from operating activities
Profit/(Loss) before taxation
Adjustment for:
Depreciation and amortisation
Share of results of associates
(Gain)/loss on disposal of property,
plant and equipment
Impairment of goodwill
Impairment of property, plant and equipment
Interest income
Interest expenses
Operating profit before working capital changes
(Increase)/decrease in inventories
(Increase)/decrease in trade and other receivables,
deposits and prepayments and amount
due from related parties
(Increase)/decrease in bills receivable
Increase/(decrease) in bills payable
Increase in amount due to a shareholder
Increase/(decrease) in trade and other payables,
customers’ deposits and accrued charges and
amounts due to related parties
Cash generated from operations
Interest income
Interest paid
Income tax paid
Net cash generated from operating activities

Year ended 31 December
2003
2004
2005
RMB’000
RMB’000
RMB’000
171,223
269,498
(939,836)
380,067
266,536
250,857
—
(6,133)
4,566
(357)
(153)
298
—
—
1,056,484
35,944
30,719
43,528
(9,159)
(23,718)
(5,010)
78,300
82,791
17,056
656,018
619,540
427 ,943
(11,760)
32,227
48,274
(571,958)
(177,891)
498,984
359,160
(116,517)
250,133
(144,548)
307,341
(92,281)
—
—
42,350
(154,417)
(54,535)
(408,049)
132,495
610,165
767,354
9,159
23,718
5,010
(78,300)
(82,791)
(17,056)
—
(6,574)
—
63,354
544,518
755,308

— 107 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Notes
Investing activities
Purchase of property, plant and equipment
Acquisition of interest in associates
Proceeds on sale of property, plant and equipment
Additional investment in a subsidiary
25
Acquisition of a company
25
Net cash used in investing activities
Financing activities
New loans raised
Repayment of loans
Dividend paid
Net cash generated from/(used in)
financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Analysis of balance of cash and cash equivalents
Bank balances and cash

Year ended 31 December
2003
2004
2005
RMB’000
RMB’000
RMB’000
(105,389)
(52,131)
(131,955)
(16,554)
(94,392)
—
357
231
101
—
—
(61,430)
—
—
24,652
(121,586)
(146,292)
(168,632)
540,000
200,000
245,000
(337,356)
(666,461)
(581,124)
(83,000)
—
(233,000)
119,644
(466,461)
(569,124)
61,412
(68,235)
17,552
94,752
156,164
87,929
156,164
87,929
105,481
156,164
87,929
105,481

— 108 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

NOTES TO THE FINANCIAL INFORMATION

1. BASIS OF PREPARATION OF FINANCIAL INFORMATION

The Financial Information are prepared based on the audited financial statements of the companies comprising the Hua Fei Group, after making such adjustments as are appropriate to comply with the Hong Kong Financial Reporting Standards (“HKFRS”).

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

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS

For the year ended 31 December 2005, the Hua Fei Group has applied, for the first time, a number of new Hong Kong Financial Reporting Standards (“HKFRS”), Hong Kong Accounting Standards (“HKASs”) and Interpretations (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) that are effective for accounting periods beginning on or after 1 January 2005.

Impact of issued but not yet effective HKFRSs

The Hua Fei Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for annual period beginning on or after 1 January 2006:

HKAS 1 Amendment Capital Disclosures HKAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures HKAS 21 Amendment Net Investment in a Foreign Operation HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions HKAS 39 Amendment The Fair Value Option HKAS 39 & HKFRS 4 Financial Guarantee Contracts (Amendments) HKFRS 6 Explorations for and Evaluation of Mineral Resources HKFRS 7 Financial Instruments: Disclosures HK(IFRIC)-Int 4 Determining whether an Arrangement contains a lease HK(IFRIC)-Int 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds HK(IFRIC)-Int 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment HK(IFRIC)-Int 7 Applying the Restatement Approach under HKFRS 29 Financial Reporting in Hyperinflationary Economics

— 109 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

3. SIGNIFICANT ACCOUNTING POLICIES

The Financial Information have been prepared under the historical cost convention except for certain assets which are measured at fair value, as explained in the accounting policies set out below. The Financial Information has been prepared in accordance with the following policies which conform with the accounting principles generally accepted in Hong Kong.

Basis of consolidation

The consolidated financial statements incorporate the financial statement of the Hua Fei and its subsidiaries made up to 31 December each year. The results of the subsidiaries acquired and disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. All significant intercompany transactions, balances and unrealized gains on transaction between group enterprises are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Minority interest at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and statement of changes in equity within equity, separately from equity attributable to the equity shareholders of the company. Minority interest in the results of the Hua Fei Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interest and the equity shareholders of the company.

Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Hua Fei Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the Hua Fei Group’s interest until the minority’s share of losses previously absorbed by the Group has been recovered.

— 110 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Business combination

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Hua Fei Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities assumed in a business combination are recognised at their values at the acquisition date.

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

Goodwill

Goodwill represents the excess of the cost of acquisition over the Hua Fei Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or an associate recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill on acquisitions of associates is included in investments in associates.

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

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

Subsidiaries

A subsidiary is an enterprise in which the Hua Fei Group has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

Investments in subsidiaries are included in the Hua Fei’s balance sheet at cost less any impairment losses. The results of the subsidiaries are accounted for by the Hua Fei on the basis of dividend received and receivable.

— 111 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Associated companies

An associate is an enterprise, not being a subsidiary nor an interest in a joint venture, over which the Hua Fei Group is in a position to exercise significant influence, through participation in the financial and operating policy decisions of the investee.

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Hua Fei Group’s share of the net assets of the associate, less impairment in the value of individual investments. Losses of an associate in excess of the Hua Fei Group’s interest in that associate are not recognised. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment.

Where a Hua Fei Group enterprise transacts with an associate of the Hua Fei Group, unrealised gains and losses are eliminated to the extent of the Hua Fei Group’s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the assets transferred.

In the Hua Fei’s balance sheet, its investments in associates are stated at cost less impairment losses. The results of associates are accounted for by the Hua Fei on the basis of dividends received and receivable.

Property, plant and equipment

— 112 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life after taking into account its estimated residual value. The estimated useful lives of fixed assets are as follows:

Buildings 25 - 33 years Plant and machinery 10 - 14 years Electronic equipment 7 years Chemical equipment 14 years Transportation equipment 7 years Others 5 years

Land use rights

Construction in progress

Impairment of assets excluding goodwill

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

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

— 113 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

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

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cashgenerating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit and loss account, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Inventories

Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Financial instruments

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

(i) Trade and other receivables

— 114 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(ii) Investments

Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction cost. At subsequent reporting dates, debts securities that the Hua Fei Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit and loss account when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised.

Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in profit and loss account for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss.

Impairment losses recognised in profit or loss for debt instruments classified as availablefor-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

(iii) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other shortterm highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. In preparing cash flow statement, cash and cash equivalents include bank loans which require immediate repayment on demand.

— 115 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(iv) Borrowings

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

(v) Trade and other payables

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

(vi) Equity instruments

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

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the profit and loss account because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Hua Fei Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

— 116 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Hua Fei Group intends to settle its current tax assets and liabilities on a net basis.

Provisions and contingencies

Translation of foreign currencies

The individual financial statements of each Hua Fei Group entity are presented in the currency of the primary economic environment in which the entity operates (its “functional currency”). The consolidated financial statements are expressed in Renminbi “RMB”), which is the functional currency of the Hua Fei and each Hua Fei Group entity, and the presentation currency for the consolidated statements.

At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit and loss account for the period.

— 117 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Borrowings costs

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

Retirement benefit scheme

According to the relevant regulation in the PRC, the Hua Fei Group contributes to pension funds based on the standard rates fixed by the PRC Government. The Hua Fei Group remits all pension fund contributions to respective social security offices, which are responsible for the payment and liabilities relating to the pension funds. Payments to retirement benefits scheme are charged to the profit and loss account.

Operating leases

Recognition of income

Revenue is recognized when it is probable that the economic benefits will flow to the Hua Fei Group and when the revenue can be measured reliably, on the following bases:

(a) Sales are recognized when the significant risks and rewards of ownership have been transferred to the buyer;
(b) Interest income from bank deposits is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable;
(c) from the rendering of services, when the services are rendered;
(d) rental income, in the period in which the properties are let out and on the straight-line basis over the lease term.

— 118 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Related parties

Parties are considered to be related to the Hua Fei Group if the Hua Fei Group has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions, or vice versa, or where the Hua Fei Group and the other party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Hua Fei Group where those parties are individuals, and postemployment benefit plans which are for the benefit of employees of the Hua Fei Group or of any entity that is a related party of the Hua Fei Group.

Critical accounting and other key sources of estimation uncertainty

Judgements

In the process of applying the Hua Fei Group’s accounting policies, management has made the judgements in relation to impairment of assets apart from those involving estimation as discussed below, which have the most significant effect on the amounts recognised in the financial statements.

In determining whether an asset is impaired or the event previously causing the impairment no longer exists, the Hua Fei Group has to exercise judgement in the area of asset impairment, particularly in assessing: (1) whether an event has occurred that may effect the asset value or such event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by net present value of future cash flows which are estimated based upon the continued use of the asset or rerecognition; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the net present value used in the impairment test.

Estimation uncertainty

— 119 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

4. TURNOVER AND REVENUE

Turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts, but excludes intra-Hua Fei transactions.

An analysis of the Hua Fei’s turnover and revenue is as follows: -

Turnover Other revenue Sales of materials Sale of scrap Interest income Rental income Processing fees and others Total	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 4,260,638 4,218,209 3,649,473 36,095 26,181 21,025 2,925 5,364 2,773 9,159 23,718 5,010 3,141 3,141 2,094 37,220 28,404 17,655 88,540 86,808 48,557	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 4,260,638 4,218,209 3,649,473 36,095 26,181 21,025 2,925 5,364 2,773 9,159 23,718 5,010 3,141 3,141 2,094 37,220 28,404 17,655 88,540 86,808 48,557
		21,025 2,773 5,010 2,094 17,655
		48,557

Note 1: Processing fees and others represent the fee received for the raw materials processed and the income received for the provisions of the utilities and administration services.

5. PROFIT FROM OPERATING ACTIVITIES

The Hua Fei’s profit from operating activities is arrived at after charging and crediting the following:

		Year ended 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
Charging:
Auditors’ remunerations	300	300	300
Amortisation of leasehold land payments	1,852	1,389	1,389
Cost of inventories	3,606,626	3,468,436	3,172,972
Depreciation of property, plant and equipment	375,181	268,119	490,873
Net exchange loss	39,123	12,753	—
Provision for doubtful debts	191	10,270	—
Provision for inventories	26,253	12,172	6,668
Impairment of property, plant and equipment	4,759	8,278	41,783
Impairment of goodwill	—	—	1,056,484
Staff costs (including directors’ remuneration):
Wages, salaries and staff welfare	125,195	117,676	104,817
Pension scheme contributions	20,021	19,780	25,708
Crediting:
Gain on disposal of property, plant and equipment	4,382	11,981	258
Net exchange gain	—	—	14,272
Reversal of provision for doubtful debts	—	—	4,656

— 120 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

6. FINANCE COSTS

Interest on borrowings wholly repayable: Within one years Within 2nd to 5th years Over 5 years	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 37,704 41,124 7,054 32,513 28,129 5,715 8,083 13,538 4,287 78,300 82,791 17,056	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 37,704 41,124 7,054 32,513 28,129 5,715 8,083 13,538 4,287 78,300 82,791 17,056
		17,056

7. DIRECTORS’ AND EMPLOYEE EMOLUMENTS

Directors’ emoluments

Fees Salaries and other benefits Contribution to retirement benefits scheme	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 — — — — — — — — — — — —	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 — — — — — — — — — — — —
		—

Five highest paid employees

Details of the remuneration of the five highest paid employees of which none of them are directors, during the Relevant Periods, are as follows:

Salaries, allowances and benefits in kind Contributions to retirement benefits scheme	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 1,280 1,280 1,280 — — — 1,280 1,280 1,280	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 1,280 1,280 1,280 — — — 1,280 1,280 1,280
		1,280

The remuneration of each of the highest paid employees for each of the Relevant Periods fell within the nil to RMB1,000,000 band.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

8. TAXATION

Current - PRC Deferred taxation Total tax charges for the year	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 — 7,032 — 12,524 5,562 8,814 12,524 12,594 8,814

Hong Kong profits tax has not been provided as the Hua Fei had no assessable profits arising in Hong Kong during the Relevant Periods.

The PRC income tax is computed according to the relevant laws and regulations in the PRC. The applicable income tax rate was 15% throughout the Relevant Periods. Reconciliation between tax expenses and accounting profit at applicable tax rate:

Profit / (loss) before tax Tax at the statutory tax rate of 15% Income not subject to tax Expenses not deductible for tax Capital allowances Utilisation of previously unrecognized tax loss Total taxation	Year ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 171,223 283,545 (939,836) 25,684 42,531 (140,975) (12,587) (51,963) (31,844) 11,782 20,827 176,767 12,524 6,020 8,814 (24,879) (4,821) (3,948) 12,524 12,594 8,814

Deferred tax assets are recognized for tax losses carried forward to the extent that realization of the related tax benefit through the future taxable profits is probable. The Hua Fei Group had unrecognized tax losses of approximately RMB45,161,000, RMB 133,519,000 which represented deferred tax assets of approximately RMB6,774,000, RMB20,027,000 as at 31 December 2003 and 2005 respectively for offset against future taxable income.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

9. DIVIDENDS

		Year ended 31 December
	2003	2004	2005
	RMB’000	RMB’000	RMB’000
DIVIDENDS PAID	83,000	—	233,000

10. Earnings per share

No basic or dilute earnings per share amount are disclosed as its inclusion, for the purpose of this report, is not considered meaningful.

