THIS PROSPECTUS IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Shanghai Merchants Holdings Limited (the “Company”), you should at once hand the Prospectus Documents (as defined herein) to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

Dealings in the Shares (as defined herein) may be settled through the CCASS (as defined herein) and you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser for the details of those settlement arrangements and how such arrangements may affect your rights and interests.

A copy of this prospectus, together with copy of each of the PAL (as defined herein) and EAF (as defined herein), having attached thereto the document(s) specified in the paragraph headed “Documents delivered to the Registrars of Companies in Hong Kong and Bermuda” in Appendix II to the prospectus, have been registered by the Registrar of Companies in Hong Kong as required by Section 342C of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). A copy of each of the Prospectus Documents has been filed with the Registrar of Companies in Bermuda in accordance with the Companies Act 1981 of Bermuda (as amended). The Registrar of Companies in Hong Kong and the Registrar of Companies in Bermuda take no responsibility as to the contents of any of the documents referred to above.

The Stock Exchange (as defined herein) and HKSCC (as defined herein) take no responsibility for the contents of this prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this prospectus.

SHANGHAI MERCHANTS HOLDINGS LIMITED * (Incorporated in Bermuda with limited liability) (Stock code: 1104) RIGHTS ISSUE OF TWO RIGHTS SHARES FOR EVERY EXISTING SHARE HELD AT HK$0.10 PER RIGHTS SHARE Financial Adviser to the Company

Underwriter

Shareholders (as defined herein) should note that if at any time between the date of the Underwriting Agreement (as defined herein) and 5:00 p.m. on the second Business Day (as defined herein) after the Final Acceptance Date (as defined herein) one or more of the following events or matters (whether or not forming part of a series of events) shall occur, arise, or exist:

(a) the Underwriter (as defined herein) shall become aware of the fact that, any of the Warranties (as defined herein) was, then or at the material time, untrue, inaccurate or misleading, or that the Company or Profit Harbour (as defined herein) is in breach of any provision of the Underwriting Agreement or the Irrevocable Undertaking (as defined herein); (b) the enactment of any new law or regulation, any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue (as defined herein); (c) any change in local, international, financial, political, economic or stock market conditions, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue; (d) any change or development involving a prospective change in taxation or exchange controls in Hong Kong, and such event or events is or are in the bona fide and reasonable opinion of the Underwriter: (i) likely to have a material adverse effect on the business or financial or trading position or prospect of the Company or the Group (as defined herein); or (ii) likely to have a material adverse effect on the success of the Rights Issue or the level of Rights Shares (as defined herein) to be taken up by the Underwriter under the Underwriting Agreement; or (iii) so material and prejudicial as to make it inappropriate, inadvisable or inexpedient to proceed further with the Rights Issue. then the Underwriter may, in addition to and without prejudice to any other remedies to which the Underwriter may be entitled, after consultation with the Company and its professional advisers, by notice in writing to the Company on or before 5:00 p.m. on the third Business Day after the Final Acceptance Date to terminate the Underwriting Agreement. In the event that the Underwriting Agreement shall have been terminated, the Rights Issue shall not proceed.

Since the trading of Shares (as defined herein) will continue to be suspended until resumption of trading in Shares on the Stock Exchange is granted by the Stock Exchange, the trading of nil-paid Rights Shares is not applicable to the Rights Issue.

The holders of nil-paid Rights Shares can sell their nil-paid Rights Shares off the market at their sole discretion and no arrangement will be provided by the Company for the trading of the nil-paid Rights Shares off the market. The latest time for splitting nil-paid Rights Shares is 4:00 p.m. on Wednesday, 28 June 2006 and details of such arrangement are set out in the paragraph headed “Basis of provisional allotment” under the section headed “Letter from the Board” in this prospectus. If the conditions of the Rights Issue are not fulfilled and/or waived or the Underwriting Agreement is terminated and/or the trading of the Shares on the Stock Exchange is unable to be resumed on or before 14 July 2006 (or any subsequent date as may be agreed in writing by the Company and the Underwriter), the Rights Issue will not proceed. Any dealings in nil-paid Rights Shares off the market will accordingly bear the risk that the Rights Issue may not become unconditional or may not proceed.

The latest time for acceptance and payment for the Rights Shares and application for excess Right Shares is 4:00 p.m. on Wednesday, 5 July 2006. The procedures for acceptance or transfer of the Rights Shares and application for the excess Right Shares are set out on pages 21 to 22 of this prospectus.

* For identification purpose only

20 June 2006

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Termination of the Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Appendix I — Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Appendix II — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	63

— i —

DEFINITIONS

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

“Acquisition”	the acquisition by the Group of approximately 60% interest in
	Chinaright together with the debt owed by Chinaright to
	Professional Trading Limited as at the date of completion
“Assignment of Debt”	the assignment of the debt of US$4.5 million in full from the
	Company at face value to Profit Harbour pursuant to a deed of
	assignment entered into between the Company and Profit
	Harbour dated 12 April 2006. Please refer to the
	announcement and circular of the Company dated 12 April
	2006 and 4 May 2006 respectively in this regard
“associates”	has the meaning ascribed to it under the Listing Rules
“Board”	the board of Directors
“Business Day”	any day (other than a Saturday) on which banks are generally
	open for business in Hong Kong
“Bye-Laws”	the memorandum of association and bye-laws of the Company
	prevailing from time to time
“CCASS”	Central Clearing and Settlement System established and
	operated by HKSCC
“Chinaright”	Chinaright Electronics Limited, a limited liability company
	incorporated under the laws of Hong Kong
“Company”	Shanghai Merchants Holdings Limited, a company
	incorporated in Bermuda with limited liability and the shares
	of which are listed on the Stock Exchange
“Director(s)”	director(s) of the Company
“EAF(s)”	the excess application form(s) in the agreed form pursuant to
	which Qualifying Shareholders may apply to subscribe for
	additional Rights Shares over and above their entitlements
	under the Rights Issue as specified under the PAL(s) on the
	terms and conditions set out in the Prospectus Documents

— 1 —

DEFINITIONS

“Excluded Shareholder(s)”	existing Shareholders whose registered addresses, as shown
	in the register of members of the Company at the close of
	business on the Record Date, are located in jurisdictions
	outside Hong Kong, which the Directors have (having made
	such enquiry concerning the applicable legal and regulatory
	requirements thereof) concluded it expedient to exclude such
	existing Shareholders from the Rights Issue in accordance
	with the Bye-Laws
“Final Acceptance Date”	Wednesday, 5 July 2006 or such other date as the Underwriter
	and the Company may agree in writing as the last date for
	acceptance and payment in respect of provisional allotments
	and excess applications under the Rights Issue
“Great Center”	Great Center Limited, a company incorporated in the British
	Virgin Islands with limited liability
“Group”	the Company and its subsidiaries
“HKSCC”	the Hong Kong Securities Clearing Company Limited
“Hong Kong”	Hong Kong Special Administrative Region of the PRC
“Independent Shareholders”	Shareholders other than Profit Harbour and its associates, if
	any
“Irrevocable Undertaking”	a deed of undertaking dated 14 February 2006 executed by
	Profit Harbour in favour of the Company, whereby Profit
	Harbour undertakes to subscribe for or procure subscription
	of its full entitlement under the Rights Issue
“Last Trading Day”	30 May 2003, being the last trading day prior to the
	suspension of the trading of the Shares on the Stock Exchange
	on 2 June 2003
“Latest Practicable Date”	16 June 2006, being the latest practicable date prior to the
	printing of this prospectus for the purpose of ascertaining
	certain information contained in this prospectus
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Mr. Yue”	Mr. Yue Jialin, the chairman and executive director of the
	Company. Mr. Yue was also deemed to be interested in
	262,602,000 Shares, representing approximately 63.58% in
	the existing issued share capital of the Company as at the
	Latest Practicable Date by virtue of his interest in Profit
	Harbour pursuant to the Securities and Futures Ordinance
	(Chapter 571 of the Laws of Hong Kong)

— 2 —

DEFINITIONS

“Overseas Letter”	a letter from the Company to the overseas Shareholders
	advising them of the arrangement of their entitlements under
	the Rights Issue
“Overseas Shareholders”	Shareholders with registered addresses (as shown in the
	register of members of the Company on the Record Date)
	which are located in jurisdictions outside Hong Kong
“PAL(s)”	the renounceable provisional allotment letter(s) in the agreed
	form to be used in connection with the Rights Shares
“PRC”	the People’s Republic of China
“Profit Harbour”	Profit Harbour Investments Limited, a company incorporated
	in the British Virgin Islands with limited liability and is
	wholly and beneficially owned by Mr. Yue. Profit Harbour
	was interested in 262,602,000 Shares, representing
	approximately 63.58% in the existing issued share capital of
	the Company as at the Latest Practicable Date
“Prospectus”	this prospectus
“Prospectus Documents”	the Prospectus, the PAL and the EAF
“Prospectus Posting Date”	Tuesday, 20 June 2006
“Qualifying Shareholder(s)”	the Shareholder(s), other than the Excluded Shareholder(s),
	whose name(s) appear(s) on the register of members of the
	Company on the Record Date
“Record Date”	Monday, 19 June 2006
“Registrar”	Secretaries Limited, being the share registrar of the Company
	in Hong Kong
“Rights Issue”	the issue of the Rights Shares on the basis of two Rights
	Shares for every existing Share held on the Record Date at the
	Subscription Price as described in this prospectus
“Rights Share(s)”	the 826,000,000 new Share(s) to be offered and issued in
	respect of the Rights Issue
“SFO”	The Securities and Futures Ordinance, Chapter 571 of the
	Laws of Hong Kong

— 3 —

DEFINITIONS

“SGM”	the special general meeting of the Company convened and
	held at 20/F., Central Tower, 29 Queen’s Road, Central, Hong
	Kong, on 19 June 2006 at 10:00 a.m. for the approval of, inter
	alia, the increase in authorised share capital of the Company
	and the Rights Issue
“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of the Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subscription Price”	the subscription price of HK$0.10 per Rights Share
“Trading Day(s)”	a day on which the Stock Exchange is open for trading
“Underwriter”	Sun Hung Kai International Limited, a licensed corporation to
	carry out type 1 (dealing in securities) and type 6 (advising on
	corporate finance) regulated activity under the Securities and
	Futures Ordinance (Chapter 571 of the Laws of Hong Kong),
	which is not a connected person (as defined in the Listing
	Rules) of the Company
“Underwriting Agreement”	the conditional agreement dated 11 May 2006 entered into
	between the Company and the Underwriter relating to the
	underwriting and other arrangements in respect of the Rights
	Issue
“Warranties”	warranties as specified in the Underwriting Agreement
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“US$”	United States dollars, the lawful currency of the United States
	of America
“%”	per cent.

Unless otherwise specified in this prospectus, amounts denominated in US$ are converted for purpose of illustration into Hong Kong dollars at the rate of US$1.0 to HK$7.8.

— 4 —

TERMINATION OF THE UNDERWRITING AGREEMENT

If at any time between the date of the Underwriting Agreement and 5:00 p.m. on the second Business Day after the Final Acceptance Date one or more of the following events or matters (whether or not forming part of a series of events) shall occur, arise, or exist:

(a) the Underwriter shall become aware of the fact that, any of the Warranties was, then or at the material time, untrue, inaccurate or misleading, or that the Company or Profit Harbour is in breach of any provision of the Underwriting Agreement or the Irrevocable Undertaking;
(b) the enactment of any new law or regulation, any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue;
(c) any change in local, international, financial, political, economic or stock market conditions, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue;
(d) any change or development involving a prospective change in taxation or exchange controls in Hong Kong,

and such event or events is or are in the bona fide and reasonable opinion of the Underwriter:

(i) likely to have a material adverse effect on the business or financial or trading position or prospect of the Company or the Group; or
(ii) likely to have a material adverse effect on the success of the Rights Issue or the level of Rights Shares to be taken up by the Underwriter under the Underwriting Agreement; or
(iii) so material and prejudicial as to make it inappropriate, inadvisable or inexpedient to proceed further with the Rights Issue,

then the Underwriter may, in addition to and without prejudice to any other remedies to which the Underwriter may be entitled, after consultation with the Company and its professional advisers, by notice in writing to the Company on or before 5:00 p.m. on the third Business Day after the Final Acceptance Date to terminate the Underwriting Agreement.

In the event that the Underwriting Agreement shall have been terminated, the Rights Issue shall not proceed.

Save for all reasonable costs, fees, charges and expenses which may be incurred in connection with the Rights Issue, upon the giving of notice of termination, all obligations of the Underwriter under the Underwriting Agreement shall cease and no party shall have any claims against any other parties in respect of any matters or things arising out of or in connection with the Underwriting Agreement.

In addition to the aforesaid rights of termination of the Underwriter, Shareholders are advised to refer to the paragraph headed “Certificate for Rights Shares and refund cheques” under the section headed “Letter from the Board” in this prospectus for details of refund mechanism if resumption of trading in Shares on the Stock Exchange is unable to be resumed on or before 14 July 2006 (or any subsequent date as may be agreed in writing by the Company and the Underwriter).

— 5 —

EXPECTED TIMETABLE

2006
Latest time for splitting nil-paid Rights Shares (Note 1) . . . . . . . 4:00 p.m. on Wednesday, 28 June
Latest time for acceptance of, and payment of
Rights Shares and application for excess Right Shares (Note 2). .4:00 p.m. on Wednesday, 5 July
Expected date for the Rights Issue to become unconditional
under the Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .5:00 p.m. on Friday, 7 July
Announcement of results of the Rights Issue and
excess applications for the excess Rights Shares . . . . . . . . . . . . . . . . . . . . . .Wednesday, 12 July
Despatch of certificates for the fully-paid Rights Shares (Note 4). . . . . . . . . . . . . . .Friday, 14 July
Refund cheques in respect of wholly or partially
unsuccessful applications for excess Rights Shares
to be despatched . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 14 July
Expected date for resumption of trading in Shares (Note 4) . . . . . . . . . . . . . . . . . . .Friday, 14 July
Effective date for the change in board lot size
from 2,000 Shares to 20,000 Shares (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 14 July
Odd lots matching services . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 14 July to Monday, 14 August
Dealings in fully-paid Rights Shares commence (Note 4) . . . . . . . . . . . . . . . . . . .Monday, 17 July

— 6 —

EXPECTED TIMETABLE

All the times in this prospectus refer to Hong Kong times. The dates stated in this prospectus for events mentioned in the timetable are for indicative purpose only and may be extended or varied. Any change to the expected timetable will be announced as appropriate.

Notes:

Since the trading of Shares on the Stock Exchange will continue to be suspended until resumption of trading in Shares on the Stock Exchange is granted by the Stock Exchange, the trading of nil-paid Rights Shares is not applicable to the Rights Issue.

The latest time of acceptance of and payment for Rights Shares and application for excess Rights Shares will not take place if there is:
a tropical cyclone warning signal number 8 or above, or
a “black” rainstorm warning
- (i) in force in Hong Kong at any local time before 12:00 noon and no longer in force after 12:00 noon on the Final Acceptance Date. Instead the latest time of acceptance of and payment for the Rights Shares and application for excess Right Shares will be extended to 5:00 p.m. on the same Business Day;
- (ii) in force in Hong Kong at any local time between 12:00 noon and 4:00 p.m. on the Final Acceptance Date. Instead the latest time of acceptance of and payment for the Rights Shares and application for excess Rights Shares will be rescheduled to 4:00 p.m. on the following Business Day which does not have either of those warnings in force at any time between 9:00 a.m. and 4:00 p.m.

If the latest time for acceptance of and payment for the Rights Shares and application for excess Rights Shares does not take place on the Final Acceptance Date, the dates mentioned in the section headed “Expected timetable” in this prospectus may be affected. A press announcement will be made by the Company in such event.

The Rights Shares certificates will be issued in board lots of 20,000 Rights Shares or its multiples, wherever possible.

As set out in the circular of the Company dated 1 June 2006, the Board proposed to change the board lot size for trading in the Shares from 2,000 Shares to 20,000 Shares with effect from Friday, 14 July 2006.

