Sinopharm Tech Holdings Limited - Proxy Solicitation & Information Statement 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in China Vanguard Group Limited (the “Company”), you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

This circular does not constitute an offer of, nor is it calculated to invite offers for, shares in or other securities of China Vanguard Group Limited.

The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) 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. This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for any securities.

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(Incorporated in the Cayman Islands with limited liability)
(Stock Code: 8156)
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MAJOR TRANSACTION:

INVESTMENT IN JOINT VENTURES FOR PARTICIPATION IN THE NATURAL GAS BUSINESS

Financial Adviser to China Vanguard Group Ltd.

Grand Vinco Capital Limited

A notice convening an extraordinary general meeting of the Company to be held at 30th Floor, Sunshine Plaza, 353 Lockhart Road, Hong Kong at 2:00 p.m. on 7 November 2006 is set out on pages 175 to 176 of this circular. A form of proxy for use at the extraordinary general meeting is enclosed with this circular. Such form of proxy is also published on the website of the Stock Exchange at www.hkex.com.hk. Whether or not you are able to attend the extraordinary general meeting, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit to the head office and principle place of business in Hong Kong of China Vanguard Group Limited at 30th Floor, Sunshine Plaza, 353 Lockhart Road, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the extraordinary general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the extraordinary general meeting or any adjournment thereof should you so wish.

for identification purpose only

19 October 2006

CHARACTERISTICS OF GEM

GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the main board of the Stock Exchange and no assurance is given that there will be a liquid market in the securities traded on GEM.

The principal means of information dissemination on GEM is publication on the internet website operated by the Stock Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website in order to obtain up-to-date information on GEM-listed issuers.

– i –

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Changde Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Hunan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Background of Changde Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Background of Hunan Joint Venture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Reasons for and Benefits of the Investments . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Financial and Trading Prospect of the Group and
Changde Joint Venture and Hunan Joint Venture . . . . . . . . . . . . . . . . . . . . . .	23
The Proposed Placing of the Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . .	25
Financial Effect of the Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Procedures for Demanding a Poll at Extraordinary General Meeting . . . . . . . . .	29
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Appendix I – Financial Information on the Group . . . . . . . . . . . . . . . . .	31
Appendix II – Accountants’ Report on the Changde Joint Venture . . . . .	80
Appendix III – Accountants’ Report on the Hunan Joint Venture . . . . . . .	102
Appendix IV – Financial Information on the Enlarged Group . . . . . . . . .	116
Appendix V – Property Valuation Report on Changde Joint Venture . . .	121
Appendix VI – Property Valuation Report on Hunan Joint Venture . . . . .	143
Appendix VII – Business Valuation Report on Changde Joint Venture. . . .	147
Appendix VIII – Business Valuation Report on Hunan Joint Venture. . . . . .	155
Appendix IX – Letters from Auditors and Financial Adviser. . . . . . . . . . .	163
Appendix X – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	165
Notice of the Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . .	175

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DEFINITIONS

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

“Announcement”	the announcement of the Company dated 2 August 2006
	in relation to, among other matters, the Changde Joint
	Venture and Hunan Joint Venture
“Aptus”	Aptus Holdings Limited a company incorporated in the
	Cayman Islands, whose shares are listed on GEM and is
	a non-wholly owned subsidiary of China Vanguard
“Aptus Directors”	directors (including the independent non-executive
	directors) of Aptus
“Aptus Group”	Aptus and its subsidiaries
“Associates”	has the meaning ascribed to it under the GEM Listing
	Rules
“Beijing Xin Hua Lian Gas”	(Beijing Xin Hua Lian
	Gas Investment Co. Ltd.*), a PRC company which holds
	35% of Hunan Joint Venture
“Board”	the board of Directors
“Business Day”	a day on which banks are open for business in Hong Kong
	throughout their normal business hours (excluding
	Saturday and Sunday)
“Changde Agreement”	the conditional capital injection agreement dated 25 July
	2006 entered into among Huayou, Changde State-owned
	Asset Operation Management Company and Aptus
	relating to, among other matters, the increase in the
	registered capital of Changde Joint Venture
“Changde Capital Contribution”	an aggregate amount of RMB131,707,900 to be paid by
	Aptus to Changde Joint Venture for the purposes of
	contributing as to RMB57,880,000 for its increase in
	registered capital, and as to RMB73,827,900 towards its
	capital reserve

– 1 –

DEFINITIONS

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|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|“Changde|Joint|Venture”|(Changde Huayou Gas Co. Ltd),|
|a|limited|company|established|in|the|PRC|on|11|October|
|1999,|the|registered|capital|of|which|is|currently|owned|
|as|to|98.71%|by|Huayou|and|1.29%|by|Changde|State-|
|owned|Asset|Operation|Management|Company|
|“Changde|State-owned|Asset|,|a|state-owned|enterprise,|
|Operation|Management|which|holds|1.29%|of|Changde|Joint|Venture|before|the|
|Company”|completion|of|the|Changde|Agreement|
|“CNPC”|China|National|Petroleum|Corporation,|a|state-owned|
|enterprise|
|“Company”|or|“China|Vanguard”|China|Vanguard|Group|Limited|(|
|),|an|exempted|company|incorporated|in|the|
|Cayman|Islands|with|limited|liability|and|whose|Shares|
|are|listed|on|GEM|
|“connected|person(s)”|has|the|meaning|ascribed|to|it|under|the|GEM|Listing|
|Rules|
|“Directors”|directors|(including|the|independent|non-executive|
|directors)|of|the|Company|
|“EGM”|the|extraordinary|general|meeting|of|the|Company|to|be|
|held|at|30th|Floor,|Sunshine|Plaza,|353|Lockhart|Road,|
|Hong Kong at 2:00 p.m. on 7 November 2006 to consider|
|and,|if|thought|fit,|to|approve|the|Changde|Joint|Venture|
|and|Hunan|Joint|Venture|
|“Enlarged|Group”|the|Group|as|enlarged|by|the|Investments|
|“GEM”|the|Growth|Enterprise|Market|of|the|Stock|Exchange|
|“GEM|Listing|Rules”|the|Rules|Governing|the|Listing|of|Securities|on|the|
|Growth|Enterprise|Market|of|The|Stock|Exchange|
|“Group”|the|Company|and|its|subsidiaries|
|“Hong|Kong”|the|Hong|Kong|Special|Administrative|Region|of|the|
|People’s|Republic|of|China|
|“Huayou”|(China|Huayou|Group|Corporation*),|
|a|wholly-owned|subsidiary|of|China|National|Petroleum|
|Corporation|and|a|state-owned|enterprise|

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DEFINITIONS

“Hunan Agreement”	the conditional capital injection agreement dated 25 July
	2006 entered into among Huayou, Beijing Xin Hua Lian
	Gas and Aptus relating to, among other matters, the
	increase in the registered capital of Hunan Joint Venture
“Hunan Capital Contribution”	an amount of RMB79,599,000 to be paid by Aptus to
	Hunan Joint Venture as contribution towards its capital
	increase
“Hunan Joint Venture”	(Hunan Huayou
	Natural Gas Transportation & Distribution Company
	Limited*), a limited company established in the PRC on
	22 April 2005, the registered capital of which is currently
	owned as to 65% by Huayou and 35% by Beijing Xin Hua
	Lian Gas
“Independent Third Party(ies)”	third party(ies) independent of, and not connected with
	Aptus and China Vanguard, their subsidiaries and their
	respective connected persons (as defined under the GEM
	Listing Rules).
“Investments”	the investments in the aggregate amount of
	RMB211,306,900 in Changde Joint Venture and Hunan
	Joint Venture, by Aptus under the Changde Agreement
	and the Hunan Agreement, respectively
“Latest Practicable Date”	17 October 2006, being the latest practicable date prior to
	the printing of this document for the purpose of
	ascertaining certain information for inclusion in this
	document
“PRC”	the People’s Republic of China
“Shareholders”	shareholders of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“USD”	denoted the lawful currency of the United States of
	America
“m3”	cubic meter, the unit of volume in the International
	System of Units
“%”	per cent

* for identification purpose only

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LETTER FROM THE BOARD

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 8156)

Executive Directors: Madam Cheung Kwai Lan Mr. Chan Tung Mei Mr. Lau Hin Kun Mr. Chan Ting

Non-executive Director: Mr. Shaw Kyle Arnold Junior

Independent non-executive Directors: Mr. Tian He Nian Mr. Zhao Zhi Ming Mr. To Yan Ming Edmond

Registered office: Century Yard Cricket Square Hutchins Drive P.O. Box 2681 GT George Town Grand Cayman British West Indies Cayman Islands

Head office and principal place of business in Hong Kong: 30th Floor Sunshine Plaza 353 Lockhart Road Hong Kong

19 October 2006

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION:

INVESTMENT IN JOINT VENTURES FOR PARTICIPATION IN THE NATURAL GAS BUSINESS

INTRODUCTION

In the Announcement, the China Vanguard Board announced that on 25 July 2006, Aptus, a subsidiary of the Company had entered into the capital injection agreements pursuant to which Aptus has conditionally agreed to make capital contributions to Changde Joint Venture and Hunan Joint Venture for an amount of approximately RMB131,707,900 (approximately HK$127,872,000) and RMB79,599,000 (approximately HK$77,281,000) respectively. Upon completion of the Changde Agreement and the Hunan Agreement, Aptus will own a 48.33% equity interest in Changde Joint Venture and a 33.00% equity interest in Hunan Joint Venture.

* for identification purpose only

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LETTER FROM THE BOARD

The investments under the Changde Agreement and the Hunan Agreement constitute a major transaction for the Company under Rules 19.06(3) of the GEM Listing Rules. Completion of Changde Joint Venture and the Hunan Joint Venture are therefore subject to the approval by the Shareholders at the EGM

The purpose of this circular is to provide you with, among other things, further details of the Changde Agreement and the Hunan Agreement and the notice of the EGM.

CHANGDE AGREEMENT

Date: 25 July 2006 Parties: (i) Huayou, an Independent Third Party. The business of Huayou is well diversified and covers the production and marketing of oil and gas products, development and exploration of natural gas, production and distribution of high grade lubricating oil, development of chemical agents used in oil fields and refining industry, and production of advanced building materials, etc;
(ii) Changde State-owned Asset Operation Management Company, an Independent Third Party principally engaging in the business of management, operation and supervision of state-owned assets; and

(iii) Aptus.

To the best of the knowledge, information and belief of the Directors and Aptus Directors, having made all reasonable enquiries, Huayou and Changde State-owned Asset Operation Management Company and their respective ultimate beneficial owner(s) (if applicable) are independent of and not connected with the Group, its subsidiaries and their respective connected persons (as defined under the GEM Listing Rules).

Conditions precedent

The Changde Agreement will become effective upon the fulfillment of the following conditions (the “Changde Conditions Precedent”):

(i) obtaining the approval by the shareholders of Aptus for the Changde Agreement and the transactions contemplated thereunder; and
(ii) obtaining the approval by the Ministry of Commerce in the PRC for the Changde Agreement and the transactions contemplated thereunder.

If any of the above Changde Conditions Precedent cannot be fulfilled, the Changde Agreement shall lapse and the parties shall be released from all their rights and obligations under the Changde Agreement.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, none of the Changde Conditions Precedent has been fulfilled. The Changde Agreement will be sent to the respective PRC government authorities, which include (1) Development & Reform Commission of Hunan Province; (2) Foreign Trade & Economic Development (branch offices of The Ministry of Commerce in provinces and cities); (3) The State-Owned Assets Supervision and Administration Commission; and (4) State Administration of Industry & Commerce of Changde City, to obtain the necessary approvals following signing by the respective parties.

Financial Information of Changde Joint Venture

Changde Joint Venture was established in the PRC on 11 October 1999 as a PRC limited liability company. It is principally engaged in the business of gas pipeline design, the supply, development and management of natural gas distribution facilities in the PRC. The registered capital and capital reserve ( ) of Changde Joint Venture are RMB61,880,000 (approximately HK$60,078,000) and RMB25,980,000 (approximately HK$25,223,000), respectively, which has been fully paid up. The following audited figures of the Changde Joint Venture are extracted from the Accountants’ Report on the Changde Joint Venture in Appendix II to this circular. For the year ended 31 December 2004, the audited net loss before and after taxation were approximately RMB6,708,000 (approximately HK$6,513,000) and approximately RMB7,050,000 (approximately HK$6,845,000), respectively. For the year ended 31 December 2005, the audited net profit before and after taxation were approximately RMB1,215,000 (approximately HK$1,180,000) and approximately RMB814,000 (approximately HK$790,000), respectively. As at 31 December 2005, the audited net asset value of Changde Joint Venture was approximately RMB83,118,000 (approximately HK$80,697,000). As at 31 December 2005, the major assets of Changde Joint Venture included gas pipelines, land use rights, buildings and other construction in progress which are all related to natural gas business and located in Changde City in the PRC. As at 31 December 2005, the audited total asset value of Changde Joint Venture was approximately RMB159,812,000 (approximately HK$155,157,000). The audited total asset value and net asset value of Changde Joint Venture as at 30 June 2006 were approximately RMB175,416,000 (approximately HK$170,307,000) and RMB83,373,000 (approximately HK$80,945,000) respectively.

Changde Capital Contribution

As at the Latest Practicable Date, Changde Joint Venture is owned as to 98.71% by Huayou and 1.29% by Changde State-owned Asset Operation Management Company. Pursuant to the Changde Agreement, Aptus will contribute an aggregate of RMB131,707,900 (approximately HK$127,872,000), being RMB57,880,000 (approximately HK$56,194,000) and RMB73,827,900 (approximately HK$71,678,000) to the registered capital and capital reserve of Changde Joint Venture, respectively. Aptus is contemplating to finance such capital contribution by way of issuance of convertible notes. Aptus has signed a non-legally binding letter of intent dated 24 July 2006 with a potential third party investor. Pursuant to the letter, the investor has agreed to finance Aptus in relation to the Changde Joint Venture and Hunan Joint Venture with a maximum amount of USD30 million (approximately HK$234 million).

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LETTER FROM THE BOARD

In addition, Aptus is also currently in discussion with several other potential investors with regards to an issuance of convertible notes, brief details of which are set out in the section headed “The Proposed Placing of the Convertible Notes”. Currently, Aptus has not signed any legally-binding agreements with any potential investors.

To the best of knowledge of Directors and Aptus Directors, the potential investors are independent of and not connected with the Company, its subsidiaries (including Aptus) and their respective connected persons (as defined under the GEM Listing Rules). They are also independent of and not connected with Huayou, Changde State-owned Asset Operation Management Company, their respective ultimate beneficial owners and their respective connected persons (as defined under the GEM Listing Rules). During the past 12 months preceding the Latest Practicable Date, Aptus obtained loans of approximately HK$31 million from third parties, who are independent from and not connected with any connected persons (as defined under the GEM Listing Rules) of Aptus or the Company, for general working capital purposes. Other than that, there were no other material financing activities carried out by Aptus or the Company during the past 12 months preceding the Latest Practicable Date. Given the upcoming funding activities to be conducted by Aptus, the Directors and Aptus Directors are of the view that Aptus should have sufficient capital resources to meet the funding obligations under the Investments.

The Changde Capital Contribution, in aggregate, of RMB131,707,900 (approximately HK$127,872,000) will be paid to the specific-use foreign exchange account opened by Aptus in the PRC within 45 days upon signing of the Changde Agreement, which will then be transferred to the designated bank account of the Changde Joint Venture within 7 days upon the issuance of the business license for the Changde Joint Venture. If the approvals of the transactions contemplated under the Changde Agreement by the relevant authorities cannot be obtained or the Changde Joint Venture cannot complete the registration of changes with the Administration for Industry and Commerce due to any reason not attributable to the default on the part of Aptus, all of the Changde Capital Contribution previously paid together with interest incurred thereon will be refunded in full to Aptus. As advised by the PRC legal adviser of Aptus, the prevailing legal mechanism such as contract law and arbitration law can enable the Company to claim a full refund with interest thereon from Changde Joint Venture.

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LETTER FROM THE BOARD

Upon completion of the Changde Capital Contribution, the registered capital of Changde Joint Venture will be increased from RMB61,880,000 (approximately HK$60,078,000) to RMB119,760,000 (approximately HK$116,272,000) and its capital reserve will be increased from RMB25,980,000 (approximately HK$25,223,000) to RMB99,807,900 (approximately HK$96,901,000). Changde Joint Venture will be owned as to 51% by Huayou, 48.33% by Aptus and 0.67% by Changde State-owned Asset Operation Management Company. Set out below is the shareholding structure of Changde Joint Venture immediately before and after completion of the Changde Capital Contribution:

Before completion of the Changde Capital Contribution

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After completion of the Changde Capital Contribution

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Upon completion of the Changde Capital Contribution, the financial results of Changde Joint Venture will be equity accounted for in the Aptus’s financial statements. Changde Joint Venture will become an associated company of the Aptus. The financial statements of the Aptus will be consolidated into the financial statements of the Company given its 54.88% equity interest in the Aptus as at the Latest Practicable Date.

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LETTER FROM THE BOARD

Basis of contribution

Upon completion of the Changde Capital Contribution, the net asset value of the Changde Joint Venture will be enlarged by the contribution of approximately RMB131.7 million from the approximately RMB83.1 million to approximately RMB214.8 million. The amount of contribution of approximately RMB131.7 million represents a premium of approximately 26.9% to the amount of approximately RMB103.8 million, being the 48.33% of the enlarged net asset value of the Changde Joint Venture, which was determined, on an arm’s length basis, with reference to (1) valuation of the market comparables; (2) the net asset value of Changde Joint Venture as at 31 December 2005; (3) the equity interest to be owned in the Changde Joint Venture; and (4) the Aptus Directors’ assessment of the business growth potential of Changde Joint Venture in the operation of the natural gas business in the PRC (see the section herein headed “Reasons for and benefits of the Investments”).

For the purpose of assessing the fairness and reasonableness of the Changde Capital Contribution, the Directors and Aptus Directors have adopted the commonly used price-tobook ratio as valuation methodology with reference to the valuation of the market comparables. They have identified 4 companies listed in the Hong Kong which are engaged in the operation of natural gas related business. The approximate price-to-book ratio of the market comparables ranged from 1.2 to 3.0 times with an average of 2.2 times. Upon completion of the Changde Capital Contribution, Changde Joint Venture’s net asset value represented a price-to-book ratio of 1.3 which was within the market range and was lower than the average price-to-earnings ratio of the market comparables of 2.2 times. As a result, the Directors and Aptus Directors consider that the Changde Capital Contribution is fair and reasonable.

Given the reasons mentioned above, the Directors and Aptus Directors believe that premium in relation to the net asset value of Changde Joint Venture is fair and reasonable.

HUNAN AGREEMENT

Date: 25 July 2006

Parties: (i) Huayou, an Independent Third Party. The business of Huayou is well diversified and covers the production and marketing of oil and gas products, development and exploration of natural gas, production and distribution of high grade lubricating oil, development of chemical agents used in oil fields and refining industry, and production of advanced building materials, etc;

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LETTER FROM THE BOARD

(ii) Beijing Xin Hua Lian Gas, an Independent Third Party principally engaging in the business of development and manufacture of gas facilities and gas related raw materials; sales, design, installation and maintenance of gas pipelines; investment management and consultation services. Beijing Xin Hua Lian Gas is a group company of a PRC private conglomerate; and

(iii) Aptus.

To the best of the knowledge, information and belief of the Directors and Aptus Directors, having made all reasonable enquiries, Huayou and Beijing Xin Hua Lian Gas and their respective ultimate beneficial owner(s) (if applicable) are third parties independent of and not connected with the Company, its subsidiaries (including Aptus) and their respective connected persons (as defined under the GEM Listing Rules).

Conditions precedent

The Hunan Agreement will become effective upon the fulfillment of the following conditions (the “Hunan Conditions Precedent”):

(i) obtaining the approval by the Shareholders for the Hunan Agreement and the transactions contemplated thereunder; and
(ii) obtaining the approval by the Ministry of Commerce in the PRC of the Hunan Agreement and the transactions contemplated thereunder.

If any of the above Hunan Conditions Precedent cannot be fulfilled, the Hunan Agreement shall lapse and the parties shall be released from all their rights and obligations under the Hunan Agreement.

As at the Latest Practicable Date, none of the Hunan Conditions Precedent have been fulfilled. The Hunan Agreement will be sent to the respective PRC government authorities, which include (1) Development & Reform Commission of Hunan Province; (2) Foreign Trade & Economic Development (branch offices of The Ministry of Commerce in provinces and cities); (3) The State-Owned Assets Supervision and Administration Commission; and (4) State Administration of Industry & Commerce of Changde City, to obtain the necessary approvals following signing by the respective parties.

Financial information of Hunan Joint Venture

Hunan Joint Venture was established in the PRC on 22 April 2005 as a PRC limited liability company. It is principally engaged in the construction and development of natural gas pipeline and related consultation services in the PRC. The registered capital of Hunan Joint Venture is RMB100,000,000 (approximately HK$97,087,000) which has been fully paid up. Hunan Joint Venture did not generate any revenue for the period between its date of

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LETTER FROM THE BOARD

incorporation and 31 December 2005. It is mainly engaged in the construction of a gas pipeline extending from Changsha City to Changde City, passing through a total of two cities and one county in the Hunan Provinces. Such pipeline is expected to commence operations by end of 2006 and all the operating expenses during that period were capitalised. The following figures of the Hunan Joint Venture are extracted from the Accountants’ Report on the Hunan Joint Venture in Appendix III to this circular. As at 31 December 2005, the audited net asset value of Hunan Joint Venture was RMB99,931,000 (approximately HK$97,020,000). The major assets of Hunan Joint Venture mainly include the capitalized expenditure on the construction of the pipelines owned by Hunan Joint Venture. The audited total asset value of Hunan Joint Venture as at 31 December 2005 was approximately RMB205,280,000 (approximately HK$199,301,000). The total asset value of Hunan Joint Venture as at 30 June 2006 was approximately RMB346,557,000 (approximately HK$336,463,000).

Hunan Capital Contribution

As at the Latest Practicable Date, Hunan Joint Venture is owned as to 65% by Huayou and 35% by Beijing Xin Hua Lian Gas. Pursuant to the Hunan Agreement, Aptus will contribute approximately RMB79,599,000 (approximately HK$77,281,000) being RMB49,254,000 (approximately HK$47,819,000) to the registered capital of Hunan Joint Venture and RMB30,345,000 (approximately HK$29,461,000) will be contributed to its capital reserve. Aptus is contemplating to finance such capital contribution by way of issuance of convertible notes. Aptus has signed a non-legally binding letter of intent dated 24 July 2006 with a potential third party investor. Pursuant to the letter, the investor has agreed to finance Aptus in relation to the Changde Joint Venture and Hunan Joint Venture with a maximum amount of USD30 million (approximately HK$234 million).

To the best of knowledge of Directors and Aptus Directors, the potential investors are independent of and not connected with the Company, its subsidiaries and their respective connected persons (as defined under the GEM Listing Rules). They are also independent of and not connected with Huayou, Beijing Xin Hua Lian Gas, their respective ultimate beneficial owners and their respective connected persons (as defined under the GEM Listing Rules). Given the upcoming funding activities to be conducted by Aptus, the Directors and Aptus Directors are of the view that Aptus should have sufficient capital resources to meet the funding obligations under the defined terms.

The Hunan Capital Contribution, in aggregate, of RMB79,599,000 (approximately HK$77,281,000) will be paid to the specific-use foreign exchange account opened by Aptus in the PRC within 45 days upon signing of the Hunan Agreement, which will then be transferred to the designated bank account of the Hunan Joint Venture within 7 days from the issuance of the business licence for the Hunan Joint Venture. If the approval of the transactions

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LETTER FROM THE BOARD

contemplated under the Hunan Agreement by the relevant approval authorities cannot be obtained or the Hunan Joint Venture cannot complete the registration of changes with the Administration for Industry and Commerce due to any reason not attributable to the default on the part of Aptus, all of the Hunan Capital Contribution previously paid together with interest accrued thereon will be refunded in full to Aptus. As advised by the PRC legal adviser, the prevailing PRC legal mechanism such as contract law and arbitration law can enable Aptus to claim a full refund with interest thereon from the Hunan Joint Venture.

Upon completion of the Hunan Capital Contribution, the registered capital of Hunan Joint Venture will be increased from RMB100,000,000 (approximately HK$97,087,000) to approximately RMB149,254,000 (approximately HK$144,907,000) and capital reserve of approximately RMB30,345,000 (approximately HK$29,461,000) will be recorded. Hunan Joint Venture will be owned as to 43.55% by Huayou, 33.00% by Aptus and 23.45% by Beijing Xin Hua Lian Gas. Set out below is the shareholding structure of Hunan Joint Venture immediately before and after completion of the Hunan Capital Contribution:

Before completion of the Hunan Capital Contribution

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==> picture [87 x 55] intentionally omitted <==

After completion of the Hunan Capital Contribution

==> picture [307 x 87] intentionally omitted <==

==> picture [86 x 54] intentionally omitted <==

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Upon completion of the Hunan Capital Contribution, the financial results of Hunan Joint Venture will be equity accounted for in the Aptus Group’s financial statements. Hunan Joint Venture will become an associated company of the Aptus Group. The financial statements of the Aptus Group will be consolidated into the financial statements of the Company given its 54.88% equity interest in the Aptus Group as at the Latest Practicable Date.

Basis of contribution

Upon completion of the Hunan Capital Contribution, the net asset value of the Hunan Joint Venture will be enlarged by the contribution of approximately RMB79.6 million from the approximately RMB99.9 million to approximately RMB178.5 million. The contribution of approximately RMB79.6 million represents a premium of approximately 34.5% to the amount of approximately RMB59.2 million being the 33% of the enlarged net asset value of the Hunan Joint Venture, which was determined, on an arm’s length basis, with reference to (1) valuation of the market comparables, (2) the net asset value of Hunan Joint Venture as at 31 December 2005, (3) the equity interest to be owned in the Hunan Joint Venture, and (4) the Aptus Directors’ assessment of the business growth potential of Hunan Joint Venture in the operation of the natural gas business in the PRC (see under the section headed “Reasons for and benefits of the Investments” below).

For the purpose of assessing the fairness and reasonableness of the Hunan Capital Contribution, the Directors and Aptus Directors have adopted the commonly used price-tobook ratio as valuation methodology with reference to the valuation of the market comparables. They have identified 4 companies listed in the Hong Kong which are engaged in the operation of natural gas related business. The approximate price-to-book ratio of the market comparables ranged from 1.2 to 3.0 times with an average of 2.2 times. Upon completion of the Hunan Contribution, Hunan Joint Venture’s net asset value represented a price-to-book ratio of 1.3 which was within the market range and was lower than the average price-to-earnings ratio of the market comparables of 2.2 times. As a result, the Directors consider the Hunan Capital Contribution is fair and reasonable.

Given the reasons mentioned above, the Directors believe that premium in relation to the net asset value of Hunan Joint Venture is fair and reasonable.

BACKGROUND OF CHANGDE JOINT VENTURE

Changde Joint Venture is principally engaged in the business of gas pipeline design, the supply, development and management of natural gas pipelines and distribution facilities in the PRC. It constructs and operates the last mile pipeline distribution network to residential, commercial and industrial customers in Changde. Since its commencement of business, it had been supplying end users in Changde City with reconstituted liquefied natural gas which has to be refilled by gas refueling station trailer. For the last two years ended 31 December 2005 and six months ended 30 June 2006, number of customers have been increased by 5038, 5100 and 4160 respectively. In addition, the gas supplied by Changde Joint Venture was 2.71 million cubic meters, 6.57 million cubic meters and 3.85 million cubic meters respectively for the last

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two years ended 31 December 2005 and six month ended 30 June 2006. When the Changsha City to Changde City main gas pipeline comes onstream which is expected to commence operation by end of 2006 (as it is responsible by the Hunan Joint Venture, please refer to the section headed “Hunan Agreement for more details), natural gas from this pipeline will replace the reconstituted liquefied natural gas as a source of gas. It is expected the demand for the natural gas will significantly increase. Changde Joint Venture is managing 2 natural gas projects in Changde City in the PRC (one of which is in Lin Li County ( ) inside Changde City) to distribute natural gas to end users including residential, commercial and industrial units within the region of Changde via pipelines. It is the sole natural gas supplier in Changde City and has been granted by Office of People’s Government of Changde Municipality an exclusive right to supply piped natural gas to the Administrative zone of Changde City for an initial term of 30 years at 2003.

Changde Joint Venture generates its income from the sale of natural gas and the installation services rendered. Therefore, its revenue mainly comprises of gas sales and installation fee. The gas sale is charged based on meter reading. The installation fee is charged on one-off basis for the connection of pipeline network service for the end users. Further to this, the Changde Joint Venture will place orders to the group company of CNPC for the natural gas, which will be transported along the Changsha to Changde pipeline. Set out below is the major stream of revenue of Changde Joint Venture:

Gas sales Installation fee	For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 22,240 12,161 1,667 16,285 10,794 2,838 38,525 22,955 4,505	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 14,055 11,185 7,742 4,257 21,797 15,442	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 14,055 11,185 7,742 4,257 21,797 15,442
			15,442

Management discussion and analysis

Financial performance

For the six months ended 30 June 2006, Changde Joint Venture recorded an unaudited consolidated turnover of approximately RMB21.8 million representing an increase of approximately 42% as compared to approximately RMB15.4 million for the six months ended 30 June 2005. The increase of turnover was attributed to the increase in sales of gas and connection fee charged to new customers. As the pipeline network in Changde expands, the gas network of the Changde Joint Venture will be increased and therefore the number of customers increased. As the result of the increase in number of customers, gas fee income and installation income increased accordingly.

Changde Joint Venture’s operating expenses amounted to approximately RMB4 million (six months ended 30 June 2005: approximately RMB2.7 million), representing an increase of

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approximately 48%. The operating expenses principally consisted of depreciation of RMB2.8 million, salaries of RMB0.4 million and staff welfare of RMB0.2 million. Increase in operating expenses was due to increase in depreciation charges of approximately RMB1 million for the period ended 30 June 2006 while the depreciation charges was RMB1.8 million for the period ended 30 June 2005.

Changde Joint Venture’s administrative expenses amounted to approximately RMB1.8 million (six months ended 30 June 2005: approximately RMB1.7 million), representing a slight increase of approximately 6%. The administrative expenses principally consisted of depreciation of RMB0.5 million, salaries of RMB0.3 million, traveling and accommodation expenses of RMB0.2 million, entertainment expenses of RMB0.1 million, staff welfare of RMB0.1 million and insurance of RMB0.1 million.

Net profit attributable to equity holders for the six months ended 30 June 2006 was approximately RMB255,000 (six months ended 30 June 2005: approximately RMB373,000), representing a decrease of 32%. Gross profit margin was maintained steady at 30% for the six months ended 30 June 2006 and 2005. Slight decrease in net profits was because the extent of increase in cost of operation is larger than that in the turnover of Changde Joint Venture.

Liquidity, financial resources and capital structure

As at 30 June 2006, Changde Joint Venture has total assets of RMB175 million (31 December 2005: RMB160 million), including net cash and bank balances of approximately RMB14 million (31 December 2005: RMB3 million). Except for the project under development of Changde Joint Venture used as security for its short term bank loans, there was no charge on Changde Joint Venture’s other assets as at 30 June 2006 and at 31 December 2005.

As at 30 June 2006, Changde Joint Venture had borrowings of RMB77.6 million (31 December 2005: RMB56 million). The gearing ratio, defined as the ratio between total long term borrowings and the equity attributable to equity holders of the Company, was 40.9% (31 December 2005: 45.2%).

Contingent liabilities

Changde Joint Venture did not have any contingent liabilities as at 30 June 2006 (31 December 2005: nil).

Commitments

Changde Joint Venture did not have any significant capital commitment or operating lease commitment as at 30 June 2006 (31 December 2005: nil).

Significant investments and acquisitions

During the six months ended 30 June 2006, Changde Joint Venture did not have any significant investments or acquisitions (six months ended 30 June 2005: nil).

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Employees

Changde Joint Venture employed a total of 141 employees as at 30 June 2006. Employees’ remuneration is in line with market conditions, working experience, and prevailing industry practice. Changde Joint Venture’s remuneration policies and packages were reviewed on a regular basis.

Financial performance

For the year ended 31 December 2005, Changde Joint Venture recorded an unaudited consolidated turnover of approximately RMB38.5 million representing an increase of approximately 67% as compared to approximately RMB23 million for the year ended 31 December 2004. The increase of turnover was attributed to the increase in sales of gas and connection fee charged to new customers. As the pipeline network in Changde expands, the gas network of the Changde Joint Venture will be increased and therefore the number of customers increased. As the result of the increase in number of customers, gas fee income and installation income increased accordingly.

Changde Joint Venture’s operating expenses amounted to approximately RMB7.6 million (year ended 31 December 2004: approximately RMB4.7 million), representing an increase of approximately 62%. The operating expenses principally consisted of depreciation of RMB4.9 million and salaries of RMB1 million. Increase in operating expenses was due to the acquisition of a subsidiary in Lin Li County for the year ended 31 December 2005 and the consolidation of the operating expenses in that subsidiary of approximately RMB0.3 million. In addition, the increase in depreciation charges from approximately RMB2.6 million for the year ended 31 December 2004 to RMB4.9 million for the year ended 31 December 2005 also led to increase in Changde Joint Venture’s overall operating expenses for the year ended 31 December 2005.

Changde Joint Venture’s administrative expenses amounted to approximately RMB4 million (year ended 31 December 2004: approximately RMB3.3 million), representing an increase of approximately 21%. The administrative expenses principally consisted of depreciation of RMB0.7 million, salaries of RMB0.6 million, repairs and maintenance of RMB0.3 million, traveling and accommodation expenses of RMB0.3 million, entertainment expenses of RMB0.2 million, various government duties of RMB0.2 million, staff welfare of RMB0.2 million and insurance of RMB0.2 million. Increase in administrative expenses was due to the acquisition of a subsidiary in Lin Li County for the year ended 31 December 2005 and the consolidation of the administrative expenses in that subsidiary of approximately RMB0.4 million.

Changde Joint Venture’s other operating expenses mainly represented loss on disposal of land use rights of RMB2.4 million. For the year ended 31 December 2005, the Company disposed of certain land use rights at a consideration of approximately RMB2.5 million.