11. PROPERTY, PLANT AND EQUIPMENT

Hua Fei Group

Cost: At 1 January 2003 Additions Disposal/write-off At 31 December 2003 and 1 January 2004 Additions Disposal/write-off At 31 December 2004 and 1 January 2005 Additions Acquired on acquisition of a subsidiary Disposal/write-off Revaluation At 31 December 2005	Buildings RMB’000 708,063 226,068 — 934,131 3,911 — 938,042 14,287 7,309 — 20,719 980,357	Plant and Electronics machinery equipment RMB’000 RMB’000 1,906,781 749,842 561,197 155,487 (12,826) (4,421) 2,455,152 900,908 44,657 28,150 (21,441) (22,560) 2,478,368 906,498 417,351 133,029 49,934 499 (196) (1,740) — — 2,945,457 1,038,286	Chemical Transportation equipment equipment RMB’000 RMB’000 — 15,768 39,518 3,507 (329) (285) 39,189 18,990 30 968 (822) (2,856) 38,397 17,102 — 3,049 — 732 — (633) — — 38,397 20,250	Others RMB’000 96,188 14,357 (1,439) 109,106 833 (983) 108,956 66,810 — (187) — 175,579	Total RMB’000 3,476,642 1,000,134 (19,300) 4,457,476 78,549 (48,662) 4,487,363 634,526 58,474 (2,756) 20,719 5,198,326

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Accumulated depreciation and impairment At 1 January 2003 Provided during the year Impairment loss Disposal/write-back At 31December 2003 and 1 January 2004 Provided during the year Impairment loss Disposal/write-back At 31 December 2004 and 1 January 2005 Provided during the year Impairment loss Disposal/write-back Reversal of accumulated depreciation upon revaluation At 31 December 2005 Net book value: At 31 December 2005 At 31 December 2004 At 31 December 2003	Buildings RMB’000 172,770 38,039 — (7,742) 203,067 30,322 — — 233,389 38,700 8,073 — (280,162) — Buildings RMB’000 980,357 704,653 731,064	Plant and Electronics machinery equipment RMB’000 RMB’000 746,037 466,800 197,011 91,582 4,759 — (70,162) (10,865) 877,645 547,517 137,326 85,766 8,278 — (12,805) (20,171) 1,010,444 613,112 266,438 131,831 251,623 27,868 (159) (1,573) (275,127) — 1,253,219 771,238 Plant and Electronics machinery equipment RMB’000 RMB’000 1,692,238 267,048 1,467,924 293,386 1,577,507 353,391	Chemical Transportation equipment equipment RMB’000 RMB’000 — 10,205 2,309 1,855 — — — (689) 2,309 11,371 2,419 1,714 — — — (2,569) 4,728 10,516 2,468 3,492 — 773 — (576) — — 7,196 14,205 Chemical Transportation equipment equipment RMB’000 RMB’000 31,201 6,045 33,669 6,586 36,880 7,619	Others RMB’000 28,709 44,385 — (3,664) 69,430 10,572 — (721) 79,281 47,944 16,958 (151) — 144,032 Others RMB’000 31,547 29,675 39,676	Total RMB’000 1,424,521 375,181 4,759 (93,122) 1,711,339 268,119 8,278 (36,266) 1,951,470 490,873 305,295 (2,459) (555,289) 2,189,890 Total RMB’000 3,008,436 2,535,893 2,746,137

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Analysis of cost and valuation

At 31 December 2005 At cost At valuation At 31 December 2004 At cost At valuation At 31 December 2003 At cost At valuation	Buildings RMB’000 5,257 975,100 980,357 704,653 — 704,653 731,064 — 731,064	Plant and Electronics machinery equipment RMB’000 RMB’000 10,953 267,048 1,681,285 — 1,692,238 267,048 1,467,924 293,386 — — 1,467,924 293,386 1,577,507 353,391 — — 1,577,507 353,391	Chemical Transportation equipment equipment RMB’000 RMB’000 31,201 6,045 — — 31,201 6,045 33,669 6,586 — — 33,669 6,586 36,880 7,619 — — 36,880 7,619	Others RMB’000 31,547 — 31,547 29,675 — 29,675 39,676 — 39,676	Total RMB’000 352,051 2,656,385
					3,008,436

					2,535,893 —
					2,535,893

					2,746,137 —
					2,746,137

At 31 December 2005, the Hua Fei Group’s buildings with an aggregate net book value of approximately RMB476,965,000 were pledged as security for bank loan of the Hua Fei Group for the total amount of RMB50,000,000.

The buildings and plant and machinery of Hua Fei are revalued by Vigers Appraisal & Consulting Limited, independent professionally qualified valuers, on the open market or depreciated replacing cost method as appropriate, at 31 December 2005 at approximately RMB975,100,000 and RMB1,681,285,600 in aggregate respectively. The surplus so arising has been credited to the asset revaluation reserve as to RMB489,608,000. However, the buildings, plant and machinery of the Nan Jing Jin Hui Industry Co., Ltd, which is a subsidiary of the Hui Fei, have not been revalued and they are carried at cost less accumulated depreciation and impairment with a net book value of RMB16,210,000.

Had the buildings of Hua Fei Group been carried at historical cost less accumulate depreciation, their carrying values would have been approximately RMB679,474,000.

Had the plant and machinery of Hua Fei Group been carried at historical cost less accumulated depreciation, their carrying values would have been approximately RMB1,417,113,000.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Hua Fei

At 1 January 2003 Additions Disposal/write-off At 31 December 2003 and 1 January 2004 Additions Disposal/write-off At 31 December 2004 And 1 January 2005 Additions Disposal/write-off Revaluation At 31 December 2005 Accumulated depreciation and impairment At 1 January 2003 Provided during the year Impairment loss Disposal/write-back At 31December 2003 and 1 January 2004 Provided during the year Impairment loss Disposal/write-back At 31 December 2004 and 1 January 2005 Provided during the year Impairment loss Disposal/write-back Reversal of accumulated depreciation upon revaluation At 31 December 2005	Buildings RMB’000 708,063 226,068 — 934,131 3,911 — 938,042 14,287 — 22,771 975,100 172,770 38,039 — (7,742) 203,067 30,322 — — 233,389 36,649 8,073 — (278,111) —	Plant and Electronics machinery equipment RMB’000 RMB’000 1,906,781 749,842 561,197 155,487 (12,826) (4,421) 2,455,152 900,908 44,657 28,150 (21,441) (22,560) 2,478,368 906,498 417,351 133,029 (196) (1,740) — — 2,895,523 1,037,787 746,037 466,800 197,011 91,582 4,759 — (70,162) (10,865) 877,645 547,517 137,326 85,766 8,278 — (12,805) (20,171) 1,010,444 613,112 235,982 131,510 243,096 27,868 (159) (1,573) (275,125) — 1,214,238 770,917	Chemical Transportation equipment equipment RMB’000 RMB’000 — 15,768 39,518 3,507 (329) (285) 39,189 18,990 30 968 (822) (2,856) 38,397 17,102 — 3,049 — (633) — — 38,397 19,518 — 10,205 2,309 1,855 — — — (689) 2,309 11,371 2,419 1,714 — — — (2,569) 4,728 10,516 2,468 3,025 — 773 — (576) — — 7,196 13,738	Others RMB’000 96,188 14,357 (1,439) 109,106 833 (983) 108,956 66,810 (187) — 175,579 28,709 44,385 — (3,664) 69,430 10,572 — (721) 79,281 47,944 16,958 (151) — 144,032	Total RMB’000 3,476,642 1,000,134 (19,300) 4,457,476 78,549 (48,662) 4,487,363 634,526 (2,756) 22,771 5,141,904 1,424,521 375,181 4,759 (93,122) 1,711,339 268,119 8,278 (36,266) 1,951,470 457,578 296,768 (2,459) (553,236) 2,150,121

— 126 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Net book value: At 31 December 2005 At 31 December 2004 At 31 December 2003 Analysis of cost and valuation At 31 December 2005 At cost At valuation At 31 December 2004 At cost At valuation At 31 December 2003 At cost At valuation	Buildings RMB’000 975,100 704,653 731,064 Buildings RMB’000 — 975,100 975,100 704,653 — 704,653 731,064 — 731,064	Plant and Electronics machinery equipment RMB’000 RMB’000 1,681,285 266,870 1,467,924 293,386 1,577,507 353,391 Plant and Electronics machinery equipment RMB’000 RMB’000 — 266,870 1,681,285 — 1,681,285 266,870 1,467,924 293,386 — — 1,467,924 293,386 1,577,507 353,391 — — 1,577,507 353,391	Chemical Transportation equipment equipment RMB’000 RMB’000 31,201 5,780 33,669 6,586 36,880 7,619 Chemical Transportation equipment equipment RMB’000 RMB’000 31,201 5,780 — — 31,201 5,780 33,669 6,586 — — 33,669 6,586 36,880 7,619 — — 36,880 7,619	Others RMB’000 31,547 29,675 39,676 Others RMB’000 31,547 — 31,547 29,675 — 29,675 39,676 — 39,676	Total RMB’000 2,991,783

					2,535,893

					2,746,137

					Total RMB’000 335,398 2,656,385
					2,991,783

					2,535,893 —
					2,535,893

					2,746,137 —
					2,746,137

At 31 December 2005, the Hua Fei’s buildings with an aggregate net book value of approximately RMB476,965,000 were pledged as security for bank loan of the Hua Fei for the total amount of RMB50,000,000.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

The buildings and plant and machinery are revalued by Vigers Appraisal & Consulting Limited, independent professionally qualified valuers, on the open market or depreciated replacing cost method as appropriate, at 31 December 2005 at approximately RMB975,100,000 and RMB1,681,285,000 in aggregate. The surplus so arising has been credited to the asset revaluation reserve as to RMB489,608,000.

Had the buildings been carried at historical cost less accumulate depreciation, their carrying values would have been approximately RMB674,218,000.

Had the plant and machinery been carried at historical cost less accumulated depreciation, their carrying values would have been approximately RMB1,406,160,000.

12. CONSTRUCTION IN PROGESS

Hua Fei Group

Cost:
At 1 January 2003,
Add: Additions during the year
Less: Transfers to property, plant and equipment
At 31 December 2003
and 1 January 2004
Add: Additions during the year
Less: Transfers to property, plant and equipment
At 31 December 2004
and 1 January 2005
Add: Additions during the year
Less: Transfers to property, plant and equipment
At 31 December 2005
Net book value:
At 31 December 2005
At 31 December 2004
At 31 December 2003

RMB’000
966,342
71,307
(986,433)
51,216
46,947
(73,364)
24,799
127,142
(117,613)
34,328
34,328
24,799
51,216

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Hua Fei

RMB’000
966,342
71,307
(986,433)
51,216
46,947
(73,364)
24,799
127,142
(117,613)
34,328
34,328
24,799
51,216

— 129 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

13. LAND USE RIGHTS

Hua Fei Group

Cost:
At 1 January 2003
At 31 December 2003 and 1 January 2004
At 31 December 2004 and 1 January 2005
At 31 December 2005
Amortisation
At 1 January 2003
Additions
At 31December 2003 and 1 January 2004
Additions
At 31 December 2004 and 1 January 2005
Additions
At 31 December 2005
Net book value:
At 31 December 2005
Less: Portion classified as current assets
Long term portion
At 31 December 2004
Less: Portion classified as current assets
Long term portion
At 31 December 2003
Less: Portion classified as current assets
Long term portion

RMB’000
69,445
69,445
69,445
69,445
—
1,852
1,852
1,389
3,241
1,389
4,630
64,815
(1,388)
63,427
66,204
(1,388)
64,816
67,593
(1,388)
66,205

— 130 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

The land use rights of the Hua Fei Group are located in the PRC and they are held under medium term leases as at 31 December 2003, 2004 and 2005.

Hua Fei Cost: At 1 January 2003, At 31 December 2003 and 1 January 2004 At 31 December 2004 and 1 January 2005 At 31 December 2005 Amortisation and impairment At 1 January 2003 Additions At 31December 2003 and 1 January 2004 Additions At 31 December 2004 and 1 January 2005 Additions At 31 December 2005 Net book value: At 31 December 2005 Less: Portion classified as current assets Long term portion At 31 December 2004 Less: Portion classified as current assets Long term portion At 31 December 2003 Less: Portion classified as current assets Long term portion	RMB’000 69,445
	69,445
	69,445
	69,445
	— 1,852
	1,852 1,389
	3,241 1,389
	4,630
	64,815 (1,388)
	63,427

	66,204 (1,388)
	64,816

	67,593 (1,388)
	66,205

The land use rights of the Hua Fei are located in the PRC and they are held under medium term leases as at 31 December 2003, 2004 and 2005.