In order to facilitate the trading of odd lots of the Shares after the change in board lot size, the Company has appointed Sun Hung Kai Investment Services (the “Agent”) to stand in the market to provide matching services for the odd lots of Shares on a best effort basis during the period from 14 July 2006 to 14 August 2006 (both days inclusive). Shareholders who wish to take advantage of this matching service either to top up or sell their holdings of Shares may directly or through their brokers, contact Miss Connie Cheung Sau Lin of the Agent at Level 12, One Pacific Place, 88 Queensway, Hong Kong at telephone number 2822-5075.

— 7 —

EXPECTED TIMETABLE

Existing share certificates will continue to be the evidence of entitlement to the Shares and be valid for trading, delivery and settlement. There will be no new share certificate issued as a result of the change in board lot size, and therefore no arrangement for free exchange of existing share certificates in board lots of 2,000 Shares for new share certificates in boards lots of 20,000 shares will be provided.

Shareholders should note that successful matching of the sale and purchase of odd lots of the Shares is not guaranteed. Shareholders are advised to consult their professional advisers if they are in doubt about the above procedures.

In the event that the approval for the resumption of trading in the Shares on the Stock Exchange is not granted by the Stock Exchange and the trading of the Shares on the Stock Exchange is unable to be resumed on or before 14 July 2006 (or any subsequent date as may be agreed in writing by the Company and the Underwriter), there will be no change in board lot size and the board lot size for trading in Shares will remain at 2,000 Shares.

In the event that the trading of the Shares on the Stock Exchange is unable to be resumed on or before 14 July 2006 (or any subsequent date as may be agreed in writing by the Company and the Underwriter), all subscription of the Rights Shares (including those subscribed or procured by the Underwriter for subscription) will be cancelled in compliance with the Bye-Laws and all applicable laws and regulations and refund cheques in respect of the amount validly tendered and received for subscription (including such amount received by the Company for Rights Shares subscribed or procured by the Underwriter for subscription), in full without interest, will be sent by ordinary post to the subscribers at their own risks on or before 21 July 2006 and further announcement will be made by the Company in this regard. If this happens, certificates for the Rights Shares will not be despatched. In that case, there will be no change in board lot size and the board lot size for trading in Shares will remain at 2,000 Shares. In the event that the trading of Shares on the Stock Exchange is resumed later than 14 July 2006, an announcement will be issued in due course addressing whether there will be refund cheques and change in board lot size. In any event, certificates for Rights Shares will only be despatched upon of resumption of trading in Shares on the Stock Exchange.

— 8 —

LETTER FROM THE BOARD

SHANGHAI MERCHANTS HOLDINGS LIMITED

*

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

Executive Directors: Registered office: Mr. Yue Jialin (Chairman) Clarendon House Mr. Lau Yau Cheung (Chief Executive Officer) 2 Church Street Hamilton HM11 Non-Executive Directors: Bermuda

Independent Non-Executive Directors: Bermuda Mr. Wong Wing Kuen, Albert Mr. Tsui Robert Che Kwong Head office and principle place of Mr. Wu Guo Jian business in Hong Kong: Rooms 2808-10 28/F., Wing On House 71 Des Voeux Road Central Hong Kong

20 June 2006

To the Qualifying Shareholders

Dear Sir or Madam,

RIGHTS ISSUE OF TWO RIGHTS SHARES FOR EVERY EXISTING SHARE HELD AT HK$0.10 PER RIGHTS SHARE

INTRODUCTION

The Company announced in its announcement dated 11 May 2006 the proposed increase in authorised share capital, change in board lot size and proposed Rights Issue.

For identification purpose only

— 9 —

LETTER FROM THE BOARD

A copy of the circular is available for inspection at such place and time as set out in the section headed “Documents available for inspection” in Appendix II to this prospectus. Ordinary resolutions were duly passed by the Shareholders to approve the increase in authorised share capital, and by the Independent Shareholders to approve the Rights Issue and all the transactions contemplated thereunder at the SGM convened and held on 19 June 2006, the results of which are published on 20 June 2006.

In accordance with Rule 7.19(6)(a) of the Listing Rules, the resolutions for the Rights Issue are subject to the approval of the Independent Shareholders at the SGM by resolutions on which any controlling Shareholders and their associates shall abstain from voting in favour at the SGM. Accordingly, Profit Harbour, which is interested in 262,602,000 Shares, representing approximately 63.58% of the entire issued share capital of the Company, and its associates, if any, shall abstain from voting to approve the Rights Issue at the SGM and the voting on such resolutions were conducted by way of poll.

The purpose of this prospectus is to give further information regarding, among other things, the Rights Issue, including information on dealings in and transfers and acceptances of the Rights Shares, the application for the excess Right Shares, and other information in respect of the Group.

PROPOSED RIGHTS ISSUE

Issue statistics

Basis of Rights Issue : Two Rights Shares for every Share held on the Record Date Number of existing Shares in : 413,000,000 Shares issue as at the Latest Practicable Date Number of Rights Shares : 826,000,000 Rights Shares, representing 200% of the existing issued share capital of the Company and approximately 66.67% of the enlarged issued share capital of the Company after completion of the Rights Issue Number of Rights Shares to be : 525,204,000 Rights Shares taken up by Profit Harbour or its nominees pursuant to the Irrevocable Undertaking Number of Rights Shares : 300,796,000 Rights Shares underwritten by the Underwriter Subscription Price : HK$0.10 per Rights Share, payable in full upon acceptance

As at the Latest Practicable Date, there were no outstanding options, warrants or securities convertible or exchangeable into Shares.

— 10 —

LETTER FROM THE BOARD

Qualifying Shareholders

The Company will send the Prospectus Documents to the Qualifying Shareholders. The Company will send the Overseas Letter together with the Prospectus to the Excluded Shareholders for their information only but the Company will not send any PAL and EAF to them.

To qualify for the Rights Issue, a Shareholder must:

(i) be registered as a member of the Company at the close of business on the Record Date; and
(ii) not be an Excluded Shareholder.

Basis of provisional allotment

Qualifying Shareholders will be entitled to subscribe for, on an assured basis, two Rights Shares for every one Share held by them on the Record Date. Rights Shares will be provisionally allotted by the Company to the Qualifying Shareholders on such basis.

There will be no trading in nil-paid Rights Shares on the Stock Exchange as the trading in Shares on the Stock Exchange will continue to be suspended until resumption of trading in Shares on the Stock Exchange is granted by the Stock Exchange and the Company will not provide any arrangements or services for the trading of the nil-paid Rights Shares off the market. However, entitlements to subscribe for Rights Shares under such provisional allotments are transferable off the market at the sole discretion of the holders of the nil-paid Rights Shares. If Qualifying Shareholders wish to accept only part of their provisional allotments or transfer a part or all of their rights to subscribe for the Rights Shares provisionally allotted, or to transfer their rights to more than one person, the entire PAL(s) must be surrendered and lodged for cancellation by not later than 4:00 p.m. on Wednesday, 28 June 2006 to the Registrar who will cancel the original PAL(s) and issue new PAL(s), free of charge, in the denomination(s) required. Any entitlements to subscribe for the Rights Shares not taken up by the Qualifying Shareholders will be available for excess application in the manner as described in the paragraph headed “Application for excess Rights Shares” under the section headed “Letter from the Board” in this prospectus.

Subscription Price for the Rights Shares

The Subscription Price will be HK$0.10 per Rights Share, payable in full when a Qualifying Shareholder accepts his/her provisional allotment of the Rights Shares under the Rights Issue or applies for excess Rights Shares. The Subscription Price represents:

the par value of the Share;
a discount of approximately 61.5% to the closing price of HK$0.26 per Share as quoted on the Stock Exchange on the Last Trading Day;

— 11 —

LETTER FROM THE BOARD

a discount of approximately 34.8% to the theoretical ex-rights price of approximately HK$0.1533 per Share based on the closing price of HK$0.26 per Share as quoted on the Stock Exchange on the Last Trading Day;
a discount of approximately 63.0% to average closing price of approximately HK$0.27 per Share as quoted on the Stock Exchange for the last ten Trading Days up to and including the Last Trading Day; and
a premium of approximately 88.7% over the audited consolidated net asset value per Share of approximately HK$0.053 with reference to the audited consolidated net asset value of the Group as at 31 December 2005 as shown in annual report 2005 of the Company.

The Subscription Price was arrived at after arm’s length negotiations between the Company and the Underwriter with reference to, inter alia, the net asset value per Share of approximately HK$0.053 as at 31 December 2005 as disclosed in the annual report 2005 of the Company and the long suspension status of the Company. The Directors (including the independent non-executive Directors) consider the terms of the Rights Issue, including the Subscription Price, to be fair and reasonable and in the best interests of the Company and the Shareholders as a whole.

Status of the Rights Shares

The Rights Shares, when allotted, issued and fully-paid, will rank pari passu in all respects with the then existing Shares in issue. Holders of such Rights Shares will be entitled to receive all future dividends and distributions which are declared, made or paid after the date of issue of the Rights Shares.

Fully-paid Rights Shares will be traded in the new board lot size of 20,000 Shares and the dealing of which will be subject to the payment of stamp duty in Hong Kong.

Certificates for Rights Shares and refund cheques

The Rights Shares certificates will be issued in board lots of 20,000 Rights Shares or its multiples, wherever possible.

Subject to the fulfillment of the conditions of the Underwriting Agreement, certificates for all fully-paid Rights Shares are expected to be posted on Friday, 14 July 2006 to those who have accepted and (where applicable) applied for, and paid for the Rights Shares, by ordinary post at their own risks, and refund cheques in respect of wholly or partially unsuccessful applications for excess Rights Shares are also expected to be posted on Friday, 14 July 2006 by ordinary post at the subscribers’ own risks.

— 12 —

LETTER FROM THE BOARD

procured by the Underwriter for subscription), in full without interest, will be sent by ordinary post to the subscribers at their own risks on or before 21 July 2006 and further announcement will be made by the Company in this regard. If this happens, certificates for the Rights Shares will not be despatched. In that case, there will be no change in board lot size and the board lot size for trading in Shares will remain at 2,000 Shares. In the event that the trading of Shares on the Stock Exchange is resumed later than 14 July 2006, an announcement will be issued in due course addressing whether there will be refund cheques and change in board lot size. In any event, certificates for the Rights Shares will only be despatched upon resumption of trading in Shares on the Stock Exchange.

Rights of Excluded Shareholders

The Prospectus Documents have not been registered or filed under the applicable securities legislation of any jurisdiction other than Hong Kong and Bermuda. No person receiving a copy of the Prospectus or the PAL or the EAF in any jurisdiction outside Hong Kong may treat it as an offer or invitation to apply for the Rights Shares, unless in the relevant jurisdiction such an offer or invitation could lawfully be made without compliance with any registration or other legal or regulatory requirements.

Based on the Company’s register of members on the Record Date, all Shareholders had their registered addresses in Hong Kong, and therefore there is no Excluded Shareholder.

Fractions of Rights Shares

The Rights Issue will not create any fractions of Rights Shares.

Applications for excess Rights Shares

Qualifying Shareholders shall be entitled to apply for the entitlements of Excluded Shareholders and any Rights Shares provisionally allotted but not accepted and paid by the Qualifying Shareholders. Application may be made by completing the EAF and lodging the same with a separate remittance for the excess Rights Shares being applied for. The Directors will allocate the excess Rights Shares at their discretion on a fair and equitable basis, but will give preference to topping-up odd lots to whole board lots.

Shareholders with Shares held by a nominee company should note that the Board would regard the nominee company as a single Shareholder according to the register of members of the Company. Accordingly, Shareholders should note that the aforesaid arrangement in relation to the allocation of the excess Rights Shares would not be extended to beneficial owners individually.

The latest time for acceptance of, and payment for, the Rights Shares and application for excess Rights Shares is expected to be at 4:00 p.m. on the Final Acceptance Date.

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LETTER FROM THE BOARD

Application for listing

The Company has applied to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in the Rights Shares.

Subject to the granting of listing of, and permission to deal in, the Rights Shares in fully-paid form on the Stock Exchange as well as compliance with the stock admission requirements of HKSCC, the Rights Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Rights Shares in fully-paid form on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

TAXATION

Shareholders are recommended to consult their professional adviser if they are in any doubt as to the taxation implications of any subscription, holding, disposal of or dealings in the Rights Shares. It is emphasised that none of the Company, the Directors or any other parties involved in the Rights Issue accepts responsibility for any tax effects or liabilities of the Shareholders resulting from the subscription, holding, disposal of or dealings in the Rights Shares.

EFFECT OF BAD WEATHER ON THE LATEST TIME FOR ACCEPTANCE OF AND PAYMENT FOR RIGHTS SHARES AND APPLICATION FOR EXCESS RIGHTS SHARES

The latest time of acceptance of and payment for Rights Shares and application for excess Rights Shares will not take place if there is:

a tropical cyclone warning signal number 8 or above, or
a “black” rainstorm warning
(i) in force in Hong Kong at any local time before 12:00 noon and no longer in force after 12:00 noon on the Final Acceptance Date. Instead the latest time of acceptance of and payment for the Rights Shares and application for excess Rights Shares will be extended to 5:00 p.m. on the same Business Day;
(ii) in force in Hong Kong at any local time between 12:00 noon and 4:00 p.m. on the Final Acceptance Date. Instead the latest time of acceptance of and payment for the Rights Shares and application for excess Rights Shares will be rescheduled to 4:00 p.m. on the following Business Day which does not have either of those warnings in force at any time between 9:00 a.m. and 4:00 p.m.

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LETTER FROM THE BOARD

UNDERWRITING ARRANGEMENTS

Underwriting Agreement:

Date:

11 May 2006

Underwriter:

Sun Hung Kai International Limited, an independent third party not connected with any Director, chief executive or substantial Shareholder of the Company or any of its subsidiaries or an associate of any of them

Number of Rights Shares underwritten:

Commission:

300,796,000 Rights Shares, representing approximately 72.8% of the existing issued share capital of the Company and approximately 24.3% of the enlarged issued share capital of the Company after completion of the Rights Issue 2.0% of the aggregate Subscription Price in respect of 300,796,000 Rights Shares (inclusive of any sub-underwriting expenses)

Pursuant to the Underwriting Agreement, the Underwriter has agreed to underwrite the Rights Shares (other than the Rights Shares to be allotted provisionally in respect of the Shares beneficially owned by Profit Harbour) which have not been taken up and fully-paid for up to the Final Acceptance Date. Accordingly, the Rights Issue is fully underwritten.

The 2.0% commission payable to the Underwriter was determined after arm’s length negotiations between the Company and the Underwriter based on normal commercial terms with reference to market rates.

Sub-underwriting by Profit Harbour

Profit Harbour has agreed with the Underwriter to sub-underwrite for up to the full amount of 300,796,000 Rights Shares underwritten by the Underwriter pursuant to the Underwriting Agreement.

Undertaking from Profit Harbour

Profit Harbour is interested in an aggregate of 262,602,000 Shares, representing approximately 63.58% of the existing issued Shares.

Subject to the Underwriting Agreement becoming unconditional and not being terminated in accordance with its terms, Profit Harbour has irrevocably undertaken to the Company by the Irrevocable Undertaking that no Shares owned by it will be disposed of or transferred from the date of the Irrevocable Undertaking to the Final Acceptance Date and that its entitlement, representing a total of 525,204,000 Rights Shares under the Rights Issue, will be taken up in full.

As at the Latest Practicable Date, Profit Harbour has not decided on whether to make any excess application under the Rights Issue.

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LETTER FROM THE BOARD

CONDITIONS OF THE RIGHTS ISSUE UNDER THE UNDERWRITING AGREEMENT

The Rights Issue and obligations of the Underwriter under the Underwriting Agreement are conditional upon:

(a) a circular (duly approved by the Stock Exchange) in relation to the Rights Issue, being posted to the Shareholders on or before 1 June 2006 (or on such other date as agreed by the Underwriter and the Company in writing), and the resolution for approving the Rights Issue, together with the resolution approving the increase in the Company’s authorised share capital to facilitate the issue of Rights Shares under the Rights Issue, being duly passed at the SGM in compliance with the Listing Rules on or before the Prospectus Posting Date;
(b) Profit Harbour having acquired the full debt of US$4.5 million due from Great Center at face value for cash consideration pursuant to the Assignment of Debt for the Company to proceed with its resumption proposal;
(c) The Stock Exchange granting or agreeing to grant (subject to allotment and despatch of certificates in respect of the Rights Shares, as appropriate, the posting of the Prospectus Documents and any other condition which may be agreed in their reasonable opinion by the Company and the Underwriter) the listing of or the permission to deal in the Rights Shares (in their fully paid form) on the Stock Exchange on or before 5:00 p.m. on the second Business Day after the Final Acceptance Date;
(d) the filing with and registration of the Prospectus Documents by the Registrar of Companies in Hong Kong in compliance with the Ordinance and the Registrar of Companies in Bermuda in compliance with the Companies Act 1981 of Bermuda (as amended from time to time) on or before the Prospectus Posting Date;
(e) the posting to Qualifying Shareholders of the Prospectus Documents on the Prospectus Posting Date; and
(f) the delivery to the Underwriter on the Prospectus Posting Date a copy of each of the Prospectus Documents, duly signed for and on behalf of the Company by a duly authorised officer thereof.

