Persistence Gold Group Ltd — M&A Activity 2006

Jul 3, 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular 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, you should at once hand this circular 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.

This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities.

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

SHANGHAI MERCHANTS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

MAJOR TRANSACTION

PROPOSED ACQUISITION OF

TRADING BUSINESS INVOLVING THE ISSUANCE OF CONVERTIBLE BOND

AND

REALLOCATION OF USE OF PROCEEDS

Financial Adviser to the Company

Asian Capital

( C o r p o r a t e F i n a n c e ) L i m i t e d

The Acquisition constitutes a major transaction of the Company under the Listing Rules. As no Shareholder is required to abstain from voting if a special general meeting is to be held to approve the Acquisition and all the transactions contemplated thereunder, and Profit Harbour, who is interested in approximately 63.58% of the issued share capital of the Company, has provided its written approval for the Acquisition and all transactions contemplated thereunder, including but not limited to the Option Agreement and the Sale Loan Assignment, pursuant to Rule 14.44 of the Listing Rules, no special general meeting will be held in this regard (all capitalised terms as defined herein).

* For identification purpose only

30 June 2006

CONTENTS

			Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			1
**Letter from the **	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		5
Appendix I	—	Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Appendix II	—	Accountants’ report on Chinaright . . . . . . . . . . . . . . . . . . . . . . . . . . .	54
Appendix III	—	Financial information on the Enlarged Group . . . . . . . . . . . . . . . . . .	77
Appendix IV	—	General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	83

— i —

DEFINITIONS

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

“2006 Accounts”	audited financial statements of Chinaright for the year ending
	31 December 2006 prepared in accordance with the Hong
	Kong Generally Accepted Accounting Principles
“Acquisition”	the acquisition by the Purchaser from the Vendor of the Sale
	Interest and the Sale Loan pursuant to the Acquisition
	Agreement
“Acquisition Agreement”	the agreement dated 14 June 2006 entered into among the
	Company, the Purchaser and the Vendor in relation to the
	Acquisition
“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 throughout their normal
	business hours
“Chinaright”	Chinaright Electronics Limited, a limited liability company
	incorporated under the laws of Hong Kong having an
	aggregate issued share capital of HK$100,001 divided into
	100,001 shares of HK$1.00 each and is approximately 60%
	owned by the Vendor and approximately 40% owned by Kam
	Sau Yee, a third party independent of the Company and its
	connected person(s) (as defined under the Listing Rules) and
	their respective associates
“Company”	Shanghai Merchants Holdings Limited, a company
	incorporated in Bermuda with limited liability and the shares
	of which are listed on the Stock Exchange
“Completion”	completion of the Acquisition Agreement in accordance with
	the terms thereof

— 1 —

DEFINITIONS

“Consideration”	consideration for the Acquisition, being HK$2.0 million,
	which will be satisfied by the issuance of the Convertible
	Bond upon Completion
“Convertible Bond”	redeemable convertible bond exchangeable into New Shares
	for the principal sum of HK$2.0 million at the Conversion
	Price
“Conversion Price”	HK$0.15 per New Share (subject to adjustments), being the
	initial conversion price for the Convertible Bond
“Director(s)”	director(s) of the Company
“Enlarged Group”	the Group as enlarged on the basis of completion of the
	Acquisition
“Group”	the Company and its subsidiaries
“Guaranteed Profit”	HK$1 million, less any Profit Adjustment without taking into
	account any amount of shareholder’s loan waived as disclosed
	in the 2006 Accounts, being the amount of profit guaranteed
	under the Profit Guarantee
“Hong Kong”	Hong Kong Special Administrative Region of the PRC
“IC”	integrated circuit, which is a semiconductor device that
	combines a number of transistors and electronic circuits onto
	a piece of silicon
“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”	28 June 2006, being the latest practicable date prior to the
	printing of this circular for the purpose of ascertaining
	information for inclusion in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Long Stop Date”	14 July 2006 or such later date as may be determined at the
	sole discretion of the Purchaser
“Maturity”	a term of 24 months from the date of the issue of the
	Convertible Bond, until fully converted or upon occurrence of
	any events of default as set out in (i) in the paragraph headed
	“Principal terms of the Convertible Bond” under the section
	headed “Letter from the Board” in this circular, whichever is
	earlier.

— 2 —

DEFINITIONS

“Mr. Yue”	Mr. Yue Jialin, the executive director and the Chairman 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
“New Share(s)”	new Shares to be issued by the Company upon the conversion
	of the Convertible Bond
“Option Agreement”	the written agreement dated 14 June 2006 in respect of the Put
	Option entered into between the Vendor and the Purchaser
	pursuant to the terms of the Acquisition Agreement
“PRC”	the People’s Republic of China
“Profit Adjustment”	shall have such meaning as defined in the paragraph headed
	“Profit Guarantee and Profit Adjustment” under the section
	headed “Letter from the Board” in this circular
“Profit Guarantee”	the guarantee in respect of the Guaranteed Profit provided by
	the Vendor under the Acquisition Agreement in relation to the
	audited net profit of Chinaright for the financial year ending
	31 December 2006
“Profit Harbour”	Profit Harbour Investments Limited, an investment holding
	company incorporated in the British Virgin Islands with
	limited liability and is wholly and beneficially owned by Mr.
	Yue. As at the Latest Practicable Date, Profit Harbour was
	interested in 262,602,000 Shares, representing approximately
	63.58% in the existing issued share capital of the Company
“Purchaser”	Rise Cheer Limited, a limited liability company incorporated
	in the British Virgin Islands and a wholly owned subsidiary of
	the Company
“Put Option”	shall have such meaning as defined in the paragraph headed
	“Option Agreement” under the section headed “Letter from
	the Board” in this circular
“Rights Issue”	the offer of Rights Shares on the basis of two new Shares for
	every existing Share held on Monday, 19 June 2006, at the
	subscription price of HK$0.10 as detailed in the
	announcement, circular and prospectus of the Company dated
	11 May 2006, 1 June 2006 and 20 June 2006 respectively

— 3 —

	DEFINITIONS
“Rights Share(s)”	the 826,000,000 new Share(s) offered under the Rights Issue
“Sale Interest”	the 60,001 shares of HK$1.00 each in the issued share capital
	of Chinaright
“Sale Loan”	the debt owed by Chinaright to the Vendor as at the date of
	Completion of approximately HK$1 million
“Sale Loan Assignment”	the deed dated 14 June 2006 in respect of the assignment of
	the Sale Loan entered into by the Vendor in favour of the
	Purchaser pursuant to the terms of the Acquisition Agreement
“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of the Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Trading Day(s)”	a day on which the Stock Exchange is open for trading
“TV”	acronym for television
“Vendor”	Professional Trading Limited, a company incorporated in the
	British Virgin Islands with limited liability
“Warranties”	the representations and warranties provided by the Vendor as
	specified in the Acquisition Agreement
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“%”	per cent.

Unless otherwise specified in this circular, 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 —

LETTER FROM THE BOARD

SHANGHAI MERCHANTS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

Executive Directors: Mr. Yue Jialin (Chairman) Mr. Lau Yau Cheung (Chief Executive Officer)

Independent Non-Executive Directors:

Mr. Wong Wing Kuen, Albert Mr. Tsui Robert Che Kwong Mr. Wu Guo Jian

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Head office and principle place of business in Hong Kong: Rooms 2808-10 28/F., Wing On House 71 Des Voeux Road Central Hong Kong

30 June 2006

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION

PROPOSED ACQUISITION OF TRADING BUSINESS INVOLVING THE ISSUANCE OF CONVERTIBLE BOND AND REALLOCATION OF USE OF PROCEEDS

INTRODUCTION

The Board refers to the announcement of the Company dated 15 June 2006 announcing that the Purchaser and the Vendor had entered into the Acquisition Agreement, pursuant to which the Purchaser had agreed to purchase or procure the purchase from the Vendor, and the Vendor had agreed to sell the Sale Interest and the Sale Loan at face value to the Purchaser subject to the terms in the Acquisition Agreement. The Consideration will be HK$2.0 million and will be satisfied by the issuance of the Convertible Bond by the Company upon Completion.

• For identification purpose only

— 5 —

LETTER FROM THE BOARD

The purpose of this circular is to provide you with, amongst other things, (i) information on the Acquisition; (ii) the respective financial information and general information of the Group and Chinaright; (iii) the pro forma financial information on the Enlarged Group; and (iv) other information required under the Listing Rules.

THE ACQUISITION AGREEMENT

Date: 14 June 2006 Parties: Purchaser: Rise Cheer Limited, a wholly-owned subsidiary of the Company Vendor: Professional Trading Limited, an investment holding company incorporated in the British Virgin Islands with limited liability and is wholly and beneficially owned by Mr. Wei Hark Man.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, the Vendor and its ultimate beneficiary are parties independent of the Company and its connected person(s) (as defined in the Listing Rules) and their respective associates.

Assets to be acquired

The Sale Interest, being the 60,001 shares of nominal value of HK$1.00 each (representing approximately 60.0% of the entire issued share capital of Chinaright) in the issued share capital of Chinaright and the Sale Loan which amounted to approximately HK$1 million.

For further information on Chinaright, please refer to the paragraph headed “Information on Chinaright” under the section headed “Letter from the Board” in this circular.

Consideration

The Consideration will be HK$2.0 million and will be satisfied by the issuance of the Convertible Bond by the Company upon Completion.

The number of New Shares which may be issued upon full conversion of the Convertible Bond at the Conversion Price will be 13,333,334, representing approximately 3.23% of the existing issued share capital of the Company as at the Latest Practicable Date and approximately 3.13% of the issued share capital of the Company as enlarged by the issue of New Shares upon full conversion of the Convertible Bond. The full conversion of the Convertible Bond into New Shares will not result in a change of control of the Company.

Upon the completion of the Rights Issue, the number of the New Shares which may be issued upon full conversion of the Convertible Bond at the adjusted conversion price of HK$0.10 per New Share will be 20,000,000 New Shares, representing (i) approximately 4.84% of the existing issue share capital of the Company as at the Latest Practicable Date, and (ii) approximately 1.59% of the issued share capital of the Company as enlarged by the issue of 20,000,000 New Shares upon full conversion of the Convertible Bond and the issue of 826,000,000 new Shares under the Rights Issue.

— 6 —

LETTER FROM THE BOARD

The Conversion Price represents a discount of approximately 42.3% to the closing price of HK$0.26 per Share as quoted on the Stock Exchange on the Last Trading Day; a discount of approximately 44.4% 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 183.0% 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 the annual report 2005 of the Company. The Conversion Price was determined after arm’s length negotiations between the Company and the Vendor with reference to the audited net asset value per Share as at 31 December 2005 and the nominal value of the Shares. The Conversion Price is comparable to the offering price of the Rights Issue, therefore it is fair and reasonable.

