Sinopec Kantons Holdings Limited — Proxy Solicitation & Information Statement 2006

Jul 31, 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Sinopec Kantons Holdings Limited, you should at once hand this circular together with the enclosed form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

SINOPEC KANTONS HOLDINGS LIMITED （中石化冠德控股有限公司）[*]

(incorporated in Bermuda with limited liability) (Stock Code: 934)

MAJOR AND CONNECTED TRANSACTION

regarding

Huade Equity Acquisition and KGSIM Equity Disposal

Independent financial adviser to the Independent Board Committee and the Independent Shareholders of Sinopec Kantons Holdings Limited

A letter from the Board is set out on pages 5 to 17 of this circular.

A letter from the Independent Board Committee containing its recommendation in respect of the Huade Equity Acquisition and the KGSIM Equity Disposal is set out on page 18 of this circular.

A letter from Rothschild, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 19 to 39 of this circular.

A notice convening the SGM to be held at 1608 Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong on 18 August 2006 at 10:00 a.m. is set out on pages 163 to 164 of this circular. Whether or not you are able to attend the SGM in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible to Secretaries Limited, the Hong Kong Branch Share Registrar and Transfer Office of the Company, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the SGM or at any adjourned meeting should you so wish.

31 July 2006

* For identification purposes only

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Letter from Rothschild. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Appendix I – Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . .	40
Appendix II – Accountants’ Report on Huade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	95
Appendix III – Unaudited Proforma Financial Information . . . . . . . . . . . . . . . . . . . .	152
Appendix IV – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	158
Appendix V – Notice of Special General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	163

– i –

DEFINITIONS

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

• “Agreements”

collectively the Huade Equity Acquisition Agreement and the KGSIM Equity Disposal Agreement;

• “associates”

has the meaning ascribed to it under the Listing Rules;

• “Board”

• the board of directors of the Company;

• “Company”

• Sinopec Kantons Holdings Limited, a limited liability company incorporated in Bermuda, the shares of which are listed on the Stock Exchange (Stock Code: 934);

• “CPIC”

• 中國石化國際事業有限公司 (China Petrochemical International Co. Ltd.), a company established under the laws of the PRC, which is a direct wholly-owned subsidiary of Sinopec Corp. and the sole shareholder of SKI;

• “CPIC Framework Master Agreement”

• the agreement dated 18 February 2005 entered into between the Company and CPIC regarding certain continuing connected transactions between the parties;

• “CPIGC”

• 中國石化國際事業廣州公司 (China Petrochemical International Guangzhou Company), a company established under the laws of the PRC, which is a wholly-owned subsidiary of GPC regarding certain continuing connected transactions between the parties;

• “CPIGC Framework Master Agreement”

• the agreement dated 18 February 2005 entered into between the Company and CPIGC;

• “Directors”

• the directors of the Company;

• “GPC”

• 中國石化集團廣州石油化工總廠 (Sinopec Guangzhou Petrochemical Complex), an enterprise established under the laws of the PRC and a wholly owned subsidiary of Sinopec Group Company;

• “Group”

the Company and its subsidiaries;

• “Guangdong Company”

• 中國石油化工股份有限公司廣東石油分公司 (Sinopec Guangdong Oil Products Company), a branch of Sinopec Group, which is principally engaged in the production and sales of petroleum products and chemical products;

• “Guangdong Province”

the areas in Guangdong Province, the PRC;

• “HK$”

Hong Kong Dollars, the currency of Hong Kong;

– 1 –

DEFINITIONS

• “Hong Kong”

• “Huade”

• “Huade Equity Acquisition”

• “Huade Equity Acquisition Agreement”

• “Huizhou Crude Oil Jetty”

• “Independent Board Committee”

• “Independent Shareholders”

• “Kantons Investment”

• “KGSIM”

• the Hong Kong Special Administrative Region of the PRC;

• 惠州市大亞灣華德石化有限公司(Hua De Petrochemical Co. Ltd.), a sino-foreign equity joint venture company established under the laws of the PRC with limited liability in respect of which 70% of registered capital is held by the Company through Kantons Investment, a wholly owned subsidiary of the Company and 30% of registered capital is held by GPC;

• the acquisition of 30% of the equity interest of Huade by Kantons Investment pursuant to the Huade Equity Acquisition Agreement;

• the conditional transfer agreement dated 10 July 2006 entered into between GPC as vendor and Kantons Investment as purchaser in connection with the transfer of 30% of equity interests in Huade;

• the Huizhou crude oil jetty complex operated by Huade, including its oil tanker handling, crude oil unloading, storage and pipeline transmission facilities, which is located on Mabianzhou Island (馬鞭洲島 ) in the Daya Bay Economic and Technological Development Zone (大 亞灣經濟技術開發區 ) in Huizhou (惠州 ), Guangdong Province, the PRC and which is owned and operated by Huade;

• the board committee of the Company constituted by Mr. Wong Po Yan, Ms. Tam Wai Chu, Maria and Mr. Fong Chung, Mark, the independent non-executive directors of the Company;

• holders of shares in the Company other than Sinopec Group Company and its associates (as defined under the Listing Rules);

• Kantons International Investment Limited, a company incorporated under the laws of the British Virgin Islands with limited liability and a wholly-owned subsidiary of the Company;

• 廣州保稅區冠德油站投資管理有限公司(Kantons Gas Station Investment & Management Co. Ltd., Guangzhou Bonded Division), a limited liability company incorporated under the laws of the PRC whose equity interest owned as to 90% by the Company through Huade and 10% by GPC through ZGAT;

– 2 –

DEFINITIONS

• “KGSIM Equity Disposal”

• “KGSIM Equity Disposal Agreement”

• “Latest Practicable Date”

• “Listing Rules”

• “Petrol Stations”

• “PRC”

• “Restructured Group”

• “RMB”

• “Rothschild” or “Independent Financial Adviser”

• “SGM”

• “Sinopec Corp.”

• “Sinopec Corp. Framework Master Agreement”

• the disposal by Huade 90% of equity interest in KGSIM pursuant to the KGSIM Equity Disposal Agreement;

• the conditional transfer agreement dated 10 July 2006 entered into between Huade as vendor and Sinopec Corp. as purchaser in connection with the transfer of 90% of the equity interest of KGSIM;

• 27 July 2006, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular;

• the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;

• collectively 38 petrol stations as at the date of this circular operated by KGSIM; each a “Petrol Station”;

• the People’s Republic of China, but for the purposes of this circular and for geographical reference only (unless otherwise indicated) excludes Taiwan region, Macau Special Administrative Region and Hong Kong;

• the Group after completion of the Huade Equity Acquisition and the KGSIM Equity Disposal;

Renminbi, the currency of the PRC;

• N M Rothschild & Sons (Hong Kong) Limited, a corporation licensed with the Securities and Futures Commission of Hong Kong to carry on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities as defined under the Securities and Futures Ordinance of Hong Kong;

• special general meeting of the Company to be held for the approval of Huade Equity Acquisition, KGSIM Equity Disposal, Huade Equity Acquisition Agreement and KGSIM Equity Disposal Agreement;

• 中國石油化工股份有限公司 (China Petroleum & Chemical Corporation), a joint-stock limited liability company incorporated in the PRC, the shares of which are listed on the stock exchanges of Hong Kong, Shanghai, New York and London (Stock Code: 386);

• the agreement dated 18 February 2005 entered into between the Company and Sinopec Corp. regarding certain continuing connected transactions between the parties;

– 3 –

DEFINITIONS

“Sinopec Group Company”	中國石油化工集團公司(China Petrochemical Corporation),
	a state-owned enterprise established under the laws of
	the PRC;
“Sinopec Guangzhou Branch”	中國石油化工股份有限公司廣州分公司(China Petroleum
	& Chemical Corporation, Guangzhou Branch), a branch
	of Sinopec Corp. whose business is principally engaged
	in oil refining and is a major client of Huade;
“SKI”	Sinopec Kantons International Limited, a limited liability
	company incorporated in the British Virgin Islands and is
	the immediate controlling shareholder of the Company;
“Stock Exchange”	The Stock Exchange of Hong Kong Limited;
“Transactions”	collectively the Huade Equity Acquisition and the KGSIM
	Equity Disposal;
“Unipec Framework	the agreement dated 18 February 2005 entered into
Master Agreement”	between the Company and China International United
	Petroleum & Chemical Co. Ltd. regarding certain
	continuing connected transactions between the parties;
“US$”	US Dollars, the currency of United States;
“ZGAT”	Guangzhou Zhong Guan An Tai Petrochemical Company
	Limited (廣州中冠安泰石油化工有限公司), a limited
	liability company incorporated in PRC, and GPC
	indirectly holds 100% of its registered capital; and
“ZGAT Agreement”	the transfer agreement dated 10 July 2006 entered into
	between ZGAT as vendor and Sinopec Corp. as purchaser
	in connection with the transfer of 10% of the registered
	capital of KGSIM.

In this circular, amounts in Renminbi have been converted into Hong Kong dollars at the rate of HK$1 = RMB1.04, and amounts in US dollars have been converted into Hong Kong dollars at the rate of US$1 = HK$7.80.

– 4 –

LETTER FROM THE BOARD

SINOPEC KANTONS HOLDINGS LIMITED （中石化冠德控股有限公司）[*]

(incorporated in Bermuda with limited liability)

(Stock Code: 934)

Executive Directors: Mr. Jiang Zhen Ying (Chairman) Mr. Pan Xin Rong (Deputy Chairman) Mr. Yang Dong (Deputy Chairman) Mr. Zhu Jian Min Mr. Zhou Feng Mr. Ye Zhi Jun (Managing Director) Mr. Han Kun

Non-executive Director: Mr. Yang Mo Fei

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Principal office: 1608 Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong

Independent Non-executive Directors: Mr. Wong Po Yan Ms. Tam Wai Chu, Maria Mr. Fong Chung, Mark

31 July 2006

To the shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

regarding

Huade Equity Acquisition and KGSIM Equity Disposal

BACKGROUND

By a press announcement issued by the Company and Sinopec Corp. jointly dated 11 July 2006, among other matters, the Transactions were announced.

* For identification purposes only

– 5 –

LETTER FROM THE BOARD

The purposes of this circular are to set out: (a) the terms of the Agreements and the Transactions; (b) the recommendation of the Independent Board Committee; (c) the advice of Rothschild to the Independent Board Committee and the Independent Shareholders; and (d) notice of the SGM to be convened at which an ordinary resolution will be proposed to consider, and if thought fit, approving the Transactions and all matters as contemplated thereunder.

THE HUADE EQUITY ACQUISITION AGREEMENT DATED 10 JULY 2006

Parties

• (1) GPC as vendor

• (2) Kantons Investment as purchaser

Assets to be transferred

30% of equity interest in Huade

Consideration

The consideration for the acquisition is RMB594 million (approximately HK$571 million). The amount of the consideration was determined following commercial negotiations between the parties at arm’s length basis and by reference to (1) audited financial information of Huade prepared in accordance with accounting principles generally accepted in Hong Kong (“HK GAAP”) for the three years ended 31 December 2005 and three months ended 31 March 2006 and the net asset value of Huade as at 31 March 2006; (2) the net asset value of Huade as at 31 March 2006, being approximately RMB1,808 million (approximately HK$1,738 million) as set out in the valuation report prepared according to PRC laws and regulations on replacement cost method issued by an independent valuation firm in the PRC appointed by GPC, which firm was designated by the PRC government to conduct asset valuation; and (3) the stable and profitable track record and growth potential of Huade.

Based on the consideration of RMB594 million (approximately HK$571 million) to be paid to GPC, the premium paid by the Company for the transaction would be (1) if based on the audited net asset value as at 31 December 2005 and 31 March 2006 respectively and on a proforma basis as if the acquisition transaction had been completed on 31 December 2005 and 31 March 2006 respectively, HK$126 million and HK$115.4 million respectively; and (2) if based on the valuation by the independent valuation firm in the PRC, HK$49.6 million. The above calculations are for reference only and the exact amount of premium payable will depend on the net asset value corresponding to 30% of equity interest of Huade as at the date of completion of this transaction.

The Directors consider that, given the stable and profitable track the growth potential of Huade and the future development of the Huizhou Crude Oil Jetty, they are of the view that the consideration is fair and reasonable and in the interest of the Company and its shareholders as a whole.

In accordance with Huade Equity Acquisition Agreement, the consideration to be payable by Kantons Investment shall be paid to GPC within 30 days after the conditions precedent to the agreement being satisfied. The Company and Kantons Investment will fund the consideration by bank borrowings.

– 6 –

LETTER FROM THE BOARD

Conditions precedent

The Huade Equity Acquisition Agreement is conditional upon, among others,

• (a) the Independent Shareholders approving the resolution to be proposed at the SGM in relation to the Huade Equity Acquisition Agreement and the KGSIM Equity Disposal Agreement;

• (b) consents required for the implementation of this agreement had been obtained by Huade from any third party pursuant to any agreement, contract or essential procedures of notification were completed;

• (c) the approval granted by the State-owned Asset Supervisory and Administration authorities in the PRC for Huade Equity Acquisition to be conducted by way of transfer through agreement;

• (d) the completion of filing procedures on the results of valuation involved in the transaction contemplated by this agreement at the State-owned Asset Supervisory and Administration authorities with jurisdiction as required by the laws and regulations; and

• (e) the approval granted by competent Industry and Commercial Administration authorities for Huade Equity Acquisition and relevant matters as contemplated thereunder.

Conditions precedent (a) and (e) may not be waived by the parties. Condition (b) may be waived by the parties upon unanimously consent. Conditions precedent (c) and (d) may be waived by the parties upon unanimously consent and with consent from the relevant governmental regulatory authority.

Completion

It is expected that the completion of the Huade Equity Acquisition Agreement will take place within 30 days after all the conditions precedent to the Huade Equity Acquisition Agreement are satisfied. Upon completion of this agreement, Huade will become an indirectly wholly owned subsidiary of the Company and the Company shall enjoy the rights and interests in the remaining 30% equity interest in Huade. Upon completion, 100% of the results and the assets and liabilities of Huade will be attributable to the equity shareholders of the Company.

Information on Huade

Huade is a sino-foreign equity joint venture established in 1994 in the PRC. Its total investment and registered capital are US$234,395,500 (approximately HK$1,828,284,900) and US$93,758,200 (approximately HK$731,313,960) respectively. The Company, through Kantons Investment, is holding 70% of equity interest in Huade while GPC is holding 30%. The term of the equity joint venture is between 1994 and 2029 for 35 years. The principal business of Huade is (a) the operation of the Huizhou Crude Oil Jetty’s crude oil unloading, storage and transmission business; and (b) operation of the Petrol Stations through KGSIM.

– 7 –

LETTER FROM THE BOARD

The Huizhou Crude Oil Jetty complex owned and operated by Huade, including its oil tanker handling, crude oil unloading, storage and pipeline transmission facilities, is located on Mabianzhou Island (馬鞭洲島 ) in the Daya Bay Economic and Technological Development Zone (大亞灣經濟技術開發區 ) in Huizhou (惠州 ), Guangdong Province, the PRC.

The Huizhou Crude Oil Jetty maintained a stable operation and systematic management and achieved steady growth result. Currently, the facilities allowed the anchoring and operation of 150,000 tonnes tankers and the crude oil storage tanks have a storage capacity of 800,000 cubic metres, including a 300,000 cubic metres bonded crude oil depot approved by the General Administration of Customs of the PRC. Crude oil in the storage tanks are pumped through approximately 173.5 km underground and underwater pipeline transmission system to Sinopec Guangzhou Branch.

Sinopec Guangzhou Branch, a major client of the Huizhou Crude Oil Jetty is expanding the capacity of its crude oil refining facility from an annual crude refining capacity of 7.7 million to an annual refining capacity within the range of 10 million to 13 million tonnes of crude oil. It is expected that the expansion will complete by the end of 2006.

With PRC’s economy sustaining a steady growth, the market demand for petroleum and petrochemical products has been increasing continuously. Huade is making an investment and construction of a 300,000 tonnes-level berth, as well as dredging channels in Huizhou Crude Oil Jetty to raise load capacity so as to satisfy its downstream customers, including Sinopec Guangzhou Branch, as well as the need to increase productivity and profitability of Huade. It is expected that the expansion of the berth will be completed around mid 2007. In addition, Huade is exploring new sources of profit by using the jetty’s reverse transport system, to enhance the operational flexibility of the bonded crude oil depot and to extend the services of its jetty.

Huade charges fees for the use of the Huizhou Crude Oil Jetty, its storage facilities and the pipeline transmission system. The jetty fees for the use of the jetty are controlled and standardized by the Ministry of Communications in the PRC. The crude oil storage fees have to be approved by the Guangdong Price Bureau. The fees for pipeline transmission are standardized by the National Development and Reform Commission.

– 8 –

LETTER FROM THE BOARD

Financial information prepared in accordance with HK GAAP of Huade

The audited turnover, net profit before and after taxation and the net asset value of Huade for the years ended 31 December 2003, 2004 and 2005 and for the three months ended 31 March 2006 are set out at the table below:

	31 March 2006	31 December 2005	31 December 2004	31 December 2003
RMB’000 (HK$’000)		RMB’000 (HK$’000)	RMB’000 (HK$’000)	RMB’000 (HK$’000)
Turnover	557,219	2,594,600	1,973,551	1,638,311
	(approximately	(approximately	(approximately	(approximately
	535,788)	2,494,808)	1,897,645)	1,575,299)
Profit before taxation	39,535	173,342	236,115	233,526
	(approximately	(approximately	(approximately	(approximately
	38,014)	166,675)	227,034)	224,544)
Net profit after taxation and minority interests	36,626	153,947	211,957	210,807
	(approximately	(approximately	(approximately	(approximately
	35,217)	148,026)	203,805)	202,699)
Net asset value	1,614,867	1,578,876	1,421,978	1,203,677
	(approximately	(approximately	(approximately	(approximately
	1,552,757)	1,518,150)	1,367,287)	1,157,382)
Net assets (excluding minority interests)	1,579,401	1,542,775	1,388,828	1,177,902
	(approximately	(approximately	(approximately	(approximately
	1,518,655)	1,483,438)	1,335,412)	1,132,598)

The audited net profit before and after taxation and the net asset value corresponding to 30% of the equity interest in Huade amounted to RMB70,835,000 (approximately HK$68,111,000), RMB63,587,000 (approximately HK$61,141,000) and RMB416,648,000 (approximately HK$400,623,000) respectively for the year ended 31 December 2004; and RMB52,003,000 (approximately HK$50,003,000), RMB46,184,000 (approximately HK$44,408,000) and RMB462,833, 000 (approximately HK$445,032,000) respectively for the year ended 31 December 2005; and RMB11,861,000 (approximately HK$11,405,000), RMB10,988,000 (approximately HK$10,565,000) and RMB473,820,000 (approximately HK$455,596,000) respectively for the three months ended 31 March 2006.

Continuing connected transactions in relation to Huizhou Crude Oil Jetty

It was announced in an announcement of the Company dated 22 February 2005 that on 18 February 2005, Sinopec Corp. and the Company entered into the Sinopec Corp. Framework Master Agreement to set out a framework and to regulate certain services and trading activities being continuing connected transactions under the Listing Rules between Sinopec Corp. and the Company. Pursuant to this agreement, Huade enters into a separate crude oil jetty service agreement with Sinopec Guangzhou Branch annually. These services include the supply of unloading and other jetty services, and crude oil storage and pipeline transmission services to

– 9 –

LETTER FROM THE BOARD

the refining complex of Sinopec Guangzhou Branch. These continuing connected transactions and the revised caps were approved in the Company’s Independent Shareholders meetings on 1 April 2005 and 21 November 2005 respectively. Upon completion of the Huade Equity Acquisition Agreement, Huade will become an indirectly wholly owned subsidiary of the Company. No change is required to the cap or to the terms of the agreements for the continuing connected transactions for provision of Huizhou Crude Oil Jetty services.

THE KGSIM EQUITY DISPOSAL AGREEMENT DATED 10 JULY 2006

Parties

• (1) Huade (holding 90% of its equity interest ) as vendor

• (2) Sinopec Corp. as purchaser

Assets to be transferred

90% of equity interest in KGSIM. KGSIM operates and/or holds the assets and the business of 38 Petrol Stations in Guangdong Province.

Consideration

The consideration for the disposal payable to Huade is RMB153 million (approximately HK$147 million). The amount of the consideration was determined following commercial negotiations between the parties at arm’s length basis and by reference to (1) unaudited financial information of KGSIM prepared in accordance with HK GAAP for the two years ended 31 December 2005 and three months ended 31 March 2006 and the net asset value of KGSIM Equity Disposal as at 31 March 2006; (2) the net asset value of KGSIM as at 31 March 2006, being approximately RMB102 million (approximately HK$98 million) as set out in the valuation report prepared according to PRC laws and regulations on replacement cost method issued by an independent valuation firm in the PRC appointed by GPC, which firm was designated by the PRC government to conduct asset valuation; and (3) the strategic positions of the Petrol Stations in Guangdong Province.

On a proforma basis as if the disposal transaction had been completed on 31 December 2005, a gain on disposal amounting to RMB16 million (equivalent to HK$15.4 million) would be recognised by Huade at 31 December 2005. The gain on the disposal is calculated as the excess of the consideration of RMB153 million (approximately HK$147.1 million) over the 90% unaudited carrying value of assets and liabilities of KGSIM and its subsidiaries of RMB137 million (approximately HK$131.7 million) at 31 December 2005. If the transaction had been completed on 31 March 2006, a gain on disposal amounting to RMB21.3 million (equivalent to HK$20.5 million) would be recognised by Huade based on consideration of HK$147.1 million and the 90% unaudited carrying value of assets and liabilities of KGSIM and its subsidiaries as at 31 March 2006. The above calculations are for reference only and the exact amount of gain (loss) will depend on the net asset value corresponding to 90% of equity interest of KGSIM as at the date of completion of this transaction.

– 10 –

LETTER FROM THE BOARD

In accordance with KGSIM Equity Disposal Agreement, the consideration to be payable by Sinopec Corp. shall be paid to Huade within 30 days after the conditions precedent to the agreement being satisfied. Sinopec Corp. will fund the consideration by internal resources.

The proceeds from the KGSIM Equity Disposal will be used as general working capital by Sinopec Kantons group.

Conditions precedent

The KGSIM Equity Disposal Agreement is conditional upon, among others,

• (a) the Independent Shareholders approving the resolution to be proposed at the SGM in relation to the KGSIM Equity Disposal Agreement and the Huade Equity Acquisition Agreement;

• (b) consents required for the implementation of this agreement had been obtained by KGSIM from any third party pursuant to any agreement, contract, or essential procedures of notification were completed;

• (c) the approval granted by the State-owned Asset Supervisory and Administration authorities in the PRC for KGSIM Equity Disposal to be conducted by way of disposal through agreement; and

• (d) the completion of filing procedures on the results of valuation involved in the transaction contemplated by this agreement at the State-owned Asset Supervisory and Administration authorities with jurisdiction as required by the laws and regulations.

Condition precedent (a) may not be waived by the parties. Condition (b) may be waived by the parties upon unanimously consent. Conditions precedent (c) and (d) may be waived by the parties upon unanimously consent and with consent from the relevant governmental regulatory authority.

Completion

It is expected that the completion of the KGSIM Equity Disposal Agreement will take place within 30 days after all the conditions precedent to the KGSIM Equity Disposal Agreement are satisfied. Upon completion of this agreement, KGSIM will become a subsidiary of Sinopec Corp. and will cease to be a subsidiary of the Company and Huade.

Information on KGSIM

KGSIM is a limited liability company established in the PRC in 2002. Its registered capital is RMB145 million (approximately HK$139.4 million). The Company, through Huade, holds 90% of equity interest in KGSIM. The principal business of KGSIM is the operation of 38 petrol stations in the Guangdong Province under the brand name of “Kantons Petrol Station (冠德油站 )”. The Kantons Petrol Stations source their supplies of petroleum products from Guangdong Company.

– 11 –

LETTER FROM THE BOARD

The PRC government establishes guidance prices chargeable by petrol stations to retail customers for sale of petroleum products in the PRC and permit retail petrol prices to adjust at a certain percentage above or below the guidance prices. However, in recent years, the profit margin of Petrol Stations business decreased as affected by the strict control over retail price adjustment by the PRC government. In spite of the fact that various cost reduction measures were taken by Petrol Stations, a net loss after tax was recorded for the year ended 31 December 2005.

Financial information prepared in accordance with HK GAAP of KGSIM

The unaudited turnover, net profit/(loss) before and after taxation and the net asset value of KGSIM for the two years ended 31 December 2005 and for the three months ended 31 March 2006 is set out at the table below:

	31 March 2006	31 December 2005	31 December 2004
RMB’000 (HK$’000)		RMB’000 (HK$’000)	RMB’000 (HK$’000)
Turnover	475,601	2,260,246	1,616,953
	(approximately	(approximately	(approximately
	457,308)	2,173,313)	1,554,762)
Profit/(loss) before taxation	(5,958)	5,003	11,788
	(approximately	(approximately	(approximately
	(5,728))	4,810)	11,334)
Net profit/(loss) after taxation	(6,021)	(1,794)	4,991
and minority interests	(approximately	(approximately	(approximately
	(5,789))	(1,725))	4,799)
Net asset value	167,103	173,156	174,022
	(approximately	(approximately	(approximately
	160,675)	166,496)	167,328)
Net assets (excluding	146,207	152,227	156,224
minority interests)	(approximately	(approximately	(approximately
	140,584)	146,372)	150,215)

The unaudited net profit/(loss) before and after taxation and the net asset value corresponding to 90% of the equity interest in KGSIM amounted to RMB10,609,000 (approximately HK$10,201,000), RMB4,492,000 (approximately HK$4,319,000) and RMB140,602,000 (approximately HK$135,194,000) respectively for the year ended 31 December 2004; and RMB4,503,000 (approximately HK$4,330,000), RMB(1,615,000) (approximately HK$(1,553,000)) and RMB137,004,000 (approximately HK$131,735,000) respectively for the year ended 31 December 2005; and RMB(5,362,000) (approximately HK$(5,156,000)), RMB(5,419,000) (approximately HK$(5,211,000)) and RMB131,586,000 (approximately HK$126,525,000) respectively for the three months ended 31 March 2006.

– 12 –

LETTER FROM THE BOARD

Continuing connected transactions in relation to Kantons Petrol Stations

It was announced in an announcement of the Company dated 22 February 2005 that on 18 February 2005, Sinopec Corp. and the Company entered into the Sinopec Corp. Framework Master Agreement to set out a framework and to regulate certain services and trading activities being continuing connected transactions under the Listing Rules between Sinopec Corp. and the Company. This includes the supply of petroleum products to the Petrol Stations by Guangdong Company.

Upon completion of the KGSIM Equity Disposal Agreement, the Company shall cease to engage in the operation of Petrol Stations. As such, Guangdong Company shall cease to supply petroleum products to the Company and this ongoing connected transaction will be terminated.

ZGAT AGREEMENT

According to the press announcement issued by the Company and Sinopec Corp. jointly dated 11 July 2006, ZGAT has on 10 July 2006 entered into an agreement with Sinopec Corp. pursuant to which ZGAT shall transfer its 10% of equity interest in KGSIM to Sinopec Corp. at a cash consideration of RMB17 million (approximately HK$16.3 million), arrived at on the same basis as the KGSIM Equity Disposal and on terms similar to the KGSIM Equity Disposal Agreement, save this agreement is not conditional upon the approval of the Huade Capital Acquisition Agreement and the KGSIM Capital Disposal Agreement by the Independent Shareholders in the SGM. It is expected that the completion of the ZGAT Agreement will take place within 30 days after all the conditions precedent to ZGAT Agreement are satisfied.

SIMPLIFIED DIAGRAM OF SHAREHOLDING STRUCTURE

Upon completion of the Transactions, the corporate and shareholding structure of the Company will be as illustrated by the diagram below:

Before the Transactions

==> picture [297 x 236] intentionally omitted <==

----- Start of picture text -----

Sinopec Group Company
71.23%
Sinopec Corp.
72.34% 100%
Sinopec Kantons GPC
(Note 1)
100% 100%
Kantons Investment 30% ZGAT (Note 2)
70%
Huade
90%
10%
KGSIM
----- End of picture text -----

– 13 –

LETTER FROM THE BOARD

Upon completion of the Transactions

==> picture [297 x 229] intentionally omitted <==

----- Start of picture text -----

Sinopec Group Company
71.23%
Sinopec Corp.
72.34% 100%
Sinopec Kantons GPC
(Note 1)
100% 100%
Kantons Investment 100% ZGAT (Note 2)
100%
Huade
KGSIM
----- End of picture text -----

Notes:

• (1) Sinopec Corp. holds the controlling interests in the Company through its wholly owned subsidiaries, CPIC and SKI.

• (2) GPC holds 90% of equity interest in ZGAT, and CPIGC, a wholly-owned subsidiary of GPC, holds the remaining 10% of equity interest in ZGAT.

REASONS AND BENEFITS FOR THE ACQUISITION AND THE DISPOSAL

According to the announcement of the Company dated 11 July 2006, Sinopec Corp. has no plan to privatize the Company on the date of announcement and on completion of the Transactions. Furthermore, Sinopec Corp. supports and encourages the Company to focus on its existing profitable business, its long term development and to further improve its profitability. However, save for the Huade Equity Acquisition and the KGSIM Equity Disposal, no specific project for merger or acquisition has been identified by the Company as at the date of this announcement.

The Huade Equity Acquisition and the KGSIM Equity Disposal are beneficial to the Company for reasons set out as follows.

1. Huade Equity Acquisition is beneficial to the Company. Huizhou Crude Oil Jetty as operated by Huade has good profitability, and is one of the main sources of profit of the Company. Upon completion of Huade Equity Acquisition, the Company can fully control Huade and Huade becomes a wholly owned subsidiary of the Company. The Company can streamline its management operations and can concentrate its resources on its core operations, namely the operations of crude oil jetty, and the trading of crude oil and petroleum products. The profitability of the Company will be further enhanced, and shall further increase shareholders’ value.

– 14 –

LETTER FROM THE BOARD

1. KGSIM Equity Disposal is beneficial to the Company. The Company will improve its profitability directly on the one hand through the disposal of the petrol station business. On the other hand, it will also avoid in its future development possible competition with the petrol station business of Sinopec Corp. This furthermore terminates the ongoing connected transactions regarding supply of petroleum products by Guangdong Company to the Company.

LISTING RULES IMPLICATIONS

Sinopec Group Company is (a) the controlling shareholder of Sinopec Corp. (holding approximately 71.23% of its entire issued share capital); (b) holder of the entire registered capital of GPC; and (c) the ultimate controlling shareholder of the Company (holding approximately 72.34% of its entire issued share capital through Sinopec Corp.). Huade is a sino-foreign equity joint venture company whose 70% equity interest is indirectly held by the Company (through Kantons Investment) and 30% is by GPC. KGSIM is a limited liability company incorporated in the PRC, 90% of its entire registered capital is held by Huade and 10% of the entire registered capital is indirectly held (through ZGAT) by GPC.

Pursuant to the Listing Rules, each of Sinopec Group Company, Sinopec Corp. and GPC is a connected person of the Company. Both the Huade Equity Acquisition Agreement and the KGSIM Equity Disposal Agreement constitute connected transactions for the Company. A percentage ratio of the Huade Equity Acquisition exceeds 25% but is less than 100%. Certain percentage ratios of the KGSIM Equity Disposal exceed 5% but all the percentage ratios are less than 25%. Under Rules 14.08 and 14.24 of the Listing Rules, these transactions constitute a major and connected transaction of the Company and will subject to Independent Shareholders’ approval of the Company. Sinopec Group Company and its associates will abstain from voting at the SGM with respect to the proposed resolutions to approve these transactions. The Huade Equity Acquisition Agreement and the KGSIM Disposal Agreement are inter-conditional to each other as to approval by the Independent Shareholders in the SGM.

FINANCIAL EFFECTS

Set out in Section A of Appendix III to this circular is an unaudited pro forma statement prepared based upon the audited consolidated balance sheet of the Group as at 31 December 2005 as if the Transactions were completed on 31 December 2005. The Group would record a gain on disposal amounted to HK$15.4 million as if the transactions had been completed on 31 December 2005.

On the basis as set out in the same section, as if the transactions had been completed on 31 December 2005, the assets of the Restructured Group would have decreased by approximately HK$284 million and the liability of the Group would have increased by approximately HK$296 million, respectively.

Based on the consideration of HK$571 million payable by the Company to GPC for the Huade Equity Acquisition Agreement and the Company’s corresponding share of the audited consolidated net asset value of Huade as at 31 December, 2005 of approximately HK$445 million, the difference between the consideration and the carrying value of the 30% minority interest of Huade would be recognized directly as decrease in Kantons Investment shareholder’s equity as if the Huade Equity Acquisition had been completed on 31 December 2005.

– 15 –

LETTER FROM THE BOARD

Based on the cash consideration of HK$147.1 million receivable by the Company from KGSIM Equity Disposal, the Company’s corresponding share of the unaudited consolidated net asset value of HK$131.7 million as at 31 December 2005, the gain on the disposal amounted to HK$15.4 million would be recorded by the Restructured Group as if the KGSIM Equity Disposal transaction had been completed on 31 December 2005. The proceeds from KGSIM Equity Disposal of approximately HK$145 million will be used for working capital purposes of the Sinopec Kantons group.