The Underwriting Agreement shall become fully unconditional as to acceptance and the obligations of the Underwriter under the Underwriting Agreement shall become unconditional (subject only to the force majure events as detailed in the paragraph headed “Termination of the Underwriting Agreement” below) upon all of the aforesaid conditions being fulfilled in full by the respective due dates thereof. It is expected that the Underwriting Agreement will become unconditional on or before 7 July 2006. As at the Latest Practicable Date, condition (b) above had been satisfied.

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LETTER FROM THE BOARD

If any of the above conditions are not fulfilled on or before the date set for its fulfillment or otherwise waived, released or modified (in whole or in part) in writing by the Underwriter with the agreement of the Company, or shall become incapable of being fulfilled on or before such date without being so waived, released or modified, the Underwriting Agreement may be terminated by the Underwriter by written notice to the Company and the Rights Issue shall not proceed.

The Company has undertaken to the Underwriter to use all reasonable endeavours to procure that all of the conditions are fulfilled by the respective due dates thereof.

TERMINATION OF THE UNDERWRITING AGREEMENT

(a) the Underwriter shall become aware of the fact that, any of the Warranties was, then or at the material time, untrue, inaccurate or misleading, or that the Company or Profit Harbour is in breach of any provision of the Underwriting Agreement or the Irrevocable Undertaking;
(b) the enactment of any new law or regulation, any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue;
(c) any change in local, international, financial, political, economic or stock market conditions, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue;
(d) any change or development involving a prospective change in taxation or exchange controls in Hong Kong,

and such event or events is or are in the bona fide and reasonable opinion of the Underwriter:

(i) likely to have a material adverse effect on the business or financial or trading position or prospect of the Company or the Group; or
(ii) likely to have a material adverse effect on the success of the Rights Issue or the level of Rights Shares to be taken up by the Underwriter under the Underwriting Agreement; or
(iii) so material and prejudicial as to make it inappropriate, inadvisable or inexpedient to proceed further with the Rights Issue,

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LETTER FROM THE BOARD

In the event that the Underwriting Agreement shall have been terminated, the Rights Issue shall not proceed.

SHAREHOLDING STRUCTURE OF THE COMPANY

Set out below is the shareholding structure of the Company immediately before and after completion of the Rights Issue

			Immediately after completion
			of the Rights Issue (assuming	Immediately after completion
			no Qualifying Shareholder	of the Rights Issue (assuming
			other than Profit Harbour	all Qualifying	Shareholders
	Immediately before		takes up its entitlements	take up their entitlements
Name/Share	completion of	the Rights Issue	under the Rights Issue)	under the Rights Issue)
		Percentage	Percentage		Percentage
	Shares	(approximately)	Shares (approximately)	Shares	(approximately)
Profit Harbour (Note)	262,602,000	63.58%	787,806,000 63.58%	787,806,000	63.58%
The Underwriter	—	—	300,796,000 24.28%	—	—
Other public Shareholders	150,398,000	36.42%	150,398,000 12.14%	451,194,000	36.42%
Total	413,000,000	100.00%	1,239,000,000 100.00%	1,239,000,000	100.00%

Note: Profit Harbour became the controlling shareholder of the Company in August 2003. The entire issued share capital of Profit Harbour is owned by Mr. Yue. Accordingly, Mr. Yue is deemed to be interested in all the shares in which Profit Harbour has interest pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

Mr. Yue was appointed as the chairman and executive director of the Company on 26 April 2004. After the discharge of the receivership in July 2004 by the court, Mr. Yue has been responsible for the strategic planning and corporate development of the Group. Mr. Yue has established in-depth knowledge of the PRC economic development and policies

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LETTER FROM THE BOARD

through his pervious role as a judge in the Economic Court of People’s Court in Luowu District, Shenzhen, the PRC during 1989 to 1992. Mr. Yue also sits on the school of business administration of Changchun Industrial University as visiting professor. Recently, Mr. Yue is engaged in legal consultation in respect of the acquisition of state owned assets and foreign investments in the PRC.

RESTORATION OF PUBLIC FLOAT

As shown under the paragraph headed “Shareholding structure of the Company” above, immediately after the completion of the Rights Issue, assuming the provisional allotments of the Rights Shares of all Shareholders are taken up by the Underwriter, the public float will drop to approximately 12.14%. Profit Harbour and the Directors undertake that they will make or procure to make the appropriate steps to place down or sub-underwrite such amounts of the Rights Shares before completion of the Rights Issue to ensure the minimum public float is maintained immediately after the issue of the Rights Shares.

The Stock Exchange has stated that if, upon completion of the Rights Issue, less than 25% of the Shares are held by the public or if the Stock Exchange believes that:

(i) a false market exists or may exist in the trading in the Shares; or
(ii) there are too few Shares in public hands to maintain an orderly market;

then the trading of the Shares will remain to be suspended until a sufficient public float is attained.

REASONS FOR THE RIGHTS ISSUE

The principal reason for the Rights Issue is to provide additional working capital and financial flexibility to the business operation and future development of the Group.

Base metals trading is currently one of the Group’s principal activities. As stated in annual report 2005 of the Company, turnover for this sector for the year ended 31 December 2005 was approximately HK$44.9 million (2004: HK$13.5 million). A growth of approximately 232% was recorded as compared with last year. Following the resumption of the base metals trading business in 2004, the Group has scaled up its operation in this sector in the year 2005. The base metals trading business segment contributed approximately HK$110,000 (2004: HK$121,000) to the Group’s operating profits which represented a drop of approximately 9%.

The Group plans to focus mainly on the trading of copper pipes and sheeting for its physical base metals trading business. As stated in the paragraph headed “Use of proceeds from the Rights Issue” below, the Company will use part of the proceeds from the Rights Issue as working capital to finance the physical base metals trading and fabric products and other merchandises trading businesses of the Group. To enhance operational effectiveness, the Board has been actively searching for and has identified a candidate who has entrenched relationships with overseas suppliers and PRC clients. The Group will finalise the terms of engagement with this candidate, who will assist in the execution of

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LETTER FROM THE BOARD

the Group’s physical base metals trading, after resumption of trading in Shares. The Directors are optimistic as to the up trend of copper markets subsisting in the long run and intend to commence trading in the physical base metals products such as the trading of copper pipes and sheeting after the proceeds from the Rights Issue become available.

The Group’s management has also been taking active actions to expand the operation of the fabric products and other merchandises trading business. The Group’s turnover for fabric products and other merchandises trading business segment reached approximately HK$23.5 million for the year ended 31 December 2005 (2004: HK$8.8 million), an increase of approximately 167% over that of 2004. Segment profit attributable to the Group for the year ended 31 December 2005 amounted to approximately HK$966,000 (2004: HK$393,000), an increase of approximately 146% as compared with 2004.

The Group did not have any capital raising activities for 12 months immediately before 11 May 2006, being the date of the announcement regarding the Rights Issue, and up to the Latest Practicable Date.

In addition, the Board considers that the Rights Issue will enlarge the capital base of the Company while enabling the Qualifying Shareholders to maintain their proportionate interests in the Company and continue to participate in the future growth and development of the Company should they wish to do so. Therefore, the Board, having considered the terms of the Rights Issue, is of the view that it is in the interests of the Company and its Shareholders as a whole.

However, those Qualifying Shareholders who do not take up the Rights Shares to which they are entitled should note that their shareholdings in the Company will be diluted.

USE OF PROCEEDS FROM THE RIGHTS ISSUE

The gross proceeds from the Rights Issue will be HK$82.6 million. As disclosed in Company’s announcement dated 11 May 2006 and circular dated 1 June 2006 that the net proceeds of approximately HK$81 million from the Rights Issue will be used as to approximately HK$20 million for working capital to finance the base metals trading business, as to approximately HK$10 million for working capital to finance fabric products and other merchandises trading business of the Group and as to approximately HK$15 million for the repayment of loan and as to approximately HK$36 million for general working capital of the Group. The Company subsequently announced by its announcement dated 15 June 2006 that there would be a reallocation of use of proceeds. The repayment of loan of HK$15 million will be financed by the proceeds from the assignment of Debt and the corresponding amount from the Rights Issue will be reallocated to finance fabric products and other merchandises trading business. The net proceeds of approximately HK$45 million to be used to finance the trading business of the Group will be mainly used for financing the trade purchases and/or placing as pledged deposits for obtaining higher limit of banking facilities such as letters of credit and/or trust receipt loans for trading purposes.

As at the Latest Practicable Date, the Company did not have any investment plans except for the acquisition of Chinaright which engages in the trading of electronic component business, the

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LETTER FROM THE BOARD

consideration of which will be satisfied by the issuance of convertible bond by the Company. For details of the Acquisition, please refer to the announcement of the Company dated 15 June 2006.

PROCEDURE FOR ACCEPTANCE OR TRANSFER

A PAL is enclosed with the Prospectus which entitles the Qualifying Shareholders to subscribe for the number of Rights Shares indicated on the PAL. If the Qualifying Shareholders wish to exercise the right to subscribe for all the Rights Shares specified in the enclosed PAL, the Qualifying Shareholders must lodge the PAL in accordance with the instructions printed thereon, together with a remittance for the full amount payable on acceptance of the number of Rights Shares provisionally allotted to the Qualifying Shareholders, with the Registrar at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong by not later than 4:00 p.m. on the Final Acceptance Date. All remittances must be made in Hong Kong dollars and cheques must be drawn on a bank account with, or cashier’s orders must be issued by, a licensed bank in Hong Kong and made payable to “Shanghai Merchants Holdings Limited — Provisional Allotment Account” and crossed “Account Payee Only”.

It should be noted that unless the PAL, together with the appropriate remittance, has been lodged with the Registrar by 4:00 p.m. on the Final Acceptance Date, whether by the original allottee or any person in whose favour the rights have been validly transferred, that provisional allotment and all rights thereunder will be deemed to have been declined and will be cancelled.

If the Qualifying Shareholders wish to accept only part of the provisional allotment or to transfer all or part of their rights to subscribe for the Rights Shares provisionally allotted under the PAL to more than one person, the entire PAL must be surrendered by not later than 4:00 p.m. on Wednesday, 28 June 2006 to the Registrar who will cancel the original PAL and issue a new PAL in the denominations required. The PALs contain full information regarding the procedures to be followed if the Qualifying Shareholders wish to accept only part of the provisional allotment or if the Qualifying Shareholders wish to transfer all or part of their provisional allotment.

All cheques and cashier’s orders will be presented for payment following receipt and any interest earned on such monies will be retained for the benefit of the Company. Any PAL in respect of which a cheque or cashier’s order is dishonoured on first presentation are liable to be rejected and in that event the provisional allotment of Rights Shares and all rights thereunder will be deemed to have been declined and will be cancelled. If the Underwriter exercises the right to terminate its obligations under the Underwriting Agreement on or before 5:00 p.m. on the second Business Day after the Final Acceptance Date, or if any of the conditions of the Underwriting Agreement (as set out in the section headed “Conditions of the Rights Issue under the Underwriting Agreement” under the section headed “Letter from the Board” in this prospectus) is not fulfilled or waived on or before 7 July 2006 or in the event that the trading of the shares on the Stock Exchange is unable to be resumed on or before 14 July 2006 (or any subsequent date as may be agreed in writing by the Company and the Underwriter), the Rights Issue will not proceed and the monies received in respect of the relevant provisional allotment of Rights Shares will be returned to the relevant persons without interest, by means of cheques to be despatched by the ordinary post at the risk of the relevant applicants on or before 21 July 2006.

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LETTER FROM THE BOARD

APPLICATION FOR EXCESS RIGHTS SHARES

Qualifying Shareholders may apply for any Rights Shares provisionally allotted but not accepted.

Application for excess Rights Shares can be made only by completing the EAF and lodging the same with a separate remittance for the excess Rights Shares being applied for. The Directors will allocate the excess Rights Shares on a fair and equitable basis, but will give preference to topping-up odd lots to whole board lots.

If the Qualifying Shareholders wish to apply for any Rights Shares in addition to their provisional allotment, they must complete and sign the enclosed EAF as indicated thereon and lodge it, together with a separate remittance for the amount payable on application in respect of the excess Rights Shares applied for, with the Registrar at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong by not later than 4:00 p.m. on the Final Acceptance Date. All remittances must be made in Hong Kong dollars and cheques must be drawn on a bank account with, or cashier’s orders must be issued by, a licensed bank in Hong Kong and made payable to “Shanghai Merchants Holdings Limited — Excess Application Account” and crossed “Account Payee Only”. The Registrar will notify the applicants of any allotment of excess Rights Shares made to them.

If no excess Rights Shares are allotted to the Qualifying Shareholders, the amount tendered on the unsuccessful application for the excess Right Shares is expected to be refunded in full to the Qualifying Shareholders by ordinary post at their own risks on or before Friday, 14 July 2006. If the number of excess Rights Shares allotted to the Qualifying Shareholders is less than that applied for, the surplus application monies are also expected to be refunded to the Qualifying Shareholders by ordinary post at their own risks on or before Friday, 14 July 2006. If the Underwriter exercises the right to terminate its obligations under the Underwriting Agreement on or before 5:00 p.m. on the second Business Day after the Final Acceptance Date, or if any of the conditions of the Underwriting Agreement (as set out in the paragraph headed “Conditions of the Rights Issue under the Underwriting Agreement” under the section headed “Letter from the Board” in this prospectus) is not fulfilled or waived on or before 7 July 2006 or in the event that the trading of the shares on the Stock Exchange is unable to be resumed on or before 14 July 2006 (or any subsequent date as may be agreed in writing by the Company and the Underwriter), the Rights Issue will not proceed and the monies received in respect of the relevant successful applications for excess Rights Shares will be returned to the Qualifying shareholders without interest, by means of cheques to be despatched by the ordinary post at the risk of the relevant applicants on or before 21 July 2006.

All cheques and cashier’s orders will be presented for payment following receipt and any interest earned on such monies will be retained for the benefit of the Company. Any EAF in respect of which a cheque or cashier’s order is dishonoured on first presentation is liable to be rejected.

The EAF is for use only by the person(s) named in it and is not transferable.

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LETTER FROM THE BOARD

BUSINESS REVIEW AND PROSPECTS

The Company is an investment holding company and its principal subsidiaries are engaged in trading businesses primarily in fabric products and other merchandises as well as base metals. The Group’s existing clients for fabric products are based in Hong Kong and Africa. As the Group was under receivership during the period from June 2003 to July 2004, its business operations were suspended during that time. The Directors were appointed to the Company as a result of a special general meeting held on 26 April 2004 and they took control of the Company in July 2004 upon the discharge of the receivers. After having taken control of the Company in July 2004, the Board immediately conducted a business and operational review of the Group and formulated strategies to revive the Company’s operations as well as to strengthen the overall business prospect of the Group. The Board has since re-established a customer and supplier network in support of the Group’s businesses. Further, leveraging on the extensive experience and business networks of the Directors, the Board has been exploring and exploiting other viable business opportunities to enhance the future business prospects of the Company. In September and December 2004 respectively, the Group resumed its fabric products and other merchandises trading and base metals trading businesses. The Company’s operation has experienced steady growth afterwards.

The executive Directors, namely Mr. Yue and Mr. Lau Yau Cheung, have been taking active steps to restore the listing status of the Company and have formulated a resumption proposal, with approval from the full Board and the assistance from the Company’s professional advisers. The resumption proposal involves, but not limited to, the implementation of the Rights Issue and further enhancement of the Company’s existing business operations, such as the resumption of the fabric products and other merchandises trading business and the base metals trading business. The related costs and expenses for the implementation of the resumption proposal are financed by part of the loan granted by a financial institution of HK$15 million. Profit Harbour’s subscription and sub-underwriting of Rights Shares under the resumption proposal are financed by Mr. Yue, the beneficial owner of Profit Harbour. In addition, the Assignment of Debt is also financed by Mr. Yue.