Net profit attributable to equity holders for the year ended 31 December 2005 was approximately RMB816,000 (year ended 31 December 2004: loss of approximately RMB7 million). Gross profit margin was maintained steady at 39% for the years ended 31 December 2004 and 2005.

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Liquidity, financial resources and capital structure

As at 31 December 2005, Changde Joint Venture has total assets of RMB160 million (31 December 2004: RMB148 million), including net cash and bank balances of approximately RMB3 million (31 December 2004: RMB0.5 million). Except for the project under development of Changde Joint Venture used as security for its short term bank loans, there was no charge on Changde Joint Venture’s other assets as at 31 December 2004 and 2005.

As at 31 December 2005, Changde Joint Venture had borrowings of RMB56 million (31 December 2004: RMB50.5 million). The gearing ratio, defined as the ratio between total long term borrowings and the equity attributable to equity holders of the Company, was 45.2% (31 December 2004: 45.7%).

Contingent liabilities

Changde Joint Venture did not have any contingent liabilities as at 31 December 2005 (31 December 2004: nil).

Commitments

Changde Joint Venture did not have any significant capital commitment or operating lease commitment as at 31 December 2005 (31 December 2004: nil).

Significant investments and acquisitions

During the year ended 31 December 2005, Changde Joint Venture did not have any significant investments or acquisitions (year ended 31 December 2004: nil).

Employees

Changde Joint Venture employed a total of 136 employees as at 31 December 2005. Employees’ remuneration is in line with market conditions, working experience, and prevailing industry practice. Changde Joint Venture’s remuneration policies and packages were reviewed on a regular basis.

Financial performance

For the year ended 31 December 2004, Changde Joint Venture recorded an audited consolidated turnover of approximately RMB23 million representing an increase of approximately 411% as compared to approximately RMB4.5 million for the year ended 31 December 2003. The increase of turnover was because Changde Joint Venture’s operation commenced in late 2003 and full year operation for the year ended 31 December 2004 was resulted.

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Changde Joint Venture’s operating expenses amounted to approximately RMB4.7 million (year ended 31 December 2003: approximately RMB0.6 million), representing an increase of approximately 683%. The operating expenses principally consisted of depreciation of RMB2.6 million, amortization of intangible assets of RMB0.6 million and salaries of RMB0.7 million. Increase in operating expenses was mainly due to the increase in depreciation charges of approximately RMB2.5 million, amortization of intangible assets of RMB0.6 million and increase in salaries of approximately RMB0.6 million.

Changde Joint Venture’s administrative expenses amounted to approximately RMB3.3 million (year ended 31 December 2003: approximately RMB1.2 million), representing an increase of approximately 175%. The administrative expenses principally consisted of amortization of land use rights of RMB0.5 million, depreciation of RMB0.3 million, salaries of RMB0.6 million, repairs and maintenance of RMB0.2 million, traveling and accommodation expenses of RMB0.2 million, entertainment expenses of RMB0.2 million, various government duties of RMB0.1 million, staff welfare of RMB0.1 million, provision for doubtful debts of RMB0.3 million and insurance of RMB0.2 million. Increase in administrative expenses was mainly due to the increase in depreciation charges of approximately RMB0.3 million, increase in amortization of land use rights of approximately RMB0.5 million, increase in salaries of approximately RMB0.3 million and increase in provision for doubtful debts of approximately RMB0.3 million.

Changde Joint Venture’s other operating expenses mainly represented impairment loss on project under development of RMB7.4 million. As the management considered that part of the projects under construction could not be used in distribution of natural gas due to the obsolescence, loss of impairment on these projects under construction of approximately RMB7.4 million was made.

Net loss attributable to equity holders for the year ended 31 December 2004 was approximately RMB7 million (year ended 31 December 2003: profit of approximately RMB15,000). Gross profit margin was approximately 39% for the years ended 31 December 2004 (year ended 31 December 2003: approximately 60%). The gross margin of installation fee is higher that of sales of gas. Since the extent of increase in sales of gas during the year ended 31 December 2004 was larger than that in the installation fee income during the same year, the gross margin shrunk accordingly. Significant net loss was mainly due to the impairment loss on projects under development of approximately RMB7.4 million for the year ended 31 December 2004.

Liquidity, financial resources and capital structure

As at 31 December 2004, Changde Joint Venture has total assets of RMB148 million (31 December 2003: RMB138 million), including net cash and bank balances of approximately RMB0.5 million (31 December 2003: RMB0.5 million). Except for the project under development of Changde Joint Venture used as security for its short term bank loans, there was no charge on Changde Joint Venture’s other assets as at 31 December 2004 (31 December 2003: nil).

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As at 31 December 2004, Changde Joint Venture had borrowings of RMB50.5 million (31 December 2003: RMB42 million). The gearing ratio, defined as the ratio between total long term borrowings and the equity attributable to equity holders of the Company, was 45.7% (31 December 2003: 42%).

Contingent liabilities

Changde Joint Venture did not have any contingent liabilities as at 31 December 2004 (31 December 2003: nil).

Commitments

Changde Joint Venture did not have any significant capital commitment or operating lease commitment as at 31 December 2004 (31 December 2003: nil).

Significant investments and acquisitions

During the year ended 31 December 2004, Changde Joint Venture did not have any significant investments or acquisitions (year ended 31 December 2003: nil).

Employees

Changde Joint Venture employed a total of 107 employees as at 31 December 2004. Employees’ remuneration is in line with market conditions, working experience, and prevailing industry practice. Changde Joint Venture’s remuneration policies and packages were reviewed on a regular basis.

Financial performance

For the year ended 31 December 2003, Changde Joint Venture recorded an audited consolidated turnover of approximately RMB4.5 million. Changde Joint Venture’s operating expenses amounted to approximately RMB0.6 million. The operating expenses principally consisted of salaries of RMB0.1 million, repairs and maintenance expenses of RMB0.1 million and transportation expenses of RMB0.1 million. The administrative expenses incurred by Changde Joint Venture of RMB1.2 million principally consisted of depreciation of RMB0.1 million, salaries of RMB0.3 million, repairs and maintenance of RMB0.2 million, traveling and accommodation expenses of RMB0.1 million, and various government duties of RMB0.1 million.

Net profit attributable to equity holders for the year ended 31 December 2003 was RMB15,000. Gross profit margin for the year ended 31 December 2003 was approximately 60%.

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Liquidity, financial resources and capital structure

As at 31 December 2003, Changde Joint Venture has total assets of RMB138 million including net cash and bank balances of approximately RMB0.5 million. There was no charge on Changde Joint Venture’s assets as at 31 December 2003.

As at 31 December 2003, Changde Joint Venture had borrowings of RMB42 million. The gearing ratio, defined as the ratio between total long term borrowings and the equity attributable to equity holders of the Company, was 42%.

Contingent liabilities

Changde Joint Venture did not have any contingent liabilities as at 31 December 2003.

Commitments

Changde Joint Venture did not have any significant capital commitment or operating lease commitment as at 31 December 2003.

Significant investments and acquisitions

During the year ended 31 December 2003, Changde Joint Venture did not have any significant investments or acquisitions.

Employees

Changde Joint Venture employed a total of 92 employees as at 31 December 2003. Employees’ remuneration is in line with market conditions, working experience, and prevailing industry practice. Changde Joint Venture’s remuneration policies and packages were reviewed on a regular basis.

BACKGROUND OF HUNAN JOINT VENTURE

The Hunan Joint Venture is principally engaged in the construction and development of natural gas pipeline and related consultation services in the PRC. Currently it is mainly engaged in the construction of a main gas pipeline extending from Changsha City to Changde City. This pipeline is a provincial level main gas pipeline, connected with Zhongxian-Wuhan pipeline which is a branch from the trunk of West-East Gas pipeline. Natural gas sourced from natural gas fields operated by the CNPC group company, passing through the ZhongxianWuhan pipeline (which originates from Chongqing City), is transported along the Changsha to Changde pipeline for distribution to city level gas distribution companies. The Hunan Joint Venture is to generate revenue by charging the city level gas distributors such as Changde Joint Venture a transportation fee based on each cubic metre of natural gas transported along the pipeline. The transportation fee levied on each cubic metre of natural gas, which has not yet been determined at the Latest Practicable Date, is subject to the approval of the regional

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government authority. The pipeline passes through three areas in Hunan Province, namely Wangcheng County ( ), Yiyang City ( ) and Changde City ( ), will be used to supply gas to the city gas distributors around the areas.

Management discussion and analysis

Financial performance

As the operation of Hunan Joint Venture has not yet been commenced during the period from 22 April 2005 (date of incorporation) to 31 December 2005 and the six months ended 30 June 2006, no revenue was generated in these periods and only minimal administrative expense were incurred in the period ended 31 December 2005, which resulted in net loss attributable to equity holders of approximately RMB69,000 for the period ended 31 December 2005.

Liquidity, financial resources and capital structure

As at 30 June 2006, Hunan Joint Venture has total assets of RMB346 million (31 December 2005: RMB205 million), including net cash and bank balances of approximately RMB54 million (31 December 2005: RMB2 million). Except for the project under development of Hunan Joint Venture secured for its bank loans, there was no charge on Hunan Joint Venture’s other assets as at 30 June 2006 and 31 December 2005.

Hunan Joint Venture did not have any borrowings as at 30 June 2006 and 31 December 2005.

Contingent liabilities

Hunan Joint Venture did not have any contingent liabilities as at 30 June 2006 and 31 December 2005.

Commitments

Hunan Joint Venture did not have any significant capital commitment or operating lease commitment as at 30 June 2006 and 31 December 2005.

Significant investments and acquisitions

During the period from 22 April 2005 (date of incorporation) to 31 December 2005 and the six months ended 30 June 2006, Hunan Joint Venture did not have any significant investments or acquisitions.

Employees

Hunan Joint Venture employed a total of 54 and 41 employees as at 30 June 2006 and 31 December 2005, respectively. Employees’ remuneration is in line with market conditions, working experience, and prevailing industry practice. Hunan Joint Venture’s remuneration policies and packages were reviewed on a regular basis.

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REASONS FOR AND BENEFITS OF THE INVESTMENTS

As at the Latest Practicable Date, Aptus is owned as to approximately 54.88% by the Company, which is principally engaged in the business of trading of edible oil and operation of oil and gas related business. The Company is principally engaged in the provision of software, hardware and other support services to the China lottery industry in various provinces in the PRC. Further, the Company is also involved in the production and distribution of bee related products and other natural products. As stated in the 2006 third quarterly reports of the Company, the Group aims to diversify its business into the lottery and oil and gas sectors in China.

Historically, natural gas has not been a major fuel in China, but given the environmental benefits of using natural gas, China has embarked on a major expansion of its gas infrastructure. According to China’s Energy Study Institute of the State Development and Reform Commission of China, demand for natural gas in 2005 was approximately 48 billion cubic metres accounting for approximately 4% of the nation’s one-off energy consumption. According to the Energy Study Institute, the growth in demand for natural gas will significantly outpace that of coal and petroleum in the next 20 years. It forecasts that by 2010, consumption of natural gas as a percentage of one-off energy consumption will increase to approximately 6% and further increase to approximately 10% by 2020.

The Chinese Government has undertaken major directives to increase natural gas supply, including and not exclusively the: (i) West-East Gas Pipeline Project; (ii) East Ocean Gas Supply Onshore, Importation of Liquefied Natural Gas (LNG) for Southern China; and (iii) construction work of Russia Gas Supply to China. On the demand side, in addition to the Chinese Government’s well aired objectives to increase gas use as a percentage of the energy mix, in February, 2005, the State Council issued the State Council’s Certain Opinion about Encouraging, Supporting and Guiding the Development of Privately-Owned Non State-Owned Economy which permitted non state-owned capital to invest in the utilities industries, including supply of natural gas in the cities, and support non state-owned capital activity participate in the investment, construction and operation of municipal public utilities businesses, such as supply of gas in cities and towns.

Taking into account the foresaid government supported policies and the movement towards using environmental-friendly energy source, the Directors and Aptus Directors consider that the Investments will provide a good opportunity for the Group to participate in the natural gas business in the PRC which the Directors and Aptus Directors consider to have substantial growth potential in the future. In Changde City, gas demand has been growing strongly. In 2004 piped gas sales totaled 2.71 million cubic metres growing 142.4% to 6.57 million cubic metres in 2005. This growth has been achieved despite the source of this piped gas being reconstituted liquefied natural gas which has to be refilled by gas refueling station trailer. When the Changsha City to Changde City main gas pipeline comes onstream, natural gas from this pipeline will replace the reconstituted liquefied natural gas as a source of gas. This is anticipated to remove logistical bottlenecks, lower operating costs and also lower end costs to the consumers facilitating strong growth in Changde City gas demand going forward.

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Although Hunan Joint Venture was recently established, the construction of gas pipeline by the Hunan Joint Venture in Hunan province has been completed. The pipelines are currently in the testing phrase and expected to commence formal operation by end of 2006. The Directors and Aptus Directors believe that both the investments in Hunan Joint Venture and Changde Joint Venture provide Aptus with a good opportunity to participate in strong growth in natural gas demand in Hunan province with strong cashflow expected to be generated in the near future.

The Directors and Aptus Directors expected that the natural gas consumption in Changde City ( ), Yiyang City ( ) and Wangcheng County ( ), in aggregate, will have substantial growth in the following years. The Directors and Aptus Directors believe that the Investments would allow Aptus to move into a solid business area which will generate recurrent cashflow and thus contribute positively to Aptus’ operating results in the future. The Directors and Aptus Directors also believe that the Investments would enable the Aptus Group to further expand its business in the oil and gas related industries. CNPC is one of the two largest state-owned petroleum corporations in the PRC. It is a state-owned enterprise whose business operations cover a broad spectrum of upstream and downstream activities, domestic marketing and international trade, technical services, and equipment manufacturing and supply in the PRC. CNPC has extensive resources in the oil and gas related sectors in the PRC.

According to the Changde Agreement and the Hunan Agreement, Aptus is not committed to any further capital commitment to each of Changde Joint Venture and Hunan Joint Venture.

FINANCIAL AND TRADING PROSPECT OF THE GROUP AND CHANGDE JOINT VENTURE AND HUNAN JOINT VENTURE

The Group

As disclosed in the 2006 annual report, the Aptus has made significant strides in establishing a footprint in the oil and gas related industries in the PRC with the acquisition of Xinjiang Oilfield.

The Board considers the Investments an important milestone and a marvelous opportunity for the Group to expand its business into the natural gas industry in the PRC which has more promising growth potential. Besides, the Investments further consolidates the Group’s business relationship with Huayou, a wholly-owned subsidiary of CNPC which has extensive resources in the oil and gas related sectors in the PRC. The Board believes the Investments would enable the Group to explore more business opportunities in the oil and gas industries in the PRC and allow the Group to further expand its business.

The Board is optimistic on the prospect of the Group given the benefits anticipated to be accrued to the Aptus as a result of the Investments. The Group will continue to look for opportunities to expand the oil and gas related business by acquisitions that will bring good returns which suit the objectives of the Group.

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On the other hand, given the Aptus Directors will use their reasonable endeavours to procure zero cash coupon for the first eighteen months from the date of issue of Convertible Notes (the “Zero Coupon Convertible Notes”), the Directors believe that the Aptus would have no any imminent financial pressure on the payment of the interest incurred for the Convertible Notes. If the Aptus cannot procure the Zero Coupon Convertible Notes, the Directors are of the view that the Aptus would has sufficient financial resources for the ongoing servicing interests payment and obligations of the Convertible Notes with the expected cash inflow generated by the Xinjiang Oilfield project and both Changde Joint Venture and Hunan Joint Venture. In the event that the Convertible Notes will not be converted and hence would need to be repaid by the Aptus, the Aptus Directors believes that Aptus will be able to refinance the Convertible Notes by using its internal resources, bank loan, potential issuance of equity securities or a new convertible notes, among others.

Changde Joint Venture

Changde Joint Venture is managing 2 natural gas projects in Changde City in the PRC (one of which is in Lin Li County ( ) inside Changde City. It has been granted an exclusive right to supply piped natural gas to the Administrative zone of Changde City for an initial term of 30 years at 2003. Since Changde Joint Venture’s commencement of business, it has been supplying end users in Changde City with reconstituted liquified natural gas which has to be refilled by gas refueling station trailer. Changde Joint Venture has an existing intra-city pipeline network and small customer base of residential, commercial and industrial users. As liquefied natural gas is transported in by trailer, this has resulted in a logistical constraint on supply and also a high cost of operation and resultant gas price of over RMB3 per cubic metre for end users, thereby constraining the growth of Changde Venture. In 2004, piped gas sales totaled 2.71 million cubic metres, growing 142.4% to 6.57 million cubic metres in 2005. This growth has been achieved despite the source of this piped gas being reconstituted liquefied natural gas which has to be refilled by gas refueling station trailer. When the Changsha City to Changde City main gas pipeline comes onstream, which is expected to commence operation by end of 2006 (as it is responsible by the Hunan Joint Venture, please refer to the section headed “Hunan Agreement for more details), natural gas from this pipeline will replace the liquefied natural gas as the source of gas. The switch is expected to result in a removal of the logistical constraint on expansion and a less expensive end selling price making the pricing more attractive to end users. The switch from liquefied natural gas to natural gas is expected to result in a new and prolonged phase of growth for Changde Joint Venture. The removal of the logistical constraint and reduced end price of its gas will enable it to more aggressively expand into the residential market and also open up the commercial and industrial market for gas.

Hunan Joint Venture

Hunan Joint Venture was established in the PRC on 22 April 2005. It is principally engaged in the construction of a 187km gas pipeline extending from Changsha City to Changde City, passing through a total of two cities and one county in the Hunan Province. This pipeline is a provincial level main gas pipeline, connected with Zhongxian-Wuhan pipeline which is a

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branch from the trunk of West-East Gas pipeline. The Changsha City to Changde City pipeline’s function is to transport gas from the Zhongxian-Wuhan pipeline for distribution to city level gas distribution companies. The pipeline passes through three areas in Hunan Province, namely Wangcheng County ( ), Yiyang City ( ) and Changde City ( ), will be used to supply gas to the city gas distributors around the areas.

The construction of gas pipeline by the Hunan Joint Venture in Hunan province has been completed. The pipelines are currently in the testing phrase and expected to commence formal operation by end of 2006. As can be seen from the above in the Changde Joint Venture future prospects section, the switch from liquefied natural gas to natural gas is expected to result in a new and prolonged phase of growth for Changde Joint Venture due to the removal of the logistical constraints and reduction in end price of gas to consumers. This is also likely to be the case for Yiyang City and Wangcheng County and will provide an attractive demand environment for the Changsha to Changde pipeline.

THE PROPOSED PLACING OF THE CONVERTIBLE NOTES

Aptus intends to finance the Changde Joint Venture and Hunan Joint Venture with a convertible notes (the “Convertible Notes”) offering. The principal amount of the Convertible Notes is expected to be approximately HK$234 million. Currently, Aptus is in negotiation with several potential investors who are independent of and not connected with it, its subsidiaries and their respective connected persons (as defined under the GEM Listing Rules) regarding the terms and conditions of the Convertible Notes. Details terms and conditions of the offering are currently being negotiated between the Company and the potential investors. A further announcement will be made by Aptus and the Company when a subscription agreement is entered into by Aptus and the investors (the “Subscription Agreement”) which will also outline the detailed terms and conditions of the Convertible Notes.

The proposed Convertible Notes (when issued) is proposed to have a principal amount of approximately HK$234 million with a term of approximately 5 years from the date of issue of the Convertible Notes. The potential investors will have the right to convert the Convertible Notes into conversion shares (the “Conversion Shares”) during the term of the Convertible Notes based on an agreed conversion price (the “Conversion Price”). In order to provide the Company with more flexibility to raise more fund when the market condition is good and minimise the dilution effect to Shareholders, the Directors expect the number of Shares to be issued will not exceed 8.85% of the issued share capital of the Company as enlarged by the issue of Convertible Notes upon conversion of the Convertible Notes in full (the “Issue Limit”). In the event that the numbers of Conversion Shares to be allotted and issued exceed the Issue Limit, the Directors will voluntarily seek for specific approval from Shareholders in relation to the issue of Convertible Notes at an extraordinary general meeting of the Company. In addition, Aptus envisages that the Convertible Notes will bear no cash coupon for the first eighteen months from the date of issue of the Convertible Notes.

– 25 –

LETTER FROM THE BOARD

Based on the above indicative terms, Aptus would have not any imminent financial pressure on the payment of the interest incurred for the Convertible Notes. With the projected cash inflow generated by the Xinjiang Oilfield project and both Changde Joint Venture and Hunan Joint Venture, Aptus Directors are of the view that Aptus would have sufficient financial resources for the ongoing servicing obligations of the Convertible Notes. In the event that the Convertible Notes will not be converted and hence would need to be repaid by Aptus, the Aptus Directors believes that it will be able to refinance the Convertible Notes by using its internal resources, bank loan, potential issuance of equity securities or a new convertible notes, among others.

The following table outlines the shareholding structure of Aptus as at the Latest Practical Date and immediately after the allotment and issue of the Conversion Shares, assuming (1) a principal amount of HK$234 million for the Convertible Notes, (2) the Convertible Notes are converted in full, (3) the Conversion Price is equivalent to the closing price of Aptus’s shares on 17 October 2006 of HK$2.23 per share, being the closing price as quoted on the Latest Practicable Date.

China Vanguard Investors Public Total	As at the Latest Practicable Date No. of Shares Approximate % of issued share capital of Aptus 915,571,428 54.88% – – 752,870,000 45.12% 1,668,441,428 100.00%	Immediately after the allotment and issue of the Conversion Shares (which are issued and converted in full for the principal amount of HK$234 million) based on the initial Conversion Price No. of Shares Approximate % of issued share capital of Aptus 915,571,428 51.63% 104,935,000 5.92% 752,870,000 42.45% 1,773,376,428 100.00%	Immediately after the allotment and issue of the Conversion Shares (which are issued and converted in full for the principal amount of HK$234 million) based on the initial Conversion Price No. of Shares Approximate % of issued share capital of Aptus 915,571,428 51.63% 104,935,000 5.92% 752,870,000 42.45% 1,773,376,428 100.00%
			100.00%

– 26 –

LETTER FROM THE BOARD

The following table outlines the shareholding structure of Aptus as at the Latest Practical Date and immediately after the issue of the Conversion Shares, assuming (1) a principal amount of HK$234 million for the Convertible Notes, (2) the Convertible Notes are converted in full, (3) maximum number of Conversion Shares to be issued without exceed the Issue Limit.

China Vanguard Investors Public Total	As at the Latest Practicable Date No. of Shares Approximate % of issued share capital of Aptus 915,571,428 54.88% – – 752,870,000 45.12% 1,668,441,428 100.00%	Immediately after the issue of the Conversion Shares (which are issued and converted in full for the principal amount of HK$234 million) based on the minimum floor Conversion Price No. of Shares Approximate % of issued share capital of Aptus 915,571,428 50.02% 162,000,000 8.85% 752,870,000 41.13% 1,830,441,428 100.00%	Immediately after the issue of the Conversion Shares (which are issued and converted in full for the principal amount of HK$234 million) based on the minimum floor Conversion Price No. of Shares Approximate % of issued share capital of Aptus 915,571,428 50.02% 162,000,000 8.85% 752,870,000 41.13% 1,830,441,428 100.00%
			100.00%

As set out in the table above, the maximum number of the Conversion Shares expected could be allotted and issued without the approval of shareholders of Aptus is 162,000,000, meaning that the minimum floor Conversion Price would be HK$1.44 per Conversion Share for raising the principal amount of HK$234 million.

Shareholders should note that given the placing of Convertible Notes will be implemented on a best effort basis, the exact number of Conversion Shares and final conversion price are subject to further negotiation and agreement between Aptus and the investors.

– 27 –

LETTER FROM THE BOARD

FINANCIAL EFFECT OF THE INVESTMENTS

Net assets

The audited consolidated net asset value of the Group as at 30 June 2006 as stated in the annual report of the Company for the year ended 30 June 2006 was approximately HK$453,851,000. As set out in Appendix IV to this circular, assuming completion of the Acquisition had taken place on 30 June 2006, the pro forma net assets of the Enlarged Group would have been approximately HK$453,970,000. Therefore, the Investments will slightly increase the Group’s net assets position.

Earnings

Upon completion of the Investments, all the earnings of the Changde Joint Venture and Hunan Joint Venture before completion of the Investments will be accounted for preacquisition profit in the financial statement of the Group which shall not have any effect on the earnings of the Group. However, the Directors expect that upon completion of the Investments of the natural gas business, the Group will be able to share the profit generated from both Changde Joint Venture and Hunan Joint Venture, which will in turn improve the profitability of the Group given the growing demand of gas supply in the PRC.

EXTRAORDINARY GENERAL MEETING

The shares of the Company and Aptus are all listed on the Stock Exchange. As at the Latest Practicable Date, the Company controls approximately 54.88% of the total voting rights of Aptus. The Investments constitute a major transaction for the Company under Rules 19.06(3) of the GEM Listing Rules and accordingly, the completion of the Investments is subject to the approval by the Shareholders at the EGM. To the best of Directors’ knowledge, as at the Latest Practicable Date, information and belief have made all reasonable enquiries, no Shareholder has interest in the Investments and therefore no Shareholder is required to abstain from voting in respect of the proposed resolution to approve the Investments at the EGM.

Set out on pages 175 to 176 is a notice convening the EGM to be held at 30th Floor, Sunshine Plaza, 353 Lockhart Road, Hong Kong at 2:00 p.m. on 7 November 2006 for the purpose of considering and if thought fit approving the Investments.

A form of proxy is also enclosed. Whether or not you are be able to attend the EGM, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit the same to the head office and principal place of business in Hong Kong of China Vanguard Group Limited at 30th Floor, Sunshine Plaza, 353 Lockhart Road, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

– 28 –

LETTER FROM THE BOARD

PROCEDURES FOR DEMANDING A POLL AT EXTRAORDINARY GENERAL MEETING

As at the Latest Practicable Date, according to Article 80 of the articles of association of the Company (the “ Articles ”), at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is duly demanded. A poll may be demanded by:

(a) the chairman of the meeting; or
(b) at least five Shareholders present in person or by proxy or, in the case of corporations, by their duly authorised representatives, and entitled to vote or who represent in the aggregate not less than one-tenth of the total voting rights of all Shareholders having the right to attend and vote at the meeting; or
(c) any Shareholder or Shareholders present in person or by proxy or, in the case of corporations, by their duly authorised representatives, and holding Shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all Shares conferring that right.

Assuming the passing of the special resolution for the amendments to be made to Article 80 at the annual general meeting of Company to be held on Tuesday, 24 October 2006 at 10:30 a.m., at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless voting by way of a poll is required by the GEM Listing Rules or (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is duly demanded. A poll may be demanded by:

(a) the chairman of the meeting; or
(b) at least five Shareholders present in person or by proxy or, in the case of corporations, by their duly authorised representatives, and entitled to vote or who represent in the aggregate not less than one-tenth of the total voting rights of all Shareholders having the right to attend and vote at the meeting; or
(c) any Shareholder or Shareholders present in person or by proxy or, in the case of corporations, by their duly authorised representatives, and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all Shares conferring that right; or

– 29 –

LETTER FROM THE BOARD

(d) if required by the GEM Listing Rules, any Director holding proxies if such aggregate proxies held individually or collectively by the Directors account for five (5) per cent or more of the total voting rights at that meeting, and if on a show of hands in respect of any resolution, the meeting votes in the opposition manner to that instructed in those proxies.

RECOMMENDATION

Having taken into consideration of the principal factors and reasons, in particular,

(i) natural gas industry has been supported by government policies and the country movement towards using environmental-friendly energy source;
(ii) it is expected that the natural gas consumption in Changde City, Yiyang City and Wangcheng County, in aggregate, will have substantial growth in the following years; and
(iii) the Investment provide a good opportunity to participate in the natural gas business which generates a more stable and promising cash inflow to the Group.

The Board is of the opinion that the terms of the Investments are fair and reasonable and the Investments are in the interest of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM in respect of the Investments.

ADDITIONAL INFORMATION

Your attention is also drawn to the additional information contained in the appendices to this circular.

Yours faithfully,

For and on behalf of the Board of

China Vanguard Group Limited Chan Ting

Director

– 30 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. THREE YEARS FINANCIAL SUMMARY

Set out below is a summary of the audited financial information on the Group for the three years ended 30 June 2006, extracted from the respective annual reports of the Company:

For 2006 HK$’000 81,608 (55,284)	the year ended 30 June 2005 2004 HK$’000 HK’$000 189,131 192,971 (142,875) (141,394) 46,256 51,577 5.112 167 (12,747) (8,865) (18,884) (11,050) – – (2,789) – 6,945 – 23,893 31,829 (1,849) (691) 17,653 – 39,697 31,138 (9,086) (1,861) 30,611 29,277 9,643 8,658 31,685 29,013 (1,074) 264 30,611 29,277 248,351 187,222 77,580 44,932 10,129 4,824 160,462 137,466	the year ended 30 June 2005 2004 HK$’000 HK’$000 189,131 192,971 (142,875) (141,394) 46,256 51,577 5.112 167 (12,747) (8,865) (18,884) (11,050) – – (2,789) – 6,945 – 23,893 31,829 (1,849) (691) 17,653 – 39,697 31,138 (9,086) (1,861) 30,611 29,277 9,643 8,658 31,685 29,013 (1,074) 264 30,611 29,277 248,351 187,222 77,580 44,932 10,129 4,824 160,462 137,466
26,324 34,282 (3,718) (111,252) (13,106) – – (67,470) (3,005) 18,830 (51,645) (6,717)	46,256 5.112 (12,747) (18,884) – (2,789) 6,945 23,893 (1,849) 17,653 39,697 (9,086)	51,577 167 (8,865 (11,050 – – –
		31,829 (691 –
		31,138 (1,861
(58,362) 3,049	30,611 9,643
(39,908) (18,454)	31,685 (1,074)	29,013 264
(58,362)	30,611
519,414 65,563 55,893	248,351 77,580 10,129	187,222 44,932 4,824
397,958	160,462

– 31 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 30 JUNE 2006

Set out below is a summary of the audited financial statements of the Group for the years ended 30 June 2006 together with the relevant notes to the accounts as extracted from the audited financial statements of the Group for the year ended 30 June 2006.