FINANCIAL AND TRADING PROSPECTS OF THE RESTRUCTURED GROUP

With PRC’s economy sustaining a steady growth, the market demand for petroleum and petrochemical products has been increasing continuously. The Company will focus on its existing businesses to enhance its profitability. Upon completion of Huade Equity Acquisition, the Company can fully control Huade, can streamline its management operations and can concentrate its resources on its core operations, namely the operations of crude oil jetty, and the storage of crude oil and business. The profitability of the Company will be further enhanced, and shall further increase shareholders’ value.

INFORMATION OF THE SINOPEC GROUP COMPANY, SINOPEC CORP., SINOPEC KANTONS AND GPC

Sinopec Group Company is a state-owned enterprise established under the laws of the PRC. Sinopec Group Company, the controlling shareholder of Sinopec Corp. and the ultimate controlling shareholder of the Company, is a state-authorised investment vehicle in oil and petrochemical business that integrates the upstream and downstream assets. The business scope of the Sinopec Group Company covers: industrial investments and investment management; exploration and development, storage and transportation (including pipeline transportation), sale and integrated application of petroleum and natural gas; petroleum refining; wholesale of gasoline, kerosene and diesel; production, sales, storage and transportation of petrochemical and other chemical products; design, and construction of petroleum and petrochemical installations; maintenance and repair of petroleum and petrochemical installations, research, development, application and related consulting services of technology, IT and alternative energy products; and import and export of self-produced products and third parties’ products and technologies (other than those operated by companies designated by the state and prohibited to be imported and exported).

Sinopec Corp. is an integrated energy and chemical company with upstream, midstream and downstream operations and is publicly listed on the stock exchanges of Hong Kong, Shanghai, New York and London. The principal operations of Sinopec Corp. and its subsidiaries include:

• (1) exploring for and developing, producing and trading of crude oil and natural gas;

• (2) processing crude oil into refined oil products, producing refined oil products and trading, transporting, distributing and marketing of refined oil products; and

• (3) producing, distributing and trading of chemical products.

The Company was incorporated in Bermuda with limited liability and its shares are listed on the Stock Exchange. The principal activities of the Company are the trading of crude oil, petroleum, and petrochemical products, the operation of crude oil jetties and its ancillary facilities and petrol stations.

– 16 –

LETTER FROM THE BOARD

CPIC is a company established under the laws of the PRC, a direct wholly-owned subsidiary of Sinopec Corp. and the sole shareholder of SKI.

GPC is a state-owned enterprise established under the laws of the PRC and a whollyowned subsidiary of Sinopec Group Company.

SKI is a limited liability company incorporated in the British Virgin Islands, and is the immediate controlling shareholder of the Company.

GENERAL

Rothschild has been appointed as the independent financial adviser to the Independent Board Committee and the Independent Shareholders of the Company in respect of the Transactions.

SPECIAL GENERAL MEETING

A SGM is to be convened and will be held on 18 August 2006 at 10:00 a.m. at 1608 Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong for the purpose of considering, and if thought fit, passing ordinary resolutions to approve the Transactions and the Agreements and all matters contemplated thereunder. The notice of the SGM is set out on pages 163 to 164 of this circular.

Sinopec Group Company, Sinopec Corp., GPC, CPIC, SKI and their respective associates will abstain from voting at the SGM.

A form of proxy for use in connection with the SGM is enclosed herewith. Whether or not you are able to attend the SGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible to Secretaries Limited, the Hong Kong Branch Share Registrar and Transfer Office of the Company, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong and in any event by no later than 48 hours before the time appointed for the holding of the SGM (or any adjourned meeting thereof). Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM (or any adjourned meeting thereof) should you so wish.

RECOMMENDATION

The Board is of the opinion that the Agreements and the Transactions (and their terms) are fair and reasonable and in the interests of the shareholders of the Company as a whole. Accordingly, the Board recommends that the Independent Shareholders vote in favour of the ordinary resolution set out in the notice of the SGM for the approval of the Transactions and the Agreements.

Yours faithfully, For and on behalf of the Board Jiang Zhen Ying Chairman

– 17 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

SINOPEC KANTONS HOLDINGS LIMITED （中石化冠德控股有限公司）[*]

(incorporated in Bermuda with limited liability)

(Stock Code: 934)

31 July 2006

MAJOR AND CONNECTED TRANSACTION

regarding Huade Equity Acquisition and KGSIM Equity Disposal

To the Independent Shareholders

Dear Sir or Madam,

We have been appointed as the Independent Board Committee to advise you in connection with the Transactions and the Agreements, details of which are set out in the Letter from the Board contained in the circular to the shareholders of the Company dated 31 July 2006 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

Having considered the Transactions and the Agreements and the advice and opinion of Rothschild in relation thereto as set out on pages 19 to 39 of the Circular, we are of the opinion that Transactions and the Agreements (and their terms) are fair and reasonable and in the interests of the shareholders of the Company as a whole. We therefore recommend that you vote in favour of the ordinary resolution to be proposed at the SGM to approve the Transactions and the Agreements.

Yours faithfully,

Mr. Wong Po Yan Ms. Tam Wai Chu, Maria Mr. Fong Chung, Mark Independent Independent Independent Non-executive Director Non-executive Director Non-executive Director

* For identification purposes only

– 18 –

LETTER FROM ROTHSCHILD

The following is the text of a letter from Rothschild in connection with the Huade Equity Acquisition and the KGSIM Equity Disposal prepared for inclusion in this circular.

31 July 2006

To the Independent Board Committee

and the Independent Shareholders of Sinopec Kantons Holdings Limited

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION regarding Huade Equity Acquisition and KGSIM Equity Disposal

We refer to the Agreements, details of which are contained in the circular issued by the Company dated 31 July 2006 (the “Circular”) of which this letter forms a part. Rothschild has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to (i) whether or not the terms of the Transactions and the Agreements are fair and reasonable so far as the Independent Shareholders are concerned and (ii) whether such transactions are in the interests of the Company and its shareholders as a whole, and to advise the Independent Shareholders on how to vote at the SGM.

The terms used in this letter shall have the same meanings as defined elsewhere in the Circular unless the context otherwise requires.

Sinopec Group Company is the ultimate controlling shareholder of the Company (holding approximately 72.34% of its entire issued share capital through Sinopec Corp. as at the Latest Practicable Date) and the controlling shareholder of Sinopec Corp. (holding approximately 71.23% of its entire issued share capital as at the Latest Practicable Date). Pursuant to the Listing Rules, the Transactions constitute major and connected transaction for the Company and are subject to, inter alia, the approval of Independent Shareholders at the SGM by way of a poll. Sinopec Group Company and its associates will abstain from voting at the SGM with respect to the proposed resolution to approve the Transactions. The Huade Equity Acquisition Agreement and the KGSIM Equity Disposal Agreement are inter-conditional to each other as to approval by the Independent Shareholders in the SGM.

Telephone +852 2525 5333 Facsimile +852 2868 1728

+852 2810 6997

N M Rothschild & Sons (Hong Kong) Limited 16th Floor, Alexandra House

18 Chater Road, Central Hong Kong SAR

– 19 –

LETTER FROM ROTHSCHILD

In formulating our recommendations, we have relied on the information and facts supplied to us by the Company and have assumed that any information and representations made to us are true, accurate and complete in all material respects as at the date hereof and that they may be relied upon. We have also assumed that all information, representations and opinions contained or referred to in the Circular are fair and reasonable and have relied on them.

We have been advised by the Directors that no material facts have been omitted and we are not aware of any facts or circumstances which would render the information provided and the representations made to us untrue, inaccurate, incomplete or misleading. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, that, to the best of their knowledge and belief, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts the omission of which would make any statement in the Circular misleading. We believe that we have reviewed sufficient information to reach an informed view in order to provide a reasonable basis for our advice. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company or Sinopec Corp. or their respective subsidiaries and associated companies.

PRINCIPAL FACTORS AND REASONS

In arriving at our opinion, we have taken into consideration the following principal factors and reasons:

1. Background and rationale

The Group is principally engaged in the trading of crude oil petroleum and petrochemical products, operation of a crude oil jetty and its ancillary facilities and petrol stations. According to the annual report of the Company for the year ended 31 December 2005 (the “2005 Annual Report”), the trading of crude oil petroleum and petrochemical products, the provision of crude oil jetty services and the distribution of petroleum products accounted for approximately 79.8%, 2.5% and 17.6% of the Group’s turnover for the year ended 31 December 2005, respectively. Based on our review of the Company’s annual reports issued since its listing in 1999, we noted that the crude oil jetty services segment has been the largest profit contributor to the Group for each of the years ended 31 December 1999 to 2005.

– 20 –

LETTER FROM ROTHSCHILD

Currently, the crude oil jetty and its ancillary facilities and petrol stations are operated through the Company’s 70% indirectly owned subsidiary, Huade. Huade is a Sino-foreign equity joint venture established in the PRC and its principal businesses are (i) the operation of Huizhou Crude Oil Jetty, which includes oil tanker handling, crude oil unloading, storage and pipeline transmission facilities in Guangdong Province, the PRC, and (ii) the operation of the Petrol Stations in the Guangdong Province, the PRC, through KGSIM, a 90% owned subsidiary of Huade. The principal business of KGSIM is the operation of the Petrol Stations in Guangdong Province under the brand name of “Kantons Petrol Station (冠德油站 )” which sources its supplies of petroleum products from Guangdong Company, a branch of Sinopec Group.

During 2005, Sinopec Guangzhou Branch (a major client of the Huizhou Crude Oil Jetty) stopped operation temporarily for maintenance and expansion and as a result, the business volume of Huizhou Crude Oil Jetty was significantly lower. As noted in the “Chairman’s statement” in the 2005 Annual Report, the crude oil jetty services segment recorded a turnover of approximately HK$330 million and a net profit after tax of approximately HK$150 million for the year, representing a decrease of approximately 6% and 25% respectively when compared to the corresponding period last year. Sinopec Guangzhou Branch has since recommenced its operation and its expansion plan to increase annual refining capacity from approximately 7.7 million tonnes of crude oil to a range of approximately 10 million to 13 million tonnes of crude oil is expected to complete at the end of 2006. As noted in the “Chairman’s statement” in the 2005 Annual Report, the Company has commenced its investment and construction of a 300,000 tonnes-level berth, as well as dredging channels in the Huizhou Crude Oil Jetty to raise its load capacity to meet the expected increased productivity of its downstream customers (including Sinopec Guangzhou Branch) and at the same time to reduce lightering and related costs in order to improve the Company’s productivity and profitability. In addition, Huade is exploring new sources of profit by using the jetty’s reverse transport system to enhance the operational flexibility of the bonded crude oil depot and to extend the services of its jetty. Based on our discussion with the management of the Company, we noted that the provision of crude oil jetty services will continue to be a core business segment of the Group going forward. In view of the foregoing, we believe the Huade Equity Acquisition provides an opportunity for the Company to consolidate its interest in the Huizhou Crude Oil Jetty (through Huade), which has a stable and profitable track record and growth potential arising from its future development, thereby enhancing its flexibility to allocate resources to further develop such business. In addition, upon completion of the Huade Equity Acquisition, the Group will have a 100% equity interest in Huade and enjoy 100% of the shareholding interest and profits generated by Huade and its subsidiaries (the “Huade Group”).

– 21 –

LETTER FROM ROTHSCHILD

As noted in the “Chairman’s statement” in the 2005 Annual Report, the Group’s petrol stations segment recorded a turnover of approximately HK$2,100 million but a net loss after tax of approximately HK$1.79 million for the year. We noted that such loss was largely due to the petroleum products price adjustment mechanism for the domestic market in the PRC which restricted KGSIM’s ability to pass on any price increases to its customers and as a result, the profit margin of the petrol station operation decreased by approximately 30% during the year ended 31 December 2005 despite the fact that various costs reduction measures have been undertaken. The KGSIM Equity Disposal provides an opportunity for the Company to divest its interests in an unprofitable business segment primarily caused by the current petroleum products price adjustment mechanism in the PRC, which is not favourable for the Company given its relatively small scale (only 38 petrol stations) and the lack of ability to pass on any price increases to its customers. Since it is Sinopec Group Company’s strategy that petrol station business in the PRC be operated by Sinopec Corp., we concur with the Company that further development of the Petrol Stations may raise competition issues with Sinopec Corp. and the future prospects of the Petrol Stations may be limited, in particular, by its scale. As evident by our comparable transaction analysis (as further discussed below), Sinopec Corp. has been actively consolidating its interest in petrol station business in the PRC.

On the above basis, we concur with the Company that the Transactions would enable it to focus on and allocate its resources to profitable core business segments, as well as to develop and capture new opportunities which would enhance and facilitate its business. As set out in the “Letter from the Board” in the Circular, Sinopec Corp. has no plan to privatise the Company on the date of the announcement and on completion of the Transactions.

2. The Huade Equity Acquisition

(i) Assets to be acquired

The Company has conditionally agreed to acquire 30% equity interest in Huade from GPC. Upon completion of the Huade Equity Acquisition Agreement, Huade will become an indirect wholly-owned subsidiary of the Company.

The principal businesses of Huade are the operation of the Huizhou Crude Oil Jetty and (through KGSIM) the Petrol Stations. The Huizhou Crude Oil Jetty is principally engaged in oil tanker handling, crude oil unloading, storage and pipeline transmission facilities. The fees which Huade charges for the use of the Huizhou Crude Oil Jetty, its storage facilities and the pipeline transmission system are based on fees standardised or approved by the PRC authorities. Currently, the facilities allowed the anchoring and operation of 150,000 tonnes tankers and the crude oil storage tanks have a storage

– 22 –

LETTER FROM ROTHSCHILD

capacity of 800,000 cubic metres, including a 300,000 cubic metres bonded crude oil depot approved by the General Administration of Customs of the PRC in 2004. Crude oil in the storage tanks is pumped through approximately 173.5 km underground and underwater pipeline transmission system to Sinopec Guangzhou Branch.

Set out below is a summary of certain financial information relating to Huade. The financial information, which has been prepared in accordance with accounting principles generally accepted in Hong Kong (“HK GAAP”), is extracted from the accountants’ reports of Huade as set out in Appendix II to the Circular.

			For the year ended 31 December	For the year ended 31 December	For the year ended 31 December	For the year ended 31 December			For	the three months ended 31	the three months ended 31	March
	2003			2004			2005		2005		2006
(RMB’000)		(HK$’000)	(RMB’000)	(HK$’000)		(RMB’000)		(HK$’000)	(RMB’000)	(HK$’000)	(RMB’000)	(HK$’000)
									(unaudited)	(unaudited)
Turnover	1,638,311	1,575,299	1,973,551	1,897,645		2,594,600		2,494,808	501,750	482,452	557,219	535,788
Gross profit	340,283	327,195	341,813		328,666	286,593		275,570	69,257	66,593	66,258	63,710
Gross margin	20.8%		17.3%				11.0%		13.8%		11.9%
Net profit after
minority interests	210,807	202,699	211,957		203,805	153,947		148,026	38,003	36,541	36,626	35,217
Net profit after
minority interests
margin	12.9%		10.7%				5.9%		7.6%		6.6%
			As at 31 December							As at	31 March
	2003			2004			2005		2005		2006
(RMB’000)		(HK$’000)	(RMB’000)	(HK$’000)		(RMB’000)		(HK$’000)	(RMB’000)	(HK$’000)	(RMB’000)	(HK$’000)
									(unaudited)	(unaudited)
Net asset value
(excluding
minority
interests)									Not	Not
(“NAV”)	1,177,902	1,132,598	1,388,828	1,335,412		1,542,775		1,483,438	available	available	1,579,401	1,518,655

– 23 –

LETTER FROM ROTHSCHILD

During the three years ended 31 December 2005 and the three months ended 31 March 2006, KGSIM was a 90% owned subsidiary of Huade and its results were fully consolidated into the accountants’ report of Huade. Huade has been the largest profit contributor to the Group in each of the three years ended 31 December 2005 and the three months ended 31 March 2006 and according to note 9 to the accountants’ report for Huade set out in Appendix II to the Circular, the crude oil jetty services segment result has been the largest profit contributor to the Huade Group, accounting for approximately 92.9%, 93.2%, 99.0% and 108.9%[1] of the segment result of the Huade Group, respectively, for each of the three years ended 31 December 2005 and the three months ended 31 March 2006.

For the year ended 31 December 2004, Huade benefited from the growth in domestic market demand and increase in oil refining and processing capacity of Sinopec Guangzhou Branch (a major customer of the Huizhou Crude Oil Jetty) resulting in an increase of approximately 7.5% and approximately 3.4% respectively in the volume of crude oil transmitted and crude oil loaded over the previous year. In addition, the stronger demand for petroleum products has also led to an increase in the turnover of KGSIM for the year ended 31 December 2004 by approximately 25.1% when compared to 2003. Correspondingly, the turnover of the Huade Group for the year ended 31 December 2004 increased by approximately 20.5% to approximately RMB1,973.6 million (equivalent to approximately HK$1,897.6 million) as compared to 2003, while gross profit and net profit after minority interests increased by approximately 0.4% and approximately 0.5% to approximately RMB341.8 million (equivalent to approximately HK$328.7 million) and approximately RMB212.0 million (equivalent to approximately HK$203.8 million) respectively as compared with 2003.

As Sinopec Guangzhou Branch stopped its operation temporarily for maintenance and expansion during 2005, the business volume of Huizhou Crude Oil Jetty was significantly lowered, resulting in a decrease of approximately 9% in the volume of crude oil transmitted and a decrease of approximately 6% in the volume of crude oil loaded over the previous year. Correspondingly, the gross profit and net profit after minority interests decreased by approximately 16.2% and approximately 27.4% to approximately RMB286.6 million (equivalent to approximately HK$275.6 million) and approximately RMB153.9 million (equivalent to approximately HK$148.0 million) respectively as compared with 2004. The increase in turnover of the Huade Group for the year ended 31 December 2005 by approximately 31.5% to approximately RMB2,594.6 million (equivalent to approximately

1 According to note 9 to the accountants’ report for Huade set out in Appendix II to the Circular, for the three months ended 31 March 2006, the crude oil jetty services segment recorded a profit of approximately RMB46.5 million (equivalent to approximately HK$44.7 million) whilst the petrol stations segment recorded a loss of approximately RMB3.8 million (equivalent to approximately HK$3.6 million).

– 24 –

LETTER FROM ROTHSCHILD

HK$2,494.8 million) as compared to 2004 was primarily due to the increase in turnover of KGSIM as a result of the increase in market demand of petroleum products which led to an increase in products’ prices and volume sold. However, it should be noted that due to the PRC's petroleum products price adjustment mechanism, turnover per tonne increased by only approximately 14.4% for KGSIM in 2005 whilst the average international Brent crude oil increased by approximately 44.4% (Source: Bloomberg) during the same period.

There was no significant improvement to the operating environment of Huade in the first quarter of 2006 as compared with the same period in 2005, except for the resumption of normal business operations by Sinopec Guangzhou Branch.

Further details relating to Huade are set out in the section headed “Letter from the Board” in the Circular and the accountants’ report of Huade in Appendix II to the Circular.

(ii) Consideration

The consideration for the Huade Equity Acquisition is RMB594.0 million (equivalent to approximately HK$571.2 million) (the “Huade Consideration”). We note that the Huade Consideration was determined following commercial negotiations between the relevant parties at arm’s length basis and with reference to (a) the audited financial information of Huade prepared in accordance with HK GAAP for the three years ended 31 December 2005 and the three months ended 31 March 2006 which contained the NAV of Huade as at 31 December 2005 and 31 March 2006, (b) the net asset value of Huade as at 31 March 2006 of approximately RMB1,807.9 million (equivalent to approximately HK$1,738.4 million) as set out in the valuation report dated 27 June 2006 prepared in accordance with PRC laws and regulations using replacement cost method issued by an independent valuation firm in the PRC appointed by GPC, which firm was designated by the PRC government to conduct valuation for State-owned assets, and (c) the stable and profitable track record and growth potential of Huade. The Company and Kantons Investment will fund the Huade Consideration by bank borrowings.

Based on the Huade Consideration together with the aggregate net debt attributable to the 30% equity interest in Huade as at 31 March 2006 of approximately RMB56.6 million (equivalent to approximately HK$54.4 million), the enterprise value (“EV”) attributable to the 30% equity interest in Huade would be approximately RMB650.6 million (equivalent to approximately HK$625.6 million). The source of the financial information applied in conducting the following ratio analysis is based on the accountants’ report of Huade as set out in Appendix II to the Circular.

– 25 –

LETTER FROM ROTHSCHILD

The Huade Consideration represents:

• (a) an EV/sales multiple of approximately 0.8 times the sales attributable to the 30% equity interest in Huade for the financial year ended 31 December 2005 of approximately RMB778.4 million (equivalent to approximately HK$748.5 million);

• (b) an EV/earnings before interest, tax, depreciation and amortisation (“EBITDA”) multiple of approximately 7.3 times the EBITDA attributable to the 30% equity interest in Huade for the financial year ended 31 December 2005 of approximately RMB88.6 million (equivalent to approximately HK$85.2 million);

• (c) a price earnings ratio (“PER”) of approximately 12.9 times the net profit attributable to the 30% equity interest in Huade for the financial year ended 31 December 2005 of approximately RMB46.2 million (equivalent to approximately HK$44.4 million);

• (d) a price (“P”) to NAV multiple of approximately 1.3 times the audited NAV attributable to the 30% equity interest in Huade as at 31 December 2005 of approximately RMB462.8 million (equivalent to approximately HK$445.0 million);

• (e) a P/NAV multiple of approximately 1.3 times the audited NAV attributable to the 30% equity interest in Huade as at 31 March 2006 of approximately RMB473.8 million (equivalent to approximately HK$455.6 million); and

• (f) a premium of approximately RMB51.6 million (equivalent to approximately HK$49.6 million) or approximately 9.5% over the NAV attributable to the 30% equity interest in Huade as at 31 March 2006 of approximately RMB542.4 million (equivalent to approximately HK$521.6 million) as appraised by the independent valuation firm in the PRC.

Please refer to paragraph 4 below for a discussion on the valuation considerations.

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LETTER FROM ROTHSCHILD

(iii) Conditions precedents

Completion of the Huade Equity Acquisition Agreement is conditional upon fulfilment of various conditions including, among others, the Independent Shareholders approving the resolution in relation to the Huade Equity Acquisition Agreement and the KGSIM Equity Disposal Agreement at the SGM. Further details of the conditions precedent to the completion of the Huade Equity Acquisition Agreement are set out in the section headed “Letter from the Board” in the Circular.

3. The KGSIM Equity Disposal

• (i) Assets to be disposed

The Company has conditionally agreed to dispose 90% equity interest in KGSIM to Sinopec Corp.. Upon completion of the KGSIM Equity Disposal, KGSIM will cease to be a subsidiary of the Company and Huade and hence, the Group will not be engaged in the operation of the Petrol Stations.

The principal business of KGSIM is the operation of the Petrol Stations in Guangdong Province under the brand name of “Kantons Petrol Station (冠德油站 )” which sources its supplies of petroleum products from Guangdong Company. As mentioned in paragraph 1 above, the profit margin of the petrol station operation of KGSIM decreased by approximately 30% during the year ended 31 December 2005 despite the fact that various costs reduction measures have been taken. We noted that such loss was largely due to the petroleum products price adjustment mechanism for the domestic market in the PRC whereby the PRC government establishes guidance prices chargeable by petrol stations to retail customers for sale of petroleum products in the PRC and permits retail petrol prices to adjust at a certain prescribed percentage above or below the guidance prices. As a result, KGSIM’s ability to pass on any price increases to its customers was restricted by such mechanism and had a particularly adverse effect during the recent high oil price environment.

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LETTER FROM ROTHSCHILD

Set out below is a summary of certain unaudited financial information relating to KGSIM. The unaudited financial information, which has been prepared in accordance with HK GAAP, is extracted from the “Letter from the Board” in the Circular.

		For the year	For the year			For the three months	For the three months
		ended 31	December			ended 31	March
		2004	2005			2006
	(RMB’000)	(HK$’000)	(RMB’000)	(HK$’000)		(RMB’000)	(HK$’000)
	(unaudited)	(unaudited)	(unaudited)	(unaudited)		(unaudited)	(unaudited)
Turnover	1,616,953	1,554,763	2,260,246	2,173,313		475,601	457,309
Net profit/(loss) after
minority interests	4,991	4,799	(1,794)		(1,725)	(6,021)	(5,789)
Net profit/(loss) after			Not			Not
minority interests margin	0.3%		meaningful			meaningful
		As at 31	December			As at 31	March
		2004	2005			2006
	(RMB’000)	(HK$’000)	(RMB’000)	(HK$’000)		(RMB’000)	(HK$’000)
	(unaudited)	(unaudited)	(unaudited)	(unaudited)		(unaudited)	(unaudited)
NAV	156,224	150,215	152,227		146,372	146,207	140,584

From our discussion with the management of the Company, we note that for the year ended 31 December 2005, as a result of increase in market demand of petroleum products, KGSIM sold approximately 550,000 tonnes of oil products, an increase of approximately 22.2% as compared to 2004. Accordingly, KGSIM’s turnover for 2005 increased by approximately 39.8% to approximately RMB2,260.2 million (equivalent to approximately HK$2,173.3 million). However, largely as a result of the PRC’s current petroleum products price adjustment mechanism, and despite several cost reduction measures taken by KGSIM during the year, it reported a net loss after minority interests of approximately RMB1.8 million (equivalent to approximately HK$1.7 million) for 2005 as compared with a net profit after minority interests of approximately RMB5.0 million (equivalent to approximately HK$4.8 million) in 2004.

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LETTER FROM ROTHSCHILD

Sinopec Group Company announced on 27 December 2005 that it has received an one-off compensation of RMB10 billion (equivalent to approximately HK$9.6 billion) from the Ministry of Finance of the PRC in view of the continued increase in international prices of crude oil, which has created a distortion of correlation of domestic refined oil product prices and the crude oil prices. However, as advised by the management of the Company, we understand that no such compensation was given to petrol stations, and as a result, KGSIM’s financial performance was adversely affected by the PRC’s petroleum products price adjustment mechanism under a high oil price environment. It should be noted that the average international Brent crude oil increased by approximately 44.4% per tonne in 2005 (Source: Bloomberg) whilst turnover per tonne increased by only approximately 14.4% for KGSIM in 2005.

Further details relating to KGSIM are set out in the “Letter from the Board” in the Circular.

(ii) Proceeds

The proceeds from the KGSIM Equity Disposal Agreement is RMB153.0 million (equivalent to approximately HK$147.1 million) (the “KGSIM Proceeds”). We note that the KGSIM Proceeds was determined following commercial negotiations between the relevant parties at arm’s length basis and with reference to (a) the unaudited financial information of KGSIM prepared in accordance with HK GAAP for the two years ended 31 December 2005 and the three months ended 31 March 2006 which contained the NAV of KGSIM as at 31 December 2005 and 31 March 2006, (b) the net asset value of KGSIM as at 31 March 2006 of approximately RMB102.2 million (equivalent to approximately HK$98.3 million) as set out in the valuation report dated 27 June 2006 prepared in accordance with PRC laws and regulations using replacement cost method issued by an independent valuation firm in the PRC appointed by GPC, which firm was designated by the PRC government to conduct valuation for State-owned assets, and (c) the strategic positions of the Petrol Stations in Guangdong Province. The KGSIM Proceeds will be in cash and applied by the Company as general working capital for the Group.

As KGSIM had reported a net loss after minority interests for the year ended 31 December 2005, the implied PER of the KGSIM Equity Disposal is not meaningful. The KGSIM Proceeds represents:

• (a) a P/NAV multiple of approximately 1.1 times the unaudited NAV attributable to the 90% equity interest in KGSIM as at 31 December 2005 of approximately RMB137.0 million (equivalent to approximately HK$131.7 million);

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LETTER FROM ROTHSCHILD

• (b) a P/NAV multiple of approximately 1.2 times the unaudited NAV attributable to the 90% equity interest in KGSIM as at 31 March 2006 of approximately RMB131.6 million (equivalent to approximately HK$126.5 million); and

• (c) a premium of approximately RMB61.0 million (equivalent to approximately HK$58.6 million) or approximately 66.3% over the NAV attributable to the 90% equity interest in KGSIM as at 31 March 2006 of approximately RMB92.0 million (equivalent to approximately HK$88.4 million) as appraised by the independent valuation firm in the PRC.

Please refer to paragraph 4 below for a discussion on the valuation considerations.

(iii) Conditions precedent

Completion of the KGSIM Equity Disposal Agreement is conditional upon fulfilment of various conditions including, among others, the Independent Shareholders approving the resolution in relation to the KGSIM Equity Disposal Agreement and the Huade Equity Acquisition Agreement in the SGM. Further details of the conditions precedent to the completion of the KGSIM Equity Disposal Agreement are set out in the “Letter from the Board” in the Circular.

(iv) Others

Independent Shareholders should note that ZGAT, holder of the remaining 10% equity interest in KGSIM, has also entered into an agreement on 10 July 2006 with Sinopec Corp. to sell its equity interest in KGSIM to Sinopec Corp. on the same basis as the KGSIM Equity Disposal and on terms similar to the KGSIM Equity Disposal Agreement, except that this agreement is not conditional upon the approval of the Huade Equity Acquisition Agreement and KGSIM Equity Disposal Agreement by the Independent Shareholders at the SGM.

4. Valuation considerations

We have analysed the Huade Consideration and the KGSIM Proceeds by reviewing (i) the trading multiples of listed companies on the Stock Exchange with business operations comparable to that of Huade and KGSIM (the “Comparable Companies”); and (ii) the transaction multiples of completed transactions involving the mergers and acquisitions of companies or assets engaged in the provision of crude oil jetty services and pipeline transmission services or separately, engaged in the operation of petrol stations in the PRC (“Comparable Transactions”). We understand the limitation of finding directly comparable

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LETTER FROM ROTHSCHILD

listed issuers and precedent transactions involving targets with businesses similar to either Huade or KGSIM. Nevertheless, we view that the Comparable Companies and the Comparable Transactions selected below could be used as reference as they are broadly comparable to Huade and KGSIM in terms of industry, market and size.

(i) Comparable company analysis

In relation to Huade, we have conducted comparable company analysis using earnings based multiples, namely PER and EV/EBITDA, which are commonly applied for valuation purposes in the crude oil jetty and pipeline transmission services industry and used P/NAV as a secondary reference. With regard to KGSIM, we have conducted comparable company analysis using assets based ratio, namely P/NAV, which is commonly applied for valuation purposes in the petrol station business during the current stage of the relevant business cycle, and we have also considered earnings based multiples as a secondary reference.

In selecting the Comparable Companies, we have taken into account their respective sizes, business activities and market exposure. Due to the differences in the operating and regulatory environment of Huade and KGSIM (in particular petroleum products price adjustment mechanism) with companies operating outside the PRC, we consider companies with operations only in the PRC to be directly relevant. In addition, since the domestic stock exchanges in the PRC have different regulations and restrictions than that of the Stock Exchange, we do not consider the trading multiples of companies traded solely on the domestic stock exchanges in the PRC to be an appropriate benchmark for the Huade Equity Acquisition and KGSIM Equity Disposal given that they are part of the Company, being a listed company on the Stock Exchange.

From our review, we noted that there is no “pure” crude oil jetty and pipeline transmission or petrol station operating companies listed on the Stock Exchange. Since KGSIM is a 90% owned subsidiary of Huade which in turn is a 70% owned subsidiary of the Company, the financial results of both Huade and KGSIM are fully consolidated in the financial statements of the Group. As noted in note 12 to the financial statements in the 2005 Annual Report, the crude oil jetty services segment result (being the operations of Huade) of approximately HK$168.4 million and the retail sales and wholesaling of petroleum products segment result (being the operations of KGSIM) of approximately HK$10.1 million accounted for approximately 79.3% and 4.8% respectively of the segment result of the Group for the financial year ended 31 December 2005, we consider the market has valued the Company based on its main underlying operations and assets, being Huade and KGSIM, and hence the Company represents the best directly comparable

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LETTER FROM ROTHSCHILD

company for both Huade and KGSIM. Therefore, we have selected the Company as the primary comparable company with respect to Huade and KGSIM (“Primary Comparable Company”).

Given the limited number of Comparable Companies, we have expanded our scope to include those oil companies with operations of crude oil jetty and pipeline transmission services and/or petrol stations in the PRC as part of their overall operations as secondary comparable companies (“Secondary Comparable Companies”). We have considered only those companies that derive a significant part of their total turnover from such operations. Having regard to the size of the Company, we have only selected the comparable companies with market capitalisation of less than HK$5,000 million as at the Latest Practicable Date.

Based on the above selection criteria, we set out below the relevant ratios for the Comparable Companies based on their respective share prices as at the Latest Practicable Date and their latest published audited full year financial statements.