As disclosed in the annual report 2005 of the Company, majority of the turnover for the year ended 31 December 2005 came from the trading in base metals sector. The turnover of the Group for the year ended 31 December 2005 was approximately HK$68.4 million, which showed an increase of approximately 207% from approximately HK$22.3 million of last year. Turnover of base metals accounted for approximately HK$44.9 million, which was approximately 65.7% of the total turnover in year 2005. The turnover for fabric products and other merchandises was approximately HK$23.5 million for the year ended 31 December 2005, representing approximately 34.3% of the total turnover in year 2005. The Group recorded a net profit after tax of approximately HK$6.5 million for year 2005, as compared to a loss of approximately HK$36.3 million in 2004.

Business outlook

Since the Board took control of the Company in July 2004, it has been searching for viable business opportunities through their extensive business networks in the PRC and Hong Kong with a view to expanding its business operations and enhancing the financial performance of the Group. On

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LETTER FROM THE BOARD

14 June 2006, the Company entered into agreements in relation to the Acquisition, the consideration of which will be settled by proposed issuance of convertible bond by the Company. It is the present intention of the Company to retain the senior management of Chinaright to directly manage this part of business with a view to achieve operational and management efficiency. Chinaright is primarily engaged in the distribution of integrated circuit chips for set-top boxes, a reception device which receives and decodes the digital signal from either cable or satellite transmission. Chinaright’s customers are located in Hong Kong and the PRC. The Board considers that the Acquisition will help to diversify the trading business of the Group and keep the Company abreast of the lucrative growth opportunities that the PRC market presents, thereby strengthening the Company’s ability to meet the rising demand from its customers. For details of the Acquisition, please refer to the announcement of the Company dated 15 June 2006.

Trading in fabric products and other merchandises

Leveraging on the extensive business networks of the controlling shareholder, Directors and management of the Company, the Group plans to expand into other product categories and provide more value-added services including supply chain management, manufacturing sourcing and quality control, so as to increase its profit margin derived from the sales orders.

A major customer of the Group has indicated that it intends to increase its orders and to source high-end products, such as water-proof fabric from the Group. Another principal customer of the Group has also indicated to the Group its intention to source fabric from the Company for its US market, in addition to the existing orders for its African market. The Company is now in discussion with a potential customer, who intends to source bedding products from the Group, which the Directors consider will enhance the businesses of the Group. Based on the above and the substantial increase in turnover in 2005 of this business segment as detailed in the paragraph below, the Board is confident on the potential of this business segment and believes it will continue to be one of the principal components of the Group’s revenue going forward.

The Group’s turnover for fabric products and other merchandises trading business segment reached approximately HK$23.5 million for the year ended 31 December 2005 (2004: HK$8.8 million), an increase of approximately 167% over that of 2004. Segment profit attributable to the Group for the year ended 31 December 2005 amounted to approximately HK$966,000 (2004: HK$393,000), an increase of approximately 146% as compared with 2004. The Group’s management has been taking active actions to expand the operations under the constraints of available working capital.

Trading in base metals

The Group currently engages in base metals futures trading. The Board has formulated a business plan for reactivating the Group’s physical base metal trading business, which includes a three-stage action plan. The first phase involves the determination of business strategies to be adopted by the Company. The Board decided to focus on the trading of copper pipes and sheeting for its physical base metals trading business as the products specifications are unique in terms of shapes, thickness and dimensions for individual orders and therefore may offer a higher margin. The second phase is the identification of potential customers and suppliers as well as suitable candidates for directly managing

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LETTER FROM THE BOARD

the physical base metal trading business. The Group is currently establishing its supplier and customer bases in the PRC and overseas. The Group has already identified several potential suppliers and customers within the supply chain for copper products trading and various discussions have been held with these potential suppliers and customers. The final stage of the plan includes finalizing the agreements with the potential customers and suppliers as well as the necessary management personnel which are expected to be commenced after sufficient financial resources are available. To enhance operational effectiveness, the Board has been actively searching and has identified a candidate who has entrenched relationships with overseas suppliers and the PRC customers to assist the Group in the execution of the Group’s physical base metals trading business. The Group is negotiating with the candidate for the terms of the engagement and will finalise the relevant terms of engagement after resumption of trading in Shares.

After completion of the Rights Issue and finalisation of the terms of engagement with the potential candidate for the management of the physical base metals trading business, the Company intends to deal with, at an early stage, not more than 10 customers and 10 suppliers. The Company will implement proper internal controls for the physical base metals trading business, including the setting of proper credit limits and credit terms of not more than 60 days unless with approval from the designated Director, for individual customers, before the commencement of the trading of physical base metals. It is the present intention of the Board to focus primarily on the PRC customers.

As detailed in the paragraph headed “Use of proceeds from the Rights Issue” under the section headed “Letter from the Board” in this prospectus, approximately HK$20 million of the proceeds from the Rights Issue will be used as working capital to finance the base metals trading business. The Directors consider that the operation of this business segment will be enhanced with the funding from the Rights Issue.

Turnover for this sector for the year ended 31 December 2005 was approximately HK$44.9 million (2004: HK$13.5 million). A growth of approximately 232% was recorded as compared with last year. Following the resumption of the base metals trading business in 2004, the Group has scaled up its operation in this section in the year 2005. The base metals trading business segment contributed approximately HK$110,000 (2004: HK$121,000) to the Group’s operating profits which represented a drop of approximately 9%.

Brief industry overview

Trading in fabric products and other merchandises

According to the data from the US Commerce Department, with China joining the World Trade Organisation, China’s export of apparel products to the US has surged by 1,274 percent in the first three months of 2005 compared with the same period in 2004. A report from the World Trade Organisation in 2004 showed that China accounted for 12% of the US’s US$61 billion apparel market and could explode to 50% after the quota system is abolished. The European Union has experienced a similar trend in the first quarter of 2005.

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LETTER FROM THE BOARD

Trading in base metals

According to the press release from International Copper Study Group (“ICSG”), an intergovernmental organization dedicated to copper industry, the global refined copper usage has been steadily on the rise from 1999 to 2004. The global usage reached about 16.4 million metric tons in 2004, a new high since the establishment of the ICSG. Asian countries showed particularly strong demand for copper as the rapid pace of China’s economy development propelled the import for copper. A report from China Mining has indicated that China’s refined copper usage accounted for 20% of the world’s total usage in 2004. The London Metal Exchange copper price increased about 73% from 1999 to 2004 and in the first quarter of 2005, the monthly average copper settlement price has further increased approximately 18%. The import of copper pipes by China has quintupled in 2004 and economists estimate China’s demand for copper will stay buoyant in the next five years while the manufacturing sector in China continues to surge in its dominance.

To the best knowledge of the Directors, there are no material information which may be relevant to the financial and trading prospects of the Group, including all special trade factors or risks which are not mentioned elsewhere in this prospectus and which are unlikely to be known or anticipated by the general public, and which could materially affect the profits.

FURTHER INFORMATION

Your attention is drawn to the financial and general information as set out in the appendices to this prospectus.

By order of the Board Shanghai Merchants Holdings Limited Yue Jialin Chairman

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FINANCIAL INFORMATION

APPENDIX I

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at the date of the Prospectus and immediately upon the completion of the Rights Issue are expected to be as follows:

Authorised 2,000,000,000 Shares as at the date of the Prospectus	HK$ 200,000,000
Issued and fully paid or credited as fully paid 413,000,000 Shares as at the date of the Prospectus 826,000,000 Rights Shares to be issued	41,300,000 82,600,000
1,239,000,000 Shares upon the completion of the Rights Issue	123,900,000

As at the Latest Practicable Date, the Company had no other derivatives, options, warrants and conversion rights on the similar rights which are convertible or exchangeable into Shares.

All the Shares in issue and the Rights Shares (when allotted) to be issued rank pari passu in all respects with each other including as regards to dividends and voting rights.

The issued Shares are listed on Stock Exchange. No part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

There is no arrangement under which future dividends are/will be waived or agreed to be waived.

No share or loan capital of the Company or any member of the Group has been put under option or agreed conditionally or unconditionally to be put under option and no warrant or conversion right affecting the shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted.

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FINANCIAL INFORMATION

APPENDIX I

2. SUMMARY OF RESULTS AND ASSETS AND LIABILITIES OF THE GROUP FOR THREE FINANCIAL YEARS ENDED 31 DECEMBER 2005

Set out below is a summary of results and assets and liabilities of the Group for three financial years ended 31 December 2005 as extracted from the Company’s annual report 2005.

FINANCIAL SUMMARY

Results

	Year ended 31 December	Year ended 31 December	Year ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Turnover	62,198	22,305	68,393
Profit/(loss) before taxation	(54,935)	(36,268)	6,539
Income tax credit (expense)	—	(31)	(38)
Profit/(loss) after taxation	(54,935)	(36,299)	6,501
Minority interests	—	—	—
Profit/(loss) for the year	(54,935)	(36,299)	6,501
s and liabilities
	At 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Total assets	76,772	57,528	43,003
Total liabilities	(25,093)	(42,148)	(21,122)
Minority interests	—	—	—
Shareholders’ funds	51,679	15,380	21,881

Assets and liabilities

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FINANCIAL INFORMATION

APPENDIX I

3. AUDITORS’ REPORT

The Company’s auditors have disclaimed their opinion on the Group’s financial statements for the year ended 31 December 2003 and issued qualified opinions relating to limitation of scopes for the Group’s financial statements for the two years ended 31 December 2005. Reproduced below is the auditors’ report for the year ended 31 December 2005 issued by Graham H.Y. Chan & Co. as extracted from the Company’s annual report 2005.

To the Shareholders of

Shanghai Merchants Holdings Limited

(incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 17 to 46 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants, except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as set out below.

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FINANCIAL INFORMATION

APPENDIX I

Included in the consolidated balance sheet at 31 December 2005, there was available-for-sale investment. Such investment represents the Group’s 100% equity interest in Chaoyang Hua Loong Textiles and Dyeing Limited (“Chaoyang Hua Loong”), a company established in the People’s Republic of China, and is stated at nil value. In addition, full allowance against an amount of HK$24,806,000 due from Chaoyang Hua Loong had been made by the Group in previous years. In the absence of reliable current financial information relating to the assets and liabilities of Chaoyang Hua Loong, we are unable to satisfy ourselves as to whether the interest in Chaoyang Hua Loong at 31 December 2005 is free from material misstatement and also whether the full allowance against the amount due from Chaoyang Hua Loong is appropriate. Any adjustment found to be necessary to the value of the available-for-sale investment and the amount due from Chaoyang Hua Loong would affect the profit of the Group for the year ended 31 December 2005 and its net assets as at that date.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Qualified opinion arising from limitations of audit scope

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the matters referred to in the basis of opinion section of this report, in our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2005 and 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 limitations on our work set out in the basis of opinion section of this report:

we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether proper books of account had been kept.

Graham H. Y. Chan & Co.

Certified Public Accountants (Practising)

Hong Kong 24 April 2006

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FINANCIAL INFORMATION

APPENDIX I

4. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR NEDED 31 DECEMBER 2005

The financial information set out below is an extract from pages 17 to 46 of the annual report 2005 for the year ended 31 December 2005. All information in this paragraph should be read in conjunction with the audited accounts which are included in the annual report 2005 for the year ended 31 December 2005.

Consolidated Income Statement

For the year ended 31 December 2005

Notes Turnover 5 Cost of sales Gross profit Other income 5 Credit arising from a scheme of arrangement with creditors 7 Distribution costs Administrative expenses 8 Allowance for bad and doubtful debts Profit/(loss) from operations Finance costs — interest on other loans Allowance for advance to an investee company 14 Gain on de-consolidation of a subsidiary 20 Profit/(loss) before taxation Income tax expense 10 Profit/(loss) for the year Earnings/(loss) per share — Basic 11	2005 HK$’000 68,393 (66,113)	2004 HK$’000 22,305 (21,369) 936 13 — (429) (8,455) (14,816) (22,751) (335) (24,806) 11,624 (36,268) (31) (36,299) (8.79) cents
	2,280 474 15,421 (1,353) (8,539) — 8,283 (1,744) — — 6,539 (38)	936 13 — (429 (8,455 (14,816
		(22,751 (335 (24,806 11,624
		(36,268 (31
	6,501 1.57 cents

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FINANCIAL INFORMATION

APPENDIX I

Consolidated Balance Sheet

At 31 December 2005

		2005	2004
	Notes	HK$’000	HK$’000
Non-current assets
Property, plant and equipment	12	—	23
Investment in security	14	—	—
Available-for-sale investment	14	—	—
		—	23
Current assets
Trade and other receivables	15	37,526	42,576
Pledged bank deposits	25	4,012	8,000
Bank balances and cash		1,465	6,929
		43,003	57,505
Current liabilities
Trade and other payables	16	6,053	27,093
Secured other loans	17	15,000	15,000
Taxation payable		69	55
		21,122	42,148
Net current assets		21,881	15,357
Total assets less current liabilities		21,881	15,380
Capital and reserves
Share capital	18	41,300	41,300
Reserves		(19,419)	(25,920)
Equity attributable to equity holders of the parent		21,881	15,380

The financial statements on pages 17 to 46 were approved and authorised for issue by the Board of Directors on 24 April 2006 and are signed on its behalf by:

Yue Jialin Lau Yau Cheung Director Director

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FINANCIAL INFORMATION

APPENDIX I

Balance Sheet

At 31 December 2005

		2005	2004
	Notes	HK$’000	HK$’000
Non-current assets
Interests in subsidiaries	13	6,296	32,121
Current assets
Other receivables		145	218
Bank balances		7	5,566
		152	5,784
Current liabilities
Other payables		3,840	7,525
Secured other loans	17	15,000	15,000
		18,840	22,525
Net current liabilities		(18,688)	(16,741)
		(12,392)	15,380
Capital and reserves
Share capital	18	41,300	41,300
Reserves		(53,692)	(25,920)
		(12,392)	15,380
Yue Jialin		Lau Yau Cheung
Director		Director

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FINANCIAL INFORMATION

APPENDIX I

Statement of Changes in Equity

For the year ended 31 December 2005

		Share
	Share	premium	Contributed	Special	Accumulated
	capital	account	surplus	reserve	losses	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
The Group
At 1 January 2004	41,300	106,957	—	(14,980)	(81,598)	51,679
Loss for the year	—	—	—	—	(36,299)	(36,299)
At 31 December 2004	41,300	106,957	—	(14,980)	(117,897)	15,380
Profit for the year	—	—	—	—	6,501	6,501
At 31 December 2005	41,300	106,957	—	(14,980)	(111,396)	21,881
The Company
At 1 January 2004	41,300	106,957	60,274	—	(157,429)	51,102
Loss for the year	—	—	—	—	(35,722)	(35,722)
At 31 December 2004	41,300	106,957	60,274	—	(193,151)	15,380
Loss for the year	—	—	—	—	(27,772)	(27,772)
At 31 December 2005	41,300	106,957	60,274	—	(220,923)	(12,392)

The special reserve represents the difference between the nominal value of the aggregate share capital of the subsidiaries acquired and the nominal value of the share capital of the Company issued for the acquisition at the time of a group reorganisation in 1998.

The contributed surplus represents the difference between the consolidated net assets of the subsidiaries acquired and the nominal value of the share capital of the Company issued for the acquisition at the time of a group reorganisation in 1998.

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

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

In the opinion of the directors, the Company had no reserve available for distribution to shareholders at the balance sheet date.