The Consideration was arrived at after arm’s length negotiations between the Purchaser and the Vendor after taking into account the growth potential of Chinaright in its industry sector, the knowledge and the experience of Chinaright’s key management and accumulated goodwill as Chinaright is one of the authorized IC chips dealers of ST Microelectronics Inc., the second largest IC chips manufacturer in France, and has established its reputation in the field of ST Microelectronics’ IC market in the PRC, Chinaright’s established PRC clientele, financial positions of Chinaright (please refer to the paragraph headed “Information on Chinaright” under the section headed “Letter from the Board” in this circular) and the market condition.

The New Shares will rank pari passu in all respects with the other Shares in issue on the date of conversion including the right to all dividend and distributions at any time thereafter, and shall be free from all charges, claims, third party rights and all other encumbrances of any nature whatever.

The issue of the Convertible Bond, the Option Agreement and the Sale Loan Assignment will take effect upon completion of the Acquisition.

An application will be made to the Listing Committee of the Stock Exchange for the listing of and permission to deal in the New Shares. The Stock Exchange has indicated that the approval for the listing of New Shares, when issued, will be conditional on, amongst other things, the completion of the Assignment of Debt and the Rights Issue.

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

Profit Guarantee and Profit Adjustment

Pursuant to the Acquisition Agreement, the Vendor has provided certain representations and warranties to the Purchaser, which include but not limited to the Profit Guarantee.

According to the Profit Guarantee, the net profit of Chinaright as disclosed in the 2006 Accounts shall be no less than HK$1 million less any Profit Adjustment, without taking into account any shareholder’s loan waived as disclosed in the 2006 Accounts. In the event that the amount of net profit of Chinaright as disclosed in the 2006 Accounts falls short of the Guaranteed Profit, the Vendor shall compensate the Purchaser in cash 60% of the amount of shortfall (up to HK$600,000) on the third Business Day from the date the Purchaser by written notice requires the Vendor of the same.

— 7 —

LETTER FROM THE BOARD

The Guaranteed Profit was arrived at after arm’s length negotiations between the Purchaser and the Vendor after taking into account the recent performance of Chinaright. As disclosed under the paragraph headed “Information on Chinaright” under the section headed “Letter from the Board” in this circular, Chinaright incurred losses for the last two financial years, the Directors consider that it is to the interests and for the protection of the Company and the Shareholders to have the Vendor to provide a profit guarantee under the Acquisition Agreement. After series of negotiations, the Vendor has agreed to set the Guarantee Profit at HK$1 million. Based on the amount of HK$1 million under the Profit Guarantee, the compensation amount of HK$600,000 will be attributable to the Company’s approximately 60% interest in Chinaright, amounting to approximately 30% of the consideration amount, which is considered to be reasonable by the Directors.

If the existing business of Chinaright shall have been materially or adversely affected by any of the following events which may not be reasonably anticipated as at the date of the Acquisition Agreement: - (a) the introduction of any new law or regulation or any change in existing laws or regulations or change in the interpretation or application thereof; or (b) the occurrence of any act of god (including earthquakes, floods or fire), the consequences of which are not preventable or avoidable, then the Guaranteed Profit shall be reduced by the extent of the adverse impact on the amount of net profit of Chinaright as disclosed in the 2006 Accounts for the same period which is a direct and natural consequence of the occurrence of such event (the amount of such reduction shall be referred to as “ Profit Adjustment ”). Any dispute arising in connection with the amount of Profit Adjustment and net profit of Chinaright shall be referred to the decision of an independent reporting accountant jointly appointed by the Purchaser and the Vendor, failing the agreement of the Vendor and the Purchaser for such appointment, the Vendor and the Purchaser shall appoint such reporting accountant as nominated by the Purchaser. The decision of such reporting accountant shall, in the absence of manifest error, be binding on the Purchaser and the Vendor. The costs and expenses for such review shall be borne by the Vendor and the Purchaser in equal shares.

Option Agreement

The Purchaser and the Vendor also entered into the Option Agreement on 14 June 2006, whereas (i) in the event that the Purchaser has not received the abovementioned compensation payment for the shortfall in Guaranteed Profit from the Vendor within the specific period mentioned above; and (ii) upon the occurrence of any events as stated under the paragraph “Termination” below post-Completion and up to the earlier of one month after the date of production of the 2006 Accounts or the date the Vendor’s obligation to compensate for the shortfall in Guaranteed Profit within the specific period mentioned above has been met, the Purchaser shall have the option to put to the Vendor all of the Sale Interest and the amounts represented by the Sale Loan then owed by Chinaright to the Purchaser, and the Vendor shall repurchase the same at a fixed consideration of HK$800,000 (“ Put Option ”), which was arrived at after arm’s length negotiations between the parties, in accordance with the terms of the Option Agreement.

— 8 —

LETTER FROM THE BOARD

The repurchase amount under the Put Option was arrived at after arm’s length negotiations between the Purchaser and the Vendor after taking into account the possible synergy that brought by the Acquisition. As Chinaright is engaged in trading business, which is the same as that of the Company, the Directors consider that the Acquisition will provide an opportunity for the Group to diversify its income stream to include trading of IC chips for set-top boxes as well as to expand the existing customer base of the Group.

The terms of the Acquisition, including the Consideration and the Put Option, were determined on arm’s length negotiations between the Company and the Vendor with reference to the financial information of Chinaright available and the Profit Guarantee. The Directors, including the independent non-executive Directors, consider that the terms under the Acquisition Agreement, including the Consideration and the Put Option, are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Conditions of the Acquisition

Completion will be conditional upon the fulfillment of, all but not part only of, the following conditions:

• (a) the necessary resolutions being passed by (i) the Board; and (ii) the Shareholders, as appropriate, to approve the acquisition of the Sale Interest and the Sale Loan contemplated under the Acquisition Agreement, the Option Agreement, the Sale Loan Assignment, the issue of the Convertible Bond and the allotment and issue of the New Shares, provided always that the Company shall exercise its best endeavour to procure the passing of such respective resolutions;

• (b) the resumption of trading in and continued listing of the Shares on the Stock Exchange;

• (c) the Listing Committee of the Stock Exchange granting (either unconditionally or subject only to conditions to which the Company, the Purchaser and the Vendor have no reasonable objection) the listing of and permission to deal in the New Shares;

• (d) all necessary approvals (if any) from the relevant parties, governmental or regulatory authorities in Hong Kong or Bermuda, in particular the Bermuda Monetary Authority, as and when required on the part of the Vendor, the Purchaser and the Company for the sale and purchase of the Sale Interest and the Sale Loan, allotment and issue of the Convertible Bond and the New Shares having been obtained; and

• (e) the execution of the Option Agreement and the Sale Loan Assignment by the Purchaser and Vendor.

In the event that any of the conditions stated above is not fulfilled (or not reasonably capable of being fulfilled) in the sole opinion of the Purchaser, on or before the Long Stop Date, the Acquisition Agreement shall be terminated and of no further effect.

As at the Latest Practicable Date, conditions (a) and (e) had been fulfilled.

— 9 —

LETTER FROM THE BOARD

Termination

If at any time prior to Completion:

• (i) it becomes apparent that there is or will be a material breach of any of the Warranties and such breach has not been remedied by the Vendor within three Business Days or any longer period as may be permitted by the Purchaser after the Purchaser becoming aware or being notified by the Vendor of such breach;

• (ii) the Purchaser shall become aware of any matter or event showing that any of the accounts, nature of business operations, representation and Warranties was, when given, untrue or inaccurate in any material respect or would be untrue or inaccurate in any material respect if appeared as at the date on which the Purchaser becomes so aware;

• (iii) the Vendor commits any material breach of or omits to observe any of its obligations or undertakings expressed to be assumed by it under the Acquisition Agreement, Option Agreement or the Sale Loan Assignment in any material respect; or

• (iv) Chinaright shall sustain a loss or damage (howsoever caused and whether or not the subject of any insurance or claim against any person) which constitutes a material adverse change (or effect) (as such term is defined in the Acquisition Agreement), otherwise than with the prior approval in writing by the Purchaser;

then, in any such case, the Purchaser may in its absolute discretion without any liability on its part, by notice in writing to the Vendor, terminate the Acquisition Agreement.

Completion

Completion shall take place on the third Business Day (or such other date as the parties to the Acquisition Agreement may agree in writing) after the Long Stop Date provided that (i) all the conditions of the Acquisition Agreement have been fulfilled on or before the Long Stop Date, and (ii) the conditions of the Acquisition Agreement remain fulfilled on or before Completion.

Principal terms of the Convertible Bond

The Convertible Bond shall have the following terms:

• (a) Period and means of conversion

By written notice to the Company, the principal amount of the Convertible Bond is convertible in whole or in part into New Shares, from the period of one month after the date of the Completion until Maturity, in amounts of not less than HK$500,000 and in integral multiples thereof, saves that if at any time, the outstanding principal amount of the Convertible Bond is less than HK$500,000, the whole (but not part only) of such outstanding amount may be converted.

— 10 —

LETTER FROM THE BOARD

The Company shall ensure that all New Shares issued upon the conversion of the Convertible Bond will be promptly, duly and validly issued fully paid (rounded up to the nearest whole number of Share) and registered in the name of the Vendor or nominee(s) thereof.

(b) Conversion Price

The principal amount of the Convertible Bond is convertible at the initial conversion price of HK$0.15 per New Share (subject to adjustments).

In the event the present issued share capital of the Company, being 413,000,000 Shares, is enlarged by any issue of Shares, or securities convertible into Shares exercisable, within the conversion period mentioned in (a) above (the “ Dilution Event ”), the conversion price per New Share will be adjusted downwards so that the aggregate percentage of Shares which would otherwise be convertible under (a) above but for the occurrence of the Dilution Event, on the basis of the issued share capital of the Company as at the date of the Acquisition Agreement and the initial conversion price per New Share before any adjustments is made, will remain as much as possible (rounded up to the nearest whole number of Share) the same (but not greater than it was before the occurrence of such Dilution Event), provided that the conversion price per Share shall at all times remain above the par value per Share as required under the laws of Bermuda and the memorandum of association and bye-laws of the Company.

Accordingly, following the Rights Issue of 826 million Shares by the Company, the conversion price will be adjusted to HK$0.10 per New Share, being the nominal value of the Shares, and therefore the maximum number of New Shares to be issued upon the full conversion of the Convertible Bond will be 20,000,000, despite there may be any possible reduction in the nominal value of the Shares in the future.