Consolidated Income Statement

For the year ended 30 June 2006

Notes Revenue 8 Cost of sales Gross profit Other revenue 8 Selling and distribution costs Administrative expenses Gain on disposal of subsidiaries Loss on disposal of an associate Loss on disposal of a jointly controlled entity Finance costs 9 Share of results of associates (Loss) profit before income tax 10 Income tax expenses 13 (Loss) profit for the year Attributable to: Equity holders of the Company Minority interests (Loss) earnings per share Basic 15 Diluted 15	2006 HK$’000 81,608 (55,284)	2005 HK$’000 189,131 (142,875) 46,256 5,112 (12,747) (18,884) 6,945 – (2,789) (1,849) 17,653 39,697 (9,086) 30,611 31,685 (1,074) 30,611 HK6.57 cents HK6.53 cents
	26,324 34,282 (3,718) (111,252) – (13,106) – (3,005) 18,830 (51,645) (6,717)	46,256 5,112 (12,747 (18,884 6,945 – (2,789 (1,849 17,653
		39,697 (9,086
	(58,362)
	(39,908) (18,454)	31,685 (1,074
	(58,362) (HK7.47 cents) (HK7.10 cents)

– 32 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Balance Sheet

At 30 June 2006

Notes Non-current assets Property, plant and equipment 16 Other intangible assets 18 Interest in associates 19 Goodwill 17 Deposits made on acquisition of property, plant and equipment Current assets Inventories 20 Trade and other receivables and prepayments 21 Pledged bank deposits Bank balances and cash Current liabilities Trade and other payables 22 Tax liabilities Borrowings – due within one year 23 Net current assets Total assets less current liabilities Non-current liabilities Borrowings 23 Net assets Capital and reserves Share capital 24 Reserves Equity attributable to equity holders of the Company Minority interests Total equity	2006 HK$’000 17,588 6,586 238 135,061 3,756	2005 HK$’000 3,329 – 31,081 12,230 3,779
	163,229 7,436 90,458 13,308 244,983 356,185 30,459 99 12,505 43,063 313,122 476,351 22,500	50,419
		5,738 24,944 31,761 135,489
		197,932
		20,602 539 51,722
		72,863
		125,069
		175,488
		4,717
	453,851	170,771

	6,241 391,717 397,958 55,893	4,821 155,821
		160,642 10,129
	453,851	170,771

– 33 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 30 June 2006

Attributable to equity holders of the Company

	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company

At 1 July 2004, as originally stated Effects of changes in accounting policies_(Note 2A) At 1 July 2004, as restated Exchange differences arising from acquisition and disposal of overseas subsidiaries Exchange differences arising from translation of financial statements of Singapore operation Shares issued on exercise of options Capital contribution from minority interests Acquisition and disposal of subsidiaries Net profit for the year Dividend paid At 30 June 2005 (restated) At 1 July 2005, as originally stated Effects of changes in accounting policies(Note 2A)_	Share capital HK$’000 4,813 – 4,813 – – 8 – – – – 4,821 4,821 –	Share premium HK$’000 80,649 – 80,649 – – 176 – – – – 80,825 80,825 –	Employee share-based compensation reserve HK$’000 – – – – – – – – – – – – –	Share options reserve HK$’000 – – – – – – – – – – – – –	Translation reserve HK$’000 15 – 15 (22) 7 – – – – – – – –	Special reserve HK$’000 (1) – (1) – – – – – – – (1) (1) –	Retained profits HK$’000 51,990 – 51,990 – – – – – 31,685 (8,678) 74,997 74,997 –	Minority interests HK$’000 – 4,824 4,824 – – – 266 6,113 (1,074) – 10,129 – 10,129	Total HK$’000 137,466 4,824
									142,290
									(22) 7 184 266 6,113 30,611 (8,678)
									170,771
									160,642 10,129

– 34 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Attributable to equity holders of the Company

	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company

At 1 July 2005, as restated Acquisition of subsidiaries Exchange differences arising from acquisition of subsidiaries Capital contribution from minority interests Partial disposal of subsidiary Shares issued on share award scheme Placing of shares Shares issued pursuant to sale and purchase agreement Recognition of equity-settled share based payments Shares issued on exercise of options Net loss for the year Dividends paid At 30 June 2006	Share capital HK$’000 4,821 – – – – 488 680 241 – 11 – –	Share premium HK$’000 80,825 – – – – – 139,147 69,715 – 317 – –	Employee share-based compensation reserve HK$’000 – – – – – 35,572 – – – – – –	Share options reserve HK$’000 – – – – – – – – 39,399 – – –	Translation reserve HK$’000 – – 1,935 – – – – – – – – –	Special reserve HK$’000 (1) – – – – – – – – – – –	Retained profits HK$’000 74,997 – – – – – – – – – (39,908) (10,281)	Minority interests HK$’000 10,129 50,917 284 12,791 226 – – – – – (18,454) –	Total HK$’000 170,771 50,917 2,219 12,791 226 36,060 139,827 69,956 39,399 328 (58,362) (10,281)
	6,241	290,004	35,572	39,399	1,935	(1)	24,808	55,893	453,851

– 35 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 30 June 2006

OPERATING ACTIVITIES (Loss) profit before income tax Adjustment for: Interest income Interest expenses Depreciation of property, plant and equipment Provision of deposits made on acquisitions of property, plant and equipment Provision on doubtful debts Amortization of goodwill Loss on disposal of property, plant and equipment Impairment of goodwill Share of results of associates Gain on partial disposal of a subsidiary Gain on disposal of subsidiaries Share of loss of a jointly controlled entity Loss on disposal of an associate Share option expenses Share award expenses Loss on disposal of a jointly controlled entity Gain on redemption of convertible notes Amortization of other intangible assets Operating cash flows before movements in working capital Decrease in inventories Increase in trade and other receivables and prepayments (Decrease) increase in trade and other payables Increase in amount due from a jointly controlled entity Cash (used in) generated from operations Income tax paid NET CASH (USED IN) FROM OPERATING ACTIVITIES	2006 HK$’000 (51,645) (1,868) 3,005 1,428 133 429 – 387 3,361 (18,830) (32,349) – – 13,106 39,399 36,060 – – 437	2005 HK$’000 39,697 (245) 1,849 1,384 130 – 1,085 36 – (17,653) – (6,945) 53 – – – 2,789 (4,319) 58 17,919 286 (1,709) 6,374 (873) 21,997 (2,932) 19,065
	(6,947) 2,476 (9,421) (15,791) – (29,683) (1,956) (31,639)	17,919 286 (1,709 6,374 (873
		21,997 (2,932
		19,065

– 36 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note INVESTING ACTIVITIES Interest received Purchases of property, plant and equipment Purchases of other intangible assets Deposits paid on acquisition of property, plant and equipment Decrease (increase) in pledged bank deposits Acquisition of subsidiaries Acquisition of investment in an associate Proceeds from disposal of property, plant and equipment Proceeds from partial disposal of a subsidiary Proceeds from sale of an associate Proceeds from disposal of subsidiaries NET CASH FROM (USED IN) INVESTING ACTIVITIES FINANCING ACTIVITIES Interest paid Issue of shares Repayment of convertible notes Cash consideration on acquisition of subsidiaries 26 Dividend paid Net borrowings raised Capital contribution from minority interests NET CASH FROM (USED IN) FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR Effect of foreign exchange rate changes Capital reserve realized on disposal CASH AND CASH EQUIVALENTS AT END OF THE YEAR, represented by Bank balances and cash Bank overdrafts – secured Trust receipt loans – secured	2006 HK$’000 1,842 (5,513) (1,665) – 18,453 – (22,887) 30 32,575 24,199 –	2005 HK$’000 245 (622) – (38) (10,626) 5,859 – – – – (2,367)	2005 HK$’000 245 (622) – (38) (10,626) 5,859 – – – – (2,367)
	47,034 (1,590) 140,155 – (23,093) (10,281) 3,943 12,791 121,925 137,320 105,597 2,066 – 244,983 – –	(7,549) (1,849) 184 (1,500) – (8,678) 9,773 266 (1,804) 9,712 94,486 (15) 1,414 135,489 (29,568) (324)
	244,983	105,597

– 37 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The Company was incorporated in the Cayman Islands as an exempted company with limited liability and its shares are listed on the Growth Enterprise Market (the “GEM”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The addresses of the registered office and principal place of business of the Company are disclosed in the corporation information to the annual report.

The Company was formerly known as B & B Group Holdings Limited. Pursuant to the special resolution passed by the shareholders at the extraordinary general meeting of the Company held on 16 June 2006, the Company changed its name from B & B Group Holdings Limited to China Vanguard Group Limited with effect from 16 June 2006 and the adoption of the new Chinese name “ ” in place of “ ” for identification purpose only.

The financial statements are presented in Hong Kong dollars, being the measurement currency of the Company and its subsidiaries (the “Group”).

The principal activities of the Group are (i) the manufacture and distribution of natural supplementary products, (ii) provision of lottery-related hardware and software systems, (iii) the sales and distribution of edible oil and (iv) mining operation of Xin Jiang Oilfield.

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS/CHANGES IN ACCOUNTING POLICIES

In the current year, the Group has applied, for the first time, a number of new Hong Kong Financial Reporting Standards (HKFRSs), Hong Kong Accounting Standards (“HKASs”) and Interpretations (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are effective for accounting periods beginning on or after 1 January 2005. The application of the new HKFRSs has resulted in a change in the presentation of the consolidated income statement, consolidated balance sheet and consolidated statement of changes in equity. In particular, the presentation of minority interests have been changed. The changes in presentation have been applied retrospectively. The adoption of the new HKFRSs has resulted in changes to the Group’s accounting policies in the following areas that have an effect on how the results for the current and prior accounting years are prepared and presented:

Business combinations

The adoption of HKFRS 3 “Business Combinations” has resulted in a change in the accounting policy relating to the discontinuation of amortization of goodwill arising on acquisitions.

With respect to goodwill previously capitalized on the balance sheet, the Group has discontinued amortizing such goodwill from 1 July 2005 onwards and such goodwill will be tested for impairment at least annually. Goodwill arising on acquisitions after 1 July 2005 is measured at cost less accumulated impairment losses (if any) after initial recognition and will be tested for impairment at least annually. As a result of this change in accounting policy, no amortization of goodwill has been charged in the current year. Comparative figures for the corresponding period have not been restated.

In the current year, the Group has also applied HKAS 21 “The Effects of Changes in Foreign Exchange Rates” which requires goodwill to be treated as assets and liabilities of the foreign operation and translated at closing rate at each balance sheet date. Previously, goodwill arising on acquisitions of foreign operations was reported at the historical rate at each balance sheet date. In accordance with the relevant transitional provisional HKAS 21, goodwill arising on acquisitions prior to 1 July 2005 is treated as a non-monetary foreign currency item. In the current year, the Group acquired some foreign operations, and goodwill arose on the acquisitions has been translated at the closing rate at 30 June 2006. There is no material impact on the Group’s translation reserve in respect of such transaction.

– 38 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Share-based payments

In the current year, the Group has applied HKFRS 2 “Share-based Payment” which requires an expenses to be recognized where the Group buys goods or obtains services in exchange for shares or rights over shares (“equity settled transactions”), or in exchange for other assets equivalent in value to a given number of shares or rights over share (“cash-settled transactions”). The principal impact of HKFRS 2 on the Group is in relation to the expensing of the fair value of share options granted to employees and eligible participants of the Company, determined at the date of grant of the share options, over the vesting period. Prior to the application of HKFRS 2, the Group did not recognize the financial effect of these shares option until they were exercised. The Group has applied HKFRS 2 to share options granted on or after 1 January 2005. In relation to share options granted before 1 January 2005, the Group chooses not to apply HKFRS 2 with respect to share options granted on or before 7 November 2002 and vested before 1 January 2005. In relation to share options granted by the Group after 7 November 2002, all of them were vested before 1 January 2005 and therefore no comparative figures have been restated.

Financial instruments

In the current year, the Group has applied HKAS 32 Financial Instruments: Disclosure and Presentation and HKAS 39 Financial Instruments: Recognition and Measurement. HKAS 32 requires retrospective application and HKAS 39, which is effective for accounting periods beginning on or after 1 January 2005, generally does not permit the recognition, derecognition or measure financial assets and liabilities on a retrospective basis. The application of HKAS 32 has had no material impact or how financial instruments of the Group are presented for current and prior accounting periods. The principal effects resulting from the implementation of HKAS 39 are summarized below:

Classification and measurement of financial assets and financial liabilities

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

However, there has been no material effect on how the results for the current accounting period are prepared and presented.

Financial assets and financial liabilities other than debt and equity securities

From 1 January 2005 onwards, the Group has classified and measured its financial assets and financial liabilities other than debt and equity securities (which were previously outside the scope of Statement of Standard Accounting Practice 24) in accordance with the requirements of HKAS 39. Financial assets under HKAS 39 are classified as “financial assets at fair value through profit or loss”, “available-for-sale financial assets”, “loans and receivables” or “held-to-maturity financial assets”. Financial liabilities are generally classified as “financial liabilities at fair value through profit or loss” or “other financial liabilities”. Financial liabilities at fair value through profit or loss are measured at fair value, with changes in fair value being recognized in profit or loss directly. Other financial liabilities are carried at amortized cost using the effective interest method after initial recognition. The Group has applied the relevant transitional provisions in HKAS 39. However, there has been no material effect on how the results for the current accounting period are prepared and presented.

Owner-occupied leasehold interest in land

In the current year, the Group has applied HKAS 17 Leases. Under HKAS 17, the land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification, unless the lease payments cannot be allocated reliably between the land and buildings elements, in which case, the entire lease is generally treated as a finance lease. To the extent that the allocation of the lease payments between the land and buildings elements can be made reliably, the leasehold interests in land are reclassified to prepaid lease payments under operating leases, which are carried at cost and amortized over the lease term on a straight-line basis. Alternatively, where the allocation between the land and buildings elements cannot be made reliably, the leasehold interests in land continue to be accounted for as property, plant and equipment. In the opinion of the directors, the allocation between the land and buildings elements cannot be made reliably.

The application of HKAS 17 has had no financial impact on the results of the Group for current or prior accounting periods.

– 39 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2A. SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES

The effect of the change in the accounting policies described above on the results for the year ended 30 June 2006 is principally the recognition of share-based payments as expenses of approximately HK$75,459,000 and there is no material effect on the result for the year ended 30 June 2005.

The cumulative effect of the application of the new HKFRSs on equity as at 1 July 2004, 30 June 2005 and 1 July 2005 were reclassification of minority interests under the Group’s capital and reserves, which is resulted from adoption of HKAS 1 “Presentation of Financial Statements”. Accordingly, the equity of the Group as at 1 July 2004 was increased by approximately HK$4,824,000 from approximately HK$137,466,000 to HK$142,290,000 and that as at 30 June 2005 and 1 July 2005 was increased by HK$10,129,000 from HK$160,642,000 to HK$170,771,000.

3. POTENTIAL IMPACT ARISING ON THE NEW ACCOUNTING STANDARD NOT YET EFFECTIVE

The Group has not early applied the following new HKFRSs that have been issued but are not yet effective. The directors of the Company anticipate that the application of these new HKFRSs will have no material impact on the consolidated financial statements of the Group.

HKAS 1 (Amendment)	Capital Disclosures1
HKAS 19 (Amendment)	Actuarial Gains and Losses, Group Plans and Disclosures2
HKAS 21 (Amendment)	Net Investment in a Foreign Operation2
HKAS 39 (Amendment)	Cash Flow Hedge Accounting of Forecast Intragroup
	Transactions2
HKAS 39 (Amendment)	The Fair Value Option2
HKAS 39 and HKFRS 4 (Amendment)	Financial Guarantee Contracts2
HKFRS 6	Exploration for and Evaluation of Mineral Resources2
HKFRS 7	Financial Instruments: Disclosures1
HK(IFRIC) – Int 4	Determining whether an Arrangement Contains a Lease2
HK(IFRIC) – Int 5	Rights to Interests Arising from Decommissioning, Restoration
	and Environmental Rehabilitation Funds2
HK(IFRIC) – Int 6	Liabilities arising from Participating in a Specific Market,
	Waste Electrical and Electronic Equipment3
HK(IFRIC) – Int 7	Applying the Restatement Approach under HKAS 29 Financial
	Reporting in Hyperinflationary Economies4

1 Effective for annual periods beginning on or after 1 January 2007
2 Effective for annual periods beginning on or after 1 January 2006
3 Effective for annual periods beginning on or after 1 December 2005
4 Effective for annual periods beginning on or after 1 March 2006

4. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared on the historical cost basis. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong, which include HKFRSs issued by the HKICPA and the applicable disclosure requirements of the Rules Governing the Listing of Securities on the GEM of the SEHK and of the Hong Kong Companies Ordinance.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries for the year ended 30 June 2006. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of the subsidiaries to bring their accounting policies into line with those used by other members of the Group.

– 40 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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

Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

Goodwill

Goodwill arising on an acquisition of a subsidiary for which the agreement date is before 1 July 2005 represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of the relevant subsidiary or associate at the date of acquisition.

For previously capitalized goodwill arising on acquisitions, the Group has discontinued amortization from 1 July 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired.

Goodwill arising on an acquisition of a subsidiary for which the agreement date is on or after 1 July 2005 represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the relevant subsidiary at the date of acquisition. Such goodwill is carried at cost less any accumulated impairment losses.

Capitalized goodwill arising on an acquisition of a subsidiary is presented separately in the balance sheet.

For the purposes of impairment testing, goodwill arising from an acquisition is allocated to each of the relevant cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a financial year, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in the income statement. An impairment loss for goodwill is not reversed in subsequent periods.

On subsequent disposal of subsidiaries or associates, the attributable amount of goodwill capitalized is included in the determination of the amount of profit or loss on disposal.

Investment in associates

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the profit or loss and of changes in equity of the associate, less any identified impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Where a Group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate.

Revenue recognition

Revenue from sales of goods is recognized on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to the customers and the title has passed.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Revenue from the provision of lottery-related hardware and software systems is recognized when the services are rendered.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

Property, plant and equipment

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

The cost of leasehold improvements is depreciated using the straight line method over the period of the respective leases. Depreciation is provided to write off the cost of other property, plant and equipment over their estimated useful lives, using the straight line method, at the following rates per annum:

Leasehold land and buildings Over the leases term but limited to 15 years Furniture, fixtures and equipment 20% Motor vehicles 20% Computer equipment 20% Plant and machinery 10%

The gain or loss arising from the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the income statement.

Impairment losses (other than goodwill)

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately, unless the relevant asset is carried at a revalued amount under another standard, in which case the impairment loss is treated as a revaluation decrease under that standard. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount under another standard, in which case the reversal of the impairment loss is treated as a revaluation increase under that standard.

Intangible assets

Intangible assets acquired separately are capitalised at cost and those acquired from a business combination are capitalised at fair value as at the date of acquisition. Following initial recognition, the cost model is applied to the class of intangible assets. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against the profit in the year in which the expenditure is incurred.

Useful lives of acquired intangible assets are assessed to be either finite or indefinite. Intangible assets with finite useful lives are stated at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets with indefinite useful lives are stated at cost less any subsequent accumulated impairment losses.

Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives.

Intangible assets are tested for impairment annually either individually or at the cash-generating unit level. Useful lives are also examined on an annual basis and, where applicable, adjustments are made on a prospective basis.

– 42 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

As intangible asset is derecognized on disposal or no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of the intangible asset, calculated as the difference between the net disposal proceeds and the carrying amount of the intangible asset, is recognized in the income statement in the year the intangible asset is derecognized.

Patents

Cost incurred on the acquisition of patents are capitalised in the consolidated balance sheet and stated at cost. Patents are not revalued as there is no active market for these assets.

Technical know-how

Acquired technical know-how is stated at cost less amortization and any identified impairment losses.

Computer software in lottery systems

Costs incurred on the acquisition of computer software in lottery systems are capitalized in the consolidated balance sheet at cost less amortization and any identified impairment losses.

Research and development expenditures

Expenditure on research activities is recognized as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development expenditure is recognized only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortized on a straight line basis over its useful life.

Where no internally-generated intangible asset can be recognised, development cost is charged to profit or loss in the year in which it is incurred.

Impairment

Intangible assets with indefinite useful lives are tested for impairment annually by comparing their carrying amounts with their recoverable amounts, irrespective of whether there is any indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimated of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

Intangible assets with finite useful lives are tested for impairment when there is an indication that an asset may be impaired.

Inventories

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

Financial instruments

Financial assets and financial liabilities are recognized on the balance sheet when a Group entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

– 43 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Financial assets

The Group’s financial assets are classified into one of the four categories, including financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss has two subcategories, including financial assets held for trading and those designated at fair value through profit or loss on initial recognition. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value, with changes in fair value recognized directly in profit or loss in the period in which they arise.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade and other receivables, deposits and loan receivables) are carried at amortized cost using the effective interest method, less any identified impairment losses. An impairment loss is recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the assets’ carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

Available-for-sale financial assets

Available-for-sale financial assets are investments in unlisted equity securities which are intended to be held for a continuing strategic or long term purpose and are stated at fair value, except for those equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, they are measured at cost less any accumulated identified losses.

In respect of available-for-sale financial assets carried at fair value, the gains or losses arising from changes in the fair value of an investment are dealt with as movements in the investment revaluation reserve, until the investment is sold, collected, or otherwise disposed of, or until the investment is determined to be impaired, the cumulative gain or loss derived from the investment recognized in the investment revaluation reserve, together with the amount of any further impairment, is charged to the income statement in the year in which the impairment arises.

In respect of available-for-sale financial assets carried at cost less any accumulated impairment losses, when there is objective evidence that an impairment loss has been incurred on an investment, the carrying amount of the investment should be reduced to the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset and the amount of the impairment is charged to the income statement in the year in which it arises. Impairment losses recognised shall not be reversed in subsequent periods.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a Group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The Group’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Other financial liabilities

Other financial liabilities including trade and other payables, loan from a shareholder and borrowings are subsequently measured at amortized cost, using the effective interest rate method.

– 44 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Equity instruments

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

Derecognition

Financial assets are derecognized when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised directly in equity is recognized in profit or loss.

For financial liabilities, they are removed from the Group’s balance sheet (i.e. when the obligation specified in the relevant contract is discharged, cancelled or expired). The difference between the carrying amount of the financial liability derecognized and the consideration received or receivable is recognised in profit or loss.

Taxation

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

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

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

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

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

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

– 45 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognized in profit or loss in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognized in equity in the consolidated financial statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in equity, in which cases, the exchange differences are also recognized directly in equity.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the exchange translation reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

Goodwill and fair value adjustments on identifiable assets acquired arising on an acquisition of a foreign operation on or after 1 January 2005 are treated as assets and liabilities of that foreign operation and translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising are recognised in the exchange translation reserve.

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

Provisions

A provision is recognized when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

When the effect of discounting is material, the amount recognized for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.

Employee benefits

(a) Retirement benefits schemes

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.

The employees of the Group’s subsidiary that operated in the People’s Republic of China and Singapore are required to participate in a central pension scheme operated by the local municipal government and Central Provident Fund Scheme, respectively. These subsidiaries are required to contribute pension, based on a certain percentage of their payroll costs, to the pension schemes. The contributions are charged to income statement as they become payable in accordance with the rules of the pension schemes.

– 46 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) Share option schemes

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participant who, in the sole discretion of the Board, have contributed or may contribute to the Group. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.

(c) Share award scheme

The Group also grants employees and consultants (but not directors) shares of the Company at nil consideration under its share award scheme. Under the share award scheme, the awarded shares are newly issued at par value. The fair value of the employees’ and consultants’ services received in exchange for the grant of shares newly issued is recognized as staff costs in the income statement with a corresponding increase in an employee share-based compensation reserve under equity.

Retirement benefit costs

Payments to state-managed retirement benefits scheme and the defined contribution schemes are charged as expense as they fall due.

Dividends

Dividends proposed or declared after the balance sheet date is not recognized as a liability at the balance sheet date.

Equity-settled share-based payment transactions

Share options granted to directors, employees or other eligible participants of the Company.

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share option reserve).

At the time when the share options are exercised, the amount previously recognized in share option reserve will be transferred to share premium. When the share options are forfeited or are still not exercised at the expiry date, the amount previously recognized in share option reserve will be transferred to retained earnings.

Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received from the leasing company are charged to the income statement on a straight-line basis over the lease periods.

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset.

All other borrowing costs are charged to the income statement in the year in which they are incurred.

– 47 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the process of applying the Group’s accounting policies which are described in Note 4, management has made the following judgments that have significant effect on the amounts recognized in the financial statements. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are also discussed below:

Depreciation of property, plant and equipment

Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account of their estimated residual value. The determination of the useful lives and residual values involve management’s estimation. The Group assesses annually the residual value and the useful life of the property, plant and equipment and if the expectation differs from the original estimate, such a difference may impact the depreciation in the year and the estimate will be changed in the future period.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. Where the actual cash flows are less than expected, a material impairment loss may arise. As at 30 June 2006, the carrying amount of goodwill is HK$135,061,000. Details of the recoverable amount calculation are disclosed in note 17.

Amortization of other intangible assets

Other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. The determination of useful lives and residual values involve management’s estimation. The Group assesses annually the useful life of other intangible assets and if the expectation differs from the original estimate, such a difference may impact the amortization in the year and the estimate will be changed in the future period.

Income taxes

As at 30 June 2006, no deferred tax asset was recognized in the Group’s consolidated balance sheet in relation to the estimated unused tax losses of approximately HK$37,084,000 due to the unpredictability of future profit streams. The realisability of the deferred tax asset mainly depends on whether sufficient future profits or taxable temporary differences will be available in the future. In cases where the actual future profits generated are more than expected, a material recognition of deferred tax asset may arise, which would be recognized in the income statement for the period in which such recognition takes place.

Share option benefit expenses

The share option benefit expense is subject to the limitations of the Black-Scholes option pricing model and the uncertainty in estimates used by management in the assumptions. The estimates include limited early exercise behavior, expected interval and frequency of open exercise periods in the share option life, and other relevant parameters of the share option model (see note 25 for the estimates).

The number of options to be vested at the end of vesting period involves management estimation. Should the number of options being vested at the end of vesting period be changed, there would be material changes in the amount of share option benefits recognized in the consolidated income statement and share option reserve.

– 48 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s major financial instruments include trade receivables, prepayments, deposits and other receivables, accounts payables, other payables and borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 30 June 2006 in relation to each class of recognized financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimize the credit risk, the management of the Group has closely monitoring the recoverability of the financial assets. In addition, the Group reviews the recoverable amount of each individual financial asset at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

Foreign currency risk

For the year ended 30 June 2006, the Group’s trade transactions are denominated in Renminbi, Hong Kong Dollars and Singaporean Dollars. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

Interest rate risk

The Group’s exposure to market risk for changes in interest rates relates primarily to the Group’s interest bearing borrowings.

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of borrowings. The Group’s exposure to liquidity risk is minimal.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. SEGMENT INFORMATION

a. Business segments

	Year ended 30 June	Year ended 30 June	2006	Total HK$’000 81,608 3,471 33,000 (103,941) 18,830 (3,005) (51,645) (6,717) (58,362)
anufacturing and distribution of natural pplementary products HK$’000 39,934 2,530	Provision of lottery- related hardware and software systems HK$’000 10,854 1,501	Sales and distribution of edible oil HK$’000 30,820 (90)	Mining operation of Xin Jiang Oilfield HK$’000 – (470)	Total HK$’000 81,608
				3,471 33,000 (103,941 18,830 (3,005
				(51,645 (6,717

	Year ended 30 June	Year ended 30 June	2005	Total HK$’000 189,131 22,039 4,038 (2,184) 17,653 (1,849) 39,697 (9,086) 30,611
anufacturing and distribution of natural pplementary products HK$’000 81,101 24,904	Provision of lottery- related hardware and software systems HK$’000 – –	Sales and distribution of edible oil HK$’000 108,030 (2,865)	Mining operation of Xin Jiang Oilfield HK$’000 – –	Total HK$’000 189,131
				22,039 4,038 (2,184 17,653 (1,849
				39,697 (9,086

– 50 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

	Year ended 30 June	Year ended 30 June	2006
anufacturing and distribution of natural pplementary products HK$’000 274,964 5,374	Provision of lottery- related hardware and software systems HK$’000 44,458 22,919	Sales and distribution of edible oil HK$’000 1,298 519	Mining operation of Xin Jiang Oilfield HK$’000 41,912 661	Total HK$’000 362,632
				156,782
				519,414
				29,473
				36,090
				65,563
1,000 – 387	824 – –	– 3,361 –	15 – –	1,839 26 3,361

				5,513 75,459

				387

– 51 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

	Year ended 30 June	Year ended 30 June	2005
anufacturing and distribution of natural pplementary products HK$’000 209,267 46,397	Provision of lottery- related hardware and software systems HK$’000 – –	Sales and distribution of edible oil HK$’000 10,517 9,656	Mining operation of Xin Jiang Oilfield HK$’000 – –	Total HK$’000 219,784
				28,567
				248,351
				56,053
				21,527
				77,580
796 36	– –	– –	– –	796 588

				622

				36

– 52 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

b. Geographical market segments

A summary of the geographical segments is set out as follows:

2006 HK$’000 66,497 1,270 30,204 616	2005 HK$’000 145,964 5,938 61,464 9,272	Elimination 2006 2005 HK$’000 HK$’000 (16,979) (33,507) – – – – – –	Elimination 2006 2005 HK$’000 HK$’000 (16,979) (33,507) – – – – – –	Consolidated 2006 2005 HK$’000 HK$’000 49,518 112,457 1,270 5,938 30,204 61,464 616 9,272 81,608 189,131 19,782 28,116 (16,221) (3,212) (88) (2,445) (2) (420) 33,000 4,038 (103,941) (2,184) (3,005) (1,849) 18,830 17,653 (51,645) 39,697 (6,717) (9,086) (58,362) 30,611	Consolidated 2006 2005 HK$’000 HK$’000 49,518 112,457 1,270 5,938 30,204 61,464 616 9,272 81,608 189,131 19,782 28,116 (16,221) (3,212) (88) (2,445) (2) (420) 33,000 4,038 (103,941) (2,184) (3,005) (1,849) 18,830 17,653 (51,645) 39,697 (6,717) (9,086) (58,362) 30,611
98,587	222,638	(16,979)	(33,507)	81,608 19,782 (16,221) (88) (2) 33,000 (103,941) (3,005) 18,830 (51,645) (6,717)	189,131
					28,116 (3,212 (2,445 (420 4,038 (2,184 (1,849 17,653
					39,697 (9,086
				(58,362)

– 53 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

8. REVENUE AND OTHER REVENUE

Revenue represents invoiced value of sales, net of returns, discounts allowed or sales taxes where applicable.

Revenue recognized during the year is as follows:

Revenue Manufacture and sales of natural supplementary products Provision of lottery-related hardware and software systems Sales and distribution of edible oil Other revenue Interest income Gain on redemption of convertible notes Gain on partial disposal of subsidiary Others 9. FINANCE COSTS Interest on borrowings wholly repayable within five years	2006 HK$’000 39,934 10,854 30,820 81,608	2005 HK$’000 81,101 – 108,030
		189,131

	1,868 – 32,349 65	245 4,319 – 548
	34,282 2006 HK$’000 3,005	5,112

		2005 HK$’000 1,849

– 54 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. (LOSS) PROFIT BEFORE INCOME TAX

(Loss) profit before income tax has been arrived at after charging (crediting): Staff costs (excluding directors’ emoluments – note 11): Wages and salaries Retirement benefits scheme contributions Total staff costs Less: Staff costs included in research and development costs Auditors’ remuneration Provision for the year Under provision in prior years Amortization of goodwill Amortization of other intangible assets Depreciation of property, plant and equipment Provision of deposits made on acquisition of property, plant and equipment Loss on disposal of jointly controlled entity Operating lease rentals in respect of land and building Research and development costs Cost of inventories recognized as expenses Net foreign exchange losses Loss on disposal of property, plant and equipment Loss on disposal of an associate Provision on doubtful debts Impairment of goodwill Net foreign exchange gains	2006 HK$’000 7,538 335	2005 HK$’000 4,002 272 4,274 (67) 4,207 453 25 478 1,085 58 1,384 130 2,789 794 67 142,875 59 36 – – – –
	7,873 – 7,873 630 – 630	4,274 (67
		4,207
		453 25
		478
	– 437 1,428 133 – 1,699 – 48,641 – 387 13,106 429 3,361 (2,110)

– 55 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

11. DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

Emoluments paid or payable to each of the 11 (2005: 9) directors of the Company during the year were as follows:

For the year ended 30 June 2006

Executive Directors: Cheung Kwai Lan Chan Ting Chan Tung Mei Lau Hin Kun Independent Non-executive Directors: Professor Peter Chin Wan Fung (Note 1) Tian He Nian Du Ying Min (Note 2) Tsui Wing Tak (Note 3) Zhao Zhi Ming (Note 4) To Yan Ming, Edmond (Note 5) Non-executive Director: Shaw Kyle Arnold Junior	Fees HK$’000 102 102 78 74 31 117 39 38 78 59 78 796	Salaries and other emoluments HK$’000 1,950 1,300 650 258 – – – – – – – 4,158	Contribution to retirement benefits scheme HK$’000 – 16 – 12 – – – – – – – 28	Total HK$’000 2,052 1,418 728 344 31 117 39 38 78 59 78
				4,982

– 56 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

For the year ended 30 June 2005

Executive Directors: Cheung Kwai Lan Chan Ting Chan Tung Mei Lau Hin Kun Independent Non-executive Directors: Professor Peter Chin Wan Fung (Note 1) Tian He Nian Du Ying Min (Note 2) Tsui Wing Tak (Note 3) Non-executive Director: Shaw Kyle Arnold Junior Notes: 1. resigned on 25 November 2005 2. resigned on 30 December 2005 3. resigned on 11 January 2006 4. appointed on 30 December 2005	Fees HK$’000 90 96 78 13 78 125 78 96 78 732	Salaries and other emoluments HK$’000 1,950 1,300 650 274 – – – – – 4,174	Contribution to retirement benefits scheme HK$’000 – 12 – 12 – – – – – 24	Total HK$’000 2,040 1,408 728 299 78 125 78 96 78
				4,930

appointed on 11 January 2006

(b) Senior management emoluments

Of the five individuals whose emoluments were the highest in the Group for the year include three (2005: three) Directors whose emoluments are set out in the above. The emoluments payable to the remaining two (2005: two) individual during the year as follows:

Salaries, allowances and other benefits Contributions to retirement benefits scheme	2006 HK$’000 2,133 23 2,156	2005 HK$’000 1,030 24
		1,054

– 57 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The emoluments fell with the following bands:

	2006	2005
	No. of	No. of
	individuals	individuals
Emoluments bands
Nil – HK$1,000,000	1	2
HK$1,000,001 – HK$1,500,000	1	–

During the year ended 30 June 2006, no emoluments have been paid by the Group to the three Directors (2005: three Directors) or the two (2005: two) highest paid individuals as an inducement to join the Group, or as compensation for loss of office.

12. STAFF COSTS (INCLUDING DIRECTORS’ EMOLUMENTS)

Wages and salaries Pension cost – defined contribution plans	2006 HK$’000 12,492 363 12,855	2005 HK$’000 8,908 296
		9,204

13. INCOME TAX EXPENSES

The charge comprises: Current year Hong Kong Profits Tax Other jurisdictions Over-provision in prior years: Hong Kong Profits Tax Other jurisdictions Share of taxation charge of an associate	2006 HK$’000 – 1,427	2005 HK$’000 – 2,514
	– (127) 5,417	– –
		6,572
	6,717	9,086

The Group did not derive any assessable profits in Hong Kong and thus no provision for Hong Kong Profits Tax has been made during the year ended 30 June 2006. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

Pursuant to the relevant laws and regulations in the PRC, the Group’s certain PRC subsidiaries are entitled to exemption from the PRC income tax for two years commencing from their first profit-making year of operation and thereafter, these PRC subsidiaries will be entitled to a 50% relief from PRC income tax for the following three years.

Income tax expenses on overseas profits have been calculated on the estimated assessable profit for the year at the rates of income tax prevailing in Singapore in which the subsidiaries of the Group operate.

– 58 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Reconciliation between accounting loss and tax charge at applicable tax rate is as follows:

(Loss) profit before income tax Tax at the Hong Kong Profits Tax rate of 17.5% (2005: 17.5%) Tax effect of sharing result of associates Tax effect of expenses that are not deductible for tax purposes Tax effect of income that is not taxable for tax purposes Tax effect of tax losses not recognized Tax effect of utilization of tax losses previously not recognized Effect of different tax rates of subsidiaries operating in other jurisdictions Tax effect of over-provision in prior years Income tax expenses	2006 HK$’000 (51,645)	2005 HK$’000 39,697

	(9,038) 5,417 22,531 (8,379) 1,751 (239) (5,199) (127)	6,947 6,572 2,144 (4,781) 1,556 – (3,352) –
	6,717	9,086

At the balance sheet date, the subsidiaries have unused tax losses of approximately HK$37,084,000 (2005: HK$27,963,000) available for offset against future profits. No deferred tax asset has been recognized in respect of the unused tax losses due to the unpredictability of future profits streams in the subsidiaries. Deductible temporary differences have not been recognized in these financial statements owing to the absence of objective evidence in respect of the availability of sufficient taxable profits that are expected to arise to offset against the deductible temporary differences. Such tax losses have no expiry date.

The components of unrecognized deductible (taxable) temporary differences are as follows:

Deductible temporary differences: Unutilized tax losses Other Taxable temporary differences: Accelerated tax allowances Other	2006 HK$’000 37,084 6,630 (1,320) (228) 42,166	2005 HK$’000 27,963 – (168) –
		27,795

14. DIVIDENDS

Interim dividend paid at HK0.5 cent per share on 609,872,807 shares (2005: HK0.5 cent per share on 482,130,000 shares) Proposed final dividend at HKNil cent per share on 624,052,807 shares (2005: HK1.5 cents per share on 482,130,000 shares)	2006 HK$’000 3,049 – 3,049	2005 HK$’000 2,411 7,232
		9,643

– 59 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The Directors do not recommend the payment of a cash dividend for 2006 but propose for shareholders’ approval at an extraordinary general meeting, the date and time of which to be fixed, a bonus issue of shares on the basis of one bonus share for every two existing shares held and one bonus warrant for every five existing shares held.