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FINANCIAL INFORMATION

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31 December 2005

	2005	2004
	HK$’000	HK$’000
Operating Activities
Profit/(loss) from operations	8,283	(22,751)
Adjustments for:
Depreciation and amortisation	7	17
Loss on disposal of property, plant and equipment	16	112
Allowance for bad and doubtful debts	—	14,816
Credit arising from scheme of arrangement with creditors	(15,421)	—
Interest income	(160)	(4)
Operating cash flows before working capital changes	(7,275)	(7,810)
Decrease/(increase) in trade and other receivables	5,050	(7,212)
Decrease in trade and other payables	(5,619)	(1,549)
Cash used in operations	(7,844)	(16,571)
Interest paid	(1,744)	(335)
Hong Kong profits tax paid	(24)	—
Net Cash Used in Operating Activities	(9,612)	(16,906)
Investing Activities
Decrease/(increase) in pledged bank deposits	3,988	(8,000)
Interest received	160	4
Net Cash from/(used in) Investing Activities	4,148	(7,996)
Financing Activities
Secured other loans raised	15,000	15,000
Repayment of other loans	(15,000)	—
Net Cash from Financing Activities	—	15,000
Net Decrease in Cash and Cash Equivalents	(5,464)	(9,902)
Cash and Cash Equivalents at 1 January	6,929	16,831
Cash and Cash Equivalents at 31 December
representing bank balances and cash	1,465	6,929

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FINANCIAL INFORMATION

APPENDIX I

Notes to the Financial Statements

For the year ended 31 December 2005

1. General

The Company is incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Its parent and ultimate holding company is Profit Harbour Investments Limited (“Profit Harbour”), a company incorporated in the British Virgin Islands. The address of its registered office and principal place of business of the Company are disclosed in the “Corporate Information” section of the annual report.

The Company is an investment holding company. The principal activities of its subsidiaries are set out in note 29.

The financial statements are presented in Hong Kong dollars (“HK$”) which is the Company’s functional and presentation currency.

Impact of New Hong Kong Financial Reporting Standards (“HKFRSs”) and Hong Kong Accounting Standards (“HKASs”)

The Hong Kong Institute of Certified Public Accountants (the “HKICPA”) has issued a number of new HKFRSs, HKASs and Interpretations that are effective for accounting periods beginning on or after 1 January 2005. The Group has adopted the following HKFRSs and HKASs which are pertinent to its operations and relevant to these financial statements.

—	HKAS 1	Presentation of Financial Statements
—	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 17	Leases
—	HKAS 18	Revenue
—	HKAS 19	Employee Benefits
—	HKAS 21	The Effects of Changes in Foreign Exchange Rates
—	HKAS 24	Related Party Disclosures
—	HKAS 27	Consolidated and Separate Financial Statements
—	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 39	Financial Instruments: Recognition and Measurement
—	HKAS 39 (Amendment)	Transition and Initial Recognition of Financial Assets and Financial Liabilities
—	HKFRS 2	Share-based Payment

The adoption of HKASs 7, 8, 10, 12, 17, 18, 19, 21, 27, 33, 36 and 37 has had no material impact on the Group’s accounting policies and the methods of computation, presentation and disclosure in the Group’s financial statements. The major effects on adoption of the other HKFRSs and HKASs are summarised as follows:

(a) The adoption of HKAS 1 requires the disclosure of judgments (apart from those involving estimations) and key assumptions concerning the future and other sources of estimation uncertainty. These disclosures are detailed in note 3 to the financial statements.

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FINANCIAL INFORMATION

APPENDIX I

(b) The adoption of HKAS 24 affects the identification of related parties and the disclosure of related party transactions.
(c) The adoption of HKAS 32 and HKAS 39 has resulted in a change in accounting policy for recognition, measurement, derecognition and disclosure of financial instruments. HKAS 32 requires retrospective application. The application of HKAS 32 has had no material impact on how financial instruments of the Group are presented for current and prior accounting periods. HKAS 39 which is effective for annual periods beginning on or after 1 January 2005, generally does not permit the recognition, derecognition or measurement of financial assets and liabilities on a retrospective basis. The principal effects resulting from the implementation of HKAS 39 are summarised below.

The Group has applied the relevant transitional provisions of HKAS 39 with respect to classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

On or before 31 December 2004, the Group classified and measured its equity securities as investment securities, which are carried at cost less impairment losses (if any), in accordance with the benchmark treatment of Statement of Standard Accounting Practice 24 “Accounting for Investments in Securities” issued by the HKICPA. From 1 January 2005 onwards, the Group classifies and measures its equity securities as “available-for-sale financial assets”, which are carried at cost, as the equity securities do not have a quoted market price in an active market and whose fair value cannot be reliably measured, in accordance with HKAS 39. No adjustment on fair value of the equity securities has been required.

(d) The adoption of HKFRS2 has resulted in a change in accounting policy for share options. Prior to this, no recognition and measurement of share-based transactions in which share options granted over shares in the Company was required until such options were exercised, at which time the share capital and share premium were credited with the proceeds received.

With effect from 1 January 2005, in order to comply with HKFRS 2, the Group has adopted a new policy for share options. Under the new policy, the Group recognises the fair value of such share options as an expense with a corresponding increase recognised in a capital reserve within equity. Further details of the new policy are set out in note 4.

There were no options granted by the Company after 7 November 2002 but had not vested before 1 January 2005. Accordingly, the adoption of HKFRS 2 in respect of share options granted has had no effect on these financial statements.

The Group has not early applied the following new HKFRSs that have been issued by the HKICPA but not yet effective. The Group has considered these standards and interpretations but does not expect that they will have a material effect on how the results of operation and financial position of the Group are prepared and presented.

—	HKAS 1 (Amendment)	Capital Disclosures 1
—	HKAS 19 (Amendment)	Actuarial Gains and Losses, Group Plans and Disclosures 2
—	HKAS 21 (Amendment)	The Effects of Changes in Foreign Exchange Rates — Net Investment in
		a Foreign Operation 2
—	HKAS 39 (Amendment)	Cash Flow Hedge Accounting of Forecast Intragroup Transactions 2
—	HKAS 39 (Amendment)	The Fair Value Option 2
—	HKAS 39 and HKFRS 4	Financial Instruments: Recognition and Measurement and Insurance
	(Amendment)	Contracts — Financial Guarantee Contracts 2
—	HKFRS 6	Exploration for and Evaluation of Mineral Resources 2
—	HKFRS 7	Financial Instruments: Disclosures 1
—	HK(IFRIC) - INT 4	Determining Whether an Arrangement Contains a Lease 2

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FINANCIAL INFORMATION

APPENDIX I

— HK(IFRIC) - INT 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds[2] — HK(IFRIC) - INT 6 Liabilities Arising from Participating in a Specific Market — Waste, Electrical and Electronic Equipment[3] — HK(IFRIC) - INT 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies[4]

1 Effective for the annual period beginning on or after 1 January 2007

2 Effective for the annual period beginning on or after 1 January 2006

3 Effective for the annual period beginning on or after 1 December 2005
4 Effective for the annual period beginning on or after 1 March 2006

3. Critical Accounting Judgments and Key Sources of Estimation Uncertainty

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

The Group makes estimates and assumption concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

There is no significant risk of key assumptions concerning the future and other key sources of estimation at the balance sheet date which will cause an adjustment to carrying amounts of assets and liabilities within the next year.

There are no significant effects on amounts recognised in the financial statements arising from the judgment or estimates used by management.

4. Significant Accounting Policies

The financial statements have been prepared in accordance with HKFRSs and HKASs issued by the HKICPA. They have been prepared under the historical cost convention. The principal accounting policies adopted are set out below:

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 subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, until the date such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, controls more than 50% of its voting power or issued share capital or controls the composition of its board of directors or has power to govern its financial and operating policies.

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

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FINANCIAL INFORMATION

APPENDIX I

Property, plant and equipment

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

Depreciation and amortisation are provided to write off the cost of items of property, plant and equipment over their estimated useful lives, using the straight-line method, at the following rates per annum:

Leasehold land	Over the shorter of the term of the lease, or 50 years
Buildings	Over the shorter of the term of the lease, or 50 years
Plant and machinery	12%
Furniture, fixtures and equipment	20-331⁄3%

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

Impairment

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

When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Revenue recognition

Sales of goods are recognised when goods are delivered and title has passed or when the relevant sales contracts become unconditional.

Interest income is recognised as it accrues using the effective interest method.

Foreign currencies

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

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which case, the exchange differences are also recognised directly in equity.

— 39 —

FINANCIAL INFORMATION

APPENDIX I

On consolidation, the assets and liabilities of the Group’s operations outside Hong Kong are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

Taxation

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

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

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

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

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

Financial instruments

Financial assets

The Group’s financial asset is classified as available-for-sale investments.

Available-for-sale investments are those non-derivative financial assets in equity securities or are not classified in any of the other three categories under the scope of HKAS 39. After initial recognition, available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement. For investments where there is no active market and whose fair value cannot be reliably measured, such investments are measured at cost less any impairment losses at each balance sheet date subsequent to initial recognition. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired. The amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses will not reverse in subsequent periods.

Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts.

— 40 —

FINANCIAL INFORMATION

APPENDIX I

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with bank and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

Trade and other payables

Trade and other payable are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the borrowings using the effective interest method.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new shares are taken to equity as a deduction, net of tax, from the proceeds.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rental payments applicable to such operating leases are charged to the income statement on the straight-line basis over the lease periods.

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. All other borrowing costs are charged to the income statement in the year in which they are incurred.

Provision

Provision are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

Employee benefits costs

Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees of the Group. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

Contributions to Mandatory Provident Fund as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognised as an expense in the income statement as incurred.

— 41 —

FINANCIAL INFORMATION

APPENDIX I

Share-based payments

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company, if applicable.

The cost of equity-settled transaction is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date of which the relevant employees became fully entitled to the award (the “vesting date”). The cumulative expense recognised for equity-settlement transactions at each balance sheet date until the vesting date reflects the extent to which (i) the vesting period has expired, and (ii) the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movements in cumulative expense recognised as at the beginning and end of the period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

— 42 —

FINANCIAL INFORMATION

APPENDIX I

5. Revenue and Other Income

The principal business of the Group is trading of base metals and fabric products and other merchandises to outsider customers. Turnover and revenue recognised during the year are as follows:

Turnover Sales revenue from trading of base metals Sales revenue from trading of fabric products and other merchandises Other income Interest income Exchange gain Others Total income	2005 HK$’000 44,937 23,456	2004 HK$’000 13,522 8,783
	68,393 160 — 314 474	22,305
		4 7 2
		13
	68,867	22,318

Business and Geographical Segments

Business segments

For management purposes, the Group is currently organised into two operating divisions - trading in base metals and trading in fabric products and other merchandises. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Continuing operations: Trading in base metals — trading in base metals Trading in fabric products — trading in fabric products and other merchandises and other merchandises Discontinued operation: Fabric processing — processing of raw fabric and the sale of finished fabric

In 2002, former directors of the Company determined to cease the Group’s fabric processing operation which had been carried out under Chaoyang Hua Loong. Chaoyang Hua Loong was de-consolidated from the Group with effect from 1 January 2004, hence, except for the gain on de-consolidation of a subsidiary and allowance made on advance to an investee company, no results, assets and liabilities were attributable to the fabric processing operation during the year ended 31 December 2004. Details are set out in note 14.

— 43 —

FINANCIAL INFORMATION

APPENDIX I

Segment information about these businesses is presented below.

2005

Turnover External sales Results Segment profit Unallocated corporate expenses Credit arising from a scheme of arrangement with creditors Finance costs - interest on other loans Profit before taxation Income tax expense Profit for the year Balance Sheet Assets Segment assets Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities	Continuing operations Trading in base metals Trading in fabric products and other merchandises HK$’000 HK$’000 44,937 23,456 110 966 432 1,719 — 1,570	Discontinued operation Fabric processing Consolidated HK$’000 HK$’000 — 68,393 — 1,076 (8,214 15,421 (1,744 6,539 (38 6,501 — 2,151 40,852 43,003 — 1,570 19,552 21,122	Discontinued operation Fabric processing Consolidated HK$’000 HK$’000 — 68,393 — 1,076 (8,214 15,421 (1,744 6,539 (38 6,501 — 2,151 40,852 43,003 — 1,570 19,552 21,122	Discontinued operation Fabric processing Consolidated HK$’000 HK$’000 — 68,393 — 1,076 (8,214 15,421 (1,744 6,539 (38 6,501 — 2,151 40,852 43,003 — 1,570 19,552 21,122
				1,076
				(8,214 15,421 (1,744
				6,539 (38
			—	6,501
				2,151
				40,852
			—	43,003
				1,570
				19,552
				21,122

— 44 —

FINANCIAL INFORMATION

APPENDIX I

2004

Turnover External sales Results Segment profit Allowance for advance to an investee company Gain on de-consolidation of a subsidiary Unallocated corporate expenses Finance costs - interest on other loans Loss before taxation Income tax expense Loss for the year Balance Sheet Assets Segment assets Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities	Continuing operations Trading in base metals Trading in fabric products and other merchandises HK$’000 HK$’000 13,522 8,783 121 393 — — — — 622 6,635 1,287 3,467	Discontinued operation Fabric processing Consolidated HK$’000 HK$’000 — 22,305 — 514 (24,806) (24,806 11,624 11,624 (23,265 (335 (36,268 (31 (36,299 — 7,257 50,271 57,528 — 4,754 37,394 42,148	Discontinued operation Fabric processing Consolidated HK$’000 HK$’000 — 22,305 — 514 (24,806) (24,806 11,624 11,624 (23,265 (335 (36,268 (31 (36,299 — 7,257 50,271 57,528 — 4,754 37,394 42,148	Discontinued operation Fabric processing Consolidated HK$’000 HK$’000 — 22,305 — 514 (24,806) (24,806 11,624 11,624 (23,265 (335 (36,268 (31 (36,299 — 7,257 50,271 57,528 — 4,754 37,394 42,148
				514
			(24,806) 11,624	(24,806 11,624 (23,265 (335
				(36,268 (31
			—	(36,299
				7,257
				50,271
			—	57,528
				4,754
				37,394
				42,148

— 45 —

FINANCIAL INFORMATION

APPENDIX I

Geographical segments

The following tables provide an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods:

Hong Kong Africa	Sales revenue by geographical market 2005 2004 HK$’000 HK$’000 49,635 14,788 18,758 7,517 68,393 22,305	Sales revenue by geographical market 2005 2004 HK$’000 HK$’000 49,635 14,788 18,758 7,517 68,393 22,305
		22,305

All segment assets are located in Hong Kong. There was no addition of property, plant and equipment for each of the year ended 31 December 2004 and 2005 respectively.

7. Credit Arising from a Scheme of Arrangement with Creditors

On 28 February 2005, Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, held a meeting with its creditors pursuant to the Order of The Honourable Deputy Justice Poon on 2 February 2005 authorising the convening of such meeting, at which a scheme of arrangement (the “Scheme”) allowing Merchants HK to compromise its debts with its creditors was duly approved by the creditors present thereat. A petition hearing before the High Court took place on 19 April 2005 at which the Court also sanctioned the Scheme, the Order for which was duly filed with the Registrar of Companies in Hong Kong on the same date whereupon the Scheme has become fully effective with the effect of reducing the Group’s liabilities by approximately HK$15,421,000.

8. Administrative Expenses

	2005	2004
	HK$’000	HK$’000
Administrative expenses include the following:
Auditors’ remuneration	250	430
Depreciation and amortisation	7	17
Legal and professional fees	4,760	5,093
Loss on disposal of property, plant and equipment	16	112
Retirement benefits scheme contributions, net of nil (2004: Nil) forfeited
contributions	55	15
Staff costs, including directors’ emoluments (Note 9) (NB)	1,513	496

NB: Staff costs to the amount of HK$213,000 (2004: HK$80,000) was also included in distribution costs in the consolidated income statement.

— 46 —

FINANCIAL INFORMATION

APPENDIX I

Directors’ and Employees’ Emoluments

The remuneration of each director for the year ended 31 December 2005 and 2004 are set out below.

2005

Executive directors Yue Jialin Lau Yau Cheung Independent non-executive directors Wong Wing Kuen, Albert Tsui Robert Che Kwong Wu Guo Jian Total 2004 Executive directors Yue Jialin Lau Yau Cheung Independent non-executive directors Wong Wing Kuen, Albert Tsui Robert Che Kwong Wu Guo Jian Total	Fees Salaries, allowances, and benefits in kind Retirement scheme contribution HK$’000 HK$’000 HK$’000 — — — — 300 15 40 — — 40 — — 40 — — 120 300 15 Fees Salaries, allowances, and benefits in kind Retirement scheme contribution HK$’000 HK$’000 HK$’000 — — — — — — 20 — — 20 — — 20 — — 60 — —	Total HK$’000 — 315 40 40 40
		435
		Total HK$’000 — — 20 20 20
		60

During the year ended 31 December 2005, Mr. Lau Yau Cheung waived part of the emoluments amounting to HK$300,000, which were excluded in the above disclosure. Apart from the above, no director has waived or agreed to waive any emoluments during the years ended 31 December 2005 and 2004.