— 131 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

14. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Hua Fei Group

Unlisted equity investments, at cost Hua Fei Unlisted equity investments, at cost	2003 RMB’000 9,951 2003 RMB’000 9,951	At 31 December 2004 2005 RMB’000 RMB’000 9,951 9,951 At 31 December 2004 2005 RMB’000 RMB’000 9,951 9,951

Certain unlisted equity investments of the Hua Fei Group are not stated at fair value but at cost less any impairment losses, because they do not have a quote market price in an active market, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed.

15. INTERSTS IN SUBSIDIARIES

Unlisted shares, at cost Impairment loss	2003 RMB’000 — — —	At 31 December 2004 2005 RMB’000 RMB’000 — 68,459 — (2,421) — 66,038	At 31 December 2004 2005 RMB’000 RMB’000 — 68,459 — (2,421) — 66,038
			66,038

— 132 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Particulars of a subsidiary of the Hua Fei are set out below:

	Place and date		Attributable
Name of subsidiary	of incorporation/	Issued and fully	equity interest	Principal
	establishment	paid share capital	of Hua Fei	activities
Nan Jing Jin Hui	PRC	RMB43,686,000	Directly	Manufacturing
Industry Co., Ltd	1993		99.9%	of electronics
				products

16. INTERESTS IN ASSOCIATES Hua Fei Group

Unlisted shares, at cost Share of net assets Hua Fei Unlisted shares, at cost Impairment loss	2003 RMB’000 16,554 — 16,554 2003 RMB’000 16,554 — 16,554	At 31 December 2004 2005 RMB’000 RMB’000 110,946 110,946 (21,071) (25,638) 89,875 85,308 At 31 December 2004 2005 RMB’000 RMB’000 110,946 110,946 (21,071) (25,638) 89,875 85,308

Particulars of an associate of the Hua Fei Group are set out below:

			Attributable
Name of subsidiary	Place	Issued and fully	equity interest	Principal
	of incorporation	paid share capital	of Hua Fei	activities
河南安飛電子玻璃有限公司	PRC	RMB82,953,800	Directly	Manufacturing
			20%	of electronics
				products

— 133 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

17. INVENTORIES

Hua Fei Group

Raw materials Work in progress Finished goods Spare parts and consumables Less: Provisions Hua Fei Raw materials Work in progress Finished goods Spare parts and consumables Less: Provisions	2003 RMB’000 188,304 21,630 36,238 433 (43,063) 203,542 2003 RMB’000 188,304 21,630 36,238 433 (43,063) 203,542	At 31 December 2004 2005 RMB’000 RMB’000 99,604 103,302 14,628 33,353 99,652 60,277 493 507 (55,234) (62,661) 159,143 134,778 At 31 December 2004 2005 RMB’000 RMB’000 99,604 95,600 14,628 32,710 99,652 37,328 493 466 (55,234) (62,661) 159,143 103,443

Amount carried at net realisable value.

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

18. TRADE RECEIVABLES

Hua Fei Group

The Group allows a credit period of 60 days to its trade customers.

The following is an aged analysis of trade receivables:-

Within 1 year 1 to 2 years 2 to 3 years Over 3 years Provision of doubtful debts Total	2003 RMB’000 422,053 1,257 2 114 (780) 422,646	At 31 December 2004 2005 RMB’000 RMB’000 677,732 658,037 613 2,245 11,755 66 1,299 5,429 (11,050) (6,394) 680,349 659,383

Hua Fei

The aging analysis of trade receivables is as follows:

Within 1 year 1 to 2 years 2 to 3 years Over 3 years Provision of doubtful debts Total	2003 RMB’000 422,053 1,257 2 114 (780) 422,646	At 31 December 2004 2005 RMB’000 RMB’000 677,732 657,880 613 2,245 11,755 66 1,299 5,429 (11,050) (6,394) 680,349 659,226

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

19. AMOUT DUE FROM FELLOW SUBSIDIARIES, ASSOCIATES, AND RELATED COMPANIES

The amounts due were unsecured and interest free and have no fixed terms of repayment, except for the amounts due from Nanjing Hua Pu Electronics Company Limited in the sum of RMB540,000,000 and RMB190,000,000 as at 31 December 2003 and 31 December 2004 respectively, which were interest bearing at a rate of 5.31% per annum.

20. TRADE PAYABLES

The following is an aged analysis of trade payables:-

Hua Fei Group

Within 1 year 1 to 2 years 2 to 3 years Over 3 years Total Hua Fei Within 1 year 1 to 2 years 2 to 3 years Over 3 years Total	2003 RMB’000 1,091,539 4,917 1,511 151 1,098,118 2003 RMB’000 1,091,539 4,917 1,511 151 1,098,118	At 31 December 2004 2005 RMB’000 RMB’000 867,702 697,381 8,706 39,775 96 1,518 — — 876,504 738,674 At 31 December 2004 2005 RMB’000 RMB’000 867,702 688,112 8,706 39,775 96 1,518 — — 876,504 729,405	At 31 December 2004 2005 RMB’000 RMB’000 867,702 697,381 8,706 39,775 96 1,518 — — 876,504 738,674 At 31 December 2004 2005 RMB’000 RMB’000 867,702 688,112 8,706 39,775 96 1,518 — — 876,504 729,405
			729,405

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FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

21. AMOUNT DUE TO FELLOW SUBSIDIARIES, ASSOCIATES, AND RELATED COMPANIES

The amounts due to the fellow subsidiaries, associates, and related companies were unsecured, interest free and have no fixed terms of repayment.

22. AMOUNT DUE TO A SHAREHOLDER

The amount due to a shareholder was unsecured, interest free and with no fixed terms of repayment.

23. BORROWINGS

Hua Fei Group

Bank loans Other unsecured borrowings Total borrowings Repayable: Within one year In the second year to fifth years, inclusive Beyond five years Less: Portion classified as current liabilities Long term portion	2003 RMB’000 1,062,500 136,829 1,199,329 577,531 498,000 123,798 1,199,329 (577,531) 621,798	At 31 December 2004 2005 RMB’000 RMB’000 598,000 50,000 134,869 101,745 732,869 151,745 364,032 62,762 249,001 50,847 119,836 38,136 732,869 151,745 (364,032) (62,762) 368,837 88,983

— 137 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

The bank loan was secured by the pledge of certain property, plant and equipment held by Hua Fei. Interest was charged on the outstanding balances at rates ranging from 2.5% to 5.58% per annum for the year ended 31 December 2005. The unsecured borrowings for the years ended 2003, 2004 and 2005 were guaranteed by the 南京華東電子集團有限公司, which is a shareholder of the Hua Fei as at 31 December 2005.

Hua Fei

Bank loans Other unsecured borrowings Total borrowings Repayable: Within one year In the second year to fifth years, inclusive Beyond five years Less: Portion classified as current liabilities Long term portion	2003 RMB’000 1,062,500 136,829 1,199,329 577,531 498,000 123,798 1,199,329 (577,531) 621,798	At 31 December 2004 2005 RMB’000 RMB’000 598,000 50,000 134,869 101,745 732,869 151,745 364,032 62,762 249,001 50,847 119,836 38,136 732,869 151,745 (364,032) (62,762) 368,837 88,983

24. DEFERRED TAXATION

Deferred taxation is calculated in full on temporary differences under the liability method using a principal taxation rate of 15%.

Excess of tax allowance on fixed assets over accounting depreciation Revaluation of fixed assets	2003 RMB’000 12,524 — 12,524	At 31 December 2004 2005 RMB’000 RMB’000 18,544 27,358 — 86,401 18,544 113,759

— 138 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

25. BUSINESS COMBINATION

(i) Acquisition of a subsidiary

On 30 November 2005, the Company acquired 99.9% interest in Nan Jing Jin Hui Industry Co., Ltd for a consideration of approximately RMB68,459,000. This acquisition has been accounted for using the purchase method. The amount of goodwill arising as a result of the acquisition was approximately RMB10,230,000 and the impairment loss of RMB10,230,000 has been recognized in the income statement for the year ended 31 December 2005.

The fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary acquired during the year at the date of acquisition, which have no significant differences from the carrying amount, is as follows:-

	30 November 2005
	RMB’000
Net assets acquired:
Cash	7,029
Bills receivables	2,103
Other debtors, deposits and prepayment	2,973
Inventories	35,383
Fixed assets	20,326
Trade creditors	(9,070)
Other creditors	(515)
	58,229
Goodwill	10,230
Total consideration	68,459
Satisfied by cash	68,459
Net cash outflow arising on acquisition:
Cash consideration	68,459
Bank balances and cash acquired	(7,029)
	61,430

If the above acquisition had taken place on 1 January 2005, the loss for the year of the Hua Fei Group would have been approximately RMB955,560,000 and the revenue for the Hua Fei Group would have been approximately RMB3,724,434,000.

— 139 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(ii) Business combination

On 25 July 2005, Ministry of Commerce of the People’s Republic of China（中華人民共和國商貿部） issued Circular （商資批） (2005)1456號. In respect of the approval of the merger by absorption of Nanjing Hua Pu Electronics Company Ltd with Hua Fei Colour Display Systems Company Limited 商貿部關於同意華飛彩色顯示系統有限公司吸收合併南京華浦電子有限公司的正式批復 and approved the merger by absorption of Nanjing Hua Pu Electronics Company Limited (“the Nanjing Hua Pu”) with the Hua Fei. As a result of the combination, the registered capital was increased by approximately USD56,120,000. On 31 October 2005, the financial result of Nanjing Hua Pu was merged with Hua Fei. This acquisition has been accounted for using the purchase method. The amount of goodwill arising as a result of the acquisition was approximately RMB1,046,254,000 and the impairment loss of RMB1,046,254,000 has been recognisd in the income statement for the year ended 31 December 2005.

The fair value of the identifiable assets, liabilities and contingent liabilities of the company acquired during the year at the date of acquisition, which have no significant differences from the carrying amount. The assets and liabilities arising from the acquisition were as follows:-

	31 October 2005
Net liabilities acquired:	RMB’000
Cash	24,652
Trade receivables	39,437
Other debtors, deposits and prepayment	2,073
Fixed assets	49,003
Trade creditors	(493,031)
Bills payable	(30,499)
Other creditors	(170,133)
	(578,498)

Cash inflow on acquisition of the Nanjing Hua Pu represents the bank and cash balances in Nanjing Hua Pu.

— 140 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Details of net liabilities acquired and goodwill were as follows:-

Purchase consideration Less: Net liabilities acquired Goodwill Less: Impairment of goodwill (iii) Impairment of goodwill Note Impairment of goodwill (a) Impairment of goodwill (b)	RMB’000 467,756 (578,498) 1,046,254 (1,046,254) — RMB’000 10,230 1,046,254 1,056,484

Notes:

(a) The cost of acquisition of Jin Hui was RMB68,459,000 and its net asset value was RMB58,229,000 as at 30 November 2005 which was the date of the acquisition. An impairment of goodwill is provided for as the Jin Hui was not generated profits during the year.
(b) The merger of Hua Pu were effected as a result of the commercial consideration of the existing shareholders of Hua Fei. Following the merger, Hua Pu has ceased its business, the goodwill arising from the merger is to be fully provided for under the Hong Kong Financial reporting standards.

— 141 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

26. CAPITAL

Name of the Joint Venture Partners of Hua Fei LG飛利浦顯示件中國有限公司江蘇省國際信託投資有限責任公司南京華東電子信息科技股份有限公司南京華東電子集團有限公司 Capital contribution as at 31 December	2003 Percentage of interests 55% 25% 20% — 100%	RMB’000 904,040 410,927 328,742 — 1,643,709	2004 Percentage of interests 55% 25% 20% — 100%	RMB’000 904,040 410,927 328,742 — 1,643,709	2005 Percentage of interests 55% 25% 17.79% 2.21% 100%	RMB’000 1,233,501 527,805 296,990 53,169
						2,111,465

27. COMMITMENTS

As at 31 December 2003, 2004 and 2005, there were no material commitments for Hui Fei Group.

28. CONTINGENT LIABILITIES

As at 31 December 2003, 2004 and 2005, there were no material contingent liabilities for Hui Fei Group.

29. FINANCIAL RISKS AND MANAGEMENT

Credit risk

The Hua Fei’s principal financial assets are trade and other receivables, loan receivables bank balances and cash, which represent the Hua Fei’s maximum exposure to credit risk in relation to financial assets.

The Hua Fei’s credit risk is primarily attributable to its trade receivables and loan receivables. The amounts presented in the balance sheet are net of accumulated impairment, if any, estimated by the Hua Fei’s management based on prior experience and their assessment of the current economic environment. The Hua Fei has no significant concentration of credit risk on trade receivables, with exposure spread over a large number of counterparties and customers.

The credit risk on liquid funds is limited because majority of the counterparties are banks with creditworthy financial institutions.

Liquidity risk

The Hua Fei Group is exposed to minimal liquidity risk as the Hua Fei Group closely monitors its cash flow position.

— 142 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

Foreign currency risk

The Hua Fei Group has foreign currency sales and purchases and certain assets and liabilities are denominated in foreign currencies which expose the Hua Fei Group to foreign currency risk.