(c) Principal amount and outstanding principal amount

The principal amount of the Convertible Bond shall be the amount of Consideration as may be reduced by way of conversion or redemption under (a) above and (f) below, if any.

(d) Interests

Interests are to be calculated from the date of issue of the Convertible Bond and payable annually in arrears in cash, on dates falling a year after the date of issue of the Convertible Bond and on the anniversary of such date thereafter, on the outstanding principal amount at the prime interests rate for Hong Kong dollars as quoted by the Hongkong and Shanghai Banking Corporation Hong Kong branch from time to time. In the event that the Convertible Bond has been repaid or redeemed (in whole or in part) interest shall accrue in respect of such part or the whole of the principal amount being repaid or redeemed for the period from the immediately preceding interest payment date (or the date of issue of the Convertible Bond, as the case may be) up to and including the date the relevant notice of repayment or relevant redemption in accordance with (f) below concerned has been received. Interest shall accrue from day to day and

— 11 —

LETTER FROM THE BOARD

shall be calculated on the basis of the actual number of days elapsed and a 365-day year, including the first day of the period during which it accrues and including the last. Provided always that if the Convertible Bond is being converted (in whole or in part) in a particular year, the interest payable for that year shall be forgiven.

(e) Term and maturity

The Convertible Bond will remain in full force and effect for a term of 24 months from the date of its issue, until fully converted or upon occurrence of any events of default as set out in (i) below, whichever is earlier.

(f) Redemption and repayment

The holder of the Convertible Bond may by written notice to the Company, given at any time after the period of one month from the date of Completion until Maturity and while a principal amount is still outstanding requests the Company to repay such principal amount outstanding (or a part thereof) together with interests accrued pursuant to (d) above up to the date of such notice for repayment.

The Company shall, at any time or immediately upon Maturity and at its sole discretion, repay and redeem the Convertible Bond in immediately available funds (at the principal amount outstanding together with interest accrued thereon up to and including the date of Maturity), or by the allotment and issue of Shares pursuant to the terms of (b) above or by any combination of the same.

(g) Voting

The holder of the Convertible Bond will not be entitled to attend or vote at any general meeting of the Company by reason only of its being the holder of the Convertible Bond.

(h) Transferability

The Convertible Bond may be transferred or assigned with notice to the Company to any associate of the holder thereof or with the prior written approval of the Company to any third party. For the avoidance of doubt, the Convertible Bond may not be transferred to persons who are connected persons of the Company (as defined in the Listing Rules) without the prior written consent of the Company.

(i) Events of default

If any of the event specified below occurs, the Company must within five Business Days of such event occurring give notice to the holder of the Convertible Bond. Within five Business Days after the Company despatches the notice, the holder of the Convertible Bond may give notice to the Company that the Convertible Bond has become immediately due and payable, whereupon it shall so become immediately due and payable.

— 12 —

LETTER FROM THE BOARD

The following are the events of default referred to in the immediately preceding paragraph:

• (i) a default is made by the Company in the performance or observance of any covenant, condition or provision contained in the Acquisition Agreement with respect to the issue of the Convertible Bond and any New Shares and on its part to be performed or observed and such default continues for the period of thirty days next following the service by the holder of the Convertible Bond on the Company of notice requiring such default to be remedied; or

• (ii) a resolution is passed or an order of a court of competent jurisdiction is made that the Company (or a principal subsidiary of the Company) be wound up or dissolved otherwise than for the purposes of or pursuant to and followed by a consolidation, amalgamation, merger or reconstruction the terms of which shall have previously been approved in writing by the holder of the Convertible Bond.

INFORMATION ON CHINARIGHT

Chinaright was incorporated on 23 June 2000 and is primarily engaged in the distribution of IC chips for set-top boxes, a reception device which receives and decodes the digital signal from either cable or satellite transmission. Chinaright is one of the authorized dealers of ST Microelectronics Inc., the second largest IC chips manufacturer in France, for its IC chips for set-top boxes. Such IC chips can be used in digital consumer segment which includes DVD, DVB, DCAM, and MP3. The customers of Chinaright, being manufacturers or traders of set-top boxes, are located in Hong Kong and the PRC.

Set out below is a brief financial summary of Chinaright based on the current information available to the Board:

	For the year ended 31 December	For the year ended 31 December
	2005 2004	2003
	(audited) (audited)	(audited)
	HK$’000 HK$’000	HK$’000
Turnover	56,640 179,132	156,424
Net (loss)/profit before taxation	(4,460) (887)	5,132
Net (loss)/profit after taxation	(4,525) (887)	4,304
	As at 31 December
	2005 2004	2003
	(audited) (audited)	(audited)
	HK$’000 HK$’000	HK$’000
Net asset value	18 4,543	5,430

— 13 —

LETTER FROM THE BOARD

REASON FOR THE ACQUISITION

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. Chinaright’s business is trading in nature, in which the chief executive officer of the Company, who oversees the Group’s existing trading business, has extensive management experience. Besides, it is the present intention of the Company to retain the senior management of Chinaright to directly manage this part of business. On the basis of the above, the Board considers 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. Although Chinaright incurred losses for the two years ended 31 December 2005, the Profit Guarantee built-in in the Acquisition Agreement offers certain protection over the investment made by the Company. Besides, the proposed TV digitalization in the PRC by 2010 would enhance the operation of Chinaright. Further, the Acquisition is one of the items required under the resumption proposal of the Company approved by the Listing Appeals Committee. Accordingly, the Board considers that the Acquisition is in the interests of the Company and the Shareholders as a whole. It is the present intention of the Company to appoint at least one person to the board of Chinaright.

MANAGEMENT DISCUSSION AND ANALYSIS ON CHINARIGHT

Review of past performance

For the year ended 31 December 2005

Summary of operation

Turnover of Chinaright was approximately HK$56.6 million (2004: HK$179.1 million). Keen competition in the IC market not only caused the drastic drop in turnover for the year but also widen the loss up to HK$4.5 million.

Business outlook

As the PRC has planned to migrate the existing TV system from analog to digital system by 2010, it is expected that the market of set-top-box IC and related products will recover in the coming years. Apart from IC trading, Chinaright will diversify its business to include provision of digital TV set-top-box solution to major customers and develop new series of electronics components to widen its product line so as to maintain its competitiveness in the market.

For the year ended 31 December 2004

Summary of operation

Turnover of Chinaright was approximately HK$179.1 million (2003: HK$156.4 million). Following the drastic growth in the preceding year, the rate of increase had slowed down. The profit margin of the IC chips was also eroded by the keen competition in the IC market due to increase in the number of players in the market. It was expected that this situation might continue for a year or so.

— 14 —

LETTER FROM THE BOARD

Business outlook

The IC chips market had undergone cut-throat competition in 2004, market price of the IC chips volatized. Credit periods for the PRC customers were extended which had driven up the operation and financing costs for the year.

For the year ended 31 December 2003

Summary of operation

Turnover of Chinaright was approximately HK$156.4 million. Profit for the year reached approximately HK$4.3 million.

Business outlook

Successful market promotion for STMicroelectronics STi5518 IC chips series in the PRC contributed for the profitability of Chinaright. The management of Chinaright intended to attribute most of the company’s resources for the development of the PRC market in 2004.

Review of financial position

Liquidity and financial resources

Total borrowings of Chinaright as at 31 December 2005 were approximately HK$1.1 million which comprised amount due to its ultimate holding company. The amount is unsecured, interest-free and repayable on demand.

Total cash and bank balances as at 31 December 2005 was approximately HK$1.7 million, which included pledged deposit of HK$40,000 and cash and bank balance of approximately HK$1.6 million.

Gearing ratio

Chinaright had no gearing (as measured by the amount of interest bearing loans over net asset value) as at 31 December 2005, as the amount due to its ultimate holding company of approximately HK$1.1 million is interest free advance.

Funding and treasury policies

The assets and liabilities of Chinaright are mainly denominated in Hong Kong dollars. Accordingly, Chinaright considers that it has minimal exposure to foreign exchange fluctuation. To manage liquidity risk, the directors of Chinaright closely monitor the liquidity position to ensure that the liquidity structure of Chinaright’s assets, liabilities and commitments can meet its funding requirements.

— 15 —

LETTER FROM THE BOARD

Employee information

Chinaright employed 2 staff in Hong Kong as at 31 December 2005. It has been Chinaright’s policy that staff be remunerated by reference to market terms, qualifications and experience of the staff concerned. Chinaright annually reviews the employees’ remuneration packages by reference to individual merits and provides employment related benefits including retirement benefits and medical insurance to all eligible staff.

Capital structure

As at 31 December 2005, Chinaright has authorised share capital of HK$200,000, divided into 200,000 shares of HK$1 each. Issued share capital as at 31 December 2005 was HK$100,001.

Exposure to fluctuation in exchange rates

Since most business transactions conducted by Chianright and payments made to suppliers are either denominated in Hong Kong dollars or United States dollars, the use of financial instruments for hedging purposes is not considered necessary.

FINANCIAL EFFECTS OF THE ACQUISITION

Upon Completion, Chinaright will become an indirect subsidiary of the Company and the financials of Chinaright will be consolidated into the financial statements of the Enlarged Group.

Earnings

According to unaudited pro forma financial information of the Enlarged Group (as set out in Appendix III to this circular) assuming that Completion had taken place on 31 December 2005, the Group would have recorded a goodwill of approximately HK$1.8 million arising from the Acquisition, representing the excess of the cost of acquisition over 60% of Chinaright’s net asset value and the Sale Loan as at 31 December 2005. Shareholders should note that the amount of goodwill calculated above is hypothetical figure with the assumption that the fair value of the assets and liabilities and the Sale Loan of Chinaright as at the date of Completion is the same as their respective carrying amounts as at 31 December 2005. The goodwill, if actually arises at the date of Completion, will be recognized as an asset and assessed for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Any impairment losses arising from the assessment will be charged to the consolidated profit and loss account of the Enlarged Group.

Assets and liabilities

Based on the unaudited pro forma statement of assets and liabilities of the Enlarged Group (as set out in Appendix III to this circular) assuming the Completion had taken place on 31 December 2005, the unaudited consolidated net assets of the Enlarged Group would have been approximately

— 16 —

LETTER FROM THE BOARD

HK$22.2 million, representing a slight increase from the Group’s audited consolidated net assets of approximately HK$21.9 million as at 31 December 2005 before the Acquisition. The borrowings for the Enlarged Group and the Group after and before the completion of the Acquisition would be approximately HK$16.7 million and HK$15 million respectively as at 31 December 2005, the increase of which is due to the issue of the Convertible Bond as consideration for the Acquisition.