		Audited financial
	Market	statements for the		EV(4)/	P(2)/
Company	capitalisation(1)	year ended/as at	PER(2)(3)	EBITDA(5)	NAV(6)
	(HK$ million)
Primary Comparable Company
The Company	2,799	31 December 2005	20.6x	8.5x	1.7x
Secondary Comparable Companies
Hans Energy Company Limited	1,100	31 December 2005	10.7x	7.3x	Not
				meaningful
Titan Petrochemicals Group Limited	2,569	31 December 2005	8.5x	7.9x	1.4x
Mean of the Secondary
Comparable Companies			9.6x	7.6x	1.4x
Huade Equity Acquisition			12.9x	7.3x	1.3x
			Not	Not
KGSIM Equity Disposal			meaningful	available	1.1x

Sources: Bloomberg and annual reports of the Comparable Companies

Notes:

(1) Market capitalisation is based on the closing price of a comparable company as quoted on the Stock Exchange on the Latest Practicable Date and the total number of shares in issue as at the most recent year-end date.

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LETTER FROM ROTHSCHILD

• (2) Price refers to the closing price of a comparable company as quoted on the Stock Exchange on the Latest Practicable Date.

• (3) Earnings refer to net profit excluding extraordinary items as per the latest published audited full year financial statements of the relevant comparable company available on the Latest Practicable Date.

• (4) EV of a comparable company refers to the sum of its market capitalisation on the Latest Practicable Date and its net indebtedness as per its latest published audited full year financial statements of the relevant company available on the Latest Practicable Date.

• (5) EBITDA refers to earnings before interest, tax, depreciation and amortisation expenses as per the latest published audited full year financial statements of the relevant company available on the Latest Practicable Date.

• (6) NAV refers to net asset value (excluding minority interests) as per the latest published audited full year financial statements of the relevant comparable company available on the Latest Practicable Date.

In respect of the Huade Equity Acquisition, the implied PER, EV/EBITDA and P/ NAV multiples are all lower than the Company. The implied PER is higher than the range of the Secondary Comparable Companies, but the implied EV/EBITDA is at the low end of the range of the Secondary Comparable Companies. The implied P/NAV multiple is slightly lower than the mean of the Secondary Comparable Companies. We consider this to be acceptable since the Company is the Primary Comparable Company.

In respect of the KGSIM Equity Disposal, the implied PER is not meaningful as KGSIM reported a net loss after minority interests for the year ended 31 December 2005. Since the EBITDA of KGSIM for the year ended 31 December 2005 and the net debt of KGSIM as at 31 December 2005 are not available, we have not been able to perform EV/ EBITDA multiple analysis on the KGSIM Equity Disposal. Although the implied P/NAV multiple is lower than the Company (being the Primary Comparable Company) and the Secondary Comparable Companies, we consider this to be acceptable since KGSIM is loss making and the KGSIM Proceeds is at a premium of approximately 11.7%, 16.3% and 66.3% over the unaudited NAV attributable to the 90% equity interest in KGSIM as at 31 December 2005 and 31 March 2006 and the NAV attributable to the 90% equity interest in KGSIM as at 31 March 2006 as appraised by the independent valuation firm in the PRC respectively.

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LETTER FROM ROTHSCHILD

(ii) Comparable transaction analysis

Our analysis also includes research into completed merger and acquisition transactions of businesses involved in crude oil jetty and pipeline transmission services and/or petrol stations in the PRC since 1 January 2004. As stated above, we consider transactions of businesses operating outside the PRC not to be directly relevant due to the different regulatory and market environment. Transactions prior to 1 January 2004 took place during a different economic cycle and hence are also not considered directly relevant. In selecting the Comparable Transactions, we have taken into account, the availability of reliable transaction information and comparability of the assets with Huade and KGSIM. Based on our review, we note that there were no comparable transactions involving crude oil jetty and pipeline transmission services. We set out below a summary of the Comparable Transactions involving petroleum storage and petrol stations operation:

• (1) Sinopec Corp. acquired a 81.79% equity interest in Shanghai Jin Hua Industrial Company Limited (“Jin Hua”) in January 2006 (“Comparable Transaction 1”)

Sinopec Corp. acquired a 81.79% equity interest in Jin Hua from a whollyowned subsidiary of Sinopec Shanghai Petrochemical Company Limited, a company listed in Hong Kong, New York and Shanghai, for a consideration of approximately RMB61.6 million (equivalent to approximately HK$59.2 million). Jin Hua is principally engaged in the operations of petrol stations.

• (2) Sinopec Corp. acquired a 51% equity interest in Dongguan China Resources Petroleum & Chemicals Co., Ltd. (“Dongguan China Resources”) in November 2005 (“Comparable Transaction 2”)

Sinopec Corp. acquired a 51% equity interest in Dongguan China Resources from a wholly-owned subsidiary of China Resources Enterprise Limited, a company listed in Hong Kong, for a consideration of RMB98 million (equivalent to approximately HK$94 million) in November 2005. Dongguan China Resources is principally engaged in the petroleum and chemical storage and distribution businesses in the city of Dongguan in the PRC and primarily operates petrol stations in the PRC and Hong Kong.

• (3) Sinopec Corp. acquired petrol station assets from Sinopec Group Company and its subsidiaries in November 2004 (“Comparable Transaction 3”)

Sinopec Corp. acquired the assets, interests and certain related liabilities of 1,023 petrol stations and 54 oil depots from Sinopec Group Company and its subsidiaries for a consideration of RMB1,881 million (equivalent to approximately HK$1,809 million).

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LETTER FROM ROTHSCHILD

The table below summarised the relevant multiples implied by the Comparable Transactions:

		P(1)/		EV(3)/
Comparable Transactions	Date announced	NAV(2)	PER(1)(4)	EBITDA(5)
Comparable Transaction 1	24 January 2006	1.1x	7.2x	Not available
Comparable Transaction 2	25 November 2005	4.5x	60.0x	Not available
Comparable Transaction 3	1 November 2004	1.7x	8.1x	5.8x
Mean		2.5x	25.1x	5.8x
Median		1.7x	8.1x	5.8x
Huade Equity Acquisition		1.3x	12.9x	7.3x
KGSIM Equity Disposal		1.1x Not meaningful		Not available

Sources: Bloomberg and public filings of companies

Notes:

• (1) Price refers to the equity purchase consideration paid in an acquisition.

• (2) NAV refers to net asset value as per the latest published full year financial statements of the relevant company available as at the time of the announcement of the transaction.

• (3) EV refers to the sum of the equity purchase consideration paid in an acquisition and the net indebtedness as per the latest published full year financial statements of the relevant company available as at the time of the announcement of the transaction.

• (4) Earnings refer to net profit excluding extraordinary items as per the latest published full year financial statements of the relevant company available as at the time of the announcement of the transaction.

• (5) EBITDA refers to earnings before interest, tax, depreciation and amortisation expenses as per the latest published full year financial statements of the relevant company available as at the time of the announcement of the transaction.

In respect of the Huade Equity Acquisition, only Comparable Transaction 2 is considered to be relevant as it relates to the acquisition of a target company engaged in petroleum and chemical storage and distribution businesses whereas both Comparable Transaction 1 and Comparable Transaction 3 are not considered to be relevant as they relate to acquisitions of business engaged in petrol stations only. The implied P/NAV and PER multiples of the Huade Equity Acquisition are both lower

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LETTER FROM ROTHSCHILD

than that of the multiples implied by Comparable Transaction 2. We note that Comparable Transaction 2 has a significantly higher implied P/NAV and PER multiples, we believe this could be attributable to the acquisition of a controlling stake in the target, which also has operations in Hong Kong, which has a different operating environment than in the PRC.

In respect of the KGSIM Equity Disposal, the implied P/NAV multiple is lower than that of the mean and median of the Comparable Transactions. We consider this to be acceptable since KGSIM is loss making.

On the basis that:

• (a) the Company is, in our view, the Primary Comparable Company given that the crude oil jetty services segment (ie the principal business of Huade) is the largest profit contributor to the Group and the implied PER of the Huade Equity Acquisition of approximately 12.9 times is lower than the PER of the Company of approximately 20.6 times as at the Latest Practicable Date which should in turn enhance shareholders’ value post completion; and

• (b) assets based ratio is commonly applied for valuation of petrol station business during the current stage of the relevant business cycle and the KGSIM Proceeds has a premium of approximately 11.7%, 16.3% and 66.3% over the unaudited NAV attributable to the 90% equity interest in KGSIM as at 31 December 2005 and 31 March 2006 and the NAV attributable to the 90% equity interest in KGSIM as at 31 March 2006 as appraised by the independent valuation firm in the PRC respectively,

we consider that the Huade Consideration and the KGSIM Proceeds are fair and reasonable so far as the Independent Shareholders are concerned.

5. Effects of the Transactions on the Company

Independent Shareholders should note that the Huade Equity Acquisition and the KGSIM Equity Disposal are inter-conditional, if one of the transaction is not completed, the other transaction will also not be completed. Upon completion of the Huade Equity Acquisition, Huade will become an indirect wholly-owned subsidiary of the Company and accordingly, its financial statements will be 100% consolidated into the financial statements of the Group. Given that KGSIM will cease to be a subsidiary of the Group on completion of the KGSIM Equity Disposal, its financial statements will cease to be consolidated into the financial statements of the Group and the Huade Group.

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LETTER FROM ROTHSCHILD

(i) Earnings

On a pro forma basis assuming completion of the Huade Equity Acquisition had taken place on 31 December 2005, the difference between the Huade Consideration and the carrying value of the 30% equity interest of the NAV of Huade as at 31 December 2005 is not expected to have an impact on the consolidated profit and loss statement of the Restructured Group post completion as it will be recognised directly as decrease in Kantons Investment’s shareholders’ equity resulting in a reduction in the reserves of the Restructured Group. The Huade Equity Acquisition is expected to be earnings accretive to the Restructured Group since the Company would be entitled to an additional 30% of the net profit of the Huade Group after completion.

On a pro forma basis assuming completion of the KGSIM Equity Disposal had taken place on 31 December 2005, the difference between the KGSIM Proceeds and the carrying value of the 90% equity interest of the NAV of KGSIM as at 31 December 2005 will result in an one-off gain on disposal of approximately RMB16.0 million (equivalent to approximately HK$15.4 million) in the consolidated profit and loss statement of the Restructured Group post completion, which will result in an increase in the reserves of the Restructured Group.

As substantially all of the Group’s profits were derived from the trading of crude oil petroleum and petrochemical products and operation of a crude oil jetty and its ancillary facilities and the Petrol Stations operation was loss making for the year ended 31 December 2005, the management expects the profitability of the Restructured Group will be further enhanced on completion of the Huade Equity Acquisition and the disposal of the loss-making petrol station business of KGSIM through the KGSIM Equity Disposal.

(ii) Net asset value

According to the 2005 Annual Report, the audited NAV of the Group was approximately HK$1,655.2 million.

On a pro forma basis assuming completion had taken place on 31 December 2005, the difference between the Huade Consideration and the carrying value of the 30% equity interest in Huade as at 31 December 2005 of approximately HK$126.1 million will be recognised directly as a decrease in the pro forma NAV of the Restructured Group and the KGSIM Equity Disposal will result in a gain on disposal which will increase the pro forma NAV of the Restructured Group by approximately HK$15.4 million.

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LETTER FROM ROTHSCHILD

As noted in the unaudited pro forma consolidated balance sheet of the Restructured Group set out in Appendix III to the Circular, upon completion of the Transactions, the pro forma NAV of the Restructured Group would be approximately HK$1,544.5 million, representing a decrease of approximately representing 6.7%.

(iii) Net gearing

According to the 2005 Annual Report, the net gearing ratio[2] of the Group for the year ended 31 December 2005 was approximately 1.2%. The Huade Consideration will be paid in cash from bank borrowings and the KGSIM Proceeds will be used by the Company as general working capital for the Group. As noted in the unaudited pro forma consolidated balance sheet of the Restructured Group set out in Appendix III to the Circular, upon completion of the Transactions, the pro forma net gearing ratio would increase to approximately 32.2%. The management of the Company has advised that they do not expect any adverse impact on the financial and operational positions of the Restructured Group as a result of the increased net gearing ratio given the steady cashflow generated by Huade.

Notwithstanding that the Transactions will have a negative impact on the pro forma NAV and net gearing ratio of the Restructured Group as discussed above, we consider this to be acceptable in light of the expected positive effect of the Transactions on the earnings of the Restructured Group on the back of a stable and profitable track record of Huade.

SUMMARY

Having considered the above principal factors and reasons, we draw your attention to the following in arriving at our recommendation:

• (i) The crude oil jetty services segment has been the Group’s largest profit contributor since its listing in 1999. The Huade Equity Acquisition would enable the Company to consolidate an additional 30% equity interest in the Huizhou Crude Oil Jetty (through Huade) thereby enhancing its flexibility to allocate resources to further develop such business;

2 Net gearing ratio is defined as (total borrowings less cash and cash equivalent)/NAV.

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LETTER FROM ROTHSCHILD

• (ii) the KGSIM Equity Disposal provides an opportunity to the Company to divest its interests in an unprofitable business segment caused by the current petroleum products price adjustment mechanism in the PRC, which is not favourable for the Company given its relatively small scale (only 38 petrol stations) and the lack of ability to pass on any price increases to its customers;

• (iii) the Transactions would enable the Company to focus and allocate its resources to profitable business segments, as well as to develop and capture new opportunities which would enhance and facilitate its business;

• (iv) the Huade Consideration and the KGSIM Proceeds are fair and reasonable so far as the Independent Shareholders are concerned based on our review of the Comparable Companies and Comparable Transactions; and

• (v) the Transactions will have a positive effect on the earnings of the Restructured Group after completion.

RECOMMENDATION

Having considered the above principal factors and reasons, we consider the terms of the Transactions and the Agreements to be fair and reasonable so far as the Independent Shareholders are concerned, and the Transactions and the Agreements are in the interests of the Company and its shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolution to approve the Transactions and the Agreements, as detailed in the notice of SGM set out at the end of the Circular.

Yours very truly, For and on behalf of

N M Rothschild & Sons (Hong Kong) Limited Kelvin Chau Catherine Yien Managing Director Director

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date was, as follows:

Authorised: 3,000,000,000 Shares Issued and fully paid: 1,036,830,000 Shares	HK$’000 $300,000
	$103,683

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. SUMMARY OF FINANCIAL INFORMATION

A summary of the results and assets and liabilities of the Group as extracted from the annual reports of the Company is set out below:

Consolidated Income Statement

for the three years ended 31 December 2005 (Expressed in Hong Kong dollars)

Turnover Cost of sales Gross profit Other revenue Distribution costs Administrative expenses Profit from operations Finance costs Profit before taxation Income tax Profit for the year Attributable to: Equity shareholders of the company Minority interests Profit for the year Dividends payable to equity shareholder of the Company attributable to the year: Interim dividend declared during the year Final dividend proposed after the balance sheet date Earnings per share-basic	2005 $’000 12,150,603 (11,823,250) 327,353 28,671 (62,469) (69,798) 223,757 (20,601) 203,156 (23,774) 179,382 135,578 43,804 179,382 15,552 15,552 31,104 13.08 cents	2004 $’000 8,448,877 (8,066,258) 382,619 17,903 (63,408) (75,393) 261,721 (20,170) 241,551 (27,661) 213,890 154,083 59,807 213,890 15,552 15,552 31,104 14.86 cents	2003 $’000 7,701,688 (7,348,842) 352,846 16,798 (60,291) (70,402) 238,951 (18,193) 220,758 (21,878) 198,880 138,591 60,289 198,880 15,552 15,552 31,104 13.37 cents

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

at 31 December 2005, 31 December 2004 and 31 December 2003 (Expressed in Hong Kong dollars)

Non-current assets Fixed assets – Property, plant and equipment – Construction in progress – Interest in leasehold land held for own use under operating lease Intangible assets Current assets Inventories Trade and other receivables Amounts due from holding companies and fellow subsidiaries Cash and cash equivalents Current liabilities Trade and other payables Amounts due to holding companies and fellow subsidiaries Loan from fellow subsidiary Bank loans and overdraft Current taxation Net current assets Total assets less current liabilities Non-current liabilities Bank loans and overdraft Loans from holding company and fellow subsidiary NET ASSETS Capital and reserves Share capital Reserves Total equity attributable to equity shareholders of the Company Minority interests TOTAL EQUITY	2005 $’000 1,432,018 67,596 94,646 80,077 1,674,337 664,546 120,177 232,944 152,385 1,170,052 260,597 266,618 – 161,526 19,810 708,551 461,501 2,135,838 11,361 – 2,124,477 103,683 1,551,519 1,655,202 469,275 2,124,477	2004 $’000 1,475,511 4,585 92,959 84,750 1,657,805 415,778 161,910 171,346 118,909 867,943 244,980 31,106 4,431 300,653 12,104 593,274 274,669 1,932,474 – – 1,932,474 103,683 1,407,004 1,510,687 421,787 1,932,474	2003 $’000 1,263,180 126,625 66,554 68,263
			1,524,622 161,978 81,672 347,266 221,104
			812,020 174,444 15,149 – 226,367 6,324
			422,284
			389,736
			1,914,358 – 169,854
			1,744,504
			103,683 1,284,412
			1,388,095 356,409
			1,744,504

– 42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. AUDITED FINANCIAL STATEMENTS

Set out below are the audited financial statements of the Group together with accompanying notes as extracted from the annual report of the Company for the year ended 31 December 2005:

Consolidated Income Statement

for the year ended 31 December 2005 (Expressed in Hong Kong dollars)

Note Turnover 3 & 12 Cost of sales Gross profit Other revenue 4 Distribution costs Administrative expenses Profit from operations Finance costs 5(a) Profit before taxation 5 Income tax 6(a) Profit for the year Attributable to: Equity shareholders of the company Minority interests Profit for the year 9 & 27 Dividends payable to equity shareholder of the company attributable to the year: 10 Interim dividend declared during the year Final dividend proposed after the balance sheet date Earnings per share-basic 11	2005 $’000 12,150,603 (11,823,250) 327,353 28,671 (62,469) (69,798) 223,757 (20,601) 203,156 (23,774) 179,382 135,578 43,804 179,382 15,552 15,552 31,104 13.08 cents	2004 (restated) $’000 8,448,877 (8,066,258) 382,619 17,903 (63,408) (75,393) 261,721 (20,170) 241,551 (27,661) 213,890 154,083 59,807 213,890 15,552 15,552 31,104 14.86 cents

– 43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

at 31 December 2005 (Expressed in Hong Kong dollars)

Note Non-current assets Fixed assets 13 – Property, plant and equipment – Construction in progress – Interest in leasehold land held for own use under operating lease Intangible assets 14 Current assets Inventories 16 Trade and other receivables 17 Amounts due from holding companies and fellow subsidiaries 18 Cash and cash equivalents 19 Current liabilities Trade and other payables 20 Amounts due to holding companies and fellow subsidiaries 18 Loan from fellow subsidiary 21 Bank loans and overdraft 22 Current taxation 23 Net current assets Total assets less current liabilities Non-current liabilities Bank loans and overdraft 22 NET ASSETS Capital and reserves 27 Share capital 26 Reserves Total equity attributable to equity shareholders of the company Minority interests TOTAL EQUITY	2005 $’000 1,432,018 67,596 94,646 80,077 1,674,337 664,546 120,177 232,944 152,385 1,170,052 260,597 266,618 – 161,526 19,810 708,551 461,501 2,135,838 11,361 2,124,477 103,683 1,551,519 1,655,202 469,275 2,124,477	2004 (restated) $’000 1,475,511 4,585 92,959 84,750
		1,657,805 415,778 161,910 171,346 118,909
		867,943 244,980 31,106 4,431 300,653 12,104
		593,274
		274,669
		1,932,474 –
		1,932,474
		103,683 1,407,004
		1,510,687 421,787
		1,932,474

– 44 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

at 31 December 2005 (Expressed in Hong Kong dollars)

Note Non-current assets Investments in subsidiaries 15 Current assets Dividend receivable from a subsidiary 17 Cash and cash equivalents 19 Current liabilities Creditors and accrued charges 20 Amounts due to subsidiaries Net current assets NET ASSETS CAPITAL AND RESERVES 27 Share capital 26 Reserves TOTAL EQUITY	2005 $’000 744,399 100,000 7 100,007 99 125,922 126,021 (26,014) 718,385 103,683 614,702 718,385	2004 $’000 744,399 100,000 7
		100,007 2,051 91,862
		93,913
		6,094
		750,493
		103,683 646,810
		750,493

– 45 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

for the year ended 31 December 2005 (Expressed in Hong Kong dollars)

Note Total equity at 1 January: As previously reported: – attributable to equity shareholders of the company 27 – minority interests 27 Opening balance adjustment arising from change in accounting policy 27 – adjustment of negative goodwill At 1 January, after opening balance adjustment 27 Net income recognised directly in equity: Exchange difference on translation of financial statements of subsidiaries outside Hong Kong 27 Net profit for the year: As previously reported: Attributable to – Equity holders of the company – Minority interests Net profit for the year 27 Total recognised income and expense for the year Attributable to: Equity shareholders of the company Minority interests Dividends declared or approved during the year Movements in equity arising from capital transactions: – Minority interests arising from acquisition of subsidiary during the year 27 Total equity at 31 December	2005 $’000 1,510,687 421,787 1,932,474 2,720 1,935,194 38,327 – – 179,382 217,709 173,905 43,804 217,709 (31,104) 2,678 2,124,477	2004 (restated) $’000 1,388,095 356,409 1,744,504 – 1,744,504 (387) 154,083 59,807 213,890 213,503 153,696 59,807 213,503 (31,104) 5,571 1,932,474

– 46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

for the year ended 31 December 2005 (Expressed in Hong Kong dollars)

Note Operating activities Profit before taxation Adjustments for: – Depreciation – Amortisation of intangible assets – Finance costs – Interest income – Loss on disposal of fixed assets – Foreign exchange gain Operating profit before changes in working capital Increase in inventories Decrease/(increase) in trade and other receivables (Increase)/decrease in amounts due from holding companies and fellow subsidiaries (Decrease)/increase in trade and other payables Increase in amounts due to holding companies and fellow subsidiaries Cash generated from operations Tax paid – PRC income tax paid Net cash generated from operating activities carried forward	2005 $’000 $’000 203,156 97,161 9,711 20,601 (2,599) 725 (18,413) 310,342 (230,679) 53,273 (45,676) (16,932) 234,859 305,187 (16,203) 288,984	2004 $’000 $’000 241,551 82,727 7,494 20,170 (4,273) 931 – 348,600 (238,953) (69,798) 175,920 46,467 15,957 278,193 (21,881) 256,312

– 47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Note Net cash generated from operating activities brought forward Investing activities Payment for purchase of fixed assets Proceeds from disposal of fixed assets Payment for purchase of subsidiaries (net of cash acquired) 28 Interest received Net cash used in investing activities Financing activities Proceeds from new bank loans Repayment of bank loans and overdrafts Dividends paid Dividends paid by a subsidiary to a minority shareholder New contribution from minority shareholders Interest paid Repayment of loan from a fellow subsidiary Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December 19	2005 $’000 $’000 288,984 (73,285) 5,585 (446) 2,599 (65,547) 2,596,259 (2,726,224) (31,104) – – (20,601) (4,566) (186,236) 37,201 117,713 (2,529) 152,385	2004 $’000 $’000 256,312 (162,619) 4,733 (61,807) 4,273 (215,420) 3,640,962 (3,567,872) (31,104) (18,484) 18,195 (20,170) (165,423) (143,896) (103,004) 221,104 (387) 117,713

– 48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Financial Statements

(Expressed in Hong Kong dollars unless otherwise indicated)

1 SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the group is set out below.

The HKICPA has issued a number of new and revised HKFRSs which are effective or available for early adoption for accounting periods beginning on or after 1 January 2005. Information on the changes in accounting policies resulting from initial application of these new and revised HKFRSs for the current and prior accounting periods reflected in these financial statements is provided in note 2.

(b) Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December 2005 comprise the company and its subsidiaries (together referred to as the “group”).

The measurement basis used in the preparation of the financial statements is the historical cost basis.

The preparation of financial statements in conforming 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 sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

– 49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Subsidiaries and controlled enterprises

A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the group, directly or indirectly, holds more than half of the issued share capital or controls more than half of the voting power or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

An investment in a controlled subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date control ceases.

Intra-group balances and transactions and any unrealised profits arising from intragroup transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

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

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

In the company’s balance sheet, an investment in a subsidiary is stated at cost less any impairment losses (see note 1(i)).

(d) Goodwill

Goodwill represents the excess of the cost of a business combination acquisition over the group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note 1(i)).

Any excess of the group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination is recognised immediately in profit or loss.

On disposal of a cash generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

– 50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Construction in progress

Construction in progress is stated at cost less impairment losses (see note 1(i)) and is transferred to relevant classes of property, plant and equipment when the asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress.

(f) Property, plant and equipment

The following items of property, plant and equipment are stated in the balance sheet at cost less accumulated depreciation and impairment losses (see note 1(i)):

• land held under operating leases and buildings thereon, where the fair values of the leasehold interest in the land and buildings cannot be measured separately at the inception of the lease and the building is not clearly held under an operating lease;

• buildings held for own use which are situated on leasehold land, where the fair value of the building could be measured separately from the fair value of the leasehold land at the inception of the lease (see note 1 (h)); and

• other items of plant and equipment.

The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see note 1(t)).

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.

Depreciation is calculated to write off the cost of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:

• leasehold land and buildings situated thereon are depreciated on a straight-line basis over the remaining term of the lease;

• buildings situated on leasehold land are depreciated over the shorter of their estimated useful lives, being from 15 years to 35 years, and the unexpired terms of the leases; and

• other property, plant and equipment are depreciated over their estimated useful lives as follows:

	10 years or over the remaining term of the
Leasehold improvements	relevant lease, if shorter
Jetty structures	10-30 years
Jetty facilities	10-30 years
Plant and machinery	8-20 years
Furniture, fixtures and equipment	5-8 years
Motor vehicles and vessels	5-18 years

– 51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(g) Intangible assets (other than goodwill)

Operating rights arising from the acquisition of petrol stations represent payments to owners of petrol stations for the rights to operate such petrol stations, which are stated in the balance sheet at cost less accumulated amortisation and impairment losses (see note 1(i)).

Amortisation of intangible asset is charged to profit or loss on a straight-line basis over the asset’s estimated useful lives unless such lives are indefinite. Operating rights for petrol stations are amortised on a straight-line basis over the operating periods of the respective petrol stations.

Both the period and method of amortisation and any conclusion that the useful life of an intangible asset is indefinite are reviewed annually.

(h) Leased assets

• (i) Classification of assets leased to the Group

Leases which do not transfer substantially all the risks and rewards of ownership to the group are classified as operating leases.

• (ii) Operating lease charge

Where the group has the use of assets under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the period of the lease term.

(i) Impairment of assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:

• property, plant and equipment;

• construction in progress;

• prepaid interests in leasehold land classified as being held under an operating lease;

• investments in subsidiaries; and

• intangible assets.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.

– 52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

–

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

–

Recognition of impairment losses

An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount.

Reversals of impairment losses

An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.

A reversal of impairment losses is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

(j) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

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

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any writedown of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any writedown of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

(k) 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 (see note (i)), 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 (see note (i)).

– 53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated discounted future cash flows.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

(l) 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 costs 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.

(m) Trade and other payables

Trade and other payables 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.

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks 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. Bank overdrafts that are repayable on demand and form an integral part of the group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

(o) Employee benefits

(i) Employee benefits and contributions to defined contribution retirement plans

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

Contributions to Mandatory Provident Funds as required under the Hong Kong Mandatory Provident Fund Scheme Ordinance and to the state-managed retirement benefits schemes for the employees of the group’s entities in the People’s Republic of China (the “PRC”) are recognised as an expense in the income statement as incurred.

(ii) Termination benefits

Termination benefits are recognised when, and only when, the group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

– 54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(p) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

– 55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the company or the group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

• in the case of current tax assets and liabilities, the company or the group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or

• in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

• the same taxable entity; or

• different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

(q) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the group or the company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(r) Revenue recognition

Provided it is probable that the economic benefits will flow to the group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:

• (i) Sale of goods

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

• (ii) Crude oil jetty services income and petroleum unloading service income

Crude oil jetty services income and petroleum unloading service income are recognised when services are rendered. Revenue is stated net of sales taxes.

• (iii) Interest income

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

– 56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(s) Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in profit or loss.

Non monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity.

On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal.

(t) Borrowing costs

Borrowing costs are expensed in profit or loss in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are interrupted or complete.

(u) Related parties

For the purposes of these financial statements, parties are considered to be related to the group if the group 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 the group 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 the group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the group or of any entity that is a related party of the group.

– 57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(v) Segment reporting

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

In accordance with the group’s internal financial reporting system, the group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements.

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

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

Unallocated items mainly comprise cash and cash equivalents and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financing expenses.

2 CHANGES IN ACCOUNTING POLICIES

The HKICPA has issued a number of new and revised HKFRSs that are effective for accounting periods beginning on or after 1 January 2005.

The accounting policies of the group and/or company after the adoption of these new and revised HKFRSs have been summarised on note 1. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in these financial statements.

The group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 36).

(a) Estimated effect of changes in accounting policies on the current period

The following tables provide estimates of the extent to which each of the line items in the consolidated income statement and balance sheet and other significant related disclosure items for the year ended 31 December 2005 is higher or lower than it would have been had the previous policies still been applied in the year, where it is practicable to make such estimates.

– 58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Effect on the consolidated financial statements

Estimated effect on the consolidated income statement for the year ended 31 December 2005:

Estimated effect of new policy (increase/(decrease) in profit for the year) HKFRS 3 (note 2(b)) $’000 Other revenue 809 Administrative expenses (988) Profit for the year (179) Attributable to: Equity shareholders of the company (113) Minority interests (66) Profit for the year (179) Earnings per share Basic 0.01 Other significant disclosure items: Amortisation of intangible assets (988)	Total $’000 809 (988) (179) (113) (66) (179) 0.01 (988)

– 59 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Estimated effect on the consolidated balance sheet at 31 December 2005:

Estimated effect of new policy (increase/(decrease) in net assets) HKFRS 3 HKAS 17 (note 2(b)) (note 2(d)) $’000 $’000 Non-current assets Other property, plant and equipment – (94,646) Interests in leasehold land held for own use under operating leases – 94,646 Intangible assets 2,541 – Net assets 2,541 – CAPITAL AND RESERVES Effect attributable to equity shareholders of the company Reserve 1,714 – Effect attributable to minority interests 827 – 2,541 –

Total $’000 (94,646) 94,646 2,541 2,541 1,714 827 2,541

• (b) Amortisation of positive and negative goodwill (HKFRS 3, Business combinations and HKAS 36, Impairment of assets)

Amortisation of goodwill

In prior periods:

• positive or negative goodwill which arose prior to 1 January 2001 was taken directly to reserves at the time if arose, and was not recognised in the income statement until disposal or impairment of the acquired business;

• positive goodwill which arose on or after 1 January 2001 was amortised on a straight line basis over its useful life and was subject to impairment testing when there were indications of impairment; and

• negative goodwill which arose on or after 1 January 2001 was amortised over the weighted average useful life of the depreciable/amortisable non-monetary assets acquired, except to the extent it related to identified expected future losses as at the date of acquisition. In such cases it was recognised in the income statement as those expected losses were incurred.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

With effect from 1 January 2005, in order to comply with HKFRS 3 and HKAS 36, the group has changed its accounting policies relating to goodwill. Under the new policy, the group no longer amortises positive goodwill but tests it at least annually for impairment. The change in policy had no effect on the financial statements as there was no goodwill arose prior to 1 January 2005. Also with effect from 1 January 2005 and in accordance with HKFRS 3, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill under the previous accounting policy), the excess is recognised immediately in profit or loss as it arises. Further details of these new policies are set out in note 1(d).

The carrying amount of negative goodwill at the beginning of the year is derecognised with a corresponding adjustment to the opening balance of retained earnings.

Also in accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before 1 January 2001) will not be recognised in profit or loss on disposal or impairment of the acquired business, or under any other circumstances.

(c) Changes in presentation (HKAS 1, Presentation of financial statements)

Minority interests (HKAS 1, Presentation of financial statements and HKAS 27, Consolidated and separate financial statements)

In prior years, minority interests at the balance sheet date were presented in the consolidated balance sheet separately from liabilities and as a deduction from net assets. Minority interests in the results of the group for the year were also separately presented in the income statement as a deduction before arriving at the profit attributable to shareholders (the equity shareholders of the company).

With effect from 1 January 2005, in order to comply with HKAS 1 and HKAS 27, the group has changed its accounting policy relating to presentation of minority interests. Under the new policy, minority interests are presented as part of equity, separately from interests attributable to the equity shareholders of the company. Further details of the new policy are set out in note 1(c).

(d) Leasehold land and buildings held for own use (HKAS 17, Leases)

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

With effect from 1 January 2005, in order to comply with HKAS 17, the group has adopted a new policy for leasehold land and buildings held for own use. Under the new policy, the leasehold interest in the land held for own use is accounted for as being held under an operating lease where the fair value of the interest in any buildings situated on the leasehold land could be measured separately identified from the fair value of the leasehold interest in the land at the time the lease was first entered into by the group, or taken over from the previous lessee, or at the date of construction of those buildings, if later.