— 47 —

APPENDIX I

FINANCIAL INFORMATION

Of the five individuals with the highest emoluments in the Group, one (2004: one) individual was a director of the Company whose emoluments are included in the disclosure set out above. The aggregate emoluments of the five highest paid individuals were as follows:

Salaries and allowances Retirement benefits scheme contributions	2005 HK$’000 1,393 55 1,448	2004 HK$’000 456 15
		471

The remuneration of each of the five highest paid individuals for the years ended 31 December 2005 and 2004 fell within Nil to HK$1,000,000 band.

During the years ended 31 December 2005 and 2004, no emoluments were paid by the Group to any of the directors or the five highest paid individuals, including directors and employees, as an inducement to join or upon joining the Group or as compensation for loss of office.

10. Income Tax Expense

Hong Kong Profits Tax is calculated at 17.5% of the assessable profit for the year.

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

Profits /(loss) before taxation Tax at Hong Kong Profits Tax rate of 17.5% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Tax effect of tax loss not recognised Utilisation of tax loss previously not recognised Tax charge for the year	2005 HK$’000 6,539	2004 HK$’000 (36,268
	1,144 1,454 (2,755) 193 2	(6,347 8,309 (2,051 120 —
	38	31

At 31 December 2005, the Group had unused tax losses of approximately HK$4,164,000 (2004: HK$23,702,000) available for offset against future profits. No deferred tax asset has been recognised in respect of such losses due to the unpredictability of future profit streams. The tax losses may be carried forward indefinitely.

The Company had no significant unprovided deferred taxation at the balance sheet date.

— 48 —

FINANCIAL INFORMATION

APPENDIX I

11. Earnings/(Loss) Per Share

The calculation of the basic earnings/(loss) per share is based on the profit for the year of HK$6,501,000 (2004: loss of HK$36,299,000) and on 413,000,000 (2004: 413,000,000) shares in issue during the year.

Diluted loss per share has not been presented for the years ended 31 December 2005 and 2004 as there were no potential dilutive shares outstanding during both years.

12. Property, Plant and Equipment

Leasehold land and buildings Plant and machinery Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 The Group Cost At 1 January 2004 47,578 24,985 1,017 Disposals — — (201) De-consolidation of a subsidiary (47,578) (24,985) — At 31 December 2004 — — 816 At 1 January 2005 — — 816 Disposals — — (816) At 31 December 2005 — — — Depreciation, Amortisation and Impairment Loss At 1 January 2004 33,030 15,790 865 Provided for the year — — 17 Eliminated on disposals — — (89) De-consolidation of a subsidiary (33,030) (15,790) — At 31 December 2004 — — 793 At 1 January 2005 — — 793 Provided for the year — — 7 Eliminated on disposals — — (800) At 31 December 2005 — — — Net Book Value At 31 December 2005 — — — At 31 December 2004 — — 23	Leasehold land and buildings Plant and machinery Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 The Group Cost At 1 January 2004 47,578 24,985 1,017 Disposals — — (201) De-consolidation of a subsidiary (47,578) (24,985) — At 31 December 2004 — — 816 At 1 January 2005 — — 816 Disposals — — (816) At 31 December 2005 — — — Depreciation, Amortisation and Impairment Loss At 1 January 2004 33,030 15,790 865 Provided for the year — — 17 Eliminated on disposals — — (89) De-consolidation of a subsidiary (33,030) (15,790) — At 31 December 2004 — — 793 At 1 January 2005 — — 793 Provided for the year — — 7 Eliminated on disposals — — (800) At 31 December 2005 — — — Net Book Value At 31 December 2005 — — — At 31 December 2004 — — 23	Leasehold land and buildings Plant and machinery Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 The Group Cost At 1 January 2004 47,578 24,985 1,017 Disposals — — (201) De-consolidation of a subsidiary (47,578) (24,985) — At 31 December 2004 — — 816 At 1 January 2005 — — 816 Disposals — — (816) At 31 December 2005 — — — Depreciation, Amortisation and Impairment Loss At 1 January 2004 33,030 15,790 865 Provided for the year — — 17 Eliminated on disposals — — (89) De-consolidation of a subsidiary (33,030) (15,790) — At 31 December 2004 — — 793 At 1 January 2005 — — 793 Provided for the year — — 7 Eliminated on disposals — — (800) At 31 December 2005 — — — Net Book Value At 31 December 2005 — — — At 31 December 2004 — — 23	Total HK$’000 73,580 (201) (72,563)
— — — — 33,030 — — (33,030) — — — — —	— — — — 15,790 — — (15,790) — — — — —	816 816 (816) — 865 17 (89) — 793 793 7 (800) —	816
			816 (816)
			—
			49,685 17 (89) (48,820)
			793
			793 7 (800)
			—
— —	— —	— 23	—
			23

— 49 —

FINANCIAL INFORMATION

APPENDIX I

13. Interests in Subsidiaries

Unlisted investments Amounts due from subsidiaries, less allowances Less: Impairment loss	The Company 2005 2004 HK$’000 HK$’000 75,274 75,274 6,296 32,121	The Company 2005 2004 HK$’000 HK$’000 75,274 75,274 6,296 32,121
	81,570 (75,274)	107,395 (75,274)
	6,296	32,121

The amounts due from subsidiaries are unsecured, non-interest bearing and have no fixed terms of repayment. In the opinion of the Directors, the amounts will not be repaid in the next twelve months from the balance sheet date and the amounts are therefore shown as non-current.

At the balance sheet date, the Directors had reviewed the carrying value of the investments in subsidiaries and identified that the recoverable amounts of certain subsidiaries were estimated to be lower than the carrying values of the investment in the respective subsidiary. The recoverable amount was determined by the Directors with reference to the existing operation plan and the recoverable value of the underlying assets and liabilities of the respective subsidiaries.

Particulars of the Company’s subsidiaries at 31 December 2005 are set out in note 29.

14. Available-for-sale Investment/Investment in Security

Overseas unlisted investment security (Note 20) Advance to an investee company Less: Allowance	The Group 2005 2004 HK$’000 HK$’000 — — 24,806 24,806 (24,806) (24,806) — —	The Group 2005 2004 HK$’000 HK$’000 — — 24,806 24,806 (24,806) (24,806) — —
		—

The investment represents a 100% equity interest in the registered capital of Chaoyang Hua Loong Textiles and Dyeing Limited (“Chaoyang Hua Loong”), a company established in the PRC which is engaged in fabric processing and manufacturing. On 12 April 2003, the Company entered into a sale and purchase agreement to dispose of the entire issued share capital of Park Well International Group Limited (“Park Well”), including the 100% equity interest in Chaoyang Hua Loong held by a wholly-owned subsidiary of Park Well, to Show Goods Inc., a company incorporated in the British Virgin Islands, (the “Park Well Disposal Agreement”). Based on the Receivers’ (who were appointed on 17 June 2003 and were discharged on 2 July 2004) investigations, they are of the view that despite the Park Well Disposal Agreement, the purported disposal of Park Well was rescinded and not completed and therefore the Company remains to be the beneficial owner of Park Well. The Receivers had since then taken steps to secure control over various companies comprising the Park Well Group. However, Chaoyang Hua Loong remains not under the control of the Company. Having obtained legal advice, in the opinion of the directors, the Group is still unable to exercise control over the financial and operating decisions of Chaoyang Hua Loong. Accordingly, Chaoyang

— 50 —

FINANCIAL INFORMATION

APPENDIX I

Hua Loong was not regarded as a subsidiary of the Company with effect from 1 January 2004 and was accounted for as an investment security and stated in the consolidated balance sheet at 31 December 2004 at nil value. The investment was reclassified as available-for-sale investment upon adoption of HKAS 39 in January 2005. Details of which are set out in note 20.

The advance to Chaoyang Hua Loong is unsecured, non-interest bearing and has no fixed terms of repayment. Despite the efforts placed by the directors to secure control over Chaoyang Hua Loong and its related assets and in light of the events described above, the directors have made full allowance against the advance to Chaoyang Hua Loong in the interests of prudence.

15. Trade and Other Receivables

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

The following is an aged analysis of trade receivables at the balance sheet date:

Trade receivables - 0 to 30 days Other receivables	The Group 2005 2004 HK$’000 HK$’000 2,151 7,249 35,375 35,327 37,526 42,576	The Group 2005 2004 HK$’000 HK$’000 2,151 7,249 35,375 35,327 37,526 42,576
		42,576

The balance at the balance sheet date includes an amount of approximately HK$35.1 million (2004: HK$35.1 million) receivable from Great Center Limited (the “Debt”). Details of the Debt, and related litigations, are set out in notes 24(i) to (iii). Subsequent to the balance sheet date, on 12 April 2006, the Company and its controlling shareholder, Profit Harbour entered into a deed of assignment, pursuant of which Profit Harbour has conditionally agreed to acquire from the Company, the Debt at the consideration of US$4.5 million (equivalent to approximately HK$35.1 million) (the “Assignment of Debt”). The Assignment of Debt constitutes a connected transaction and a major transaction of the Company under the Rules Governing the Listing of Securities on of The Stock of Exchange of Hong Kong Limited and is therefore subject to independent shareholders’ approval.

— 51 —

FINANCIAL INFORMATION

APPENDIX I

16. Trade and Other Payables

The following is an aged analysis of trade payables at the balance sheet date:

Trade payables 0 to 30 days Over 365 days Other payables	The Group 2005 2004 HK$’000 HK$’000 1,554 3,069 — 1,287	The Group 2005 2004 HK$’000 HK$’000 1,554 3,069 — 1,287
	1,554 4,499	4,356 22,737
	6,053	27,093

17. Secured Other Loans

As at 31 December 2005, the secured other loans bear interest at the Hong Kong Prime Rate plus 5% per annum and are due on 30 October 2006. Details of the assets pledged are set out in note 25.

18. Share Capital

Number of ordinary shares of HK$0.10 each Authorised: At 1 January 2004, 31 December 2004 and 31 December 2005 1,000,000,000 Issued and fully paid: At 1 January 2004, 31 December 2004 and 31 December 2005 413,000,000	Amount HK$’000 100,000
	41,300

19. Share Options Schemes

The existing share option scheme was adopted by the Company pursuant to an ordinary resolution passed on 22 September 2004 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 21 September 2014 (the “Scheme”). Under the Scheme, the board of directors of the Company may grant options to eligible persons, including directors of the Company and its subsidiaries, to subscribe for shares in the Company.

Options granted must be taken up within 28 days of the date of grant, upon payment of HK$1 per grant. Options may be exercised at any time from the date of grant of the share option to the 10th anniversary of the date of grant. The exercise price is determined by the directors of the Company, and will not be less than the highest of the closing price of the Company’s shares on the date of grant, the nominal value of the Company’s shares and the average closing price of the shares for the five business days immediately preceding the date of grant.

— 52 —

FINANCIAL INFORMATION

APPENDIX I

The total number of shares in respect of which options may be granted under the Scheme is not permitted to exceed 10% of the shares of the Company in issue as at 22 September 2004, being the date of passing of the resolution regarding the Scheme, without prior approval from the Company’s shareholders. The number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders. Options granted to substantial shareholders or independent non-executive directors in excess of 0.1% of the Company’s share capital or with a value in excess of HK$5 million must be approved in advance by the Company’s shareholders.

No option has been granted under the Scheme since its adoption.

20. De-consolidation of a Subsidiary

As set out in note 14, having obtained legal advice, in the opinion of the Directors the Group is not in a position to exercise control over the financial and operating decisions of Chaoyang Hua Loong. Accordingly, Chaoyang Hua Loong was not regarded as a subsidiary of the Company with effect from 1 January 2004 and was excluded from the consolidated financial statements of the Company on the same date.

Net liabilities de-consolidated: Property, plant and equipment Trade and other payables Advance from Park Well Taxation payable Gain on de-consolidation of a subsidiary Reclassification of investment in a subsidiary to investment security (Note 14)	2005 HK$’000 — — — —	2004 HK$’000 23,743 (515) (24,806) (10,046)
	— —	(11,624) 11,624
	—	—

Chaoyang Hua Loong was de-consolidated during the year ended 31 December 2004 and it did not contribute to the turnover, operating results or cash flows of the Group.

21. Major Non-cash Transaction

As detailed on note 7 above, during the year, a wholly-owned subsidiary of the Company had effected a scheme of arrangement with creditors, with which the Group’s liabilities were reduced by approximately HK$15,421,000.

During the year ended 31 December 2004, other receivables amounting to HK$14,134,000, which were offset against other payables of the same amount in prior year by the Receivers, were carried at their respective gross amounts.

22. Financial Risk Management

The Group’s activities exposed it mainly to currency risk and credit risk. The Group’s overall risk management programme seeks to minimize potential adverse effects on the Group’s financial performance.

— 53 —

FINANCIAL INFORMATION

APPENDIX I

Currency risk

The Group operates internationally and certain trade receivables are denominated in foreign currencies, which is mainly in United Stated dollars that are pegged with Hong Kong dollars. Therefore, the Group does not have any significant exposure to currency risk.

Credit risk

The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. It arises primarily from the Group’s bank deposits and trade and other receivables. The Group only traded with recognised and creditworthy third parties. Receivable balances are monitored on an ongoing basis and the Group’s exposure to bad debts is not significant. Bank balances are placed with high-credit-quality institutions and directors of the Company considered that the credit risk for such is minimal.

Interest rate risk

The Group’s interest rate risk relates to impact of interest rate changes on interest bearing secured other loan. The interest rates and terms of repayment of the borrowings are disclosed in note 17.

The Group has not used any interest rate swaps to hedge its exposure to interest rate risk.

23. Commitments

Operating Lease — The Group as lessee

		2005	2004
		HK$’000	HK$’000
Minimum	lease payments under operating leases in respect of rented premises
during	the year	465	748

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

Within one year In the second to fifth year inclusive	The Group 2005 2004 HK$’000 HK$’000 366 252 153 — 519 252	The Group 2005 2004 HK$’000 HK$’000 366 252 153 — 519 252
		252

Operating lease payments represent rental payable by the Group for certain of its office premises. Leases are negotiated for an average term of two years.

— 54 —

FINANCIAL INFORMATION

APPENDIX I

Capital Commitment

On 19 April 2005, the Company has entered into a Heads of Terms with a third party in respect of a proposed acquisition of a company which is engaged in the trading of electronics parts at a consideration of HK$4,500,000.

Apart from the above, the Company and/or the Group had no commitment at the balance sheet date.

24. Litigation and Contingent Liabilities

At 31 December 2005, the Group had the following litigation and contingent liabilities:

(i) Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center Limited (“Great Center”), a company incorporated in the British Virgin Islands, for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank accounts of Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (“the Great Center Action”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action.
(ii) The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2004 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from a bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from a bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain former executive directors, officers and employees of the Group, and all directors or authorised signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003.
(iii) Solicitors instructed by the directors have pursued the claim against Great Center and Modern Shine further and obtained the following directions from the court:
(a) The Company do file and serve its list of documents by 21 March 2005;
(b) Great Center and Modern Shine do file and serve their lists of documents by 28 March 2005;
(c) There be inspection of documents by 11 April 2005;
(d) The parties do exchange signed witness statements of facts within 25 April 2005;
(e) The application for leave to set the case down for trial be adjourned to 25 April 2005 at 10:00 a.m. before the Listing Clerk for fixing an appointment before the Listing Master;

— 55 —

FINANCIAL INFORMATION

APPENDIX I

(f) The application to set down was adjourned by the court to a date to be fixed as Great Centre was not ready to exchange its witness statements with the Company; and
(g) The date to exchange witness statements was postponed to 14 September 2005. The Company will apply to set down for trial after the exchange of witness statements.

The Company and Great Center have exchanged their lists of documents and solicitors for the Company have received copy documents from Great Center’s solicitors for inspection. Modern Shine has failed to comply with the direction to file and serve its list of documents. Solicitors for the Company have taken out an application against Modern Shine for an order that it must serve and file its list of documents within 7 days of the order, failing which solicitors for the Company will further apply for an order that unless Modern Shine do comply with the direction of the court within 14 days, judgment be entered against it for the full amount claimed. After that it will be for the Company to trace the assets of Modern Shine in order to recover the judgment sum. As Modern Shine has failed to file its list of documents within the time limit imposed by the court, the court entered judgment against Modern Shine on 7 November 2005 for the sum of HK$22,000,000 plus interest and damages for conversion and interest thereon.