The Hua Fei Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

Interest rate risk

The Hua Fei Group obtained financing through bank and third party borrowings, and the details of the Hua Fei Group’s interest rate exposure are disclosed in note 23.

30. RELATED PARTY TRANSACTIONS

The Hua Fei had following material related party transactions in the normal course of business during the Relevant Period:

Name of related party	Nature of transaction	2003	2004	2005
		RMB’000	RMB’000	RMB’000
Hua Fei associates
河南安飛電子玻璃有限公司	Purchase of goods	—	343,310	286,980
Fellow subsidiaries
南京飛金磁性材料有限公司	Purchase of goods	37,750	25,130	24,540
北京樂金飛利浦電子有限公司	Purchase of goods	15,270	17,390	5,060
樂金飛利浦曙光電子有限公司	Purchase of goods	30,620	5,410	70
LPD Sittard	Purchase of goods	—	—	69,830
LPD Stadskanaaal	Purchase of goods	—	—	19,770
LPD Blackburn	Purchase of goods	—	—	53,330
LPD Korea GUMIN	Purchase of goods	—	—	23,900
LPD Slovakia	Purchase of goods	—	—	2410
LPD Durham	Purchase of goods	—	—	610
LPD Netherlands(PTE/DEE)	Purchase of goods	—	—	56,260
敘熟飛金磁性材料有限公司	Purchase of goods	4,990	—	3,220
LPD Netherlands(PTE/DEE)	Sale of goods	—	—	153,700
Nanjing Hua Pu
Electronics Co., Ltd	Sale of goods	302,630	135,500	—
蘇州飛利浦消費電子
有限公司	Sales of goods	701,700	605,090
Shareholder
LG. Philips Displays
(China) Limited	Payment of technical fees	86,230	86,750	79,210

— 143 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

II. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by any companies in Hua Fei Group in respect of any period subsequent to 31 December 2005.

Yours faithfully

Morison Heng Chartered Accountants Certified Public Accountants

Hong Kong

— 144 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

B MANAGEMENT DISCUSSION AND ANALYSIS

1. Year ended 31 December 2005

Business Review

Faced with the keen market competition and continuously falling prices of color picture tubes, Hua Fei Group took every effort to reduce cost and financial expenses and proactively developed new technologies for super-thin picture tubes in 2005. During the year, it recorded sales revenue of RMB3.65 billion, representing a decrease of 13% from that of last year, and profit before taxation and impairment of goodwill amounting to RMB116,648,000. The decrease in sales revenue and profit before taxation and impairment of goodwill was mainly a result of the falling prices. Meanwhile, due to the impairment of goodwill amounting to RMB1,056,484,000 arising from the merger of Nanjing Hua Pu Electronics Company Limited and the acquisition of Nanjing Jin Hui Industry Co., Ltd., net loss before taxation loss of Hua Fei for the year climbed up to RMB939,836,000. As the impairment of goodwill is one-off in nature, it will not have any impact on future results.

(a) Turnover

For the year ended 31 December 2005, the Hua Fei Group attained a turnover of approximately RMB3,649,473,000 (2004: RMB4,218,209,000). This represented a marginal decrease of RMB568,736,000 over the financial year ended 31 December 2004.

(b) Gross Profit margin

For the year ended 31 December 2005, the Hua Fei Grou’s gross profit was approximately RMB476,501,000 (2004: RMB749,773,000). The gross profit margin decreased from 17% in 2004 to 13% in 2005 due to keen competition and accordingly there was a fall in selling price.

(c) Administration and other Operating Expenses

As the turnover only decreased by approximately 13% in 2005, the administration and other operating expenses of the Hua Fei Group decreased by 18.78% accordingly to approximately RMB368,788,000 (2004: RMB476,378,000).

(d) Loss for the year

The Group had a loss after tax of approximately RMB948,650,000 for the year ended 31 December 2005 (2004: a profit after tax of approximately RMB270,951,000). The loss after tax of approximately RMB948,650,000 comprised the impairment of goodwill of approximately RMB1,056,484,000.

— 145 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(e) Liquidity and Financial Resources

The working capital of Hua Fei Group was mainly funded by borrowings and its own working capital.

The average term of credit for customers is 60 days. As at 31 December 2005, the loans amounted to RMB151,745,000, RMB50,000,000 of which was secured bank loan.

As at 31 December 2005, the current ratio was 0.41 ( the current asset of Hua Fei Group divided by its current liabilities). The gearing ratio was 4.25%, which was the amount of total longterm borrowings over its total net assets.

(f) Staff Costs

The total staff costs (including directors’ remuneration) for the year ended 31 December 2005 comprised of wages, salaries and staff welfare of RMB104,817,000 and pension scheme contributions of RMB25,708,000.

(g) Capital Structure

In 2005, Hua Fei increased its share capital by RMB467,756,000 as the consideration for merging Hua Pu. The issued share capital of the Hua Fei Group as at 31 December 2005 was RMB2,111,465,000. As at 31 December 2005, there was no other issued or outstanding loan capital, preference shares or convertible securities.

(h) Charge on Assets

As at 31 December 2005, the Hua Fei Group pledged its buildings with net carrying value of approximately RMB476,965,000 for its bank loan of RMB50,000,000 in total.

(i) Foreign Exchange Risk

The foreign exchange risk was minimal as the business was mainly denominated with Renminbi.

(j) Capital commitment

The Hua Fei Group did not have any capital commitment as at 31 December 2005.

(k) Contingent liability

The Hua Fei Group did not have any contingent liability as at 31 December 2005.

— 146 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

2. Year ended 31 December 2004

Business review

Faced with the violent market competition and declining prices, Hua Fei Group speeded up the rollout of low-cost new picture tube products in 2004 to constantly cut down cost and increase gross profit margin of the products. As a result, the group’s profitability was enhanced. During the year, it recorded sales revenue of RMB4.2 billion, representing a decrease of 1% as compared with that of last year, and net profit of RMB270 million, representing an increase of 70% as compared with that of last year.

(a) Turnover

For the year ended 31 December 2004, the Hua Fei Group recorded turnover of approximately RMB4,218,209,000 (2003: RMB4,260,638,000). This represented a decrease of RMB42,429,000 over the financial year ended 31 December 2003.

(b) Gross profit margin

The gross profit of approximately RMB749,773,000 (2003: RMB654,012,000) achieved for the year ended 31 December 2004 registered a 17.77% gross margin as compared to 15.35% for the year ended 31 December 2003.

(c) Administration and other operating expenses

In line with the slight decrease in turnover, the administration and other operating expenses showed a slight decrease to approximately RMB476,378,000 (2003: RMB493,029,000).

(d) Profit for the year

The profit before tax was approximately RMB283,545,000 and taxation was RMB12,594,000. The profit after tax was approximately RMB270,951,000 (2003: RMB158,699,000).

(e) Liquidity and financial resources

The working capital of Hua Fei Group is mainly funded by borrowings and its own working capital. The working capital of Hua Fei Group is mainly funded by borrowings and its own working capital. The average credit period granted to its customers was 60 days. Total loans of Hua Fei Group as at 31 December 2004 amounted to RMB732,869,000, of which RMB598,000,000 were pledged bank loans.

As at 31 December 2004, the current ratio of Hua Fei Group was 0.88 which represented the amount of current assets divided by the amount of current liabilities. The gearing ratio was 16%, represented long term borrowings over total net assets.

— 147 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(f) Staff Costs

The total staff costs (including directors’ remuneration) for the year ended 31 December 2004 comprise of wages, salaries and staff welfare of approximately RMB117,676,000 and pension scheme contributions of approximately RMB19,780,000.

(g) Capital structure

The share capital as at 31 December 2004 was RMB1,643,709,000. As at 31 December 2004, there were no other issued and outstanding loan shares, preference shares or convertible debentures.

(h) Assets pledge

As at 31 December 2004, Hua Fei Group pledged buildings with net book value totalling approximately RMB476,965,000 and its bank loan of RMB598,000,000 in total.

(i) Exposure to Fluctuations in Exchange Rates

Since business operations are primarily denominated in Renminbi, there is no significant exposure to foreign exchange fluctuations.

(j) Capital commitment

As at 31 December 2004, Hua Fei Group had no capital commitment.

(k) Contingent liabilities

As at 31 December 2004, Hua Fei Group had no contingent liabilities.

3. Year ended 31 December 2003

(a) Turnover

For the year ended 31 December 2003, Hua Fei Group showed a turnover of approximately RMB4,260,638,000.

(b) Gross Profit Margin

The gross profit of approximately RMB654,012,000 for the year ended 31 December 2003 represented a 15.35% gross profit margin for the year ended 31 December 2003.

— 148 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(c) Administration and other Operating Expenses

The administration and other operating expenses of Hua Fei Group amounted to approximately RMB493,029,000.

(d) Profit for the year

The profit before tax was approximately RMB171,223,000 and taxation was approximately RMB12,524,000. The profit after tax was approximately RMB158,699,000.

(e) Liquidity and financial resources

The working capital of Hua Fei Group is mainly funded by borrowings and its own working capita. The average credit period granted to its customers was 60 days. Total loans of Hua Fei Group as at 31 December 2003 amounted to RMB1,199,329,000, of which RMB1,062,500,000 were pledged bank loans.

As at 31 December 2003, the current ratio of Hua Fei Group was 0.80 which represented the amount of current assets divided by the amount of current liabilities. The gearing ratio was 30%, represented long term borrowings over total net assets.

(f) Staff Costs

The total staff costs (including directors’ remuneration) for the year ended 31 December 2003 comprise of wages, salaries and staff welfare of approximately RMB125,195,000 and pension scheme contributions of approximately RMB20,021,000.

(g) Capital structure

The share capital for as at 31 December 2003 was RMB1,643,709,000. As at 31 December 2003, there were no other issued and outstanding loan shares, preference shares or convertible debentures.

(h) Assets pledge

As at 31 December 2003, Hua Fei Group pledged buildings with net book value totalling approximately RMB476,965,000 and its bank loans of RMB1,062,500,000 in total.

(i) Exposure to Fluctuations in Exchange Rates

Since business operations are primarily denominated in Renminbi, there is no significant exposure to foreign exchange fluctuations.

— 149 —

FINANCIAL INFORMATION OF HUA FEI GROUP

APPENDIX II

(j) Capital commitment

As at 31 December 2003, Hua Fei Group had no capital commitment.

(k) Contingent liabilities

As at 31 December 2003, Hua Fei Group had no contingent liabilities.

4. Outlook

Over the recent three years, with the rapid development of flat panel TV technology such as Plasma Display Panel (PDP ) television and Liquid Crystal Display (LCD) television, development of Cathode Ray Tube (“CRT”) television was somehow affected, as shown by declining prices along with the increasingly intensified market competitions. However, as CRT televisions feature competitive edges such as low price, long useful life and reliable quality, they were still favoured by a majority of common consumers. Besides, there remained potential to further reduce product costs of Cathode Ray Tube. Thus for a rather long period to come, CRT televisions will continue to be the mainstream of TV markets in China and many other countries.

Hua Fei will continue to expand its CRT business, further reduce costs and improve quality, while developing new products and enlarge overseas market. Especially super-slim CRT products will be launched nationwide to secure its competitive edge and steady development. Accordingly, the Directors believed Hua Fei can achieve desirable operating results in the future.

— 150 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Morison Heng Chartered Accountants Certified Public Accountants

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIECTORS OF NANJING PANDA ELECTRONICS COMPANY LIMITED

We report on the unaudited pro forma financial information (the “Pro Forma Financial Information”) of Nanjing Panda Electronics Company Limited (“the Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”, which has been prepared by the directors for illustrative purposes only, to provide information about how the proposed acquisition of Hua Fei Colour Display Systems Co., Ltd (the “Hua Fei”) might have affected the financial information presented, for inclusion in circular dated 30 June 2006 (the “Circular”). The basis of preparation of the unaudited pro forma financial information is set out page 152 to the Circular.

Respective responsibilities of directors of the Company and reporting accountants

It is the responsibility solely of the directors of the Company to prepare the unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“the Listing Rules’) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants.

It is our responsibility to form an opinion, as required by rule 4.29 (7) of the Listing Rules, on the unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— 151 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagement 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly complied by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

The unaudited pro forma financial information is for illustrative purpose only, based on the judgments and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

the financial position of the Group as at 31 December 2005 or any future date; or
the results and cash flows of the Group for the year ended 31 December 2005 or any future period.

Opinion

In our opinion:

a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
b) such basis is consistent with the accounting policies of the Group; and
c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Morison Heng Chartered Accountants Certified Public Accountants

Hong Kong, 30 June 2006

— 152 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

The following unaudited pro forma financial information of the Enlarged Group has been prepared based on the audited financial statements of the Group for the year ended 31 December 2005 and the financial information of Hua Fei Colour Display Systems Co., Ltd for the year ended 31 December 2005 extracted from the Accountants’ Report set out in Appendix II of the Circular and adjusted for the transaction resulting from the Acquisition.

Unaudited Pro Forma Income Statement of the Enlarged Group

The following is a summary of the unaudited pro forma income statement of the Enlarged Group, assuming that the Acquisition had taken place on 1 January 2005 for the purpose of illustrating how the Acquisition might have affected the results of the Group.