INFORMATION ON THE GROUP

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.

SHAREHOLDING STRUCTURE OF THE GROUP

Set out below is the shareholding structure of the Company immediately before and after conversion of Convertible Bond.

					Immediately after the
					Rights Issue and the
			Immediately after the		conversion of Convertible
			conversion of		Bond at the adjusted
	Immediately before		Convertible Bond at the		conversion price of
	the conversion of		Conversion Price		HK$0.10 per New Share
	Convertible Bond		**of HK$0.15 **	per New Share	(Note 1)
	Shares	Percentage	Shares	Percentage	Shares Percentage
		(approximately)		(approximately)	(approximately)
Profit Harbour (Note 2)	262,602,000	63.58%	262,602,000	61.60%	787,806,000 62.57%
Vendor	—	—	13,333,334	3.13%	20,000,000 1.59%
Public Shareholders	150,398,000	36.42%	150,398,000	35.27%	451,194,000 35.84%
Total	413,000,000	100.00%	426,333,334	100.00%	1,259,000,000 100.00%

Notes:

1. Assuming that all the Shareholders take up their entitlements under the Rights Issue.

2. 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).

REALLOCATION OF USE OF PROCEEDS

It is stated in the announcement and the circular of the Company dated 12 April 2006 and 4 May 2006 respectively that the proceeds of approximately HK$35.1 million from the Assignment of Debt

— 17 —

LETTER FROM THE BOARD

will be used mainly as working capital to finance the fabric products trading business of the Group. It is also stated in the announcement and the circular of the Company dated 11 May 2006 and 1 June 2006 respectively that part of the proceeds from the Rights Issue of HK$15 million will be used for the repayment of loan.

The Company would like to announce that the proceeds from the Assignment of Debt and the Rights Issue will be reallocated in the following manner:

• (i) HK$15 million from the Assignment of Debt will be used for the repayment of loan; and

• (ii) HK$15 million out of the Rights Issue will be used as working capital to finance the fabric products trading business of the Group.

The Directors consider that such reallocation will allow the Company to employ its financial resources more efficiently to reduce the finance charges of the Group.

GENERAL

The Acquisition constitutes a major transaction of the Company under the Listing Rules. As no Shareholder is required to abstain from voting if a special general meeting is to be held to approve the Acquisition and all transactions contemplated thereunder, and Profit Harbour, who is interested in approximately 63.58% of the issued share capital of the Company, has provided its written approval for the Acquisition and all transactions contemplated thereunder, including but not limited to the Option Agreement and the Sale Loan Assignment, pursuant to Rule 14.44 of the Listing Rules, no special general meeting will be held in this regard.

The New Shares will be issued under the general mandate to issue new Shares granted to the Directors on 23 May 2006.

ADDITIONAL INFORMATION

Your attention is drawn to the financial information relating to the Group and Chinaright, the pro forma financial information on the Enlarged Group, and other information set out in the appendices to this circular.

Trading of the Shares will continue to be suspended until resumption of trading in Shares on the Stock Exchange is granted by the Stock Exchange.

By Order of the Board Shanghai Merchants Holdings Limited

Yue Jialin Chairman

— 18 —

APPENDIX I FINANCIAL INFORMATION ON THE GROUP

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$’000
Turnover	62,198	22,305	68,393
Profit/(loss) before taxation	(54,935)	(36,268)	6,539
Income tax credit (expense)	—	(31)	(38)
Profit/(loss) after taxation	(54,935)	(36,299)	6,501
Minority interests	—	—	—
Profit/(loss) for the year	(54,935)	(36,299)	6,501
Assets and liabilities
	At 31 December
	2003	2004	2005
	HK$’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

— 19 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

— 20 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

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

— 21 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 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

— 22 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Balance Sheet

At 31 December 2005

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

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 Director

Lau Yau Cheung Director

— 23 —

FINANCIAL INFORMATION ON THE GROUP

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

— 24 —

FINANCIAL INFORMATION ON THE GROUP

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.

— 25 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31 December 2005

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

— 26 —

FINANCIAL INFORMATION ON THE GROUP

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.

2. 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.

— 27 —

FINANCIAL INFORMATION ON THE GROUP

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

— 28 —

FINANCIAL INFORMATION ON THE GROUP

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.

Property, plant and equipment

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

— 29 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

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.

— 30 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

— 31 —

FINANCIAL INFORMATION ON THE GROUP

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.

— 32 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

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.

— 33 —

FINANCIAL INFORMATION ON THE GROUP

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

6. 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.

— 34 —

FINANCIAL INFORMATION ON THE GROUP

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

— 35 —

FINANCIAL INFORMATION ON THE GROUP

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

— 36 —

FINANCIAL INFORMATION ON THE GROUP

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.

— 37 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

9. 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.

— 38 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

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.

— 39 —

FINANCIAL INFORMATION ON THE GROUP

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

— 40 —

FINANCIAL INFORMATION ON THE GROUP

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

— 41 —

FINANCIAL INFORMATION ON THE GROUP

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.

— 42 —

FINANCIAL INFORMATION ON THE GROUP

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.

— 43 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

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.

— 44 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

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:

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

— 45 —

FINANCIAL INFORMATION ON THE GROUP

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;

— 46 —

FINANCIAL INFORMATION ON THE GROUP

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

— 47 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

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.

25. Pledge of Assets

(a) Banking facilities of HK$4 million (2004: HK$8 million) granted by a bank and secured by bank deposits of the Group (b) Other loan facilities of HK$15 million (2004: HK$15 million) granted by a financial institution and secured by floating charges over: — Trade and other receivables — Bank balances and cash	The Group 2005 2004 HK$’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.

— 48 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

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.

— 49 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the annual report 2005 of the Company.

Business review

Turnover of the Group for the year ended 31 December 2005 was approximately HK$68,393,000 (2004: HK$22,305,000), which was up 207% from that of last year.

Profit of HK$6,501,000 was recorded for the current year, as compared to a loss of HK$36,299,000 in 2004.

Trading in base metals

Turnover for this sector for the year was approximately HK$44,937,000 (2004: HK$13,522,000). A growth of 232% was recorded as compared with last year. Following the resumption of the base metals trading business in last year, the Group has scaled up its operation in this sector in the year 2005. The base metals trading business segment contributed HK$110,000 (2004: HK$121,000) to the Group’s operating profits which represented a drop of 9%.

Trading in fabric products and other merchandises

The Group’s turnover for fabric products and other merchandises trading business segment reached HK$23,456,000 during the year (2004: HK$8,783,000), an increase of 167% over that of 2004. Segment profit attributable to the Group during the year amounted to HK$966,000 (2004: HK$393,000), an increase of 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.

Litigation and contingent liabilities

Details of the material litigation and contingent liabilities are set out in note 24 to the financial statements.

Pledge of assets

Details of the pledge of assets are set out in note 25 to the financial statements.

Liquidity and financial resources

As at 31 December 2005, the Group had secured other loans of HK$15 million (2004: HK$15 million), and bank balances and cash were at approximately HK$5,477,000 (2004: HK$14,929,000).

— 50 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Foreign exchange exposure

Since most business transactions conducted by the Group and payments made to suppliers are either in Hong Kong Dollars, or US Dollars, no use of financial instruments for hedging purposes is considered necessary.

Employees and remuneration policy

As at 31 December 2005, the Group had 3 (2004: 5) managerial, administrative and trading staff in Hong Kong.

The Group remunerates its employees largely based on the prevailing industry practice.

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 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 expected that the proposed migration of the TV system from analog to digital system in the PRC by 2010 will provide further growth opportunities for Chinaright, therefore the Board considers that the Acquisition represents a diversification opportunity for the Group’s trading businesses. For details of the Acquisition, please refer to the section headed “Letter from the Board” in this circular.

Trading in fabric products and other merchandises

Leveraging on the extensive business networks of the controlling shareholder, the 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 United States 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.

— 51 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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 metals 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 the physical base metals 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.

— 52 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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%.

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 circular and which are unlikely to be known or anticipated by the general public, and which could materially affect the profits.

— 53 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

ACCOUNTANTS’ REPORT ON CHINARIGHT FOR THE THREE YEARS ENDED 31 DECEMBER 2005

The following is the text of the accountants’ report on Chinaright from Graham H. Y. Chan & Co, the auditors and reporting accountants of the Company, for the three years ended 31 December 2005 prepared for the purpose of incorporation in this circular.

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GRAHAM H.Y. CHAN & CO.

CERTIFIED PUBLIC ACCOUNTANTS HONG KONG

Unit1, 15/F., The Center 99 Queen’s Road, Central Hong Kong

30 June 2006

The directors

Shanghai Merchants Holdings Limited

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) relating to Chinaright Electronics Limited (“Chinaright”) for each of the three years ended 31 December 2005 (the “Relevant Periods”) for inclusion in the circular of Shanghai Merchants Holdings Limited (the “Company”) dated 30 June 2006 (the “Circular”) in connection with the proposed acquisition of trading business involving the issuance of convertible bond.

Chinaright was incorporated in Hong Kong with limited liability on 23 June 2000. The principal activities of Chinaright are the trading of electronics parts and provision of reworking services.

The financial statements of Chinaright for the Relevant Periods, prepared in accordance with accounting principles generally accepted in Hong Kong, were audited by Ceiceily Lo & Company, Certified Public Accountants registered in Hong Kong.

For the purpose of this report, we have examined the audited financial statements of Chinaright for the Relevant Periods and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

The Financial Information as set out in Section I and II below has been prepared based on the audited financial statements of Chinaright, after making such adjustments as we consider appropriate for the purpose of preparing this report. This accountants’ report is prepared using the accounting policies materially consistent with those of the Company.

— 54 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

The audited financial statements are the responsibility of the directors of Chinaright who approved their issue. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the audited financial statements, to form an independent opinion on the Financial Information and to report our opinion.

The auditors of Chinaright issued qualified opinion on the financial statements for the years ended 31 December 2003, 2004 and 2005 in respect of limitation of audit scope and disagreement with the accounting treatment.

For years ended 31 December 2003 and 2004, they stated that the financial statements of the years give a true and fair view except for the effect of any adjustments that might have been found to be necessary in respect of limitation in evidence available to them referred to the following paragraphs and absent of disclosure of the associated company.

Set out below is the basis of opinion of the auditors’ report for the years ended 31 December 2003 and 2004 as extracted from the 2003 and 2004 audited financial statements of Chinaright.

• “1. We are unable to obtain sufficient information to ascertain the recoverability of the sundry receivables of HK$3,720,000 included in sundry receivables as stated in the balance sheet. We are unable to satisfy ourselves as to whether the amount is fairly stated.