Regarding the claim against Great Center, the Company is in negotiation with Great Center’s liquidators for an amicable settlement.

(iv) As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory Holdings Limited (“Win Victory”), a company incorporated in Hong Kong and Mr. Chau Ching Ngai, former substantial shareholder of the Company and the spouse of Ms. Mo Yuk Ping, and Ms. Mo Yuk Ping, former chairman of the Company, are the registered shareholders of 49% and 51%, respectively, of the issued share capital of Win Victory, without apparent legitimate commercial reason. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against Win Victory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Claim such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for, and obtained on 22 August 2003, from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action.
(v) Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs. Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory. In the first instance, this order would remain valid up to and including 7 October 2003, on which date the matter would be heard again by the High Court.
(vi) The appointment of Provisional Liquidators is continued by an order of the court made by Madam Justice Kwan on 7 October 2003 until the determination of the Winding Up Petition, which has been adjourned. Due to the lack of funds in Win Victory, the Provisional Liquidators have not undertaken an extensive investigation. The Provisional Liquidators have recently made an application to the court for the discharge of their appointment and their application is fixed to be heard on 20 April 2006. The continuation of the Petition was to enable a more thorough investigation of the flow of funds in and out of Win Victory. The Petition is being opposed by Mr. Chau

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FINANCIAL INFORMATION

APPENDIX I

Ching Ngai. Solicitors for the Company will continue with the Winding Up proceedings. In view of the application by the Provisional Liquidators, the official receiver made an application to restore the Petition, which has been adjourned to 24 April 2006 for hearing. The court had on the hearing of 24 April 2006 ordered that Win Victory be wound-up on the petition of the Company.

(vii) Solicitors for the Company issued a writ of Summons on 17 December 2004 against Mr. Tsoi Hon Chung and his son Mr. Tsoi Chun Bun for the return of all statutory books, records and documents of Park Well Group on the basis that on 15 July 2003, those documents were sent by Secretaries Limited to Mr. Tsoi Chun Bun as the agent of Mr. Tsoi Hon Chun, who was at the material times the sole director of Park Well. The Company has a copy of the signed receipt by Mr. Tsoi Chun Bun for the above documents. Both Mr. Tsoi Hon Chun and Mr. Tsoi Chun Bun deny the receipt and/or receipt as agent of such statutory books and records in their Defence filed in February 2005. Solicitors for the Company have taken out a Summons for Directions for the exchange of lists of documents and witness statements in order to set the case down for trial. The court made an order for Directions on 27 April 2005 and the Company has exchanged list of documents with Mr. Tsoi Hon Chung and Mr. Tsoi Chun Bun. Mr. Tsoi Hon Chung has filed his witness statements denying knowledge of the whereabouts of the statutory books, records and document so the Park Well Group. Mr. Tsoi Chun Bun has exchanged his witness statement with the Company 20 August 2005.
Pledge of Assets

The Group 2005 2004 HK$’000 HK$’000 4,012 8,000	The Group 2005 2004 HK$’000 HK$’000 4,012 8,000	The Company 2005 2004 HK$’000 HK$’000 — —	The Company 2005 2004 HK$’000 HK$’000 — —
1,864 1,376 3,240	6,853 6,917 13,770	145 7 152	218 5,566
			5,784
7,252	21,770	152	5,784

In addition, the Company’s interests in its subsidiaries had been pledged under floating charges to secure the other loan facilities granted by a financial institution to the Group.

26. Retirement Benefits Scheme

The Group operates a Mandatory Provident Fund scheme for all qualifying employees of its Hong Kong subsidiaries. The assets of the scheme are held separately from those of the Group in funds under the control of trustees. The Group contributed 5% of the relevant payroll costs to the scheme, which contribution is matched by employees.

The total cost charged to the consolidated income statement of HK$55,000 (2004: HK$15,000) represents contributions payable to the scheme by the Group at rates specified in the rules of the scheme.

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FINANCIAL INFORMATION

APPENDIX I

At the balance sheet date, there was no forfeited contribution, which arose upon employees leaving the retirement benefits scheme and which was available to reduce the contribution payables in the future years.

27. Related Party Transactions

Other than related party transactions in respect of key management personnel remuneration which was disclosed in note 9 above, the Group had no material related party transactions during the years ended 31 December 2005 and 2004.

28. Post Balance Sheet Events

The following event took place subsequent to 31 December 2005.

On 12 April 2006, the Company and its controlling shareholder, Profit Harbour entered into a deed of assignment, pursuant of which Profit Harbour has conditionally agreed to acquire from the Company, the Debt at the consideration of US$4.5 million (equivalent to approximately HK$35.1 million) (the “Assignment of Debt”). The Assignment of Debt constitutes a connected transaction and a major transaction of the Company under the Rules Governing the Listing of Securities on of The Stock of Exchange of Hong Kong Limited and is therefore subject to independent shareholders’ approval.

29. Particulars of Subsidiaries

Particulars of the subsidiaries of the Company as at 31 December 2005 are as follows:

	Place/country of		Proportion of	Proportion of
	incorporation/	Paid up issued	nominal	value of
	establishment and	ordinary	issued capital
Name of subsidiary	operations	share capital	held by the Company			Principal activities
			Directly	Indirectly
			%		%
Asia Cheer Trading	Hong Kong	HK$1	100		—	Trading in fabric
Limited		ordinary share				products and other
						merchandises
First Landmark Limited	British Virgin Islands	US$1	100		—	Investment holding
		ordinary share
Merchants HK	Hong Kong	HK$2	—	100		Inactive
		ordinary shares
Park Well International	British Virgin Islands	US$6	100		—	Investment holding
Group Limited		ordinary shares
Sino Chance Trading	Hong Kong	HK$1	100		—	Trading in base metals
Limited		ordinary share
Sky Joy Management	Hong Kong	HK$1	100		—	Provision of
Limited		ordinary share				management
						services

The above list contains only the particular of subsidiaries which principally affected the results, assets or liabilities of the Group.

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FINANCIAL INFORMATION

APPENDIX I

5. SUFFICIENCY IN WORKING CAPITAL

The Directors are of the opinion that upon the completion of Rights Issue and based on available banking and other facilities and internal resources of the Group, the Group has sufficient working capital for its requirements, currently and the period ending 12 months from the date of this prospectus.

6. STATEMENT OF INDEBTEDNESS

As at the close of business on 30 April 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this prospectus, the Group had outstanding total borrowings of approximately HK$15 million which was a term loan secured by floating charge over the undertaking, property and assets of the Company and one of its subsidiaries. All borrowings are repayable within one year.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-Group liabilities, at the close of business on 30 April 2006, the Group did not have any debt securities issued and outstanding, or authorised or otherwise created but unissued, any term loans (secured, unsecured, guaranteed or not), any other borrowings or indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptances (other than normal trade bills) or acceptance credits or hire purchase commitments (whether secured or unsecured, guaranteed or not), any mortgages or charges, or other material contingent liabilities or guarantees.

The Directors confirm that, there is no material change in indebtedness and contingent liabilities of the Group since 30 April 2006 up to and including the Latest Practicable Date.

7. MATERIAL ADVERSE CHANGE IN THE FINANCIAL OR TRADING POSITION

As at the Latest Practicable Date, the Directors were not aware of any circumstances or events which may give rise to material adverse change in the financial or trading position of the Group since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

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FINANCIAL INFORMATION

APPENDIX I

8. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

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GRAHAM H.Y. CHAN & CO.

CERTIFIED PUBLIC ACCOUNTANTS HONG KONG

Unit 1, 15/F, The Center, 99 Queen’s Road Central, Hong Kong

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

TO THE DIRECTORS OF SHANGHAI MERCHANTS HOLDINGS LIMITED

We report on the unaudited pro forma statement of adjusted consolidated net tangible assets of Shanghai Merchants Holdings 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 rights issue of 826,000,000 rights shares at a price of HK$0.10 per rights share payable in full on acceptance on the basis of two rights shares for every existing share held might have affected the financial information presented, for inclusion in Section 9 of Appendix I of the prospectus dated 20 June 2006 (the “Prospectus”). The basis of preparation of the unaudited pro forma statement of adjusted consolidated net tangible assets is set out in Section 9 of Appendix I of the Prospectus.

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 statement of adjusted consolidated net tangible assets 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 AG7 “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 paragraph 4.29(7) of the Listing Rules, on the unaudited pro forma statement of adjusted consolidated net tangible assets 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 statement of adjusted consolidated net tangible assets beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

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FINANCIAL INFORMATION

APPENDIX I

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements (“HKSIR”) 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 statement of adjusted consolidated net tangible assets 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 statement of adjusted consolidated net tangible assets has been properly compiled 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 statement of adjusted consolidated net tangible assets as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Our work does not constitute an assurance engagement performed in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants and accordingly we do not express any such assurance on the unaudited pro forma statement of adjusted consolidated net tangible assets.

The unaudited pro forma statement of adjusted consolidated net tangible assets is for illustrative purposes only, based on the judgements 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.

Opinion

In our opinion:

a. the unaudited pro forma statement of adjusted consolidated net tangible assets 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 statement of adjusted consolidated net tangible assets as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising) Hong Kong 20 June 2006

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FINANCIAL INFORMATION

APPENDIX I

9. UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

The following unaudited pro forma statement of adjusted consolidated net tangible assets of the Group is prepared based on the audited consolidated net tangible asset value of the Group as at 31 December 2005, as shown in the annual report 2005 of the Group, and adjusted to reflect the effect of the Rights Issue.

The pro forma adjusted consolidated net tangible asset value is prepared for illustrative purposes only and because of its nature, it may not give a true picture of the consolidated net tangible asset value of the Group for any financial periods.

Audited consolidated Pro forma net tangible asset value Estimated adjusted consolidated of the Group as at net proceeds from net tangible asset value 31 December 2005 the Rights Issue of the Group after the (Note 1) (Note 2) Rights Issue (HK$’000) (HK$’000) (HK$’000) 21,881 81,000 102,881 Pro forma adjusted Audited consolidated consolidated net tangible asset value net tangible asset value per Share as at per Share immediately 31 December 2005 after the Rights Issue (Note 1) (Note 3) (HK$) (HK$) 0.053 0.083

Notes:

The calculation of the audited consolidated net tangible asset value per Share is based on the audited consolidated net tangible asset value of approximately HK$21,881,000, as shown in the annual report 2005 of the Group and 413,000,000 Shares in issue as at 31 December 2005.
The estimated net proceeds from the proposed Rights Issue are based on 826,000,000 Rights Shares at an issue price of HK$0.10 per Rights Share, after deducting the estimated underwriting fees and other related expenses amounting to approximately HK$1.6 million to be incurred by the Company.
The calculation of the pro forma adjusted consolidated net tangible asset value per Share is based on 1,239,000,000 Shares expected to be in issue immediately after the completion of the Rights Issue.

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GENERAL INFORMATION

APPENDIX II

RESPONSIBILITY STATEMENT

This prospectus includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group.

The Directors collectively and individually accepts the responsibility for the accuracy of the information contained in this prospectus and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained in this prospectus, the omission of which would make any statement herein misleading.

DISCLOSURE OF INTERESTS BY DIRECTORS

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (i) 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 interest or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by the Directors of the Listed Companies contained in the Listing Rules, were as follows:

(a) Long position in Shares

		Number of
Name of Director	Capacity and nature	ordinary shares	% holding
Mr. Yue	Interest of controlled	262,602,000	63.58%
	corporation (Note 1)		(Note 2)

(b) Long position in Rights Shares

		Number of
Name of Director	Capacity and nature	ordinary shares	% holding
Mr. Yue	Interest of controlled	826,000,000	66.67%
	corporation (Note 1)		(Note 3)

Notes:

These Shares are registered/will be registered (as the case may be) in the name of and beneficially owned by Profit Harbour.
Such percentage holding is calculated on the basis of the Company’s issued share capital of 413,000,000 Shares as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX II

Such percentage holding is calculated on the basis of the Company’s issued share capital of 1,239,000,000 Shares as enlarged by the Rights Issue.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the Shares, underlying shares or debentures of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) which (i) 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 or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies contained in the Listing Rules.

Save as disclosed above, none of the Directors or proposed directors of the Company (if any) had any interest or short position in Shares or underlying Shares of the Company which would fall to be disclosed pursuant to the provision of Divisions 2 and 3 of Part XV of the SFO.

(b) Interests in competing businesses

As at the Latest Practicable Date, none of the Directors nor their respective associates had any business which competes or is likely to compete, either directly or indirectly, with any business of the Group.

(c) Interests in assets of the Group

As at the Latest Practicable Date, save for the Assignment of Debt which Mr. Yu Jialin (being the Chairman and an executive Director) is indirectly interested in as a result of his shareholding in Profit Harbour, none of the Directors had any direct or indirect interests in any assets which have been acquired or disposed of by, or leased to, or which are proposed to be acquired or disposed of by or leased to, the Company or any of its subsidiaries since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

(d) Interests in contracts of the Company

None of the Directors is materially interested in any contracts or arrangements subsisting as at the Latest Practicable Date which are significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX II

DISCLOSURE OF INTERESTS BY SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to the Directors and chief executive of the Company, the following persons (not being Directors or chief executives of the Company) had, or were deemed to have, interests or short positions in the Shares and underlying shares of the Company which would fall to be disclosed to the Company or the Stock Exchange under the provisions of Divisions 2 and 3 of part XV of the SFO or who were, directly or indirectly, interested in 10% 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 or had an option in respect of such capital were as follows:

(a) Long position in Shares

			Number of
	Name of Shareholders	Capacity and nature	ordinary shares	% holding
	Profit Harbour (Note 1)	Beneficial owner	262,602,000	63.58%
				(Note 2)
(b)	Long position in Rights	Shares
			Number of
	Name of Shareholders	Capacity and nature	ordinary shares	% holding
	Profit Harbour (Note 1)	Beneficial owner	826,000,000	66.67%
				(Note 3)
	The Underwriter (Note 4)	Beneficial owner	300,796,000	24.28%
				(Note 3)
(c)	Short position in Rights	Shares
			Number of
	Name of Shareholders	Capacity and nature	ordinary shares	% holding
	The Underwriter (Note 4)	Beneficial owner	300,796,000	24.28%
				(Note 3)

Notes:

The entire issued capital of Profit Harbour is owned by Mr. Yue.
Such percentage holding is calculated on the basis of the Company’s issued share capital of 413,000,000 Shares as at the Latest Practicable Date.
Such percentage holding is calculated on the basis of the Company’s issued share capital of 1,239,000,000 Shares as enlarged by the Rights Issue.
The Underwriter’s interest is subunderwritten to the extent of 300,796,000 Rights Shares.

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GENERAL INFORMATION

APPENDIX II

Save as disclosed above, as at the Latest Practicable Date, the Directors and chief executive of the Company were not aware of any other persons (other than Directors or chief executives of the Company) had, or were deemed to have, interests or short positions in the Shares and underlying shares (including any interests in options in respect of such capital), which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of part XV of the SFO, or who was, directly or indirectly, interested in 10% 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 or had any option in respect of such capital.

