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 stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your securities of Winsan (China) Investment Group Company Limited, you should at once hand this Circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

This Circular does not constitute an offer of, nor is it calculated to invite offers for, shares in, or other securities of Winsan (China) Investment Group Company Limited.

The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this Circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

*

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability)

(Stock Code: 85)

POSSIBLE ACQUISITION OF 65% EQUITY INTEREST IN SHENZHEN SANG FEI CONSUMER COMMUNICATIONS COMPANY LIMITED FROM CHINA ELECTRONICS CORPORATION (A VERY SUBSTANTIAL ACQUISITION CONSIDERED AS AN APPLICATION FOR NEW LISTING OF WINSAN) AND RELATED APPLICATION FOR WHITEWASH WAIVER

PROPOSED CHANGE OF NAME

PROPOSED GRANT OF SPECIAL MANDATE TO ISSUE SHARES

PROPOSED CHANGE IN BOARD LOT SIZE

Sponsor to the new listing application of Winsan (China) Investment Group Company Limited

The Hongkong and Shanghai Banking Corporation Limited

Independent financial adviser to the Independent Board Committee of Winsan (China) Investment Group Company Limited

Altus Capital Limited

A letter of advice from Altus Capital Limited to the independent board committee of Winsan (China) Investment Group Company Limited is set out on pages 40 to 85 of this Circular.

A notice convening a special general meeting of Winsan (China) Investment Group Company Limited to be held at Tianshan and Lushan Rooms, 5/F., Island Shangri-La Hong Kong, Pacific Place, Supreme Court Road, Central, Hong Kong at 4:00 p.m. on Wednesday, 14th July, 2004 to consider the Acquisition and the Non-exempt Ongoing Connected Transactions, the Whitewash Waiver, the Name Change and the Special Mandate is set out on pages VI-1 to VI-3 of this Circular. If they are not able to attend the meeting in person, shareholders are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Abacus Share Registrars Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting. Completion and return of the form of proxy will not preclude shareholders from attending and voting in person at the meeting should they so wish.

For identification purposes only

21st June, 2004

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Glossary of technical terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Expected timetable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Letter from CEC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	39
Letter from Altus Capital Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40
Information on the New Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	86
Appendix I – Accountants’ report on Sang Fei . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Appendix II – Financial information on the Winsan Group. . . . . . . . . . . . . . . . . . .	II-1
Appendix III – Unaudited pro forma financial information
of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	III-1
Appendix IV – Property valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
Appendix V – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V-1
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1

– i –

DEFINITIONS

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

“Acquisition”	the proposed acquisition of the Target Equity Interest by
	Winsan pursuant to the Acquisition Agreement
“Acquisition Agreement”	the agreement dated 10th December, 2003 among
	Winsan, Winsan International and CEC in relation to,
	inter alia, the Acquisition
“Amoi”	夏新電子股份有限公司(Amoi Electronics Co., Ltd.),
	a subsidiary of CEC, further information of which is set
	out in section 9D “Information on the New Group –
	Relationship with the CEC Group – Competition”
“Announcement”	the joint announcement of Winsan and CEC dated 20th
	December, 2003 in relation to the Acquisition
“ASP”	an abbreviation for “average selling price”, measured as
	turnover divided by total units sold
“associates”	has the meaning ascribed to that term in the Listing Rules
“Bai Li”	深圳桑達百利電器有限公司(Shenzhen Sang Da Baili
	Electronics Co. Ltd.), a subsidiary of SZST established
	in the PRC
“Board”	the board of directors of Winsan from time to time
“Business Day”	a day, other than a Saturday, on which banks in Hong
	Kong are generally open for business
“Business Services Agreement”	a business services agreement dated 17th June, 2004
	entered into between CEC and Sang Fei in respect of the
	sales of products and purchases of raw materials by Sang
	Fei for the CEC Group, and the provision by the CEC
	Group to Sang Fei of products, design, after sales
	services, canteen facilities and renovation services
“CAGR”	compound annual growth rate
“CCASS”	the Central Clearing and Settlement System established
	and operated by HKSCC

– 1 –

DEFINITIONS

“CCID Consulting”	CCID Consulting Co. Ltd., a joint stock limited company
	directly affiliated to China Center of Information Industry
	Development of MII
“CEC”	China Electronics Corporation, a state-owned enterprise
	established under the laws of PRC
“CEC Group”	CEC and its subsidiaries excluding Sang Fei
“CECM”	北京中電奧盛移動通信科技有限公司(CEC Mobile
	Co., Ltd), an associate of CECT, further information of
	which is set out in section 9D “Information on the New
	Group – Relationship with the CEC Group –
	Competition”
“CECT”	中電通信科技有限責任公司(CEC Telecom Technology
	Co., Ltd.), an associate of CEC, further information of
	which is set out in section 9D “Information on the New
	Group – Relationship with the CEC Group –
	Competition”
“CECW”	中電賽龍通信研究中心有限責任公司(CEC Wireless
	R&D Ltd), a subsidiary of CEC established in December
	1999 which became a sino foreign equity joint venture
	between CEC and the Cellon Group on 26th August,
	2002, further information relating to which is set out in
	section 9D “Information on the New Group –
	Relationship with the CEC Group – Competition”
“Cellon France”	Cellon France S.A.S., a subsidiary of CECW established
	in France
“Cellon Group”	Cellon International Holding Corp. or its subsidiaries,
	being an Independent Third Party group of companies
	which engage in the design and development of wireless
	modules and terminal device

“Company” or “Winsan” Winsan (China) Investment Group Company Limited, a company incorporated in the Cayman Islands and continued in Bermuda with limited liability, whose shares are listed on the Stock Exchange

“Companies Act” the Companies Act, 1981 of Bermuda “Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)

– 2 –

DEFINITIONS

“Completion” completion of the sale and purchase (directly or indirectly) of the Target Equity Interest in accordance with the provisions of the Acquisition Agreement “Consideration Shares” the 6,500,000,000 new Winsan Shares to be issued by Winsan as consideration for the Acquisition “Cooperation Agreement” the cooperation agreement dated 22nd October, 2001 between Sang Fei, a member of the Philips Group, CECW and Cellon France in respect of the design, development and manufacture of certain mobile phones for the Philips Group, further particulars of which are set out in section 10C “Information on the New Group-Relationship with the Philips Group – Transactions with the Philips Group”