• The auditors’ report in the financial statements for the period ended 31 December 2002 was qualified to the extent that no opinion could be expressed in respect of a substantial proportion of its income and documentary evidence to support amounts of HK$894,891 included in the Income Statement as license software charges included in selling and distribution cost and purchase. Any adjustment to the figure would have a consequential effect on the retained profits for the year ended 31 December 2003/2004.”

For year ended 31 December 2005, they stated that the investment in the associated company has been accounted for in the company financial statements at cost. This is not in accordance with Hong Kong Accounting Standard (“HKAS”) no. 28 issued by the HKICPA. Except for the effect of any adjustment that might have been found to be necessary in respect of of limitation in evidence available to them referred to the following paragraph, the financial statements of the year ended 31 December 2005 give a true and fair view.

Set out below is the basis of opinion of the auditors’ report for the year ended 31 December 2005 as extracted from the 2005 audited financial statements of Chinaright.

“The auditors’ report in the financial statements for the period ended 31 December 2002 was qualified to the extent that no opinion could be expressed in respect of a substantial proportion of its income and documentary evidence to support amounts of HK$894,891 included in the Income Statement as license software charges included in selling and distribution cost and purchase. Any adjustment to the figure would have a consequential effect on the accumulated losses for the year ended 31 December 2005.”

— 55 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

In accordance with the provisions of the Auditing Guideline “Prospectus and the Reporting Accountants” which govern the present reporting, we carried out additional audit procedures in a view to consider if we need to repeat the qualification in our present reporting.

In respect of the recoverability of sundry receivables, the amount was due from a related party, Pacific Resources Nominee Limited and has been fully recovered during the year ended 31 December 2005. We have reviewed the accounting records of Chinaright and the audited financial statements for year ended 31 December 2005 and found that such amount has been settled during the year ended 31 December 2005. Besides, we have received audit confirmation from Pacific Resources Nominee Limited with the balance confirmed. As the sundry receivables have been finally settled, we are satisfied with certainty of the recoverability of the sundry receivables and our opinion is not qualified.

In respect of the substantial proportion of Chinaright’s income and the lack of documentary evidence to support license software charges and purchase for the period ended 31 December 2002, we have reviewed the accounting records for the Relevant Periods and up to the date of this report, the audit files and the audit adjustments prepared by the auditors of Chinaright for the Relevant Periods We are not aware of any income and expenses for the Relevant Periods that are related to income and license software charges and purchase for period ended 31 December 2002. On the other hand, the account receivables in respect of the income for the period ended 31 December 2002 were subsequently received during the year ended 31 December 2003. Besides, the relevant expenses had been ratified and approved by the board of Chinaright. It is unlikely that the expenses will be reversed subsequently. We have discussed with management of Chinaright and reviewed the board’s minutes. We are satisfied that the income received and expenses paid for year ended 31 December 2002 has no effect on the results of the Relevant Periods and of any subsequent periods. Our opinion is not qualified in this aspect.

In respect of the accounting treatment of associated company, HKAS 28 has been adopted for the purposes of preparing Financial Information for the Relevant Periods. We have obtained the management accounts of the associated company from the management of Chinaright and computed the share of post acquisition loss of the associated company. Disclosure pursuant to HKAS 28 has been made in the accountants’ report. With the adoption of HKAS 28, there is no material change on carrying amount of the investment in an associated company. The accounting treatment of the associated company for the purpose of this accountants’ report is in compliance with the Hong Kong Accounting Standards and our opinion is not qualified.

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

— 56 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

I. FINANCIAL INFORMATION

INCOME STATEMENTS

Notes Turnover 5 Cost of sales Gross profit Other income 6 Write-down of inventories Selling and distribution costs Administrative expenses Operating profit/(loss) 8 Taxation 10 Profit/(loss) attributable to the shareholders of Chinaright	Year ended 31 December 2003 2004 2005 HK$’000 HK$’000 HK$’000 156,424 179,132 56,640 (148,147) (173,940) (56,333) 8,277 5,192 307 89 279 235 — — (542) (2,187) (4,535) (1,645) (1,047) (1,823) (2,815) 5,132 (887) (4,460) (828) — (65) 4,304 (887) (4,525)

— 57 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

BALANCE SHEETS

			At 31 December	At 31 December
	Notes	2003	2004	2005
		HK$’000	HK$’000	HK$’000
Non-current assets
Property, plant and equipment	11	492	937	576
Investment in an associated company	12	—	—	—
Available-for-sale investment	13	—	—	—
		492	937	576
Current assets
Amount due from an associated company	12	21	21	25
Inventories	14	5,201	—	4,783
Trade receivables	15	8,761	26,737	2,529
Bill receivables		1,817	—	—
Sundry receivables		271	156	—
Sundry deposit		—	85	85
Amounts due from related companies	16	3,720	4,504	1,112
Pledged bank deposits	23	40	40	40
Cash and bank balances		3,455	2,232	1,614
		23,286	33,775	10,188
Current liabilities
Trade payables	17	15,815	20,346	9,532
Other payables and accruals		33	1,227	34
Amount due to parent company	18	1,524	7,620	1,140
Provision for taxation		967	967	40
		18,339	30,160	10,746
Net current assets/(liabilities)		4,947	3,615	(558)
Total assets less current liabilities		5,439	4,552	18
Deferred tax liability	20	9	9	—
Net assets		5,430	4,543	18
Capital and reserves
Issued capital	19	100	100	100
Reserves		5,330	4,443	(82)
Total equity attributable to equity
shareholders of Chinaright		5,430	4,543	18

— 58 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

STATEMENTS OF CHANGES IN EQUITY

			Retained
			profits/
	Share	Share	(accumulated
	capital	premium	losses)	Total
	HK$’000	HK$’000	HK$’000	HK$’000
Balance at 1 January 2003	100	250	776	1,126
Profit for the year	—	—	4,304	4,304
Balance at 31 December 2003	100	250	5,080	5,430
Balance at 1 January 2004	100	250	5,080	5,430
Loss for the year	—	—	(887)	(887)
Balance at 31 December 2004	100	250	4,193	4,543
Balance at 1 January 2005	100	250	4,193	4,543
Loss for the year	—	—	(4,525)	(4,525)
Balance at 31 December 2005	100	250	(332)	18

— 59 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

CASH FLOW STATEMENTS

	**Year **	ended 31 December	ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Profit/(loss) before taxation	5,132	(887)	(4,460)
Adjustments for:
Interest income	—	—	(1)
Depreciation	249	492	522
Write-down of inventories	—	—	542
Impairment loss for bad and doubtful debts	—	—	771
Operating profit/(loss) before changes in
working capital	5,381	(395)	(2,626)
Increase in amount due from an associated company	(21)	—	(4)
(Increase)/decrease in inventories	(5,201)	5,201	(5,325)
(Increase)/decrease in trade and other receivables,
and sundry deposit	(13,371)	(16,129)	27,313
Increase in amount due from related companies	—	(784)	(328)
Increase/(decrease) in trade payables, other
payables and accruals	10,589	5,725	(12,007)
Increase/(decrease) in amount due to parent
company	(172)	6,096	(6,480)
Cash (used in)/from operations	(2,795)	(286)	543
Interest income	—	—	1
Hong Kong profits tax paid	—	—	(1,001)
Net cash used in operating activities	(2,795)	(286)	(457)
Investing activities
Increase in pledged bank deposits	(40)	—	—
Purchase of property, plant and equipment	(675)	(937)	(161)
Net cash used in investing activities	(715)	(937)	(161)
Net decrease in cash and cash equivalents	(3,510)	(1,223)	(618)
Cash and cash equivalents at beginning of year	6,965	3,455	2,232
Cash and cash equivalents at end of year	3,455	2,232	1,614
Analysis of the balance of cash and cash
equivalents
Bank balances and cash	3,455	2,232	1,614

— 60 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. GENERAL INFORMATION

Chinaright was incorporated in Hong Kong on 23 June 2000 as a limited liability company. The address of its registered office is Room 804A, World-Wide House, 19 Des Voeux Road Central, Hong Kong. The principal activities of Chinaright are the trading of electronics parts and provision of reworking services.

The Financial Information is presented in thousands of HK dollars, which is the same as the functional currency of Chinaright, unless otherwise stated.

2. PRINCIPAL ACCOUNTING POLICIES

The Financial Information has been prepared based on a going concern basis because, upon completion of the proposed acquisition, Chinaright should have adequate funds to enable it to meet its financial obligations as they fall due for the foreseeable future.

Pursuant to the acquisition agreement dated 14 June 2006 entered into among the Company, Rise Cheer Limited and Professional Trading Limited, Rise Cheer Limited, a subsidiary of the Company, agreed to acquire 60% of shareholding interest in Chinaright together with debt owed by Chinaright amounted to approximately HK$1 million from Professional Trading Limited. As such, the Company will acquire indirectly, upon completion of the acquisition, 60% interest of Chinaright.

(a) Basis of preparation

The Financial Information has been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRS”) issued by the HKICPA. The Financial Information has been prepared under the historical cost convention.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”) and Hong Kong Accounting Standards (“HKASs”) (together, “new HKFRS”) which are effective for accounting periods beginning on or after 1 January 2005. For the purposes of preparing Financial Information for the Relevant Periods, Chinaright has adopted these new HKFRS.

The preparation of Financial Information in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other source. Actual results may differ from these estimates.

The HKICPA has issued the following standards and interpretations (“INT”) that are not yet effective. Chinaright has considered the following standards and interpretations but does not expect they will have a material effect on how the results of operations and financial position of Chinaright 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]

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APPENDIX II

ACCOUNTANTS’ REPORT ON CHINARIGHT

HKAS 39 and HKFRS 4 Financial Instruments: Recognition and Measurement and Insurance (Amendments) 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] 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] HK(IFRIC) — INT 8 Scope of HKFRS 2[5] HK(IFRIC) — INT 9 Reassessment of Embedded Derivatives[6]

• 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

• 5 Effective for the annual period beginning on or after 1 May 2006

• 6 Effective for the annual period beginning on or after 1 June 2006

(b)

Property, plant and equipment

All property, plant and equipment are stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Chinaright and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the income statement during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method to write off their cost over their estimated useful lives at the following rate per annum:

Furniture and equipment	20%
Office equipment	20%
Computer	30%
Motor vehicle	30%

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. The gain or loss on disposal or retirement of an asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the income statement.

(c) Associated company

An associated company is a company, not being a subsidiary or a jointly-controlled entity, in which Chinaright has a long term interest of generally not less than 20% of the equity voting rights and significant influence is exercised in its management.