Further details of the new policy are set out in note 1(h).

Any buildings held for own use which are situated on such land leases continue to be presented as part of property, plant and equipment.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

• (e) Financial instruments (HKAS 32, Financial instruments: Disclosure and presentation and HKAS 39, Financial instruments: Recognition and measurement).

With effect from 1 January 2005, in order to comply with HKAS 32 and HKAS 39, the group has changed its accounting policies relating to financial instruments to those as set out in notes 1(i), (k) and (m).

(f) Definition of related parties (HKAS 24, Related party disclosures)

As a result of the adoption of HKAS 24, Related party disclosures, the definition of related parties as disclosed in note 1(u) has been expanded to clarify that related parties include entities that are under the significant influence of a related party that is an individual (i.e. key management personnel, significant shareholders and/or their close family members) and post-employment benefit plans which are for the benefit of employees of the group or of any entity that is a related party of the group. The clarification of the definition of related parties has not resulted in any material changes to the previously reported disclosures of related party transactions nor has it had any material effect on the disclosures made in the current period, as compared to those that would have been reported had SSAP 20, Related party disclosures, still been in effect.

3 TURNOVER

The principal activities of the group are trading of crude oil petroleum and petrochemical products, operating of a crude oil jetty and its ancillary facilities and petrol stations.

Turnover represents sales value of goods supplied to refinery customers and consumers and income from providing crude oil jetty services, net of related sales taxes. The amount of each significant category of revenue recognised in turnover during the year is as follows:

Trading of crude oil, petroleum and petrochemical products Retail sales and wholesaling of petroleum products Crude oil jetty services	2005 $’000 9,701,385 2,140,988 308,230 12,150,603	2004 $’000 6,607,208 1,509,732 331,937
		8,448,877

4 OTHER REVENUE

Interest income Petroleum unloading services income Net exchange gain Others	2005 $’000 2,599 4,411 8,856 12,805 28,671	2004 $’000 4,273 3,232 – 10,398
		17,903

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5 PROFIT BEFORE TAXATION

Profit before taxation is arrived at after charging:

(a) Finance costs: Interest on bank advances (b) Staff costs: Salaries, wages and other benefits Contribution to defined contribution plans (c) Other items: Cost of inventories Amortisation of intangible assets Auditors’ remuneration Depreciation – assets held for use under operating leases – other assets Loss on disposal of fixed assets Operating lease charges: – petrol station facilities – machinery and vessel	2005 $’000 20,601 59,698 4,182 63,880 11,823,250 9,711 1,000 3,425 93,736 725 4,064 1,439	2004 (restated) $’000 20,170
		62,893 3,980
		66,873
		7,946,912 7,494 1,000 2,772 79,955 931 7,452 3,237

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6 INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT

(a) Taxation in the consolidated income statement represents:

Current tax – Hong Kong Profits Tax Provision for the year Under-provision in respect of prior years Current tax – Outside Hong Kong Provision for the year Under-provision in respect of prior years	2005 $’000 5,250 – 5,250 18,524 – 18,524	2004 $’000 6,017 99
		6,116 21,465 80
		21,545
	23,774	27,661

The provision for Hong Kong Profits Tax for 2005 is calculated at 17.5% (2004: 17.5%) of the estimated assessable profits for the year. Taxation for subsidiaries outside Hong Kong is charged at the appropriate current rates of taxation ruling in the relevant countries.

One of the company’s subsidiaries established in the PRC, which commenced operations in March 1997, enjoys full tax exemption for its first five profit making years and a tax reduction of 50% for the next five years in respect of its jetty operations. The income tax rate applicable to this PRC subsidiary is 15%. The year 2005 is the ninth year that the subsidiary started to have a taxable profit. Accordingly, the subsidiary is subject to a 50% reduction in applicable income tax rate, which is 7.5%.

(b) Reconciliation between tax expense and accounting profit at applicable tax rates:

Profit before tax Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned Tax effect of concession Tax effect of non-deductible expenses Tax effect of non-taxable revenue Under-provision in previous years Actual tax expense	2005 $’000 203,156 30,059 (7,224) 1,796 (857) – 23,774	2004 $’000 241,551
		39,911 (13,293 1,127 (263 179
		27,661

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7 DIRECTORS’ REMUNERATION

Directors’ remuneration disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is as follows:

Executive directors Yang Shu Shan Pan Xin Rong Zhu Jian Min Zhou Feng Ye Zhi Jun Ge Han Hua Han Kun Independent non-executive directors Tam Wai Chu Fong Chung Wong Po Yan Executive directors Hong Zhi Ming Yang Shu Shan Dai Zhao Ming Ye Zhi Jun Lai Yong Fu Zhu Jian Ming Ge Han Hua Pan Xing Rong Zhou Feng Independent non-executive directors Wong Po Yan Tam Wai Chu, Maria Fong Chung, Mark	Directors’ fee $’000 1,680 1,080 980 980 – – – 180 180 180 5,260 Directors’ fee $’000 345 1,530 245 – – 327 – 810 735 180 180 60 4,412	Salaries, allowances and benefits in kind $’000 – – – – 600 536 74 – – – 1,210 Salaries, allowances and benefits in kind $’000 – – – 583 36 – 235 – – – – – 854	2005 Total $’000 1,680 1,080 980 980 600 536 74 180 180 180
			6,470
			2004 Total $’000 345 1,530 245 583 36 327 235 810 735 180 180 60
			5,266

Note: As certain executive directors had received salaries and other benefits from a subsidiary of the Company for the financial years ended 31 December 2004 and 2005, they had agreed in writing to waive their directors’ emoluments, under their respective directors’ service contracts for the financial years ended 31 December 2004 and 2005 respectively.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8 INDIVIDUALS WITH HIGHEST EMOLUMENTS

The five highest paid individuals of the group for both years are all directors of the company and details of their emoluments are set out in note 7 above.

9 PROFIT ATTRIBUTABLE TO EQUITY SHAREHOLDERS OF THE COMPANY

The consolidated profit attributable to equity shareholders of the company includes a loss of $1,004,000 (2004: loss of $3,740,000) which has been dealt with in the financial statements of the company.

10 DIVIDENDS

(a) Dividends payable to equity shareholders of the company attributable to the year

Interim dividend declared and paid of 1.5 cents (2004: 1.5 cents) per share Final dividend proposed after the balance sheet date of 1.5 cents (2004: 1.5 cents) per share	2005 $’000 15,552 15,552 31,104	2004 $’000 15,552 15,552
		31,104

The final dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.

• (b) Dividends payable to equity shareholders of the company attributable to the previous financial year, approved and paid during the year

Final dividend in respect of the previous financial year, approved and paid during the year, of 1.5 cents (2004: 1.5 cents)	2005 $’000 15,552	2004 $’000 15,552

11 EARNINGS PER SHARE

The calculation of the basic earnings per share is based on the profit attributable to ordinary equity shareholders of the company of approximately $135,578,000 (2004: $154,083,000) and on 1,036,830,000 (2004: 1,036,830,000) ordinary shares in issue throughout the year.

Diluted earnings per share has not been presented because there were no dilutive potential ordinary shares in issue in either year.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

12 SEGMENT REPORTING

Segment information is presented in respect of the group’s business and geographical segments. Business segment information is chosen as the primary reporting format because this is more relevant to the group’s internal financial reporting.

Business segments

For management purposes, the group is currently organised into three operating divisions, namely trading of crude oil, petroleum and petrochemical products, retail sales and wholesaling of petroleum products, and the rendering of crude oil jetty services.

Trading of crude Retail sales and oil, petroleum wholesaling of and petrochemical petroleum products products 2005 2004 2005 2004 $’000 $’000 $’000 $’000 Revenue Revenue from external customers 9,701,385 6,607,208 2,140,988 1,509,731 Inter-segment revenue – – – – Other revenue from external customers 8,853 98 17,001 12,844 Total 9,710,238 6,607,306 2,157,989 1,522,575 Segment result 39,863 46,608 10,090 12,448 Unallocated interest income Unallocated corporate income/ (expenses) Profit from operations Finance costs Income tax Minority interests Profit after taxation Depreciation and amortisation for the year 1,439 1,412 21,150 17,068	Trading of crude Retail sales and oil, petroleum wholesaling of and petrochemical petroleum products products 2005 2004 2005 2004 $’000 $’000 $’000 $’000 9,701,385 6,607,208 2,140,988 1,509,731 – – – – 8,853 98 17,001 12,844	Trading of crude Retail sales and oil, petroleum wholesaling of and petrochemical petroleum products products 2005 2004 2005 2004 $’000 $’000 $’000 $’000 9,701,385 6,607,208 2,140,988 1,509,731 – – – – 8,853 98 17,001 12,844	Trading of crude Retail sales and oil, petroleum wholesaling of and petrochemical petroleum products products 2005 2004 2005 2004 $’000 $’000 $’000 $’000 9,701,385 6,607,208 2,140,988 1,509,731 – – – – 8,853 98 17,001 12,844	Trading of crude Retail sales and oil, petroleum wholesaling of and petrochemical petroleum products products 2005 2004 2005 2004 $’000 $’000 $’000 $’000 9,701,385 6,607,208 2,140,988 1,509,731 – – – – 8,853 98 17,001 12,844	Crude oil jetty services 2005 2004 $’000 $’000 308,230 331,938 9,769 2,966 218 688	Crude oil jetty services 2005 2004 $’000 $’000 308,230 331,938 9,769 2,966 218 688	Inter-segment Elimination Unallocated 2005 2004 2005 2004 $’000 $’000 $’000 $’000 – – – – (9,769) (2,966) – – – – 2,599 4,273	Inter-segment Elimination Unallocated 2005 2004 2005 2004 $’000 $’000 $’000 $’000 – – – – (9,769) (2,966) – – – – 2,599 4,273	Inter-segment Elimination Unallocated 2005 2004 2005 2004 $’000 $’000 $’000 $’000 – – – – (9,769) (2,966) – – – – 2,599 4,273	Inter-segment Elimination Unallocated 2005 2004 2005 2004 $’000 $’000 $’000 $’000 – – – – (9,769) (2,966) – – – – 2,599 4,273	Consolidated 2005 2004 $’000 $’000 12,150,603 8,448,877 – – 28,671 17,903	Consolidated 2005 2004 $’000 $’000 12,150,603 8,448,877 – – 28,671 17,903
	9,710,238	6,607,306	2,157,989	1,522,575	318,217	335,592	(9,769) (2,966) 2,599			4,273	12,179,274 8,466,780
		46,608 1,412	10,090 21,150	12,448 17,068	168,443 84,283	210,411 71,741	(6,057) (1,839)				212,339 2,599 8,819	267,628 4,273 (10,180)
											223,757 261,721 (20,601) (20,170) (23,774) (27,661) (43,804) (59,807)
											135,578	154,083

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure incurred during the year	Trading of crude Retail sales and oil, petroleum wholesaling of and petrochemical petroleum products products 2005 2004 2005 2004 $’000 $’000 $’000 $’000 822,721 773,646 386,983 344,070 (299,678) (100,900) (140,095) (184,130) 130 729 7,413 83,429	Crude oil Inter-segment jetty services Elimination 2005 2004 2005 2004 $’000 $’000 $’000 $’000 1,907,699 1,710,444 (465,891) (463,123) (435,439) (454,179) 465,891 463,123 70,420 144,910	Consolidated 2005 2004 $’000 $’000 2,651,512 2,365,037 192,877 160,711 2,844,389 2,525,748 (409,321) (276,086) (310,591) (317,188) (719,912) (593,274)	Consolidated 2005 2004 $’000 $’000 2,651,512 2,365,037 192,877 160,711 2,844,389 2,525,748 (409,321) (276,086) (310,591) (317,188) (719,912) (593,274)
				2,525,748
				(276,086) (317,188)
				(593,274)

Geographical segments

Substantially all the group’s activities are based in the PRC and more than 90% of the group’s turnover and contribution to profit from ordinary activities before taxation are derived from the PRC in both years.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

13 FIXED ASSETS

The group

Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Furniture, Motor Interest in Land and fixtures vehicles leasehold buildings held Leasehold Jetty Jetty Plant and and and land held for own use improvement structures facilities machinery equipment vessels Subtotal for own use $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2005 (restated) 284,251 5,695 351,527 1,049,462 255,254 22,855 52,143 2,021,187 103,045 Additions – through acquisition of subsidiaries 1,511 – – – 696 – – 2,207 2,471 – others 72 – – – 2,158 249 13 2,492 – Transfer 181 – 1,603 5,420 1,594 – – 8,798 – Disposals (1,741) – (59) (330) (6,643) (239) (2,892) (11,904) – Exchange adjustments 6,600 163 10,058 32,258 8,065 637 1,432 59,213 2,977 At 31 December 2005 290,874 5,858 363,129 1,086,810 261,124 23,502 50,696 2,081,993 108,493 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2005 (restated) 84,471 2,496 73,982 270,119 79,592 15,262 19,754 545,676 10,086 Charge for the year 11,275 699 9,310 53,707 12,602 3,279 2,864 93,736 3,425 Written back on disposal (458) – (22) (144) (3,323) (196) (1,452) (5,595) – Exchange adjustments 2,206 86 2,244 8,476 2,124 441 581 16,158 336 At 31 December 2005 97,494 3,281 85,514 332,158 90,995 18,786 21,747 649,975 13,847 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2005 193,380 2,577 277,615 754,652 170,129 4,716 28,949 1,432,018 94,646	Construction in progress Total $’000 $’000 4,585 2,128,817 70,793 75,471 – 2,492 (8,798) – – (11,904) 1,016 63,206	Construction in progress Total $’000 $’000 4,585 2,128,817 70,793 75,471 – 2,492 (8,798) – – (11,904) 1,016 63,206
	290,874 5,858 – – – – – – – – – – – – 84,471 2,496 11,275 699 (458) – 2,206 86							67,596 – – – – – – – – – –	2,258,082 – – – – – – 555,762 97,161 (5,595) 16,494
	97,494 3,281 – – – – – – – – – – – –	85,514 – – – – – –	332,158 90,995 – – – – – – – – – – – –	18,786 – – – – – –	21,747 – – – – – –	649,975 – – – – – –	13,847 – – – – – –	– – – – – – –	663,822 – – – – – –
	193,380 2,577	277,615	754,652 170,129	4,716	28,949	1,432,018	94,646	67,596	1,594,260

– 69 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Land and buildings held Leasehold Jetty for own use improvement structures $’000 $’000 $’000 Cost: At 1 January 2004 (restated) 267,672 5,672 335,655 Additions – through acquisition of subsidiaries 13,845 – – – others 1,980 23 – Transfer 926 – 15,872 Disposals (172) – – At 31 December 2004 (restated) 284,251 5,695 351,527 – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2004 (restated) 72,861 2,139 73,865 Charge for the year 11,655 357 117 Written back on disposal (45) – – At 31 December 2004 (restated) 84,471 2,496 73,982 – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2004 (restated) 199,780 3,199 277,545	Land and buildings held Leasehold Jetty for own use improvement structures $’000 $’000 $’000 Cost: At 1 January 2004 (restated) 267,672 5,672 335,655 Additions – through acquisition of subsidiaries 13,845 – – – others 1,980 23 – Transfer 926 – 15,872 Disposals (172) – – At 31 December 2004 (restated) 284,251 5,695 351,527 – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2004 (restated) 72,861 2,139 73,865 Charge for the year 11,655 357 117 Written back on disposal (45) – – At 31 December 2004 (restated) 84,471 2,496 73,982 – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2004 (restated) 199,780 3,199 277,545	Land and buildings held Leasehold Jetty for own use improvement structures $’000 $’000 $’000 Cost: At 1 January 2004 (restated) 267,672 5,672 335,655 Additions – through acquisition of subsidiaries 13,845 – – – others 1,980 23 – Transfer 926 – 15,872 Disposals (172) – – At 31 December 2004 (restated) 284,251 5,695 351,527 – – – – – – – – – – – – – – – – – – Depreciation: At 1 January 2004 (restated) 72,861 2,139 73,865 Charge for the year 11,655 357 117 Written back on disposal (45) – – At 31 December 2004 (restated) 84,471 2,496 73,982 – – – – – – – – – – – – – – – – – – Net book value: At 31 December 2004 (restated) 199,780 3,199 277,545	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)	Furniture, Motor Interest in fixtures vehicles leasehold Jetty Plant and and and land held Construction facilities machinery equipment vessels Subtotal for own use in progress Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 865,641 179,782 22,782 55,187 1,732,391 74,072 126,625 1,933,088 – 10,330 – 59 24,234 18,234 – 42,468 17,699 13,068 333 905 34,008 12,045 116,566 162,619 166,155 55,653 – – 238,606 – (238,606) – (33) (3,579) (260) (4,008) (8,052) (1,306) – (9,358)
	284,251 5,695 – – – – – – – – – – – – 72,861 2,139 11,655 357 (45) –	351,527 – – – – – – 73,865 117 –	1,049,462 255,254 22,855 52,143 2,021,187 103,045 4,585 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 219,236 68,892 13,463 18,756 469,212 7,517 – 50,893 11,572 1,943 3,418 79,955 2,772 – (10) (872) (144) (2,420) (3,491) (203) –						2,128,817 – – – – – – 476,729 82,727 (3,694)
	84,471 2,496 – – – – – – – – – – – –	73,982 – – – – – –	270,119 79,592 – – – – – – – – – – – –	15,262 – – – – – –	19,754 – – – – – –	545,676 – – – – – –	10,086 – – – – – –	– – – – – – –	555,762 – – – – – –
	199,780 3,199	277,545	779,343 175,662	7,593	32,389	1,475,511	92,959	4,585	1,573,055

The analysis of net book value of leasehold land, land use rights and buildings is as follows:

Long leases in Hong Kong Medium-term leases outside Hong Kong	2005 $’000 39,838 248,189 288,027	2004 $’000 41,007 251,732
		292,739

– 70 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14 INTANGIBLE ASSETS

The group

Cost: At 1 January – as previously reported – opening balance adjustment arising from change in accounting policy – adjustment of negative goodwill – as restated Additions through acquisition of subsidiaries Exchange adjustments At 31 December Accumulated amortisation: At 1 January – as previously reported – opening balance adjustment arising from change in accounting policy – adjustment of negative goodwill – as restated Charge for the year Exchange adjustments At 31 December Net book value: At 31 December	Petrol station operating rights 2005 2004 $’000 $’000 99,375 75,394 2,878 – 102,253 75,394 – 23,981 2,877 – 105,130 99,375 – – – – – – – – – – – – – – 14,625 7,131 158 – 14,783 7,131 9,711 7,494 559 – 25,053 14,625 80,077 84,750	Petrol station operating rights 2005 2004 $’000 $’000 99,375 75,394 2,878 – 102,253 75,394 – 23,981 2,877 – 105,130 99,375 – – – – – – – – – – – – – – 14,625 7,131 158 – 14,783 7,131 9,711 7,494 559 – 25,053 14,625 80,077 84,750
		75,394 23,981 –
		99,375 – – – – – – – 7,131 –
		7,131 7,494 –
		14,625
		84,750

The amortisation charge for the year has been included in “administrative expenses” in the consolidated income statement.

– 71 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15 INVESTMENTS IN SUBSIDIARIES

Unlisted investments, at cost Amounts due from subsidiaries	The company 2005 2004 $’000 $’000 114,738 114,738 629,661 629,661 744,399 744,399	The company 2005 2004 $’000 $’000 114,738 114,738 629,661 629,661 744,399 744,399
		744,399

The amounts due from subsidiaries are unsecured and interest-free. The amounts will not be repayable within twelve months from the balance sheet date and, accordingly, the balances are classified as non-current.

The following list contains only the particulars of subsidiaries which principally affected the results, assets or liabilities of the group. The class of shares held is ordinary unless otherwise stated.

All of these are controlled subsidiaries as defined under note 1(c) and have been consolidated into the group financial statements.

		Particulars of	Proportion for	Proportion for
	Place of	issued and	ownership interest			Principal
	incorporation/	paid up	group’s			activities
	establishment	share capital/	effective	held by the	held by	and place of
Name of company	and operation	registered capital	interest	company	subsidiaries	operation
Hua De Petrochemical	The PRC	Registered capital	70%	–	70%	Operation of a
Company Limited *		US$93,758,200				crude oil jetty and
						ancillary facilities
Sinomart KTS Development	Hong Kong	50 ordinary shares	100%	100%	–	Trading of crude
Limited		of $1 each				oil, petroleum and
		(note)				petrochemical
						products
Kantons International	British Virgin	3,000,000 ordinary	100%	100%	–	Investment holding
Investment Limited	Islands	shares of US$1
		each
Kantons Gas Station Investment	The PRC	Registered capital	63%	–	90%	Investment holding
& Management Co Ltd#		RMB145,000,000				and operation of
						petrol stations

• A sino-foreign owned enterprise established in the PRC.

• The company is a limited liability company established in the PRC.

Note: Sinomart KTS Development Limited also has in issue fully paid 10,000 non-voting deferred shares of $1 each, holders of which practically carry no rights to dividends or to receive notice of or to attend or vote at any general meeting of the company or to participate in any distribution on winding up.

– 72 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16 INVENTORIES

(a) Inventories in the balance sheet comprise:

Crude oil and spare parts Petroleum and petrochemical products	The group 2005 2004 $’000 $’000 442,818 190,946 221,728 224,832 664,546 415,778	The group 2005 2004 $’000 $’000 442,818 190,946 221,728 224,832 664,546 415,778
		415,778

The inventories is stated at cost.

(b) The analysis of the amount of inventories recognised as an expense is as follows:

			The group	The group
			2005	2004
			$’000	$’000
Carrying amount of inventories sold		11,823,250		8,066,258
TRADE AND OTHER RECEIVABLES
	The	group	The company
	2005	2004	2005	2004
	$’000	$’000	$’000	$’000
Dividend receivable
from a subsidiary	–	–	100,000	100,000
Trade receivables and bills receivable	71,679	122,760	–	–
Deposits and prepayments	48,498	39,150	–	–
	120,177	161,910	100,000	100,000

17 TRADE AND OTHER RECEIVABLES

All of the trade and other receivables are expected to be recovered within one year.

Included in trade and other receivables are trade debtors and bills receivable (net of impairment losses for bad and doubtful debts) with the following ageing analysis as of the balance sheet date:

Current 1 to 3 months overdue More than 3 months overdue but less than 12 months overdue	The group 2005 2004 $’000 $’000 70,088 111,954 999 9,938 592 868 71,679 122,760	The group 2005 2004 $’000 $’000 70,088 111,954 999 9,938 592 868 71,679 122,760
		122,760

The group’s credit policy as set out in note 29(a).

– 73 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18 AMOUNTS DUE FROM/TO HOLDING COMPANIES AND FELLOW SUBSIDIARIES

The amounts due from/to holding companies and fellow subsidiaries mainly represent balances arising from trading transactions and are unsecured, interest free and are repayable on demand.

19 CASH AND CASH EQUIVALENTS

Cash at bank and in hand Bank overdrafts_(note 22)_ Cash and cash equivalents in the consolidated cash flow statement	The group 2005 2004 $’000 $’000 152,385 118,909 – (1,196) 152,385 117,713	The company 2005 2004 $’000 $’000 7 7 – – 7 7

20 TRADE AND OTHER PAYABLES

Bills payable Trade payables Creditors and accrued charges	The group 2005 2004 $’000 $’000 120,638 60,561 9,873 34,497 130,086 149,922 260,597 244,980	The company 2005 2004 $’000 $’000 – – – – 99 2,051 99 2,051

All of the trade and other payables are expected to be settled within one year.

Included in trade and other payables are trade creditors and bills payable with the following ageing analysis:

Due within 1 month or on demand Due after 1 month but within 3 months Due after 3 months but within 6 months	The group 2005 2004 $’000 $’000 8,154 26,105 122,351 66,115 6 2,838 130,511 95,058	The group 2005 2004 $’000 $’000 8,154 26,105 122,351 66,115 6 2,838 130,511 95,058
		95,058

21 LOAN FROM FELLOW SUBSIDIARY

The loan is unsecured, interest-free and repayable on demand.

– 74 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

22 BANK LOANS AND OVERDRAFTS

As at 31 December 2005, the bank loans and overdrafts were repayable as follows:

Within 1 year or on demand After 1 year but within 2 years	The group 2005 2004 $’000 $’000 161,526 300,653 11,361 – 172,887 300,653	The group 2005 2004 $’000 $’000 161,526 300,653 11,361 – 172,887 300,653
		300,653

As at 31 December 2005, the unsecured bank loans and overdrafts were as follows:

Unsecured bank overdrafts_(note 19)_ Bank loans – secured – unsecured	2005 $’000 – 5,768 167,119 172,887	2004 $’000 1,196 – 299,457
		300,653

At 31 December 2005, the banking facilities of a subsidiary were secured by its land use rights with carrying value of $13,539,000.

Included in bank loans and overdrafts are the amounts dominated in the following currencies:

	The	group
	2005	2004
	$’000	$’000
United States Dollars	USD5,000	USD32,770
Hong Kong Dollars	HKD128,321	HKD1,196
Renminbi Yuan	RMB6,000	RMB48,000

23 INCOME TAX IN THE BALANCE SHEET

• (a) Current taxation in the balance sheet represents:

Provision for Hong Kong Profits Tax for the year Balance of PRC income tax payable Balance of Profits Tax provision relating to prior years	The group 2005 2004 $’000 $’000 5,250 6,017 7,160 4,705 7,400 1,382 19,810 12,104	The group 2005 2004 $’000 $’000 5,250 6,017 7,160 4,705 7,400 1,382 19,810 12,104
		12,104

(b) No provision for deferred taxation has been made as the effect of all temporary differences is not material.

– 75 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24 EMPLOYEE RETIREMENT BENEFITS

The group operates a Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF scheme is a defined contribution retirement scheme administered by independent trustees. Under the MPF scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of $20,000. Contributions to the scheme vest immediately.

The company’s subsidiaries established in the PRC participate in pension fund schemes organised by the relevant local government authorities in the PRC. These subsidiaries are required to make contribution to the retirement scheme at a certain percentage of the basic salaries of their employees.

The group does not have any other pension schemes for its employees in respect of its subsidiaries elsewhere. The group does not have any other obligations other than the contributions described above.

25 EQUITY COMPENSATION BENEFITS

The company has a share option scheme (the “scheme”) which was adopted on 27 May 1999 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 26 May 2009. Under the scheme, the directors of the company may grant option to eligible employees, including directors of the company and its subsidiaries, to subscribe for shares in the company.

Options granted must be taken up within 21 days from the date of grant, upon payment of $1 per option. Options may be exercised at any time from the date of acceptance of the grant of the share option to the earlier of the date on which such options lapse under early termination of employment and 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 higher of the nominal value of the shares and 80% of the average closing price of the shares for the five business days immediately preceding the date of grant.

No options were granted under the scheme since its inception.

26 SHARE CAPITAL

Authorised: Ordinary shares of $0.1 each Issued and fully paid: At 1 January and 31 December	2005 Number of shares Amount (’000) $’000 3,000,000 300,000 1,036,830 103,683	2004 Number of shares Amount (’000) $’000 3,000,000 300,000 1,036,830 103,683	2004 Number of shares Amount (’000) $’000 3,000,000 300,000 1,036,830 103,683
			103,683

– 76 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27 CAPITAL AND RESERVES

The group

At 1 January 2004 Final dividends approved in respect of the previous year (note 10(b)) Transfer Exchange differences on translation of financial statements of the subsidiaries outside Hong Kong Profit for the year Interim dividends declared in respect of the current year_(note 10(a)) Addition through acquisition of subsidiaries Dividend paid by a subsidiary to a minority shareholder New contribution from minority shareholders At 31 December 2004 At 1 January 2005 – as previously reported – opening balance adjustment arising from change in accounting policy – adjustment of negative goodwill – as restated Final dividends approved in respect of the previous year(note 10(b)) Transfer Exchange differences on translation of financial statements of the subsidiaries outside Hong Kong Profit for the year Interim dividends declared in respect of the current year(note 10(a))_ Addition through acquisition of subsidiary At 31 December 2005	Share capital $’000 103,683 – – – – – – – – 103,683 103,683 – 103,683 – – – – – – 103,683	Attributable to equity shareholders of the company Share Merger General Exchange Retained premium reserve reserves reserve profits $’000 $’000 $’000 $’000 $’000 333,857 23,444 144,437 (792) 783,466 – – – – (15,552) – – 32,877 – (32,877) – – – (387) – – – – – 154,083 – – – – (15,552) – – – – – – – – – – – – – – – 333,857 23,444 177,314 (1,179) 873,568 333,857 23,444 177,314 (1,179) 873,568 – – – – 1,714 333,857 23,444 177,314 (1,179) 875,282 – – – – (15,552) – – 23,251 – (23,251) – – – 38,327 – – – – – 135,578 – – – – (15,552) – – – – – 333,857 23,444 200,565 37,148 956,505	Total $’000 1,388,095 (15,552) – (387) 154,083 (15,552) – – – 1,510,687 1,510,687 1,714 1,512,401 (15,552) – 38,327 135,578 (15,552) – 1,655,202	Minority interest $’000 356,409 – – – 59,807 – 5,860 (18,484) 18,195 421,787 421,787 1,006 422,793 – – – 43,804 – 2,678 469,275	Total equity $’000 1,744,504 (15,552) – (387) 213,890 (15,552) 5,860 (18,484) 18,195
					1,932,474
					1,932,474 2,720
					1,935,194 (15,552) – 38,327 179,382 (15,552) 2,678
					2,124,477

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The merger reserve of the group represents the difference between the nominal amount of the share capital of the subsidiaries acquired and the nominal value of the share capital of the company issued for the acquisition under a group reorganisation carried out in 1999.

The general reserves of the group represent appropriations made by the company’s PRC subsidiaries from retained profits to a discretionary surplus reserve and an enterprise development fund, pursuant to the relevant PRC laws and regulations applicable to Sinoforeign equity joint ventures. The percentages of appropriations are determined annually by the directors of the relevant subsidiaries. The discretionary surplus reserve can be utilised to offset prior years’ losses or convert into paid up capital. The enterprise development fund can be used for the future development of the enterprise or convert into paid up capital. Neither the discretionary surplus reserve nor the enterprise development fund are available for distribution. Included in the general reserves is goodwill of $4,880,000 as at 31 December 2005 (2004: $4,880,000) arising from the acquisition of subsidiaries before 2001.

The company

At 1 January 2004 Final dividends approved in respect of the previous year_(note 10(b)) Loss for the year(note 9) Interim dividends declared in respect of the current year(note 10(a)) At 31 December 2004 At 1 January 2005 Final dividends approved in respect of the previous year(note 10(b)) Loss for the year(note 9) Interim dividends declared in respect of the current year(note 10(a))_ At 31 December 2005	Share capital $’000 103,683 – – – 103,683 103,683 – – – 103,683	Share premium $’000 333,857 – – – 333,857 333,857 – – – 333,857	Contributed surplus $’000 242,397 – – – 242,397 242,397 – – – 242,397	Retained profits $’000 105,400 (15,552) (3,740) (15,552)	Total equity $’000 785,337 (15,552) (3,740) (15,552) 750,493 750,493 (15,552) (1,004) (15,552) 718,385
				70,556
				70,556 (15,552) (1,004) (15,552)
				38,448

The contributed surplus of the company represents the difference between the aggregate shareholders’ funds of the subsidiaries at the date on which the company became the holding company of the group and the nominal amount of the share capital of the company issued under a group reorganisation.

Under the Companies Act 1981 of Bermuda, the contributed surplus account of the company is available for distribution. However, a company cannot declare or pay a dividend or make a distribution out of contributed surplus if:

• (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or

• (ii) 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.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

At 31 December 2005, the aggregate amount of reserves available for distribution to equity shareholders of the company was $280,845,000 (2004: $312,953,000). After the balance sheet date the directors proposed a final dividend of 1.5 cents per share (2004: 1.5 cents per share), amounting to $15,552,000 (2004: $15,552,000). This dividend has not been recognised as a liability at the balance sheet date.

28 ACQUISITION OF SUBSIDIARIES

During the year, the group acquired several subsidiaries for a total consideration of $1,250,000, satisfied in cash.

Net assets acquired Fixed assets Intangible assets Inventories Trade and other receivables Cash at bank and in hand Trade and other payables Minority interests Net identifiable assets and liabilities Total purchase prices paid, satisfied in cash Less: cash of subsidiaries acquired Net cash outflow in respect of the purchase of subsidiaries	2005 $’000 4,678 – 16,135 9,808 804 (27,497) (2,678) 1,250 1,250 (804) 446	2004 $’000 42,468 23,981 14,847 10,440 8,851 (24,069) (5,860) 70,658 70,658 (8,851) 61,807

29 FINANCIAL INSTRUMENTS

Exposure of credit, liquidity, interest rate and currency risks arises in the normal course of the group’s business. These risks are limited by the group’s financial management policies and practices described below.

(a) Credit risk

The group’s credit risk is primarily attributable to trade and other receivables. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.

In respect of trade and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 90 days from the date of billing. Normally, the group does not obtain collateral from customers.