“DC” an abbreviation for the “distribution configuration” process of Sang Fei, being that part of its mobile phone production process where the mobile phones are configured with the software applications suitable for the designated market of those mobile phones
“DIC Group” Shenzhen DIC Information Technologies Co., Ltd (深圳迪科信息技術有限責任公司 ), and the companies through which Winsan holds its 70% equity interest in that company
“Directors” the directors of the Company, and where the context requires, the existing Directors
“Dopod” 武漢多普達通訊有限公司 (Wuhan Dopod Communication Corp), a subsidiary of CEC, further information of which is set out in section 9D “Information on the New Group – Relationship with the CEC Group – Competition”
“Employee Options” the options to subscribe for in aggregate 80,480,000 Winsan Shares granted pursuant to the employee share option schemes of Winsan and outstanding as at the date of this Circular, with exercise prices per Winsan Share ranging from HK$0.173 to HK$1.53

– 3 –

DEFINITIONS

“Executive”	the executive director of the Corporate Finance Division
	of the SFC from time to time and any delegate of such
	executive director
“FA”	an abbreviation for the “final assembly” process of Sang
	Fei, being that part of its production process during which
	component parts and modules are assembled to produce
	the mobile phone product
“Future Disposals”	the disposals of the DIC Group and the Transonline
	Group within 2 weeks after Completion
“Gartner”	Gartner, Inc., a research and advisory firm founded in
	1979, the businesses of which consist of research,
	consulting, measurement, events and executive programs
“Golden Cellular”	金蜂通信有限責任公司(Golden Cellular
	Communications Co., Ltd.), a subsidiary of CEC, further
	information of which is set out in section 9D “Information
	on the New Group – Relationship with the CEC Group –
	Competition”
“Group”	the Company and its subsidiaries
“HKSCC”	Hong Kong Securities Clearing Company Limited
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC
“HSBC”	The Hongkong and Shanghai Banking Corporation
	Limited, the financial adviser to CEC in respect of the
	Acquisition and the sponsor to Winsan in respect of its
	new listing application, a deemed registered institution
	for Types 1, 4, 6, 7 and 9 regulated activities under the
	SFO and a licensed bank under the Banking Ordinance
	(Chapter 155 of the Laws of Hong Kong)
“IDC”	IDC Company, a global market intelligence and
	advisory firm in the information technology and
	telecommunications industries

– 4 –

DEFINITIONS

“Independent Board Committee”
“Independent Shareholders”
“Independent Third Party”
“Industrial Cooperation Contract”
“Issue Price”
“Last Dealing Date”
“Latest Practicable Date”
“Listing Committee”
“Listing Rules”

the independent board committee comprising Messrs. Wong Po Yan and Chan Kay Cheung, the independent non-executive Directors, who have been appointed to advise the Independent Shareholders on whether or not the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions are fair and reasonable

Shareholders other than Winsan International, Mr. Chan, their associates and parties acting in concert with any of them with respect to Winsan for the purposes of the Takeovers Code

an independent third party not connected with the Directors, chief executive or substantial shareholders of Winsan or any of its subsidiaries or their respective associates (as defined under the Listing Rules) and not being a party acting in concert with Winsan International, Mr. Chan, or their associates with respect to Winsan for the purposes of the Takeovers Code

the industrial cooperation contract dated 9th December, 1996 (and amended by agreements on 7th October, 1999 and as of 1st April, 1999) and between a member of the Philips Group and Sang Fei, in respect of certain technology and other support to be provided by the Philips Group to Sang Fei, further particulars of which are set out under section 3B of “Information on the New Group – History and Development – Sang Fei”
HK$0.04 per Consideration Share
19th December, 2002, being the last trading day for the Winsan Shares prior to the suspension of dealings of Winsan Shares on 20th December, 2002, pending the issue of the Announcement
16th June, 2004, being the latest practicable date prior to the printing of this Circular for ascertaining certain information in this Circular

the listing committee of the Stock Exchange

the Rules Governing the Listing of Securities on the Stock Exchange

– 5 –

DEFINITIONS

“Main Board”

the stock market (excluding the option market) operated by the Stock Exchange which is independent from and operated in parallel with the Growth Enterprise Market (“GEM”) of the Stock Exchange. For the avoidance of doubt, the Main Board excludes GEM

“MII”

Ministry of Information Industry of the PRC

“MOC” Ministry of Commerce of the PRC, where the context so requires, includes the previous Ministry of Foreign Trade and Economic Corporation of the PRC “Mr. Chan”

Mr. Chan Chak Shing, Director and the chairman of the Board and the ultimate controlling shareholder of Winsan
“Name Change”

the proposed change of name of the Company referred to in paragraph 9 “Proposed Change of Name” of the Letter from the Board

“New Directors”

Messrs. Yang Xiaotang, Tong Baoan, Fan Qingwu and Hua Longxing, being the new Directors proposed to be appointed to the board of Directors upon Completion

“New Group”

Winsan and its subsidiaries immediately after completion of the Acquisition and the Future Disposals, and where the context requires, Winsan and Sang Fei as if the post Completion shareholding structure were in place since 1st January, 2004 and in respect of the historical financial information and other information contained in the section “Information on the New Group”, the New Group refers, unless the context otherwise requires, to that of Sang Fei

“New Share Option Scheme”

the share option scheme of the Company adopted on 20th June, 2002

“Non-exempt Ongoing Connected Transactions”

the transactions between the New Group and the CEC Group referred to in section 11C “Information on the New Group – Connected Transactions – Non-exempt Ongoing Connected Transactions requiring Independent Shareholders’ approval” which require Independent Shareholders’ approval

– 6 –

DEFINITIONS

“NPD”	an abbreviation of the process called “new product
	development” of Sang Fei, being the process during
	which new products are developed by Sang Fei as
	described in section 6J “Information on the New Group
	– Operations – Product Development”
“NPI”	an abbreviation of the process called “new product
	introduction” of Sang Fei, being the process during which
	new products for OEM customers are introduced for mass
	production by Sang Fei as described in section 6J
	“Information on the New Group – Operations – Product
	Development”
“Old Share Option Scheme”	the share option scheme of the Company adopted on 5th
	July, 1997 and terminated on 20th June, 2002
“Philips”	Philips Consumer Communications B.V. incorporated in
	the Netherlands and/or飛利浦（中國）投資有限公司
	(Philips (China) Investment Company Limited)
	established in the PRC, being members of the Philips
	Group ultimately owned by the Philips Group
“Philips Group”	Koninklijke Philips Electronics N.V., a company listed
	on the New York and the Amsterdam stock exchanges
	and its subsidiaries
“Placing”	the possible placing of up to 610 million new Winsan
	Shares by Winsan as contemplated under the Preliminary
	Placing Agreement
“PRC”	the People’s Republic of China and, for the purpose of
	this Circular, excluding Hong Kong, Taiwan and Macau
“Preliminary Placing Agreement”	the preliminary placing agreement dated 17th June, 2004
	between Winsan and HSBC in relation to the Placing as
	described in paragraph 2 “Possible Placing of Winsan
	Shares” of the Letter from the Board
“product return rate”	in respect of Sang Fei’s OEM business, the number of
	mobile phones which are not accepted by an OEM
	customer of Sang Fei on delivery expressed as a
	percentage of the total number of mobile phones delivered
	to that OEM customer; and in respect of Sang Fei’s own-
	branded products, the number of mobile phones which
	are returned for exchange by its customers or end users,
	expressed as a percentage of the total number of those
	mobile phones sold to its customers