15. (LOSS) EARNINGS PER SHARE

The calculation of basic and diluted (loss) earnings per share is based on the following data:

(Loss) earnings for the purposes of basic (loss) earnings per share Number of shares Weighted average number of ordinary shares for the purpose of basic (loss) earnings per share Effect of dilutive potential ordinary shares: Share options Weighted average number of ordinary shares for the purpose of diluted (loss) earnings per share	2006 HK$’000 (39,908) ’000 534,223 28,202 562,425	2005 HK$’000 31,685

		’000 481,915 3,354
		485,269

– 60 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. PROPERTY, PLANT AND EQUIPMENT

Leasehold land and buildings Leasehold improvements HK$’000 HK$’000 – – – 519 – – – – – –	Leasehold land and buildings Leasehold improvements HK$’000 HK$’000 – – – 519 – – – – – –	Motor vehicles HK$’000 932 – – – (75)	Plant and machinery HK$’000 3,867 – – – (616)	Furniture, fixtures and equipment HK$’000 430 103 1,487 (1,487) (1)	Computer equipment HK$’000 – – – – –	Total HK$’000 5,229 622 1,487 (1,487) (692) 5,159 109 5,513 10,521 (868) 20,434 1,682 1,384 (580) (656) 1,830 36 1,428 (448) 2,846 17,588 3,329
– – 359 6,019 – 6,378 – – – – – – 106 – 106	519 – 1,547 – – 2,066 – 187 – – 187 – 253 – 440	857 8 2,502 255 (345) 3,277 236 186 – (39) 383 3 318 (260) 444	3,251 95 516 – (523) 3,339 1,294 329 – (616) 1,007 29 351 (188) 1,199	532 6 535 603 – 1,676 152 682 (580) (1) 253 4 146 – 403	– – 54 3,644 – 3,698 – – – – – – 254 – 254	5,159 109 5,513 10,521 (868
						20,434
						1,682 1,384 (580 (656
						1,830 36 1,428 (448
						2,846
6,272 –	1,626 332	2,833 474	2,140 2,244	1,273 279	3,444 –

The leasehold land and buildings of the subsidiary is located in PRC and held under medium lease term. The Group has pledged land and buildings having a net book value of approximately HK$5,918,000 (2005: HK$Nil) to secure general banking facilities granted to the subsidiary.

At 30 June 2006, none of the Group’s property, plant and equipment was held under finance lease (2005: HK$Nil).

– 61 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

17. GOODWILL

COST
At 1 July 2004
Exchange adjustments
Arising on acquisition of subsidiaries
Disposal of subsidiaries
At 30 June 2005 and 1 July 2005
Elimination of accumulated amortization upon the application of HKFRS 3
Arising on acquisition of subsidiaries
At 30 June 2006
AMORTIZATION
At 1 July 2004
Exchange adjustments
Charge for the year
Eliminated on disposal of subsidiaries
At 30 June 2005 and 1 July 2005
Elimination of accumulated amortization upon the application of HKFRS 3
At 30 June 2006
IMPAIRMENT
Impairment loss recognized for the year
At 30 June 2006
CARRYING VALUES
At 30 June 2006
At 30 June 2005

HK$’000
272
–
13,305
(272)
13,305
(1,075)
126,192
138,422
81
–
1,085
(91)
1,075
(1,075)
–
(3,361)
(3,361)
135,061
12,230

The goodwill, which arose from acquisition of subsidiaries, is not amortized commencing from 1 July 2005 in accordance with the transitional provisional of HKFRS 3.

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (“CGUs”) that are expected to benefit from that business combination.

The Group tests goodwill annually for impairment or more frequently if there is indications that goodwill might be impaired.

In connection with the impairment test on the goodwill arising from the acquisition of subsidiaries, CNPC Huayou Cu Energy Investment Co. Limited and Shenzhen Bozone IT Co. Limited (the “subsidiaries”), during the year, the management of the Group prepared a profit forecast and a cash flow forecast (the “Forecast”) in respect of the subsidiaries. The cash flow forecast based on financial budgets approved by management covering a period of 3 years and a discount rate of 5%. Cash flow forecast during the budget period are based on the expected gross margins during the budget period. Budgeted gross margins have been determined based on the management’s expectation for the market development and the management believes that the budgeted gross margins are reasonable. The Directors are of the opinion, based on the Forecast, that the recoverable amount of the goodwill arising from acquisition of the subsidiaries, the recoverable amount exceeds its carrying amount in the consolidated balance sheet and no impairment is necessary.

– 62 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

18. OTHER INTANGIBLE ASSETS

Patent HK$’000 – 714 1,665	Computer software in lottery systems HK$’000 – 4,644 –	Technical know-how HK$’000 519 – –	Total HK$’000 519 5,358 1,665
2,379 – – – – –	4,644 – – – 437 437	519 461 58 519 – 519	7,542
			461 58
			519 437
			956
2,379 –	4,207 –	– –	6,586

			–

The above intangible assets other than patents have definite useful lives. Such intangible assets are amortized on a straight-line basis over the following periods:

Computer	software in lottery systems	5 years
Technical	know-how	3 years

The patent is considered by the management of the Group as having an indefinite useful life because it is expected to contribute to net cash inflows indefinitely. The patent will not be amortized until its useful life is determined to be finite. Instead it will be tested for impairment annually and whenever there is an indication that it may be impaired.

19. INTEREST IN ASSOCIATES

Cost of unlisted investment Share of post-acquisition profits Disposals during the year	2006 HK$’000 43,125 24,494	2005 HK$’000 20,000 11,081
	67,619 (67,381)	31,081 –
	238	31,081

– 63 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

				Proportion of
				nominal value
				of issued
	Form of	Place of		share capital
	business	incorporation/	Class of	held by the
Name of company	structure	operation	shares held	Group	Nature of business
Your Mart Co.	Incorporated	PRC	Ordinary	20.83%	Engagement on
Limited					department store
	Incorporated	PRC	Registered capital	24.99%	Provision of lottery- related hardware
(Shenzhen Bozone					and software
Technology					systems
Services Co. Ltd.)

Pursuant to the Promoters’ Agreement in set up of Your Mart Co. Limited, the Group will invest a total amount of RMB45,000,000 (approximately HK$42,453,000) by way of cash contribution and will own a 20.83% equity interest in Your Mart Co. Limited. During the year, the interest in Your Mart Co. Limited was disposed of at a consideration of approximately HK$54,275,000. During the year, the Group acquired a 51% stake in Shenzhen Bozone IT Co., Limited which in turn held a 49% stake in (Shenzhen Bozone Technology Services Co. Ltd.) which became an associate company of the Group.

20. INVENTORIES

Raw materials and consumables Work in progress Finished goods	2006 HK$’000 2,401 832 4,203 7,436	2005 HK$’000 479 2,045 3,214
		5,738

All inventories are stated at cost.

21. TRADE AND OTHER RECEIVABLES AND PREPAYMENTS

Trade receivables Other receivables and prepayments	2006 HK$’000 5,760 84,698 90,458	2005 HK$’000 22,155 2,789
		24,944

Payment terms with customers are mainly on credit together with deposits. Invoices are normally payable within 90 days of issuance. The following is an aged analysis of trade receivables at the balance sheet dates:

0 to 30 days 31 to 60 days 61 to 365 days Over 1 year	2006 HK$’000 1,241 96 3,804 619 5,760	2005 HK$’000 18,073 2,288 1,792 2
		22,155

– 64 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Included in other receivables and prepayments are prepayments for the drilling operation of Xin Jiang Oilfield in the PRC of approximately HK$29 million (2005: Nil) and deposits for acquisition of plant and machinery for the Xin Jiang Oilfield of approximately HK$12 million (2005: Nil).

The fair value of the Group’s trade and other receivables and prepayments at 30 June 2006 was approximate to the corresponding carrying amount.

22. TRADE AND OTHER PAYABLES

Trade payables Other payables	2006 HK$’000 1,350 29,109 30,459	2005 HK$’000 11,896 8,706
		20,602

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

0 to 30 days 31 to 120 days Over 1 year	2006 HK$’000 1,150 87 113 1,350	2005 HK$’000 11,235 661 –
		11,896

The fair value of the Group’s trade and other payables at 30 June 2006 was approximate to the corresponding carrying amount.

23. BORROWINGS

Bank overdrafts, secured Trust receipt loans, secured Other loan, unsecured (note a) Other loan, unsecured (note b) Bank loans, secured (note c)	2006 HK$’000 – – 22,500 8,427 4,078 35,005	2005 HK$’000 29,568 324 – – 26,547
		56,439

The Group’s borrowings are repayable as follows:

On demand or within one year More than one year, but not exceeding two years Less: Amount due within one year shown under current liabilities Amount due after one year	2006 HK$’000 12,505 22,500	2005 HK$’000 51,722 4,717
	35,005 (12,505)	56,439 (51,722
	22,500	4,717

The fair value of the Group’s borrowings at 30 June 2006 was approximate to the corresponding carrying amount.

– 65 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes:

a. The loan is interest bearing at 2% over prime rate and unsecured, and not repayable within the year.
b. The loan is unsecured, bears interest at prime rate and has no fixed repayment term.
c. The loans are interest bearing, and secured by leasehold land and buildings and fixed deposits of subsidiaries. The loans have been fully repaid in next financial year.

24. SHARE CAPITAL

Notes Authorized: At 1 July 2005 and 30 June 2006, shares of HK$0.01 each Issued and fully paid: At 1 July 2004, shares of HK$0.01 each Shares issued on exercise of options At 30 June 2005, shares of HK$0.01 each Issue of shares pursuant to placing and subscription agreement (a) Shares issued on exercise of options (Note 25) Shares issued on Share Award Scheme (b) Shares issued pursuant to sale and purchase agreement (c) At 30 June 2006, shares of HK$0.01 each	Number of shares ’000 20,000,000	HK$’000 200,000

	481,330 800 482,130 68,000 1,070 48,730 24,123	4,813 8
		4,821 680 11 488 241
	624,053	6,241

Notes:

a. On 13 January 2006, 68,000,000 shares of HK$0.01 each were placed to 9 independent investors at a price of HK$2.15 per share from the substantial shareholder, Best Frontier Investments Limited, pursuant to the placing and subscription agreement dated on 12 January 2006.

After completion on placing, the subscription of 68,000,000 new shares of HK$0.01 each in the capital of the Company at the subscription price of HK$2.15 per new share were allotted and issued to Best Frontier Investments Limited on 26 January 2006.

The net proceeds of the subscription amounted to approximately HK$140,000,000 and approximately HK$90,000,000 would be used to expand the business of Shenzhen Bozone IT Co. Limited which is the research and development and application of information technology in the lottery field. The remaining balance of approximately HK$50,000,000 will be applied as general working capital.

b. On 8 July 2005, the Company selected 10 consultants and 1 employee to join the Share Award Scheme at a price of HK$0.74 per share on 48,730,000 shares. The shares would be issued upon the vesting conditions were fulfilled.
c. Pursuant to the sale and purchase agreement, the Company issued 24,122,807 shares at HK$2.9 in order to acquire 51% interest in Shenzhen Bozone IT Co. Limited.

25. SHARE-BASED PAYMENT TRANSACTIONS

Pre-IPO Share Option Scheme

Pursuant to the Pre-IPO Share Option Scheme adopted by the Company on 18 October 2002, 13 individuals, including three Executive Directors, one Independent Non-executive Director, one consultant and eight employees, have been granted by the Company options to subscribe for an aggregate of 40,000,000 shares in the Company at an exercise price of HK$0.23.

– 66 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Details of movements during the year in the Company’s Pre-IPO Share Option Scheme held by employees (including directors and consultant) are as follows:

Categories of grantees Date of grant Exercise price HK$ Director (Note) 18/10/2002 0.23 Total	Number of share options at 1 July 2005 ’000 870 870	Granted during the year ’000 – –	Exercised during the year ’000 (870) (870)	Number of share options at 30 June 2006 ’000 –
				–

Note: An independent non-executive director, Mr. Peter Chin Wan Fung resigned on 25 November 2005.

Under the terms of the options granted under the Pre-IPO Share Option Scheme, these options can only be exercised by the grantees in the following manner:

	Number of shares that	Number of shares that
	can be exercised under
		the Pre-IPO Share
Exercisable period		Option Scheme
12 May 2003 – 17 October 2007		12,333,333
12 November 2003 – 17 October 2007		12,333,333
12 May 2004 – 17 October 2007		12,333,334

Each of the above eligible participants who has been granted options under the Pre-IPO Share Option Scheme has undertaken with the Company, Guotai Junan Capital Limited, Shenyin Wanguo Capital (H.K.) Limited (for itself and on behalf of the underwriters) and the Stock Exchange that for a period of twelve months from the date when trading in the shares first commences on GEM, he or she will not dispose of (or enter into any agreement to dispose of) nor permit the registered holder thereof to dispose of (or enter into any agreement to dispose of) any of his, her or its direct or indirect interest in the shares pursuant to the exercise of the options granted to him or her under the Pre-IPO Share Option Scheme.

The closing price of the shares immediately before the date in which the options were exercised was HK$1.77. The options were exercised in January 2006.

Consideration paid for each grant of an option was HK$1. No charge was recognized in the income statement in respect of the value of options granted.

Share Option Scheme

The Company has adopted a share option scheme (the “Share Option Scheme”), under which the Directors may, at its discretion, invite any persons belonging to any of the following classes of participants, to take up options to subscribe for the shares in the Company:

(a) any employees (whether full-time or part-time) of the Company, any of its subsidiaries or any entity (the “Invested Entity”) in which the Group holds any equity interest, including any executive director of the Company, any of such subsidiaries or any Invested Entity;
(b) any Non-executive Directors (including Independent Non-executive Directors) of the Company, any of its subsidiaries or any Invested Entity;
(c) any supplier of goods or services to any member of the Group or any Invested Entity;
(d) any customer of the Group or any Invested Entity;

– 67 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(e) any person or entity that provides research, development, or other technological support to the Group or any Invested Entity; and
(f) any shareholder of any member of the Group or any Invested Entity or any holder of any securities issued by any member of the Group or any Invested Entity.

The Share Option Scheme will remain valid for a period of 10 years commencing from 18 October 2002. The exercise price of the share options is determinable by the Directors, and may not be less than the highest of:

(i) the closing price of the shares of the Company as stated in the Stock Exchange’s daily quotation sheets on the date of grant, which must be a business day;
(ii) the average closing price of the shares of the Company as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the date of grant; and
(iii) the nominal value of a share of the Company.

On 22 March 2006, 40,210,000 share options were granted to 15 eligible participants, which entitled them to subscribe for a total of 40,210,000 ordinary shares of the Company. There were 40,000,000 outstanding share options brought forward from 1 July 2005, out of which 200,000 share options have been exercised. Thus there were a total 80,010,000 share options outstanding as at 30 June 2006.

2006

Categories of grantees Date of grant Exercise price HK$ Director 18/8/2004 0.64 Director 19/10/2004 0.65 Eligible participants 18/8/2004 0.64 Eligible participants 22/3/2006 2.85 Total	Number of share options at 1 July 2005 ’000 1,600 1,200 37,200 – 40,000	Granted during the year ’000 – – – 40,210 40,210	Exercised during the year ’000 – – (200) – (200)	Number of share options at 30 June 2006 Exercise period of share options ’000 1,600 19/8/2004 – 17/10/2012 1,200 20/10/2004 – 17/10/2012 37,000 19/8/2004 – 17/10/2012 40,210 22/3/2006 – 22/3/2008 80,010

The closing prices of the Company’s shares on 18 August 2004, 19 October 2004 and 22 March 2006, the dates of grant of the share options, were HK$0.64, HK$0.65 and HK$2.90, respectively.

The exercise in full of the share options would, under the present capital structure of the Company, result in the issue of 80,010,000 additional ordinary shares of the Company at additional share capital of HK$800,100 and share premium of HK$139,282,400.

At 30 June 2006, the number of the shares in respect of which option had been granted and remained outstanding under the scheme was 12.82% (2005: 8.30%) of the shares of the Company in issue at that date.

A nominal consideration of HK$1 is payable on acceptance of each grant. Total consideration received during the year from eligible participants for taking up the options granted amounted to HK$15.

The maximum number of shares of the Company which may be issued upon exercise of all the outstanding options granted and yet to be issued under the Pre-IPO Share Option Scheme, the Share Option Scheme or any other schemes must not, in aggregate, exceed 30% of the shares of the Company in issue from time to time.

– 68 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The maximum number of shares which may be granted under the Pre-IPO Share Option Scheme of the Company must not exceed 40,000,000 shares, being 10% of the issued share capital as at the listing of the Company’s shares on GEM on 12 November 2002.

The maximum number of shares issued and to be issued on the exercise of options granted and to be granted to each eligible participant (included both exercised and outstanding options) in any 12-month period must not exceed 1% of the total issued share capital of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholder’s approval in a general meeting.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

2005

Categories of grantees Date of grant Exercise price HK$ Director 18/8/2004 0.64 Director 19/10/2004 0.65 Eligible participants 18/8/2004 0.64 Total	Number of share options at 1 July 2004 ’000 – – – –	Granted during the year ’000 1,600 1,200 37,200 40,000	Exercised during the year ’000 – – – –	Number of share options at 30 June 2005 Exercise period of share options ’000 1,600 19/8/2004 – 17/10/2012 1,200 20/10/2004 – 17/10/2012 37,200 19/8/2004 – 17/10/2012 40,000

During the year ended 30 June 2006, options were granted on 22 March 2006. The estimated fair value of the options granted is approximately HK$34,208,000.

These fair values were calculated by using the Black-Scholes Option Pricing Model. The inputs into the model were as follows:

Share price on grant date	HK$2.90
Exercise price	HK$2.85
Expected volatility	83.83%
Expected life	2 years
Risk-free rate	4%
Expected dividend yield	0.69%

Expected volatility was determined by using the historical volatility of the Company’s share price over the previous 2 years. The expected life used in the model has been adjusted, based on the management’s best estimate, for the effects on non transferability, exercise restrictions and behavioural considerations.

The risk-free rate represents the yields to maturity of respective Hong Kong Exchange Fund Note as at 22 March 2006.

The Group recognized the total expenses of approximately HK$16,192,000 for the year ended 30 June 2006 (2005: Nil) in relation to share options granted by the Company.

In addition, the Group recognized share option expenses of its subsidiary, Aptus Holdings Limited of approximately HK$23,207,000 into the consolidated income statement.

– 69 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

26. ACQUISITION OF SUBSIDIARIES

During the year, the Group acquired 70% equity interest in Huayou Cu (via Aptus Holdings Limited) and Shenzhen Bozone IT Co. Ltd. and its subsidiaries and an associate (“Bozone”) at a consideration of approximately HK$29,000,000 and HK$101,726,000, respectively. For the acquisition of Huayou Cu, the Group has paid cash consideration of HK$5,000,000 and issued 20,000,000 ordinary shares of its subsidiary, Aptus Holdings Limited (“Aptus”) of HK$0.01 per share for the acquisition. The closing price of Aptus share as at 11 January 2006, the completion date of the transaction was HK$1.20 and non-cash consideration of HK$24,000,000 for this acquisition transaction was resulted. The registered capital of Huayou Cu is RMB100,000,000 (equivalent to approximately HK$97,087,000) and RMB15,950,000 (equivalent to approximately HK$15,485,000) has been paid up by minority interest and considered as the capital contributed by minority interest upon the completion of aforesaid acquisition. Accordingly, the Group has to further invest RMB70,000,000 (equivalent to approximately HK$67,961,000) into Huayou Cu and during the year, the Group has invested RMB31,099,000 (equivalent to approximately HK$30,000,000). The total consideration for the acquisition transaction is HK$96,961,000, which has been partially settled by issuance of the Company’s shares of HK$24,000,000 and cash of HK$35,000,000 as of the balance sheet date.

For the acquisition of Bozone, the Group has paid cash consideration of approximately HK$31,770,000 and issued 24,122,807 ordinary shares of the Company of HK$0.01 per share for the acquisition. The closing price of the Company’s share as at 22 March 2006, the completion date of the transaction was HK$2.90 and non-cash consideration of approximately HK$69,956,000 for this acquisition transaction was resulted.

The net assets were stated as follows:

Bozone HK$’000 10,394 5,358 238 4,174 10,414 3,407 743 13,658 (3,745) (4,036) (807) (189) (3,544) (971) (15,033) (12,766)	Huayou Cu HK$’000 127 – – – – 11,856 – 19 – – – – – – (612) (38,151)	Total HK$’000 10,521 5,358 238 4,174 10,414 15,263 743 13,677 (3,745) (4,036) (807) (189) (3,544) (971) (15,645) (50,917) (19,466) 126,192 106,726 36,770 69,956 106,726 (36,770) 13,677 (23,093)
7,295 94,431	(26,761) 31,761	(19,466 126,192
101,726	5,000
31,770 69,956	(Note) 5,000 –	36,770 69,956
101,726	5,000
(31,770) 13,658	(5,000) 19	(36,770 13,677
(18,112)	(4,981)

– 70 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note: Consideration for acquisition of Huayou Cu was included the allotment of 20,000,000 ordinary shares in Aptus Holdings Limited of HK$0.01 par values. Fair value of the shares allotted at the acquisition date was HK$1.20.

The acquirees’ carrying amount of net assets before combination approximates to its fair value. Accordingly, no fair value adjustments are required. Huayou Cu contributed to the Group’s loss before taxation of approximately HK$463,000 between the date of acquisition and the balance sheet date.

Shenzhen Bozone IT Co. Limited contributed approximately HK$10,854,000 revenue and HK$1,501,000 to the Group’s loss before income tax for the period between the date of acquisition and the balance sheet date.

27. CONTINGENT LIABILITIES

The Company provided corporate guarantees to the extent of approximately HK$42,500,000 (2005: HK$66,538,000) to banks and financial institution to secure general banking facilities granted to certain subsidiaries.

The total facilities utilized by the Group at 30 June 2006 amounted to approximately HK$26,578,000 (2005: HK$56,439,000).

28. OPERATING LEASE COMMITMENTS

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

Within one year In the second to fifth year inclusive	2006 HK$’000 1,824 41 1,865	2005 HK$’000 693 26
		719

Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for the terms ranging from one year to three years.

29. CAPITAL COMMITMENTS

Capital expenditure in respect of the acquisition of property, plant and equipment – authorized but not contracted for – contracted for but not provided in the financial statements Capital expenditure in respect of the acquisition of joint stock limited company and subsidiary – authorized but not contracted for – contracted for but not provided in the financial statements	2006 HK$’000 – 559	2005 HK$’000 18,981 20,019
	559 37,768 –	39,000 – 22,453
	38,327	61,453

– 71 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

30. RETIREMENT BENEFITS SCHEME

With the introduction of Mandatory Provident Fund Scheme (the “MPF Scheme”) in December 2000 in Hong Kong, the Group has arranged its employees in Hong Kong to join the MPF Scheme. The retirement benefits scheme contributions charged to the consolidated income statement represents contributions payable to the MPF Scheme by the Group at rates specified in the rules of the MPF Scheme.

The total cost charged to the consolidated income statement of HK$207,000 (2005: HK$148,000) represents contributions payable to the MPF Scheme in respect of the current accounting year.

The employees employed in the PRC subsidiaries are members of the state-managed retirement benefits schemes operated by the PRC government. The PRC subsidiaries are required to contribute a certain percentage of their payroll to the retirement benefits schemes to fund the benefits. The only obligation of the Group with respect to the retirement benefits schemes is to make the required contributions under the schemes.

The employees employed in the Singapore subsidiary are members of the Central Provident Fund Scheme. The Singapore subsidiary is required to contribute pension, based on a certain percentage of their payroll, to the Central Provident Fund Scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefits scheme is to make the required contributions under the scheme.

31. PROVISION FOR LONG SERVICE PAYMENTS

Under the Hong Kong Employment Ordinance, the Group is obliged to make lump sum payments on cessation of employment in certain circumstances to certain employees who have completed at least five years of service with the Group. The amount payable is dependent on the employee’s final salary and years of service, and is reduced by entitlements accrued under the Group’s retirement plan that are attributable to contributions made by the Group. The Group does not set aside any assets to fund any remaining obligations.

The Group had no significant provision for long service payments at 30 June 2006 (2005: Nil).

32. PLEDGE OF ASSETS

At 30 June 2006, the Group has pledged its bank deposits of approximately HK$13,308,000 (2005: HK$31,761,000) and leasehold property at net book value of approximately HK$5,918,000 (2005: HK$Nil) approximately as securities for the general banking facilities granted to the Group.

33. EVENTS AFTER THE BALANCE SHEET DATE

On 25 July 2006, the Company’s non-wholly owned subsidiary, Aptus Holdings Limited which its shares are listed on the Growth Enterprise Market (the “GEM”) of The Stock Exchange of Hong Kong Limited, entered into two capital injection agreements to invest on (the “Changde Joint Venture”) and (the “Hunan Joint Venture”) for the amount of approximately HK$127,872,000 and HK$77,281,000 respectively. Upon completion of the Changde Agreement and the Hunan Agreement, the Company will own 48.33% equity interest in the Changde Joint Venture and 33% equity interest in the Hunan Joint Venture.

The Changde Joint Venture is managing natural gas project in Changde City in the PRC. The Hunan Joint Venture is mainly engaged in the construction of a main gas pipeline. The investments under the Changde Agreement and the Hunan Agreement constitute a very substantial acquisition for Aptus Holdings Limited and a major transaction for the Company under the GEM Listing Rules and therefore, it needs to seek for an approval from its shareholders in the extraordinary general meeting.

Besides, subsequent to the balance sheet date, on 18 August 2006, the Group issued a circular (the “Circular”) to the shareholders of the Company in relation to a major transaction. According to the Circular, the Group disposed 55% equity interest of Wuhu Bee & Bee Natural Food Company Limited and 100% equity interest of Zhuhai Free Trade Zone Bee & Bee Natural Food Company Limited to an independent third party at a price of HK$76,000,000 in cash. The Group intends to place the net proceeds from the disposals of subsidiaries in short term deposits with financial institution or licensed banks in Hong Kong. On 4 September 2006, the shareholders approved the disposals of subsidiaries in the extraordinary general meeting.

– 72 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

34. SHARE AWARD SCHEME

On 24 January 2005, the Company adopted a share award scheme for employees and consultants, excluding executive directors and chief executive, of the Group for the purpose of recognizing the contributions of certain employees and consultants of the Group to the growth of the Group, by rewarding them with opportunities to obtain an ownership interest in the Company and to further motivate them and give an incentive to these persons to continue to contribute to the Group’s long term success and prosperity. Under the scheme, following the making of an award to employees and consultants, the relevant newly issued shares vest over a period of time provided that the employees and consultants continue to contribute to the Group at the relevant time and satisfies any other conditions specified at the time the award is made. The maximum aggregate number of shares that can be awarded under the scheme is limited to 20% of the issued share capital of the Company and no cash consideration should be paid for the shares allotted under the share award scheme.

A summary of movements in shares held under the share award scheme during the year is as follows:

Beginning of year Shares granted during the year Awards of vested shares to employees and consultants End of year Fair value of shares held as at 30 June Fair value of shares awarded to employees and consultants during the year Amounts recognized in the consolidated balance sheet as prepaid expenses Amounts recognized in the consolidated income statement as staff cost	2006 Number of shares ’000 – 48,730 (48,730) – 2006 HK$’000 N/A 36,060 – 36,060	2005 Number of shares ’000 – – –
		–

		2005 HK$’000 N/A – – –

The fair value of shares under the share award scheme is measured by the last 14 days of trading average of the quoted market price of the Shares on the Stock Exchange before the date of grant.

35. COMPARATIVE FIGURES

Certain comparative figures have been restated to conform with current year’s presentation.

36. RELATED PARTY TRANSACTIONS

Compensation of directors and key management personnel

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

Short-term benefits Post-employment benefits	2006 HK$’000 8,486 84 8,570	2005 HK$’000 6,613 71
		6,684

The remuneration of directors and key management personnel is determined by the remuneration committee having regard to the performance of individuals and market trends.

– 73 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

37. PARTICULARS OF PRINCIPAL SUBSIDIARIES OF THE COMPANY

Details of the subsidiaries at 30 June 2006 are as follows:

		Class of shares
		held/Issued and	Percentage of equity
	Place of	fully paid up	interest	attributable
	incorporation/	shares/registered	to the Company
Name of company	operation	capital	Direct		Indirect	Principal activities
Precise Result Profits	British Virgin	Ordinary share		–	100%	Investment holding
Limited	Islands	US$1
Aptus Holdings	Cayman Islands	Ordinary shares		–	54.89%	Investment holding
Limited		HK$16,681,414
China Success	British Virgin	Ordinary shares	100%		–	Investment holding
Enterprises Limited	Islands	US$2,000
Loyalion Limited	Hong Kong	Ordinary shares		–	100%	Distribution of
		HK$1,000				natural
						supplementary
						products and
						investment
						holding
Wuhu Bee & Bee	PRC	Registered capital		–	55%	Manufacture and
Natural Food		US$1,000,000				distribution of
Company Limited#						natural
						supplementary
						products
Zhuhai Free Trade	PRC	Registered capital		–	100%	Distribution of
Zone Bee & Bee		HK$1,000,000				natural
Natural Food						supplementary
Company Limited#						products
B & B International	Hong Kong	Ordinary shares		–	100%	Distribution of
Marketing (HK)		HK$2				natural
Limited						supplementary
						products
B & B International	British Virgin	Ordinary share		–	100%	Investment holding
Marketing Limited	Islands	US$1
B & B Winery	Hong Kong	Ordinary shares		–	100%	Investment holding
Limited		HK$1,000
B & B Enterprises	Hong Kong	Ordinary shares		–	100%	Investment holding
Limited		HK$100
Natural Lives	Hong Kong	Ordinary shares		–	60%	Distribution of
Company Limited		HK$500,000				natural
						supplementary
						products
B & B Bio-Products	British Virgin	Ordinary share		–	100%	Investment holding
Limited	Islands	US$1

– 74 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

==> picture [429 x 617] intentionally omitted <==

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

|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|Class|of|shares|
|held/Issued|and|Percentage|of|equity|
|Place|of|fully|paid|up|interest|attributable|
|incorporation/|shares/registered|to|the|Company|
|Name|of|company|operation|capital|Direct|Indirect|Principal|activities|
|B|&|B|Group|Hong|Kong|Ordinary|share|–|100%|Investment|holding|
|Holdings|Limited|HK$1|
|(Formerly|known|as|
|High|Faith|(China)|
|Limited)|
|Rain|International|Hong|Kong|Ordinary|shares|–|100%|Investment|holding|
|Company|Limited|HK$1,000,000|
|La|Cucina|Italian|Macau|Share|capital|–|60%|Restaurant|and|
|(Macau)|Limited|[]|MOP$25,000|import|and|export|
|of|correspondent|
|products|
|Step|Gain|Limited|[]|British|Virgin|Ordinary|shares|–|60%|Investment|holding|
|Islands|US$10|
|PRC|Registered|capital|–|60%|Animal|feed|
|#|HK$1,600,000|(|
|(Shuang|Liao|City|)|
|Step|Gain|
|Technology|
|Limited|[†]|)|
|Greatest|Luck|British|Virgin|Ordinary|share|–|100%|Investment|holding|
|Limited|[]|Islands|US$1|
|PRC|Registered|capital|100%|–|Investment|holding|
|#|US$4,000,000|
|(B|&|B|(Shenzhen)|
|Limited|[†]|)|
|PRC|Registered|capital|–|50.5%|Provision|of|lottery-|
|RMB6,060,000|related|hardware|
|#|and|software|
|(Guangzhou|Latech|systems|
|Computer|
|Technology|
|Co.|Limited|[†]|)|
|Ace|Bingo|Group|British|Virgin|Ordinary|share|–|100%|Investment|holding|
|Limited|[]|Islands|US$1|
|Cheerfull|Group|British|Virgin|Ordinary|share|–|51%|Investment|holding|
|Holdings|Limited|[]|Islands|US$50,000|
|PRC|Registered|capital|–|51%|Provision|of|lottery-|
|#|RMB10,000,000|related|hardware|
|(Shenzhen|Bozone|and|software|
|IT|Co.|Limited|[†]|)|systems|

----- End of picture text -----

– 75 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

			Class of shares
			held/Issued and	Percentage of equity
		Place of	fully paid up	interest	attributable
		incorporation/	shares/registered	to the Company
Name of company		operation	capital	Direct		Indirect	Principal activities
		PRC	Registered capital RMB1,000,000		–	50.49%	Provision of lottery- related hardware
	*#						and software
(Shenzhen							systems
Longjiang Fengcai
IT Co. Limited†)
		PRC	Registered capital RMB500,000		–	33.15%	Provision of lottery- related hardware
	*# (Harbin						and software
Longjiang Fengcai							systems
Technology
Co. Limited†)		PRC	Registered capital		–	35.7%	Provision of lottery-
	*#		RMB1,000,000				related hardware
(Shenzhen Bozone							and software
Mobile Technology							systems
IT Co. Limited†)
		PRC	Registered capital		–	22.49%	Provision of lottery-
	*#		RMB1,000,000				related hardware
(Jinan Weita							and software
Technology							systems
Co. Limited†)

The statutory financial year end date of these subsidiaries is 31 December
** Subsidiaries newly established during the year
Subsidiaries acquired during the year

† For identification only

– 76 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. MANAGEMENT AND DISCUSSION AND ANALYSIS

The following is the management discussion and analysis as extracted from the annual report of the Company for the year ended 30 June 2006:

Financial review

Significant progress has been made by the Group in developing its presence in the China lottery-related sector and in the oil and gas related industries. The results for the 12 months to 30 June 2006, however, still predominantly reflect the natural products and edible oil trading businesses, as the Group’s newly acquired business units have yet to begin contributing significantly. Positively, however, we are pleased to announce that our 51%-owned China lottery-related company, Bozone, has made a maiden contribution to our results. Bozone contributed HK$10.85 million in revenue and HK$1.50 million in segmental results for the period since its completion of acquisition on 22 March 2006.