At the balance sheet date, the group has a certain concentration of credit risk as 25% (2004: 26%) and 65% (2004: 72%) of the total trade and other receivables was due from the group’s largest customer and the five largest customers respectively within the trading of crude oil, petroleum and petrochemical products segment.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The maximum exposure to credit risk is represented by the carrying amount of each financial asset, in the balance sheet. Except for the financial guarantee given by the company in respect of a loan undertaken by the subsidiary of the company as disclosed in note 31, the group does not provide any other guarantees which would expose the group to credit risk.

(b) Liquidity risk

Individual operating entities within the group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of shortterm loans to cover expected cash demands. Long-term loans are subject to approval by the parent company. The group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

(c) Interest rate risk

Effective interest rates analysis

In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date.

The group

Repricing dates for assets/(liabilities) Cash and cash equivalents Bank loans and overdraft	Effective interest rate % 2.1% 4.4%	2005 Total $’000 152,385 (172,887) (20,502)	One year or less $’000 152,385 (161,526) (9,141)	1-2 years $’000 – (11,361) (11,361)	Effective interest rate % 2.0% 4.0%	2004 Total $’000 118,909 (300,653) (181,744)	One year or less $’000 118,909 (300,653) (181,744)

(d) Foreign currency risk

The group does not undertake significant transactions in a currency other than the functional currency of each entity within the group. Funds are retained by the foreign operations for use with the respective operations. Based on this, management considers the foreign exchange exposure to be low.

Sales and purchases transactions are denominated primarily in United States Dollars and Renminbi. As the HKD is pegged to the USD, and the RMB pegged to the USD within a narrow band, the group does not expect any significant movements in the USD/HKD or RMB/HKD exchange rate.

The foreign currency bank loans and overdraft is disclosed in note 22.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Fair value

All financial assets and financial liabilities are not materially different from their fair value as at 31 December 2004 and 2005 due to short-term in nature.

30 COMMITMENTS

• (a) Capital commitments outstanding at 31 December 2005 not provided for in the financial statements were as follows:

Contracted for Authorised but not contracted for	The group 2005 2004 $’000 $’000 491,413 23,402 – – 491,413 23,402	The group 2005 2004 $’000 $’000 491,413 23,402 – – 491,413 23,402
		23,402

• (b) At 31 December 2005, the total future minimum lease payments under noncancellable operating leases are payable as follows:

		The group and the company	The group and the company
		2005	2004
	Petrol station	Land and Petrol station		Land and
	facilities	buildings	facilities	buildings
	$’000	$’000	$’000	$’000
Within 1 year	2,654	546	2,169	531
After 1 year but within 5 years	10,513	2,183	8,409	2,123
After 5 years	22,542	9,915	22,686	10,171
	35,709	12,644	33,264	12,825

The group leases a number of petrol station facilities, plant and machinery, and land and buildings. Leases for petrol station facilities are generally run for a period of 20 years and rentals are mostly fixed during the lease period. Lease payments of certain petrol station facilities to be determined by reference to the revenue of the relevant petrol stations have not been included in the above future minimum lease payments disclosures.

31 CONTINGENT LIABILITIES

At 31 December 2005, there were contingent liabilities in respect of banking facilities utilised by certain subsidiaries and guaranteed by the company amounting to approximately $135,381,000 (2004: $138,607,000).

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32 MATERIAL RELATED PARTY TRANSACTIONS

In addition to the transactions and balances disclosed elsewhere in these financial statements, the group entered into the following material related party transactions.

(a) Key management personnel remuneration

Remuneration for key management personnel, including amounts paid to the company’s directors as disclosed in note 7 and certain of the highest paid employees as disclosed in note 8, is as follows:

Short-term employee benefits	2005 $’000 1,672	2004 $’000 1,053

Total remuneration is included in “staff costs” (see note 5(b)).

• (b) During the year, the group had the following significant transactions with its holding companies and fellow subsidiaries. Details of the amounts which have been charged/ (credited) to the consolidated income statement are as follows:

2005 $’000 Crude oil sold by the group_(note (i)) (3,296,755) Crude oil purchased by the group and related charges(note (i)) 2,411,533 Petrochemical products sold by the group(note (i)) (1,496,091) Petroleum products purchased by the group(note (i)) 1,835,944 Insurance premium charged to the group(note (ii)) 4,188 Crude oil refining and processing fees charged to the group(note (iii)) 40,762 Rentals charged to the group in respect of land and buildings and motor vehicle(note (iv)) 540 Jetty service fees, charged by the group(note (v)) (314,543) Maintenance service fees charged to the group (note (vi)) – Fuel purchased by the group(note (vii)) – Operating lease payments in respect of petrol station facilities charged to the group(note (viii)) 1,274 Transportation service fees charged to the group(note (ix)) – Petroleum unloading services fee charged by the group(note x))_ (1,867)

2004 $’000 (2,715,246 1,198,421 (841,236 1,204,875 4,108 48,857 431 (340,049 2,954 6,774 1,564 9,808 (2,812

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In addition, the group had the following transactions with its fellow subsidiaries in connection with the construction of the crude oil jetty of the group:

Cost of construction and acquisition of plant and equipment and other attributable overheads charged to the group_(note (xi))_	2005 $’000 –	2004 $’000 23,309

Notes: The above transactions were conducted in accordance with the following terms:

• (i) The crude oil and petroleum products trading transactions were carried out in accordance with the terms of the relevant sales and purchase agreements and on terms agreed between the parties having regard to commercial practice of the crude oil industry and international market conditions during the year the transactions were entered into.

• (ii) The insurance premium was calculated by reference to the provisions of a document jointly issued by its ultimate holding company and the Ministry of Finance in the PRC in 1998 and at a predetermined percentage as revised by its ultimate holding company from time to time.

• (iii) The group engaged the intermediate holding company to refine and process crude oil into various types of petroleum products on behalf of the group. The crude oil refining and processing fees were charged in accordance with the terms of the relevant refining and processing agreements and at price not lower than US$10 per tonne of crude oil processed.

• (iv) The rentals on properties and motor vehicles were charged at a fixed monthly amount in accordance with the terms of the relevant rental agreements.

• (v) The jetty service fees were charged in accordance with the relevant service agreement and at rates based on the State-prescribed price regulated and standardised by the Ministry of Communications and government-approved prices approved by the Guangdong Price Bureau in the PRC.

• (vi) The maintenance service fees, which relate principally to after-sale services for plant and machinery purchased from or installed by the fellow subsidiaries, were charged in accordance with the terms of the relevant maintenance service agreements.

• (vii) The fuel were purchased at cost from the intermediate holding company.

• (viii) The operating fees in respect of petrol stations were charged at a fixed annual fee or with reference to the revenue of the relevant petrol stations in accordance with the terms of the relevant operating agreements for the operation of the petrol stations.

• (ix) Transportation service fees were charged by a fellow subsidiary for delivery of petroleum products to the groups’ petrol stations. The transportation service fee were charged at RMB23 per tonne which is in accordance with the price governing by Guangdong Price Bureau in the PRC.

• (x) Petroleum unloading services fee was charged to the intermediate holding company for unloading of petroleum products from storage tank to delivery truck. The unit price charged by the group is in accordance with the price governing by Guangdong Price Bureau in the PRC.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

• (xi) The construction and acquisition of plant and equipment for the crude oil jetty of the group and other attributable overheads were charged in accordance with the terms of the relevant construction and purchase agreements.

• (c) Certain banking facilities of the group have been supported by guarantees and/or other financial undertakings provided by the holding companies, at no cost to the group.

• (d) The balances with related companies are set out in the consolidated balance sheet and notes 17 and 20.

• (e) On 11 November 2004, Hua De Petrochemical Co. Ltd., an indirect subsidiary of the group, contracted with 廣州中元石油化工工程有限公司 (Guangzhou Zhong Yuan Petrochemical Engineering Co. Ltd.), an indirect wholly owned subsidiary of China Petrochemical Corporation for construction and installation of two crude oil storage tanks and relevant facilities in Huizhou, the PRC for a consideration of approximately $Nil (2004: $17.79 million).

• (f) In addition, a subsidiary of the company paid a dividend of approximately $4,428,530 (2004: $18,483,695) to its minority shareholder which is a fellow subsidiary of the group.

• (g) The group operates in an economic regime currently predominated by state-owned entities. Apart from transactions with the group’s holding companies and fellow subsidiaries, the group conducts a majority of its business activities with entities directly or indirectly owned or controlled by the PRC government and numerous government authorities and agencies (collectively referred to as “state-owned entities”) in the ordinary course of business. These transactions mainly include trading of crude oil, petroleum and petrochemical products and are carried out at terms similar to those that would be entered into with non-state-owned entities and have been reflected in the financial statements. The group believes that it has provided meaningful disclosure of related party transactions in Note 32 (b).

33 COMPARATIVE FIGURES

Certain comparative figures have been adjusted and re-classified as a result of the change in accounting policies. Further details are disclosed in note 2.

34 PARENT AND ULTIMATE HOLDING COMPANY

At 31 December 2005, the directors consider the parent and ultimate controlling party of the group to be Sinopec Kantons International Limited and China Petroleum & Chemical Corporation respectively, which are established in British Virgin Island and the PRC respectively. The ultimate controlling party produces financial statements available for public use.

35 ACCOUNTING ESTIMATES AND JUDGEMENT

The Group’s financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that the Group believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the financial statements. The principal accounting policies are set forth in Note 1. The Group believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of the financial statements.

Impairment for long lived assets

If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered “impaired”, and an impairment loss may be recognised in accordance with HKAS 36 “Impairment of Assets”. The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the group’s assets are not readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price and amount of operating costs. The group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.

Depreciation

Property, plant and equipment, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Impairment for bad and doubtful debts

The Group estimates impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. The Group bases the estimates on the aging of the accounts receivable balance, customer credit-worthiness, and historical writeoff experience. If the financial condition of the customers were to deteriorate, actual writeoffs would be higher than estimated.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

36 POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDED 31 DECEMBER 2005

Up to the date of issue of these financial statements, the HKICPA has issued the following amendments, new standards and interpretations which are not yet effective for the accounting period ended 31 December 2005 and which have not been adopted in these financial statements:

		Effective for
		accounting periods
		beginning on or after
HKFRS 6	Exploration for and evaluation of mineral resources	1 January 2006
HK(IFRIC) 4	Determining whether an arrangement contains a lease	1 January 2006
HK(IFRIC) 5	Rights to interests arising from decommissioning,	1 January 2006
	restoration and environmental rehabilitation funds
HK(IFRIC) 6	Liabilities arising from participating in a specific	1 December 2005
	market – Waste electrical and electronic equipment
HK (IFRIC) 7	Applying the restatement approach under IAS 29	1 March 2006
	Financial Reporting in hyperinflationary economies
Amendment to HKAS 1	Presentation of financial statements:	1 January 2007
	capital disclosures
Amendments to HKAS 19	Employee benefits – Actuarial Gains and Losses,	1 January 2006
	Group Plans and Disclosures
Amendments to HKAS 21	Net investment in a foreign operation	1 January 2006
Amendments to HKAS 39	Financial instruments:
	Recognition and measurement:
	– Cash flow hedge accounting of forecast	1 January 2006
	intragroup transactions
	– The fair value option	1 January 2006
	– Financial guarantee contracts	1 January 2006
Amendments to HKFRS 1	First-time Adoption of Hong Kong	1 January 2006
	Financial Reporting Standards
Amendments, as a
consequence of the
Hong Kong Companies
(Amendment) Ordinance
2005, to:
– HKAS 1	Presentation of financial statements	1 January 2006
– HKAS 27	Consolidated and separate financial Statements	1 January 2006
– HKFRS 3	Business combinations	1 January 2006
HKFRS 7	Financial instruments: disclosures	1 January 2007

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on 1 December 2005 and would be first applicable to the group’s financial statements for the period beginning 1 January 2006.

The group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of HKFRS 6, HK(IFRIC) 5, HK(IFRIC) 6, HK(IFRIC) 7 and HKAS 19 and the amendments to HKFRS 1 are not applicable to any of the group’s operations and the adoption of the rest of them is unlikely to have a significant impact on the group’s results of operations and financial position.

4. 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 Group had outstanding borrowings of approximately HK$890,206,000, comprising secured bank loans, unsecured bank loans and loans under bills discounted of approximately HK$5,859,000, HK$633,374,000, and HK$250,973,000, respectively.

Bank loan amounting to HK$5,859,000 is secured by the land of a subsidiary of the Group. Unsecured bank loans amounting to HK$154,906,000 are guaranteed by the Company.

Save as aforesaid above, at the close of business on 31 May 2006, the Group did not have any outstanding mortgages, charges, debentures or other loan capital or bank overdrafts, loans, debt securities or other similar indebtedness, liabilities under acceptances or acceptances credits or hire purchase commitments, or any guarantees or any contingent liabilities.

The Directors have confirmed that, save as disclosed above, there has not been any material change in the indebtedness and contingent liabilities of the Group since 31 December 2005.

5. WORKING CAPITAL

The Directors are of the opinion that taking into account cash balances of the Group and in the absence of unforeseen circumstances, and the existing banking facilities and financial resources available to the Group, the Group has sufficient working capital for its present requirements (for at least the next twelve months from the date of this circular).

6. MATERIAL ADVERSE CHANGE

Save as disclosed in the annual report of the Company for the year ended 31 December 2005, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. MANAGEMENT DISCUSSION AND ANALYSIS

For the year ended 31st December 2003

BUSINESS REVIEW

2003 saw a year of unrest. Oil prices sharply fluctuated and remained high for long period of time with the outbreak of US-Iraqi War. Korean nuclear crisis also added a new variable to the global environment. In addition, the widespread of Severe Acute Respiratory Syndrome (“SARS”) in the People’s Republic of China (“PRC”) and Hong Kong during March and April in last year heavily attacked the public confidence in consumption and to a certain extent, slowed down economic development. Despite the above, the economies of some Asian countries such as China and India still showed a strong growth performance. With the benefits under Closer Economic Partnership Arrangement (“CEPA”), Hong Kong’s economy showed a prominent sign of recovery and a steady decrease in unemployment rate in the second half of the year. In this capricious and complicated market condition, the Company and its subsidiaries (the “Group”) overcame numerous difficulties and achieved relatively stable results through its staff’s effort. For the accounting year ended 31 December 2003, the Group realized a turnover of HK$7,702,000,000, representing a substantial growth of 23.19% over the corresponding period of the preceding year. In 2003, the Group recorded profit attributable to shareholders of HK$139,000,000 and earnings per share of HK$13.37 cents, representing an decrease of 6.63% as compared with the corresponding period of the preceding year. The Group generally kept stable operating results and healthy financial performance with excellent assets quality. The stock of the Company was accepted by the Hang Seng Composite Index as a constituent stock on 4 August 2003.

Huizhou GPC Crude Oil Jetty Complex of the Group (“Huizhou Jetty”) maintained a stable operation and systematic management and achieved steady growth results. In 2003, as compared with the previous year, the volume of crude oil transmitted by it increased by 2.98% to 6,910,000 tonnes; the volume of crude oil received and unloaded increased by 3.37% to 7,060,000 tonnes; and the average daily storage volume of crude oil increased by 20.45% to 265,000 tonnes. On the same basis of comparison, the turnover of jetty operation for the year increased by 4.89% to HK$321,000,000; and profit after tax increased by 6.28% (approximately HK$186,000,000). The growth in results of the jetty operation was mainly attributable to an increase in the capacity of oil refining and processing of China Petroleum & Chemical Corporation Guangzhou Branch (“Sinopec Guangzhou Branch”) as well as its effective measures in increasing revenue and reducing cost. Currently, the jetty-centred logistic facilities are being improved. After completion of the second phase channel and port dredge works, the facilities have been put into operation and is basically able to allow the anchoring and operation of 300,000-tonne tankers. The construction of a one million cubic meter on-shore oil storage tank commenced and the work of leveling the site in the storage area was fully completed. The initial two storage tanks of 100,000 cubic metres will be delivered in June of 2004. Approved by the General Administration of Customs of the State, a 300,000-tonne bonded crude oil storage tank set up in Ma Bian Zhou Island Storage Tank Area (馬鞭洲島儲存 油庫區 ) was put into operation formally. This further expanded the rooms for development of crude oil trading business and increased the storage rate of the oil storage tanks. In June of 2003, a total of 460,000 barrels of crude oil was put under bonded storage for the first time and generated an economic benefits of more than US$700,000, creating valuable experience for the operation of bonded storage tank in the future.

– 88 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group expanded the operation and management of petrol stations strictly in line with the strategies of “resources centralisation, clear relation, systematic management, skillful operation and stable development”. This further rationalized the management framework and shareholding structure of petrol stations. As a result, a professional and standardized management system was established, thereby centralizing the management and resources deployment of petrol stations. Now, the Group operates 42 petrol stations in the Pearl River delta region where the economy has been well developed and has a strong consumption demand for oil products. The brand name of “Kantons Petrol Station” (冠德 油站 ) has been generally recognized and appreciated by the public in that region. For the year ended 31 December 2003, the division of petrol station business sold 390,000 tonnes of petroleum products, realizing a turnover of HK$1,207,000,000 and profit after tax of HK$10,000,000. The decline in operating results was attributable to the decrease in gross profit.

In 2003, international oil market fluctuated vigorously and prices remained high, causing difficulties in oil product business. Under such circumstances, the Group stuck to the strategies of practical operation and prudent development and succeeded in controlling operating risks by closely monitoring market change, deeply analyzing market trend and skillfully making use of various trading means and marketing tools. Besides, the Group used its extensive trading channels and customer network to develop new oil products timely, resulting in rapid growth and relatively stable operating results. In 2003, the Group’s sales volumes of crude oil amounted to 2,900,000 tonnes, increasing by 13.73 % over the preceding year. The sales revenue of international trade recorded HK$6,174,000,000, representing a growth of 28.38% over the preceding year.

CAPITAL STRUCTURE

For the year ended 31st December, 2003, there has been no change in the Company’s share capital.

FINANCIAL REVIEW

Liquidity and Source of Finance

The Group continued to maintain a healthy financial position. As at 31 December 2003, cash and bank balances amounted to HK$221,000,000 (at 31 December 2002: HK$268,000,000). As at 31 December 2003, the Group had bank borrowings of HK$226,000,000 (at 31 December 2002: HK$259,000,000), all of which were short term.

Gearing Ratio

As at 31 December 2003, the current ratio of the Group (current assets to current liabilities) was 1.92 (at 31 December 2002: 1.56) and the gearing ratio (total liabilities to total assets) was 25.3% (at 31 December 2002: 31.0%).

Capital Expenditure

The total capital expenditure for the year amounted to HK$166,000,000 (2002: HK$123,000,000). During the year, the Group invested approximately HK$112,000,000 in constructing storage and conveyance facilities for jetty situated in the PRC. The Group also incurred other capital expenditure which amounted to approximately HK$54,000,000.

– 89 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Significant Investments and Material Acquisitions and Disposals

During the year, the Group acquired certain petrol stations in Guangdong Province, the PRC.

Contingent Liabilities and Pledged Assets

As at 31 December 2003, the Group did not have any contingent liabilities and pledged assets.

Exchange Risk

As the Group’s operations are principally based in the PRC, and all assets and liabilities are denominated either in Renminbi, Hong Kong dollars or US dollars, the Directors believe that the operations of the Group are not subject to significant foreign exchange risk.

Employees and Emolument Policies

As at 31 December 2003, the Group had a total of 1,297 employees, more or less the same as at the beginning of the year. The Group’s emolument policies are formulated on the basis of the performance of individual employee, the salary trends in various regions and employees’ contribution to the Group. Subject to the profit of the Group and the performance of the employees, the Group may also provide discretionary bonus to its employees as an incentive for their further contribution.

For the year ended 31st December 2004

BUSINESS REVIEW

In the year of 2004, the global economy prospered while the economy of China kept growing steadily under the government’s macroeconomic adjustment policy, which successfully prevented the economy from overheating. Demand for oil, oil products and petrochemical products remained strong in a new round of growth. The Hong Kong economy showed encouraging and strong recovery boosted by the joint efforts of the central government and the government together with the industrial and commercial sectors of Hong Kong, after a difficult period caused by the Asian financial crisis and SARS. Internationally, due to the continual weakening of US dollar, increase in international energy consumption, volatile situation in the oil production regions and severe weather in winter, crude oil price surged to US$55 for a time. Although a slight reduction was seen at the end of the year, overall speaking, crude oil price lingered at a high level.

Faced with the surge in oil price and volatile market environment, the Company and its subsidiaries (the “Group”) achieved satisfactory operating results with sustained efforts contributed by all our staff members and by grasping the right opportunities whilst avoiding risks. For the accounting year ended 31 December 2004, steady growth in performance was achieved and turnover amounted to HK$8,450 million, representing a

– 90 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

growth of 9.7% over the accounting year of 2003. In 2004, the Group recorded profit attributable to shareholders of HK$154 million and earnings per share of HK$14.9 cents, representing an increase of 11.1% as compared with the corresponding period of the preceding year. In brief and in conclusion, the Group made steady progress in performance and maintained sound financial position and excellent asset quality in 2004.

Huizhou Crude Oil Jetty (“Huizhou Jetty”) of the Group maintained a stable operation and systematic management. Benefited from the growth in domestic market demand and increase in oil refining and processing capacity of Sinopec Guangzhou Branch, the operation load of Huizhou Jetty was enlarged significantly leading to good progress in performance. In 2004, as compared with the previous year, the volume of crude oil transmitted by Huizhou Jetty increased by 7.5% to 7.43 million tones. Huizhou Jetty recorded annual turnover of approximately HK$330 million, representing a growth of 3.4% over the preceding year, and recorded operating profit of approximately HK$210 million, representing a growth of 3.1% over the preceding year. In 2004, with the basic construction of the onshore oil depot taking shape and completion of two onshore oil storage tanks (with storage capacity of 200,000 cubic metre), users could ensure comprehensive back up for further rise in their oil refining capacity, and the Group’s future profitability was simultaneously enhanced. Construction of Huizhou Jetty’s oil transportation system was basically completed, making the ancillary facilities of the bonded oil depot more comprehensive and improving the operational flexibility of the bonded oil depot, which, under a volatile crude oil market environment, provided the Group with additional means to avoid risks and created new profit-making opportunities.

The petrol stations of the Group experienced unprecedented difficulties in 2004. Surge in crude oil price led to sustained high oil product price. The costs borne by petrol stations increased significantly. On the other hand, the retail price of oil products in China showed no significant increase owing to objective factors in the market. The profit margin of petrol stations was reduced. Under such circumstances, the Group further strengthened management of the petrol stations, rationalized station distribution, diversified operating risks, centralized resource deployment and enhanced cost effectiveness, but the results still declined. In 2004, the petrol stations sold 450,000 tones of oil products, realizing a turnover of approximately HK$1,510 million, an increase of 24.8% from the preceding year but operating profit dropped by 37.4%.

In the preceding year, the international market price of oil remained high, bringing both opportunities and challenges to the Group’s oil product operations. Subject to strict risk management, the Group achieved steady progressive in performance by closely monitoring market changes and constantly assessing the latest market trend. In 2004, the sales revenue of international trade recorded HK$6,610 million, representing a growth of 7.0% over the preceding year. Operating profit increased by 1.2 times compared with the corresponding period last year.

CAPITAL STRUCTURE

For the year ended 31st December, 2004, there has been no change in the Company’s share capital.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCIAL REVIEW

Liquidity and Source of Finance

The Group continued to maintain a healthy financial position. As at 31 December 2004, cash and bank balances amounted to approximately HK$119 million (at 31 December 2003: HK$221 million). As at 31 December 2004, the Group had bank borrowings of approximately HK$301 million (at 31 December 2003: HK$226 million), all of which were short term.

Gearing Ratio

As at 31 December 2004, the current ratio of the Group (current assets to current liabilities) was 1.46 (at 31 December 2003: 1.92) and the gearing ratio (total liabilities to total assets) was 23.5% (at 31 December 2003: 25.3%).

Capital Expenditure

The total capital expenditure for the year amounted to HK$229 million (2003: HK$166 million). During the year, the Group invested approximately HK$145 million in constructing storage and conveyance facilities for jetty situated in the PRC. The Group also incurred other capital expenditure which amounted to approximately HK$84 million.

Significant Investments and Material Acquisitions and Disposals

During the year, the Group acquired certain petrol stations in Guangdong Province, the PRC.

Contingent Liabilities and Pledged Assets

As at 31 December 2004, the Group did not have any contingent liabilities and pledged assets. Except for contingent liabilities in respect of banking facilities utilised by certain subsidiaries and guaranteed by the Company amounting to approximately HK$139 million (2003: HK$99 million).

Exchange Risk

As the Group’s operations are principally based in the PRC, and all assets and liabilities are denominated either in Renminbi, Hong Kong dollars or US dollars, the Directors believe that the operations of the Group are not subject to significant foreign exchange risk.

Employees and Emolument Policies

As at 31 December 2004, the Group had a total of 1,408 employees. The Group’s emolument policies are formulated on the basis of the performance of individual employee, the salary trends in various regions and employees’ contribution to the Group.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Subject to the profit of the Group and the performance of the employees, the Group may also provide discretionary bonus to its employees as an incentive for their further contribution.

For the year ended 31st December 2005

BUSINESS REVIEW

For the year ended 31 December 2005, the Group’s turnover totalled HK$12,150,000,000, representing an increase of 44% over the corresponding period last year. Profit attributable to shareholders was HK$136,000,000, a decrease of 12% compared to the same period in the previous year. The decrease in profit was mainly the result of reduced business as a major customer of the Group temporarily stopped operation for maintenance.

During the year of 2005, Sinopec Guangzhou Branch stopped operation for maintenance and business of Huizhou Crude Oil Jetty was significantly lowered. As such, transmitted crude oil was decreased by 9% from last year to 6,790,000 tonnes; crude oil loading was 6,900,000 tonnes, representing a decrease of 6% over the previous year. The jetty segment recorded turnover of HK$330,000,000 and net profit after tax of HK$150,000,000 for the year, representing a decrease of 6% and 25% respectively compared to the corresponding period last year.

For the year ended 31 December 2005, the Group’s petrol stations product sales totalled approximately 550,000 tonnes, representing a growth rate of 22% over the same period last year. Turnover was approximately HK$2,100,000,000, representing a growth rate of approximately 40% for the same period last year. On the other hand, the profit margin of petrol station operation decreased by 30% as affected by China’s oil product price adjustment mechanism for the domestic market. In spite of the fact that the petrol stations took various cost reduction measures, the net loss of HK$1,790,000 was recorded.

In 2005, the Group sold 2,470,000 tonnes of crude oil, and sales revenue amounted to HK$7,000,000,000, representing a growth rate of approximately 6% and 39% respectively over the same period last year. Petrochemicals sales was 430,000 tonnes, representing a drop of 8% over the same period last year; realizing sales revenue of HK$1,700,000,000, representing a growth rate of approximately 34% over the same period last year. The significant growth in sales revenue was largely a result of continual surge in crude oil prices. Despite the increase in volatility of crude oil prices which brought about higher operating risks, the Group still recorded a gross profit of international trade of HK$55,740,000, a decrease of HK$7,430,000 over the same period last year; while net profit dropped HK$2,120,000.

CAPITAL STRUCTURE

For the year ended 31st December, 2005, there has been no change in the Company’s share capital.

– 93 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCIAL REVIEW

Liquidity and Source of Finance

The Group continued to maintain a healthy financial position. As at 31 December 2005, cash and bank balances totalled approximately HK$152,000,000 (31 December 2004: HK$119,000,000); bank borrowings was approximately HK$173,000,000 (31 December 2004: HK$301,000,000) of which approximately HK$162,000,000 was shortterm bank borrowings and approximately HK$11,000,000 was long-term bank borrowings.

Gearing Ratio

As at 31 December 2005, the Group’s current ratio (current assets to current liabilities) was 1.65 (31 December 2004: 1.46) and gearing ratio (total liabilities to total assets) was 25.3% (31 December, 2004: 23.5%).

Contingent Liabilities and Pledged Assets

As at 31 December 2005, except for contingent liabilities in respect of banking facilities utilised by certain subsidiaries and guaranteed by the Company amounting to approximately HK$135,381,000 (31 December 2004: HK$138,607,000), the Group did not have any contingent liabilities and pledged assets.

Exchange Risk

As the Group’s operations are in the PRC, including Hong Kong and Macau, and all its assets and liabilities are denominated either in Renminbi, Hong Kong dollars or US dollars, the Directors believe that the operations of the Group are not subject to significant foreign exchange risk.

Employees and Emolument Policies

As at 31 December 2005, the Group had a total of 1,326 employees. Remuneration packages including basic salary, bonus and benefit in kind are structured by reference to market terms, trend of human resources costs in various regions and employee’s contribution based on performance appraisal. Subject to the profit for the Group and the performance of the employees, the Group may also provide discretionary bonus to its employees as an incentive for their further contribution.

– 94 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

The following is the text of a report, prepared for the sole purpose of incorporation in this Circular, received from the independent reporting accountants of the Company, KPMG, Certified Public Accountants, Hong Kong. As described under “Documents available for inspection” in Appendix IV to this Circular, a copy of the accountants’ report is available for inspection.

==> picture [87 x 36] intentionally omitted <==

8th Floor Prince’s Building 10 Chater Road Hong Kong 31 July 2006

The Board of Directors Sinopec Kantons Holdings Limited 1608 Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong

We set out below our audit report on the financial information relating to Huade Petrochemical Company Limited (“Huade” or the “Target Company”) and its subsidiaries, (hereinafter collectively referred to as the “Target Group”) in Sections I to VI, including the consolidated balance sheets as at 31 December 2003, 2004 and 2005, and 31 March 2006, and the related consolidated income statements, consolidated statements of changes in equity and consolidated cash flow statements of the Target Group for each of the years ended 31 December 2003, 2004 and 2005, and for the three months ended 31 March 2006 (the “relevant period”), and the notes thereto (collectively the “Financial Information”), together with the unaudited financial information of the Target Group including the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the three months ended 31 March 2005 and the notes thereto (the “31 March 2005 Corresponding Information”), for inclusion in the Circular of Sinopec Kantons Holdings Limited (“the Company”) dated 31 July 2006 (the “Circular”).

Huade was established in the People’s Republic of China (the “PRC”) on 7 January 1994 as a sino-foreign equity joint venture company. Huade is principally engaged in the operating of a crude oil jetty and its ancillary facilities in Huizhou in the PRC. Kantons Gas Station Investment and Management Company Limited (“KGSIM”), which is a 90% owned subsidiary of Huade, was established in the PRC on 18 January 2002 as a limited liability company, and it is principally engaged in the investment and management of petrol stations in Guangdong Province in the PRC.

The Company holds 70% equity interests in Huade through Kantons International Investment Limited (“KII”). KII is a wholly owned subsidiary of the Company. Sinopec Guangzhou Petroleum Complex (“GPC”), a fellow subsidiary, holds the remaining 10% equity interests in Huade.

Both Huade and KGSIM are registered in the PRC and are required to prepare statutory financial statements, based on 31 December year end, in accordance with relevant accounting rules and regulations applicable in the PRC.

– 95 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

The statutory financial statements of the Target Company and its subsidiaries were audited by the following certified public accountants registered in the PRC:

Name of Company	Financial Period	Auditors
Huade	Years ended 31 December	Hui Zhou Fang Zheng
	2003, 2004 and 2005	Partnership Certified
		Public Accountants
KGSIM	Years ended 31 December	Guang Dong Feng Heng
	2003, 2004 and 2005	Certified Public
		Accountants Co., Ltd
Zhuhai Jingxing Huade	Years ended 31 December	Zhuhai Huatian
Petrochemical Co., Limited	2003, 2004 and 2005	Certified Public
（珠海市景星華德石化		Accountants Co., Ltd
有限公司）		（珠海市華天會計師
		事務所有限公司）
Shaoguan Mingzhu	Years ended 31 December	Shaoguan Zhongyi
Petrochemical Co., Limited	2003, 2004 and 2005	Certified Public
（韶關明珠石化有限公司）		Accountant Co., Ltd
		（韶關市鐘一會計師
		事務所有限公司）
Zhuhai Jingji Tequ Petroleum	Years ended 31 December	Zhuhai Yuehua Andi
and Chemical Trading	2003, 2004 and 2005	Lianhuan Certified
Co., Limited		Accountants
（珠海經濟特區石油化工		（珠海岳華安地聯歡
貿易有限公司）		會計師事務所）
Doumen Huade Petrochemical	Years ended 31 December	Zhuhai Huatian
Co., Limited	2003, 2004 and 2005	Certified Public
（斗門華德石油化工		Accountants Co., Ltd
有限公司）		（珠海市華天會計師
		事務所有限公司）
Heyuan Huade Nanfang	Years ended 31 December	Heyuan Dongjiang
Petroleum and Chemical	2003, 2004 and 2005	Certified Public
Co., Limited		Accountants
（河源市華德南方石油		（河源市東江
化工有限公司）		會計師事務所）

Other PRC subsidiaries of the Target Company are not required to prepare statutory financial statements.