– 7 –

DEFINITIONS

“Purchase Price”	HK$260,000,000
“SAFE”	the State Administration of Foreign Exchange of the PRC
“Sang Fei”	深圳桑菲消費通信有限公司(Shenzhen Sang Fei
	Consumer Communications Company Limited), a sino-
	foreign equity joint venture company established under
	the laws of the PRC and owned as to 65% by a wholly-
	owned subsidiary of CEC, 25% by Philips and 10% by
	SZST as at the Latest Practicable Date
“Sang Fei BVI”	Sang Fei (BVI) Company Limited, a company
	incorporated in the British Virgin Islands and indirectly
	wholly-owned by CEC
“SARS”	severe acute respiratory syndrome
“SFC”	the Securities and Futures Commission of Hong Kong
“SFO”	the Securities and Futures Ordinance (Chapter 571 of
	the Laws of Hong Kong)
“SGM”	the special general meeting of Winsan to be convened
	for the purpose of approving, among other matters, the
	Acquisition and the Non-exempt Ongoing Connected
	Transaction, the Whitewash Waiver, the Special Mandate
	and Name Change
“Share(s)” or “Winsan Shares”	ordinary share(s) of HK$0.01 each in the capital of the
	Company
“Shareholder(s)”	holder(s) of the Shares
“Special Mandate”	the special mandate to issue and allot new Winsan Shares
	referred to in paragraph 10 “Special Mandate” of the
	Letter from the Board
“Sponsor”	HSBC, the sponsor to Winsan in respect of its new listing
	application and the financial adviser to CEC with respect
	to the Acquisition

– 8 –

DEFINITIONS

“sq.ft” square feet “sq.m.” square metres “Stock Exchange” The Stock Exchange of Hong Kong Limited “SZST” 深圳市桑達實業股份有限公司 (Shenzhen SED Industry Co., Ltd.) established in the PRC and whose A shares are listed on the Shenzhen Stock Exchange and is indirectly owned as to approximately 54.35% by CEC as at the Latest Practicable Date
“Takeovers Code” the Hong Kong Code on Takeovers and Mergers
“Target Equity Interest” the 65% of the equity interest in Sang Fei legally and beneficially owned by the CEC Group (excluding SZST) as at the date of the Acquisition Agreement and at Completion
“Transonline Group” Transonline Holdings and its subsidiaries
“Transonline Holdings” Transonline Holdings Limited, an investment holding company incorporated in Bermuda on 14th March, 2003 and wholly-owned by Winsan through which Winsan holds its interest in the Transonline Project
“Transonline Project” the contractual cooperation between Winsan and certain of its subsidiaries and the Research Institute of Highway under the Ministry of Communication of the PRC known as “The China Transportation Online Project” which creates and operates services portals which serve the transportation industry in the PRC
“USA” United States of America
“Whitewash Waiver”

a waiver from the Executive pursuant to Note 1 on Dispensations from Rule 26 of the Takeovers Code in respect of the obligations of CEC and parties acting in concert with it to make a mandatory general offer for all the Winsan Shares (other than the Consideration Shares) as a result of the Acquisition

“Winsan Group” Winsan and its subsidiaries

– 9 –

DEFINITIONS

“Winsan International”	Winsan International Holdings Limited, a company
	incorporated in the British Virgin Islands with limited
	liability, being interested in approximately 50.14% of
	the issued share capital of Winsan as at the Latest
	Practicable Date
“WTO”	World Trade Organisation
“YOY”	year on year
“HK$”	Hong Kong dollars
“RMB”	Renminbi
“US$”	United States dollars
“Euro”	the basic monetary unit of most members of the European
	Union
“%”	per cent

For illustration purposes only and unless otherwise stated, the conversion rate of RMB1.0606 : HK$1 has been used in this Circular. In this Circular, sq.m. are converted into sq.ft at the rate of 1 sq.m. : 10.9 sq.ft.

For the purposes of this Circular, references to parties acting in concert with CEC exclude the Philips Group. Under the Takeovers Code, the Philips Group are associated companies of CEC by virtue of their 25% equity interest in Sang Fei and are therefore presumed to be acting in concert with CEC. CEC has made submissions to the SFC to have such presumption rebutted. The SFC has, based on the submissions made, confirmed that such presumption is rebutted.

For ease of reference only, the names of PRC established companies and entities have been included in this Circular in both the Chinese and English languages and the English names of these companies and entities are either English translations of their respective official Chinese names or English tradenames used by them. In the event of any inconsistency between the English names and their respective official Chinese names, the Chinese names shall prevail.

– 10 –

GLOSSARY OF TECHNICAL TERMS

“BoM” an abbreviation of “Bills of Materials”, a manufacturing industry term which refers to the list of items required to manufacture a product “CDMA” an abbreviation of “Code Division Multiple Access”, a system that allows multiple users to share one or more radio channels for service by adding a unique code to each data signal that is being sent to and from each of the radio transceivers, which code is used to spread the data signal to a bandwidth much wider than is necessary to transmit the data signal without the code “CDMA 2000” a member of the family of 3G technologies approved by the International Telecommunications Union; CDMA 2000 is backwardly compatible with the first commercial CDMA Cellular System, CDMA-One “FTA” an abbreviation of “Full Type Approval”, a manufacturing industry term which generally refers to the certification given by a recognised accreditation authority in respect of the type and range of tests relevant to approval application for a particular product, before it could be marketed. In the case of GSM mobile phone manufacturers, different type approvals are required before an International Mobile Equipment Identity Number (IMEI) will be given to each model of mobile phones they manufacture for use on GSM 900, GSM 1800 and UMTS networks, and before their mobile phones could be used in the target markets

“GPRS” an abbreviation of “General Packet Radio Service”, a standard for wireless communications which runs at speeds up to 115 kilo bits per second, compared with current GSM systems’ 9.6 kilo bits “GSM” an abbreviation of “Global System for Mobile Communications”, a digital cellular telephone system which is now available in most parts of the world, and uses 200 kHz wide channels that allows eight simultaneous calls on the same radio frequency