The results and assets and liabilities of associate are incorporated in the Financial Information using the equity method of accounting. Under the equity method, investment in associated company is carried in the balance sheet at cost as adjusted for post-acquisition changes in Chinaright’s share of the profit or loss and of changes in equity of the

— 62 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

associated company, less any identified impairment loss. When Chinaright’s share of losses of an associated company equals or exceeds its interest in that associated company, Chinaright discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that Chinaright has incurred legal or constructive obligations or made payments on behalf of that associated company.

(d) Impairment

At each balance sheet date, Chinaright reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If 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 losses are recognised as an expense immediately unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as revaluation decrease.

Where 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 unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(e) Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to Chinaright and when the revenue can be measured reliably, on the following bases:

• (i) from the sale of goods, on the transfer of risks and rewards of ownership, which generally coincides with the time when goods are delivered to customers and title has passed;

• (ii) reworking service income, when the services are rendered; and

• (iii) Interest income is recognised as it accrues using the effective interest method.

(f) Foreign currencies

Foreign currency transactions are translated into the Hong Kong dollars, which is Chinaright’s functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

(g) 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. Chinaright’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

— 63 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

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 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 income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

(h) Financial instruments

Available-for-sale investments

Available-for-sale investments are those non-derivatives and are designated as available-for-sale investments or not classified under other investment categories. Available-for-sale investments are carried at fair value. Unrealised gain and losses (including transaction costs on acquisition) arising from changes in the fair value are recognised in investment revaluation reserve in accordance with HKAS 39. When the securities are sold, the difference between the net sale proceeds and the carrying value, and the accumulated fair value adjustments in the investment revaluation reserve are treated as gains or losses on disposal. 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.

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.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks.

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.

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.

(i) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis and includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to disposal.

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ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

(j) 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.

(k) Provision

Provision are recognised when Chinaright 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.

(l) Employee benefits costs

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

Chinaright operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all its employees in Hong Kong. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of Chinaright in an independently-administered fund. Chinaright’s employer contributions vest fully with the employees when contributed into the MPF Scheme. Chinaright’s contributions to retirement schemes are recognised as an expense in the period in which the employee’s services are rendered.

(m) Related parties

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

(n) Segment reporting

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

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENT

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.

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

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ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

There are 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 Information arising from the judgment or estimates used by management.

4 FINANCIAL RISK MANAGEMENT

(a) Financial risk factor

(i) Foreign exchange risk

Chinaright’s activities are principally made and settled in Hong Kong dollars (“HK$”) and United Stated dollars (“US$”). Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities.

Considering that the exchange rate between HK$ and US$ is pegged, directors of Chinaright believe Chinaright’s exposure to exchange rate risk is minimal..

(ii) Interest rate risk

Chinaright’s operating cash flows are substantially independent of changes in market interest rate as Chinaright has no significant interest-bearing assets and liabilities.

(iii) Price risk

Chinaright is not exposed to equity securities price risk or commodity price risk as Chinaright does not have listed equity investment.

(iv) Credit risk

Chinaright 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 Chinaright’s bank deposits and trade and other receivables. Chinaright only traded with recognised and creditworthy third parties. Receivable balances are monitored on an ongoing basis and Chinaright’s exposure to bad debts is not significant. Bank balances are placed with high-credit-quality institutions and directors of the Chinaright consider that the credit risk for such is minimal.

(v) Liquidity risk

Chinaright finances its working capital requirements principally by internally generated funds and funds advanced from its parent company.

(b) Fair values estimation

The carrying amounts of Chinaright’s financial assets including cash and cash equivalents, trade and other receivables and amount due from related companies; and financial liabilities including trade and other payables and amount due to parent company, approximate their fair values due to their short maturities. The face value less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values.

— 66 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

5. TURNOVER

Turnover represents the aggregate of amounts received and receivable for goods sold and services rendered, net of returns, by Chinaright during the Relevant Periods and is analysed as follows:

Sale of goods Provision of reworking services	Year ended 31 December 2003 2004 HK$’000 HK$’000 156,424 179,132 — — 156,424 179,132	2005 HK$’000 54,885 1,755
		56,640

6. OTHER INCOME

		Year ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Bank interest income	—	—	1
Rental income	—	—	229
Exchange gain	11	1	5
Sundry income	78	278	—
	89	279	235

7. SEGMENTAL INFORMATION

Chinaright’s turnover is substantially derived from the trading of electronic parts and provision of relevant reworking service in the People’s Republic of China including Hong Kong SAR during the Relevant Periods. Accordingly, no analysis by business and geographical segments is presented.

— 67 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

8. OPERATING PROFIT/(LOSS)

Operating profit/(loss) of Chinaright is arrived at after charging:

		Year ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Auditors’ remuneration	18	18	19
Impairment loss for bad and doubtful debts	—	—	771
Depreciation	249	492	522
Operating lease rental in respect of:
- land and buildings	—	308	493
- office equipments	—	—	5
Staff costs
- salaries and benefits in kind	207	301	228
- contribution to retirement scheme	—	5	11

9. DIRECTORS’ REMUNERATION AND FIVE HIGHEST PAID EMPLOYEES

None of the directors received or will receive any fees or emoluments in respect of their services to Chinaright during the Relevant Periods.

Other than the directors, Chinaright had one, three and three employees during the years ended 31 December 2003, 2004 and 2005, respectively. Aggregate remuneration paid to these employees are as follows:

Salaries and benefits in kind Pension scheme contributions	Year ended 31 December 2003 2004 HK$’000 HK$’000 207 301 — 5 207 306	2005 HK$’000 228 11
		239

During the Relevant Periods, no emoluments were paid by Chinaright to the directors or any of the employees as an inducement to join or upon joining Chinaright or as compensation for loss of office. No directors waived any emoluments during the Relevant Periods.

— 68 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

10. TAXATION

The amount of taxation charged to the income statement represents:

Hong Kong profits tax - current year - under provision in prior years Deferred taxation — note 20	Year ended 31 December 2003 2004 HK$’000 HK$’000 828 — — — — — 828 —	2005 HK$’000 — 74 (9)
		65

Hong Kong profits tax has been provided at the rate of 17.5% on the estimated assessable profit for the year ended 31 December 2003.

No Hong Kong profits tax has been provided for the years ended 31 December 2004 and 2005 as Chinaright has no assessable profit.

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

Profit/(loss) before taxation Tax at the domestic income tax rate of 17.5% Under provision in prior year Tax effect of non-deductible expenses Deferred tax liabilities not recognised Deferred tax assets not recognised	Year ended 31 December 2003 2004 HK$’000 HK$’000 5,132 (887)	Year ended 31 December 2003 2004 HK$’000 HK$’000 5,132 (887)	2005 HK$’000 (4,460)
	898 — — (70) —	(155) — — — 155	(780) 74 44 — 727
	828	—	65

— 69 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

11. PROPERTY, PLANT AND EQUIPMENT

Furniture and fixtures Office equipments HK$’000 HK$’000 Cost At 1 January 2003 37 4 Additions — — At 31 December 2003 37 4 At 1 January 2004 37 4 Additions 85 16 At 31 December 2004 122 20 At 1 January 2005 122 20 Additions 4 — At 31 December 2005 126 20 Depreciation, amortisation and impairment loss At 1 January 2003 22 2 Charge for the year 7 1 At 31 December 2003 29 3 At 1 January 2004 29 3 Charge for the year 24 4 At 31 December 2004 53 7 At 1 January 2005 53 7 Charge for the year 18 4 At 31 December 2005 71 11 Net book value At 31 December 2003 8 1 At 31 December 2004 69 13 At 31 December 2005 55 9	Furniture and fixtures Office equipments HK$’000 HK$’000 Cost At 1 January 2003 37 4 Additions — — At 31 December 2003 37 4 At 1 January 2004 37 4 Additions 85 16 At 31 December 2004 122 20 At 1 January 2005 122 20 Additions 4 — At 31 December 2005 126 20 Depreciation, amortisation and impairment loss At 1 January 2003 22 2 Charge for the year 7 1 At 31 December 2003 29 3 At 1 January 2004 29 3 Charge for the year 24 4 At 31 December 2004 53 7 At 1 January 2005 53 7 Charge for the year 18 4 At 31 December 2005 71 11 Net book value At 31 December 2003 8 1 At 31 December 2004 69 13 At 31 December 2005 55 9	Furniture and fixtures Office equipments HK$’000 HK$’000 Cost At 1 January 2003 37 4 Additions — — At 31 December 2003 37 4 At 1 January 2004 37 4 Additions 85 16 At 31 December 2004 122 20 At 1 January 2005 122 20 Additions 4 — At 31 December 2005 126 20 Depreciation, amortisation and impairment loss At 1 January 2003 22 2 Charge for the year 7 1 At 31 December 2003 29 3 At 1 January 2004 29 3 Charge for the year 24 4 At 31 December 2004 53 7 At 1 January 2005 53 7 Charge for the year 18 4 At 31 December 2005 71 11 Net book value At 31 December 2003 8 1 At 31 December 2004 69 13 At 31 December 2005 55 9	Computer HK$’000 179 575	Motor vehicle HK$’000 — 100	Total HK$’000 220 675
	37 37 85 122 122 4 126 22 7 29 29 24 53 53 18 71	4 4 16 20 20 — 20 2 1 3 3 4 7 7 4 11	754 754 136 890 890 157 1,047 130 211 341 341 224 565 565 260 825	100 100 700 800 800 — 800 — 30 30 30 240 270 270 240 510	895
					895 937
					1,832
					1,832 161
					1,993
					154 249
					403
					403 492
					895
					895 522
					1,417
	8 69 55	1 13 9	413 325 222	70 530 290	492
					937
					576

— 70 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

12 INVESTMENT IN AN ASSOCIATED COMPANY

Unlisted shares, at cost Amount due from an associated company	At 2003 HK$’000 — 21	31 December 2004 HK$’000 — 21	2005 HK$’000 —
			25

Amount due from an associated is unsecured, interest free and repayable on demand.

Chinaright held shares directly in the following associated company as at 31 December 2003, 2004 and 2005:

						Percentage
				Place of		of equity
**Company **	name			incorporation	Issued share capital	interest held	Principal activity
Chinaright	Precious	Metals	Limited	Hong Kong	Ordinary shares of	50%	Inactive
					HK$2

Subsequent to 31 December 2005, Chinaright disposed of its entire equity interest in the associated company at a consideration of HK$1 to a related company in which both directors of Chinaright have beneficial interest.