– 96 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

The Financial Information of the Target Group for each of the years ended 31 December 2003, 2004 and 2005 were included in the Company’s consolidated financial statements audited by us. The consolidated financial statements have been prepared by the Company in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These consolidated financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

No Financial Information of the Target Group has been prepared and audited subsequent to 31 March 2006.

BASIS OF PREPARATION

The Financial Information, together with the 31 March 2005 Corresponding Information, has been prepared by the management of the Target Group in accordance with HKFRSs based on the audited financial statements or, where appropriate, management accounts of the companies comprising the Target Group. Adjustments have been made, for the purpose of this report, to restate those financial statements, or, where appropriate, management accounts to conform with HKFRSs and the disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

RESPONSIBILITIES

The management of the Target Group is responsible for preparing the Financial Information which gives a true and fair view. In preparing the Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates are made which are prudent and reasonable and that the reasons for any significant departure from applicable accounting standards are stated.

It is our responsibility to form an independent opinion, based on our audit, on the Financial Information.

BASIS OF OPINION

As a basis for forming an opinion on the Financial Information, for the purpose of this report, we have carried out appropriate audit procedures in respect of the audited financial statements or, where appropriate, management accounts of the companies comprising the Target Group for each of the years ended 31 December 2003, 2004 and 2005 and for the three months ended 31 March 2006 in accordance with Hong Kong Standards on Auditing issued by the HKICPA and carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline “Prospectus and the Reporting Accountants’ issued by the HKICPA. We have not audited any Financial Information of the Target Group in respect of any period subsequent to 31 March 2006.

– 97 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Information. It also includes an assessment of the significant estimates and judgements made by the management of the Target Group in the preparation of the Financial Information, and of whether the accounting policies are appropriate to the circumstances of the Target Group, consistently applied and adequately disclosed.

We planned and performed 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 Information is free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of Financial Information. We believe that our audit provides a reasonable basis for our opinion.

OPINION

In our opinion, for the purpose of this report, all adjustments considered necessary have been made and the Financial Information gives a true and fair view of the Target Group’s consolidated results, consolidated changes in equity and consolidated cash flows for the relevant period, and the Target Company’s and the Target Group’s state of affairs at 31 December 2003, 2004 and 2005, and 31 March 2006.

REVIEW WORK PERFORMED

For the purpose of this report, we have also reviewed the 31 March 2005 Corresponding Information, for which the management of the Target Group are responsible, in accordance with Statement of Auditing Standards 700 “Engagements to review interim financial reports” issued by the HKICPA.

A review consists principally of making enquiries of management and applying analytical procedures to the 31 March 2005 Corresponding Information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the 31 March 2005 Corresponding Information.

REVIEW CONCLUSION

On the basis of our review of the 31 March 2005 Corresponding Information, which does not constitute an audit, for the purpose of this report, we are not aware of any material modifications that should be made to the unaudited financial information presented for the three months ended 31 March 2005.

– 98 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(I) CONSOLIDATED INCOME STATEMENTS

Years Section (VI) 2003 Note RMB’000 Turnover 2 1,638,311 Cost of revenue (1,298,028) Gross profit 340,283 Other revenue 3 16,867 Distribution costs (64,483) Administrative expenses (51,874) Profit from operations 240,793 Finance costs 4(a) (7,267) Profit before taxation 4 233,526 Income tax 5 (21,483) Profit for the year/period 212,043 Attributable to: Equity owners of the Target Company 210,807 Minority interests 1,236 Profit for the year/period 212,043 Dividends payable to equity owners of the Target Company attributable to the year/period: Dividends declared or approved during the year/period 8 110,000	ended 31 December 2004 2005 RMB’000 RMB’000 1,973,551 2,594,600 (1,631,738) (2,308,007) 341,813 286,593 20,766 20,364 (67,847) (65,914) (52,036) (56,859) 242,696 184,184 (6,581) (10,842) 236,115 173,342 (23,053) (19,270) 213,062 154,072 211,957 153,947 1,105 125 213,062 154,072 65,925 –	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 557,219 501,750 (490,961) (432,493) 66,258 69,257 1,398 2,276 (11,281) (16,080) (13,287) (12,730) 43,088 42,723 (3,553) (1,832) 39,535 40,891 (3,544) (3,594) 35,991 37,297 36,626 38,003 (635) (706) 35,991 37,297 – –

– 99 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(II) CONSOLIDATED BALANCE SHEETS

Section (VI) Note Non-current assets Fixed assets 10 – Property, plant and equipment – Construction in progress – Interests in leasehold land held for own use under operating lease Intangible assets 11 Current assets Inventories 13 Trade and other receivables 14 Amounts due from holding companies and fellow subsidiaries 15 Cash and cash equivalents 17 Current liabilities Trade and other payables 18 Amounts due to holding companies and fellow subsidiaries 15 Bank loans 19 Current taxation 20 Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Bank loans 19 Loans from immediate holding company and fellow subsidiary 16 NET ASSETS Capital and reserves Capital Reserves Total equity attributable to equity owners of the Target Group 22 Minority interests 22 TOTAL EQUITY	31 December 2003 2004 RMB’000 RMB’000 1,307,213 1,535,138 135,489 4,907 71,214 99,466 73,791 93,552 1,587,707 1,733,063 ----------- ----------- 19,668 68,442 67,255 60,646 202,100 41,391 189,988 84,314 479,011 254,793 ----------- ----------- 106,816 161,822 6,803 23,901 136,268 172,108 5,394 5,034 255,281 362,865 ----------- ----------- 223,730 (108,072) ----------- ----------- 1,811,437 1,624,991 ----------- ----------- – – 607,760 203,013 607,760 203,013 ----------- ----------- 1,203,677 1,421,978 722,799 787,693 455,103 601,135 1,177,902 1,388,828 25,775 33,150 1,203,677 1,421,978	2005 RMB’000 1,448,642 70,322 98,459 83,305 1,700,728 ----------- 124,298 51,416 31,800 104,296 311,810 ----------- 211,944 34,414 168,036 7,449 421,843 ----------- (110,033) ----------- 1,590,695 ----------- 11,819 – 11,819 ----------- 1,578,876 787,693 755,082 1,542,775 36,101 1,578,876	31 March 2006 RMB’000 1,426,054 183,519 91,043 80,814 1,781,430 ----------- 171,591 124,658 46,304 51,041 393,594 ----------- 304,224 9,598 239,858 6,477 560,157 ----------- (166,563) ----------- 1,614,867 ----------- – – – ----------- 1,614,867 787,693 791,708 1,579,401 35,466 1,614,867

– 100 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(III) BALANCE SHEETS

Section (VI) Note Non-current assets Fixed assets 10 – Property, plant and equipment – Construction in progress – Interests in leasehold land held for own use under operating lease Investment in subsidiaries 12 Current assets Inventories 13 Trade and other receivables 14 Amounts due from holding companies and fellow subsidiaries 15 Cash and cash equivalents 17 Current liabilities Trade and other payables 18 Amounts due to holding companies and fellow subsidiaries 15 Bank loans 19 Current taxation 20 Net current assets/(liabilities) Total assets less current liabilities Non-current liabilities Bank loans 19 Loans from ultimate holding company and fellow subsidiary 16 NET ASSETS Capital and reserves Capital Reserves TOTAL EQUITY 22	31 December 2003 2004 RMB’000 RMB’000 1,241,581 1,449,682 134,603 4,851 31,048 30,841 130,500 180,500 1,537,732 1,665,874 ----------- ----------- 2,014 1,848 12,737 2,646 219,670 40,763 97,299 35,719 331,720 80,976 ----------- ----------- 23,936 49,155 – 10,799 82,768 124,108 3,906 3,428 110,610 187,490 ----------- ----------- 221,110 (106,514) ----------- ----------- 1,758,842 1,559,360 ----------- ----------- – – 607,760 203,013 607,760 203,013 ----------- ----------- 1,151,082 1,356,347 722,799 787,693 428,283 568,654 1,151,082 1,356,347	2005 RMB’000 1,370,711 70,195 29,803 197,437 1,668,146 ----------- 1,736 5,521 25,056 43,478 75,791 ----------- 27,157 12,092 162,036 2,107 203,392 ----------- (127,601) ----------- 1,540,545 ----------- 11,819 – 11,819 ----------- 1,528,726 787,693 741,033 1,528,726	31 March 2006 RMB’000 1,348,941 183,519 29,543 197,437 1,759,440 ----------- 1,758 30,104 32,235 10,982 75,079 ----------- 74,219 2,280 183,859 3,425 263,783 ----------- (188,704) ----------- 1,570,736 ----------- – – – ----------- 1,570,736 787,693 783,043 1,570,736

– 101 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(IV) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Years Section (VI) 2003 Note RMB’000 Total equity at 1 January 22 1,102,708 ------------- Net profit for the year/period – Attributable to equity owners of the Target Group 210,807 – Minority interests 22 1,236 212,043 ------------- Dividends declared or approved during the year/period (110,000) ------------- Dividends paid by subsidiaries to minority owners 22 (1,796) ------------- Movements in equity arising from capital transactions: Minority interests arising from acquisition of subsidiaries during the year/period 22 722 Capital contribution 22 – 722 ------------- Total equity at 31 December/31 March 1,203,677	ended 31 December 2004 2005 RMB’000 RMB’000 1,203,677 1,421,978 ------------- ------------- 211,957 153,947 1,105 125 213,062 154,072 ------------- ------------- (65,925) – ------------- ------------- – – ------------- ------------- 6,270 2,826 64,894 – 71,164 2,826 ------------- ------------- 1,421,978 1,578,876	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 1,578,876 1,421,978 ------------- ------------- 36,626 38,003 (635) (706) 35,991 37,297 ------------- ------------- – – ------------- ------------- – – ------------- ------------- – – – – – – ------------- ------------- 1,614,867 1,459,275

– 102 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(V) CONSOLIDATED CASH FLOW STATEMENTS

Years ended 31 December Section (VI) 2003 2004 2005 Note RMB’000 RMB’000 RMB’000 Operating activities Profit before taxation 233,526 236,115 173,342 Adjustments for: – Depreciation 85,668 87,010 100,999 – Amortisation of intangible asset (4(c)) 7,111 8,102 10,247 – Finance costs (4(a)) 7,267 6,581 10,842 – Interest income (3) (3,493) (4,082) (2,196) – Loss/(gain) on sale of fixed assets (4(c)) 1,893 996 757 Operating profit before changes in working capital 331,972 334,722 293,991 Decrease/(Increase) in inventories 13,978 (32,888) (38,834) (Increase)/decrease in trade and other receivables (14,618) 17,780 19,577 Increase in trade and other payables 2,237 27,049 21,115 (Decrease)/increase in amounts due from holding companies and fellow subsidiaries (96,865) 176,775 20,104 Cash generated from operations 236,704 523,438 315,953 PRC income tax paid (22,611) (23,413) (16,855) Net cash generated from/(used in) operating activities 214,093 500,025 299,098 ------------- ------------- -------------

Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 39,535 40,891 23,923 23,965 2,491 2,137 3,553 1,832 (406) (574) (89) 248 69,007 68,499 (47,293) (38,899) (73,242) (43,688) 92,280 159,703 (39,320) (48,792) 1,432 96,823 (4,516) (1,335) (3,084) 95,488 ------------- -------------

– 103 –

APPENDIX II

ACCOUNTANTS’ REPORT ON HUADE

Years ended 31 December Section (VI) 2003 2004 2005 Note RMB’000 RMB’000 RMB’000 Investing activities Payment for the purchase of fixed assets (137,551) (173,223) (80,635) Proceeds from disposal of fixed assets 10,853 5,064 5,901 Proceeds from disposal of intangible assets 4,936 – – Interest received 3,493 4,082 2,196 Payment for purchase of subsidiaries (net of cash acquired) (32,635) (66,134) (470) Net cash used in investing activities (150,904) (230,211) (73,008) ------------- ------------- ------------- Financing activities Proceeds from new bank loans 254,057 89,340 254,066 Repayment of bank loans (201,289) (53,500) (246,319) Repayment of loans from holding company and fellow subsidiaries – (404,747) (203,013) Interest paid (7,267) (6,581) (10,842) Dividends paid during the year (110,000) – – Dividends paid by subsidiary to minority shareholder (1,796) – – Net cash (used in)/from financing activities (66,295) (375,488) (206,108) ------------- ------------- ------------- Net (decrease)/increase in cash and cash equivalents (3,106) (105,674) 19,982 Cash and cash equivalents at 1 January 193,094 189,988 84,314 Cash and cash equivalents at 31 December/ 31 March 17 189,988 84,314 104,296

Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) (114,023) (21,980) 6,996 112 – – 406 574 – – (106,621) (21,294) ------------- ------------- 98,920 175,718 (38,917) (28,230) – (203,013) (3,553) (1,832) – – – – 56,450 (57,357) ------------- ------------- (53,255) 16,837 104,296 84,314 51,041 101,151

Major non-cash transaction:

In April 2004, the Target Company declared dividends totalling RMB65,952,000, out of which RMB64,894,000 was subsequently re-invested by the owners as additional capital in June 2004.

– 104 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(VI) NOTES TO THE FINANCIAL INFORMATION

1 PRINCIPAL ACCOUNTING POLICIES

(a) Statement of compliance

These Financial Information have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These Financial Information also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Target Group is set out below.

The Target Company has previously prepared its financial statements in accordance with relevant accounting rules and regulations applicable in the PRC (“PRC GAAP”), but has not prepared consolidated financial statements. These are the Target Group’s first HKFRS consolidated financial statements and HKFRS 1, First-time adoption of Hong Kong Financial Reporting Standards, has been applied.

The Target Group has not early adopted any HKFRSs that are not yet effective for the accounting period ending 31 December 2006 (see note 32).

The accounting policies set out below have been applied consistently for all periods presented in the Financial Information and throughout the Target Group.

(b) Basis of preparation of the Financial Information

The measurement basis used in the preparation of the Financial Information is the historical cost basis.

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 sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the Financial Information and estimates with a significant risk of material adjustment in the next year are discussed in note 31.

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(c) Subsidiaries and controlled entities

A subsidiary is a company in which the Target Group, directly or indirectly, holds more than half of the issued share capital or controls more than half of the voting power or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Target Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

An investment in a controlled subsidiary is consolidated into the consolidated Financial Information from the date that control commences until the date control ceases.

Intra-group balances and transactions and any unrealised profits arising from intragroup transactions are eliminated in full in preparing the consolidated Financial Information. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

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

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

In the Target Company’s balance sheet, investment in subsidiary is stated at cost less impairment losses (see note 1(i)), unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sale).

(d) Goodwill

Goodwill represents the excess of the cost of a business combination acquisition over the Target Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note 1(i)).

Any excess of the Target Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination is recognised immediately in profit or loss.

On disposal of a cash generating unit during the year/period, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

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(e) Property, plant and equipment

The following items of property, plant and equipment are stated in the balance sheets at cost less accumulated depreciation and impairment losses (see note 1(i)):

• buildings held for own use which are situated on leasehold land, where the fair value of the building could be measured separately from the fair value of the leasehold land at the inception of the lease; and

• other items of plant and equipment.

The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see note 1(t)).

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in consolidated income statement on the date of retirement or disposal.

Depreciation is calculated to write off the cost of property, plant and equipment, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:

• buildings are depreciated over the shorter of their estimated useful lives, being from 15 years to 35 years, and the unexpired terms of the leases; and

• other property, plant and equipment are depreciated over their estimated useful lives as follows:

Leasehold improvements	12-25 years
Jetty structures	20-40 years
Jetty facilities	20-40 years
Plant and machinery	8-20 years
Furniture, fixtures and equipment	5-8 years
Motor vehicles	5-18 years

Both the useful life of an asset and its residue value, if any, are reviewed annually.

(f) Construction in progress

Construction in progress is stated at cost less impairment losses (see note 1(i)) and is transferred to the relevant classes of property, plant and equipment when the asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress.

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(g) Intangible assets (other than goodwill)

Operating rights arising from the acquisition of petrol stations represent payments to owners of petrol stations for the rights to operate such petrol stations, which are stated in the balance sheet at cost less accumulated amortisation and impairment losses (see note 1(i)).

Amortisation of intangible asset is charged to profit or loss on a straight-line basis over the asset’s estimated useful lives unless such lives are indefinite. Operating rights for petrol stations are amortised on a straight-line basis over the operating periods of the respective petrol stations.

Both the period and method of amortisation and any conclusion that the useful life of an intangible asset is indefinite are reviewed annually.

(h) Leased assets

Leases which do not transfer substantially all the risks and rewards of ownership are classified as operating leases.

Where the Target Group has the use of assets held under operating leases, payments made under the leases are charged to the consolidated income statement in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in the consolidated income statement as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the consolidated income statement in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is amortised on a straight line basis over the period of the lease term of 10-50 years.

(i) Impairment of assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased.

• property, plant and equipment;

• construction in progress;

• pre-paid interests in leasehold land classified as being held under an operating lease;

• investment in subsidiaries;

• intangible assets; and

• goodwill.

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If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

–

Recognition of impairment losses

An impairment loss is recognised in the consolidated income statement whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

– Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the consolidated income statement in the year/period in which the reversals are recognised.

(j) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the weighted average cost formula and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition.

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

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any writedown of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any writedown of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

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(k) 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.

Impairment losses for bad and doubtful debts are measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted where the effect of discounting is material.

(l) 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 the consolidated income statement over the period of the borrowings using the effective interest method.

(m) Trade and other payables

Trade and other payables 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.

(n) Cash and cash equivalents

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

(o) Employee benefits

• (i) Employee benefits and contributions to defined contribution retirement plans

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

Contributions to state-managed retirement benefits schemes for the employees of the Target Group’s entities are expensed as incurred.

• (ii) Termination benefits

Termination benefits are recognised when, and only when, the Target Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

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(p) Income tax

Income tax comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the consolidated income statement except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Target Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

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Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Target Company and the Target Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

• in the case of current tax assets and liabilities, the Target Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or.

• in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

• the same taxable entity; or

• different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

(q) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Target Group or the Target Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(r) Revenue recognition

Provided it is probable that the economic benefits will flow to the Target Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in the consolidated income statement as follows:

(i) Sales of goods

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added or other sales taxes and is after deduction of any trade discounts.

(ii) Crude oil jetty services income and petroleum unloading service income

Crude oil jetty services income and petroleum unloading service income are recognised when services are rendered. Revenue is stated net of sales taxes.

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(iii) Interest income

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

(iv) Rental income

Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Contingent rentals are recognised as income in the accounting period in which they are earned.

(s) Translation of foreign currencies

Foreign currency transactions during the relevant period are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in the consolidated income statement.

(t) Borrowing costs

Borrowing costs are expensed in the consolidated income statement in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are interrupted or complete.

(u) Repairs and maintenance expenditure

Repairs and maintenance expenditure is expensed as incurred.

(v) Related parties

For the purposes of the Financial Information, parties are considered to be related to the Target Group if the Target Group 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 the Target Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant owners and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Target Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Target Group or of any entity that is a related party of the Target Group.

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(w) Segment reporting

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

In accordance with the Target Group’s internal financial reporting system, the Target Group has chosen business segment information as the primary reporting format. All the Target Group’s activities are based in the PRC and the Target Group’s turnover and contribution to profit from ordinary activities are entirely derived from the PRC, therefore no geographic segment information is presented for the purposes of the Financial Information.

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

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

Unallocated items mainly comprise cash and cash equivalents and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financing expenses.

2 TURNOVER

The principal activities of the Target Group are operating of a crude oil jetty and its ancillary facilities and petrol stations.

Turnover represents sales value of goods supplied to refinery customers and consumers and income from providing crude oil jetty services, net of related sales taxes. The amount of each significant category of revenue recognised in turnover during the year is as follows:

Retail sales and wholesaling of petroleum products Crude oil jetty services	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 1,291,072 1,615,476 2,259,064 347,239 358,075 335,536 1,638,311 1,973,551 2,594,600	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 1,291,072 1,615,476 2,259,064 347,239 358,075 335,536 1,638,311 1,973,551 2,594,600	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 1,291,072 1,615,476 2,259,064 347,239 358,075 335,536 1,638,311 1,973,551 2,594,600	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 475,414 418,983 81,805 82,767 557,219 501,750	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 475,414 418,983 81,805 82,767 557,219 501,750
	1,638,311	1,973,551	2,594,600	557,219	501,750

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3 OTHER REVENUE

Other revenue Petroleum unloading services Income Rental income Interest income Others	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 5,269 3,458 4,654 3,430 3,532 2,382 3,493 4,082 2,196 4,675 9,694 11,132 16,867 20,766 20,364	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 5,269 3,458 4,654 3,430 3,532 2,382 3,493 4,082 2,196 4,675 9,694 11,132 16,867 20,766 20,364	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 5,269 3,458 4,654 3,430 3,532 2,382 3,493 4,082 2,196 4,675 9,694 11,132 16,867 20,766 20,364	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 671 732 48 520 406 574 273 450 1,398 2,276	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 671 732 48 520 406 574 273 450 1,398 2,276
	16,867	20,766	20,364	1,398	2,276

4 PROFIT BEFORE TAXATION

Profit before taxation is arrived at after charging/(crediting):

Finance costs Interest on bank advances and other borrowings wholly repayable within five years Foreign exchange loss/(gain) Finance charges Total borrowing costs	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 6,683 6,061 14,240 3 53 (3,868) 581 467 470 7,267 6,581 10,842	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 6,683 6,061 14,240 3 53 (3,868) 581 467 470 7,267 6,581 10,842	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 6,683 6,061 14,240 3 53 (3,868) 581 467 470 7,267 6,581 10,842	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 4,137 2,225 (1,028) (611 444 218 3,553 1,832	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 4,137 2,225 (1,028) (611 444 218 3,553 1,832
	7,267	6,581	10,842	3,553	1,832

(a) Finance costs

Staff costs Salaries, wages and other benefits Contributions to defined contribution retirement plans	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 46,948 55,224 51,878 3,880 4,241 4,329 50,828 59,465 56,207	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 46,948 55,224 51,878 3,880 4,241 4,329 50,828 59,465 56,207	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 46,948 55,224 51,878 3,880 4,241 4,329 50,828 59,465 56,207	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 11,825 10,850 1,243 1,057 13,068 11,907	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 11,825 10,850 1,243 1,057 13,068 11,907
	50,828	59,465	56,207	13,068	11,907

(b) Staff costs

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ACCOUNTANTS’ REPORT ON HUADE

(c) Other items Cost of inventories Amortisation – intangible assets – land held for own use under operating leases Auditor’s remuneration Depreciation Negative goodwill written off Loss/(gain) on sale of fixed asset Operating leases charges: – petrol station facilities – land and buildings – machinery

Three months Years ended 31 December ended 31 March 2003 2004 2005 2006 2005 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 1,175,804 1,504,037 2,156,125 457,545 396,869 7,111 8,102 10,247 2,491 2,137 2,365 2,966 3,613 679 936 1,375 1,401 1,483 223 220 83,303 84,044 97,386 23,244 23,029 (832) (2,203) (853) – – 1,893 996 757 (89) 248 5,901 4,836 4,289 1,027 1,398 2,450 2,450 568 142 142 1,252 1,135 1,519 402 447

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5 INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT

(a) Taxation in the consolidated income statement represents:

Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 Current tax Provision for PRC income tax for the year/period 21,013 22,967 19,270 Under provision in respect of prior years 470 86 – 21,483 23,053 19,270	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 3,544 3,594 – – 3,544 3,594	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 3,544 3,594 – – 3,544 3,594
		3,594

The Target Company commenced operations in March 1997, which was entitled to full tax exemption for its first five profit making years and a tax reduction of 50% for the next five years in respect of its jetty operations. The PRC income tax rate applicable to the Target Company is 15%. The year of 2006 is the tenth year that the Target Company started to have a taxable profit. Accordingly, the Target Company is subject to a 50% reduction in the applicable income tax rate, which is 7.5%, for the relevant period.

The provision for PRC income tax for the Target Group’s subsidiaries is based on the respective statutory rates, of 15% or 33%, of the assessable profits as determined in accordance with the relevant income tax rules and regulations of the PRC during the relevant period.

(b) Reconciliation between income tax expense and accounting profit at applicable tax rates:

Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 Profit before taxation 233,527 236,116 173,344 Notional tax on profit before taxation, calculated at the rates applicable 35,029 35,417 26,002 Tax effect of concession (12,232) (13,224) (7,621) Tax effect of non-taxable revenue (1,835) (178) (761) Tax effect of non-deductible expenses 51 952 1,650 Under provision in prior years 470 86 – Actual tax expense 21,483 23,053 19,270	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 39,535 40,892 5,930 6,133 (3,110) (3,292) (264) (218) 988 971 – – 3,544 3,594	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 39,535 40,892 5,930 6,133 (3,110) (3,292) (264) (218) 988 971 – – 3,544 3,594
		6,133 (3,292) (218) 971 –
		3,594

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6 DIRECTORS’ REMUNERATION

Details of directors’ remuneration are as follows:

Executive Directors Mr. Ye Zhi Jun Mr. Feng Jian Ping Mr. Zhong Jian Wei Mr. Qiao Ming Qian Mr. Zhang Zuo Yu Total Executive Directors Mr. Liao Qing Shan Mr. Feng Jian Ping Mr. Ye Zhi Jun Mr. Nie Yu Dong Mr. He Yuao Bo Mr. Xu Pei Jian Mr. Zhu Xu Ji Total Executive Directors Mr. Liao Qing Shan Mr. Feng Jian Ping Mr. Ye Zhi Jun Mr. Nie Yu Dong Mr. He Yuao Bo Mr. Xu Pei Jian Mr. Zhu Xu Ji Total	Fees RMB’000 – – – – – – Fees RMB’000 – – – – – – – – Fees RMB’000 – – – – – – – –	Salaries, allowance and benefits in kind RMB’000 – – – 13 11 24 Basic salaries, allowance and other benefits RMB’000 – – – – – – 11 11 Basic salaries, allowance and other benefits RMB’000 – – – – – – 11 11	Contri -bution to retirement benefit scheme RMB’000 – – – 8 13 21 Contri -bution to retirement benefit scheme RMB’000 – – – – – – 12 12 Contri -bution to retirement benefit scheme RMB’000 – – – – – – 12 12	Discre -tionary bonus RMB’000 – – – 13 11 24 Discre -tionary bonus RMB’000 – – – – – – 23 23 Discre -tionary bonus RMB’000 – – – – – – 29 29	Three months ended 31 March 2006 Total RMB’000 – – – 34 35
					69
					Three months ended 31 March 2005 Total RMB’000 – – – – – – 46
					46
					Year ended 31 December 2005 Total RMB’000 – – – – – – 52
					52

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ACCOUNTANTS’ REPORT ON HUADE

Details of directors’ remuneration are as follows:

Executive Directors Mr. Liao Qing Shan Mr. Feng Jian Ping Mr. Ye Zhi Jun Mr. Nie Yu Dong Mr. He Yuao Bo Mr. Xu Pei Jian Mr. Zhu Xu Ji Total Executive Directors Mr. Liao Qing Shan Mr. Feng Jian Ping Mr. Ye Zhi Jun Mr. Nie Yu Dong Mr. He Yuao Bo Mr. Xu Pei Jian Mr. Zhu Xu Ji Total	Fees RMB’000 – – – – – – – – Fees RMB’000 – – – – – – – –	Basic salaries, allowance and other benefits RMB’000 – – – – – – 45 45 Basic salaries, allowance and other benefits RMB’000 – – – – – – 45 45	Contri -bution to retirement benefit scheme RMB’000 – – – – – – 43 43 Contri -bution to retirement benefit scheme RMB’000 – – – – – – 29 29	Discre -tionary bonus RMB’000 – – – – – – 96 96 Discre -tionary bonus RMB’000 – – – – – – 84 84	Year ended 31 December 2004 Total RMB’000 – – – – – – 184
					184
					Year ended 31 December 2003 Total RMB’000 – – – – – – 158
					158

There were no amounts paid during the years ended 31 December 2003, 2004 and 2005 and for the three months ended 31 March 2006 to the directors in connection with the compensation for loss of office with the Target Company, or inducement to join. There was no arrangement under which a director waived or agreed to waive any remuneration during the above mentioned period.

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APPENDIX II

7 INDIVIDUALS WITH HIGHEST EMOLUMENTS

The five highest paid individuals of the Target Group include three, one, one, one and two directors of the Target Company during the years ended 31 December 2003, 2004 and 2005 and the three months ended 31 March 2005 and 2006, respectively, whose remuneration are reflected in the analysis disclosed in note 6 above. Details of the emoluments paid to the remaining highest paid individuals of the Target Group during the relevant period are as follows:

Salaries, allowances and other benefits Discretionary bonus Contributions to retirement benefit scheme Total	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 144 139 157 260 297 316 68 116 161 472 552 634	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 144 139 157 260 297 316 68 116 161 472 552 634	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 144 139 157 260 297 316 68 116 161 472 552 634	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 34 46 33 69 31 40 98 155	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) 34 46 33 69 31 40 98 155
	472	552	634	98	155

8 DIVIDENDS

Dividends payable to equity owners of the Target Company attributable to the previous financial year, approved during the year/period:

Final dividend in respect of the previous financial year, approved during the year/period	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 110,000 65,925 –	Three months ended 31 March 2006 2005 RMB’000 RMB’000 (unaudited) – –

Dividend of RMB110,000,000 was declared, approved and fully paid during 2003. Dividend of RMB65,925,000 was declared and approved during 2004, of which RMB64,894,000 was subsequently re-invested by the owners as additional capital in 30 June 2004.

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

9 SEGMENT REPORTING

Segment information is presented in respect of the Target Group’s business segments. Business segment information is chosen as the primary reporting format because it is more relevant to the Target Group’s internal financial reporting.

(a) Business segment

For management purposes, the Target Group is currently organised into two operating divisions, namely retail sales and wholesaling of petroleum products, and the rendering of crude oil jetty services.