“IC” an abbreviation of “Integrated Circuit”, an electronic circuit consisting of many individual circuit elements and electronic components

– 11 –

GLOSSARY OF TECHNICAL TERMS

“ISO 9001:2000”

a certification from the International Organisation for Standardisation which belongs to the ISO 9000 family of quality management standards. The ISO 9000 family represents an international consensus on good management practices with the aim of ensuring that the organization can timely deliver the product or services, where the context so requires, includes the previous ISO 9002

“ISO 14001:1996” a certification from the International Organisation for Standardisation which belongs to the ISO 14000 family of environmental management standards. The ISO 14000 family sets requirements and standards for environmental management systems with the aim of minimising harmful effects on the environment

“JAVA” a general-purpose object-oriented programming language “LCD” an abbreviation of “Liquid Crystal Display”, a display technology that relies on polarising filters and liquidcrystal cells rather than phosphors eliminated by electron beams to produce an on-screen image. Laptops, notebooks, PDAs, and mobile phones use LCDs
“MMS” an abbreviation of “Multimedia Message Service”, a service which allows for transmission of multimedia over the mobile network
“modules” in the context of mobile phone production, a separate constituent and functional part of the mobile phone complete with related circuitary and could be assembled to the main circuit board at final assembly to create the mobile phone
“MPEG” an abbreviation of “Moving Pictures Experts Group” which is a working group of International Organization for Standardization/International Electrotechnical Commission in charge of the development of standards for coded representation of digital audio and video

– 12 –

GLOSSARY OF TECHNICAL TERMS

“MRP” an abbreviation of “Material Requirements Planning”, being the planning done to ensure that necessary materials are available on hand when needed for production or sales. An MRP document typically provides four basic items of information, when to place order, how much to order, who to order from and when the items need to be on hand

“ODM”	an abbreviation of “Original Design Manufacturer”, being
	a manufacturer that designs and makes products in
	accordance with the customers’ conceptual requirements
	and which carry the customers’ brandnames
“OEM”	an abbreviation of “Original Equipment Manufacturer”
	being a manufacturer that makes products in accordance
	with the specification, and which carry the brandnames,
	of its customers
“PCB”	an abbreviation of “Printed Circuit Board”, a flat plate
	or base of insulating material containing a pattern of
	conducting material. It becomes an electrical circuit when
	components are attached and soldered to it
“PCBA”	an abbreviation of “Printed Circuit Board Assembly”,
	the process by which PCBs are produced
“PDA”	an abbreviation of “Personal Digital Assistant”, a
	handheld device that combines computing telephone/fax
	and networking features. A typical PDA can function as
	a cellular phone, fax send and personal organiser
“PHS”	an abbreviation of “Personal Handyphone System”, a
	digital cordless technology developed in Japan and
	deployed by NTT DoCoMo and other Japanese operators.
	It offers two-way communications, data services and
	Internet access
“QS-9000”	an ISO 9000 derivative which applies to all internal and
	external suppliers who furnish parts or materials for
	production or service
“SMA”	an abbreviation for “Surface Mount Assembly”, the
	production process during which the circuit board for a
	mobile phone product is produced

– 13 –

GLOSSARY OF TECHNICAL TERMS

“SMS” an abbreviation of “Short Message Service”, a service which allows for transmission of short messages over the mobile network “TD-SCDMA” an abbreviation of “Time Division-Synchronous CDMA”, a CDMA variant that offers high data rates and greater coverage “WCDMA” an abbreviation of “Wideband CDMA”, a high-speed 3G mobile wireless technology with the capacity to offer higher data speeds than CDMA. WCDMA can reach speeds of up to 2 Mbps for voice, video, data and image transmission “2G” an abbreviation of “Second Generation” which is the second generation of digital mobile phone technologies including GSM, CDMA IS-95 “2.5G” an abbreviation of “Two point five Generation” which is the enhancement of GSM which includes technologies such as GPRS “3G” an abbreviation of “Third Generation” which is the third generation of mobile communications technology enabling communication using voice, text, images and video “UMTS” a n a b b r e v i a t i o n f o r “ U n i v e r s a l M o b i l e Telecommunications System”, a 3G mobile technology that will deliver broadband information speeds up to 2 Mbit s/sec “USB” an abbreviation of “Universal Serial Bus”, a plug-andplay interface between a computer and add-on device (such as keyboards, telephones and PDAs). With USB, a new device can be added to a computer without having to add an adapter card or to turn the computer off “WAP” an abbreviation of “Wireless Application Protocol”, which enables mobile users with wireless devices to easily access and interact with information services

– 14 –

EXPECTED TIMETABLE

2004

Forms of proxy in respect of the SGM to be returned by . . . . . . . . . . . . 4:00 p.m. on 12th July SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on 14th July

Expected date of completion of Acquisition (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . 6th October

Note:

This assumes that all conditions precedent to completion of the Acquisition are fulfilled (or, if waivable, waived by the relevant party) on or before 30th September, 2004. In particular, Shareholders should note that listing permission for the Consideration Shares (the grant of which is a condition precedent to Completion) will not be granted until the Placing is effected. According to the Acquisition Agreement, these conditions precedent must be fulfilled on or before 30th September, 2004 (or such later date as the parties may agree) if Completion were to take place. Accordingly, Shareholders should note that the Acquisition may or may not proceed on the date specified above or at all .

– 15 –

LETTER FROM THE BOARD

*

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability)

Directors:

Mr. Chan Chak Shing (Chairman)

Mr. Chan Hon Ching (Deputy Chairman)

Ms. Lo Mei Chun

Ms. Chiu King Cheung[†]

Registered office: Clarendon House 2 Church Street Hamilton, HM 11 Bermuda

Mr. Wong Po Yan[††]
Mr. Chan Kay Cheung[††]
Non-executive Director
†† Independent Non-executive Director

Principal place of business in Hong Kong:

Room 908, 9th Floor Sun Hung Kai Centre No. 30 Harbour Road Wanchai Hong Kong

21st June, 2004

To the Shareholders and the optionholders

Dear Sir or Madam,

PROPOSED CHANGE OF NAME

PROPOSED GRANT OF SPECIAL MANDATE TO ISSUE SHARES

PROPOSED CHANGE IN BOARD LOT SIZE

INTRODUCTION

It was announced by the Directors on 20th December, 2003 that Winsan has entered into the Acquisition Agreement with CEC and Winsan International, pursuant to which Winsan

For identification purposes only

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LETTER FROM THE BOARD

agreed to purchase, and CEC agreed to sell, the Target Equity Interest in consideration of the Purchase Price, which is to be satisfied by the issue of the Consideration Shares. As conditions precedent to Completion, the Whitewash Waiver must be obtained by CEC and the shareholders’ approval of both the Acquisition and the Whitewash Waiver has to be obtained by Winsan. In order to appropriately reflect the position of the New Group and facilitate future activities of the Company after Completion, the Directors will also seek approval of the Shareholders for the Non-exempt Ongoing Connected Transactions and the Change of Name.