Overall revenue for the Group, however, was HK$81.61 million against HK$189.13 million previously. The large reduction in revenue was due to poor performance at the Group’s edible oil trading operations and at the natural products division due to continuing difficult business conditions. Revenue from sales of edible oil for the period was HK$30.82 million against HK$108.03 million previously and revenue from the manufacturing and distribution of natural products declined to HK$39.93 million from HK$81.10 million previously. As a result, gross profits contracted to HK$26.32 million against HK$46.26 million previously. Overall the Group recorded a net loss attributable to shareholders after minorities of HK$39.91 million for the year ended 30 June 2006 against a net profit of HK$31.69 million for the previous corresponding period.

Most of all the HK$71.60 million swing in net profits can be explained as follows: (i) a HK$19.94 million reduction in gross profit due to difficult operating conditions; (ii) share award expenses of HK$36.06 million; (iii) share option expenses of HK$39.4 million; and (iv) loss on disposal of an associate of HK$13.1 million. Helping offset some of this was HK$32.3 million in gains on the partial disposal of Aptus shares by China Vanguard.

Employment and remuneration policies

As at 30 June 2006, the Group employed 28 staff in Hong Kong, 2 staff in Singapore and 149 staff in the PRC. Staff costs excluding directors’ remuneration amounted to approximately HK$7,873,000 (2005: HK$4,274,000). Employee remuneration is determined by reference to market terms and the performance, qualification and experience of individual employees. In addition to basic salaries and provident fund contributions, the Group also offers medical benefits and training programs. Share options may be granted to employees based on performance evaluation in order to provide incentives and rewards.

– 77 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Liquidity and financial resources

As at 30 June 2006, shareholders’ funds amounted to approximately HK$453,851,000 (2005: HK$170,771,000). Current assets amounted to approximately HK$356,185,000 (2005: HK$197,932,000), mainly comprising of cash and bank deposits. The Group had current liabilities amounting to approximately HK$43,063,000 (2005: HK$72,863,000), mainly its trade and other payables and bank borrowings. The Group’s bank borrowings amounted to approximately HK$4,078,000 (2005: HK$56,439,000) for the year ended 30 June 2006. The Group financed its operations primarily with internally generated cash flows, banking facilities granted by banks and the placement of shares. The net asset value per share of the Company was approximately HK$0.73 (2005: HK$0.35). The gearing ratio was 14.45% (2005: 45.43%) on the basis of total liabilities divided by shareholders’ funds.

Exposure to fluctuations in exchange rates and any related hedges

The business activities of the Group are not exposed to material fluctuations in exchange rates except the operations through its subsidiaries in the PRC and Singapore which are subject to fluctuation in exchange rates between Renminbi, Singaporean dollars and Hong Kong dollars.

Significant investments

For the year ended 30 June 2006, the Group did not have any significant investments.

Material Acquisitions and disposals of subsidiaries

For the year ended 30 June 2006, the Group acquired a 51% equity interest in Cheerfull Group Holdings Limited which through its 100% wholly-owned subsidiary, Shenzhen Bozone IT Co., Ltd, is principally engaged in the research and development and application of information technology in the lottery field. This includes application software development and production of large online lottery systems and multi-platform wagering systems, integration of online lottery networks, network security system solutions, wagering terminals, operational solutions and operational consultation services.

The Group also acquired a 70% equity interest of CNPC Huayou Cu Energy investment Co. Ltd. (“CNPC Investment”) for the year ended 30 June 2006. CNPC Investment has profit sharing rights to an oilfield development project located in Feng Cheng, Xin Jiang, the People’s Republic of China.

– 78 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Contingent liabilities

As at 30 June 2006, the Group did not have any material contingent liabilities.

Charges on group assets

As at 30 June 2006, the Group pledged certain of its bank deposits and leasehold property as securities for the general banking facilities granted to the Group.

Capital structure

For the year ended 30 June 2006, 870,000 shares and 200,000 shares were issued due to the exercise of pre-IPO share options under the pre-IPO Share Option Scheme and share options under the existing Share Option Scheme. In addition, 68,000,000 shares were placed on 26 January 2006 to raise approximately HK$140,000,000. Besides, 48,730,000 shares were issued pursuant to the Share Award Scheme of the Company during the year. Furthermore, 24,122,807 shares were issued to acquire the 51% interest in Cheerfull Group Holdings Limited (which holds 100% of Shenzhen Bozone IT Co., Limited).

5. INDEBTEDNESS

At the close of business on 31 August 2006, being the latest practicable date for the purpose of preparing this indebtedness statement prior to the printing of this circular, the Group had unsecured borrowings of approximately HK$32,171,000, of which HK$22,500,000 is due within 2 years from its drawdown date and the balance of HK$9,671,000 does not have any fixed terms of repayment.

Save as aforesaid and apart from intra-group liabilities, as at 30 June 2006, the Group had no debt securities issued and outstanding, and authorised or otherwise created but unissued, term loans, distinguishing between guaranteed, unguaranteed, secured and unsecured, and guaranteed, unguaranteed, secured and unsecured bank borrowings including, bank loans and overdrafts or other similar indebtedness, liabilities under acceptances (other than normal trade bills) or acceptance credit, hire purchase or finance lease commitments, guarantees or other material contingent liabilities.

To the best understanding and knowledge of the Directors, the Directors confirmed that there is no material adverse change in the indebtedness position of the Group since 30 June 2006 up to the Latest Practicable Date.

6. WORKING CAPITAL

The Directors are of the opinion that, after taking into account the Group’s present internal resources and availability banking facilities or similar indebtedness upon the completion, the Group has sufficient working capital for its present requirements for at least the next 12 months from the date of publication of this circular.

7. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position or prospects of the Group since 30 June 2005, the date to which the latest audited consolidated financial statements of the Company were made up.

– 79 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

The following is the text of a report, prepared for inclusion in this circular, received from W.H. Tang & Partners CPA Limited, the independent reporting accountants.

Level 7, Parkview Centre, 7 Lau Li Street, Causeway Bay, Hong Kong. Tel : (852) 23426130 Fax : (852) 23426006

==> picture [66 x 44] intentionally omitted <==

19 October 2006

The Directors

China Vanguard Group Limited

30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

We set out below our report on the financial information relating to (Changde Huayou Gas Co. Ltd*), a company incorporated in the People’s Republic of China (“PRC”) with limited liability on 11 October 1999 (“Changde Huayou”), for each of the years ended 31 December 2003, 2004 and 2005, the period from 1 January 2006 to 30 June 2006 (hereafter collectively referred to as the “Relevant Periods”) for inclusion in the circular of China Vanguard Group Limited dated 19 October 2006 (the “Circular”), in connection with the acquisition of an aggregate of 48.33% equity interest in Changde Huayou.

Changde Huayou and its subsidiary (the “Group”) is principally engaged in the business of gas pipeline design, the supply, development and management of natural gas distribution facilities in the PRC.

The financial statements of Changde Huayou for the Relevant Periods has been prepared in accordance with accounting principles generally accepted in the PRC. The financial statements for the 2 years ended 31 December 2004 and 2005 of Changde Huayou were audited by a CPA firm in PRC. We have also carried out independent audit procedures with reference to Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) on the financial statements for this period.

No audited financial statements have been prepared by Changda Huayou for the year ended 31 December 2003 and six months ended 30 June 2006. For the purpose of this report, we have, however, carried out independent audit procedures with reference to Hong Kong Standards on Auditing issued by the HKICPA on the management accounts of Changde Huayou for the year ended 31 December 2003 and the six months ended 30 June 2006.

– 80 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

The financial information as set out on pages 82 to 101 (“Financial Information”) has been prepared based on the audited financial statements or, where appropriate, unaudited management accounts of Changde Huayou for the Relevant Periods, which were made available to us by the directors of Changde Huayou, and we have carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The directors of Changde Hauyou are responsible for preparing the Financial Information which gives a true and fair view. In preparing the Financial Information, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of Changde Huayou as at 31 December 2003, 2004 and 2005 and 30 June 2006 and of the results and cash flows of Changde Huayou for the Relevant Periods.

The comparative consolidated income statement, consolidated statements of changes in equity and consolidated cash flow statements of Changde Huayou for the six months ended 30 June 2005 together with the notes thereon (the “30 June 2005 Financial Information”) have been extracted from Changde Huayou’s financial information for the same period which was prepared by the directors of Changde Huayou solely for the purpose of this report. We have reviewed the financial information for the six months ended 30 June 2005 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 the management and applying analytical procedures to the financial 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 test of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provided a lower level of assurance than an audit. Accordingly we do not express an audit opinion on 30 June 2005 Financial Information. On the basis of our review which does not constitute an audit, we are not aware of any material modifications that should be made to the 30 June 2005 Financial Information of Changde Huayou for the Relevant Periods.

Yours faithfully,

W.H. Tang & Partners CPA Limited Certified Public Accountants Hong Kong

– 81 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

I. FINANCIAL INFORMATION

Consolidated Income Statement

For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 38,525 22,955 4,505 (23,326) (13,994) (1,800)	For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 38,525 22,955 4,505 (23,326) (13,994) (1,800)	For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 38,525 22,955 4,505 (23,326) (13,994) (1,800)	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 21,797 15,442 (15,278) (10,836) 6,519 4,606 466 960 (3,974) (2,733) (1,801) (1,710) – (137) (834) (613) 376 373 (121) – 255 373 250 429 5 (56) 255 373	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 21,797 15,442 (15,278) (10,836) 6,519 4,606 466 960 (3,974) (2,733) (1,801) (1,710) – (137) (834) (613) 376 373 (121) – 255 373 250 429 5 (56) 255 373
15,199 1,474 (7,602) (3,999) (2,534) (1,323) 1,215 (401)	8,961 753 (4,699) (3,279) (7,504) (940) (6,708) (342)	2,705 163 (644) (1,212) (15) (979) 18 (3)	6,519 466 (3,974) (1,801) – (834) 376 (121)	4,606 960 (2,733 (1,710 (137 (613
				373 –
814	(7,050)	15	255
816 (2)	(7,050) –	15 –	250 5	429 (56
814	(7,050)	15	255

– 82 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Consolidated Balance Sheet

30 June 2006 RMB’000 106,419 24,235 26,429 –	2005 RMB’000 109,128 15,794 26,762 –	31 December 2004 RMB’000 90,655 18,779 32,588 3,489	2003 RMB’000 2,199 100,310 33,719 – 136,228 1,026 103 710 170 469 2,478 5,742 1,934 993 168 – – 5,080 13,917 (11,439) 124,789 36,920 87,869 61,880 25,989 87,869 – 87,869
157,083 2,447 607 590 963 13,726 18,333 7,673 354 4,704 1,744 33,000 5,500 5,581 58,556 (40,223) 116,860 33,487	151,684 1,262 1,355 262 1,768 3,481 8,128 14,831 960 2,762 2,087 8,500 5,500 5,134 39,774 (31,646) 120,038 36,920	145,511 515 781 253 814 500 2,863 12,122 2,448 1,606 894 3,000 5,500 5,080 30,650 (27,787) 117,724 36,920	136,228
			1,026 103 710 170 469
			2,478
			5,742 1,934 993 168 – – 5,080
			13,917
			(11,439
			124,789
			36,920
83,373	83,118	80,804
61,880 19,990 81,870 1,503	61,880 19,740 81,620 1,498	61,880 18,924 80,804 –	61,880 25,989
			87,869 –
83,373	83,118	80,804

– 83 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Consolidated Statements of Changes in Equity

Attributable to equity	Attributable to equity	holders of the	parent		Total RMB’000 36,654 51,200 15 87,869 (7,050) (15) 80,804 1,500 814 83,118 255 83,373 80,804 1,500 373 82,677
Share capital RMB’000 10,680 51,200 – 61,880 – – 61,880 – – 61,880 –	Contribution from shareholder RMB’000 25,974 – – 25,974 – – 25,974 – – 25,974 –	Retained profits (Deficit) RMB’000 – – 15 15 (7,050) (15) (7,050) – 816 (6,234) 250	Total RMB’000 36,654 51,200 15 87,869 (7,050) (15) 80,804 – 816 81,620 250	Minority interests RMB’000 – – – – – – – 1,500 (2) 1,498 5	Total RMB’000 36,654 51,200 15
					87,869 (7,050 (15
					80,804 1,500 814
					83,118 255
61,880	25,974	(5,984)	81,870	1,503
61,880 – –	25,974 – –	(7,050) – 429	80,804 – 429	– 1,500 (56)	80,804 1,500 373
61,880	25,974	(6,621)	81,223	1,444

** Contribution from shareholder represents revaluation reserve arose from revaluation of the Company’s assets and liabilities as at 31 August 2003.

– 84 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Consolidated Cash Flow Statement

For the year ended 31 2005 2004 RMB’000 RMB’000 1,215 (6,708) – – 1,323 940 6,145 3,953 2,411 19 (7) – – – (13) 7,453	For the year ended 31 2005 2004 RMB’000 RMB’000 1,215 (6,708) – – 1,323 940 6,145 3,953 2,411 19 (7) – – – (13) 7,453	December 2003 RMB’000 18 – 979 58 – – 25,974 –	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 376 373 – – 834 613 3,340 2,165 – – (5) (1) – – – – 4,545 3,150 (1,185) (1,096) 748 (1) (378) (253) 805 460 (7,158) (4,069) (606) (1,580) 1,992 260 (343) 224 (1,580) (2,905) 5 1 (834) (613) (121) – – (2,530) (3,517) – 2,520 – 3,500 – – (298) (1,104) (8,441) –	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 376 373 – – 834 613 3,340 2,165 – – (5) (1) – – – – 4,545 3,150 (1,185) (1,096) 748 (1) (378) (253) 805 460 (7,158) (4,069) (606) (1,580) 1,992 260 (343) 224 (1,580) (2,905) 5 1 (834) (613) (121) – – (2,530) (3,517) – 2,520 – 3,500 – – (298) (1,104) (8,441) –
11,074 (747) (574) (9) (954) 2,709 (1,488) 1,156 1,193 12,360 7 (1,323) (401) – 10,643 2,520 3,500 – (5,643) (15,093)	5,657 511 (678) 457 (644) 6,380 514 613 726 13,536 – (940) (342) (15) 12,239 – (3,500) – (272) (16,936)	27,029 (1,026) (103) (710) (170) 5,742 1,934 993 168 33,857 – (979) (3) – 32,875 – – (33,719) (2,257) (100,310)	4,545 (1,185) 748 (378) 805 (7,158) (606) 1,992 (343) (1,580) 5 (834) (121) – (2,530) – – – (298) (8,441)	3,150
				(1,096 (1 (253 460 (4,069 (1,580 260 224
				(2,905 1 (613 –
				(3,517 2,520 3,500 – (1,104 –

– 85 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

For the year ended 31 2005 2004 RMB’000 RMB’000 (14,716) (20,708)	For the year ended 31 2005 2004 RMB’000 RMB’000 (14,716) (20,708)	December 2003 RMB’000 136,286	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 (8,739) 4,916 – – – 1,500 (2,986) (1,000) 24,500 – – – – – – 21,514 500 10,245 1,899 3,481 500 13,726 2,399 13,726 2,399 13,726 2,399	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 (8,739) 4,916 – – – 1,500 (2,986) (1,000) 24,500 – – – – – – 21,514 500 10,245 1,899 3,481 500 13,726 2,399 13,726 2,399 13,726 2,399
54 1,500 – 5,500 – – – 7,054 2,981 500	– – – 3,000 – 5,500 – 8,500 31 469	42,000 – – 48,250 (48,250) – 61,880 103,880 469 –	– – (2,986) 24,500 – – – 21,514 10,245 3,481	– 1,500 (1,000 – – –
				500
				1,899 500
3,481	500	469	13,726
3,481	500	469	13,726	2,399
3,481	500	469	13,726

– 86 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Company was incorporated in the PRC on 11 October 1999 with limited liability.

There are two co-operative parties to Changde Huayou, namely (China Huayou Group Corporation), a company established in the PRC and (Changde State-owned Asset Operation Management Company), a company established in the PRC. The registered office and place of address of the Company is located at No. 268 Dongting Road, Changdeng City, Hunan Province, PRC.

The Company and its subsidiary (the “Group”) are principally engaged in the business of gas pipeline design, the supply, development and management of natural gas distribution facilities in the PRC.

The financial statements are presented in Renminbi dollars which is the same as functional currency of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The Financial Information set out in this report has been prepared under the historical cost convention and in accordance with accounting principals generally accepted in Hong Kong and comply with Hong Kong Financial Reporting Standards issued by HKICPA.

Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries made up to the end of Relevant Periods.

Subsidiaries

Subsidiaries are those entities in which the Company, directly or indirectly, controls the composition of the board of directors, controls more than half the voting power or holds more than half of the issued share capital.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated.

Unrealized losses are also eliminated but considered an impairment indicator of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

– 87 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Revenue recognition

(i) Gas sales – based on gas consumption derived from meter readings.
(ii) Bottle liquefied gas sales – upon delivery of bottle liquefied gas to the customers.
(iii) Installation sales – upon completion of installation work.
(iv) Maintenance and service charges – when services are provided and invoiced.
(v) Interest income – recognized on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Impairment of assets

An assessment is made at each balance sheet date, of whether there is any indication of impairment of any asset, or whether there is an indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the assets recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement in the period in which it arises.

A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortization), had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to the income statement in the period in which it arises.

Income tax

Income tax comprises current and deferred tax. Income tax is recognized in the income statement or in equity if it related to items that are recognized in the same or a different period, directly in equity.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Tax rates enacted or substantively enacted by the balance sheet date are used to determine deferred tax.

Deferred tax liabilities are provided in full on all taxable temporary differences while deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Property, plant and equipment

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

– 88 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purposes are as follows:

Leasehold buildings 3-4% Office equipment 7%-24% Plant and machinery 3%-12% Motor vehicles 12%

The gain or loss on disposal or retirement of a property, plant and equipment recognized in the income statement is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Cash and cash equivalents

For the purpose of the cash flow statements, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restrict to use and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of balance sheet, cash and cash equivalents comprised cash on hand and at banks, including term deposits, which are not restricted as to use.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentals payable under the operating leases are charges to the income statement on the straight-line basis over the lease terms.

Foreign currency translation

Transactions in currencies other than the functional currency of the Group are recorded in its functional currency at the applicable exchange rates ruling at the transaction dates. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable exchange rates ruling at that date. Exchange differences are dealt with in the income statement.

Employee benefits

The employees of the Group that operate in the People’s Republic of China (the “PRC”) are required to participate in central pension scheme operated by the local municipal government. They are required to contribute certain percentage of their covered payroll to the central pension scheme to fund the retirement benefits. The local municipal government undertakes to assume the retirement benefits obligations of all existing and future retired employees of the Group. The only obligation of the Group with respect to the central pension scheme is to meet the required contributions under the scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.

Borrowing costs

All borrowing costs are expensed when they are incurred.

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost comprises the cost of purchase by using the first-in, first out method. Net realizable value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date, and in other cases, to management estimated based on prevailing market condition.

Provisions

Provisions are recognized when the Group has present legal or constructive obligation as a result of past event, it is probable that an outflow of resources will be required to settle the obligations, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.

– 89 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Project under development

Project under development are stated at cost less any identified impairment losses. Cost of project under development comprises its purchase price of materials, construction costs and any directly attributable cost of bring the project to its working condition and location for its intended use.

Land use rights

Land use rights are stated at cost less amortization and any identified impairment losses. Amortization of land use rights commences when the leasehold building and equipment are available put into use.

Financial instruments

Financial assets and financial liabilities are recognized on the balance sheet when an entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

The Group’s financial assets are classified into one of the two categories, including financial assets at fair value through profit or loss, loans and receivables. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Financial assets at fair value through profit or loss

Loans and receivables

Financial liabilities and equity

Financial liabilities and equity instruments issued by an entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The Group’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

– 90 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Other financial liabilities

Other financial liabilities including trade and other payables and borrowings are subsequently measured at amortized cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue

costs.

3. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the process of applying the entity’s accounting policies which are described in Note 2, management has made the following judgments that have significant effect on the amounts recognized in the financial statements. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are also discussed below.

(a) Depreciation of property, plant and equipment

(b) Recognition of property, plant and equipment from project under development

The Group assesses the completion stage of project under development periodically. And then transfer the corresponding cost of project under development to property, plant and equipment if the asset is intended to put into use.

(c) Fair value

The fair value of bank balances and cash, prepayments and deposits, trade debtors, trade creditors, accrued liabilities and bank borrowings are not materially different from there carrying amounts because of the short maturities of these instruments.

4. FINANCIAL RISK FACTORS

The Group’s major financial instruments include trade debtors, deposits and prepayments, bank balances and cash, trade creditors, accrued charges and borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

(a) Business risk

The operations of natural gas industry are substantially influenced by global political and economic development. Accidents, wars, natural disasters, etc. may have material impact on Changde Huayou or the industry as a whole. In addition, Changde Huayou conducts its principal operations in the PRC and accordingly us subject to special consideration and significant risks including political, economic and legal environment, and influence of the PRC government.

(b) Foreign exchange risk

The Group operates in the PRC with the transactions settled in RMB principally and did not have any significant exposure to foreign exchange risk.

(c) Credit risk

The Group has no significant concentrations of credit risk. The Group has credit policy to handle credit risk of customers. There is no significant concentration of sale to individual customer. Furthermore, advance payments are required for providing services to the customers.

– 91 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

(d) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the management aims to maintain flexibility in funding by keeping adequate credit lines available.

(e) Interest rate risk

The Group’s interest-rate risk arises from long-term borrowings. Borrowings issued at floating rates expose the Group to cash flow interest-rate risk. At the end of each Relevant Periods, the Group’s borrowings were at floating rates and denominated primarily in Renminbi (“RMB”).

5. REVENUE AND SEGMENT INFORMATION

The Group is principally engaged in the business of gas pipeline design, the supply, development and management of natural gas distribution facilities in the PRC. The revenue comprises the following:

Gas sales Installation fee	For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 22,240 12,161 1,667 16,285 10,794 2,838 38,525 22,955 4,505	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 14,055 11,185 7,742 4,257 21,797 15,442	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 14,055 11,185 7,742 4,257 21,797 15,442
			15,442

Business segments

During the Relevant Periods, the Group is principally engaged in the business of gas pipeline design, the supply, development and management of natural gas distribution facilities in the PRC. The directors consider that the Company operates within a single business segment. Accordingly, no business segmental information is prepared by the Company.

Geographical segments

All of the activities of the Group are based in the PRC and all of the Group’s turnover and profit (loss) before taxation are derived from the PRC. In addition, the Group’s assets are located in the PRC.

6. OTHER REVENUE

Maintenance and sales of equipment Rental income Bank interest received Sundry income	For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB000 420 418 141 886 241 – 7 – – 161 94 22 1,474 753 163	For the six months ended 30 June 2006 2005 RMB000 RMB’000 202 159 206 758 5 1 53 42 466 960	For the six months ended 30 June 2006 2005 RMB000 RMB’000 202 159 206 758 5 1 53 42 466 960
			960

– 92 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

7. FINANCE COSTS

	For the year ended	For the year ended		For the six months ended	For the six months ended
		31 December		30 June
	2005	2004	2003	2006	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Interest on:
– borrowings wholly
repayable within
five years	1,323	940	979	834	613

8.
STAFF COSTS
For the year ended
31 December
2005
2004
2003
RMB’000
RMB’000
RMB’000
Salaries and other benefits
1,556
1,012
716
9.
PROFIT (LOSS) BEFORE TAXATION
For the year ended
31 December
2005
2004
2003
RMB’000
RMB’000
RMB’000
Profit (loss) before taxation
has been arrived at after
charging (crediting):
Cost of inventories sold
23,326
13,994
1,800
Auditors’ remuneration
27
34
–
Depreciation
5,230
2,822
58
Amortization
915
1,131
–
Loss on disposal
of fixed assets
20
19
–
Impairment loss on project
under development
(2)
7,442
–
Staff cost:
– Wages and salaries
1,556
1,012
716
Loss on disposal
of land use rights
2,391
–
–
and after crediting:
Interest income
7
–
–

For the six months ended
30 June
2006
2005
RMB’000
RMB’000
743
402
For the six months ended
30 June
2006
2005
RMB’000
RMB’000
15,278
10,836
–
–
3,007
2,165
333
179
–
–
–
–
743
402
–
–
5
1

– 93 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

10. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

Directors’ emoluments

	For the year ended	For the year ended		For the six months ended	For the six months ended
		31 December		30 June
	2005	2004	2003	2006	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Directors’ fee	–	–	–	–	–
Other emoluments:
Salaries and other
benefits:
(Xia
Chong Ren)	200	125	18	55	100

Employees’ emoluments

The five individuals whose emoluments were the highest in the Group are as follows:

	For the year ended	For the year ended		For the six months ended	For the six months ended
		31 December		30 June
	2005	2004	2003	2006	2005
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Directors	200	125	18	55	100
Senior management	265	225	31	99	133

Details of remuneration to the highest paid individuals who are not directors of the Group are as follows:

Salaries and other benefits Number of highest paid employees were less than HK$1,000,000 INCOME TAX EXPENSES PRC Profits Tax Current year/period	For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 265 225 31 4 4 4 For the year ended 31 December 2005 2004 2003 RMB’000 RMB’000 RMB’000 401 342 3	For the six months ended 30 June 2006 2005 RMB’000 RMB’000 99 133 4 4 For the six months ended 30 June 2006 2005 RMB’000 RMB’000 121 –

11. INCOME TAX EXPENSES

Profits Tax in the PRC is calculated at 33% on the estimated assessable profit for the year/period.

– 94 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

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

For the year ended 31 March 2005 2004 2003 RMB’000 RMB’000 RMB’000 1,215 (6,708) 18	For the year ended 31 March 2005 2004 2003 RMB’000 RMB’000 RMB’000 1,215 (6,708) 18	For the year ended 31 March 2005 2004 2003 RMB’000 RMB’000 RMB’000 1,215 (6,708) 18	For the nine months ended 31 December 2006 2005 RMB’000 RMB’000 376 373	For the nine months ended 31 December 2006 2005 RMB’000 RMB’000 376 373

401 1 (1)	(2,213) 2,555 –	6 – (3)	124 – (3)	123 – (123
401	342	3	121	–

As at the end of each of Relevant Periods, the Group had no material unprovided deferred tax.

12. PROPERTY, PLANT AND EQUIPMENT

(a) Movement

COST Additions and at 31 December 2003 DEPRECIATION Charged for the period and at 31 December 2003 NET BOOK VALUES At 31 December 2003	Leasehold buildings RMB’000 689	Plant and machinery RMB’000 –	Motor vehicles RMB’000 940	Office equipment RMB’000 628	Total RMB’000 2,257
	8	–	29	21	58
	681	–	911	607	2,199

– 95 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Leasehold buildings RMB’000 689 – 24,369 –	Plant and machinery RMB’000 – – 35,787 –	Motor vehicles RMB’000 940 153 – (46)	Other equipment RMB’000 628 119 30,869 –	Total RMB’000 2,257 272 91,025 (46) 93,508 58 2,822 (27) 2,853 90,655 Total RMB’000 93,508 5,643 19,994 (1,914) (110) 117,121 2,853 5,230 (90) 7,993 109,128
25,058 8 448 – 456	35,787 – 1,360 – 1,360	1,047 29 121 (27) 123	31,616 21 893 – 914	93,508
				58 2,822 (27
				2,853
24,602 Leasehold buildings RMB’000 25,058 121 417 (1,914) –	34,427 Plant and machinery RMB’000 35,787 1,829 19,577 – –	924 Motor vehicles RMB’000 1,047 219 – – (100)	30,702 Other equipment RMB’000 31,616 3,474 – – (10)
23,682 456 743 – 1,199	57,193 1,360 1,818 – 3,178	1,166 123 244 (90) 277	35,080 914 2,425 – 3,339	117,121
				2,853 5,230 (90
				7,993
22,483	54,015	889	31,741

– 96 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

Leasehold buildings RMB’000 23,682 –	Plant and machinery RMB’000 57,193 –	Motor vehicles RMB’000 1,166 208	Other equipment RMB’000 35,080 90	Total RMB’000 117,121 298
23,682 1,199 433 1,632	57,193 3,178 1,363 4,541	1,374 277 121 398	35,170 3,339 1,090 4,429	117,419
				7,993 3,007
				11,000
22,050	52,652	976	30,741	106,419

13. PROJECT UNDER DEVELOPMENT

Balance b/f Additions Transfer from property, plant and equipment Transferred to property, plant and equipment Impairment loss Balance c/f	At 30 June 2006 RMB’000 15,794 8,441 – – – 24,235	At 31 December 2005 2004 RMB’000 RMB’000 18,779 100,310 15,093 16,936 1,914 – (19,994) (91,025) 2 (7,442) 15,794 18,779	2003 RMB’000 – 100,310 – – –
			100,310

Project under development represent construction work for gas pipeline network in Changde, Hunan, the PRC.

14. LAND USE RIGHTS

Balance b/f Additions Disposal Amortization Balance c/f	At 30 June 2006 RMB’000 26,762 – – (333) 26,429	At 31 December 2005 2004 RMB’000 RMB’000 32,588 33,719 – – (4,911) – (915) (1,131) 26,762 32,588	2003 RMB’000 – 33,719 – –
			33,719

Land use rights represent leasehold land acquired in the PRC for build up of pipeline network and leasehold buildings. The land are held on medium term leases and amortized by using straight-line method on 30 years.

– 97 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

15. INVESTMENT IN SUBSIDIARY

Unlisted shares, at costs Less: Impairment loss	At 30 June 2006 RMB’000 – – –	At 31 December 2005 2004 RMB’000 RMB’000 – 3,500 – (11) – 3,489	2003 RMB’000 – –
			–

Particulars of the investment of the Company are as follows:

		Place of	Particulars of	Proportion of
		incorporation/	issued and	equity interest	Principal
Name of company		operation	paid up capital	held directly	activities
		PRC	RMB5,000,000	70%	Natural gas
	(Linli Huayou Gas				distribution
	Co. Ltd*)

The subsidiary was incorporated on 26 October 2004. Consolidated financial statements for the year ended 31 December 2004 has not been prepared, as the management considered that there was no real values for preparing of the consolidated financial statements.

16. INVENTORIES

		At 30 June		At 31 December
		2006	2005	2004	2003
		RMB’000	RMB’000	RMB’000	RMB’000
Trading	goods	2,447	1,262	515	1,026

At the respective balance sheet dates, no inventories were stated at net realized values.

17. TRADE DEBTORS

Trade debtors Less: Provision for doubtful debts	At 30 June 2006 RMB’000 1,007 (400) 607	At 31 December 2005 2004 RMB’000 RMB’000 1,755 1,061 (400) (280) 1,355 781	2003 RMB’000 103 –
			103

– 98 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

The following is an aged analysis of trade debtors at the respective balance dates:

Age: Under one year 1 to 2 years Over 2 years	At 30 June 2006 RMB’000 537 – 470 1,007	At 31 December 2005 2004 RMB’000 RMB’000 1,285 591 – 470 470 – 1,755 1,061	2003 RMB’000 103 – –
			103

TRADE CREDITORS
	At 30 June		At 31 December
	2006	2005	2004	2003
	RMB’000	RMB’000	RMB’000	RMB’000
Trade creditors	7,673	14,831	12,122	5,742

The following is an aged analysis of trade debtors at the respective balance dates:

Age: Under one year 1 to 2 years Over 2 years	At 30 June 2006 RMB’000 6,445 – 1,228 7,673	At 31 December 2005 2004 RMB’000 RMB’000 13,603 10,409 – 1,713 1,228 – 14,831 12,122	2003 RMB’000 5,742 – –
			5,742

19. SHORT TERM BANK LOAN

(a) Short term loan of the Group which are analysed as follows:

			At 30 June		31 December
			2006	2005	2004	2003
			RMB’000	RMB’000	RMB’000	RMB’000
Bank	loan,	secured	33,000	8,500	3,000	–

– 99 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

(b) The Group’ short term bank loan were repayable as follows:

	At 30 June		At 31 December
	2006	2005	2004	2003
	RMB’000	RMB’000	RMB’000	RMB’000
Bank borrowings:
Within one years	33,000	8,500	3,000	–

i. Short term bank loan are secured by project under development of the Group and corporate guarantee given by the shareholder.

ii. Short term bank loan are secured, interest charged at prevailing interest rate and have fixed repayment term.

20. LOAN FROM SHAREHOLDER

	At 30 June		31 December
	2006	2005	2004	2003
	RMB’000	RMB’000	RMB’000	RMB’000
(China Huayou Group
Corporation*)	5,500	5,500	5,500	–

The Group’s loan from shareholder was repayable as follows:

	At 30 June		At 31 December
	2006	2005	2004	2003
	RMB’000	RMB’000	RMB’000	RMB’000
Loan from shareholder:
Within one year	5,500	5,500	5,500	–

The loan is unsecured, interest charged at 5.31% per annum and has fixed repayment term.

21. OTHER LOAN

(a) Other loan of the Group which are analysed as follows:

(Finance Changde	At 30 June At 31 December 2006 2005 2004 2003 RMB’000 RMB’000 RMB’000 RMB’000 Bureau of City of the PRC*) 39,068 42,054 42,000 42,000

– 100 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE CHANGDE JOINT VENTURE

(b) The Group’s other loan were repayable as follows:

Other loan: Within one year One to two years Two to five years Over five years	At 30 June 2006 RMB’000 5,581 5,080 15,240 13,167 39,068	At 31 December 2005 2004 RMB’000 RMB’000 5,134 5,080 5,080 5,080 15,240 15,240 16,600 16,600 42,054 42,000	2003 RMB’000 5,080 5,080 15,240 16,600
			42,000

Other loan is unsecured, interest charged at prevailing interest rate and has fixed repayment terms.

22. PAID UP CAPITAL

	At 30 June		31 December
	2006	2005	2004	2003
	RMB’000	RMB’000	RMB’000	RMB’000
Registered share capital
and paid up capital	61,880	61,880	61,880	61,880

At incorporation, registered capital of the Company was RMB10,680,000. At a general meeting of shareholders held on 12 November 2003, the registered capital was increased from RMB10,680,000 to RMB61,880,000 to provide additional capital to the Company.

23. COMMITMENTS

The Group had no significant operating lease commitments and capital commitments at 30 June 2006.

24. CONTINGENT LIABILITIES

The Group had no significant contingent liabilities at 30 June 2006.