PARTICULAR OF DIRECTORS AND SENIOR MANAGEMENT

Name	Address
Executive Directors
Yue Jialin	Apartment E-09, Sha He Golf Course
	Shenzhen
	P.R.C.
Lau Yau Cheung	Flat A, 14/F., Block 3
	Flora Garden
	7 Chun Fai Road
	Jardine’s Lookout
	Hong Kong
Independent Non-Executive Directors
Wong Wing Kuen, Albert	Flat D, 18/F., Ilford Court
	Perth Garden
	5 Perth Street
	Ho Man Tin
	Kowloon
Tsui Robert Che Kwong	Flat 1, 1/F., Block 1
	Middleton Towers
	140 Pok Fu Lam Road
	Hong Kong
Wu Guo Jian	Ground Floor, Block H9
	Royal Camellia
	9 Fairview Park Boulevard
	Yuen Long
	New Territories
Senior Management
Ng Kwok Ping	Flat F, 6/F., Block 6
	Oscar By The Sea
	8 Pung Loi Road
	Tseung Kwan O
	New Territories

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GENERAL INFORMATION

APPENDIX II

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Executive Directors

Mr. Yue Jialin, aged 38, appointed on 26 April 2004, is the Chairman and Executive Director of the Company. Mr. Yue is responsible for the strategic planning and corporate development of the Group. Mr. Yue has established in-depth knowledge of the PRC economic development and policies through his previous role as a judge in the Economic Court of People’s Court in Luowu District, Shenzhen, the People’s Republic of China (the “PRC”) during 1989 to 1992. Mr. Yue also sits on the school of business administration of Changchun Industrial University as visiting professor. Recently, Mr. Yue is engaged in legal consultation in respect of the acquisition of state owned assets and foreign investments in the PRC. As disclosed under the paragraph headed “Disclosure of interests by Directors” in Appendix II to this prospectus, Mr. Yue is, through his ownership of Profit Harbour, deemed to be interested in such amount of Shares and Rights Shares held by Profit Harbour pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO.

Mr. Lau Yau Cheung, aged 45, appointed on 26 April 2004, is an Executive Director of the Company. Mr. Lau is the Company’s Chief Executive Officer and responsible for the overall management and general administrative activities. Mr. Lau graduated in 1984 from the University of Toronto in Canada with a Bachelor of Commerce degree and has served in various senior management positions with both private and publicly listed companies in Hong Kong in the past years. Mr. Lau is also an independent non-executive director of Warderly International Holdings Limited (Stock Code: 607), a company listed on the Main Board of The Stock Exchange of Hong Kong Limited, since September 2005.

Independent Non-Executive Directors

Mr. Wong Wing Kuen, Albert, aged 55, appointed on 6 July 2004, is an Independent Non-executive Director of the Company. Mr. Wong is a fellow member of The Institute of Chartered Secretaries and Administrators, a fellow member of The Hong Kong Institute of Company Secretaries, a fellow member of the Taxation Institute of Hong Kong, a member of Hong Kong Securities Institute, a fellow member of Association of International Accountants, a fellow member of Society of Registered Financial Planners, a member of The Chartered Institute of Arbitrators, a member of The Chartered Institute of Bankers in Scotland and a full member of Macau Society of Certified Practising Accountants. Mr. Wong was also a director of Minghua Group International Holdings Limited, a listed public company in the USA, until 30 June 2004. Currently, Mr. Wong is the Managing Director of Charise Financial Consultants Limited, a private professional consulting firm in Hong Kong.

Mr. Tsui Che Kwong, Robert, aged 52, appointed on 6 July 2004, is an Independent Non-executive Director of the Company. Mr. Tsui is a graduate of University of Buckingham, England, with a bachelor degree in Law. He is the sole proprietor of Robert C.K. Tsui & Co., a firm of solicitors in Hong Kong. Mr. Tsui has been practising in the legal field for more than 20 years. He is also an independent non-executive director of Teem Foundation Group Limited. (Stock Code: 628), a company listed on the Main Board of The Stock Exchange of Hong Kong Limited since August 2004.

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GENERAL INFORMATION

APPENDIX II

Mr. Wu Guo Jian, aged 60, appointed on 6 July 2004, is an Independent Non-executive Director of the Company. Mr. Wu is also a director of New Era International Holdings Limited and specializes in trading and property development for more than 15 years.

Senior Management

Mr. Ng Kwok Ping, aged 38, joined the Group in July 2004 and is the Financial Controller and Secretary of the Company. Mr. Ng has had over 10 years of experience in finance and accounting field. He has worked in an international audit firm and companies listed on the Stock Exchange. He has Master’s Degree of Science in Finance and is a member of the Hong Kong Institute of Certified Public Accountants.

CORPORATE INFORMATION

Registered office	Clarendon House
	2 Church Street
	Hamilton
	Bermuda
Principal office	Rooms 2808-10, 28th Floor
	Wing On House
	71 Des Voeux Road
	Central
	Hong Kong
Financial adviser	Asian Capital (Corporate Finance) Limited
	Suite 1006, Bank of America Tower
	12 Harcourt Road
	Central
	Hong Kong
Legal adviser in Hong Kong	P.C. Woo & Co.
	12th Floor
	Prince’s Building
	10 Chater Road
	Central
	Hong Kong
Legal adviser in Bermuda	Conyers Dill & Pearman
	2901, One Exchange Square
	8 Connaught Place
	Central
	Hong Kong

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GENERAL INFORMATION

APPENDIX II

Auditors


Auditors	Graham H. Y. Chan & Co.
	Certified Public Accountants (Practising)
	Unit 1, 15/F., The Center
	99 Queen’s Road Central
	Hong Kong
Principal banker	Liu Chong Hing Bank Limited
Principal share registrar	Butterfield Fund Services (Bermuda) Limited
and transfer office	Rosebank Centre
	11 Bermudiana Road
	Pembroke
	Bermuda
Hong Kong branch share registrar	Secretaries Limited
and transfer office	26/F., Tesbury Centre
	28 Queen’s Road East
	Wanchai
	Hong Kong
Authorised representatives	Mr. Lau Yau Cheung
	Mr. Ng Kwok Ping
Company secretary	Mr. Ng Kwok Ping
Qualified accountant	Mr. Ng Kwok Ping

SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors have any existing or proposed services contract with any members of the Group excluding contracts expiring or determinable by the employer within one year without payment of compensations other than statutory compensation.

MATERIAL LITIGATIONS

As at the Latest Practicable Date, so far as the Directors are aware, the following are the only litigations or claims of material importance which have been pending or threatened against any member of the Group: -

Reference is made to the disclosure of litigation and contingent liabilities in the annual reports 2005 and 2004 of the Company.

After taking legal advice, the receivers of the Company, Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants (the “ Receivers ”), commenced legal proceedings on 2 July 2003 against Great Center for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million),

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GENERAL INFORMATION

APPENDIX II

remitted on or about 21 May 2003 with no apparent justification, from the bank of Merchants (Hong Kong) Limited, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (the “ Great Center Action ”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained, on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing the assets of Great Center up to the value of US$4.5 million (the “ Injunction Order ”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003, and on which date, the Injunction Order was continued until further order or final determination of the Great Center Action.

The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2004 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from a bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from a bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million. At last, the court entered judgment against Modern Shine on 7 November 2005 for the sum of HK22,000,000 plus interest and damages for conversion and interest thereon. Regarding the claim against Great Center, the Company is in negotiation with Great Center’s liquidators for an amicable settlement. The Company has not obtained the judgment sum of HK$22,000,000. Since Modern Shine is a company incorporated in the British Virgin Islands, it makes the enforcement extremely costly. Further, the Company has no information on the financial status and asset position of Modern Shine. As advised by the legal advisers to the Company, the viable course of action includes the petitioning for winding up of Modern Shine, which is also a very costly process.
On 23 August, 2003 the Receivers commenced legal proceedings against Win Victory Holdings Limited (“ Win Victory ”), a company incorporated in Hong Kong, for the repayment of a sum of HK$37.0 million, together with interest thereon, damages and costs of the legal proceedings. Further, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds, inter alia, that Win Victory is unable to pay its debts and provisional liquidators were appointed. Due to the lack of funds in Win Victory, the provisional liquidators have not undertaken an extensive investigation and have recently made an application to the court for the discharge of their appointment and their application is fixed to be heard on 20 April 2006. The continuation of the winding-up petition was to enable a more thorough investigation of the flow of funds in and out of Win Victory. In view of the application by the provisional liquidators, the official receiver made an application to restore the winding-up petition, which has been adjourned to 24 April 2006 for hearing. The court had on the hearing of 24 April 2006 ordered that Win Victory be wound-up on the petition of the Company. The Company is taking advice from its legal adviser on the appropriate course of action to enforce the relevant order of the court.

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GENERAL INFORMATION

APPENDIX II

The Directors are of the opinion that the above litigations or claims would have no material impact on the operations of the Group.

As at the Latest Practicable Date and save for those disclosed above, no member of the Group was engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened against any member of the Group.

MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company or any of its subsidiaries within the two years immediately preceding the date of this prospectus and are or may be material:

(i) the loan agreement and the supplemental loan agreement dated 30 August 2004 and 22 November 2004 respectively entered into between the lender, being an independent third party and qualified money lender under the Money Lenders Ordinance, and the Company, pursuant to which the lender had agreed to provide to the Company a six months term loan facility commencing from the drawdown date on 30 August 2004, for an amount of HK$5,000,000.00 at the interest rate of 1% per month payable monthly in arrears, and such loan facility were subsequently increased to HK$15,000,000.00 pursuant to the supplemental loan agreement commencing from the drawdown of such increased sum on 22 November 2004;
(ii) the loan agreement dated 26 April 2005 entered into between the lender, being an independent third party and qualified money lender under the Money Lenders Ordinance, and the Company, pursuant to which the lender had agreed to provide to the Company a term loan for one year for amount of HK$15,000,000 with interests at 5% per annum over prime interest rate payable monthly in arrears, and such term loan was subsequently renewed on 23 August 2005;
(iii) The deed of assignment dated 12 April 2006 in relation to the Assignment of Debt;
(iv) The Underwriting Agreement;
(v) The agreement dated 14 June 2006 entered into among the Company, Professional Trading Limited and Rise Cheer Limited (a wholly-owned subsidiary of the Company) regarding the Acquisition for an aggregate amount of HK$2.0 million consideration to be satisfied by the issue of a convertible bond by the Company upon completion thereof, particulars as disclosed in the announcement of the Company dated 15 June 2006;
(vi) The option agreement dated 14 June 2006 entered into between Professional Trading Limited and Rise Cheer Limited (a wholly-owned subsidiary of the Company) granting to Rise Cheer Limited an option to put to Professional Trading Limited for repurchase for an

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GENERAL INFORMATION

APPENDIX II

aggregate consideration of HK$800,000 all of the 60% interest in Chinaright together with an amount represented by the amount of debt owed by Chinaright to Professional Trading Limited as at completion of the Acquisition, the details of which are disclosed in the announcement of the Company dated 15 June 2006; and

(vii) The deed dated 14 June 2006 in respect of the assignment of the debt of approximately HK$1 million (owed by Chinaright to Professional Trading Limited as at the date of completion of the Acquisition agreement referred to in note (v) above) executed by Professional Trading Limited in favour of Rise Cheer Limited as part of the Acquisition, the details of which are disclosed in the announcement of the Company dated 15 June 2006.

EXPERT AND CONSENT

The following is the qualification of the expert who has given opinion or advice which is contained in this prospectus:

Name Qualification Graham H. Y. Chan & Co. Certified Public Accountants (Practising)

Graham H. Y. Chan & Co. has given and not withdrawn its written consent to the issue of this prospectus with the inclusion of its letter dated 20 June 2006 and references to its name in the form and context in which it appear.

EXPERT’S INTEREST IN ASSETS

As at the Latest Practicable Date, Graham H. Y. Chan & Co. did not have any shareholding interest in any member of the Group nor the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any member of the Group.

As at the Latest Practicable Date, Graham H. Y. Chan & Co. did not have any direct or indirect interests in any assets which had since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group.

EXPENSES

The expenses in connection with the Rights Issue, including financial advisory fees, underwriting commission, printing, registration, translation, legal and accountancy charges are estimated to amount to approximately HK$1.6 million and are payable by the Company.

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GENERAL INFORMATION

APPENDIX II

DOCUMENTS DELIVERED TO THE REGISTRARS OF COMPANIES IN HONG KONG AND BERMUDA

A copy of this prospectus, together with copy of each of the PAL and EAF, having attached thereto the written consent referred to under the heading “Expert and Consent” in this appendix, have been registered by the Registrar of Companies in Hong Kong as required by Section 342C of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). A copy of each of the Prospectus Documents has been filed with the Registrar of Companies in Bermuda in accordance with the Companies Act 1981 of Bermuda (as amended).

MISCELLANEOUS

a. The company secretary and the qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Ng Kwok Ping. Mr. Ng Kwok Ping is a qualified accountant and member of the Hong Kong Institute of Certificate Public Accountants.
b. The English text of this prospectus shall prevail over the Chinese text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours at the head office of the Company at Rooms 2808-10, 28/F., Wing On House, 71 Des Voeux Road Central, Hong Kong from the date of this prospectus up to and including the Final Acceptance Date:

a. the Bye-Laws;
b. the material contracts referred to under the paragraph headed “ Material contracts” in this appendix;
c. the annual reports of the Company for the two financial years ended 31 December 2005;
d. the letter from Graham H. Y. Chan & Co., the text of which is set out on pages 60 to 61 of this prospectus;
e. the consent letter from Graham H. Y. Chan & Co. referred to in the paragraph headed “Expert and consent” in this appendix;
f. the circular of the Company dated 4 May 2006 regarding the Assignment of Debt; and
g. the circular of the Company dated 1 June 2006 regarding, among other things, the increase in authorised share capital, the change in board lot size and the Rights Issue.

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AI assistant

Persistence Gold Group Ltd — Capital/Financing Update 2006

50623_rns_2006-07-05_423639d4-0d2e-4630-a9bd-857b8c0111e6.pdf

THIS PROSPECTUS IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

Underwriter

DEFINITIONS

DEFINITIONS

EXPECTED TIMETABLE

EXPECTED TIMETABLE

SHANGHAI MERCHANTS HOLDINGS LIMITED

*

RIGHTS ISSUE OF TWO RIGHTS SHARES FOR EVERY EXISTING SHARE HELD AT HK$0.10 PER RIGHTS SHARE

INTRODUCTION

PROPOSED RIGHTS ISSUE

Issue statistics

Qualifying Shareholders

Basis of provisional allotment

Subscription Price for the Rights Shares

Status of the Rights Shares

Certificates for Rights Shares and refund cheques

Rights of Excluded Shareholders

Fractions of Rights Shares

Applications for excess Rights Shares

Application for listing

TAXATION

EFFECT OF BAD WEATHER ON THE LATEST TIME FOR ACCEPTANCE OF AND PAYMENT FOR RIGHTS SHARES AND APPLICATION FOR EXCESS RIGHTS SHARES

UNDERWRITING ARRANGEMENTS

Underwriting Agreement:

Sub-underwriting by Profit Harbour

Undertaking from Profit Harbour

CONDITIONS OF THE RIGHTS ISSUE UNDER THE UNDERWRITING AGREEMENT

TERMINATION OF THE UNDERWRITING AGREEMENT

SHAREHOLDING STRUCTURE OF THE COMPANY

LETTER FROM THE BOARD

RESTORATION OF PUBLIC FLOAT

REASONS FOR THE RIGHTS ISSUE

However, those Qualifying Shareholders who do not take up the Rights Shares to which they are entitled should note that their shareholdings in the Company will be diluted.

USE OF PROCEEDS FROM THE RIGHTS ISSUE

PROCEDURE FOR ACCEPTANCE OR TRANSFER

APPLICATION FOR EXCESS RIGHTS SHARES

BUSINESS REVIEW AND PROSPECTS

Business outlook

LETTER FROM THE BOARD

Trading in fabric products and other merchandises

Trading in base metals

LETTER FROM THE BOARD

Brief industry overview

Trading in fabric products and other merchandises

FURTHER INFORMATION

1. SHARE CAPITAL

2. SUMMARY OF RESULTS AND ASSETS AND LIABILITIES OF THE GROUP FOR THREE FINANCIAL YEARS ENDED 31 DECEMBER 2005

FINANCIAL SUMMARY

Results

Assets and liabilities

3. AUDITORS’ REPORT

To the Shareholders of

Shanghai Merchants Holdings Limited

Respective responsibilities of directors and auditors

Basis of opinion

Qualified opinion arising from limitations of audit scope

Graham H. Y. Chan & Co.

4. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR NEDED 31 DECEMBER 2005

Consolidated Income Statement

Consolidated Balance Sheet

Balance Sheet

Statement of Changes in Equity

Consolidated Cash Flow Statement

Notes to the Financial Statements

1. General

3. Critical Accounting Judgments and Key Sources of Estimation Uncertainty

4. Significant Accounting Policies

Basis of consolidation

Subsidiaries

Property, plant and equipment

Impairment

Revenue recognition

Foreign currencies

Taxation

Financial instruments

Financial assets

Persistence Gold Group Ltd Capital/Financing Update 2006