The purpose of this Circular is to give you further information in respect of the Acquisition, the Non-exempt Ongoing Connected Transactions, the Special Mandate, the Name Change and the change in board lot size. The Acquisition is a very substantial acquisition of Winsan under the Listing Rules and Winsan is to be treated as a new listing applicant as a result (see paragraph 8 “Requirements of the Listing Rules” below for further details). This Circular also contains information regarding the New Group as required by the Listing Rules.

1. THE ACQUISITION

Summary of the Acquisition

Winsan has agreed on 10th December, 2003 to acquire the Target Equity Interest and to issue the Consideration Shares as consideration to satisfy the Purchase Price. Further details of the Acquisition Agreement are set out below.

The following diagrams illustrate the corporate and shareholding structure of Winsan and its principal subsidiaries immediately before and after the Placing, Completion and the Future Disposals:

Before the Placing and Completion

==> picture [305 x 193] intentionally omitted <==

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

Other existing Winsan International Other Shareholders
Directors (Note 6)
0.96% 52.25% (Note 1) 46.79%
Winsan
100% 70%
Transonline Holdings (Notes 2 & 3) Shenzhen DIC Information Technologies
– investment holding Co., Ltd. (Note 2)
70% (Note 3) (深圳迪科信息技術有限責任公司)
– provision of broadband and cable
The Transonline Project (華夏交通在線) television related platform and
– provision of transport logistics services equipment for cable television and
– in Chinadevelopment of a freight information telecommunication services operators
system in joint venture with the
Research Institute of Highway
----- End of picture text -----

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LETTER FROM THE BOARD

After the Placing, Completion and the Future Disposals

==> picture [336 x 142] intentionally omitted <==

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

Other existing
Winsan International CEC (Note 4) Other Shareholders
Directors (Note 6)
0.17% 9.40% (Note 1) 74.98% 15.45%
Winsan
65%
The Philips Group (Note 5) SZST (Note 7)
25% 10%
Sang Fei
– the manufacturing and sale of
mobile phones
----- End of picture text -----

Notes:

These shareholdings include those of Winsan International’s associates and parties acting in concert with it.
Winsan is to dispose of the DIC Group and the Transonline Group within 2 weeks after Completion (see paragraph 6 “Reasons for the Acquisition and the Future Disposals” below).
This is the effective interest of Transonline Holdings in the Transonline Project.
CEC may direct that the Consideration Shares be issued to its wholly-owned subsidiary.
Winsan will hold the Target Equity Interest through Sang Fei BVI.
These other Directors are Mr. Chan Hon Ching and Ms. Chiu King Cheung (see paragraph 5 “Effects of the Acquisition and the Placing”).
SZST is indirectly owned as to approximately 54.35% by CEC as at the Latest Practicable Date.

The Acquisition Agreement

On 10th December, 2003, the parties specified below entered into the Acquisition Agreement which contains terms including those described below.

Parties to the 1. CEC, an Independent Third Party Agreement:
Winsan
Winsan International, the controlling shareholder of Winsan

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LETTER FROM THE BOARD

Brief particulars of CEC and Winsan are set out below.

Winsan International is wholly-owned by Mr. Chan, the chairman of Winsan. As at the date of the Announcement, Winsan International, Mr. Chan and his spouse held a total of 814,372,870 Winsan Shares, representing about 52.25% of the voting rights in Winsan.

Summary:

Subject matter of purchase:
Consideration:

Winsan agreed, conditionally, to acquire the Target Equity Interest at the Purchase Price, which is to be satisfied by the issue of the Consideration Shares.

The Target Equity Interest is 65% equity interest in Sang Fei currently held by Sang Fei BVI (which is wholly-owned by CEC). Further information regarding Sang Fei is set out in “Information on the New Group” below. The entire issued share capital of Sang Fei BVI will be transferred to Winsan on Completion. It is an investment holding company established solely for the purpose of holding the Target Equity Interest and has no assets and liabilities other than such holding.

The Purchase Price is HK$260,000,000. The Purchase Price will be satisfied by the allotment and issue of the Consideration Shares to CEC or its nominee by Winsan at HK$0.04 per Winsan Share.

The Consideration Shares represent (i) about 417.07% of the existing issued share capital of Winsan; (ii) about 80.66% of the existing issued share capital of Winsan as enlarged by the issue of the Consideration Shares; and (iii) about 74.98% of the enlarged issued share capital of Winsan immediately after Completion and the Placing (assuming that there will be no change in its share capital from the Latest Practicable Date to Completion save for the issue of the Consideration Shares and the Shares to be issued pursuant to the Placing). The Consideration Shares will upon issue rank pari passu with the other issued Winsan Shares. In respect of dividends, as Winsan has been recording losses, no dividend will be paid in respect of Winsan Shares prior to Completion.

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LETTER FROM THE BOARD

The Purchase Price and the Issue Price per Consideration Share were arrived at after arms’ length negotiations among the parties, by reference to:

the historical earnings of Sang Fei; and
the average closing price per Winsan Share of HK$0.047 for the period of 23 consecutive trading days in the one month from 19th November, 2002 up to and including the Last Dealing Date.

The Issue Price per Consideration Share represents a discount of about 38.5% to the closing price per Winsan Share of HK$0.065 as quoted on the Stock Exchange on the Last Dealing Date and a discount of about 14.2% to the 10-day average closing price per Winsan Share of HK$0.047 as quoted on the Stock Exchange for the period from 6th December, 2002 to the Last Dealing Date.