The unaudited pro forma income statement is prepared to provide financial information on the Enlarged Group as a result of completion of the Acquisition. As it is prepared for illustrative purpose only, it may not purport to represent what the results of the Enlarged Group for the year ended December 2005 or any future period shall be.

Turnover
Cost of sales
Gross profit
Other revenue
Distribution costs
Administrative expenses
Loss from operations
Finance costs
Gain on disposal of interests in associates
Share of results of associates
Profit/(loss) before taxation
Income tax expenses
Net profit/(loss) for the year
Attributable to:
Shareholders of the Company
Minority interests
Net profit/(loss) for the year

Pro-forma
Pro-forma
The Group
Adjustment (1)
Adjustment (2)
Enlarged Group
RMB’000
RMB’000
RMB’000
RMB’000
850,817
850,817
(726,720)
(726,720)
124,097
124,097
13,444
22,487
35,931
(24,537)
(24,537)
(226,560)
(226,560)
(113,556)
(91,069)
(58,817)
(58,817)
15,157
15,157
257,381
(237,162)
20,219
100,165
(114,510)
(3,176)
(3,176)
96,989
22,487
(237,162)
(117,686)
92,761
22,487
(237,162)
(121,914)
4,228
—
—
4,228
96,989
22,487
(237,162)
(117,686)

— 153 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Unaudited Pro Forma Balance Sheet of the Enlarged Group

The following is a summary of the unaudited pro forma balance sheet of the Enlarged Group, assuming that the Acquisition had been completed on 31 December 2005 for the purpose of illustrating how the Acquisition might have affected the financial position of the Group.

The unaudited pro forma balance sheet is prepared to provide financial information on the Enlarged Group as a result of completion of the Acquisition. As it is prepared for illustrative purpose only, it may not purport to represent what the financial position of the Enlarged Group shall be on actual completion of the Acquisition.

		Pro-forma	Pro-forma
	The Group	Adjustment (1)	Adjustment (2)	Enlarged Group
	RMB’000	RMB’000	RMB’000	RMB’000
NON-CURRENT ASSETS
Intangible assets	4,103			4,103
Property, plant and equipment	302,430			302,430
Construction in progress	20,448			20,448
Land use rights	1,645			1,645
Interests in associates	561,720	522,487	—	1,084,207
	890,346	522,487	—	1,412,833
CURRENT ASSETS
Inventories	175,155			175,155
Bills receivable	4,247			4,247
Trade debtors	110,670			110,670
Other debtors, deposits and prepayments	750,548	(500,000)		250,548
Amounts due from fellow subsidiaries,
associates and related companies	23,898			23,898
Amount due from ultimate holding company	269,431			269,431
Bank balances and cash	347,457			347,457
Taxation	87			87
	1,681,493	(500,000)	—	1,181,493

— 154 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

CURRENT LIABILITIES
Borrowings
Trade creditors
Other creditors, customers’ deposits and
accrued charges
Amounts due to fellow subsidiaries,
associates and related companies
NET CURRENT ASSETS/(LIABILITIES)
TOTAL ASSETS LESS
CURRENT LIABILITIES
TOTAL NET ASSETS
CAPITAL AND RESERVES
Share capital
Share premium and reserves
Equity attributable to equity
holders of the Company
Minority interests
TOTAL EQUITY

Pro-forma
Pro-forma
The Group
Adjustment (1)
Adjustment (2)
Enlarged Group
RMB’000
RMB’000
RMB’000
RMB’000
839,135
839,135
145,808
145,808
251,112
251,112
9,456
9,456
1,245,511
—
—
1,245,511
435,982
—
—
(64,018)
1,326,328
—
—
1,348,815
1,326,328
—
—
1,348,815
655,015
655,015
630,561
22,487
—
653,048
1,285,576
22,487
—
1,308,063
40,752
—
—
40,752
1,326,328
22,487
—
1,348,815

— 155 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Unaudited Pro Forma Cash Flow Statement of the Enlarged Group

The following is a summary of the unaudited pro forma cash flow statement of the Enlarged Group, assuming that the Acquisition had taken place on 1 January 2005 for the purpose of illustrating how the Acquisition might have affected the cash flows of the Group.

The unaudited pro forma cash flow statement is prepared to provide financial information on the Enlarged Group as a result of completion of the Acquisition. As it is prepared for illustrative purpose only, it may not give a true picture of the cash flows of the Enlarged Group for the year ended 31 December 2005 or any future period.

		Pro-forma	Pro-forma
	The Group	Adjustment (1)	Adjustment (2)	Enlarged Group
	RMB’000	RMB’000	RMB’000	RMB’000
Profit/(loss) before taxation	100,165			(114,510)
Adjustments for:
State special project fund recognised
to offset the cost of project	(570)			(570)
Write off of construction in progress	5,027			5,027
Share of results of associates	(257,381)		237,162	(20,219)
Other income	—	(22,487)		(22,487)
Interest income	(2,216)			(2,216)
Interest expenses	57,687			57,687
Impairment loss on long term investment	3,956			3,956
Depreciation and amortisation	46,751			46,751
Gain on disposal of property, plant and
equipment and construction in progress	(2,462)			(2,462)
Impairment loss on construction in progress	5,722			5,722
Gain on disposal of interests in associates	(15,157)			(15,157)
Operating loss before working capital changes	(58,478)			(58,478)
Increase in inventories	(27,659)			(27,659)
Increase in trade and other receivables,
deposits and prepayments and amount
due from related parties	(13,482)			(13,482)
Increase in bills receivable	(1,341)			(1,341)
Increase in bills payable	21,781			21,781
Decrease in trade and other payables,
customers’ deposits and accrued charges and
amounts due to related parties	(59,700)			(59,700)
Cash used in operations	(138,879)			(138,879)
Interest paid	(57,687)			(57,687)
Income tax paid	(3,113)			(3,113)
Net cash used in operating activities	(199,679)			(199,679)

— 156 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Investing activities
Purchase of property, plant and equipment
(36,433)
Expenditure on construction in progress
(17,704)
Return on investment in an associate
5
Proceeds from partial disposal of associates
81,883
Proceeds from disposal of property,
plant and equipment
1,145
Repayment from unconsolidated subsidiaries
291,530
Placement of pledged bank deposits
(30,065)
Interest received
2,216
Dividends received from associates
172,796
Net cash generated from investing activities
465,373
Financing activities
New loans raised
1,458,980
Repayment of loans
(1,477,510)
Net increase in advance to ultimate
holding company
(30,755)
Dividends paid to minority shareholders
(1,186)
Dividend income
—
Net cash used in financing activities
(50,471)
Net increase in cash and cash equivalents
215,223
Increase in cash due to consolidation/
deconsolidation of subsidiaries
43
Cash and cash equivalents
at beginning of year
87,243
Cash and cash equivalents
at the end of year
302,509
Analysis of the balances of
cash and cash equivalents
Bank balances and cash
347,457
Less: Pledged bank balances
(44,948)
302,509

(36,433)
(17,704)
5
81,883
1,145
291,530
(30,065)
2,216
172,796
465,373
1,458,980
(1,477,510)
(30,755)
(1,186)
—
(50,471)
215,223
43
87,243
302,509
347,457
(44,948)
302,509

Notes:

(1) This represents the transfer of 25% equity interest in the Hua Fei from Jiangsu International Trust (the “JIT”) to the Company in satisfaction of the debts in the sum of RMB500,000,000 together with the interests in the sum of RMB522,487,000. Upon completion of the transfer of the JIT shares, the JIT shares will be accounted for as an investment in associate company in accordance with the Hong Kong Accounting Standards 28Investments in Associates.
(2) This represents the share of the result of the Hui Fei and its subsidiary (the “Hua Fei Group”). The results and assets and liabilities of Hua Fei Group are incorporated in the financial statement of the Group using the equity method of accounting.

— 157 —

PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

The following is the text of a letter, summary of values and valuation certificates, prepared for the purpose of incorporation in this circular received from Vigers Appraisal & Consulting Limited, an independent valuer, in connection with its valuation as at 31 March 2006 of the property interests of Hua Fei Group.

Vigers Appraisal & Consulting Limited

International Assets Appraisal Consultants

10th Floor, The Grande Building 398 Kwun Tong Road Kowloon Hong Kong

==> picture [53 x 52] intentionally omitted <==

30 June 2006

The Directors Nanjing Panda Electronics Company Limited 301 East Zongshan Road Nanjing The PRC

Dear Sirs,

In accordance with your instructions for us to value the property interests exhibited to us as held by Hua Fei Color Display Systems Company Limited (華飛彩色顯示系統有限公司) (the “Hua Fei”) or its subsidiaries (collectively referred to as the “Hua Fei Group”) in the People’s Republic of China (“the PRC”), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you (“the Company”) with our opinion of the market value of such property interests as at 31 March 2006 (the “date of valuation”) for the purpose of incorporation in the circular.

Our valuation is our opinion of the market value of the property interest which we would define as intended to mean “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

Due to the nature of the buildings and structure of the properties, there is a lack of evidence of comparable transaction. In valuing the property interests, we have adopted a combination of the market and depreciated replacement cost approaches respectively in assessing the land portions of the properties, and the buildings and structures standing on the land. The sum of the two results represents the market value of the properties as a whole. In the valuation of the land portions, reference has been made to the standard land prices in the relevant cities and the sales evidences as available to us in the locality. Unless otherwise stated, the valuations represent the value of the entire property interests described in the valuation certificates and not the value of a share of them.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

The depreciated replacement cost approach considers the cost to reproduce or replace in new condition the property appraised in accordance with current construction costs for similar property in the locality, with allowance for accrued depreciation as evidenced by observed condition or obsolescence present, whether arising from physical, functional or economic causes. The depreciated replacement cost approach generally furnishes a reliable indication of value for property in the absence of a known market based on comparable sales. It is subject to adequate potential profitability of the business or of the whole entity.

Our valuation has been made on the assumption that the owner sell the property interests on the market without the benefit of deferred term contracts, leasebacks, joint ventures, management agreements or any similar arrangements which would serve to increase the value of the property interests. In addition, no forced sale situation in any manner is assumed in our valuation. Other assumptions in respect of each property, if any, have been set out in the footnotes of the valuation certificates for the respective properties.

We have not caused title searches to be made for the property interests at the relevant government bureau in the PRC. We have been provided with certain extracts of title documents relating to the property interests. However, we have not inspected the original documents to verify the ownership, encumbrances or the existence of any subsequent amendments which may not appear on the copies handed to us. In undertaking our valuation of the properties, we have relied on the legal opinion provided by the Group’s PRC legal adviser, Jiangsu FD Yongheng Law Firm (江蘇法德永衡律師事務所).

We have relied to a considerable extent on information provided by the Company and have accepted advice given to us on such matters as planning approvals, statutory notices, easements, tenure, occupation, lettings, site and floor areas, development plan, construction costs, identification of the properties and other relevant matters. We have also been advised by the Company that no material facts had been concealed or omitted in the information provided to us. All documents have been used for reference only.

All dimensions, measurements and areas included in the valuation certificates are based on information contained in the documents provided to us by the Company and are approximations only. No on-site measurement has been taken.

We have inspected the exterior and, where possible, the interior of the properties. However, no structural survey has been made and we are therefore unable to report whether the properties are free from rot, infestation or any other structural defects. No tests were carried out on any of the services.

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

We have not carried out investigations on site to determine the suitability of ground conditions and services etc. for any future development, nor have we undertaken any ecological or environmental surveys. Our valuation is prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during construction period.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

In valuing the property interests, we have complied with the requirements set out in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited and the HKIS Valuation Standards on Properties (First Edition 2005) published by the Hong Kong Institute of Surveyors (“HKIS”).

Unless otherwise stated, all monetary amounts stated are in Renminbi (RMB). The exchange rates adopted as at 31 March 2006 was HK$1=RMB1.03 and as at 31 December 2005 was HK$1 = RMB1.04.

We enclosed herewith a summary of our valuation and the valuation certificates.