For identification purpose only

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Group in respect of any period subsequent to 30 June 2006. In addition, no dividend or distribution has been declared, made or paid by the Group in respect of any period subsequent to 30 June 2006.

– 101 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

The following is the text of a report, prepared for inclusion in this circular, received from W.H. Tang & Partners CPA Limited, the independent reporting accountants.

Level 7, Parkview Centre, 7 Lau Li Street, Causeway Bay, Hong Kong. Tel : (852) 23426130 Fax : (852) 23426006

==> picture [66 x 44] intentionally omitted <==

19 October 2006

The Directors

China Vanguard Group Limited

30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

We set out below our report on the financial information relating to (Hunan Huayou Natural Gas Transportation & Distribution Company Limited*), a company incorporated in the People’s Republic of China (“PRC”) with limited liability on 22 April 2005 (“Hunan Huayou”) for each of the period from 22 April 2005 (date of incorporation) to 31 December 2005 and the period from 1 January 2006 to 30 June 2006 (hereafter collectively referred to as the “Relevant Periods”) for inclusion in the circular of China Vanguard Group Limited (the “Company”) dated 19 October 2006 (the “Circular”), in connection with the investment of an aggregate of 33% equity interest in Hunan Huayou.

Hunan Huayou is principally engaged in the construction of a main gas pipeline extending from Changsha City, PRC to Changde City, PRC.

The financial statements of Hunan Huayou for the period from 22 April 2005 (date of incorporation) to 31 December 2005 has been prepared in accounting with accounting principles generally accepted in the PRC and audited by a CPA firm in PRC. We have also carried out independent audit procedures with reference to Hong Kong Standards on Auditing (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) on the financial statements for this period.

No audited financial statements have been prepared by Hunan Huayou for the six months ended 30 June 2006. For the purpose of this report, we have, however, carried out independent audit procedures with reference to Hong Kong Standards on Auditing issued by the HKICPA on the management accounts of Hunan Huayou for the six months ended 30 June 2006.

– 102 –

ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

APPENDIX III

The financial information as set out on pages 104 to 115 (“Financial Information”) has been prepared based on the audited financial statements and management accounts, where appropriate, of Hunan Huayou for the Relevant Periods. For the purposes of this report, we have examined the Financial Information and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The directors of Hunan Huayou are responsible for preparing the Financial Information which gives a true and fair view. In preparing the Financial Information, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information for the purpose of this report gives a true and fair view of the state of affairs of Hunan Huayou as at 31 December 2005 and 30 June 2006, and of the results and cash flows of Hunan Huayou for the Relevant Periods.

Yours faithfully,

W.H. Tang & Partners CPA Limited

Certified Public Accountants Hong Kong

– 103 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

I. FINANCIAL INFORMATION

(a) Income Statement

Notes Revenue 5 Administrative expenses Loss before taxation 6 Income tax expenses 7 Net loss for the period Balance Sheet Notes Non-current assets Property, plant and equipment 8 Project under development 9 Current assets Trade debtors 10 Deposits and prepayments Amounts due from fellow subsidiaries 11 Bank balances and cash Current liabilities Trade creditors 12 Accrued charges Amount due to fellow subsidiary 13 Amount due to shareholder 14 Other payables Net current assets Capital and reserves Paid up capital 15 Accumulated losses Non-current liabilities Bank borrowings 16	1-1-2006 to 30-6-2006 RMB’000 – –	22-4-2005 to 31-12-2005 RMB’000 – (69) (69) – (69) 31-12-2005 RMB’000 2,349 128,419 130,768 4 30,474 41,639 2,395 74,512 438 964 52,977 944 26 55,349 19,163 149,931 100,000 (69) 99,931 50,000 149,931
	– –	(69 –
	– 30-6-2006 RMB’000 2,189 202,967
	205,156 – 73,785 13,940 53,676 141,401 1,904 1,833 21,945 944 – 26,626 114,775	130,768
		4 30,474 41,639 2,395
		74,512
		438 964 52,977 944 26
		55,349
		19,163
	319,931
	100,000 (69) 99,931 220,000	100,000 (69
		99,931
		50,000
	319,931

(b) Balance Sheet

– 104 –

ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

APPENDIX III

(c) Statements of Changes in Equity

At 22 April 2005 Capital injection Loss for the period At 31 December 2005 and at 1 January 2006 Loss for the period At 30 June 2006	Share capital Accumulated losses RMB’000 RMB’000 – – 100,000 – – (69) 100,000 (69) – – 100,000 (69)	Total RMB’000 – 100,000 (69) 99,931 – 99,931

– 105 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

(d) Cash Flow Statement

Operating activities Loss before taxation Operating loss before working capital changes Decrease (Increase) in trade debtors Increase in deposits and prepayments Increase in trade creditors Increase in accrued charges (Decrease) Increase in other payables Cash used in operations and net cash outflows from operating activities Investing activities Purchases of property, plant and equipment Capitalize of depreciation in project under development Increase in project under development Net cash outflow from investing activities Financing activities Raising of bank loan Injection of capital Amounts due from fellow subsidiaries Amount due to fellow subsidiaries Amount due to shareholder Net cash inflow from financing activities Increase in cash and cash equivalents Cash and cash equivalents at 1 January/22 April Cash and cash equivalents at 30 June/31 December Cash and cash equivalents at 30 June/31 December represented by Bank balances and cash	1-1-2006 to 30-6-2006 RMB’000 –	22-4-2005 to 31-12-2005 RMB’000 (69) (69) (4) (30,474) 438 964 26 (29,119) (2,470) 121 (128,419) (130,768) 50,000 100,000 (41,639) 52,977 944 162,282 2,395 – 2,395 2,395
	– 4 (43,311) 1,466 869 (26) (40,998) – 160 (74,548) (74,388) 170,000 – 27,699 (31,032) – 166,667 51,281 2,395	(69 (4 (30,474 438 964 26
		(29,119
		(2,470 121 (128,419
		(130,768
		50,000 100,000 (41,639 52,977 944
		162,282
		2,395 –
	53,676 53,676

– 106 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Company was incorporated in the PRC on 22 April 2005 with limited liability.

There are two co-operative parties to Hunan Huayou, namely (China Huayou Group Corporation), a company established in the PRC and (Beijing Xin Hua Lian Gas Investment Co. Ltd), a company incorporated in the PRC. The registered office and place of address of the Company is located at No. 268 Dongting Road, Changdeng City, Hunan Province, PRC.

The Company is principally engaged in the construction of a main gas pipeline extending from Changsha City, PRC to Changda City, PRC.

The financial statements are presented in Renminbi dollars which is the same as functional currency of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

Impairment of assets

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement in the period in which it arises.

Income tax

Cash and cash equivalents

– 107 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

For the purpose of balance sheet, cash and cash equivalents comprised cash on hand and at banks, including term deposits, which are not restricted as to use.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Property, plant and equipment

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

The cost of an asset comprises its purchase price and any directly attributable costs of bring the assets to its working condition and location for its intended use. Expenditure incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the property, plant and equipment, the expenditure is capitalized as an additional cost of that asset.

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purposes are as follows:

Computer equipment	25%
Office equipment	20%
Motor vehicles	12.5%

Project under development

Project under development are stated at cost less any identified impairment losses, if any. Cost of project under development comprises its purchase price of materials, construction costs and any directly attributable cost of bring the project to its working condition and location for its intended use. Depreciation of assets commences when they are available for use (i.e. when they are in the location and condition necessary for them to capable of operating in the manner intended by management).

Operating leases

Employee benefits

The employees of the Company that operates in the People’s Republic of China (the “PRC”) are required to participate in central pension scheme operated by the local municipal government. It is required to contribute certain percentage of their covered payroll to the central pension scheme to fund the retirement benefits. The local municipal government undertakes to assume the retirement benefits obligations of all existing and future retired employees of the Company. The only obligation of the Company with respect to the central pension scheme is to meet the required contributions under the scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an qualifying assets, are capitalized as part of the cost of those assets. Capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

– 108 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

Provisions

Provisions are recognized when the Company has present legal or constructive obligation as a result of past event, it is probable that an outflow of resources will be required to settle the obligations, and a reliable estimate of the amount can be made. Where the Company expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.

Foreign currency translation

Transactions in currencies other than the functional currency of the Company are recorded in its functional currency at the applicable exchange rates ruling at the transaction dates. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable exchange rates ruling at that date. Exchange differences are dealt with in the income statement.

Financial instruments

Financial assets

The Company’s financial assets are classified into one of the two categories, including financial assets at fair value through profit or loss, loans and receivables. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Financial assets at fair value through profit or loss

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade and other receivables, deposits and loan receivables) are carried at amortized cost using the effective interest method, less any identified impairment losses. An impairment loss is recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

Financial liabilities and equity

An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The Company’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

– 109 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

Other financial liabilities

Other financial liabilities including trade and other payables and borrowings are subsequently measured at amortized cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue

costs.

3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

(a) Depreciation of property, plant and equipment

Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, after taking into account of their estimated residual value. The determination of the useful lives and residual values involve management’s estimation. The Company assesses annually the residual value and the useful life of the property, plant and equipment and if the expectation differs from the original estimate, such a difference may impact the depreciation in the year and the estimate will be changed in the future period.

(b) Fair value

The fair value of bank balances and cash, prepayments, deposits, trade debtors, trade creditors, accrued liabilities and bank borrowings are not materially different from there carrying amounts because of the short maturities of these instruments.

4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company’s major financial instruments include trade debtors, deposits and prepayments, bank balances and cash, trade creditors, accrued charges and borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

(a) Business risk

The operations of natural gas industry are substantially influenced by global political and economic development. Accidents, wars, natural disasters, etc. may have material impact on Hunan Huayou or the industry as a whole. In addition, Hunan Huayou conducts its principal operations in the PRC and accordingly us subject to special consideration and significant risks including political, economic and legal environment, and influence of the PRC government.

(b) Foreign currency risk

The Company operates in the PRC with the transactions settled in RMB principally and did not have any significant exposure to foreign exchange risk.

(c) Interest rate risk

The Company’s fair value interest rate risk related primarily to the Company’s bank borrowings. The Company exposure to interest rate risk is subject to the change of interest rate in the market.

– 110 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

5. REVENUE AND SEGMENT INFORMATION

The Company did not have any business revenue during the Relevant Periods.

Business segments

As the Company did not have any business revenue, no business segmental information is prepared by the Company.

Geographical segments

All of the activities of the Company are based in the PRC and all of the Company’s loss before taxation is wholly derived from the PRC. In addition, the Company’s assets are located in the PRC.

6. LOSS FROM OPERATIONS

	1-1-2006	22-4-2005
	to	to
	30-6-2006	31-12-2005
	RMB’000	RMB’000
Loss before taxation has been arrived at after charging:
Formation fee	–	69

7. INCOME TAX EXPENSES

As the Company is a tax loss for the Relevant Periods, provision for taxation is considered not necessary.

Income tax expenses for the period can be reconciled to the loss before taxation per the income statement as follows:

Loss before taxation Taxation in the domestic income tax rate Tax effect of utilization of tax losses not previously recognized	1-1-2006 to 30-6-2006 RMB’000 –	22-4-2005 to 31-12-2005 RMB’000 (69

	– –	(23 23
	–	–

As at the end of each of Relevant Periods, the Company had no material unprovided deferred tax.

– 111 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

8. PROPERTY, PLANT AND EQUIPMENT

Computer equipment RMB’000 114	Office equipment RMB’000 89	Motor vehicles RMB’000 2,267	Total RMB’000 2,470
11	11	99	121
103	78	2,168	2,349

114 11 16 27	89 11 9 20	2,267 99 135 234	2,470
			121 160
			281
87	69	2,033	2,189

9. PROJECT UNDER DEVELOPMENT

Balance b/f Additions Balance c/f	As at 30-6-2006 RMB’000 128,419 74,548 202,967	As at 31-12-2005 RMB’000 – 128,419
		128,419

Project under development represent the development and construction of main gas pipeline from Changsha City to Changda City, Hunan, PRC. The project is divided into 5 sectors and the total length of gas pipe under construction is approximately 182 kilometer.

During the Relevant Periods, the following expenses were capitalized into project under development:

	1-1-2006	22-4-2005
	to	to
	30-6-2006	31-12-2005
	RMB’000	RMB’000
Finance cost:
Interest on long term bank loan	3,749	727
Depreciation	160	121
Staff costs	1,046	1,164
Interest income	(127)	(208)

– 112 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

Directors’ emoluments

Details of the emoluments paid to the Directors of the company are as follows:

Fees Salaries and allowances	1-1-2006 to 30-6-2006 RMB’000 – 24 24	22-4-2005 to 31-12-2005 RMB’000 – 32
		32

Employees’ emoluments

The five individuals whose emoluments were the highest in the Company are as follows:

Director Senior management Number of highest paid employees were less than RMB1,000,000	1-1-2006 to 30-6-2006 RMB’000 24 51 75 5	22-4-2005 to 31-12-2005 RMB’000 32 68
		100

		5

10. TRADE DEBTORS

As at 30-6-2006 RMB’000 Trade debtors – The following is an aged analysis of trade debtors at the respective balance dates: As at 30-6-2006 RMB’000 Age: Under one year – AMOUNTS DUE FROM FELLOW SUBSIDIARIES As at 30-6-2006 RMB’000 (Huayou Industrial Development Co.) 13,686 (Changde Huayou Gas Co. Ltd) 254 13,940	As at 31-12-2005 RMB’000 4

	As at 31-12-2005 RMB’000 4

	As at 31-12-2005 RMB’000 41,385 254
	41,639

11. AMOUNTS DUE FROM FELLOW SUBSIDIARIES

– 113 –

ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

APPENDIX III

The amounts are unsecured, interest and arisen from normal course of business.

12. TRADE CREDITORS

As at 30-6-2006 RMB’000 Trade creditors 1,904 The following is an aged analysis of trade creditors at the respective balance dates: As at 30-6-2006 RMB’000 Age: Under one year 1,904 13. AMOUNT DUE TO FELLOW SUBSIDIARY As at 30-6-2006 RMB’000 (Huayou Industrial Development Co.*) 21,945	As at 31-12-2005 RMB’000 438

	As at 31-12-2005 RMB’000 438

	As at 31-12-2005 RMB’000 52,977

The amount is unsecured, interest free and arisen from normal course of business.

14. AMOUNT DUE TO SHAREHOLDER

As at 30-6-2006 RMB’000 (China Huayou Group Corporation*) 944 The amount is unsecured, interest free and has no fixed repayment term.	As at 31-12-2005 RMB’000 944

15. PAID UP CAPITAL

						As at	As at
						30-6-2006	31-12-2005
						RMB’000	RMB’000
Registered	capital	and	paid	up	capital	100,000	100,000

At incorporation, registered capital of the Company was RMB10,000,000. At a general meeting of shareholders held on 10 May 2005, registered capital of the Company was increased from RMB10,000,000 to RMB100,000,000 to provide additional working capital to the Company.

– 114 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE HUNAN JOINT VENTURE

16. BANK BORROWINGS

(a) Bank borrowings of the Company which are analysed as follows:

Bank loan (b) The Company’s bank borrowings were repayable as follows: Bank borrowings repayable within: One year One to two years Two to five years Over five years	30-6-2006 RMB’000 220,000 30-6-2006 RMB’000 – – 70,000 150,000 220,000	31-12-2005 RMB’000 50,000

		31-12-2005 RMB’000 – – 50,000 –
		50,000

Bank loans have been secured by a charge over project under development of the Company. The average interest rate paid on bank loans during the period was charged at prevailing interest rate.

17. COMMITMENTS

The Company had no significant operating lease commitments and capital commitments at 30 June 2006.

18. CONTINGENT LIABILITIES

The Company had no significant contingent liabilities at 30 June 2006.

19. RELATED PARTY TRANSACTIONS

(a) Transaction with connected or related parties

During the Relevant Periods, the Company had the following related party transactions:

				1-1-2006	22-4-2005
				to	to
				30-6-2006	31-12-2005
				RMB’000	RMB’000
Purchase	of	materials for project under development:
			(Huayou Industrial Development Co.*)	52,917	30,614
Utilities	expenses paid:		(Changde Huayou Gas Co. Ltd*)	–	213

Balances due from related parties are stated at Note 11, 13 and 14 to the financial statements.

For identification purpose only

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Hunan Huayou in respect any period subsequent to 30 June 2006. In addition, no dividend or distribution has been declared, made or paid by Hunan Huayou in respect of any period subsequent to 30 June 2006.

– 115 –

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

The following is the text of a report, prepared for inclusion in this circular, received from W.H. Tang & Partners CPA Limited, the independent reporting accountants.

==> picture [233 x 76] intentionally omitted <==

==> picture [66 x 44] intentionally omitted <==

19 October 2006

The Directors

China Vanguard Group Limited

30th Floor

Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

We report on the pro forma financial statements of pro forma consolidated statement of assets and liabilities, (“Pro Forma Financial Statements”) of China Vanguard Group Limited (formerly known as B & B Group Holdings Limited) (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) in connection with the acquisition of 48.33% equity interest in and 33% equity interest in (the “Acquisition”), which has been prepared, for illustrative purposes only, to provide information about how the Acquisition might have affected the financial information presented.

RESPONSIBILITIES

It is the responsibility solely of the Director of the Company to prepare the Pro Forma Financial Information in accordance with paragraph 31 of Chapter 7 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Rules”).

It is our responsibility to form an opinion, as required by with paragraph 31 of Chapter 7 of the Rules of the GEM Rules, on the 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 that dates of their issue.

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

BASIS OF OPINION

We conducted our work with reference to the Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars”. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjusting and discussing the Pro Forma Financial Information with the Directors of the Company.

Our work does not constitute an audit or a review in accordance with the Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express any such assurance on the Pro Forma Financial Information.

The Pro Forma Financial Information has been prepared on the basis set out in Appendix IV to the Circular for illustrative purpose only and, because of its nature, it may not give a indicative financial position of the Enlarged Group at 30 June 2006 or at any future date and result and cash flows of the Enlarged Group for the period ended 30 June 2006 or any future period.

OPINION

In our opinion:

(a) the Pro Forma Financial Information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Pro Forma Financial Information as disclosed pursuant to paragraph 7.31(1) of the GEM Rules.

Yours faithfully

W.H. Tang & Partners CPA Limited

Certified Public accountants Hong Kong

– 117 –

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

PRO FORMA FINANCIAL INFORMATION

1. Pro Forma Consolidated Statement of Assets and Liabilities

The following table is an illustrative pro forma consolidated statement of assets and liabilities of the Enlarged Group which has been prepared on the basis set out below for the purpose of illustration as if the Acquisition had been completed on 30 June 2006.

The pro forma consolidated statement of assets and liabilities of the Enlarged Group is prepared as if the Acquisition has been commenced on 1 July 2005 and is based on the audited balance sheet of and as at 30 June 2006 as extracted from the accountants’ report of and as set out in Appendices II and III to this circular, and the pro forma consolidated statement of assets and liabilities of the Group as at 30 June 2006, and after making certain pro forma adjustments as set out below.

The pro forma consolidated statement of assets and liabilities of the Enlarged Group has been prepared to provide the pro forma financial information of the Enlarged Group as if the Acquisition had been completed on 30 June 2006. As it has been prepared for illustrative purpose only and because of its nature, it may not given a true picture of the results of the Enlarged Group as at 30 June 2006 in respect of which it is prepared or for any future financial date.

– 118 –

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

Pro Forma Consolidated Statement of Assets and Liabilities

Non-current assets Property, plant and equipment Goodwill Other intangible assets Deposits made on acquisition of property, plant and equipment Investment in associates Current assets Inventories Trade and other receivables and prepayments Pledged bank deposits Bank balances and cash TOTAL ASSETS Current liabilities Trade and other payables Taxation Bank borrowings – secured Non-current liability Other loan TOTAL LIABILITIES NET ASSETS	The Group as at 30 June 2006 Pro forma adjustments HK$’000 HK$’000 Notes 17,588 135,061 6,586 3,756 238 205,272 1 and 3	Pro forma balance HK$’000 17,588 135,061 6,586 3,756 205,510
	163,229 7,436 90,458 13,308 244,983 356,185	368,501
		7,436 90,458 13,308 244,983
		356,185
	519,414	724,686

	30,459 99 12,505 43,063 22,500 205,153 2	30,459 99 12,505
		43,063
		227,653
	65,563 453,851	270,716

		453,970

– 119 –

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX IV

Notes:

Upon completion of the Acquisition, the Company will apply the equity method to account for the acquisition of associates in the consolidated statement of assets and liabilities of the Enlarged Group. In applying the equity method, the investments in associates is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the acquisition date.
The adjustment reflects the Acquisition at the purchase price of approximately HK$205 million which will be supported by other borrowings raised by the Group to complete the Acquisition.
The adjustment reflects the share of profit of associates of approximately HK$119,000. As Hunan joint venture did not have any profit or loss for the period ended 30 June 2006, the share of profit was solely for sharing of profit from Changde joint venture.

– 120 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

The following is the text of a letter, summary of value and valuation certificate, prepared for the purpose of incorporation in this circular received from RHL Appraisal Ltd., an independent valuer, in connection with its valuation as at 31 July 2006 of the property interests held by the Enlarged Group.

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21 August 2006

The Board of Directors

China Vanguard Group Limited

30th Floor

Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

Re: Valuation of property interests situated in Changde City, Hunan Province, the People’s Republic of China and in Hong Kong

In accordance with the instructions from China Vanguard Group Limited (referred to as the “Company”) to value the property interests (referred to as the “properties”) held by Changde Huayou Gas Company Limited (referred to as “Changde Huayou”) situated in Changde City, Hunan Province, the People’s Republic of China (the “PRC”) and the Company (Changde Huayou and the Company are altogether referred to as the “Enlarged Group”), we confirm that we have carried out inspections of the properties, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market values of the properties as at 31 July 2006 (the “date of valuation”).

BASIS OF VALUATION

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

– 121 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

VALUATION METHODOLOGY

The properties are valued by the comparison method where comparison based on prices realised or market prices of comparable properties is made. Comparable properties of similar size, character and location are analysed and carefully weighed against all the respective advantages and disadvantages of each property in order to arrive at a fair comparison of capital values.

Where, due to the nature of the buildings and structures of the properties, there are no market sales comparable readily available, they have been valued on the basis of depreciated replacement costs (DRC).

DRC is defined as “an estimate of the market value on existing use of the land plus the current gross replacement (reproduction) costs of the improvements, less allowances for physical deterioration and all relevant forms of obsolescence and optimization”. The underlying theory of this basis is the Market Value of the appraised property should, at least, be equivalent to the replacement cost of the remaining service potential of the appraised property i.e. the DRC of the appraised property. In the absence of known market for the property, the DRC generally furnishes the most reliable indication of value for property where it is not practicable to ascertain its value on market bases.

The valuation of the properties on the basis of DRC is on the assumption that the properties are subject to the test of adequate potential profitability of the business having due regard to the values of the total assets employed and the nature of the operation.

We have ascribed no commercial value to those land parcels as highlighted in the valuation certificate attached herewith on the ground that land use rights therein have been granted by way of administration allocation with undefined term. As advised by the PRC legal adviser to the Company, these allocated land use rights are restricted for the use of the grantee and are barred from being transferred on the market.

We have ascribed no commercial value to the property rented by the Company due to the non-assignable nature of the leasehold interest or the lack of substantial profit rent.

ASSUMPTIONS

Save for the allocated land use rights to which no commercial value is ascribed, our valuation has been made on the assumption that owners sell the properties on the market in their existing state without the benefit of deferred terms contracts, leaseback, joint ventures, management agreements or any similar arrangement which would serve to affect the value of the properties.

For those properties held by the owners by means of long term Land Use Rights granted by the Government, we have assumed that the owner has free and uninterrupted rights to use the properties for the whole of the unexpired term of the respective land use rights. We have also assumed that they can be freely transferred on the market free from any land premium or expenses of substantial amount payable to the Government.

Other special assumptions for our valuation (if any) would be stated out in the footnotes of the valuation certificate attached herewith.

– 122 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

TITLESHIP

We have been provided with copies of legal documents regarding the properties. However, we have not verified ownership of the properties and the existence of any encumbrances that would affect ownership of them.

We have also relied upon the legal opinion provided by Hills & Co. ( ), an independent PRC legal adviser, to the Company on the relevant laws and regulations in the PRC, on the nature of land use rights in the properties and the validity of the leasehold interest in the properties in Group II.

LIMITING CONDITIONS

No allowance has been made in our report for any charges, mortgages or amounts owing on the properties nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature, which could affect its value. Our valuation have been made on the assumption that the seller sells the property on the market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement, which could serve to affect the values of the properties.

We have relied to a very considerable extent on the information given by the Company and have accepted advice given to us on such matters as tenure, planning approvals, statutory notices, easements, particulars of occupancy, lettings, and all other relevant matters.

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the properties but have assumed that the site areas shown on the documents and official site plans handed to us are correct. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations.

We have carried out inspections of the properties. However, no structural survey has been made. In the course of our inspection, we did not note any serious defects. We are unable to report whether the buildings and structures of the properties are free of rot, infestation or any other structural defects. No test was carried out on any of the services of the buildings and structures of the properties.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We have also sought confirmation from the Company that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and we have no reason to suspect that any material information has been withheld.

– 123 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

In valuing the properties, we have complied with all the requirements contained in Chapter 8 of the Rules Governing the Listing of Securities on the Growth Enterprise Market and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited; the HKIS Valuation Standards on Properties (First Edition 2005) published by The Hong Kong Institute of Surveyors effective from 1 January 2005.

Unless otherwise stated, all monetary sums stated in this report are in Renminbi (RMB).

Our summary of valuation and valuation certificate are attached herewith.

Yours faithfully, for and on behalf of RHL Appraisal Ltd.

Tse Wai Leung MFin BSc MRICS MHKIS RPS(GP) Director

Sandra S.W. Lau

MFin MHKIS AAPI RPS(GP) Director

Tse Wai Leung is a member of the Royal Institution of Chartered Surveyors, a member of The Hong Kong Institute of Surveyors, a Registered Professional Surveyor in General Practice and a qualified real estate appraiser in the PRC. Sandra S.W. Lau is a member of the Hong Kong Institute of Surveyors, an Associate of the Australian Property Institute and a Registered Professional Surveyor in General Practice. Both of them are on the list of Property Valuers for Undertaking Valuations for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers of the Hong Kong Institute of Surveyors, Registered Business Valuer under the Hong Kong Business Forum and have over 10 years’ experience in valuation of properties in Hong Kong, in Macau and in the PRC.

– 124 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

SUMMARY OF VALUATION

		Market value in
		existing state
		as at
	Property	31 July 2006
		RMB
	Group I – Properties held and occupied by Changde Huayou
1.	Land and buildings of Yanping Gas Station	9,500,000
	Yanping Village
	Changde City
	Hunan Province
	The PRC
2.	Land and buildings of Gas Storage Station	3,950,000
	Huangmuguan
	Changde City
	Hunan Province
	The PRC
3.	Land and buildings of Fuhai Gas Station	2,100,000
	Changci Road
	Jubao Village
	Hefu Town
	Wuling District
	Changde City
	Hunan Province
	The PRC
4.	Levels 1 to 3 of the building on	1,650,000
	No. 581 Renmin Dong Road
	Donghu Xiang
	Wuling District
	Changde City
	Hunan Province
	The PRC

– 125 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

		Market value in
		existing state
		as at
	Property	31 July 2006
		RMB
5.	Portion of Levels 3 to 6, 8 and 9 of	5,600,000
	Control Station
	Dongting Avenue Central
	Wuling District
	Changde City
	Hunan Province
	The PRC
6.	Land and buildings of Deshan Pump Station	1,800,000
	Changsha-Changde Gas Pipeline
	Hunan Province
	The PRC
	Sub-total:	24,600,000
	Group II – Properties held by Changde Huayou for investment
7.	Warehouse on	940,000
	Qingnian Bei Road
	Si Cun
	Wuling District
	Changde City
	Hunan Province
	The PRC
8.	Land and buildings of Service Station	2,280,000
	No. 581 Renmin Dong Road
	Donghu Xiang
	Wuling District
	Changde City
	Hunan Province
	The PRC

– 126 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

Property 9. Land and buildings of Control Station Dongting Avenue Central Wuling District Changde City Hunan Province The PRC 10. Shop Nos. B-11-19 and B-11-20 on Level 1 Zhilan Estate Nanping Wuling District Changde City Hunan Province The PRC Sub-total: Group III – Property rented by the Company 11. 30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong Grand Total:	Market value in existing state as at 31 July 2006 RMB 15,400,000 160,000
	18,780,000
	No commercial value
	43,380,000

– 127 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

VALUATION CERTIFICATE

Group I – Properties held and occupied by Changde Huayou

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
1.	Land and buildings	The property comprises three	The property is	9,500,000
	of Yanping Gas	parcels of contiguous land with a	currently occupied by
	Station	total area of 26,639.90 square	the owner as Gas
	Yanping Village	metres on which a total of twelve	Storage Station.
	Changde City	single to 2-storey buildings and
	Hunan Province	structures are erected.
	The PRC
		The buildings and structures have
		a total gross floor area of
		2,666.26 square metres and were
		completed in 2003. They include
		administration building,
		transformer room, pump room,
		pressurizing plant room,
		compressor room, liquefied gas
		storage tank rooms, gas
		liquefying workshop, boiler room
		and power plant room.
		The land use rights in a portion
		of the subject land with an area
		of 9,818 square metres have been
		granted by way of administrative
		allocation for an undefined term
		whilst the land use rights in the
		remaining portion the subject
		land are held for a term expiring
		on 14 July 2050.

Notes:

As revealed by a Land Use Right Certificate (Ref Nos. Chang Guo Yong (2005) No. 14 dated 26 January 2005, the land use rights in a portion of the subject land with an area of 9,818 square metres were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) by way of administrative allocation for public facility purposes for an undefined land use right term. As the aforesaid land use rights were granted by way of administrative allocation and are prohibited from being transferred on the market, we have ascribed no commercial value to this land portion of the property.
As revealed by two sets of Land Use Right Certificate Ghang Guo Yong (2005) No. 15 and Chang Guo Yong (2005) No. 16 all dated 26 January 2005, the land use rights of the remaining portion of the subject land parcels with a total area of 16,821.9 square metres were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial uses for a term of years expiring on 14 July 2050.
Building Ownership Certificates for the subject buildings and structures have not yet been issued. Our valuation has been made on the basis
(i) Changde Huayou shall have no legal impediment and subject to no expenses of substantial amount for the application of building ownership certificate; and
(ii) All buildings and structures have been constructed in accordance with relevant construction standards and regulations and are all safety in use for the designed purposes.

– 128 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal advisers, which contains, inter alia, the followings:
(i) The land use rights in the portion of the property with an area of 9,818 square metres is held by Changde Huayou by way of administrative allocation and it is required to pay land premium to the government in order to dispose, lease or mortgage of the property;
(ii) The land use rights in the remaining portion of the property is held by Changde Huayou for a term expiring on 14 July 2050;
(iii) The land interests is legal, valid and protected by law;
(iv) After completing statutory building completion examination, the Building Ownership Certificate of the property will be issued in the name of Changde Huayou.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Not yet applied for

– 129 –

PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

APPENDIX V

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
2.	Land and buildings	The property comprises two	The property is	3,950,000
	of Gas Storage	parcels of contiguous land with a	currently occupied by
	Station	total area of 26,073.50 square	the owner as Gas
	Huangmuguan	metres on which a total of four	Storage Station.
	Changde City	single to 2-storey buildings and
	Hunan Province	structures are erected.
	The PRC
		The buildings and structures have
		a total gross floor area of
		1,080.67 square metres and were
		completed in 2004. They include
		transformer room, administration
		building, transformer room, pump
		room and fire sprinkler valve
		chamber room.
		The land use rights of the
		property were granted by way of
		administrative allocation for an
		undefined term.

Notes:

As revealed by two sets of Land Use Right Certificate (Ref Nos. Chang Guo Yong (2005) No. 17 and Chang Guo Yong (2005) No. 18 all dated 26 January 2005, the land use rights of the subject land parcels were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for public facilities and access road uses for an undefined term.
Building Ownership Certificates for the subject buildings and structures have not yet been issued. Our valuation has been made on the basis
(i) Changde Huayou shall have no legal impediment and subject to no expenses of substantial amount for the application of building ownership certificate; and
(ii) All buildings and structures have been constructed in accordance with relevant construction standards and regulations and are all safety in use for the designed purposes.
As the land use rights were granted by way of administrative allocation and are prohibited from being transferred on the market, we have ascribed no commercial value to the land portions of the property.
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou by way of administrative allocation and it is required to pay land premium to the government in order to dispose, lease or mortgage of the property;
(ii) The land interests is legal, valid and protected by law;
(iii) After completing statutory building completion examination, the Building Ownership Certificate of the property will be issued in the name of Changde Huayou.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Not yet applied for

– 130 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
3.	Land and buildings	The property comprises a parcel	The property is	2,100,000
	of Fuhai Gas	of contiguous land with a total	currently occupied by
	Station	area of 7,246.35 square metres	the owner as Gas
	Changci Road	on which a total of seven single	Station.
	Jubao Village	to 2-storey buildings and
	Hefu Town	structures are erected.
	Wuling District
	Changde City	The buildings and structures have
	Hunan Province	a total gross floor area of 966.77
	The PRC	square metres. They include
		office building, gate house, pump
		room, transformer room, flooding
		gate and commercial building.

The land use rights of the property were granted for a term expiring on 5 November 2051.

Notes:

As revealed by a set of Land Use Right Certificate (Ref No. Chang Guo Yong (2005) No. 19 dated 26 January 2005, the land use rights of the subject land parcel were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial uses for a term expiring on 5 November 2051.
As revealed by six sets of Building Ownership Certificates (Ref Title: Chang Fang Chan Zheng Wu), the detail breakdown of the subject buildings and structures are as follows:

Ref No. No. of storey 00135750 2 00135752 1 00135753 1 00135754 1 00135758 1 00135755 2 Total Gross Floor Area:	Gross floor area Usage (sq.m.) 149.78 Office 140.03 Others 34.94 Others 22.22 Others 371.00 Industrial 137.00 Industrial 854.97

Building Ownership Certificates for a single storey car port structure with a gross floor area of 111.80 square metres have not yet been issued. Our valuation has been made on the basis
(i) Changde Huayou shall have no legal impediment and subject to no expenses of substantial amount for the application of building ownership certificate; and
(ii) the car port structure has been constructed in accordance with relevant construction standards and regulations and are all safety in use for the designed purposes.