Conditions precedent:

Completion is conditional upon the fulfilment (or waiver, in certain cases as stated below) of various conditions precedent. The conditions precedent include, among others, the following:

all PRC regulatory approvals and permissions required to give effect to the transactions contemplated under the Acquisition Agreement having been obtained;
CEC being satisfied with its due diligence review of the legal and financial affairs of Winsan in all material respects;
Winsan being satisfied with its due diligence review of the legal and financial affairs of Sang Fei in all material respects and receipt by Winsan of a PRC legal opinion relating to Sang Fei and its ownership and the legality and validity of the transactions contemplated under the Acquisition Agreement in form and substance to Winsan’s satisfaction;

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LETTER FROM THE BOARD

the granting by the Executive to CEC and, all persons with which it is or is deemed to be acting in concert, of the Whitewash Waiver (either unconditionally or subject to such conditions as CEC may reasonably agree);
the Listing Committee of the Stock Exchange granting listing of and permission to deal in the Consideration Shares and having approved the new listing application filed by Winsan as a result of the Acquisition;
the current listing of the Winsan Shares not having been withdrawn or cancelled and the Winsan Shares being continuously traded on the Stock Exchange (save for any suspension of dealings for not more than 10 full consecutive trading days of the Stock Exchange and any suspension of dealing pending the issue of the formal announcement of the transactions contemplated under the Acquisition Agreement) and the Stock Exchange and/or SFC not having indicated that such listing is likely to be withdrawn or cancelled (or any conditions being attached thereto other than such conditions as are acceptable to CEC acting reasonably) following and as a result of Completion; and
the Shareholders approving the Acquisition Agreement and the transactions contemplated thereunder, including the Whitewash Waiver and the issue and the allotment of the Consideration Shares.

Winsan may waive the condition described in paragraph 3 above. CEC may waive the conditions described in paragraphs 2, 4 or 6 above. However, CEC may only waive the condition in paragraph 4 above if it demonstrates to the satisfaction of the Executive the sufficiency of its financial resources for making a mandatory offer as required under the Takeovers Code. CEC has indicated that it does not intend to waive such condition.

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LETTER FROM THE BOARD

If the above conditions precedent are not fulfilled or waived (as provided in the Acquisition Agreement) in writing on or before 30th June, 2004 (or such later date as may be agreed), the Acquisition Agreement will terminate and none of the parties shall have any claim against the others for costs, damages, compensation or otherwise, save in respect of any prior breach. The parties to the Acquisition Agreement have on 18th June, 2004 agreed in writing to extend that long stop date to 30th September, 2004.

As at the Latest Practicable Date, the Executive has indicated that it will grant the Whitewash Waiver to CEC and all persons with which it is or is deemed to be acting in concert, subject to approval by the Independent Shareholders of the Whitewash Waiver, which is to be voted by poll at the SGM. On 17th June, 2004, the Listing Committee of the Stock Exchange has approved in principle Winsan’s new listing application. However, the Stock Exchange has also indicated that listing of and permission to deal in the Consideration Shares (being that required in condition precedent numbered 5 above) will only be granted after Winsan has demonstrated that it will be able to comply with the requirements of Rule 8.08 of the Listing Rules on the date of Completion.

Completion:

Other terms:

The Acquisition Agreement provides that Completion shall take place on the third business day following the day on which the last unfulfilled condition as set out above is satisfied or waived (or such other date as may be agreed between the parties to the Acquisition Agreement).

Undertakings from CEC

CEC has given the following undertakings under the Acquisition Agreement:

a non-compete undertaking in favour of Winsan not to engage or participate in any business which is similar to or compete (whether directly or indirectly) with Sang Fei’s business of manufacturing mobile communication

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LETTER FROM THE BOARD

equipment in Hong Kong and the PRC or to own any interest in such business in excess of 25% (save for those disclosed prior to Completion, being those set out in section 9D “Information on the New Group – Relationship with the CEC Group – Competition” below) and has granted pre-emption rights in favour of Winsan over future transfers of its interest in businesses which may compete with Sang Fei, both of which takes effect from Completion and for so long as CEC remains a controlling shareholder (as defined in the Listing Rules) of Winsan;

an undertaking not to dispose of the Consideration Shares for a period of six months after Completion (without the consent of Winsan International) otherwise than for the purpose of maintaining sufficient public float in the Winsan Shares, and a tag along right in favour of Winsan International pursuant to which CEC has to procure the sale of Winsan International’s Winsan Shares on a pro rata basis in conjunction with any future sales of Winsan Shares by the CEC Group; and
an undertaking to comply with the requirements of the Takeovers Code if CEC waives the requirement for a Whitewash Waiver as a condition precedent to Completion.

Shareholders should note that the existence of the non-compete undertaking from the CEC Group does not prevent those existing mobile phone manufacturing subsidiaries of the Group (further particulars of which are set out in section 9D “Information on the New Group – Relationship with the CEC Group – Competition”) from competing with the New Group in respect of their respective own-branded mobile phone products which are primarily targeted at the PRC domestic market as are Sang Fei’s own-branded mobile phone products. Those CEC Group companies could also compete with Sang Fei on its mobile phone OEM business.

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LETTER FROM THE BOARD

Undertakings from Winsan International

Winsan International has given the following undertakings under the Agreement:

an undertaking not to dispose of 581,372,870 of the Winsan Shares it held from the date of the Acquisition Agreement up to the expiry of six months after Completion (without the consent of CEC) otherwise than for the purpose of maintaining sufficient public float in the Winsan Shares or pursuant to the tag along right referred to above;
an undertaking to use its best endeavours to assist Winsan to dispose of the Transonline Group and the DIC Group at a fair value to Independent Third Parties (which, Winsan intends, will not be a Shareholder or an associate (as defined in the Takeovers Code) of a Shareholder) within 2 weeks after Completion and to bear all costs and expenses in connection with the Future Disposals; and
an undertaking at its own cost to repay all existing loans of Winsan Group (excluding the Transonline Group and the DIC Group) and related interest and the release of all guarantees and other security before Completion.

Under the Acquisition Agreement, Winsan International will also, at Completion, waive all amounts receivable by it or its associates from the Winsan Group (excluding the Transonline Group and the DIC Group) and bear all indebtedness and expenses incurred by Winsan prior to Completion (apart from certain agreed expenses associated with the Acquisition which will continue to be borne by Winsan).

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LETTER FROM THE BOARD

2. POSSIBLE PLACING OF WINSAN SHARES

Immediately after Completion and the Future Disposals, the principal asset and business of Winsan will be that of Sang Fei. CEC (or its nominee) and Winsan International and its associates and parties acting in concert with it and other public shareholders will hold about 80.66%, 10.11% and 9.23% respectively of the existing issued share capital of Winsan as enlarged by the issue of the Consideration Shares only (assuming that there will be no change in the share capital of Winsan from the Latest Practicable Date to Completion save for the issue of the Consideration Shares).