Yours faithfully, For and on behalf of Vigers Appraisal & Consulting Limited Raymond Ho Kai Kwong Registered Professional Surveyor MRICS MHKIS MSc(e-com) Executive Director

Note: Raymond K. K. Ho, Chartered Surveyor, MRICS, MHKIS has over nineteen years’ experience in undertaking valuations of properties in Hong Kong and Macau and has over twelve years’ experience in the valuation of properties in the PRC. Mr. Ho has been working with Vigers Group since 1989.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

SUMMARY OF VALUATION

Property 1. Land, various buildings and structures located at No.1 Hua Fei Road, Hong Shan Streets, Xuanwu District, Nanjing City, The PRC 2. Land, various buildings and structures located at Tengzi Village, Hong Shan Streets, Xuanwu District, Nanjing City, The PRC 3. Land, various buildings and structures located at Guojie Village of Maigaoqiao, Hong Shan Streets, Xuanwu District, Nanjing City, The PRC 4. Blocks 1, 2, 5 to 11 and Units 205 to 605, 207 to 607 of Block 26, Beiyuanyi Estate, Tengzi Village, Hong Shan Streets, Xuanwu District, Nanjing City, The PRC 5. No.100 Changying Village, Qixia District, Nanjing City, The PRC	Capital Value in existing state as at 31 December 2005 RMB302,000,000 (equivalent to approximately HK$290,400,000) No commercial value No commercial value No commercial value RMB30,000,000 (equivalent to approximately HK$28,800,000)	Capital Value in existing state as at 31 March 2006 RMB302,000,000 (equivalent to approximately HK$293,200,000) No commercial value No commercial value No commercial value RMB30,000,000 (equivalent to approximately HK$29,100,000)
	Total: RMB332,000,000 (equivalent to approximately HK$319,200,000)	Total: RMB332,000,000 (equivalent to approximately HK$322,300,000)

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

VALUATION CERTIFICATES

Property

Description

Particulars of occupancy

Capital Value in existing state as at 31 March 2006

Land,various buildings The property comprises The property is RMB302,000,000 and structures located a parcel of land having currently occupied by (equivalent to at No.1 Hua Fei Road, a total site area of the Hua Fei Group as a approximately Hong Shan Streets, approximately 95,805.7 production plant. HK$293,200,000) Xuanwu District, sq.m. and two Nanjing City, workshops together (Capital value in The PRC with the associated existing state as at structures erected 31 December 2005 thereon. RMB302,000,000

The buildings have a equivalent to total gross floor area of approximately about 58,000 sq.m. HK$290,400,000) completed in about 2004.

(Capital value in existing state as at 31 December 2005

RMB302,000,000 equivalent to approximately HK$290,400,000)

Notes:

i. According to the Land Use Rights Certificate Ning Xuan Guo Yong (2001) No.13194, the land use rights of the property having a site area of approximately 95,805.7 sq.m. have been granted to Hua Fei Color Display Systems Company Limited (華飛彩色顯示系統有限公司) (“Hua Fei”) for industrial uses for a term expiring on 26 August 2051.
ii. According to the Building Ownership Certificates Xuan Chu No.240380, the title of the two buildings having a total area of approximately 58,023.21 sq.m. is vested in Hua Fei.
iii. The PRC legal opinion states, inter alia, as follows:
Hua Fei has acquired the land use rights of the property via assignment and obtained the title certificate.
Hei Fei has legally obtained the Building Ownership Certificate of the buildings mentioned in Note (ii) above.
Hua Fei is entitled to use the land and the buildings, and may assign, mortgage, lease out or disposal of them in accordance with the law.
Hua Fei is a joint venture company operated with the current Business Licence No.Qi He Su Ning Zi 000016 issued on 18 October 2005. The operating period is from 27 April 1988 to 26 April 2023. 江蘇省國際信託投資有限責任公司 legally and effectively holds 25% of the equity interest of the jointventure. 江蘇省國際信託投資有限責任公司 is entitled to share the profit earned by Hua Fei in accordance with it equity share ratio.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

Property

Description

Particulars of occupancy

Capital Value in existing state as at 31 March 2006

Land, various The property comprises buildings and a parcel of land having structures located at a total site area of Tengzi Village, approximately Hong Shan Streets, 197,445.3 sq.m. Xuanwu District, together with various Nanjing City, buildings and The PRC associated structures erected thereon.

No commercial value

The property is No commercial value currently occupied by the Hua Fei Group as a (Capital value in production plant. existing state as at 31 December 2005

No commercial value)

The buildings and structures have a total gross floor area of approximately 170,000 sq.m. completed in between 1982 to 2003. The buildings and structures of the property mainly include production workshops, maintenance workshops, administrative office, water tanks, roadworks and fence.

Notes:

i. According to the Land Use Rights Certificate Ning Xuan Guo Yong (95) No.1721, the land use rights of the property having a site area of approximately 197,445.3 sq.m have been granted to Hua Fei via administrative allocation for industrial uses without a specific year term.
ii. According to four Building Ownership Certificates, the title of 20 buildings having a total area of approximately 40,758.5 sq.m. is vested in Hua Fei. Further details are as follows:

Certificate No.	No. of Block	Floor Area(in sq.m)
Qi Zhi No. 60242	2	1,116.7
Qi Zhi No. 60243	6	3,341.1
Qi Zhi No. 60244	6	2,654.1
Qi Zhi No. 60245	6	33,646.6
Total	20	40,758.5

According to the Company, no building ownership certificate has been issued for the remaining buildings.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

iii. We have ascribed no commercial value to the property due to the prohibition against assignment or absence of ownership certificate. For reference purpose, the depreciated replacement cost of the buildings and structures of the property as at the date of valuation was in the region of RMB680,000,000.
iv. The PRC legal opinion states, inter alia, as follows:
Hua Fei has acquired the land use rights of the property via administrative allocation and obtained the title certificate.
Hei Fei has legally obtained the Building Ownership Certificates of the buildings mentioned in Note (ii) above.
Hua Fei is entitled to use the land and those buildings with certificates issued. However, approvals from relevant government authorities have to be acquired for the assignment, mortgage, lease out or disposal of them.
Hua Fei is a joint venture company operated with the current Business Licence No.Qi He Su Ning Zi 000016 issued on 18 October 2005. The operating period is from 27 April 1988 to 26 April 2023. 江蘇省國際信託投資有限責任公司 legally and effectively holds 25% of the equity interest of the jointventure. 江蘇省國際信託投資有限責任公司 is entitled to share the profit earned by Hua Fei in accordance with it equity share ratio.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

Property

Description

Particulars of occupancy

Capital Value in existing state as at 31 March 2006

Land, various The property comprises buildings and a parcel of land having structures located at a total site area of Guojie Village of approximately 18,672 Maigaoqiao, sq.m. together with an Hong Shan Streets, office building and the Xuanwu District, associate structures Nanjing City, erected thereon. The PRC

The property is No commercial value currently occupied by the Hua Fei Group as (Capital value in administrative office. existing state as at 31 December 2005

No commercial value)

The building having a gross floor area of approximately 4,003 sq.m. completed in about 1995.

Notes:

i. According to the Land Use Rights Certificate Ning Xuan Guo Yong (95) No.2135, the land use rights of the property having a site area of approximately 18,672 sq.m. was granted to Hua Fei for industrial uses via administrative allocation without a specific year term. However, according to the PRC legal opinion, due to the implementation of a new housing policy by Hua Fei and other reasons, the site area of the land use rights of the subject property is currently subject to adjustment.
ii. We have ascribed no commercial value to the property due to the prohibition against assignment or absence of building ownership certificate. For reference purpose, the depreciated replacement cost of the buildings and structures of the property as at the date of valuation was in the region of RMB8,100,000.
iii. The PRC legal opinion states, inter alia, as follows:
Hua Fei had once been granted via administrative allocation the land use rights of the site having an area of 18,627 sq.m. However, due to the implementation of a new housing policy by Hua Fei and other reasons, the site area of the land use rights of the subject property is currently subject to adjustments and the relevant change of the land use rights certificate is currently in process.
Hua Fei is a joint venture company operated with the current Business Licence No.Qi He Su Ning Zi 000016 issued on 18 October 2005. The operating period is from 27 April 1988 to 26 April 2023. 江蘇省國際信託投資有限責任公司 legally and effectively holds 25% of the equity interest of the joint-venture. 江蘇省國際信託投資有限責任公司 is entitled to share the profit earned by Hua Fei in accordance with it equity share ratio.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

Particulars of Property Description occupancy

Capital Value in existing state as at 31 March 2006

Blocks 1, 2, 5 to 11 The property comprises and Units 205 to 605, three parcels of land 207 to 607 of Block 26, having a total site area Beiyuanyi Estate, of approximately Tengzi Village, 16,087.8 sq.m. together Hong Shan Streets, with the buildings or Xuanwu District, portion of the buildings Nanjing City, erected thereon. The PRC

The property is currently No commercial value occupied by the Hua Fei Group as dormitories. (Capital value in existing state as at 31 December 2005 No commercial value)

The property has a total gross floor area of approximately 26,660 sq.m. completed in 1990 and 1991.

Notes:

i. According to three Land Use Rights Certificates, the land use rights of the property having a total site area of approximately 16,087.8 sq.m. have been granted to Hua Fei via administrative allocation for residential uses without a specific year term. Further details are as follows:

Certificate No.	Site Area(in sq.m)
Ning Xuan Guo Yong (2001) No.10509	12,246.4
Ning Xuan Guo Yong (2001) No.10872	233.0
Ning Xuan Guo Yong (2001) No.10873	3,608.4
Total:	16,087.8

ii. According to four Building Ownership Certificates, the title of the property in 9 buildings having a total area of approximately 26,660.3 sq.m. is vested in Hua Fei. Further details are as follows:

Certificate No.	Number of Block	Floor Area(in sq.m)
Qi Mai Zhi No. 60035	Portion of a block	579.9
Qi Mai Zhi No. 60254	1	522.9
Qi Mai Zhi No. 60257	3	9,065.7
Qi Mai Zhi No. 60258	4	16,491.8
Total:		26,660.3

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

iii. We have ascribed no commercial value to the property due to the prohibition against assignment. For reference purpose, the depreciated replacement cost of the buildings and structures of the property as at the date of valuation was in the region of RMB23,000,000.
iv. The PRC legal opinion states, inter alia, as follows:
Hua Fei has acquired the land use rights of the property via administrative allocation and obtained the title certificates.
Hei Fei has legally obtained the Building Ownership Certificates.
Hua Fei is entitled to use the land and those buildings with certificates issued. However, approvals from relevant government authorities have to be acquired for the assignment, mortgage, lease out or disposal of them.
Hua Fei is a joint venture company operated with the current Business Licence No.Qi He Su Ning Zi 000016 issued on 18 October 2005. The operating period is from 27 April 1988 to 26 April 2023. 江蘇省國際信託投資有限責任公司 legally and effectively holds 25% of the equity interest of the jointventure. 江蘇省國際信託投資有限責任公司 is entitled to share the profit earned by Hua Fei in accordance with it equity share ratio.

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PROPERTY VALUATION OF HUA FEI GROUP

APPENDIX IV

Particulars of occupancy

Property Description occupancy 5. No.100 Changying The property comprises The property is Village, three parcels of land currently occupied by Qixia District, having a total site area the Hua Fei Group as Nanjing City, of approximately staff quarters. The PRC 4,961.4 sq.m. and a majority portion of the buildings erected thereon. The property include one single-storey ancillary building, one 6-storey residential block, and the second to seventh levels of another 7-storey residential block completed in about 1996 and 1997. The property has a total gross floor area of approximately 11,419.23 sq.m.

Capital Value in existing state as at 31 March 2006

RMB30,000,000 (equivalent to approximately HK$29,1000,000)

(Capital value in existing state as at 31 December 2005

RMB30,000,000 (equivalent to approximately HK$28,800,000))

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APPENDIX IV

Notes:

i. According to three Land Use Rights Certificates, the land use rights of the property having a total site area of approximately 4,961.4 sq.m. have been granted to Hua Fei for residential uses for a term expiring on 13 May 2063. Further details are as follows:

Certificate No. Site Area(in sq.m.) Ning Xi Guo Yong (2004) No.11657 2,489.3 Ning Xi Guo Yong (2004) No.12375 22.2 Ning Xi Guo Yong (2004) No.12376 2,449.9 Total: 4,961.4

ii. According to three Building Ownership Certificates, the title of the buildings having a total area of approximately 11,419.23 sq.m. is vested in Hua Fei. Further details are as follows:

Certificate No. No. of Block Gross Ning Fang Quan Zheng Xi Zhuan Zi 227858 1 Ning Fang Quan Zheng Xi Zhuan Zi 227859 1 Ning Fang Quan Zheng Xi Zhuan Zi 60423 2nd to 7th levels of a block Total:	Floor Area (in sq.m.) 5,639.21 51.12 5,728.90
	11,419.23

iii. The PRC legal opinion states, inter alia, as follows:
Hua Fei has acquired the land use rights of the property via assignment and obtained the title certificates.
Hei Fei has legally obtained the Building Ownership Certificates for the buildings.
Hua Fei is entitled to use the land and the buildings, and may assign, mortgage, lease out or disposal of them in accordance with the law.
Hua Fei is a joint venture company operated with the current Business Licence No.Qi He Su Ning Zi 000016 issued on 18 October 2005. The operating period is from 27 April 1988 to 26 April 2023. 江蘇省國際信託投資有限責任公司 legally and effectively holds 25% of the equity interest of the jointventure. 江蘇省國際信託投資有限責任公司 is entitled to share the profit earned by Hua Fei in accordance with it equity share ratio.

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MACHINERY AND EQUIPMENT VALUATION OF HUA FEI GROUP

APPENDIX V

The following is the text of a letter and summary of values for the purpose of incorporation in this circular received from Vigers Appraisal & Consulting Limited, an independent valuer, in connection with its valuation as at 31 March 2006 of the machinery and equipment interests of Hua Fei Group.

Vigers Appraisal & Consulting Limited

International Assets Appraisal Consultants 10th Floor, The Grande Building 398 Kwun Tong Road Kowloon Hong Kong

==> picture [53 x 52] intentionally omitted <==

30 June 2006

The Directors Nanjing Panda Electronics Company Limited 301 East Zongshan Road Nanjing The PRC

Dear Sirs,

In accordance with your instructions for us to value certain property consisting of plant and equipment (herein referred to as the “Equipment”) exhibited to us as being owned by Hua Fei Colour Display Systems Company Limited (referred to as the “Company”), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the Equipment as at 31st March 2006.