– 131 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou for a term expiring on 5 November 2051;
(ii) Exception of a single storey car port structure, the aforesaid buildings with a total gross floor area of 854.97 square metres is held by Changde Huayou;
(iii) The property interests is legal, valid and protected by law;
(iv) The aforesaid buildings and structures can be freely transferred, mortgaged or leased.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate:	Yes
Red-line Drawing:	Yes
Building Ownership Certificate:	Yes

– 132 –

PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

APPENDIX V

Property Description and tenure
1. Levels 1 to 3 of The subject development the building on comprises a parcel of contiguous No. 581 Renmin land with a total area of 1,745.10 Dong Road square metres on which a total of Donghu Xiang three single to 5-storey buildings Wuling District and structures completed in 2000. Changde City Hunan Province The property comprises The PRC retail/office premises on levels 1 to 3 of the aforesaid 5-storey building. The total gross floor area of the property is approximately of 558.53 square metres.

Market value in existing state Particulars of as at occupancy 31 July 2006 RMB The property is 1,650,000 occupied by the owner as a service centre such as cashier, administration office, stove and other gas product display etc.

The land use rights of the property were granted for a term expiring on 20 November 2041.

Notes:

As revealed by a set of Land Use Right Certificate (Ref No. Chang Guo Yong (2005) No. 21 dated 26 January 2005, the land use rights of the subject land parcel were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial and commercial uses for a term expiring on 20 November 2041.
As revealed by the Building Ownership Certificate (Ref Title: Chang Fang Chan Zheng Wu 00135749), the property is held by Changde Huayou.
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou for a term expiring on 20 November 2041;
(ii) The aforesaid buildings and structures are held by Changde Huayou;
(iii) The property interests is legal, valid and protected by law;
(iv) The land and building of the property can be freely transferred, mortgaged or leased.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Yes

– 133 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
5.	Portion of Levels	The subject development	The property is	5,600,000
	3 to 6, 8 and 9 of	comprises a parcel of contiguous	occupied by the
	Control Station	land with a total area of 6,840.40	owner for office
	Dongting Avenue	square metres on which a total of	purpose.
	Central	three single to 9-storey buildings
	Wuling District	and structures are erected in
	Changde City	2004.
	Hunan Province
	The PRC	The property comprises office
		premises on portion of levels
		3 to 6, 8 and 9 of the aforesaid
		9-storey building. The total gross
		floor area of the property is
		approximately of 2,874.87 square
		metres.
		The land use rights of the
		property were granted for a term
		expiring on 29 November 2041.

Notes:

As revealed by a set of Land Use Right Certificate (Ref No. Chang Guo Yong (2005) No. 192 dated 26 January 2005, the land use rights of the subject land parcel were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial and commercial uses for a term expiring on 29 November 2041.
As revealed by three sets of Building Ownership Certificate (Ref Title: Chang Fang Chan Zheng Wu 00133254), the property is held by Changde Huayou.
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou for a term expiring on 29 November 2041;
(ii) The aforesaid buildings and structures are held by Changde Huayou;
(iii) The property interests is legal, valid and protected by law;
(iv) The aforesaid 9-storey building is subject to a mortgage;
(v) The land and building of the property can be freely transferred, mortgaged or leased with the mortgagee prior consent.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Yes

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PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

APPENDIX V

				Market value in
				existing state
			Particulars of	as at
	Property	Description	occupancy	31 July 2006
				RMB
6.	Land and	Deshan Pump Station comprises	The property is	1,800,000
	buildings of	a parcel of land dotted in the	currently occupied by
	Deshan Pump	Changsha-Changde Gas Pipeline	the owner as pump
	Station	running in between Changsha	station.
	Changsha-Changde	City and Changde City. Erecting
	Gas Pipeline	on the land parcel is three single
	Hunan Province	storey buildings and structures
	The PRC	completed in 2005.

The land area and the gross floor area are of the property are 8,653.33 square metres and 677.90 square metres respectively.

Notes:

As revealed by a set of Land Use Right Certificate dated 9 May 2005, the land use rights for the land parcel of Deshan Pump Station were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for composite use for a term expiring on 21 August 2046.
In our valuation, we have assumed that the property (exception of the Deshan Pump Station) is held for a term of 50 years for industrial purpose (being the maximum term for land use for industrial purpose under the land law of the PRC).
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou. Upon obtaining the Land Use Rights Certificate, the land use rights in the remaining portion of the property will be held by Hunan Huayou Gas Supply Co., Ltd.;
(ii) The land interests in the property is legal, valid and protected by law;
(iii) The land use rights in the property can be freely transferred, mortgaged or leased.
(iv) After completing statutory building completion examination, the Building Ownership Certificate of the property will be issued in the name of Changde Huayou.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: No

– 135 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

Group II – Properties held by Changde Huayou for investment

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
7.	Warehouse on	The property comprises a parcel	The property is	940,000
	Qingnian Bei Road	of contiguous land with a total	subject to a tenancy
	Si Cun	area of 1,916.89 square metres	for a term
	Wuling District	on which a single storey	commencing on 1
	Changde City	warehouse building is erected in	January 2006 and
	Hunan Province	about 1990’s.	expiring on 31
	The PRC		December 2006 at an
		The building structure has a	annual rent of
		gross floor area of 453.02 square	RMB5,000.
		metres.
		The land use rights of the
		property were granted for a term
		expiring on 20 November 2051.

Notes:

As revealed by a set of Land Use Right Certificate (Ref No. Chang Guo Yong (2005) No. 20 dated 26 January 2005, the land use right of the subject land parcel were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial uses for a term expiring on 20 November 2051.
As revealed by Building Ownership Certificate Ref No. Chang Fang Chan Zheng Wu 00135757, the building structure is a single storey commercial building with a gross floor area of 453.02 square meters.
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou for a term expiring on 20 November 2051;
(ii) The aforesaid building is held by Changde Huayou;
(iii) The property interests is legal, valid and protected by law;
(iv) The land and building of the property can be freely transferred, mortgaged or leased.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Yes

– 136 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
8.	Land and buildings	The property comprises a parcel	The property is	2,280,000
	of Service Station	of contiguous land with a total	subject to a tenancy
	No. 581 Renmin	area of 1,745.10 square metres	for a term
	Dong Road	on which a total of three single	commencing on 1
	Donghu Xiang	to 5-storey buildings (excluding	February 2006 and 31
	Wuling District	the retail/office premises on	January 2007 at an
	Changde City	levels 1 to 3 as stated in property	annual rent of
	Hunan Province	numbered 4) and structures are	RMB45,000.
	The PRC	erected. The aforesaid buildings
		and structures were fully
		completed in 2000.
		The property has a total gross
		floor area of 911.21 square
		metres. They include office
		buildings and residential
		building.
		The land use rights of the
		property were granted for a term
		expiring on 20 November 2041.

Notes:

As revealed by a set of Land Use Right Certificate (Ref No. Chang Guo Yong (2005) No. 21 dated 26 January 2005, the land use rights of the subject land parcel were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial and commercial uses for a term expiring on 20 November 2041.
As revealed by three sets of Building Ownership Certificate (Ref Title: Chang Fang Chan Zheng Wu), the detail breakdown of the subject buildings and structures are as follows:

Ref No. No. of storey 00135748 2 00135749 5 00135751 1 Total Gross Floor Area:	Gross floor area Usage (sq.m.) 379.74 Office 930.89 Office 159.11 Residential 1,469.74

We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou for a term expiring on 20 November 2041;
(ii) The aforesaid buildings and structures are held by Changde Huayou;
(iii) The property interests is legal, valid and protected by law;
(iv) The land and building of the property can be freely transferred, mortgaged or leased with the mortgagee prior consent.

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APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Yes

– 138 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

				Market value in
				existing state
			Particulars of	as at
	Property	Description and tenure	occupancy	31 July 2006
				RMB
9.	Land and buildings	The property comprises a parcel	The property is	15,400,000
	of Control Station	of contiguous land with a total	subject to various
	Dongting Avenue	area of 6,840.40 square metres	tenancies for terms
	Central	on which a total of three single	expiring on between
	Wuling District	to 9-storey buildings and	31 July 2007 and 31
	Changde City	structures (excluding the office	August 2014 at a total
	Hunan Province	premises on levels 3 to 6, 8 and	annual rent of
	The PRC	9 of the 9-storey building as	RMB1,322,000.
		stated in property numbered 5)
		are erected in 2004.
		The buildings and structures have
		a total gross floor area of
		7,663.32 square metres. They
		include composite buildings and
		residential building.
		The land use rights of the
		property were granted for a term
		expiring on 29 November 2041.

Notes:

As revealed by a set of Land Use Right Certificate (Ref No. Chang Guo Yong (2005) No. 192 dated 26 January 2005, the land use rights of the subject land parcel were granted to Changde Huayou Gas Company Limited (“Changde Huayou”) for industrial and commercial uses for a term expiring on 29 November 2041.
As revealed by three sets of Building Ownership Certificate (Ref Title: Chang Fang Chan Zheng Wu), the detail breakdown of the subject buildings and structures are as follows:

Ref No. No. of storey 00133252 1 00133253 4 00133254 9 Total Gross Floor Area:	Gross floor area Usage (sq.m.) 34.06 Residential 1,665.60 Composite 8,838.53 Composite 10,538.19

We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The land use rights in the property is held by Changde Huayou for a term expiring on 29 November 2041;
(ii) The aforesaid buildings and structures are held by Changde Huayou;
(iii) The property interests is legal, valid and protected by law;
(iv) The aforesaid 9-storey building is subject to a mortgage;
(v) The land and building of the property can be freely transferred, mortgaged or leased.

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APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate: Yes Red-line Drawing: Yes Building Ownership Certificate: Yes

– 140 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

				Market value in
				existing state
			Particulars of	as at
	Property	Description	occupancy	31 July 2006
				RMB
10.	Shop Nos. B-11-19	The property comprises two	Shop No.B-11-20 is	160,000
	and B-11-20	retail units on ground floor level	subject to a tenancy at
	on Level 1	of a single storey building	a monthly rent of
	Zhilan Estate	completed in 2001.	RMB350 on monthly
	Nanping		basis whilst the
	Wuling District	The total gross floor area of the	remaining portion of
	Changde City	property is of 81.22 square	the property is vacant.
	Hunan Province	metres.
	The PRC

Notes:

As revealed by the Building Ownership Certificate (Ref Title: Chang Fang Chan Zheng Wu 00135756), the property is held by Changde Huayou Gas Company Limited (“Changde Huayou”) for commercial use.
In our valuation, we have assumed that the property is held for a term of 40 years for commercial purpose (being the maximum term for land use for commercial purpose under the land law of the PRC).
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia, the followings:
(i) The property (building portion and the land use rights attributable to the subject shop units) is held by Changde Huayou;
(ii) The property interests is legal, valid and protected by law;
(iii) The property can be freely transferred, mortgaged or leased.
The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Building Ownership Certificate: Yes

– 141 –

APPENDIX V PROPERTY VALUATION REPORT ON CHANGDE JOINT VENTURE

Group III – Property rented by the Company

Market value in existing state Particulars of as at Property Description and tenure occupancy 31 July 2006 RMB 11. 30th Floor The property comprises the entire The property is No Commercial Value Sunshine Plaza office premises on 30th floor of currently occupied by No. 353 Lockhart a 38-storey commercial building the Company as Road completed in 1994. office. Wanchai Hong Kong The gross floor area of the 40/1150th Shares property is 5,130 square feet of and in the (476.59 square metres). Remaining Portion of Sub-Section 3 The property is rented by B & B of Section B of, International Marketing (HK) the Remaining Limited for a term of 1 year Portion of Section expiring on 2 July 2007 at a B of, Sub-Section monthly rent of HK$82,080 2 of Section B of, exclusive of rates, management Sub-Section 1 of fee and other outgoings. Section B of Marine Lot No. 439 and the Remaining Portion of, Section A and Section B of Inland Lot No. 2751

Notes:

The registered owner of the property is Dragon Asia Industrial (Holdings) Limited registered vide Memorial No. UB9187942 in consideration of HK$11,000,000 dated 15 March 2004.
By virtue of a tenancy agreement between Dragon Asia Industrial (Holdings) Limited (the Landlord) and B & B International Marketing (HK) Limited, a wholly-owned subsidiary of the Company, (the Tenant), the property is leased by the Tenant from the Landlord for a term of 1 year expiring on 2 July 2007 at a monthly rent of HK$82,080 exclusive of rates, management fee and other outgoings.

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PROPERTY VALUATION REPORT ON HUNAN JOINT VENTURE

APPENDIX VI

==> picture [73 x 79] intentionally omitted <==

21 August 2006

The Board of Directors

China Vanguard Group Limited

30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

Re: Valuation of Land and buildings of Changsha-Changde Gas Pipeline, Hunan Province, the People’s Republic of China (the “PRC”)

In accordance with the instructions from China Vanguard Group Limited (referred to as the “Company”) to value the Land and buildings of Changsha-Changde Gas Pipeline (referred to as the “property”) held by Hunan Huayou Natural Gas Transportation & Distribution Company Limited (referred to as “Hunan Huayou”), we confirm that we have carried out inspections of the property, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the property as at 31 July 2006 (the “date of valuation”).

Basis of Valuation

Valuation Methodology

The property has no commercial value on the reason that the land grant procedures have not yet been completed as at the valuation date.

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PROPERTY VALUATION REPORT ON HUNAN JOINT VENTURE

APPENDIX VI

Assumptions

For the property held by means of long term Land Use Rights granted by the Government, we have assumed that the owner has free and uninterrupted rights to use the property for the whole of the unexpired term of the respective land use rights. We have also assumed that they can be freely transferred on the market free from any land premium or expenses of substantial amount payable to the Government.

Other special assumptions for our valuation (if any) would be stated out in the footnotes of the valuation certificate attached herewith.

Titleship

We have been provided with copies of legal documents regarding the property. However, we have not verified ownership of the property and the existence of any encumbrances that would affect ownership of them.

We have also relied upon the legal opinion provided by Hills & Co. ( ), an independent PRC legal adviser, to the Company on the relevant laws and regulations in the PRC and on the nature of land use rights in the property.

Limiting Conditions

No allowance has been made in our report for any charges, mortgages or amounts owing on the property nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature, which could affect its value. Our valuation have been made on the assumption that the seller sells the property on the market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement, which could serve to affect the value of the property.

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the property but have assumed that the site areas shown on the documents and official site plans handed to us are correct. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations.

We have carried out inspections of the property. However, no structural survey has been made. In the course of our inspection, we did not note any serious defects. We are unable to report whether the buildings and structures of the property are free of rot, infestation or any other structural defects. No test was carried out on any of the services of the buildings and structures of the property.

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PROPERTY VALUATION REPORT ON HUNAN JOINT VENTURE

APPENDIX VI

In valuing the property, we have complied with all the requirements contained in Chapter 8 of the Rules Governing the Listing of Securities on the Growth Enterprise Market and Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited; the HKIS Valuation Standards on Properties (First Edition 2005) published by The Hong Kong Institute of Surveyors effective from 1 January 2005.

Unless otherwise stated, all monetary sums stated in this report are in Renminbi (RMB).

Our valuation certificate are attached herewith.

Yours faithfully, for and on behalf of RHL Appraisal Ltd.

Tse Wai Leung Sandra S.W. Lau MFin BSc MRICS MHKIS RPS(GP) MFin MHKIS AAPI RPS(GP) Director Director

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PROPERTY VALUATION REPORT ON HUNAN JOINT VENTURE

APPENDIX VI

VALUATION CERTIFICATE

			Market Value
			in existing
		Particulars of	state as at
Property	Description	occupancy	31 July 2006
			RMB
Land and buildings of	The property comprises various	The property is	No Commercial Value
Changsha-Changde Gas	parcels of land dotted along the	currently occupied by
Pipeline	Changsha-Changde Gas Pipeline	the owner as
Hunan Province	running in between Changsha	embarkation station,
The PRC	City and Changde City. Erecting	pump station and
	on the land parcels are various	terminal station.
	single to 2-storey buildings and
	structures which include an
	embarkation station (Xingsha
	Embarkation Station), three
	intermediary pump station
	(Tongguan Pump Station,
	Wangcheng Pump Station and
	Yiyang Pump Station) and a
	terminal station (Huangmuguan).
	The total land area and total
	gross floor area are of the
	property are 35,451.12 square
	metres and 2,403.12 square
	metres respectively.

Notes:

In our valuation, we have assumed that the property is held for a term of 50 years for industrial purpose (being the maximum term for land use for industrial purpose under the law of the PRC).
We have been provided with a legal opinion regarding the property interests by the Company’s PRC legal adviser, which contains, inter alia , the following:

Upon obtaining the Land Use Rights Certificate, the land use rights in the property will be held by Hunan Huayou.

The status of the title and grant of major approvals and licenses in accordance with the information provided by the Group and the opinion of the Company’s legal advisers on the PRC law is as follows:

Land Use Rights Certificate:	No
Red-line Drawing:	No
Building Ownership Certificate:	No

The property has no commercial value on the reason that the land grant procedures have not yet been completed as at the valuation date.

– 146 –

APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

The following is the text of a letter prepared for the purpose of incorporation in this circular received from BMI Appraisals Limited, an independent valuer, in connection with its valuation as at 30 June 2006 of the 100 per cent equity interest in Changde Huayou Gas Co. Ltd.

==> picture [226 x 79] intentionally omitted <==

30 August 2006

The Directors

(Changde Huayou Gas Co. Ltd.)

268 (No. 268 Dong Ting Da Dao, Changde City, Hunan Province)

China Vanguard Group Limited

30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

INSTRUCTIONS

We refer to the instructions from Changde Huayou Gas Co. Ltd. and China Vanguard Group Limited for us to provide our opinion on the market value of the 100 per cent equity interest in Changde Huayou Gas Co. Ltd. (referred to as the “Company”) in the People’s Republic of China (the “PRC”) as at 30 June 2006 (the “date of valuation”).

This report describes the background of the Company, a brief overview of Changde City, the basis of valuation & assumptions, explains the valuation methodology utilized and presents our conclusion of value.

PURPOSE OF VALUATION

We understand that the purpose of our valuation is to express an independent opinion on the market value of the 100 per cent equity interest in the Company as at 30 June 2006 for acquisition reference purposes only.

BASIS OF VALUATION

Our valuation was carried out on the basis of market value. Market value is defined as “the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

– 147 –

APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

BACKGROUND OF THE COMPANY

The Company was formerly called (Changde City Tian Yuan Pipeline Gas Industrial Co. Ltd.), established by (Beijing Xin Heng Investment Consultancy Co. Ltd.), (Changde State-owned Asset Operation Management Company) and (Mr. Xia Chong Ren), with capital investments of RMB1,200,000, RMB800,000 and RMB8,680,000 respectively. According to a resolution made at a shareholders’ meeting in October 2003 and an agreement of transfer of investments, the combined investments of RMB9,880,000 by Beijing Xin Heng Investment Consultancy Co. Ltd. and Mr. Xia Chong Ren was transferred to (China Huayou Group Corporation) and (Changde City Tian Yuan Pipeline Gas Industrial Co. Ltd.) was then renamed as Changde Huayou Gas Co. Ltd. (i.e. the Company). After an increase in the invested capital of the Company by China Huayou Group Corporation, the registered capital of the Company reached RMB61,880,000. The capital invested by China Huayou Group Corporation and Changde State-owned Asset Operation Management Company was RMB61,080,000 and RMB800,000, representing 98.71% and 1.29% of the total invested capital respectively.

The principal businesses of the Company include: building pipelines of natural gas, exploring natural gas resources, usage and technical services, technical consultancy and maintenance. The Company also sells gas-related equipment and facilities, construction materials, electronic products and equipment leasing.

Currently, the Company mainly engages in selling pipeline gas, liquefied natural gas, liquefied gas in cylinders and gas-related products. It also undertakes designs and construction of gas pipelines as well as property leasing.

BRIEF OVERVIEW OF CHANGDE CITY

Geographical Location and Economy

Located in Hunan province, Changde City is one of the major commercial cities of the province. With continually rapid economic development in the PRC, together with Changde City’s specific geographic location and transportation advantages, Changde City is expected to become a centre city and a centre of transportation and logistics in the region. The principal industry of Changde City is light industry, including manufacturing of cigarettes and glasses, etc.

Population

Changde City is composed of two districts, one city and six counties, with a total area of about 18,190 square kilometers. The total city population in 2005 was 580,000 and is expected to reach 950,000 by the end of 2020.

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APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

SOURCE OF INFORMATION

For the purpose of our valuation, we were furnished with the financial and operational data related of the Company, which was given by the management of the Company.

The valuation of 100 per cent equity interest in the Company required consideration of all pertinent factors affecting the economic benefits of the Company and its abilities to generate future investment returns. The factors considered in the valuation included, but were not limited to the following:

The business nature of the Company;
The financial information of the Company;
The specific economic environment and competition for the market in which the Company operates;
Market-derived investment returns of entities engaged in similar lines of business; and
The financial and business risks of the Company, including the continuity of income and the projected future results.

SCOPE OF WORKS

In the course of our valuation work for the Company, we have conducted the following steps to evaluate the reasonableness of the adopted bases and assumptions provided by the Company:

Interviewed with the management of the Company;
Obtained all relevant operational and financial information of the Company;
Performed market research and obtained statistical figures from public sources;
Examined all relevant bases and assumptions of both the financial and operational information of the Company, which were provided by the management of the Company;
Prepared a business financial model to derive the indicated value of the Company; and
Presented all relevant information on the background of the Company, valuation methodology, source of information, scope of works, major assumptions, comments and our conclusion of value in this report.

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APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

VALUATION ASSUMPTIONS

Given the changing environment in which the Company is exposed to, a number of assumptions have to be established in order to sufficiently support our concluded opinion of value of the Company. The major assumptions adopted in our valuation are:

There will be no major changes in the existing political, legal, and economic conditions in the jurisdiction where the Company operates;
There will be no major changes in the current taxation law in the jurisdiction where the Company operates, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;
The financial information in respect of the Company has been prepared on a reasonable basis, reflecting estimates that have been arrived at after due and careful considerations by the management of the Company;
Exchange rates and interest rates will not differ materially from those presently prevailing; and
Economic conditions will not deviate significantly from economic forecasts.

VALUATION METHODOLOGY

Three generally accepted valuation methodologies have been considered in valuing the 100 per cent equity interest in the Company. They are the market approach, the cost approach and the income approach.

The Market approach provides indications of value by comparing the subject to similar businesses, business ownership interests, and securities that have been sold in the market.

The Cost approach provides indications of value by studying the amounts required to recreate the business for which a value conclusion is desired. This approach seeks to measure the economic benefits of ownership by quantifying the amount of fund that would be required to replace the future service capability of the business.

The Income approach is the conversion of expected periodic benefits of ownership into an indication of value. It is based on the principle that an informed buyer would pay no more for the project than an amount equal to the present worth of anticipated future benefits from the same or a substantially similar business with a similar risk profile.

We considered that the market approach was not appropriate to value the Company, as there are insufficient comparable transactions in the market. The Cost Approach was also regarded not adequate in this valuation, as this approach does not take future growth potential of the Company into consideration. Thus, we determined that the income approach was the most appropriate valuation approach for this valuation.

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APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

In the valuation, we applied the income approach also known as the discounted cash flow (referred to as “DCF”) method. We determined the market value by applying a discount rate (i.e. the cost of capital) in the DCF model to determine the net present value of the Company’s future expected cash flows. The expected cash flows were determined from the net profits after tax plus non-cash expenses such as depreciation and amortization expenses, and after-tax interest expenses and less non-cash incomes, capital expenditures and changes in working capital.

The discount rate takes into account two different types of risks – systematic and non-systematic risks. Risks that are correlated with the return from the stock market are referred to as systematic risks. Other risks that are company-specific are referred to as non-systematic risks. We determined the rate of return for systematic risks based on the Capital Asset Pricing Model (“CAPM”). The CAPM states that an investor requires excess returns to compensate systematic risks without excess return for non-systematic risks.

Under the CAPM, the appropriate rate of return is the sum of the risk-free rate and a related beta times the market risk premium. We adopted the yield rate of the 10-year Hong Kong government bond as at the date of valuation as the risk-free rate, which was 4.88%. Besides, the market risk premium we adopted in the DCF model was 6.95%. The beta was determined as the weighted-average of betas of publicly listed comparable companies that are in the same industry. In working out the weighted-average beta, we took into consideration the difference in market capitalization of each selected company. The estimated beta for the Company is 0.596.

In respect of non-systematic risks, we considered the size difference (a company-specific risk) between the Company and the selected comparable companies (with reference to “Risk Premia over Time Report: 2003”, published by Ibbotson Associates), and determined that a size premium of 3.53% was adopted. In addition, a company-specific risk of 1% was added in the determination of the discount rate to reflect limited geographical exposure of the Company. As a result, the discount rate was calculated as 13.55%.

One of the parameters playing a crucial role in the valuation was the penetration rate. The penetration rate indicates how many existing energy users (by percentage) in Changde City change its existing fuel source (other than natural gas) to natural gas. The penetration rate significantly affects the turnover of the Company between 2006 and 2010. We determined that a penetration rate of 75% was appropriate for the valuation. The 75% was based on market reference that the penetration rate in the covered areas (more than 40 cities) in China can reach 70% to 80%, therefore, we considered that a penetration rate of 75% would be appropriate.

Based on a penetration rate of 75%, the expected annual increased rates of turnover between 2006 and 2010 and between 2011 and 2026 are 38.08% and 2.31% respectively. We based our estimations of the annual increased rate partly on publicly available market data and partly on a research report (Changsha Xingsha to Changde Natural Gas Main Pipeline Construction Project Economic Valuation) ( : B04036) conducted by (Research Institute of Engineering Technology of CNPC −Beijing Branch) on 6 April 2006. The relatively large annual increased rate of 38.08% is mainly attributed to an estimated substantial change in fuel source (i.e. from diesel oil, coal, liquefied petroleum gas, etc to natural gas) by the existing energy users (including residential users commercial users, industrial users, governmentrelated users and some specific vehicles) in Changde City.

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APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

VALUATION COMMENTS

For the purpose of this valuation and in arriving at our opinion of value, we have referred to the information provided by the management of the Company to estimate the value of the Company. We have also sought and received confirmation from the Company that no material facts have been omitted from the information supplied. In addition, the valuation was based on The Hong Kong Business Valuation Forum Business Valuation Standards.

To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others, which have been used in formulating this analysis.

REMARKS

Neither the whole nor any part of this report nor any reference thereto may be included in any document, circular or statement without our written approval of the form and context in which it will appear.

Finally and in accordance with our standard practice, we must state that this report is for the exclusive use of the addressee and for the purpose stated herein. No responsibility is accepted to any third party for the whole or any part of its contents.

Unless otherwise stated, all money amounts stated are in Renminbi (RMB).

SENSITIVITY ANALYSIS

A sensitivity analysis based on various discount rates and penetration rates has been performed and is presented as follows:

(RMB’000)

			Penetration Rate
Discount	Rate	70%	75%	80%
13.05%		135,390	145,550	159,000
13.55%		130,610	140,440	153,420
14.05%		126,080	135,600	148,130

CONCLUSION OF VALUE

Our conclusion of value is based on accepted valuation procedures and practices that rely substantially on the use of numerous assumptions and the consideration of a lot of uncertainties, not all of which can be easily ascertained or quantified.

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APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

Further, whilst the assumptions and consideration of such matters are considered by us to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company or us.

Based on our investigation and analysis outlined in this report, it is of our opinion that the market value of the 100 per cent equity interest in the Company as at 30 June 2006 was RMB140,440,000 (Renminbi One Hundred Forty Million Four Hundred and Forty Thousand Only) .

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

This report is subject to the limiting conditions attached.

Yours faithfully, For and on behalf of BMI APPRAISALS LIMITED

Marco T.C. Sze

Brian W. K. Li

B.Eng(Hon) MBA(Acct) BSc MHKIS MRICS RPS(GP) CIREA Senior Manager Associate Director

Lowell W.W. Lo

BBA(Hons) MSc(NJIT) CPA AICPA SIFM Director

Notes:

Mr. Marco Sze holds a Master’s Degree of Business Administration in Accountancy from the City University of New York – Baruch College and has passed all qualifying examinations of Chartered Financial Analyst. He has about 3 years’ experience in valuing businesses and intangible assets in Hong Kong, China and the Asia-Pacific Regions.
Mr. Brian Li is a member of the Royal Institution of Chartered Surveyors, a member of the Hong Kong Institute of Surveyors, a Registered Professional Surveyor in General Practice and a member of China Institute of Real Estate Appraisers. He is on the list of Property Valuers for Undertaking Valuations for Incorporation or Reference in Listing Particulars and Circulars and Valuations in connection with Takeovers and Mergers of the Hong Kong Institute of Surveyors and a Registered Business Valuer under the Hong Kong Business Valuation Forum. He has over 10 years’ experience in valuing businesses and intangible assets in Hong Kong, China and the Asia-Pacific Regions.
Mr. Lowell Lo is a practicing member of the Hong Kong Institute of Certified Public Accountants, a member of the American Institute of Certified Public Accountants. He has over 5 years of experience in valuing businesses and intangible assets in Hong Kong, Macao, China and various locations in the Asia-Pacific Region.

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APPENDIX VII BUSINESS VALUATION REPORT ON CHANGDE JOINT VENTURE

LIMITING CONDITIONS

As part of our analysis, we have reviewed financial and business information from public sources together with such financial information, project documentation and other pertinent data concerning the project as has been made available to us. We have assumed the accuracy of, and have relied on, such information. We have relied to a considerable extent on such information provided in arriving at our opinion of value.
BMI Appraisals Limited shall not be required to give testimony or attendance in court or to any government agency by reason of this valuation, with reference to the project described herein, unless prior arrangements have been made.
No opinion is intended to be expressed for matters which require legal or other specialized expertise or knowledge, beyond that customarily employed by valuers.
Our conclusions assume continuation of prudent management policies over whatever period of time is reasonable and necessary to maintain the character and integrity of the assets valued.
We assume that there are no hidden or unexpected conditions associated with the assets valued that might adversely affect the reported value. Further, we assume no responsibility for changes in market conditions which may require an adjustment in the valuation.

* For identification purpose only

– 154 –

APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

==> picture [226 x 79] intentionally omitted <==

30 August 2006

The Directors (Hunan Huayou Natural Gas Transportation &

**Distribution Company Limited*)**

268 (No. 268 Dong Ting Da Dao, Changde City, Hunan Province)

China Vanguard Group Limited

30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

INSTRUCTIONS

We refer to the instructions from (Hunan Huayou Natural Gas Transportation & Distribution Company Limited) and China Vanguard Group Limited for us to provide our opinion on the market value of the 100 per cent equity interest in (Hunan Huayou Natural Gas Transportation & Distribution Company Limited) (referred to as the “Company”) in the People’s Republic of China (the “PRC”) as at 30 June 2006 (the “date of valuation”).

This report describes the background of the Company, a brief overview of the subject cities, the basis of valuation & assumptions, explains the valuation methodology utilized and presents our conclusion of value.

PURPOSE OF VALUATION

We understand that the purpose of our valuation is to express an independent opinion on the market value of the Company as at 30 June 2006 for acquisition reference purposes only.

BASIS OF VALUATION

– 155 –

APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

BACKGROUND OF THE COMPANY

The Company was established by (China Huayou Group Corporation) and (Beijing Xin Hua Lian Gas Investment Co. Ltd.) in April 2005. The registered capital of the Company is RMB100,000,000, including RMB65,000,000 (65% share equity) and RMB35,000,000 (35% share equity) from China Huayou Group Corporation and Beijing Xin Hua Lian Gas Investment Co. Ltd. respectively.

The principal businesses of the Company include: building pipelines of natural gas, exploring natural gas resources, usage and technical services, technical consultancy and maintenance. The Company also engages in selling gas-related equipment and facilities, construction materials, electronic products and equipment leasing.

The Company has constructed a natural gas pipeline between Changsha City and Changde City, with a total length of 187.46 kilometers and the diameter of 406*5.2 millimeters. The project is a major construction project in Hunan Province. The short-term, middle-term and long-term design capacities of the pipeline are 250,000,000 cubic meters, 350,000,000 cubic meters and 600,000,000 cubic meters respectively. The total construction area and the occupied area of the pipeline are 2.65 acres and 1,978 square meters respectively. Total investment was RMB346,000,000. The pipeline primarily serves Wangcheng County, Yiyang City and Changde City, and will expand its services to other cities/counties along the pipeline.

BRIEF OVERVIEW OF THE SUBJECT CITIES

(1) Wangcheng County

According to the research about Wangcheng County carried out by the Company, the city population for 2005, 2010 and 2020 are 120,000, 180,000 and 250,000 respectively. The city population mainly spreads over (Gaotangling Zutuan), (Xitangjie Zutuan), (Liefengjie Zutuan), (Baifutang Zutuan), (Wangwang Zutuan), (Hong Kong and Taiwan Investment & Development Zone) and (Xingchengzhen Zutuan*).

(2) Yiyang City

Yiyang City is one of the major cities in the area. Its principal industries include manufacturing of machineries, electronics, fabrics and food. It also focuses more on energy, transportation, high technology, finance, trading, information and property.

(3) Changde City

Located in Hunan province, Changde City is one of the major commercial cities of the province. With continually rapid economic development in the PRC, together with Changde City’s specific geographic location and transportation advantages, Changde City is expected to become a centre city and a center of transportation and logistics in the region. The principal industry of Changde City is light industry, including manufacturing of cigarettes and glasses, etc.

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APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

OPERATIONAL PERIOD OF THE PIPELINE

As the normal useful life of a natural gas pipeline is 20 years, the Company will need to make additional investments in the pipeline if it wants to run the pipeline continually. For this valuation, we assume that the Company will not make such additional investments after the end of the useful life. Therefore, the period that was used in this valuation is between 1 July 2006 and 30 June 2026.

SOURCE OF INFORMATION

For the purpose of our valuation, we were furnished with the financial and operational data of the Company, which was given by the management of the Company.