Financial information of the associated company for Relevant Periods is as follows:

Turnover Loss for the year Loss for the year attributable to Chinaright Total assets Total liabilities Net liabilities	2003 HK$’000 — (16) (8)	2004 HK$’000 — (3) (2)	2005 HK$’000 — (6
			(3
	16 (32)	13 (33)	11 (36
	(16)	(20)	(25

As Chinaright’s share of loss of the associated company exceeds its investment cost of HK$1, no share of post acquisition losses has been recognised for the Relevant Periods.

The above financial information is extracted from the unaudited financial statements of the associated company for the years ended 31 December 2003, 2004 and 2005, respectively.

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ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

13. AVAILABLE-FOR-SALE INVESTMENT

					**At **	**31 **	December
				2003			2004	2005
				HK$			HK$	HK$
Unlisted	share,	at	cost	—			—	—

The investment represents 1 share, being 100% issued share of Resourceful Holdings Limited, a company incorporated in Hong Kong. The share was transferred from a director, Mr. Wai Gung Kiu, Peter (“Peter Wai”) during the year ended 31 December 2004 at a cost of HK$1 for certain commercial reason with the intention to transfer back to Mr. Peter Wai in near future. In the opinion of the directors of Chinaright, Chinaright does not have the power to govern the financial and operating policies of Resourceful Holdings Limited so as to obtain benefits from its activities. Therefore, the investment was classified as available-for-sale investment.

On 17 February 2006, Chinaright transfer its entire interest in Resourceful Holdings Limited to Mr. Peter Wai at a consideration of HK$1 in cash.

The unlisted equity investment is measured at cost less impairment because the range of reasonable fair value estimates is so significant that the directors of Chinaright are of the opinion that their fair values cannot be measured reliably.

14. INVENTORIES

					**At **	31 December
				2003		2004	2005
				HK$’000		HK$’000	HK$’000
Goods	purchased	for	resale	5,201		—	4,783

Inventories comprise electronics parts. The carrying amount of inventories that were carried at net realisable value were approximately HK$5,201,000 and HK$1,626,000 at 31 December 2003 and 2005, respectively.

15. TRADE RECEIVABLES

In general, credit term of 45 days is given to customers. The aging analysis of trade receivables, net of provision for impairment, is as follows:

		At 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
0 - 30 days	7,474	20,824	2,501
31 - 60 days	437	292	—
61 - 90 days	2	—	—
Over 90 days	848	5,621	28
	8,761	26,737	2,529

— 72 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

16. DUE FROM RELATED COMPANIES

		At 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
China Best Electronics Limited	—	784	1,112
Pacific Resources Nominee Limited	3,720	3,720	—
	3,720	4,504	1,112
Maximum amount outstanding during the year
China Best Electronics Limited	—	784	1,112
Pacific Resources Nominee Limited	3,720	3,720	3,720

Mr. Wai Gung Kiu, Peter, a director of Chinaright has interests in the China Best Electronics Limited as director and beneficial shareholder.

Mr. Wai Gung Kiu, Peter and Mr. Wei Hark Man have interests in Pacific Resources Nominee Limited as director and beneficial shareholder.

Chinaright provided fund financing to the above related companies. All amounts due from related companies have been settled subsequently.

The amounts due from related companies are unsecured, interest-free and repayable on demand.

17. TRADE PAYABLES

The aging analysis of trade payables, is as follows:

0 - 30 days 31 - 60 days 61 - 90 days Over 90 days	At 2003 HK$’000 5,058 1,488 9,165 104 15,815	31 December 2004 HK$’000 5,183 5,151 — 10,012 20,346	2005 HK$’000 7,778 — — 1,754
			9,532

18. DUE TO PARENT COMPANY

The amount due to parent company is unsecured, interest-free and has no fixed terms of repayment.

— 73 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

19. SHARE CAPITAL

Authorised: 200,000 ordinary shares of HK$1 each Issued and fully paid: 100,001 ordinary shares of HK$1 each	At 2003 HK$’000 200 100	31 December 2004 HK$’000 200 100	2005 HK$’000 200
			100

20 DEFERRED TAX

The following are major deferred tax liabilities recognised by Chinaright and movements thereon during the Relevant Periods:

	Accelerated tax
	depreciation
	HK$’000
At 1 January 2003	9
Charge to income statement	—
At 31 December 2003	9
At 1 January 2004	9
Charge to income statement	—
At 31 December 2004	9
At 1 January 2005	9
Charge to income statement	(9)
At 31 December 2005	—

— 74 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

The following are the major deferred tax assets/(liabilities) not recognised in the balance sheet:

Accelerated tax depreciation Unused tax losses*	At 2003 HK$’000 (70) — (70)	31 December 2004 HK$’000 (104) 189 85	2005 HK$’000 (62) 874
			812

* The unused tax losses can be carried forward indefinitely.

21. RELATED PARTIES TRANSACTIONS

Chinaright is controlled by Professional Trading Limited, a company incorporated in the British Virgin Islands, which owns 60% of Chinaright’s share. The directors of Chinaright regard Professional Trading Limited to be the ultimate parent company of Chinaright.

Other than amount due from related companies and amount due to parent company, which were disclosed in note 16 and 18 respectively, Chinaright entered into the following transactions with Resourceful Holdings Limited in the ordinary course of business. Details of the relationship between Resourceful Holdings Limited and Chinaright are set out in note 13 to the Financial Information.

				**Year **	ended 31 December
			2003		2004	2005
			HK$’000		HK$’000	HK$’000
Rental	income	received	—		—	229

22. OPERATING LEASE COMMITMENTS

As at 31 December 2003, 2004 and 2005, Chinaright had future aggregate minimum lease payments under non-cancellable operating leases in respect of land and buildings falling due as follows:

Within one year In the second to fifth years inclusive	At 2003 HK$’000 — — —	31 December 2004 HK$’000 443 115 558	2005 HK$’000 133 —
			133

— 75 —

ACCOUNTANTS’ REPORT ON CHINARIGHT

APPENDIX II

23. PLEDGE OF ASSETS

During the Relevant Periods, Chinaright has issued Security Over Deposits in favour of a bank in its standard form thereby charging the bank deposits of HK$40,000 held with the bank to secure banking facilities granted to Chinaright.

24. EARNINGS/(LOSS) PER SHARE

Figure of earnings/(loss) per share is not presented as such information is not meaningful having regard to the purpose of this report.

III. SUBSEQUENT EVENT

There is no material subsequent event subsequent to 31 December 2005.

IV. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared for Chinaright in respect of any period subsequent to 31 December 2005.

Yours faithfully,

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising) Hong Kong

— 76 —

APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of an accountants’ report from Graham H.Y. Chan & Co., the reporting accountants, on the unaudited pro forma financial information of the Enlarged Group.

==> picture [40 x 40] intentionally omitted <==

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 FINANCIAL INFORMATION TO THE DIRECTORS OF SHANGHAI MERCHANTS HOLDINGS LIMITED

We report on the unaudited pro forma financial information of Shanghai Merchants Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 79 to 81 under the headings of “Financial Information on the Enlarged Group” in Appendix III of the Company’s circular dated 30 June 2006 (the “Circular”), in connection with the proposed acquisition of trading business involving the issuance of convertible bond. The unaudited pro forma financial information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the proposed acquisition might have affected the relevant financial information of the Group. The basis of preparation of the unaudited pro forma financial information is set out on page 79 of the Circular.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to 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 financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

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

— 77 —

APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP

consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly 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 financial information as disclosed pursuant to paragraph 4.29 (1) of the Listing Rules.

The unaudited pro forma financial information 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 financial information has been properly compiled by the directors of the Company on the basis stated;

• b. such basis is consistent with the accounting policies of the Group; and

• c. the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising)

Hong Kong

30 June 2006

— 78 —

APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following unaudited pro forma statement of assets and liabilities of the Enlarged Group has been prepared to illustrate the effect of the Acquisition.

The unaudited pro forma statement of assets and liabilities of the Enlarged Group is based on the audited consolidated balance sheet of the Group as at 31 December 2005, which has been extracted from the annual report 2005 of the Company and set out in Appendix I to this circular and the audited balance sheet of Chinaright as at 31 December 2005 as extracted from the accountants’ report set out in Appendix II to this circular as if the Acquisition had been completed on 31 December 2005.

The unaudited pro forma financial information is prepared to provide information on the Enlarged Group as a result of completion of the Acquisition. As it is prepared for illustrative purposes only, it may not give a true picture of the financial position of the Enlarged Group following completion of the Acquisition.