Basis of Valuation

We have valued the Equipment on the basis of its market value which is defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

In forming our opinion of the market value, we have assumed that the Equipment will continue in its present existing use in the business of the Company for which it was designed, built and erected, subject to potential profitability of the business.

The opinion of market value (in-place) as installed for intended utilization is not necessarily meant to represent the amount that might be realized from piecemeal disposition of the subject Equipment in the open market or from alternative use of the Equipment.

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MACHINERY AND EQUIPMENT VALUATION OF HUA FEI GROUP

APPENDIX V

Assets Appraised

The assets subject of this valuation, as per the list provided to us, are those utilized by the Company in cathode ray tube (CRT) manufacturing that includes colour picture tube (CPT) and colour display tube (CDT), consisting of:

Chemical Equipment
Electronic and Electrical Equipment
Machinery Production Equipment
Other Equipment
Motor Vehicles and Transport Equipment

The plant is located at No. 1 Hua Fei Road, Nanjing City, Jiangsu Province, The People’s Republic of China.

The plant is a highly automated production equipped with machineries imported from European countries, USA and others. At the time of our inspection, the Equipment was observed to be in good working condition. It is our opinion that it is capable of being used for the purpose for which it was designed, built and erected. There was evidence of routine maintenance program.

Valuation Methodology

In arriving at our opinion of value, we have considered the two generally accepted approaches to values; namely:

Cost Approach - considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation arising from condition, utility, age, wear and tear, or obsolescence present, taking into consideration past and present maintenance policy and rebuilding history. This approach is best applied to assets without a known established secondhand market comparable.

Physical depreciation is the loss in value due to physical deterioration resulting from wear and tear in operation and exposure to elements. Deterioration due to age and deterioration due to usage are the main factors that affect physical condition. Physical condition due to wear and tear is proportional to use rather than age. Use is the best indicator to estimate physical deterioration.

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APPENDIX V MACHINERY AND EQUIPMENT VALUATION OF HUA FEI GROUP

Market Data or Comparative Sales Approach - considers prices recently paid for similar assets, with adjustments made to the indicated market prices to reflect condition and utility of the appraised assets relative to the market comparative. Asset for which there is an established secondhand market comparable is best appraised by this approach.

Scope of Investigation, Assumptions and Considerations

Before arriving at our opinion of value, we have personally conducted a physical inventory and inspection of the subject Equipment, investigated market condition, interviewed personnel, and examined documents and specifications provided to us.

During our inspection we observed the various Equipment. Any deferred maintenance, physical wear and tear, operating malfunctions, lack of utility, or any observable conditions distinguishing the appraised assets from assets of like kind in new conditions were noted and made part of our judgement in arriving at the values.

Consideration has been given to accrued depreciation that was based on the observed condition and present and prospective serviceability in comparison with new units of like kind.

We have assumed that the Equipment will be used in its present existing state with the benefit of continuity of the tenure of land and buildings during the foreseeable future.

We have relied to a considerable extent on information such as records, listings and specifications provided to us by the Company. We have made no investigation of and assume no responsibility for titles to or liabilities against the Equipment appraised.

We have not made any deduction in respect of any grant either available or received, neither has any adjustment been made for any outstanding amounts owing under financing agreements.

Our investigation was restricted to a physical inspection and appraisal of the subject Equipment and does not attempt to arrive at any conclusion of values of the Company as a total business entity.

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MACHINERY AND EQUIPMENT VALUATION OF HUA FEI GROUP

APPENDIX V

Opinion of Value

Premised on the above, we are of the opinion that the market value (in-place) of the Equipment for its intended usage, as part of an on-going business, appraised as at 31st March 2006, is fairly represented in the amount of RMB2,087,654,000 (Renminbi Two Billion Eighty Seven Million Six Hundred Fifty Four Thousand), broken-down as follows:

		Market Value (in-place)
		as at 31st March 2006
		RMB
Chemical Equipment		35,249,800
Electronic and Electrical Equipment		338,375,800
Machinery Production Equipment		1,681,285,600
Other Equipment		26,406,900
Motor Vehicles and Transport Equipment		6,335,700
	Total	2,087,653,800
	Rounded to	2,087,654,000

Furthermore, it is our opinion that as at 31st December 2005, there was no substantial material change and the appraised market value of the subject Equipment is fairly represented in the amount of RMB2,087,654,000 (Renminbi Two Billion Eighty Seven Million Six Hundred Fifty Four Thousand).

We hereby certify that we have neither present nor prospective interest in the Company or the appraised Equipment or the values reported.

Yours faithfully,

For and on behalf of

VIGERS APPRAISAL & CONSULTING LIMITED

Raymond Ho Kai Kwong	Maximo I. Montes Jr.
Registered Professional Surveyor	Professional Mechanical Engineer
MRICS, MHKIS, MSc(e-com)	PME BSME
Executive Director	Executive Director, Plant and Machinery Appraisal

Note: Maximo I. Montes Jr. is a Professional Mechanical Engineer who has 35 years experience in industrial plant valuation. He has 25 years experience in the valuation of plant machinery and equipment in Hong Kong, the PRC and Asia Pacific Rim.

Raymond K.K. Ho is a Chartered Surveyor who has over ten years’ experience in the valuation of plant machinery and equipment in Hong Kong and the PRC.

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GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

2. DISCLOSURE OF INTERESTS

(A) Directors’ interests

Save as disclosed below, as at the Latest Practicable Date, to the knowledge of the Company, none of the Directors or Supervisors or chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Directors or Supervisors or the chief executive of the Company are deemed or taken to have under such provisions of the SFO) or which are required to be and are recorded in the register required to be kept pursuant to Section 352 of the SFO or as otherwise required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the “Model Code”) contained in the Listing Rules.

Interests in the Company’s domestic shares:

		No. of Domestic	Percentage of
Name	Duties	Shares held	share capital	Nature of
		(Long position)	in issue (%)	such interest
Zhang Zuzhong	Vice-chairman	9,400	0.014	Personal interest
Xu Guofei	Non-executive Director	1,886	0.004	Personal interest
Zhu Lifeng	Non-executive Director	2,743	0.004	Personal interest
Shi Qiusheng	Non-executive Director &
	Company secretary	3,343	0.005	Personal interest
Zhang Zhenping	Chairman of the Supervisory Committee	3,429	0.005	Personal interest
Wang Hongjin	Deputy General Manager	8,300	0.013	Personal interest

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GENERAL INFORMATION

APPENDIX VI

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or Supervisors or chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Directors or Supervisors or the chief executive of the Company are deemed or taken to have under such provisions of the SFO) or which are required to be and are recorded in the register required to be kept pursuant to Section 352 of the SFO or as otherwise required to be notified to the Company and the Stock Exchange pursuant to the Model Code contained in the Listing Rules.

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

(B) Substantial shareholders’ interests

As at the Latest Practicable Date, so far as is known to any Director or Supervisors or chief executive of the Company, other than the interests of the Directors or Supervisors or chief executive of the Company as disclosed above, none of the Directors or Supervisors or the chief executive of the Company is aware of any other person having interests or short positions in the shares, underlying shares and debenture of the Company which would fail to be disclosed under the provisions of Divisions 2 and 3 or Part XV of the SFO.

The following Directors and Supervisors of the Company are holding offices as director or employee in Panda Electronics Group Limited (“PEGL”), the substantial shareholder of the Company which has an interest in the shares of the Company which would fail to be disclosed to the Company under provisions 2 and 3 of Part XV of the Securities and Futures Ordinance:

	Name of the	Position held in this
Name	Company’s shareholders	Company’s shareholders
Li Anjian	PEGL	Chairman
Zhang Zuzhong	PEGL	Secretary to Party Committee
Xu Guofei	PEGL	General Manager
Liu Ailian	PEGL	Deputy General Manager
Zhu Lifeng	PEGL	Deputy General Manager
Shi Qiu Sheng	PEGL	Chairman to Labor Union
Zhang Zhenping	PEGL	Deputy Secretary to Party Committee

As at the Latest Practicable Date, so far as is known to any Director or Supervisors or chief executive of the Company, other than the interests of the Directors or Supervisors or chief executive of the Company as disclosed above, none of the Directors or Supervisors or the chief executive of the Company is aware of any other person who has interests or short positions in the shares, underlying shares and debenture of the Company of any persons which would fall to be disclosed under the provisions of Divisions 2 and 3 or Part XV of the SFO.

— 175 —

GENERAL INFORMATION

APPENDIX VI

As at the Latest Practicable Date, the following companies are interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company.

	Class/ No.		Approximate	Approximate
Name of	of Shares		Percentage in	Percentage
Substantial	interested	Nature of	the relevant class	in the total
Shareholder	(long position)	Interest	of shares in issue	shares in issue
PEGL	355,015,000	Corporate interest held	85.96%	54.20%
	domestic shares	in the capacity
		of beneficial owner
Lewis Joseph	20,260,000	Personal interest	8.38%	3.10%
	H shares	held in the
		capacity of
		beneficial owner
Tuesday Thirteen Inc.	16,920,000	Corporate interest held	7%	2.59%
	H shares	in the capacity of
		controlled corporation

As at the Latest Practicable Date, so far as is known to any director or chief executive of the Company, the following parties, other than a director or chief executive of the Company, have, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group and the amount of each of such party’s interest in such securities, together with particulars of any options in respect of such capital:

— 176 —

GENERAL INFORMATION

APPENDIX VI

			Percentage to the
Name of Shareholders	Name of Subsidiaries	Paid-up capital	equity interest held
南京白下區	Nanjing Guanghua	3,500,000	28.06%
石門坎鎮工業公司	Electronic Plastic
(Nanjing Baixia District	Installing Plant
Shi Men Kan Zhen
Industrial Company)
Simsen Technology Limited	Nanjing Panda Network	5,000,000	50%
	Technology Co., Ltd.
Panda Electronics	Nanjing Panda Information	952,000	28%
Company Limited	Industry Co., Ltd.
Centra Developments	Nanjing Panda International	280,000	28%
Company Limited	Telecommunication System
	Co., Ltd.
Han Danmei	Nanjing Panda Netcom	500,000	10%
	Technology Co., Ltd.
Labour Union of Panda	Nanjing Panda Mechanical	1,500,000	30%
Mechanical Nanjing	Manufacturing Co. Ltd.
Manufacturing Co. Ltd.
Liu Changhua	Nanjing Panda System	380,000	12.67%
	Integration Co., Ltd.
Zhang Yongjie	Nanjing Panda Accurate	525,000	10.5%
	Machinery Co., Ltd.

Save as disclosed above, so far as is known by the Company, no other persons (exclusive of directors, supervisors and senior management members of the Company) has any interests or short positions which were required to be notified to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or were required to be entered in the register pursuant to section 336 of the SFO.

— 177 —

GENERAL INFORMATION

APPENDIX VI

3. MATERIAL CONTRACTS

The following contracts, not being contracts in ordinary course of business of the Group, have been entered into by members of the Group, within the two years preceding the Latest Practicable Date and are or may be material:

(a) the Assignment of Debt Agreement;
(b) the Further Assignment of Debt;
(c) the Equity Transfer Agreement;
(d) The agreement entered into by the Company and Japan Sharp Co., Ltd. (日本國夏普株式會社) on 10 October 2005 to transfer the 8.72% equity interests in Nanjing Sharp Electronics Co., Ltd. (南京夏普電子有限公司), details of which were stated in the announcement of the Company dated 14 October 2005;
(e) the agreement dated 12 May 2004 and entered into by the Company and Nanjing Jiangning Economic and Technological Development Corporation (南京江寧經濟技術開發轂公司), pursuant to which the Company agreed to transfer its 25% equity interests in Jiangsu Provincial Software Industry Company Limited (江蘇省軟件產業股份有限公司) to Nanjing Jiangning Economic and Technological Development Corporation at a consideration of RMB57,385,350, details of which were stated in the announcement of the Company dated 13 May 2004; and
(f) the agreement dated 12 May 2004 and entered into by the Company and Nanjing Xincheng Company Limited (南京新城股份有限公司), pursuant to which the Company agreed to transfer its 10% equity interests in Jiangsu Provincial Software Industry Company Limited (江蘇省軟件產業股份有限公司) to Nanjing Xincheng Company Limited at a consideration of RMB22,954,140, details of which were stated in the announcement of the Company dated 13 May 2004;

4. SERVICE CONTRACTS

The Company has not signed any new service contract with any Director or supervisor and none of the Directors or supervisors has any existing or proposed service contract with the Company which is not determinable by the Company within one year without payment of compensation other than statutory compensation.