The business nature of the Company;
The financial information of the Company;
The specific economic environment and competition for the market in which the Company operates;
Market-derived investment returns of entities engaged in similar lines of business; and
The financial and business risks of the Company, including the continuity of income and the projected future results.

SCOPE OF WORKS

In the course of our valuation work for the Company, we have conducted the following steps to evaluate the reasonableness of the adopted bases and assumptions provided by the Company:

Interviewed with the management of the Company;
Obtained all relevant operational and financial information of the Company;
Performed market research and obtained statistical figures from public sources;
Examined all relevant bases and assumptions of both the financial and operational information of the Company, which were provided by the management of the Company;

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APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

Prepared a business financial model to derive the indicated value of the Company; and
Presented all relevant information on the background of the Company, valuation methodology, source of information, scope of works, major assumptions, comments and our conclusion of value in this report.

VALUATION ASSUMPTIONS

There will be no major changes in the existing political, legal, and economic conditions in the jurisdiction where the Company operates;
There will be no major changes in the current taxation law in the jurisdiction where the Company operates, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;
The financial information in respect of the Company has been prepared on a reasonable basis, reflecting estimates that have been arrived at after due and careful considerations by the management of the Company;
Exchange rates and interest rates will not differ materially from those presently prevailing; and
Economic conditions will not deviate significantly from economic forecasts.

VALUATION METHODOLOGY

The Market approach provides indications of value by comparing the subject to similar businesses, business ownership interests, and securities that have been sold in the market.

– 158 –

APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

In the valuation, we applied the income approach also known as the discounted cash flow (referred to as “DCF”) method. We determined the market value by applying a discount rate (the cost of capital) in the DCF model to determine the net present value of the Company’s future expected cash flows. The expected cash flows were determined from the net profits after tax plus non-cash expenses such as depreciation and amortization expenses, and after-tax interest expenses and less non-cash incomes, capital expenditures and changes in working capital.

In respect of non-systematic risks, we considered the size difference (a company-specific risk) between the Company and the selected comparable companies (with reference to “Risk Premia over Time Report: 2003”, published by Ibbotson Associates), and determined that a size premium of 3.00% was adopted. As a result, the discount rate was calculated as 12.02%.

One of the parameters playing a crucial role in the valuation was the penetration rate. The penetration rate indicates how many existing energy users (by percentage) in the subject areas change its existing fuel source (other than natural gas) to natural gas. The penetration rate significantly affects the turnover of the Company between 2006 and 2010. We determined that a penetration rate of 75% was appropriate for the valuation. The 75% was based on market reference that the penetration rate in the covered areas (more than 40 cities) in China can reach 70% to 80%, therefore, we considered that a penetration rate of 75% would be appropriate.

– 159 –

APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

Regarding expected annual increased rates of turnover between 2006 and 2010 and between 2011 and 2026 are 43.53% and 2.59% respectively. We based our estimations of the annual increased rate partly on publicly available market data and partly on a research report (Changsha Xingsha to Changde Natural Gas Main Pipeline Construction Project Economic Valuation) ( : B04036) conducted by (Research Institute of Engineering Technology of CNPC −Beijing Branch) on 6 April 2006. The relatively large annual increased rate of 43.53% is mainly attributed to an estimated substantial change in fuel source (i.e. from diesel oil, coal, liquefied petroleum gas, etc to natural gas) by the existing energy users (including residential users commercial users, industrial users, government-related users and some specific vehicles) in the subject areas.

VALUATION COMMENTS

REMARKS

Unless otherwise stated, all money amounts stated are in Renminbi (RMB).

SENSITIVITY ANALYSIS

A sensitivity analysis based on various discount rates and penetration rates has been performed and is presented as follows:

				(RMB’000)
			Penetration Rate
Discount	Rate	70%	75%	80%
11.50%		147,080	171,520	199,050
12.00%		138,130	161,610	188,040
12.50%		129,780	152,340	177,740

– 160 –

APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

CONCLUSION OF VALUE

Based on our investigation and analysis outlined in this report, it is of our opinion that the market value of the 100 per cent equity interest in the Company as at 30 June 2006 was RMB161,610,000 (Renminbi One Hundred Sixty One Million Six Hundred and Ten Thousand Only).

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

This report is subject to the limiting conditions attached.

Yours faithfully, For and on behalf of BMI APPRAISALS LIMITED

Marco T.C. Sze

Brian W. K. Li

B.Eng(Hon) MBA(Acct) BSc MHKIS MRICS RPS(GP) CIREA Senior Manager Associate Director

Lowell W.W. Lo

BBA(Hons) MSc(NJIT) CPA AICPA SIFM

Director

Notes:

Mr. Marco Sze holds a Master’s Degree of Business Administration in Accountancy from the City University of New York – Baruch College and has passed all qualifying examinations of Chartered Financial Analyst. He has about 3 years’ experience in valuing businesses and intangible assets in Hong Kong, China and the Asia-Pacific Regions.
Mr. Brian Li is a member of the Royal Institution of Chartered Surveyors, a member of the Hong Kong Institute of Surveyors, a Registered Professional Surveyor in General Practice and a member of China Institute of Real Estate Appraisers. He is on the list of Property Valuers for Undertaking Valuations for Incorporation or Reference in Listing Particulars and Circulars and Valuations in connection with Takeovers and Mergers of the Hong Kong Institute of Surveyors and a Registered Business Valuer under the Hong Kong Business Valuation Forum. He has over 10 years’ experience in valuing businesses and intangible assets in Hong Kong, China and the Asia-Pacific Regions.
Mr. Lowell Lo is a practicing member of the Hong Kong Institute of Certified Public Accountants, a member of the American Institute of Certified Public Accountants. He has over 5 years of experience in valuing businesses and intangible assets in Hong Kong, Macao, China and various locations in the Asia-Pacific Region

– 161 –

APPENDIX VIII BUSINESS VALUATION REPORT ON HUNAN JOINT VENTURE

LIMITING CONDITIONS

As part of our analysis, we have reviewed financial and business information from public sources together with such financial information, project documentation and other pertinent data concerning the project as has been made available to us. We have assumed the accuracy of, and have relied on, such information. We have relied to a considerable extent on such information provided in arriving at our opinion of value.
BMI Appraisals Limited shall not be required to give testimony or attendance in court or to any government agency by reason of this valuation, with reference to the project described herein, unless prior arrangements have been made.
No opinion is intended to be expressed for matters which require legal or other specialized expertise or knowledge, beyond that customarily employed by valuers.
Our conclusions assume continuation of prudent management policies over whatever period of time is reasonable and necessary to maintain the character and integrity of the assets valued.
We assume that there are no hidden or unexpected conditions associated with the assets valued that might adversely affect the reported value. Further, we assume no responsibility for changes in market conditions which may require an adjustment in the valuation.

* For identification purpose only

– 162 –

LETTERS FROM AUDITORS AND FINANCIAL ADVISER

APPENDIX IX

The following is the text of the letters from its reporting accountants, W.H. Tang & Partners CPA Limited, and its financial advisers, Grand Vinco Capital Limited, in connection with the business valuation of the Changde Joint Venture and Hunan Joint Venture for inclusion in this circular. As described in the section headed “Documents available for inspection” in Appendix X, a copy of the following letters are available for inspection.

A. LETTER FROM W.H. TANG & PARTNERS CPA LIMITED

Level 7, Parkview Centre, 7 Lau Li Street, Causeway Bay, Hong Kong.

Tel : (852) 23426130 Fax : (852) 23426006

==> picture [66 x 45] intentionally omitted <==

19 October 2006

The Directors China Vanguard Group Limited 30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

In accordance with the instructions of the Directors of China Vanguard Group Limited (the “Company”), we have performed a reviewed on profit forecast of (“Changde Huayou”) and (“Hunan Huayou”) dated 30 August 2006 prepared by BMI Appraisals Limited (the “valuations”).

We hereby confirmed that we have reviewed the accounting policies and calculations for the valuations. In our opinion, the valuations, so far as the calculations are concerned, have been properly complied in accordance with the bases and assumptions made by BMI Appraisals Limited.

We make no representation as to the legal interpretation of the above information as presented in the circular dated 19 October 2006 issued by Aptus Holdings Limited in connection with the very substantial acquisition in relation to the proposed acquisition of an aggregate of 48.33% equity interest in Changde Huayou and 33% equity interest of Hunan Huayou (the “Circular”).

This letter is prepared solely for your information and must not be filed with or referred to (either in whole or in part in the above-mentioned circular) or any other document or otherwise quoted, circulated or used for any other purposes without our prior written consent.

Yours faithfully, For and on behalf of

W.H. Tang & Partners CPA Limited Tang Wai Hung Director

– 163 –

LETTERS FROM AUDITORS AND FINANCIAL ADVISER

APPENDIX IX

B. LETTER FROM GRAND VINCO CAPITAL LIMITED

Grand Vinco Capital Limited Unit 4909-4910, 49/F The Center 99 Queen’s Road Central Hong Kong

19 October 2006

The Directors

China Vanguard Group Limited

30th Floor Sunshine Plaza No. 353 Lockhart Road Wanchai Hong Kong

Dear Sirs,

We refer to the report of the business valuation prepared by BMI Appraisals Limited (“BMI”) in relation to the appraisal of the market value of 48.33% % interest in (“Changde Huayou”) and 33% interest in (“Hunan Huayou”) as at 30 August 2006 ( the “Business Valuations” as set out in Appendix VII & VIII to this Circular ).

We have reviewed the Business Valuation for which BMI is responsible and discussed with you the information and documents provided by you which formed part of the bases and assumptions upon which Business Valuations have been prepared. We have also considered the letter from W.H. Tang & Partners CPA Limited dated 19 October 2006 addressed to yourselves regarding whether the Business Valuations were compiled properly so far as the calculations are concerned.

On the basis of the foregoing, we are of the opinion that the Business Valuations, for which you as the directors of the Company are solely responsible, have been stated after due and careful enquiry of you.

Your faithfully, For and on behalf of

Grand Vinco Capital Limited Alister Chung

Managing Director

– 164 –

GENERAL INFORMATION

APPENDIX X

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, include particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:

(a) the information contained in this circular is accurate and complete in all material respects and not misleading;
(b) there are no other matters the omission of which would make any statement in this circular misleading; and
(c) all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

2. DIRECTORS’ INTERESTS AND SHORT POSITION IN SHARES, UNDERLYING SHARES AND DEBENTURES

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO), or which were required, pursuant to Section 352

– 165 –

GENERAL INFORMATION

APPENDIX X

of the SFO, to be entered in the register referred to therein, or which were required, pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules, to be notified to the Company and the Stock Exchange, were as follows:

(1) Long positions in the shares of the Company

		Number of ordinary shares held	Number of ordinary shares held	Number of ordinary shares held	Number of ordinary shares held
	Company/Name					Approximate
	of associated	Corporate	Personal	Family		percentage of
Name of Directors	corporation	interest	interest	interest	Total interest	shareholding
Cheung Kwai Lan	Company	241,130,000	1,380,000	–	242,510,000	38.86%
		(Note 1)
Chan Tung Mei	Company	241,130,000	–	1,380,000	242,510,000	38.86%
		(Note 2)		(Note 3)
Shaw Kyle	Company	46,600,000	–	–	46,600,000	7.47%
Arnold Junior		(Note 4)
Lau Hin Kun	Company	–	450,000	–	450,000	0.07%
Cheung Kwai Lan	Best Frontier	–	909	1	910	–
	Investments			(Note 5)
	Limited
Chan Tung Mei	Best Frontier	–	1	909	910	–
	Investments			(Note 6)
	Limited

Notes:

The 241,130,000 shares are owned by Best Frontier Investments Limited (“Best Frontier”) which is owned as to 99.89% and 0.11% by Madam Cheung Kwai Lan and Mr. Chan Tung Mei respectively. Madam Cheung Kwai Lan is the spouse of Mr. Chan Tung Mei. Accordingly, Madam Cheung Kwai Lan is deemed to be interested in the shares under the SFO.
The 241,130,000 shares are owned by Best Frontier which is owned as to 99.89% and 0.11% by Madam Cheung Kwai Lan and Mr. Chan Tung Mei respectively. Mr. Chan Tung Mei is the spouse of Madam Cheung Kwai Lan. Accordingly, Mr. Chan Tung Mei is deemed to be interested in the shares under the SFO.
The 1,380,000 shares are owned by Madam Cheung Kwai Lan who is the spouse of Mr. Chan Tung Mei. Accordingly, Mr. Chan Tung Mei is deemed to be interested in the shares under the SFO.
These interests represent Mr. Shaw Kyle Arnold Junior’s interests in:
(a) 1,030,000 shares beneficially owned by Shaw, Kwei & Partners (Asia) Ltd. of which Mr. Shaw Kyle Arnold Junior is deemed under the SFO to have an interest by reason of his being the indirect controlling shareholder of Shaw, Kwei & Partners (Asia) Ltd. through his controlled corporation Haven Associates Limited.

– 166 –

GENERAL INFORMATION

APPENDIX X

(b) 24,620,000 shares beneficially owned by China Value Investment Limited which is wholly-owned by Asian Value Investment Fund L. P. (AVIF, L.P.), a limited liability partnership, whose general partner Shaw, Kwei & Partners (Asia) Ltd. (having a 1% interest in AVIF, L.P.) and its indirect controlling shareholder Mr. Shaw Kyle Arnold Junior are both deemed under the SFO to have interest in the same 24,620,000 shares.
(c) 20,950,000 shares beneficially owned by Javelin Capital Holdings Limited which is wholly-owned by Asian Value Investment Fund II, L. P. (AVIF II, L.P.), a limited liability partnership, whose general partner SKP Capital Limited (having a 1.19% interest in AVIF II, L.P.) and its indirect controlling shareholder Mr. Shaw Kyle Arnold Junior are both deemed under the SFO to have interest in the same 20,950,000 shares.
The 1 share of US$1 in Best Frontier is owned by Mr. Chan Tung Mei who is the spouse of Madam Cheung Kwai Lan. Accordingly, Madam Cheung Kwai Lan is deemed to be interested in the shares under the SFO.
The 909 shares of US$1 each in Best Frontier are owned by Madam Cheung Kwai Lan who is the spouse of Mr. Chan Tung Mei. Accordingly, Mr. Chan Tung Mei is deemed to be interested in the shares under the SFO.

(2) Share options of the Company

The Company has adopted a share option scheme on 18 October 2002 (the “Share Option Scheme”), under which the Board may, at its discretion, invite any persons who satisfy the criteria of the Share Option Scheme, to take up options to subscribe for Shares.

The Share Option Scheme will remain valid for a period of 10 years commencing from 18 October 2002.

		Outstanding
		at Latest
Name of Director	Date of Grant	Practicable Date
Lau Hin Kun	18/8/2004	1,600,000
Shaw Kyle Arnold Junior	19/10/2004	1,200,000
Total:		2,800,000

(3) Long positions in the shares of an associated corporation – Aptus Holdings Limited

	Number of ordinary	Number of ordinary	shares held	shares held	Approximate
	Corporate	Personal	Family	Total	percentage of
Name of Director	interest	interest	interest	interest	shareholding
Cheung Kwai Lan (Note)	915,571,428	–	–	915,571,428	54.88%

Note: Madam Cheung Kwai Lan and Mr. Chan Tung Mei have equity interests of 99.89% and 0.11% respectively of the issued share capital of Best Frontier. Madam Cheung Kwai Lan is the spouse of Mr. Chan Tung Mei. Accordingly, Madam Cheung Kwai Lan is deemed to be 100% interested

– 167 –

GENERAL INFORMATION

APPENDIX X

in the shares of Best Frontier under the SFO. As at the Latest Practicable Date, Best Frontier is interested in approximately 38.64% of the issued share capital of the Company which in turn holds 100% shareholding of China Success Enterprises Limited. China Success Enterprises Limited then holds 100% shareholding of Precise Result Profits Limited which directly holds 915,571,428 shares of Aptus Holdings Limited. Besides, Madam Cheung Kwai Lan holds 1,380,000 shares of the Company as at the Latest Practicable Date.

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interests or short positions in any shares, underlying shares or debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which would have to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which required, pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules, to be notified to the Company and the Stock Exchange.

3. SUBSTANTIAL SHAREHOLDERS’ INTERESTS AND SHORT POSITIONS IN THE SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY

As at the Latest Practicable Date, according to the register kept by the Company pursuant to section 336 of SFO, and so far as is known to the Directors or chief executive of the Company, the following persons (other than a Director or chief executive of the Company) had, or was deemed or taken to have, an interest or short position in the Company Shares or underlying the Company Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or who were directly or indirectly interested in 10% or more of the nominal value of any class of share capital, carrying rights to vote in all circumstances at general meeting of any member of the Group:

					Approximate
		Number of ordinary shares held			percentage of
Name of Shareholder	Capacity	Long position	Short position		shareholding
Best Frontier Investments	Directly beneficial	241,130,000		–	38.64%
Limited	owned	(Note 1)
Oppenheimer Funds, Inc.	Investment manager	110,000,000		–	17.63%
Haven Associates Limited	Controlled corporation	46,600,000		–	7.47%
		(Note 2)

Notes:

The 241,130,000 shares are owned by Best Frontier Investments Limited which is owned as to 99.89% and 0.11% by Madam Cheung Kwai Lan and Mr. Chan Tung Mei respectively.
The 46,600,000 shares represent:
(a) 1,030,000 shares beneficially owned by Shaw, Kwei & Partners (Asia) Ltd.

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GENERAL INFORMATION

APPENDIX X

(b) 24,620,000 shares beneficially owned by China Value Investment Limited which is wholly-owned by Asian Value Investment Fund L. P. (AVIF, L.P.), a limited liability partnership, whose general partner Shaw, Kwei & Partners (Asia) Ltd. (having a 1% interest in AVIF, L.P.) is deemed under the SFO to have interest in the same 24,620,000 shares.
(c) 20,950,000 shares beneficially owned by Javelin Capital Holdings Limited which is whollyowned by Asian Value Investment Fund II, L.P. (AVIF II, L.P.), a limited liability partnership, whose general partner SKP Capital Limited (having a 1.19% interest in AVIF II, L.P.) is deemed under the SFO to have interest in the same 20,950,000 shares.
(d) Haven Associates Limited is the controlling shareholder of Shaw, Kwei & Partners (Asia) Ltd. and SKP Capital Limited.

Save as disclosed above, as at the Latest Practicable Date, the Directors or chief executive of the Company were not aware of any person (other than a Director or chief executive of the Company) who had an interest or short position in the Company Shares or underlying the Company Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, was, directly or indirectly, interest in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group.

4. LITIGATION

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

5. SERVICE CONTRACTS

None of the Directors had entered into any service agreements with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation other than statutory compensation).

6. COMPETING INTERESTS

As at the Latest Practicable Date, so far as the Directors were aware, none of them or the management shareholders of the Company or their respective associates had any interests in a business which competes or may compete with the business of the Group nor are there any conflicts of interest which any such persons have with the Group.

7. DIRECTORS’ INTEREST IN CONTRACTS AND ASSETS

No contract or arrangement in which any Directors is materially interested and which is significant in relation to the business of the Group subsisted as at the Latest Practicable Date.

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which have been, since 30 June 2006 (the date to which the latest published audited consolidated accounts 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 or leased to any member of the Group.

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GENERAL INFORMATION

APPENDIX X

8. MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business) have been entered into by a member of the Group within the two years immediately preceding the Latest Practicable Date:

(a) the agreement dated 4 March 2005 entered into between Aptus Holdings Limited and Solarmax Limited in respect of disposal of the entire equity interest of Aptus Medical Group Limited;
(b) the agreement dated 17 June 2005 in relation to the acquisition of 70% equity interest in (CNPC Huayou Cu Energy Investment Co. Ltd.) from (China United (International) Investment Development Limited) by Good United Management Limited pursuant to the Agreement;
(c) the Conditional Sale and Purchase Agreement entered into between Bemaestro International Limited and China Success Enterprises Limited dated 10 August 2005 in relation to the acquisition the acquisition of a 75% equity interest in Skilltime Management;
(d) the placing agreement as constituted by a letter dated as of 12 August 2005 issued by the Shenyin Wanguo Capital (H.K.) Limited to the Best Frontier Investments Limited and Madam Cheung Kwai Lan in relation to the Placing;
(e) the subscription agreement dated as of 12 August 2005 made between the Company and Best Frontier Investments Limited in relation to the Subscription;
(f) two termination agreements were entered into between (i) the Best Frontier Investments Limited and Madam Cheung Kwai Lan and the Shenyin Wanguo Capital (H.K.) Limited; and (ii) Best Frontier Investments Limited and the Company both on 26 August 2005;
(g) the rescission agreement in relation to the rescission of the Conditional Sale and Purchase Agreement with the Bemaestro International Limited dated 26 August 2005;
(h) the agreement dated 28 November 2005 and entered into between the Mr. Xu Ming, Mr. Li Jun, Mr. Lin Zhiwei, Mr. Miao Jian, Mr. Jiang Chuan, Ms. Liu Ling and Ms. Zhu Yuan and Ace Bingo Group Limited in relation to the acquisition an aggregate of 51% of the registered capital of Shenzhen Bozone IT Co., Limited;
(i) a placing and subscription agreement dated 12 January 2006 was entered into between, inter alia, Best Frontier Investments Limited, the Company and Pacific Foundation Securities Limited;

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GENERAL INFORMATION

APPENDIX X

(j) the agreement dated 15 March 2006 and entered into between Shenzhen Bozone IT Co. Ltd. and Greatest Luck Limited in relation to the acquisition of a 70% interest in Shenzhen Bozone Mobile Technology Company Limited;
(k) the agreement dated 15 March 2006 and entered into between Mr. Xu Ming and Greatest Luck Limited in relation to the acquisition of a 30% interest in Shenzhen Bozone Mobile Technology Company Limited;
(l) a deed of variation dated 17 March 2006 in relation to the agreement dated 28 November 2005 and entered into between the Mr. Xu Ming, Mr. Li Jun, Mr. Lin Zhiwei, Mr. Miao Jian, Mr. Jiang Chuan, Ms. Liu Ling and Ms. Zhu Yuan and Ace Bingo Group Limited in relation to the acquisition an aggregate of 51% of the registered capital of Shenzhen Bozone IT Co., Limited;
(m) an agreement dated 25 July 2006 entered into between Aptus, China Hua You Group Corporation and Changde State-owned Asset Operation Management Company relating to the increase in the registered capital of Changde Hua You Gas Co. Ltd;
(n) an agreement dated 25 July 2006 entered into between Aptus, China Hua You Group Corporation and Beijing Xin Hua Lian Gas Investment Co. Ltd relating to the increase in the registered capital of Hunan Huayou Natural Gas Transportation & Distribution Company Limited;
(o) an agreement dated 13 April 2006 entered into between Loyalion Limited and Human Friendship Apollo Company Limited in relation to the disposal by Loyalion Limited of a 20.83% equity interest in Your Mart Co. Ltd.; and
(p) the agreement dated 4 August 2006 entered into between Loyalion Limited and Davidson Agents in relation to the disposal by Loyalion Limited of a 55% and 100% equity interest in Wuhu Bee & Bee and Zhuhai Bee & Bee respectively.

9. EXPERTS AND CONSENTS

The followings are the qualifications of the experts who have given opinion and advise, which is contained in this circular:

Name Qualification

W. H. Tang & Partners CPA Limited Certified Public Accountants

W. H. Tang & Partners CPA Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its respective letters and references to its name in the form and context in which they appear.

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GENERAL INFORMATION

APPENDIX X

As at the Latest Practicable Date, W. H. Tang & Partners CPA Limited:

(a) was not interested, directly or indirectly, in any assets which have been acquired or disposed of by or leased to an member of the Enlarged Group or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group since 31 December 2005, being the date to which the latest published audited accounts of the Company were made up; and
(b) did not have any shareholding interest in any member of the Enlarged Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Enlarged Group.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company at 30th Floor, Sunshine Plaza, 353 Lockhart Road, Hong Kong during normal business hours on any weekday other than public holidays, up to and including the date of the EGM:

(a) the memorandum and articles of association of the Company;
(b) the material contracts referred to in the paragraph headed “Material Contracts” in this appendix;
(c) the annual reports of the Company for the last two financial years immediately preceding the issue of this circular;
(d) the circular of the Company dated 22 December 2005 relating to the acquisition of 51% interest in Shenzhen Bozone IT Co., Limited;
(e) the circular of the Company dated 22 May 2006 relating to the disposal of 20.83% interest in Your Mart Co. Limited;
(f) the circular of the Company dated 18 August 2006 relating to the disposal of 55% equity interest in Wuhu Bee & Bee Natural Food Company Limited and 100% equity interest in Zhuhai Fee Trade Zone Bee & Bee Natural Food Company Limited;
(g) the circular of the Company dated 6 October 2006 relating to the proposed bonus issue of shares and bonus issue of warrants;
(h) the service contract dated 18 October 2002 entered into between Madam Cheung Kwai Lan and the Company;
(i) the service contract dated 18 October 2002 entered into between Mr. Chan Tung Mei and the Company;

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GENERAL INFORMATION

APPENDIX X

(j) the service contract dated 18 October 2002 entered into between Mr. Chan Ting and the Company;
(k) the property valuation report of Changde Joint Venture issued by RHL Appraisal Limited, the text of which is set out in Appendix V;
(l) the property valuation report of Hunan Joint Venture issued by RHL Appraisal Limited, the text of which is set out in Appendix VI;
(m) the business valuation report of Changde Joint Venture issued by BMI Appraisals Limited, the text of which is set out in Appendix VII;
(n) the business valuation report of Hunan Joint Venture issued by BMI Appraisals Limited, the text of which is set out in Appendix VIII;
(o) the letter issued from W.H. Tang & Partners CPA Limited and Grand Vinco Capital Limited, the text of which is set out in Appendix IX;
(p) the accountants’ report of Changde Huayou Gas Co. Ltd. and Hunan Huayou Natural Gas Transportation & Distribution Company Limited, the text of which are set out in Appendix II and III to this circular;
(q) the letter from W. H. Tang & Partners CPA Limited regarding the proforma financial information of the Enlarged Group as set out in Appendix IV to this circular; and
(r) the written consents referred to in paragraph 9 of this Appendix.

11. GENERAL

(a) The registered office of the Company is at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681GT, George Town, Grand Cayman, British West Indies, Cayman Islands and the head office and principal place of business of the Company is at 30th Floor, Sunshine Plaza, 353 Lockhart Road, Hong Kong. The share registrar and transfer office of the Company is Standard Registrars Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(b) The Compliance Officer of the Company is Mr. Chan Ting.
(c) The Company Secretary of the Company is Mr. Tsui Wing Tak. Mr. Tsui holds a bachelor’s degree in economics from Macquarie University, Australia. Mr. Tsui is a member of both the Hong Kong Institute of Certified Public Accountants and CPA Australia.
(d) The Qualified Accountant of the Company is Mr. Kwan Yiu Ming, Patrick. Mr. Kwan holds a bachelor degree of commerce in accounting from the Curtin University of Technology in Australia. Mr. Kwan is a fellow member of Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants.

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GENERAL INFORMATION

APPENDIX X

(e) The Company established an audit committee on 18 October 2000 comprising 3 independent non-executive Directors with written terms of reference in compliance with Rules 5.28 to 5.29 of the GEM Listing Rules. The primary duties of the audit committee are to review the Company’s annual report and accounts, half-year reports and quarterly reports and to provide advice and comments thereon to the Board. The audit committee is also responsible for reviewing and supervising the financial reporting process and internal control procedures of the Group. The details of the members are as follows:

Mr. Tian He Nian, aged 66, an independent non-executive Director. He was the deputy head of the Department of United Front Work of the Central Government of the PRC from 1998 to 2003. He is the vice-chairman of China Overseas Association. He is also an independent non-executive director and audit committee member of Aptus. He joined the Group in November 2004.

Mr. Zhao Zhi Ming, aged 64, an independent non-executive Director. He is the committee member of (the Specialist Committee of the China Development Bank) and the Professor of (LiaoNing Technical University). After graduation from the University in 1965, he had worked for several governmental authorities of the PRC, such as (Tianjin Government), (National Energy Investment Company of the PRC) and (China Development Bank). Mr. Zhao had been engaged in the general management, investment, review and approval, and risk management of some sizable national infrastructure projects in the PRC. He has extensive knowledge of and experience in management, investment and capital markets. He is also an independent non-executive director and audit committee member of Aptus. He joined the Group in December 2005.

Mr. To Yan Ming, Edmond, aged 34, an independent non-executive Director. He holds a bachelor degree in commerce in accounting from Curtin University of Technology in Western Australia. He is a practicing accountant and presently the director of Fortitude C.P.A. Limited, Certified Public Accountants. He is a member of both the CPA Australia and Hong Kong Institute of Certified Public Accounts. He worked for one of the international accounting firms, Deloitte Touche Tohmatsu and has over 8 years of experience in auditing, accounting, flotation and taxation matters. He is also an independent non-executive director and audit committee member of Aptus. He joined the Group in January 2006.

(f) The English text of this circular shall prevail over the Chinese text in case of inconsistency.

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NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 8156)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the “Extraordinary General Meeting”) of the shareholders of China Vanguard Group Ltd. (the “Company”) will be held at the 30th Floor, Sunshine Plaza, No. 353 Lockhart Road, Hong Kong on 7 November 2006 at 2:00 p.m. to consider and, if thought fit, pass the following resolution as an ordinary resolution:

“ THAT (i) the conditional capital injection agreement dated 25 July 2006 entered into among (China Huayou Group Contribution), Changde State-owned Asset Operation Management Company and Aptus Holdings Limited, a non-wholly owned subsidiary of the Company relating to, among other matters, the increase in the registered capital of a joint venture under the name of (Changde Huayou Gas Co. Ltd.) and (ii) the conditional capital injection agreement dated 25 July 2006 entering into among (China Huayou Group Contribution), (Beijing Xin Hua Lian Gas Investments Co. Ltd.) and Aptus Holdings Limited, a non-wholly owned subsidiary of the Company relating to, among other matters, the increase in the registered capital of a joint venture under the name of (Hunan Huayou Natural Gas Transportation & Distribution Company Limited) (collectively the “Investments”) be and are hereby approved, ratified and confirmed in all respects and that any one director of the Company be and is hereby authorised to do or execute all such acts or such other documents which the director may deem necessary, desirable or expedient to carry into effect or to give effect to the Investments.”

By order of the Board China Vanguard Group Ltd. Chan Ting Director

Hong Kong, 19 October 2006

Registered office: Principal place of business in Hong Kong: Century Yard 30th Floor Cricket Square Sunshine Plaza Hutchins Drive No. 353 Lockhart Road P.O. Box 2681 GT Hong Kong George Town Grand Cayman British West Indies Cayman Islands

for identification purpose only

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NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Notes:

A member of the Company entitled to attend and vote at the Extraordinary General Meeting convened by the above notice is entitled to appoint one or more proxies to attend and, on a poll, vote instead of such member. A proxy need not be a member of the Company.
In the case of joint holders of shares in the Company, the vote of the senior who tenders a vote whether in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holders), seniority being determined by the order in which names stand in the register of members.
In order to be valid, the form of proxy together with a power of attorney or other authority (if any) under which it is signed or a notarially certified copy thereof, must be deposited at the principal place of business of the Company at the 30th Floor, Sunshine Plaza, No. 353 Lockhart Road, Hong Kong not less than 48 hours before the time appointed for holding the Extraordinary General Meeting (or any adjournment thereof).
As at the date of this notice, the directors of the Company are Madam Cheung Kwai Lan, Mr. Chan Tung Mei, Mr. Lau Hin Kun, Mr. Chan Ting, Mr. Shaw Kyle Arnold Junior, Mr. Tian He Nian, Mr. Zhao Zhi Ming and Mr. To Yan Ming, Edmond.

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AI assistant

Sinopharm Tech Holdings Limited — Proxy Solicitation & Information Statement 2006

51300_rns_2006-10-19_ebd4ff09-2e49-423c-95f0-7708d26986d2.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

This circular does not constitute an offer of, nor is it calculated to invite offers for, shares in or other securities of China Vanguard Group Limited.

MAJOR TRANSACTION:

INVESTMENT IN JOINT VENTURES FOR PARTICIPATION IN THE NATURAL GAS BUSINESS

Grand Vinco Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

MAJOR TRANSACTION:

INVESTMENT IN JOINT VENTURES FOR PARTICIPATION IN THE NATURAL GAS BUSINESS

INTRODUCTION

CHANGDE AGREEMENT

(iii) Aptus.

Conditions precedent

LETTER FROM THE BOARD

Financial Information of Changde Joint Venture

Changde Capital Contribution

LETTER FROM THE BOARD

Before completion of the Changde Capital Contribution

After completion of the Changde Capital Contribution

Basis of contribution

HUNAN AGREEMENT

LETTER FROM THE BOARD

(iii) Aptus.

Conditions precedent

Financial information of Hunan Joint Venture

LETTER FROM THE BOARD

Hunan Capital Contribution

Before completion of the Hunan Capital Contribution

LETTER FROM THE BOARD

Basis of contribution

BACKGROUND OF CHANGDE JOINT VENTURE

Management discussion and analysis

Financial performance

Liquidity, financial resources and capital structure

Contingent liabilities

Commitments

Significant investments and acquisitions

Employees

Financial performance

Contingent liabilities

Commitments

Significant investments and acquisitions

Financial performance

LETTER FROM THE BOARD

Liquidity, financial resources and capital structure

Contingent liabilities

Commitments

Significant investments and acquisitions

Employees

Financial performance

Contingent liabilities

Commitments

Significant investments and acquisitions

BACKGROUND OF HUNAN JOINT VENTURE

Management discussion and analysis

Financial performance

Liquidity, financial resources and capital structure

Contingent liabilities

Commitments

Significant investments and acquisitions

Employees

REASONS FOR AND BENEFITS OF THE INVESTMENTS

LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECT OF THE GROUP AND CHANGDE JOINT VENTURE AND HUNAN JOINT VENTURE

The Group

LETTER FROM THE BOARD

Changde Joint Venture

Hunan Joint Venture

LETTER FROM THE BOARD

THE PROPOSED PLACING OF THE CONVERTIBLE NOTES

LETTER FROM THE BOARD

LETTER FROM THE BOARD

FINANCIAL EFFECT OF THE INVESTMENTS

Net assets

Earnings

Sinopharm Tech Holdings Limited Proxy Solicitation & Information Statement 2006