— 79 —

APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP

The Group as at 31 December 2005 Chinaright as at 31 December 2005 Pro forma adjustments Note Pro forma Enlarged Group HK$’000 HK$’000 HK$’000 HK$’000 Non-current assets Property, plant and equipment — 576 576 Investments in associated companies — — — Available-for-sale investment — — Goodwill 1,849 1 1,849 576 2,425 Current assets Amount due from an associated company — 25 25 Inventories — 4,783 4,783 Trade and other receivables 37,526 2,529 40,055 Prepayments and deposits — 85 85 Amount due from related company — 1,112 1,112 Pledged bank deposits 4,012 — 4,012 Cash and bank balances 1,465 1,654 (1,000) 3 2,119 43,003 10,188 52,191 Current liabilities Trade and other payables 6,053 9,532 15,585 Other payables and accruals — 34 34 Amount due to parent company — 1,140 (1,140) 4 — Secured other loan 15,000 — 15,000 Tax payables 69 40 109 21,122 10,746 30,728 Net current assets/(liabilities) 21,881 (558) 21,463 Total assets less current liabilities 21,881 18 23,888 Non-current liabilities Convertible Bond — — 1,723 2 1,723 Net assets 21,881 18 22,165	The Group as at 31 December 2005 Chinaright as at 31 December 2005 Pro forma adjustments Note Pro forma Enlarged Group HK$’000 HK$’000 HK$’000 HK$’000 Non-current assets Property, plant and equipment — 576 576 Investments in associated companies — — — Available-for-sale investment — — Goodwill 1,849 1 1,849 576 2,425 Current assets Amount due from an associated company — 25 25 Inventories — 4,783 4,783 Trade and other receivables 37,526 2,529 40,055 Prepayments and deposits — 85 85 Amount due from related company — 1,112 1,112 Pledged bank deposits 4,012 — 4,012 Cash and bank balances 1,465 1,654 (1,000) 3 2,119 43,003 10,188 52,191 Current liabilities Trade and other payables 6,053 9,532 15,585 Other payables and accruals — 34 34 Amount due to parent company — 1,140 (1,140) 4 — Secured other loan 15,000 — 15,000 Tax payables 69 40 109 21,122 10,746 30,728 Net current assets/(liabilities) 21,881 (558) 21,463 Total assets less current liabilities 21,881 18 23,888 Non-current liabilities Convertible Bond — — 1,723 2 1,723 Net assets 21,881 18 22,165	The Group as at 31 December 2005 Chinaright as at 31 December 2005 Pro forma adjustments Note Pro forma Enlarged Group HK$’000 HK$’000 HK$’000 HK$’000 Non-current assets Property, plant and equipment — 576 576 Investments in associated companies — — — Available-for-sale investment — — Goodwill 1,849 1 1,849 576 2,425 Current assets Amount due from an associated company — 25 25 Inventories — 4,783 4,783 Trade and other receivables 37,526 2,529 40,055 Prepayments and deposits — 85 85 Amount due from related company — 1,112 1,112 Pledged bank deposits 4,012 — 4,012 Cash and bank balances 1,465 1,654 (1,000) 3 2,119 43,003 10,188 52,191 Current liabilities Trade and other payables 6,053 9,532 15,585 Other payables and accruals — 34 34 Amount due to parent company — 1,140 (1,140) 4 — Secured other loan 15,000 — 15,000 Tax payables 69 40 109 21,122 10,746 30,728 Net current assets/(liabilities) 21,881 (558) 21,463 Total assets less current liabilities 21,881 18 23,888 Non-current liabilities Convertible Bond — — 1,723 2 1,723 Net assets 21,881 18 22,165	The Group as at 31 December 2005 Chinaright as at 31 December 2005 Pro forma adjustments Note Pro forma Enlarged Group HK$’000 HK$’000 HK$’000 HK$’000 Non-current assets Property, plant and equipment — 576 576 Investments in associated companies — — — Available-for-sale investment — — Goodwill 1,849 1 1,849 576 2,425 Current assets Amount due from an associated company — 25 25 Inventories — 4,783 4,783 Trade and other receivables 37,526 2,529 40,055 Prepayments and deposits — 85 85 Amount due from related company — 1,112 1,112 Pledged bank deposits 4,012 — 4,012 Cash and bank balances 1,465 1,654 (1,000) 3 2,119 43,003 10,188 52,191 Current liabilities Trade and other payables 6,053 9,532 15,585 Other payables and accruals — 34 34 Amount due to parent company — 1,140 (1,140) 4 — Secured other loan 15,000 — 15,000 Tax payables 69 40 109 21,122 10,746 30,728 Net current assets/(liabilities) 21,881 (558) 21,463 Total assets less current liabilities 21,881 18 23,888 Non-current liabilities Convertible Bond — — 1,723 2 1,723 Net assets 21,881 18 22,165
	— — 37,526 — — 4,012 1,465 43,003 6,053 — — 15,000 69 21,122 21,881 21,881 —	576 25 4,783 2,529 85 1,112 — 1,654 (1,000) 3 10,188 9,532 34 1,140 (1,140) 4 — 40 10,746 (558) 18 — 1,723 2	2,425
			25 4,783 40,055 85 1,112 4,012 2,119
			52,191
			15,585 34 — 15,000 109
			30,728
			21,463
			23,888 1,723
	21,881	18	22,165

— 80 —

APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP

Notes:

1. The adjustment reflects the excess of the cost of Acquisition (including acquisition consideration and direct legal and professional cost for the proposed Acquisition) over 60% of Chinaright’s net asset value as at 31 December 2005 and debt owed by Chinaright to Vendor as at 31 December 2005 with the assumption that the fair value of net assets of Chinaright and the amount owed to the Vendor at the completion date is the same as the carrying amount of net assets of Chinaright and the amount owed to the Vendor as at 31 December 2005.

Since the fair value of the assets and liabilities of Chinaright and amount due to Vendor at the completion date will be different from their net asset value and amount due to Vendor as at 31 December 2005 used in the preparation of the unaudited pro forma financial information, the actual goodwill of the Enlarged Group arising from the acquisition of Chinaright will be different from the estimated goodwill as shown above.

1. The consideration of the Acquisition will be satisfied by issue of Convertible Bond of HK$2 million.

This represents liability component of Convertible Bond of HK$2 million. According to Hong Kong Accounting Standard 32 (“HKAS 32”), if compound financial instrument contains both liability and equity, the company recognises separately the liability component and equity component. The liability component is based on the present value of the liability component which is calculated using a discount rate of 7.75% (being the Hong Kong dollar prime rate as at 31 December 2005). The equity component is the difference between the proceeds of Convertible Bond and the fair value of the liability component.

1. In connection with the proposed Acquisition, the Group will be required to incur legal and professional cost of approximately HK$1 million.

2. At the completion of the Acquisition, the amount due to parent company will be acquired by the Company and thus become intra-group balance. It represents consolidation adjustment for elimination of intra-group balance.

— 81 —

APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP

WORKING CAPITAL

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

STATEMENT OF INDEBTEDNESS

As at the close of business on 31 May 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding total borrowings of approximately HK$16.0 million, of which HK$15 million was a term loan repayable within one year secured by floating charge over the undertaking, property and assets of the Company and one of its subsidiaries and approximately HK$1 million was an interest free unsecured loan repayable on demand.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-Group liabilities, at the close of business on 31 May 2006, the Enlarged 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 Enlarged Group since 31 May 2006 up to and including the Latest Practicable Date.

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 Enlarged Group since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

— 82 —

GENERAL INFORMATION

APPENDIX IV

RESPONSIBILITY STATEMENT

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

SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and upon issue of New Shares were as follows:

Authorised 2,000,000,000 Shares as at the Latest Practicable Date	HK$ 200,000,000
Issued and fully paid or credited as fully paid 413,000,000 As at the Latest Practicable Date 13,333,334 New Shares upon full conversion of the Convertible Bond at HK$0.15 per New Share	41,300,000 1,333,334
426,333,334 Shares upon full conversion of the Convertible Bond	42,633,334

The issued Shares are listed on the 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.

— 83 —

GENERAL INFORMATION

APPENDIX IV

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 corporation	262,602,000	63.58%
	(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 corporation	826,000,000	66.67%
	(Note 1)		(Note 3)

Notes:

1. These Shares are registered/will be registered (as the case may be) in the name of and beneficially owned by Profit Harbour.

2. 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.

3. 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.

— 84 —

APPENDIX IV

GENERAL INFORMATION

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.

(c) 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 businesses of the Group.

(d) Interests in assets

As at the Latest Practicable Date, save for the Assignment of Debt which Mr. Yu Jialin (being the chairman and an executive director of the Company) was 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 had been acquired or disposed of by, or leased to, or which were proposed to be acquired or disposed of by or leased to any members of the Enlarged Group since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

(e) Interests in contracts

None of the Directors was materially interested in any contracts or arrangements entered into by any members of the Enlarged Group and subsisting as at the Latest Practicable Date which were significant in relation to the business of the Enlarged Group.

— 85 —

GENERAL INFORMATION

APPENDIX IV

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 Enlarged Group or had an option in respect of such capital:

(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)
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)
Sun Hung Kai International	Beneficial owner	300,796,000	24.28%
Limited (Note 4)			(Note 3)
Short position in Rights Shares
		Number of
Name of Shareholders	Capacity and nature	ordinary shares	% holding
Sun Hung Kai International	Beneficial owner	300,796,000	24.28%
Limited (Note 4)			(Note 3)

(b) Long position in Rights Shares

(c) Short position in Rights Shares

Notes:

1. The entire issued share capital of Profit Harbour is owned by Mr. Yue.

2. 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.

3. 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.

4. The interest of Sun Hung Kai International Limited, the underwriter to the Rights Issue, is subunderwritten to the extent of 300,796,000 Rights Shares.

— 86 —

GENERAL INFORMATION

APPENDIX IV

• (d) Interest in 10% or more of the equity interests in members of the Enlarged Group

Name of members of		Number of
the Enlarged Group	Name of shareholder	ordinary shares	% holding
Chinaright	Kam Sau Yee	40,000	40%

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 Enlarged Group or had any option in respect of such capital.

SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had 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 members of the Enlarged Group:

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

1. 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), 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.

— 87 —

APPENDIX IV

GENERAL INFORMATION

1. 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 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. 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.

2. 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.

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

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

— 88 —

GENERAL INFORMATION

APPENDIX IV

MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Enlarged Group within the two years immediately preceding the date of this circular 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 entered into between the Company and Profit Harbour in relation to the assignment of debt of US$4.5 million in full at face value from the Company to Profit Harbour;

• (iv) the conditional agreement dated 11 May 2006 entered into between the Company and Sun Hung Kai International Limited relating to the underwriting and after arrangements in respect of the Rights Issue;

• (v) the agreement dated 14 June 2006 entered into among the Company, the Vendor and the Purchaser regarding the Acquisition for an aggregate consideration of HK$2.0 million to be satisfied by the issue of the Convertible Bond by the Company upon completion thereof, the details of which are disclosed under the section headed “Letter from the Board” in this circular;

• (vi) the option agreement dated 14 June 2006 entered into between the Vendor and the Purchaser granting to the Purchaser an option to put to the Vendor for repurchase for an aggregate consideration of HK$800,000 of the Sale Interest and Sale loan, the details of which are disclosed under the section headed “Letter from the Board” in this circular; and

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GENERAL INFORMATION

APPENDIX IV

• (vii) the deed dated 14 June 2006 in respect of the assignment of the Sale Loan entered into by the Vendor in favour of the Purchaser as part of the Acquisition, the details of which are disclosed under the section headed “Letter from the Board” in this circular.

EXPERT AND CONSENT

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

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 circular with the inclusion of its letters or reports dated 30 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 members of the Group nor the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any members 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 members of the Enlarged Group or which are proposed to be acquired or disposed of by or leased to any members of the Enlarged Group.

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 circular shall prevail over the Chinese text.

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GENERAL INFORMATION

APPENDIX IV

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 circular up to and including 15 July 2006:

• a. the memorandum of association and bye-laws of the Company;

• 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 accountants’ report from Graham H. Y. Chan & Co. on Chinaright, the text of which is set out in Appendix II to this circular;

• e. the statement of adjustment issued by Graham H. Y. Chan & Co. dated 30 June 2006;

• f. the accountants’ report from Graham H. Y. Chan & Co., on unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;

• g. the consent letter from Graham H. Y. Chan & Co. referred to in the paragraph headed “Expert and consent” in this appendix;

• h. the circular of the Company dated 4 May 2006 regarding the Assignment of Debt; and

• i. the circular and prospectus of the Company dated 2 June 2006 and 20 June 2006 respectively regarding, inter alia, the Rights Issue.

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