For the three months ended 31 March 2006

Retail sales and wholesaling of petroleum products RMB’000 Revenue Revenue from external Customers 475,414 Other revenue from external customers 817 Total 476,231 Segment result (3,791) Unallocated interest income Profit from operations Finance costs Income tax Profit after taxation Depreciation and amortisation for the period 4,346	Crude oil jetty services RMB’000 81,805 175 81,980 46,473 22,068	Consolidated RMB’000 557,219 992 558,211 42,682 406 43,088 (3,553) (3,544) 35,991 26,414

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APPENDIX II

For the three months ended 31 March 2005 (unaudited)

Retail sales and wholesaling of petroleum products RMB’000 Revenue Revenue from external customers 418,983 Other revenue from external customers 1,682 Total 420,665 Segment result (2,629) Unallocated interest income Profit from operations Finance costs Income tax Profit after taxation Depreciation and amortisation for the period 5,236	Crude oil jetty services RMB’000 82,767 20 82,787 44,778 20,866	Consolidated RMB’000 501,750 1,702 503,452 42,149 574 42,723 (1,832) (3,594) 37,297 26,102

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

For the year ended 31 December 2005

Retail sales and wholesaling of petroleum products RMB’000 Revenue Revenue from external customers 2,259,064 Other revenue from external customers 17,938 Total 2,277,002 Segment result 1,812 Unallocated interest income Profit from operations Finance costs Income tax Profit after taxation Depreciation and amortisation for the year 22,315	Crude oil jetty services RMB’000 335,536 230 335,766 180,176 88,931	Consolidated RMB’000 2,594,600 18,168 2,612,768 181,988 2,196 184,184 (10,842) (19,270) 154,072 111,246

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

For the year ended 31 December 2004

Retail sales and wholesaling of petroleum products RMB’000 Revenue Revenue from external customers 1,615,476 Other revenue from external customers 15,946 Total 1,631,422 Segment result 16,283 Unallocated interest income Profit from operations Finance costs Income tax Profit after taxation Depreciation and amortisation for the year 18,347	Crude oil jetty services RMB’000 358,075 738 358,813 222,331 76,765	Consolidated RMB’000 1,973,551 16,684 1,990,235 238,614 4,082 242,696 (6,581) (23,053) 213,062 95,112

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

For the year ended 31 December 2003

Retail sales and wholesaling of petroleum products RMB’000 Revenue Revenue from external customers 1,291,072 Other revenue from external customers 13,327 Total 1,304,399 Segment result 16,804 Unallocated interest income Profit from operations Finance costs Income tax Profit after taxation Depreciation and amortisation for the year 18,471	Crude oil jetty services RMB’000 347,239 47 347,286 220,496 74,308	Consolidated RMB’000 1,638,311 13,374 1,651,685 237,300 3,493 240,793 (7,267) (21,483) 212,043 92,779

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APPENDIX II

At 31 March 2006

Retail sales and wholesaling of petroleum Crude oil products jetty services RMB’000 RMB’000 Segment assets 493,621 1,697,299 Unallocated assets Total assets Segment liabilities (102,258) (36,501) Unallocated liabilities Total liabilities Capital expenditure incurred during the period 660 113,363 At 31 December 2005 Retail sales and wholesaling of petroleum Crude oil products jetty services RMB’000 RMB’000 Segment assets 400,776 1,574,311 Unallocated assets Total assets Segment liabilities (148,453) (39,252) Unallocated liabilities Total liabilities Capital expenditure incurred during the year 7,822 77,747

Inter- segment elimination Consolidated RMB’000 RMB’000 (66,937) 2,123,983 51,041 2,175,024 66,937 (71,822) (488,335) (560,157) – 114,023 Inter- segment elimination Consolidated RMB’000 RMB’000 (66,846) 1,908,241 104,297 2,012,538 66,846 (120,859) (312,803) (433,662) – 85,569

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APPENDIX II

At 31 December 2004

Retail sales and wholesaling of petroleum Crude oil products jetty services RMB’000 RMB’000 Segment assets 352,477 1,600,972 Unallocated assets Total assets Segment liabilities (110,874) (258,229) Unallocated liabilities Total liabilities Capital expenditure incurred during the year 91,473 155,055	Inter- segment elimination Consolidated RMB’000 RMB’000 (49,908) 1,903,541 84,315 1,987,856 49,908 (319,195) (246,683) (565,878) – 246,528

At 31 December 2003

Retail sales and wholesaling of petroleum Crude oil products jetty services RMB’000 RMB’000 Segment assets 235,171 1,641,650 Unallocated assets Total assets Segment liabilities (51,986) (449,951) Unallocated liabilities Total liabilities Capital expenditure incurred during the year 55,225 122,238	Inter- segment elimination Consolidated RMB’000 RMB’000 (91) 1,876,730 189,988 2,066,718 91 (501,846) (361,195) (863,041) – 177,463

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APPENDIX II

10 FIXED ASSETS

(a) The Group

Cost: At 1 January 2003 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 December 2003 At 1 January 2004 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 December 2004 At 1 January 2005 Additions – through acquisition of subsidiaries –others Transfer Disposals At 31 December 2005 At 1 January 2006 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 March 2006	Buildings held for Leasehold own use improvements RMB’000 RMB’000 227,463 6,124 – – 5,333 – – – (3,191) – 229,605 6,124 - - - - - - - - - - - - - - - - - - 229,605 6,124 14,815 – 2,119 – 990 – (184) – 247,345 6,124 - - - - - - - - - - - - - - - - - - 247,345 6,124 1,594 – 76 – 191 – (1,837) – 247,369 6,124 - - - - - - - - - - - - - - - - - - 247,369 6,124 – – – – – – (286) – 247,083 6,124 - - - - - - - - - - - - - - - - - -	Jetty structures RMB’000 359,150 – – – – 359,150 - - - - - - - - - 359,150 – – 16,983 – 376,133 - - - - - - - - - 376,133 – – 1,691 (62 ) 377,762 - - - - - - - - - 377,762 – – – – 377,762 - - - - - - - - -	Jetty facilities RMB’000 924,678 – 839 720 (1) 926,236 - - - - - - - - - 926,236 – 18,938 177,786 (35) 1,122,925 - - - - - - - - - 1,122,925 – 2,313 5,719 (348) 1,130,609 - - - - - - - - - 1,130,609 – – – – 1,130,609 - - - - - - - - -	Plant and machinery RMB’000 177,082 2,625 4,435 296 (2,594) 181,844 - - - - - - - - - 181,844 11,054 13,984 59,549 (3,830) 262,601 - - - - - - - - - 262,601 734 3,409 1,682 (7,009) 261,417 - - - - - - - - - 261,417 – 669 127 (10) 262,203 - - - - - - - - -	Furniture, fixtures and equipment RMB’000 24,378 – 610 217 (1,194) 24,011 - - - - - - - - - 24,011 – 217 – (278) 23,950 - - - - - - - - - 23,950 – 126 – (252) 23,824 - - - - - - - - - 23,824 – 30 – – 23,854 - - - - - - - - -	Motor vehicles RMB’000 59,562 – 621 – (1,085) 59,098 - - - - - - - - - 59,098 63 351 – (4,288) 55,224 - - - - - - - - - 55,224 – 13 – (3,052) 52,185 - - - - - - - - - 52,185 – – – (136) 52,049 - - - - - - - - -	Property, plant and equipment Sub-total RMB’000 1,778,437 2,625 11,838 1,233 (8,065) 1,786,068 - - - - - - - - - 1,786,068 25,932 35,609 255,308 (8,615) 2,094,302 - - - - - - - - - 2,094,302 2,328 5,937 9,283 (12,560) 2,099,290 - - - - - - - - - 2,099,290 – 699 127 (432) 2,099,684 - - - - - - - - -	Interests in leasehold land held for own use RMB’000 71,738 10,395 5,735 – (8,611) 79,257 - - - - - - - - - 79,257 19,510 12,888 – (1,397) 110,258 - - - - - - - - - 110,258 2,606 – – – 112,864 - - - - - - - - - 112,864 – – – (7,527) 105,337 - - - - - - - - -	Construction in progress RMB’000 16,744 – 119,978 (1,233) – 135,489 - - - - - - - - - 135,489 – 124,726 (255,308) – 4,907 - - - - - - - - - 4,907 – 74,698 (9,283) – 70,322 - - - - - - - - - 70,322 – 113,324 (127) – 183,519 - - - - - - - - -	Total fixed assets RMB’000 1,866,919 13,020 137,551 – (16,676)
										2,000,814 - - - - - - - - - 2,000,814 45,442 173,223 – (10,012)
										2,209,467 - - - - - - - - - 2,209,467 4,934 80,635 – (12,560)
										2,282,476 - - - - - - - - - 2,282,476 – 114,023 – (7,959)
										2,388,540 - - - - - - - - -

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APPENDIX II

ACCOUNTANTS’ REPORT ON HUADE

Buildings held for Leasehold own use improvements RMB’000 RMB’000 Accumulated depreciation or amortisation: At 1 January 2003 56,720 2,099 Charge for the year/period 10,714 550 Written back on disposal (1,244) – At 31 December 2003 66,190 2,649 - - - - - - - - - - - - - - - - - - At 1 January 2004 66,190 2,649 Charge for the year/period 11,316 265 Written back on disposal (48) – At 31 December 2004 77,458 2,914 - - - - - - - - - - - - - - - - - - At 1 January 2005 77,458 2,914 Charge for the year/period 10,663 622 Written back on disposal (483) – At 31 December 2005 87,638 3,536 - - - - - - - - - - - - - - - - - - At 1 January 2006 87,638 3,536 Charge for the year/period 8,431 76 Written back on disposal (193) – At 31 March 2006 95,876 3,612 - - - - - - - - - - - - - - - - - - Net book value: At 31 March 2006 151,207 2,512 At 31 December 2005 159,731 2,588 At 31 December 2004 169,887 3,210 At 31 December 2003 163,415 3,475	Jetty structures RMB’000 78,911 125 – 79,036 - - - - - - - - - 79,036 125 – 79,161 - - - - - - - - - 79,161 9,822 (23 ) 88,960 - - - - - - - - - 88,960 2,509 – 91,469 - - - - - - - - - 286,293 288,802 296,972 280,114	Jetty facilities RMB’000 182,354 52,229 – 234,583 - - - - - - - - - 234,583 54,455 (11) 289,027 - - - - - - - - - 289,027 56,669 (152) 345,544 - - - - - - - - - 345,544 8,139 – 353,683 - - - - - - - - - 776,926 785,065 833,898 691,653	Plant and machinery RMB’000 52,578 11,937 (1,323) 63,192 - - - - - - - - - 63,192 12,384 (932) 74,644 - - - - - - - - - 74,644 13,299 (3,505) 84,438 - - - - - - - - - 84,438 2,896 (10) 87,324 - - - - - - - - - 174,879 176,979 187,957 118,652	Furniture, fixtures and equipment RMB’000 9,670 3,774 (356) 13,088 - - - - - - - - - 13,088 1,894 (154) 14,828 - - - - - - - - - 14,828 3,412 (207) 18,033 - - - - - - - - - 18,033 528 – 18,561 - - - - - - - - - 5,293 5,791 9,122 10,923	Motor vehicles RMB’000 16,317 3,974 (174) 20,117 - - - - - - - - - 20,117 3,605 (2,590) 21,132 - - - - - - - - - 21,132 2,899 (1,532) 22,499 - - - - - - - - - 22,499 665 (59) 23,105 - - - - - - - - - 28,944 29,686 34,092 38,981	Property, plant and equipment Sub-total RMB’000 398,649 83,303 (3,097) 478,855 - - - - - - - - - 478,855 84,044 (3,735) 559,164 - - - - - - - - - 559,164 97,386 (5,902) 650,648 - - - - - - - - - 650,648 23,244 (262) 673,630 - - - - - - - - - 1,426,054 1,448,642 1,535,138 1,307,213	Interests in leasehold land held for own use RMB’000 6,511 2,365 (833) 8,043 - - - - - - - - - 8,043 2,966 (217) 10,792 - - - - - - - - - 10,792 3,613 – 14,405 - - - - - - - - - 14,405 679 (790) 14,294 - - - - - - - - - 91,043 98,459 99,466 71,214	Construction in progress RMB’000 – – – – - - - - - - - - - – – – – - - - - - - - - - – – – – - - - - - - - - - – – – – - - - - - - - - - 183,519 70,322 4,907 135,489	Total fixed assets RMB’000 405,160 85,668 (3,930)
									486,898 - - - - - - - - - 486,898 87,010 (3,952)
									569,956 - - - - - - - - - 569,956 100,999 (5,902)
									665,053 - - - - - - - - - 665,053 23,923 (1,052)
									687,924 - - - - - - - - -
									1,700,616
									1,617,423
									1,639,511
									1,513,916

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APPENDIX II

(b) The Company

Cost: At 1 January 2003 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 December 2003 At 1 January 2004 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 December 2004 At 1 January 2005 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 December 2005 At 1 January 2006 Additions – through acquisition of subsidiaries – others Transfer Disposals At 31 March 2006	Buildings held for Leasehold own use improvements RMB’000 RMB’000 204,460 – – – – – – – – – 204,460 – - - - - - - - - - - - - - - - - - - 204,460 – – – – – – – – – 204,460 – - - - - - - - - - - - - - - - - - - 204,460 – – – – – – – (615) – 203,845 – - - - - - - - - - - - - - - - - - - 203,845 – – – – – – – – – 203,845 – - - - - - - - - - - - - - - - - - -	Jetty structures RMB’000 359,150 – – – – 359,150 - - - - - - - - - 359,150 – – 16,983 – 376,133 - - - - - - - - - 376,133 – – 1,691 (62 ) 377,762 - - - - - - - - - 377,762 – – – – 377,762 - - - - - - - - -	Jetty facilities RMB’000 924,678 – 839 720 – 926,237 - - - - - - - - - 926,237 – 18,938 177,786 (35) 1,122,926 - - - - - - - - - 1,122,926 – – 8,032 (348) 1,130,610 - - - - - - - - - 1,130,610 – – – – 1,130,610 - - - - - - - - -	Plant and machinery RMB’000 144,975 – 112 – (4) 145,083 - - - - - - - - - 145,083 – 11,361 58,808 – 215,252 - - - - - - - - - 215,252 – 153 2,390 (3,066) 214,729 - - - - - - - - - 214,729 – 9 – – 214,738 - - - - - - - - -	Furniture, fixtures and equipment RMB’000 7,416 – 593 – (754) 7,255 - - - - - - - - - 7,255 – 217 – (277) 7,195 - - - - - - - - - 7,195 – 126 – (252) 7,069 - - - - - - - - - 7,069 – 30 – – 7,099 - - - - - - - - -	Motor vehicles RMB’000 54,525 – 595 – (938) 54,182 - - - - - - - - - 54,182 – 351 – – 54,533 - - - - - - - - - 54,533 – 13 – (2,853) 51,693 - - - - - - - - - 51,693 – – – – 51,693 - - - - - - - - -	Property, plant and equipment Sub-total RMB’000 1,695,204 – 2,139 720 (1,696) 1,696,367 - - - - - - - - - 1,696,367 – 30,867 253,577 (312) 1,980,499 - - - - - - - - - 1,980,499 – 292 12,113 (7,196) 1,985,708 - - - - - - - - - 1,985,708 – 39 – – 1,985,747 - - - - - - - - -	Interests in leasehold land held for own use RMB’000 34,075 272 – – – 34,347 - - - - - - - - - 34,347 362 – – – 34,709 - - - - - - - - - 34,709 – – – – 34,709 - - - - - - - - - 34,709 – – – – 34,709 - - - - - - - - -	Construction in progress RMB’000 15,498 – – 119,825 (720) 134,603 - - - - - - - - - 134,603 – 123,825 (253,577) – 4,851 - - - - - - - - - 4,851 – 77,457 (12,113) – 70,195 - - - - - - - - - 70,195 – 113,324 – – 183,519 - - - - - - - - -	Total fixed assets RMB’000 1,744,777 272 2,139 120,545 (2,416)
										1,865,317 - - - - - - - - - 1,865,317 362 154,692 – (312)
										2,020,059 - - - - - - - - - 2,020,059 – 77,749 – (7,196)
										2,090,612 - - - - - - - - - 2,090,612 – 113,363 – –
										2,203,975 - - - - - - - - -

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APPENDIX II

ACCOUNTANTS’ REPORT ON HUADE

Buildings held for Leasehold own use improvements RMB’000 RMB’000 Accumulated depreciation or amortisation: At 1 January 2003 53,418 – Charge for the year/period 9,404 – Written back on disposal – – At 31 December 2003 62,822 – - - - - - - - - - - - - - - - - - - At 1 January 2004 62,822 – Charge for the year/period 9,404 – Written back on disposal – – At 31 December 2004 72,226 – - - - - - - - - - - - - - - - - - - At 1 January 2005 72,226 – Charge for the year/period 9,392 – Written back on disposal (177) – At 31 December 2005 81,441 – - - - - - - - - - - - - - - - - - - At 1 January 2006 81,441 – Charge for the year/period 8,280 – Written back on disposal – – At 31 March 2006 89,721 – - - - - - - - - - - - - - - - - - - Net book value: At 31 March 2006 114,124 – At 31 December 2005 122,404 – At 31 December 2004 132,234 – At 31 December 2003 141,638 –	Jetty structures RMB’000 78,911 125 – 79,036 - - - - - - - - - 79,036 125 – 79,161 - - - - - - - - - 79,161 9,823 (23 ) 88,961 - - - - - - - - - 88,961 2,509 – 91,470 - - - - - - - - - 286,292 288,801 296,972 280,114	Jetty facilities RMB’000 182,354 52,229 – 234,583 - - - - - - - - - 234,583 54,456 (11) 289,028 - - - - - - - - - 289,028 56,669 (152) 345,545 - - - - - - - - - 345,545 8,139 – 353,684 - - - - - - - - - 776,926 785,065 833,898 691,654	Plant and machinery RMB’000 47,695 8,584 – 56,279 - - - - - - - - - 56,279 8,781 – 65,060 - - - - - - - - - 65,060 8,674 (1,767) 71,967 - - - - - - - - - 71,967 2,089 – 74,056 - - - - - - - - - 140,682 142,762 150,192 88,804	Furniture, fixtures and equipment RMB’000 3,410 668 (303) 3,775 - - - - - - - - - 3,775 659 (154) 4,280 - - - - - - - - - 4,280 551 (207) 4,624 - - - - - - - - - 4,624 133 – 4,757 - - - - - - - - - 2,342 2,445 2,915 3,480	Motor vehicles RMB’000 15,416 2,913 (38) 18,291 - - - - - - - - - 18,291 2,771 – 21,062 - - - - - - - - - 21,062 2,783 (1,386) 22,459 - - - - - - - - - 22,459 659 – 23,118 - - - - - - - - - 28,575 29,234 33,471 35,891	Property, plant and equipment Sub-total RMB’000 381,204 73,923 (341) 454,786 - - - - - - - - - 454,786 76,196 (165) 530,817 - - - - - - - - - 530,817 87,892 (3,712) 614,997 - - - - - - - - - 614,997 21,809 – 636,806 - - - - - - - - - 1,348,941 1,370,711 1,449,682 1,241,581	Interests in leasehold land held for own use RMB’000 2,914 385 – 3,299 - - - - - - - - - 3,299 569 – 3,868 - - - - - - - - - 3,868 1,038 – 4,906 - - - - - - - - - 4,906 260 – 5,166 - - - - - - - - - 29,543 29,803 30,841 31,048	Construction in progress RMB’000 – – – – - - - - - - - - - – – – – - - - - - - - - - – – – – - - - - - - - - - – – – – - - - - - - - - - 183,519 70,195 4,851 134,603	Total fixed assets RMB’000 384,118 74,308 (341)
									458,085 - - - - - - - - - 458,085 76,765 (165)
									534,685 - - - - - - - - - 534,685 88,930 (3,712)
									619,903 - - - - - - - - - 619,903 22,069 –
									641,972 - - - - - - - - -
									1,562,003
									1,470,709
									1,485,374
									1,407,232

(c) The analysis of net book value of buildings and interest in leasehold land is as follows:

		31 December		31 March
	2003	2004	2005	2006
	RMB’000	RMB’000	RMB’000	RMB’000
Medium term leases
in the PRC	234,629	269,353	258,190	242,250

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APPENDIX II

(d) Jetty structure leased out under operating lease

During 2006, the Target Group allows a third party the right to use part of its jetty structure, i.e. the dredging channel, under an operating lease arrangement. The lessee is subjected to pay a RMB3 million rental charge to the Target Company annually only when any vessels of the lessee with transportation volume exceeding 120,000 tonne pass through the dredging channel in a calendar year, otherwise no rental charge is payable. The lease arrangement runs for an initial period of 23 years, with an option to renew the lease after that date at which time all terms are negotiated.

11 INTANGIBLE ASSETS

The Group

Cost: At 1 January Additions through acquisition of subsidiaries Disposals At 31 December/31 March Accumulated amortisation At 1 January Charge for the year/period Written back on disposal At 31 December/31 March Net book value At 31 December/31 March	2003 RMB’000 62,055 26,892 (7,443) 81,504 ---------- 3,109 7,111 (2,507) 7,713 ---------- 73,791	31 December 2004 RMB’000 81,504 27,863 – 109,367 ---------- 7,713 8,102 – 15,815 ---------- 93,552	2005 RMB’000 109,367 – – 109,367 ---------- 15,815 10,247 – 26,062 ---------- 83,305	31 March 2006 RMB’000 109,367 – –
				109,367 ---------- 26,062 2,491 –
				28,553 ----------
				80,814

The amortisation charge for the year/period has been included in “administrative expenses” in the consolidated income statement.

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

12 INVESTMENT IN SUBSIDIARY

The Company

Unlisted investment, at cost Amount due from subsidiary	2003 RMB’000 130,500 – 130,500	31 December 2004 RMB’000 130,500 50,000 180,500	2005 RMB’000 130,500 66,937 197,437	31 March 2006 RMB’000 130,500 66,937
				197,437

Particulars of the principal subsidiary of the Target Group are as follows:

			Proportion of	Proportion of
			ownership interest
		Particulars	Group’s	Held by the
Name of	Place of	of registered	effective	Target	Principal
company	establishment	capital	interest	Company	activities
KGSIM	The PRC	RMB145,000,000	90%	90%	Investment holding
					and operation of
					petrol stations

All controlled subsidiaries as defined under note 1(c) have been consolidated into the Target Group’s Financial Information. Certain of these subsidiaries are not listed above due to their insignificant impact on an individual basis to the Target Group.

13 INVENTORIES

(a) Inventories comprise:

The Group

Petroleum products Spare parts and others The Company Spare parts and others	2003 RMB’000 17,654 2,014 19,668 2003 RMB’000 2,014	31 December 2004 RMB’000 66,594 1,848 68,442 31 December 2004 RMB’000 1,848	2005 RMB’000 122,562 1,736 124,298 2005 RMB’000 1,736	31 March 2006 RMB’000 169,833 1,758
				171,591
				31 March 2006 RMB’000 1,758

The inventories are stated at cost.

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APPENDIX II

14 TRADE AND OTHER RECEIVABLES

The Group

Trade and bills receivables Prepayments, and other receivables The Company Trade and bills receivable Prepayments, and other receivables	2003 RMB’000 26,964 40,291 67,255 2003 RMB’000 2,150 10,587 12,737	31 December 2004 RMB’000 26,352 34,294 60,646 31 December 2004 RMB’000 1,352 1,294 2,646	2005 RMB’000 8,171 43,245 51,416 2005 RMB’000 2,173 3,348 5,521	31 March 2006 RMB’000 22,614 102,044
				124,658
				31 March 2006 RMB’000 3,908 26,196
				30,104

All of the trade and other receivables are expected to be recovered within one year.

Included in trade and other receivables are trade debtors and bills receivable (net of impairment losses for bad and doubtful debts) with the following ageing analysis:

The Group

Current 1 to 3 months overdue More than 3 months overdue but less than 12 months overdue	2003 RMB’000 23,899 1,999 1,066 26,964	31 December 2004 RMB’000 24,646 988 718 26,352	2005 RMB’000 7,093 649 429 8,171	31 March 2006 RMB’000 21,193 465 956
				22,614

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APPENDIX II

The Company

					31 December		31 March
				2003	2004	2005	2006
				RMB’000	RMB’000	RMB’000	RMB’000
1	to	3	months overdue	2,150	1,352	2,173	3,908

The Target Group’s credit policy is set out in note 24(a).

15 AMOUNTS DUE FROM/TO HOLDING COMPANIES AND FELLOW SUBSIDIARIES

The amounts due from/to holding companies and fellow subsidiaries mainly represent balances arose in the ordinary course of business and are unsecured, interest free and have no fixed repayment terms.

16 LOANS FROM IMMEDIATE HOLDING COMPANY AND FELLOW SUBSIDIARY

The loans in 2003 and 2004 were unsecured, interest free and had no fixed repayment terms.

17 CASH AND CASH EQUIVALENTS

The Group

2003 RMB’000 Cash at bank and cash in hand 189,988 The Company 2003 RMB’000 Cash at bank and cash in hand 97,299 TRADE AND OTHER PAYABLES The Group 2003 RMB’000 Bills payable 37,789 Trade payables 8,740 Creditors and accrued charges 60,287 106,816	31 December 2004 RMB’000 84,314 31 December 2004 RMB’000 35,719 31 December 2004 RMB’000 64,800 3,786 93,236 161,822	2005 RMB’000 104,296 2005 RMB’000 43,478 2005 RMB’000 125,500 3,509 82,935 211,944	31 March 2006 RMB’000 51,041
			31 March 2006 RMB’000 10,982
			31 March 2006 RMB’000 242,000 2,044 60,180
			304,224

18 TRADE AND OTHER PAYABLES

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APPENDIX II

The Company

Bills payable Creditors and accrued charges	2003 RMB’000 – 23,936 23,936	31 December 2004 RMB’000 – 49,155 49,155	2005 RMB’000 – 27,157 27,157	31 March 2006 RMB’000 40,000 34,219
				74,219

All of the trade and other payable are expected to be settled within one year.

Included in trade and other payables are trade creditors and bills payable with the following ageing analysis:

The Group

Due within 1 month or on demand Due after 1 month but within 3 months Due after 3 months but within 6 months The Company Due after 3 months but within 6 months	2003 RMB’000 7,454 38,950 125 46,529 2003 RMB’000 –	31 December 2004 RMB’000 3,547 65,002 37 68,586 31 December 2004 RMB’000 –	2005 RMB’000 8,472 120,531 6 129,009 2005 RMB’000 –	31 March 2006 RMB’000 9,852 234,186 6
				244,044
				31 March 2006 RMB’000 40,000

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

19 BANK LOANS

The bank loans were repayable as follows:

The Group

Within 1 year or on demand Over 1 year but within 2 years The Company Within 1 year or on demand Over 1 year but within 2 years	2003 RMB’000 136,268 – 136,268 2003 RMB’000 82,768 – 82,768	31 December 2004 RMB’000 172,108 – 172,108 31 December 2004 RMB’000 124,108 – 124,108	2005 RMB’000 168,036 11,819 179,855 2005 RMB’000 162,036 11,819 173,855	31 March 2006 RMB’000 239,858 –
				239,858
				31 March 2006 RMB’000 183,859 –
				183,859

The bank loans were secured as follows:

The Group

Bank loans – secured – unsecured The Company Bank loans – unsecured	2003 RMB’000 – 136,268 136,268 2003 RMB’000 82,768	31 December 2004 RMB’000 – 172,108 172,108 31 December 2004 RMB’000 124,108	2005 RMB’000 6,000 173,855 179,855 2005 RMB’000 173,855	31 March 2006 RMB’000 6,000 233,858
				239,858
				31 March 2006 RMB’000 183,858

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

At 31 December 2005 and 31 March 2006, banking facilities of a subsidiary totalling RMB6,000,000 were secured by its interest in leasehold land held for own use and buildings with carrying value of RMB14,085,000.

Included in bank loans are the following amounts denominated in a currency other than the functional currency of the Target Company to which they relate:

The Group and the Company

		31 December		31 March
	2003	2004	2005	2006
	’000	’000	’000	’000
United States Dollars	US$10,000	US$15,000	US$5,000	US$1,220
Hong Kong Dollars	–	–	HK$128,321	HK$129,489

The weighted average interest rates for the Target Group were 4.5%, 4.0%, 3.7%, and 4.2% at 31 March 2006, 31 December 2005, 31 December 2004 and 31 December 2003, respectively.

20 INCOME TAX IN THE BALANCE SHEET

• (a) Current taxation in the balance sheets represents:

The Group

Beginning of the year/period Provision for PRC income tax for the year/period PRC income tax paid At end of the year/period The Company Beginning of the year/period Provision for PRC income tax for the year/period PRC income tax paid At end of the year/period	2003 RMB’000 6,522 21,483 (22,611) 5,394 2003 RMB’000 4,155 16,617 (16,866) 3,906	31 December 2004 RMB’000 5,394 23,053 (23,413) 5,034 31 December 2004 RMB’000 3,907 16,861 (17,340) 3,428	2005 RMB’000 5,034 19,270 (16,855) 7,449 2005 RMB’000 3,428 12,777 (14,098) 2,107	31 March 2006 RMB’000 7,449 3,544 (4,516
				6,477
				31 March 2006 RMB’000 2,107 3,449 (2,131
				3,425

(b) No provision for deferred taxation has been made as the effect of all temporary differences is not material.

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APPENDIX II

21 EMPLOYEE RETIREMENT BENEFITS

The Target Company and its subsidiaries established in the PRC participate in pension fund schemes organised by the relevant local government authorities in the PRC. The Target Group is required to make contributions to the retirement schemes at 18%-20% of the basic salaries of their employees.

The Target Group does not have any other pension schemes for its employees elsewhere. The Target Group does not have any other obligations other than the contributions described above.

22 CAPITAL AND RESERVES

The Group

Registered capital RMB’000 At 1 January 2003 722,799 Final dividend approved in respect of previous financial year – Profit for the year – Transfer – Additions through acquisition of subsidiaries – Dividends paid by subsidiaries to minority owners – At 31 December 2003 722,799 At 1 January 2004 722,799 Final dividend approved in respect of previous financial year – Profit for the year – Transfer – Additions through acquisition of subsidiaries – Capital contribution 64,894 At 31 December 2004 787,693 At 1 January 2005 787,693 Profit for the year – Transfer – Additions through acquisition of subsidiaries – At 31 December 2005 787,693 At 1 January 2006 787,693 Profit for the period – At 31 March 2006 787,693	General reserves RMB’000 150,158 – – 32,135 – – 182,293 182,293 – – 35,179 – – 217,472 217,472 – 24,533 – 242,005 242,005 – 242,005	Retained profits RMB’000 204,138 (110,000) 210,807 (32,135) – – 272,810 272,810 (65,925) 211,957 (35,179) – – 383,663 383,663 153,947 (24,533) – 513,077 513,077 36,626 549,703	Subtotal RMB’000 1,077,095 (110,000) 210,807 – – – 1,177,902 1,177,902 (65,925) 211,957 – – 64,894 1,388,828 1,388,828 153,947 – – 1,542,775 1,542,775 36,626 1,579,401	Minority interests RMB’000 25,613 – 1,236 – 722 (1,796) 25,775 25,775 – 1,105 – 6,270 – 33,150 33,150 125 – 2,826 36,101 36,101 (635) 35,466	Total equity RMB’000 1,102,708 (110,000) 212,043 – 722 (1,796) 1,203,677 1,203,677 (65,925) 213,062 – 6,270 64,894 1,421,978 1,421,978 154,072 – 2,826 1,578,876 1,578,876 35,991 1,614,867

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

The Company

Registered capital RMB’000 At 1 January 2003 722,799 Final dividend approved in respect of previous financial year – Profit for the year – Transfer – At 31 December 2003 722,799 At 1 January 2004 722,799 Final dividend approved in respect of previous financial year – Profit for the year – Transfer – Capital contribution 64,894 At 31 December 2004 787,693 At 1 January 2005 787,693 Profit for the year – Transfer – At 31 December 2005 787,693 At 1 January 2006 787,693 Profit for the period – At 31 March 2006 787,693	General reserves RMB’000 146,429 – – 29,963 176,392 176,392 – – 31,733 – 208,125 208,125 – 23,959 232,084 232,084 – 232,084	Retained profits RMB’000 187,255 (110,000) 204,599 (29,963) 251,891 251,891 (65,925) 206,296 (31,733) – 360,529 360,529 172,379 (23,959) 508,949 508,949 42,010 550,959	Total equity RMB’000 1,056,483 (110,000) 204,599 – 1,151,082 1,151,082 (65,925) 206,296 – 64,894 1,356,347 1,356,347 172,379 – 1,528,726 1,528,726 42,010 1,570,736

(i) Capital

The Target Company is a sino-foreign equity joint venture established by Kantons International Investment Limited (“KII”) and Sinopec Guangzhou Petrochemical Complex (“GPC”). In 2004, KII and GPC have increased their capital contribution by USD5,488,000 and USD2,352,000 respectively. The capital contributed by KII and GPC at 31 March 2006 are USD65,630,000 and USD28,128,000 respectively.

(ii) General reserves

The general reserves of the Target Company represent appropriations made from retained profits to a discretionary surplus reserve and an enterprise development fund, pursuant to the relevant PRC laws and regulations applicable to Sino-foreign equity joint ventures. The percentages of appropriations are determined annually by the directors of the Target Company. The discretionary surplus reserve can be utilised to offset prior years’ losses or convert into paid up capital. The enterprise development fund can be used for the future development of the enterprise or convert into paid up capital. Neither the discretionary surplus reserve nor the enterprise development fund are available for distribution.

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APPENDIX II

The Target Company’s subsidiaries are required to transfer 10% of the company’s after tax profit, as determined under the PRC Accounting Rules and Regulations, to the statutory surplus reserve until the reserve balance reaches 50% of the company’s registered capital, 5%-10% of the company’s profit after taxation to the statutory public welfare fund. Statutory surplus reserve can be utilised to offset prior years’ losses or convert into paid up capital. Statutory public welfare fund can only be utilised on capital items for the collective benefits of the Target Company’s employees such as the construction of dormitories, canteen and other staff welfare facilities. Neither the surplus reserve nor the statutory public welfare funds are available for distribution.

23 ACQUISITION OF SUBSIDIARIES

During the year ended 31 December 2003, 2004 and 2005, the Target Group acquired subsidiaries (petrol stations) for a total consideration of RMB41,304,000, RMB75,605,000 and RMB1,316,000 respectively, satisfied in cash.

Net assets acquired Fixed assets Intangible assets Inventories Trade and other receivables Cash at bank and in hand Trade and other payables Minority interests Net identifiable assets and liabilities Total purchase prices paid, satisfied in cash Less: cash of subsidiaries acquired Net cash outflow in respect of the purchase of subsidiaries	Years ended 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 13,020 45,442 4,934 26,892 27,863 – 1,469 15,886 17,022 3,429 11,171 10,347 8,669 9,471 848 (11,455) (27,957) (29,009) (721) (6,270) (2,826) 41,303 75,606 1,316 41,303 75,606 1,316 (8,668) (9,472) (846) 32,635 66,134 470

24 FINANCIAL INSTRUMENTS

Exposure of credit, liquidity, interest rate and currency risks arises in the normal course of the Target Group’s business. These risks are limited by the Target Group’s financial management policies and practices described below.

(a) Credit risk

The Target Group’s credit risk is primarily attributable to trade and other receivables due from third parties and related parties. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.

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APPENDIX II

In respect of trade and other receivables, credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 90 days from the date of billing. Normally, the Target Group does not obtain collateral from customers.

The maximum exposure to credit risk is represented by the carrying amount in the balance sheet.

(b) Liquidity risk

Individual operating entities within the Target Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands. The Target Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

(c) Interest rate risk

Effective interest rates analysis

In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they reprice or the maturity dates, if earlier.

Effective interest rate % Repricing dates for assets/liabilities which reprice before maturity 31 March 2006 Cash and cash equivalents 3.18% Bank loans 7.30% 31 December 2005 Cash and cash equivalents 2.11% Bank loans 7.92% 31 December 2004 Cash and cash equivalents 4.84% Bank loans 3.84% 31 December 2003 Cash and cash equivalents 1.84% Bank loans 4.90%	Total RMB’000 51,041 239,858 290,899 104,296 179,855 284,151 84,314 172,108 256,422 189,988 136,268 326,256	One year or less RMB’000 51,041 239,858 290,899 104,296 168,036 272,332 84,314 172,108 256,422 189,988 136,268 326,256	1-2 years RMB’000 – –
			–
			– 11,819
			11,819
			– –
			–
			– –
			–

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APPENDIX II

(d) Foreign currency risk

The Target Group does not undertake significant transactions in a currency other than the functional currency of each entity within the Target Group. Management considers the foreign exchange exposure to be low.