As mentioned in paragraph 1 “The Acquisition” above and also paragraph 8 “Requirements of the Listing Rules” below, the Stock Exchange has indicated that listing of and permission to deal in the Consideration Shares (being that required in condition precedent numbered 5 above) will only be granted after Winsan has demonstrated that it will be able to comply with the requirements of Rule 8.08 of the Listing Rules on the date of Completion. Accordingly, Winsan and HSBC have on 17th June, 2004 entered into a Preliminary Placing Agreement whereby Winsan agreed to place through HSBC up to 610 million new Winsan Shares at a price to be agreed between them with reference to the then prevailing market price for Winsan Shares at a date to be agreed between them prior to Completion. The parties have also agreed that subject to relevant Shareholders’ approval being obtained at the SGM (in particular resolutions numbered 1, 2 and 3 contained in the notice convening the SGM set out on pages VI-1 to VI-2 of this Circular), they will in good faith negotiate and agree the placing price and the placing date and enter into a formal agreement for placing of those shares to the intent that such placing will be effected at or shortly before Completion. Further announcement will be made by Winsan as and when such placing agreement is entered into between the parties. Shareholders should note that if the terms of such placing could not be agreed with HSBC or any other placing agent and Winsan is unable otherwise to demonstrate to the satisfaction of the Stock Exchange that it is able to comply with the requirements of Rule 8.08 of the Listing Rules on the date of Completion, the listing of and permission to deal in the Consideration Shares will not be granted and the Acquisition will not proceed.

On the basis that no document (including this Circular) has been or will be registered in Hong Kong by Winsan in respect of its proposed placing of new Shares and that the placing must be effected in such manner as will comply with the applicable laws in Hong Kong, the formal agreement for the placing of Shares as contemplated above will contain provisions requiring the placing agent appointed to effect the Placing by way of oral contracts to selected private, professional and institutional investors (typically confirmed by subsequent written confirmations) and without distributing copies of this Circular to potential placees in relation to such Placing. Winsan has been advised that this Circular does not constitute a prospectus for the purposes of the Companies Ordinance on the basis that it does not offer any shares or debentures of Winsan to the public for subscription or purchase for cash or other consideration and it is not calculated to invite offers by the public to subscribe for or purchase for cash or other consideration any shares or debentures of Winsan.

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LETTER FROM THE BOARD

Further analysis of the shareholding structure of Winsan immediately before and after Completion is set out in paragraph 5 “Effects of the Acquisition and the Placing” below.

3. INFORMATION ON CEC AND SANG FEI

Further information in relation to CEC and Sang Fei are set out in the Letter from CEC and in “Information on the New Group” in this Circular. Shareholders should note that after Completion Sang Fei’s business dealings with the CEC Group and the Philips Group (particulars in relation to which are set out in section 9 “Information on the New Group – Relationship with the CEC Group” and section 10 “Information on the New Group – Relationship with the Philips Group”) will constitute connected transactions of the Company under the Listing Rules as disclosed in section 11 “Information on the New Group – Connected Transactions”. The Non-exempt Ongoing Connected Transactions will be subject to the approval of Independent Shareholders.

4. DIRECTORS AND MANAGEMENT OF WINSAN

All executive and non-executive Directors (other than independent non-executive Directors) are required to resign as directors of Winsan upon Completion. The independent non-executive Directors have agreed to remain in office after Completion. Information regarding new Directors proposed to be appointed to the Board by CEC are set out under section 7A “Information on the New Group – New Directors, Senior Management and Staff – New Directors” in this Circular.

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LETTER FROM THE BOARD

5. EFFECTS OF THE ACQUISITION AND THE PLACING

(a) Changes to the shareholding in Winsan as a result of the Acquisition and the Placing

The interest in Winsan of Winsan International and its associates (other than the Group), CEC, the Directors and the shareholdings of the public shareholders in Winsan immediately before and after Completion are as follows:

CEC Group, its associates and parties acting in concert with it Mr. Chan, Winsan International, its associates and parties acting in concert with them (excluding the Winsan Group)(Note 2) Directors and their associates_(Note 2)_: Chan Hon Ching Chiu King Cheung Wong Po Yan Chan Kay Cheung Existing public shareholders (and placees) Total Total Winsan Shares in public hands	Before Completion No. of Shares % (Note 1) – – 814,372,870 52.25 11,250,000 0.72 3,812,500 0.24 – – – – 729,044,630 46.79 1,558,480,000 100.00 729,044,630 46.79	Immediately after Placing but before Completion No. of Shares % (Note 1) – – 814,372,870 37.56 11,250,000 0.52 3,812,500 0.17 – – – – 1,339,044,630 61.75 2,168,480,000 100.00 1,339,044,630 61.75	Immediately after Placing and Completion No. of Shares % (Note 1) 6,500,000,000 74.98 814,372,870 9.40 11,250,000 0.13 3,812,500 0.04 – – – – 1,339,044,630 15.45 (Note 2) 8,668,480,000 100.00 2,168,480,000 25.02	Immediately after Placing and Completion No. of Shares % (Note 1) 6,500,000,000 74.98 814,372,870 9.40 11,250,000 0.13 3,812,500 0.04 – – – – 1,339,044,630 15.45 (Note 2) 8,668,480,000 100.00 2,168,480,000 25.02
				100.00

				25.02

Notes:

The percentages stated above assume that the outstanding Employee Options as at the Latest Practicable Date will not be exercised and that there will not be any changes to the total issued share capital of Winsan as at the Latest Practicable Date to Completion or the shareholding of Mr. Chan, Winsan International, CEC and their respective associates and parties acting in concert or that of any of the Directors and their associates (other than the issue of the Consideration Shares). Winsan International will procure at Completion that all holders of Employee Options then outstanding waive their subscription rights under such Employee Options. No additional consideration or benefit has been or will be paid to such holders in respect of such waiver. Amongst the outstanding Employee Options, options to subscribe for up to 80,400,000 Winsan Shares are held by the Directors. Assuming that those options are exercised in full prior to Completion and no change otherwise to the shareholding of those parties as stated above, the total number of Winsan Shares held by Winsan International, its associates and parties acting in concert with it and the Directors will be 909,835,370 Winsan Shares representing approximately 55.52% and 10.40% of the total issued Winsan Shares immediately before and after the Placing and Completion.

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LETTER FROM THE BOARD

Immediately after the Placing and Completion, the shareholding of Mr. Chan, Winsan International and the existing Directors and their associates are considered as being in the hands of the public under the Listing Rules.

As at the Latest Practicable Date, none of CEC and parties acting in concert with it have any interest in any Winsan Shares and/or Employee Options.