— 178 —

GENERAL INFORMATION

APPENDIX VI

5. LITIGATION

Save as disclosed in the Annual Reports 2005 and 2004 and as far as the Directors are aware, neither the Company nor any of its subsidiaries is involved in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

6. EXPERTS AND CONSENTS

The following are the qualifications of the experts who have been named in this circular or have given opinions, letters or advice contained in this circular:

Name Qualifications IFA VXL Financial Services Limited, a licensed corporation by the Securities and Futures Commission to conduct type 6 (advising on corporate finance) regulated activities under the SFO PRC IFA Central China Securities Co., Limited, a national comprehensive securities company and sponsor institution approved by China Securities Regulatory Committee and the first group standard securities company approved by Securities Association of China Accountants Morison Heng Certified Public Accountants Valuer Vigers Appraisal & Consulting Ltd., Chartered Surveyor PRC lawyer Jiangsu FD Yongheng Law Firm, Legal adviser on PRC law

Each of IFA, PRC IFA, the Accountants, the Valuer and the PRC lawyer has given and has not withdrawn its written consent to the issue of this circular within the inclusion therein of its letter and/ or references to its name, in the form and context in which it appears.

Each of IFA, PRC IFA, the Accountants, the Valuer and the PRC lawyer is not beneficially interested in the share capital of any member of the Group nor has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in nay member of the Group.

7. INTEREST OF DIRECTORS OR EXPERTS

As at the Latest Practicable Date, save for disclosed herein, none of the Directors or experts had any direct or indirect interest in any assets which have been acquired or disposed of by, or leased to any member of the Group, or are proposed to be acquired or disposed of by, or leased to, any member of the Group since 31 December, 2005 (being the date to which the latest published audited accounts of the Group were made up).

— 179 —

GENERAL INFORMATION

APPENDIX VI

8. MATERIAL CHANGE

Save as disclosed in the Annual Report 2005, as at the Latest Practicable Date, the Directors are not aware of any material change in the financial or trading position of the Group since 31 December 2005, being the date to which the latest published audited financial statements of the Company were made up.

9. GENERAL

(a) The company secretary of the Company is Mr. Shi Qiu Sheng who is a senior economist. The Company has obtained a three-year conditional waiver from the Stock Exchange from strict compliance with Rule 3.24 of the Listing Rules in relation to the requirement for the appointment of a qualified accountant that the Company could appoint Mr. Wu Liu Lin, the chief accountant and a member of senior management of the Company, as its qualified accountant under Rule 3.24 of the Listing Rules and Ms. Wong Wan Lung, being a fellow member of Hong Kong Institute of Certified Public Accountants, to assist Mr. Wu for fulfillment of his duties as the qualified accountant during the relevant waiver period.
(b) The share registrar and transfer office of the Company is Hong Kong Registrars Limited of Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(c) As at the Latest Practicable Date, the issued share capital of the Company was RMB655,015,000, which comprised 355,015,000 non-circulating shares held by the state and 300,000,000 circulating shares. Among the circulating shares, 242,000,000 are overseas listed foreign shares (H shares) and 58,000,000 are Renminbi ordinary shares (A shares).

— 180 —

GENERAL INFORMATION

APPENDIX VI

10. DOCUMENTS AVAILABLE FOR INSPECTION

The following documents will be available for inspection at the offices of 301 Zhong Shan Road East, Nanjing, the People’s Republic of China from the date of this circular and the copies of the following documents wil be available for inspection at the offices of the Company’s Solicitors, Philip K.H. Wong, Kennedy Y. H. Wong & Co., at 23rd Floor, Admiralty Centre Tower II, 18 Harcourt Road, Hong Kong from date of this circular up to and including 21 July 2006:

(a) The Assignment of Debt Agreement;
(b) The Further Assignment of Debt;
(c) The Equity Transfer Agreement;
(d) The memorandum and articles of association of the Company;
(e) The annual reports of the Company for the three years ended 31 December 2005;
(f) The letter from the Independent Board Committee, the text of which is set out on pages 18 to 19 of this circular;
(g) The letter from IFA, the text of which is set out on page 20 of this circular;
(h) The accountants’ report of Hua Fei included in Appendix II of this circular;
(i) the unaudited pro-forma financial information of the Enlarged Group and the report of Morison Heng thereon, the text of which is set out in the section headed “Pro-forma financial information of the Enlarged Group” in Appendix III of this circular;
(j) The property valuation report, the text of which is set out in Appendix IV to this circular;
(k) The machinery and equipment valuation report, the text of which is set out in Appendix V to this circular;
(l) The material contracts referred to in the paragraph headed “Material contracts” to this Appendix;
(m) The written consents referred to in the paragraph headed “Experts and consents” to this Appendix; and
(n) this circular.

— 181 —

NOTICE OF EGM

==> picture [46 x 46] intentionally omitted <==

南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited

(a joint stock limited company incorporated in the People’s Republic of China)

(Stock Code: 0553)

EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (“EGM”) of Nanjing Panda Electronics Company Limited (the “Company”) will be held at the Conference Room, Workers’ Union, 301 Zhong Shan Road East, Nanjing, the People’s Republic of China (the “PRC”) on 17 August 2006 at 9:00 a.m., to transact the following business:

to consider and if thought fit, to approve the very substantial connected transaction under the Assignment of Debt Agreement (as defined and described in the announcement dated 11 May 2006 of the Company concerning Very Substantial Acquisition and Connected Transaction - Assignment of Debt and Transfer of 25% equity interest in Hua Fei Colour Display Systems Company Limited from Jiangsu International Trust to the Company in satisfaction of The Debt (the “VSA Announcement”) and the circular dated 30 June 2006, a copy of which has been produced to the meeting, marked “A” and initialed by the chairman of the meeting for identification) and the transactions contemplated therein and to authorize the directors of the Company to take all steps necessary or expedient in their opinion to implement and/or to give effect to the Assignment of Debt Agreement;
to consider and if thought fit, to approve the very substantial connected transaction under the Further Assignment of Debt (as defined and described in the VSA Announcement and the circular dated 30 June 2006, a copy of which has been produced to the meeting, marked “B” and initialed by the chairman of the meeting for identification) and the transactions contemplated therein and to authorize the directors of the Company to take all steps necessary or expedient in their opinion to implement and/ or to give effect to the Further Assignment of Debt;

— 182 —

NOTICE OF EGM

to consider and if thought fit, to approve the very substantial connected transaction under the Equity Transfer Agreement (as defined and described in the VSA Announcement and the circular dated 30 June 2006, a copy of which has been produced to the meeting, marked “C” and initialed by the chairman of the meeting for identification) and the transactions contemplated therein and to authorize the directors of the Company to take all steps necessary or expedient in their opinion to implement and/ or to give effect to the Equity Transfer Agreement.

By order of the Board LI Anjian Chairman

30 June 2006

Nanjing, the People’s Republic of China

Notes :

(1) All shareholders of the Company whose names appear in the Company’s register of members at the close of business on 17 July 2006, Monday, are entitled to attend the EGM. Holders of A Shares of the Company whose names appear in register of member in the Shanghai branch of China Securities Depository and Clearing Corporation Limited at the close of business on 17 July 2006 can bring along with their identity cards or shareholder account cards to attend the EGM. Holders of A Shares or their proxies (if any) shall bring their identity cards, shareholder account cards and the proxy forms (if any) to complete the procedures for attending the EGM at the secretarial office of the Board of the Company at 301 Zhong Shan Road East, Nanjing at 9:00 a.m. to 4:00 p.m. from 17 July 2006 to 27 July 2006. Overseas shareholders can register by post or by fax.
(2) All holders of H Shares of the Company should pay attention that the register of members of the Company will be closed from 17 July 2006 to 15 August 2006 , both days inclusive, during which period no transfer of H Shares can be registered. Holders of H Shares whose names appear in the Company’s register of member at the close of business on 17 July 2006 , or their representatives or proxies are entitled to attend the EGM with their identity certificates or passports. If a shareholder appoints a proxy to attend the EGM on his behalf, his proxy must bring along with the proxy form.
(3) Shareholder who has the right to attend and vote at the EGM is entitled to appoint one proxy or several proxies, whether a member of the Company or not, to attend and vote at the EGM.
(4) If more than one proxies are appointed, the rights of voting may only be exercised when a poll is taken.
(5) The instrument appointing a proxy must be in writing under the hand of the appointer or his attorney duly authorized in writing. In the case of a corporation, the proxy form must be under its common seal or under the hand of its director or duly authorized attorney. If the proxy form is signed by an agent on behalf of an appointer, the proxy form or other authority must be notarially certified. The proxy form together with the notarially certified power of attorney or other authority must be delivered to the office of the Company 24 hours before the time appointed for the holding of the EGM.
(6) Shareholders who intend to attend the EGM should send a reply in writing to the office of the Company in person or by post or by fax before 27 July 2006. The written reply shall not prelude the shareholders to attend the EGM.

— 183 —

NOTICE OF EGM

(7) The EGM is expected to last for a half day. Shareholders and their proxies attending the EGM are responsible for their own transportation and accommodation expenses.
(8) As for details of the Assignment of Debt Agreement, Further Assignment of Debt Agreement and Equity Transfer Agreement, please refer to the announcements published in China Securities Journal, Shanghai Securities News, Ta Kung Pao and The Standard in Hong Kong on 12 September 2005 and 12 May 2006.
(9) The Company’s office and correspondence address:

Postal code : 210002 Telephone : 8625-8480 1144 Fax : 8625-8482 0729

— 184 —

AI assistant

Nanjing Panda Electronics Company Limited — Proxy Solicitation & Information Statement 2006

49292_rns_2006-06-30_78f6a25c-b027-4062-811d-dead5108d198.pdf

南京熊 貓 電子股份有限公司 Nanjing Panda Electronics Company Limited

CONTENTS

DEFINITIONS

DEFINITIONS

南京熊 貓 電子股份有限公司 Nanjing Panda Electronics Company Limited

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

INTRODUCTION

LETTER FROM THE BOARD

THE ASSIGNMENT OF DEBT AND THE TRANSFER

A. BACKGROUND AND GENERAL NATURE OF ASSIGNMENT OF DEBT AND THE TRANSFER

B. MAJOR TERMS OF THE AGREEMENTS

1. THE FURTHER ASSIGNMENT OF DEBT

2. THE EQUITY TRANSFER AGREEMENT

C. INFORMATION ON HUA FEI

LETTER FROM THE BOARD

MANAGEMENT DISCUSSION AND ANALYSIS ON HUA FEI

THE DECREASING TREND IN TERMS OF HUA FEI’S ASSETS, TURNOVER AND PROFIT

D. THE CONSIDERATION FOR THE OBJECT OF THE TRANSACTION AND THE BASIS UPON WHICH THE CONSIDERATION WAS DETERMINED

THE COMPANY

JIANGSU INTERNATIONAL TRUST

JIANGSU INVESTMENT MANAGEMENT

PANDA MOBILE

F. THE REASONS FOR THE FURTHER ASSIGNMENT OF DEBT AND THE TRANSFER

G. BENEFITS OF THE FURTHER ASSIGNMENT OF DEBT AND THE TRANSFER

Financial Impact

H. FINANCIAL AND TRADING IMPACT OF THE ENLARGED GROUP

Management Analysis of the Group’s operation and development:

LETTER FROM THE BOARD

Mortgage and Pledge

I. LISTING RULES IMPLICATION

J. RIGHT TO DEMAND A POLL AT A GENERAL MEETING OF THE COMPANY

K. THE REPORT BY THE PRC IFA

RECOMMENDATION

ADDITIONAL INFORMATION

南京熊 貓 電子股份有限公司 Nanjing Panda Electronics Company Limited

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN

HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

Yours faithfully,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION - ASSIGNMENT OF DEBT AND TRANSFER OF 25% EQUITY INTEREST IN HUA FEI COLOUR DISPLAY SYSTEMS COMPANY LIMITED FROM JIANGSU INTERNATIONAL TRUST TO THE COMPANY IN SATISFACTION OF THE DEBT

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background to and reasons for the Assignment of Debt and the Transfer

2. Information on Hua Fei

Business of Hua Fei and future intention of the Company

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Track record of Hua Fei

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. Consideration for the Transfer

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. Financial effects of the Transfer on the Group

Earnings

Net tangible assets

Working capital

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

VXL Financial Services Limited Gary Mui Director

A. SUMMARY OF FINANCIAL INFORMATION

HIGHLIGHT OF THE AUDITORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2005

Basis of opinion

Qualified opinion arising from limitation of audit scope

HIGHLIGHT OF THE AUDITORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2004

Basis of opinion

Qualified opinion arising from limitation of audit scope

APPENDIX I

B. SUMMARY OF AUDITED FINANCIAL STATEMENTS

Consolidated Income Statements

Prepared in accordance with accounting principles generally accepted in Hong Kong

Consolidated Balance Sheets

Prepared in accordance with accounting principles generally accepted in Hong Kong

Balance Sheets

Prepared in accordance with accounting principles generally accepted in Hong Kong

APPENDIX I

Consolidated statement of changes in equity

Prepared in accordance with accounting principles generally accepted in Hong Kong

Consolidated statement of changes in equity

Prepared in accordance with accounting principles generally accepted in Hong Kong

Consolidated cash flow statements

Prepared in accordance with accounting principles generally accepted in Hong Kong

Nanjing Panda Electronics Company Limited Proxy Solicitation & Information Statement 2006

南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited

南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited

南京熊貓電子股份有限公司 Nanjing Panda Electronics Company Limited