(e) Commodity and price risk

The Target Group is exposed to general price fluctuations of petroleum products. The purchase price of petroleum products is based on the market price, while the retail price for petroleum products is set by the Price Bureau in the PRC. The Target Group historically has not used commodity derivative instruments to hedge the potential price fluctuations of the petroleum products.

(f) Fair value

All financial assets and liabilities are not materially different from their fair value as at 31 December 2003, 2004 and 2005 and 31 March 2006.

25 COMMITMENTS

• (a) Capital commitments outstanding at balance sheet date not provided for in the Financial Information were as follows:

The Group and the Company

Contracted for Authorised but not contracted for	2003 RMB’000 51,233 219,580 270,813	31 December 2004 RMB’000 23,402 – 23,402	2005 RMB’000 491,413 – 491,413	31 March 2006 RMB’000 400,148 –
				400,148

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APPENDIX II

ACCOUNTANTS’ REPORT ON HUADE

• (b) The total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year After one year but within five years After five years	2003 Petrol station Land and facilities buildings RMB’000 RMB’000 3,053 2,450 11,683 2,271 31,947 11,949 46,683 16,670	31 December 2004 Petrol station Land and facilities buildings RMB’000 RMB’000 2,321 568 8,997 2,271 24,274 10,883 35,592 13,722	2005 Petrol station Land and facilities buildings RMB’000 RMB’000 2,761 568 10,937 2,271 23,451 10,315 37,149 13,154	31 March 2006 Petrol station Land and facilities buildings RMB’000 RMB’000 2,723 568 10,810 2,271 22,629 10,173 36,162 13,012	31 March 2006 Petrol station Land and facilities buildings RMB’000 RMB’000 2,723 568 10,810 2,271 22,629 10,173 36,162 13,012
					13,012

The Target Group leases a number of petrol station facilities, and land and buildings. Leases for petrol station facilities are generally run for a period of 15-20 years and rentals are mostly fixed during the lease period. Lease payments of certain petrol station facilities to be determined by reference to the revenue of the relevant petrol stations have not been included in the above future minimum lease payments disclosures. Lease for petrol station facilities and land and building are generally run for a period of 5 to 30 years.

26 CONTINGENT LIABILITIES

There were no contingent liabilities as at the year ended 31 December 2003, 2004 and 2005 and the period ended 31 March 2006.

27 ENVIRONMENTAL CONTINGENCIES

To date, the Target Group has not incurred any significant expenditures for environmental remediation, is currently not involved in any environmental remediation, and has not accrued any amounts for environmental remediation relating to its petrol station operations. Under existing legislation, management believes there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Target Group. The PRC government, however, has moved and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent cost of remediation efforts. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present.

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

28 RELATED PARTY TRANSACTIONS

In addition to the transactions and balances disclosed elsewhere in these Financial Information, the Target Group entered into the following material related party transactions.

(a) Key management personnel remuneration

Remuneration for key management personnel, including amounts paid to the Target Company’s directors as disclosed in note 6 and certain of the highest paid employees as disclosed in note 7, is as follows:

31 December 31 December 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 Short-term employee benefits 404 436 473 Post-employment benefits 68 116 161 472 552 634	31 March 2006 RMB’000 67 31 98	31 March 2005 RMB’000 115 40
		155

Total remuneration is included in “staff costs” (see note 4(b)).

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ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

• (b) During the year, the Target Group had the following significant transactions with its holding companies and fellow subsidiaries. Details of the amounts which have been charged/(credited) to the consolidated income statement are as follows:

				Total for	Total for
		Total for the		the three months
	year	ended 31 December		ended 31 March
	2003	2004	2005	2006	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
					(unaudited)
Petroleum products
purchased by the
Target Group
(note (i))	867,513	1,285,012	1,691,284	409,265	315,603
Insurance premium
charged to the
Target Group
(note (ii))	4,393	4,357	4,406	2,766	2,750
Rentals charged to the
Target Group in
respect of land
and buildings and
motor vehicles
(note (iii))	154	457	664	157	142
Jetty service fees,
charged by the
Target Group
– Crude oil unloading
service fees
(note (iv))	(71,798)	(116,300)	(92,138)	(22,421)	(21,410)
– Crude oil storage
service fees
(note (v))	(82,620)	(79,806)	(86,694)	(21,563)	(21,093)
– Crude oil
transportation
service fees
(note (vi))	(146,742)	(157,873)	(145,485)	(34,269)	(37,780)
Fuel purchased by the
Target Group
(note vii))	48,760	6,870	–	–	–
Maintenance service
charged to the Target
Group_(note (viii))_	2,596	1,658	1,340	280	305
Transportation service
fee charged to the
Target Group_(note xi))_	10,226	10,403	–	–	–
Petroleum unloading
services charged by
the Target Group
(note (x))	(2,994)	(2,983)	(1,963)	(671)	(2,207)

Notes: The above transactions were conducted in accordance with the following terms:

• (i) Petroleum products were purchased from the Target Group’s ultimate holding company in accordance with the terms of the relevant sales and purchase agreements and on terms agreed between the parties having regard to commercial practice of the crude oil industry and international market conditions during the year the transactions were entered into.

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APPENDIX II

• (ii) Insurance premium was calculated by reference to the provisions of a document jointly issued by its ultimate holding company and the Ministry of Finance in the PRC in 1998 and at a predetermined percentage of 0.1% of the Target Company’s total fixed assets and inventory balances and is revised by its ultimate holding company from time to time.

• (iii) Rentals on properties and motor vehicles were charged at a fixed monthly amount in accordance with the terms of the relevant rental agreement.

• (iv) Unloading service income was charged to fellow subsidiaries for unloading of crude oil from oil tankers and dockage and for the related handling charges. Unloading service fee is charged based on the volume of crude oil unloaded and at a rate based on the price regulated and standardised by the Ministry of Communication.

• (v) Crude oil storage service income was charged to fellow subsidiaries for crude oil storage in oil tanker and for the related handling charges. Crude oil storage service income is charged based on storage volume and at a rate based on the governmentapproved price approved by the Guangdong Price Bureau in the PRC.

• (vi) Crude oil transportation income was charged to fellow subsidiaries for transmission of crude oil from the Target Company’s Jetty to the customer’s refinery plant and for the related handling charges. Crude oil transportation income is charged based on transportation volume and at a rate based on the government-approved price approved by the Guangdong Price Bureau in the PRC.

• (vii) Fuel was purchased at cost from the Target Group’s ultimate holding company.

• (viii) Maintenance service fees, which relate principally to after-sale services for plant and machinery purchased from or installed by the fellow subsidiaries, were charged in accordance with the terms of the relevant maintenance service agreements.

• (ix) Transportation service fees were charged by a fellow subsidiary for delivery of petroleum products to the Target Groups’ petrol stations which were calculated at RMB23 per tonne in accordance with the price set by Guangdong Price Bureau in the PRC.

• (x) Petroleum unloading services fee was charged to the Target Group’s ultimate holding company for unloading of petroleum products from storage tank to delivery truck. The unit price charged by the Target Group is in accordance with the price set by Guangdong Price Bureau in the PRC.

• (c) The Target Group incurred cost of construction and acquisition of plant and equipment and other attributable overheads. The amount charged by its fellow subsidiaries were RMB25,000,000 and RMB25,000,000 for years ended 31 December 2003 and 2004 respectively.

• (d) At 31 March 2006, banking facilities of the Target Group guaranteed by the intermediate holding company at no cost amounted to RMB184,000,000 (31 December 2005: RMB174,000,000; 31 December 2004: RMB124,000,000; 31 December 2003: RMB83,000,000).

• (e) On 11 November 2004, Target Company contracted with 廣州中元石油化工工程有 限公司 (Guangzhou Zhong Yuan Petrochemical Engineering Co. Ltd.), an indirect wholly owned subsidiary of China Petrochemical Corporation for construction and installation of two crude oil storage tanks and relevant facilities in Huizhou, the PRC for a consideration of approximately RMB19,000,000 (2003: RMB38,000,000).

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APPENDIX II

29 TRANSACTIONS WITH OTHER STATE-CONTROLLED ENTITIES IN THE PRC

The ultimate holding company of the Target Group is a state controlled enterprise. The Target Group conducts certain business activities with enterprises directly or indirectly owned or controlled by the PRC government authorities and agencies (collectively referred to as “statecontrolled entities”) in the ordinary course of business. These transactions primarily include rendering and receiving services and sales and purchase of goods, are carried out at terms similar to those that would be entered into with non-state-controlled entities and have been reflected in the Financial Information.

30 PARENT AND ULTIMATE HOLDING COMPANY

At 31 March 2006, the directors consider the immediate, intermediate and the ultimate holding companies of the Target Group to be Kantons International Investment Limited, Sinopec Kantons Holdings Limited and China Petrochemical Corporation, which are incorporated in the British Virgin Islands, Bermuda and the PRC respectively. Sinopec Kantons Holdings Limited is listed in Hong Kong and produces financial statements available for public use.

31 ACCOUNTING ESTIMATES AND JUDGEMENT

The Target Group’s financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the Financial Information. The Target Group bases the assumptions and estimates on historical experience and on various other assumptions that the Target Group believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ form those estimates as facts, circumstances and conditions change.

The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the Financial Information. The principal accounting policies are set forth in Note 1. The Target Group believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the Financial Information.

Impairment for fixed assets and intangible assets

If circumstances indicate that the net book value of fixed assets and intangible assets may not be recoverable, the asset may be considered ‘impaired’, and an impairment loss may be recognised in accordance with HKAS 36 “Impairment of Assets”. The carrying amounts of fixed assets and intangible assets are reviewed periodically in order to assess the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the Target Group’s assets are not readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price and amount of operating costs. The Target Group uses all readily available information in determining an amount that is reasonable approximation of the recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.

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APPENDIX II

Depreciation

Property, plant and equipment, are depreciated on a straight-line basis over the estimated useful lives of the assets after taking into account the estimated residual value. The Target Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Target Group’s historical experience with similar assets and taking into account anticipated technological changes.

Depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

Impairment losses for bad and doubtful debts

The Target Group estimates impairment losses for bad and doubtful debts resulting from the inability of the customers to make the required payments. The Target Group bases the estimates on the aging of the accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial conditions of the customers were deteriorate, actual write-offs would be higher than estimated.

32 P O S S I B L E I M PAC T O F A M E N D M E N T S , N E W S TA N DA R D S A N D INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDING 31 DECEMBER 2006

Up to the date of issue of these Financial Information, the HKICPA has issued the following amendments, new standards and interpretations which are not yet effective for the accounting period ending 31 December 2006 and which have not been adopted in the Financial Information set out in this report:

	Effective for accounting
	periods beginning on or after
HKFRS 7, Financial instruments: disclosures	1 January 2007
Amendment to HKAS 1, Presentation of financial
statements: capital disclosures	1 January 2007

The Target Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of HKFRS 7 and amendment to HKAS 1 are unlikely to have a significant impact on the Target Group’s results of operations and financial position.

– 149 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

33 EXPLANATION OF TRANSITION TO HKFRS

In preparing its opening HKFRS balance sheet, the Target Group has adjusted amounts reported previously in financial statements prepared in accordance with PRC GAAP. An explanation of how the transition from PRC GAAP to HKFRS has affected the Target Group’s financial position and financial performance is set out below:

Reconciliation of owners’ equity attributable to equity owners of the Target Company at 1 January 2003 and 31 December 2005.

Note Owners’ equity attributable to equity owners of the Target Company under PRC GAAP Previous GAAP adjustments Interest capitalisation (a) Negative goodwill (b) Correction of error Provision for income tax (c) Others Shareholders’ equity attributable to equity owners of the Target Company under HKFRS	1 January 2003 RMB’000 1,044,761 33,058 – – (724) 1,077,095	31 December 2005 RMB’000 1,511,632 30,743 3,571 (2,700) (471) 1,542,775

Reconciliation of net profit attributable to equity owners of the Target Company for the year ended 31 December 2005.

Note Net profit attributable to equity owners of the Target Company under PRC GAAP Previous GAAP adjustments Interest capitalisation (a) Negative goodwill (b) Correction of error Provision for income tax (c) Others Net profit attributable to equity owners of the Target Company under HKFRS	2005 RMB’000 159,733 (1,960) 853 (2,700) (1,854) 154,072

(a) Interest Capitalisation

Under HKFRS, borrowing costs are capitalised based on a capitalisation rate to the expenditures on the qualifying assets, while previous PRC GAAP only allows capitalization of borrowing costs from specific purpose loans.

Adjustment made to owners’ equity represented borrowing costs capitalised under HKFRS, and adjustment made to net profit attributable to equity owners represented depreciation charge related to capitalised borrowing costs.

– 150 –

ACCOUNTANTS’ REPORT ON HUADE

APPENDIX II

(b) Negative goodwill

Under HKFRS, negative goodwill is recognised directly in the income statement, while the Target Group amortises negative goodwill under the previous PRC GAAP.

(c) Provision for income tax

The amount represents the adjustment for understatement of income tax for the Target Group at 31 December 2005.

(VII) POST BALANCE SHEET EVENT

On 10 July 2006, the Target Company entered into a sale and purchase agreement with China Petroleum and Chemical Corporation (“Sinopec Corp.”), the intermediate holding company of the Target Company, to sell its 90% equity interest in KGSIM to Sinopec Corp. for a cash consideration of RMB153 million. KGSIM is a 90% owned subsidiary of the Target Company, and operates in the business segment of retail and wholesaling of petroleum products. The completion of the sale is conditional upon, among others, the approval of the shareholders of Sinopec Kantons Holdings Limited and the State-owned Asset Supervisory and Administration Commission in the PRC.

Yours faithfully, KPMG

Certified Public Accountants Hong Kong

– 151 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

(A) UNAUDITED PRO FORMA FINANCIAL INFORMATION

(I) Introduction

The accompanying unaudited pro forma financial information of Sinopec Kantons Holdings Limited (the “Company”, and together with its subsidiaries referred to as the “Group”) (the “Pro Forma Financial Information”) has been prepared to illustrate the effect to the Group’s proposed acquisition of a further 30% equity interest in Huade Petrochemical Company Limited (“Huade”) for a consideration of RMB594 million (referred to as the “Huade Acquisition”) and disposal of 90% equity interest in Kantons Gas Station Investment and Management Company Limited (“KGSIM”) for a consideration of RMB153 million (referred to as the “KGSIM disposal”). Details of the transaction are set out in the Letter from the Board of the Company’s circular dated 31 July 2006.

The unaudited pro forma consolidated balance sheet of the Group has been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the Huade Acquisition and the KGSIM Disposal as if the Acquisition and Disposal had taken place on 31 December 2005.

This statement has been prepared by the Directors for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Group following the completion of Huade Acquisition and KGSIM Disposal (hereinafter collectively referred to as the “Restructured Group”).

The unaudited pro forma consolidated balance sheet of the Group is prepared based upon the audited consolidated balance sheet of the Group as at 31 December 2005, which has been extracted from the annual report of the Company for the year ended 31 December 2005, after giving effect to the pro forma adjustments of the Huade Acquisition and the KGSIM disposal that are (i) clearly shown and explained; (ii) directly attributable to the transactions; and (iii) factually supportable, as summarised in the accompanying notes.

The unaudited pro forma consolidated balance sheet of the Group is based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying unaudited pro forma consolidated balance sheet of the Group does not purport to describe the actual financial position of the Group that would have been attained had the Huade Acquisition and the KGSIM Disposal been completed on 31 December 2005. The unaudited pro forma balance sheet of the Group does not purport to predict the future financial position of the Group.

The unaudited pro forma consolidated balance sheet of the Group should be read in conjunction with the historical financial information of the Group as set out in the annual report of the Company for the year ended 31 December 2005 and other financial information included elsewhere in this circular.

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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

(II) Unaudited pro forma consolidated balance sheet of the Group as at 31 December 2005

Non-current assets Fixed assets – Property , plant and equipment – Construction in progress – Interests in leasehold land held for own use under operating lease Intangible assets Current assets Inventories Trade and other receivables Amount due from holding companies and fellow subsidiaries Cash and cash equivalents Current liabilities Trade and other payables Amounts due to holding companies and fellow subsidiaries Loan from holding companies and fellow subsidiaries Bank loans and overdraft Current taxation Net current assets Total assets less current liabilities Non-current liabilities Bank loans NET ASSETS	The Group Historical HK$’000 1,432,018 67,596 94,646 80,077 1,674,337 -------------- 664,546 120,177 232,944 152,385 1,170,052 -------------- 260,597 266,618 – 161,526 19,810 708,551 -------------- 461,501 -------------- 2,135,838 -------------- 11,361 11,361 -------------- 2,124,477	Pro forma consolidated Pro forma balance sheet consolidated after Huade (1) balance sheet (2) Acquisition Pro forma after Huade Pro forma and KGSIM adjustment Acquisition Adjustment Disposal HK$’000 HK$’000 HK$’000 HK$’000 – 1,432,018 (74,912) 1,357,106 – 67,596 (122) 67,474 – – – – – 94,646 (65,997) 28,649 – 80,077 (80,077) – – 1,674,337 (221,108) 1,453,229 -------------- -------------- -------------- -------------- – 664,546 (117,813) 546,733 – 120,177 (33,694) 86,483 – 232,944 – 232,944 – 152,385 88,610 240,995 – 1,170,052 (62,897) 1,107,155 -------------- -------------- -------------- -------------- – 260,597 (181,429) 79,168 – – – – – 266,618 (82,807) 183,811 – – – – – 161,526 (5,768) 155,758 – 19,810 (5,134) 14,676 – 708,551 (275,138) 433,413 -------------- -------------- -------------- -------------- – 461,501 212,241 673,742 -------------- -------------- -------------- -------------- – 2,135,838 (8,867) 2,126,971 -------------- -------------- -------------- -------------- 571,154 582,515 – 582,515 571,154 582,515 – 582,515 -------------- -------------- -------------- -------------- (571,154) 1,553,323 (8,867) 1,544,456	Pro forma consolidated Pro forma balance sheet consolidated after Huade (1) balance sheet (2) Acquisition Pro forma after Huade Pro forma and KGSIM adjustment Acquisition Adjustment Disposal HK$’000 HK$’000 HK$’000 HK$’000 – 1,432,018 (74,912) 1,357,106 – 67,596 (122) 67,474 – – – – – 94,646 (65,997) 28,649 – 80,077 (80,077) – – 1,674,337 (221,108) 1,453,229 -------------- -------------- -------------- -------------- – 664,546 (117,813) 546,733 – 120,177 (33,694) 86,483 – 232,944 – 232,944 – 152,385 88,610 240,995 – 1,170,052 (62,897) 1,107,155 -------------- -------------- -------------- -------------- – 260,597 (181,429) 79,168 – – – – – 266,618 (82,807) 183,811 – – – – – 161,526 (5,768) 155,758 – 19,810 (5,134) 14,676 – 708,551 (275,138) 433,413 -------------- -------------- -------------- -------------- – 461,501 212,241 673,742 -------------- -------------- -------------- -------------- – 2,135,838 (8,867) 2,126,971 -------------- -------------- -------------- -------------- 571,154 582,515 – 582,515 571,154 582,515 – 582,515 -------------- -------------- -------------- -------------- (571,154) 1,553,323 (8,867) 1,544,456
			1,453,229 -------------- 546,733 86,483 232,944 240,995
			1,107,155 -------------- 79,168 – 183,811 – 155,758 14,676
			433,413 -------------- 673,742 --------------
			2,126,971 -------------- 582,515
			582,515 -------------- 1,544,456

– 153 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

Capital and reserve Share capital Reserves Total equity attributable to equity Shareholders of the company Minority interests TOTAL EQUITY	The Group Historical HK$’000 103,683 1,551,519 1,655,202 -------------- 469,275 -------------- 2,124,477	Pro forma consolidated Pro forma balance sheet consolidated after Huade (1) balance sheet (2) Acquisition Pro forma after Huade Pro forma and KGSIM adjustment Acquisition Adjustment Disposal HK$’000 HK$’000 HK$’000 HK$’000 – 103,683 – 103,683 (126,122) 1,425,397 15,376 1,440,773 (126,122) 1,529,080 15,376 1,544,456 -------------- -------------- -------------- -------------- (445,032) 24,243 (24,243) – -------------- -------------- -------------- -------------- (571,154) 1,553,323 (8,867) 1,544,456	Pro forma consolidated Pro forma balance sheet consolidated after Huade (1) balance sheet (2) Acquisition Pro forma after Huade Pro forma and KGSIM adjustment Acquisition Adjustment Disposal HK$’000 HK$’000 HK$’000 HK$’000 – 103,683 – 103,683 (126,122) 1,425,397 15,376 1,440,773 (126,122) 1,529,080 15,376 1,544,456 -------------- -------------- -------------- -------------- (445,032) 24,243 (24,243) – -------------- -------------- -------------- -------------- (571,154) 1,553,323 (8,867) 1,544,456
			1,544,456 -------------- – -------------- 1,544,456

(III) Notes to the unaudited Pro Forma Financial Information

• 1 The adjustment of the Huade Acquisition.

Huade was a 70% owned subsidiary of the Company at 31 December 2005. On 10 July 2006, Kantons International Investment Limited (“KII”), a wholly owned subsidiary of the Company entered into a sale and purchase agreement with Sinopec Guangzhou Petrochemical Complex (“GPC”) to acquire the remaining 30% equity interest in Huade from GPC for a cash consideration of RMB594 million (equivalent to HK$571 million). Upon completion of the Huade Acquisition, Huade would become an indirect wholly-owned subsidiary of the Company.

The difference between the consideration of RMB594 million (equivalent to HK$571 million) and the carrying value of the 30% minority interest of Huade of RMB463 million (equivalent to HK$445 million) at 31 December 2005 is recognised directly as a decrease in KII’s shareholder’s equity.

The consideration of RMB594 million (equivalent to HK$571 million) is payable by cash upon completion and RMB594 million will be obtained through a 5 year long term bank loan which is reflected as an increase in the long term bank loan in the pro forma adjustment.

– 154 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

• 2 The adjustment of the KGSIM Disposal.

KGSIM was a 90% owned subsidiary of Huade at 31 December 2005. On 10 July 2006, Huade entered into a sale and purchase agreement with China Petroleum and Chemical Corporation (“Sinopec Corp.”) to dispose its 90% equity interest in KGSIM to Sinopec Corp. for a cash consideration of RMB153 million (equivalent to HK$147.1 million).

If the KGSIM Disposal had taken place at 31 December 2005, a gain on disposal amounting to RMB16 million (equivalent to HK$15.4 million) would be recognised by Huade based on the 90% unaudited carrying value of assets and liabilities of KGSIM of RMB137 million (equivalent to HK$131.7 million) at 31 December 2005. The gain on the disposal is calculated as the excess of consideration to be received over the 90% carrying value of assets and liabilities of KGSIM and its subsidiaries as at 31 December 2005.

The adjustments reflect the disposal of the carrying values of assets and liabilities of the KGSIM and its subsidiaries, the gain recognised as a result of the disposal and the cash consideration received.

3 For illustrative purpose, amounts expressed in RMB for the purpose of the unaudited pro forma consolidated balance sheet of the Restructured Group have been translated into Hong Kong dollars at the rate of HK$1: RMB1.04.

4. The Huade Equity Acquisition Agreement and the KGSIM Disposal Agreement are inter-conditional to each other as to approval by the Independent Shareholders in the Special General Meeting.

– 155 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

(B) REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the text of a report, prepared for the sole purposes of incorporation in this Circular, received from the independent reporting accountants of the Company, KPMG, Certified Public Accountants, Hong Kong. As described under “Documents available for inspection” in Appendix IV to this Circular, a copy of the following report is available for inspection.

==> picture [87 x 36] intentionally omitted <==

8th Floor Prince’s Building 10 Chater Road Central Hong Kong

31 July 2006

The Directors Sinopec Kantons Holding Limited 1608 Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information of Sinopec Kantons Holdings Limited (the “Company”, and together with its subsidiaries referred to as the “Group”) (the “Pro Forma Financial Information”) set out in Appendix III(A) of the circular of the Company dated 31 July 2006 (the “Circular”), which has been prepared by the directors for illustrative purposes only, to provide information about how the completion of the proposed acquisition and disposal transactions as described in appendix III(A) might have affected the financial information presented. The basis of preparation of the unaudited Pro Forma Financial Information is set out in the introduction and notes to the unaudited Pro Forma Financial Information of the Group as set out in Appendix III(A).

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the Pro Forma Financial Information in accordance with Paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

It is our responsibility to form an opinion, as required by 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 Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 156 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

Basis of opinion

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

Our work did not constitute an audit or review made in accordance with Statement of Auditing Standards issued by the HKICPA, and, accordingly, we do not express any such audit or review assurance on the Pro Forma Financial Information.

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, it 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 unaudited Pro Forma Financial Information as disclosed pursuant to Paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully, KPMG Certified Public Accountants Hong Kong

– 157 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

Directors’ Interests and Short Positions

As at the Latest Practicable Date, none of the Directors, nor their associates, had any interest and short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance Cap.571 (the “ SFO ”)) which were required to be notified to the Company and the Stock Exchange pursuant to section 341 of the SFO (including interests which they are deemed or taken to have under section 344 of the SFO) or pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as set out in appendix 10 of the Listing Rules to be notified to the Company and the Stock Exchange or which are required, pursuant to section 352 of the SFO, to be entered in the register referred to therein.

Directors’ Interest in Any Asset Acquired, Disposed or Leased

None of the Directors has any material interest, direct or indirect, in any asset which, since 31 December 2005, being the date to which the latest audited consolidated financial statements of the Group have been made up, had been acquired or disposed of by or leased to any member of the Group or was proposed to be acquired or disposed of by or leased to any member of the Group.

Directors’ Service Contracts

None of the Directors has or is proposed to have a service contract with the Company or any of its subsidiaries which is not determinable by the Group within one (1) year without the payment of compensation other than statutory compensation.

Directors’ Interest in Contracts

No contracts of significance to which the Company, any of its holding companies, fellow subsidiaries or subsidiaries was a party and in which a Director had a material interest and which is significant to the Group’s business, whether directly or indirectly, subsisted at the date of this circular.

– 158 –

GENERAL INFORMATION

APPENDIX IV

3. SUBSTANTIAL SHAREHOLDERS

So far as the Directors are aware, shareholders holding five (5) per cent. or more or a short position of 1% or more of the Company’s relevant share capital as recorded in the register of interests in shares and short position maintained by the Company and their reported interests pursuant to provisions of section 336 of the SFO are as follows:

		Percentage of
Name of interested party	Number of Shares	shareholding
		(%)
SKI_(Note 1)_	750,000,000	72.34
Prime Capital Management (Cayman) Limited	52,526,000	5.06

Note 1: The entire share capital of SKI is held by China Petrochemical International Company Limited. The entire registered capital of China Petrochemical International Company Limited was held by China Petroleum & Chemical Corporation. The controlling interest in the registered capital of China Petroleum & Chemical Corporation is held by China Petrochemical Corporation.

4. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial position or trading prospects of the Group since 31 December 2005, the date to which the latest audited financial statements of the Group were made up.

5. LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

6. CONSENT AND EXPERT

The following are the qualifications of the professional advisers (the “Experts”) who have given opinion or advice, which is contained in this circular:

Name	Qualification
Rothschild	Licensed under the SFO for type 1 (dealing in
	securities), type 4 (advising on securities) and type
	6 (advising on corporate finance) as defined under
	the SFO
KPMG	Certified public accountants

Each of the Experts has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and the reference to its name in the form and context in which it appears.

– 159 –

GENERAL INFORMATION

APPENDIX IV

As at the Latest Practicable Date, none of the Experts is beneficially interested in the share capital of any member of the Group nor does it have any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group nor does it have any interest, either direct or indirect, in any assets which have been, since the date to which the latest published audited financial statements of the Company were made up acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group.

7. COMPETING INTEREST

As at the Latest Practicable Date, save as disclosed herein, none of the Directors and their respective associates had any interest, directly or indirectly, in a business which competes or may compete with the business of the Group.

8. PROCEDURES FOR DEMANDING A POLL

Set out below is the procedure by which shareholders and the chairman of any shareholders’ meeting may demand a poll pursuant to article 73 of the bye-laws of the Company:

“At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded:

• (i) by the Chairman of the meeting; or

• (ii) by at least three shareholders present in person (or, in the case of a shareholder being a corporation, by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or

• (iii) by any shareholder or shareholders present in person (or, in the case of a shareholder being a corporation, by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all the shareholders having the right to vote at the meeting; or

• (iv) by any shareholder or shareholders present in person (or, in the case of a shareholder being a corporation, by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.”

A poll will be demanded by the Chairman of the SGM meeting to pass the ordinary resolution in the notice of the SGM.

– 160 –

GENERAL INFORMATION

APPENDIX IV

9. MATERIAL CONTRACTS

Save as disclosed below, there are no material contracts (not being contracts entered into in the ordinary course of business) entered into by any member of the Group within 2 years preceding the Latest Practicable Date:

• (a) Sinopec Corp. Framework Master Agreement;

• (b) Unipec Framework Master Agreement;

• (c) CPIC Framework Master Agreement;

• (d) CPIGC Framework Master Agreement;

• (e) Huade Equity Acquisition Agreement; and

• (f) KGSIM Equity Disposal Agreement.

10. MISCELLANEOUS

• (a) The secretary of the Company is Mr. Lai Yang Chau, Eugene (Practising Solicitor, Hong Kong).

• (b) The qualified accountant of the Company is Mr. Chan Kim Fat (FCCA, Certified Public Accountant, Hong Kong).

• (c) The Hong Kong Branch Share Registrar and Transfer Office of the Company is Secretaries Limited of 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

• (d) The English text of this circular and form of proxy shall prevail over the Chinese text.

11. DOCUMENTS FOR INSPECTION

Copies of the following documents will be available for inspection at the office of Room 3403, Two Exchange Square, 8 Connaught Place, Central, Hong Kong during normal business hours on any weekday (except Saturdays and public holidays) from the date of this circular up to and including 18 August 2006:

• (a) the letter from Rothschild as the Independent Financial Adviser as set out on pages 19 to 39 in this circular;

• (b) the letter of recommendation from the Independent Board Committee to the Independent Shareholders as set out on page 18 in this circular;

• (c) the memorandum and bye-laws of the Company;

• (d) the annual reports of the Company for the two years ended 31 December 2004 and 2005 and the interim reports of the Company for the six months ended 30 June 2004 and 2005;

– 161 –

GENERAL INFORMATION

APPENDIX IV

• (e) the accountants’ report on Huade, the text of which is set out in Appendix II to this circular; and its statement of adjustments;

• (f) the unaudited pro forma statement of assets and liabilities of the Restructured Group and the comfort letter from KPMG thereon, the text of each of which is set out in Appendix III to this circular;

• (g) the written consents of the Experts as referred to in the paragraphs headed “Consent and Expert” in this appendix;

• (h) the material contracts as referred to in the paragraphs headed “Material contracts” in this appendix; and

• (i) a copy of each circular issued pursuant to the requirements set out in Chapters 14 and/or 14A of the Listing Rules which has been issued since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

– 162 –

NOTICE OF SPECIAL GENERAL MEETING

APPENDIX V

SINOPEC KANTONS HOLDINGS LIMITED （中石化冠德控股有限公司）[*]

(incorporated in Bermuda with limited liability)

(Stock Code: 934)

NOTICE IS HEREBY GIVEN that a special general meeting of Sinopec Kantons Holdings Limited (the “ Company ”) will be held at 1608 Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong on 18 August 2006 at 10:00 a.m. for the purposes of considering and, if thought fit, passing the following resolutions as ordinary resolution:

ORDINARY RESOLUTION

“ THAT

(1) the Huade Equity Acquisition (as defined in the circular of the Company dated 31 July 2006 (the “ Circular ”), a copy of which was marked “A” and has been produced to the meeting and signed by the Chairman of the meeting for the purposes of identification) and the Huade Equity Acquisition Agreement (as defined in the Circular) be and are hereby approved; and (2) KGSIM Equity Disposal (as defined in the Circular) and KGSIM Equity Disposal Agreement (as defined in the Circular) be and are hereby approved; and that the Directors be and are hereby authorised to do all such acts and take all necessary actions in connection therewith.”

Note: This ordinary resolution will be put to a poll.

By Order of the Board Jiang Zhen Ying Chairman

Hong Kong, 31 July 2006

* For identification purposes only

– 163 –

NOTICE OF SPECIAL GENERAL MEETING

APPENDIX V

Principal office: 1608 Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong

Notes:

1. A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxies to attend, and subject to the provisions of the Byelaws of the Company, vote in his stead. A proxy need not be a member of the Company.

2. In order to be valid, the form of proxy must be deposited together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority, at Secretaries Limited, the Hong Kong Branch Share Registrar and Transfer Office of the Company, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time for holding the meeting or adjourned meeting.

– 164 –