(b) Financial effects of the Acquisition

The audited consolidated negative net assets of Winsan as at 31st December, 2003 as extracted from the latest published annual report of Winsan for the year ended 31st December, 2003 was HK$67,223,000. Based on the unaudited pro forma combined balance sheet (as set out in Appendix III to this Circular) and the unaudited statement of pro forma combined net tangible assets (as set out in Appendix III to this Circular), the unaudited pro forma combined net assets and the unaudited pro forma combined net tangible assets of the New Group as at 31st December, 2003 were HK$246,634,000 and HK$141,353,000 respectively. Based on the unaudited pro forma combined profit and loss account, the unaudited pro forma combined turnover and loss attributable to shareholders for the year ended 31st December, 2003 were approximately HK$2,867,225,000 and HK$57,506,000 respectively. The pro forma figures referred to above are calculated on the bases and assumptions set out in greater detail in Appendix III to this Circular and should be read in conjunction with them.

The pro forma statements are prepared in accordance with Paragraph 29 of Chapter 4 of the Listing Rules for the purpose of providing investors information on the effect of the Acquisition. The statements are prepared for illustrative purpose only and because of their nature, they may not give a true picture of the actual financial performance of the New Group had the Acquisition actually been completed as at the relevant dates as set out on the basis stated.

The unaudited pro forma financial information is prepared on the basis stated in note 1 of section D in Appendix III to this Circular and derived according to a number of adjustments. Although reasonable care has been exercised in preparing the said information, prospective investors who read the information should bear in mind that these figures are for illustrative purpose only and are inherently subject to adjustments and because of its nature, it may not give a complete picture of the actual financial performance of the Group had the Acquisition actually been completed as at the relevant dates as set out in the basis stated.

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LETTER FROM THE BOARD

6. REASONS FOR THE ACQUISITION AND THE FUTURE DISPOSALS

Winsan is an investment holding company. Through its subsidiaries, its principal activities comprise the operation of the Transonline Project and the provision of fully-integrated broadband and cable television related platform and equipment for cable television and telecommunications services operators, through DIC Group.

The Acquisition has been structured on the basis that Winsan will upon Completion become the Main Board listed vehicle through which CEC holds the Target Equity Interest. CEC has informed Winsan that it does not wish to continue with the existing business of the Winsan Group.

The audited consolidated turnover, the audited consolidated loss attributable to the Shareholders for the financial year ended 31st December, 2002 and the financial year ended 31st December, 2003 were as follows:

	Audited	Audited
	Year ended	Year ended
	31/12/2002	31/12/2003
	HK$’000	HK$’000
Turnover	708	3,369
Loss attributable to Shareholders	(47,177)	(85,756)

The audited consolidated net asset value and deficit on net tangible assets of Winsan Group as at 31st December, 2002 and 31st December, 2003 as extracted from the published annual report of Winsan Group as at 31st December, 2003, were as follows:

	Audited
	As at	As at
	31/12/2002	31/12/2003
	HK$’000	HK$’000
Net asset value/(negative net asset value)	18,533	(67,223)
Deficit on net tangible assets	(40,583)	(67,223)

Winsan has recorded losses for the last two financial years and no dividend has been paid nor will any be payable prior to Completion. It has been and continues to be supported financially by Winsan International and Winsan’s principal bankers. While the Directors believe that the Winsan Group’s current businesses have much potential, the Winsan Group’s financial position imposes certain constraint on Winsan’s ability to take full advantage of its listed status. The Acquisition offers a great opportunity for Winsan to engage in a business with proven profit track record and to bolster its net tangible assets value (bringing immediate shareholder value).

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LETTER FROM THE BOARD

Transonline Holdings was incorporated in Bermuda on 14th March, 2003. It was incorporated for the purpose of holding Winsan’s interest in the Transonline Project. The Transonline Project is the fruit of Winsan’s efforts in 1999 and 2000 to re-allocate its resources to increase its investment in technology projects. It is a joint venture between the Winsan Group and the Research Institute of Highway under the PRC Ministry of Communication for the development of a freight exchange information system, in which Winsan has 70% effective interest. The Transonline Project was launched in August 2000 and has now developed into a network-based land transport logistic operator for the transport industry in the PRC.

The Transonline Group has over the past few years focused both on the construction of the project’s technology platform as well as increasing its network coverage, which includes distribution outlets for providing basic services to its network members such as cargo matching, vehicle maintenance, insurance, lodging etc. As at 31st December, 2003, its network covered 150 medium to large cities and comprised 270 allied services outlets. As stated in its 2002 and 2003 Annual Reports, Winsan is in negotiation with a wireless operator and a platform provider to seek to enable the Transonline Project to offer nationwide location based services (LBS) in conjunction with short messaging services (SMS) for the transport logistics service industry in the PRC. However, the impact of Severe Acute Respiratory Syndrome (SARS) in 2003 has seriously affected Transonline’s membership roll out program. The Transonline Group resumed to implement action of its full membership roll out program for the Transonline Project in the last quarter of 2003.

As extracted from the audited consolidated financial statements of Winsan Group as stated in its 2003 Annual Report, the business segment results attributable to the Transonline Group for the financial year ended 31st December, 2002 and the financial year ended 31st December, 2003 were as follows:

	Year ended	Year ended
	31/12/2002	31/12/2003
	HK$’000	HK$’000
Segment results (losses)	(4,850)	(3,322)

As extracted from the audited consolidated financial statements of Winsan Group as stated in its 2003 Annual Report, the segment assets and the segment liabilities attributable to the Transonline Group as at 31st December, 2003 were as follows:

	As at 31/12/2003
	HK$’000
Segment assets	2,723
Segment liabilities	(7,377)
Segment assets less segment liabilities	(4,654)

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LETTER FROM THE BOARD

As outlined above, much effort has been invested by the Winsan Group in the development of the Transonline Project. While the Board considers that its prospects are promising, the project will require continuing financial support and is not expected to be able to make significant positive contribution to the results of the Winsan Group for another 2 to 3 years.

DIC Group’s prospects are less clear – Winsan acquired Shenzhen DIC Information Technologies Co., Ltd. in 2001 in anticipation of its ability to participate in perceived growth potential of the Digital Video Broadcasting – Cable (DVB-C) solutions market in the PRC, arising from the conversion of analog systems commonly used in cable broadcasting to digital systems. Unfortunately, the relevant PRC authorities have not yet set all the relevant standards for the DVB-C industry and it now appears that the relevant authorities are unlikely to ease the restrictions on the broadcasting of foreign media content in the PRC in the near future. In order to cope with the change of the market environment, the DIC Group has been working on vertical products. The Directors consider much resources will need to be dedicated towards realising the full potential of this business before it could make positive contribution to the results of the Winsan Group.

As extracted from the audited consolidated financial statements of Winsan Group as stated in its 2003 Annual Report, the business segment results attributable to the DIC Group for the financial year ended 31st December, 2002 and the financial year ended 31st December, 2003 were as follows:

	Year ended	Year ended
	31/12/2002	31/12/2003
	HK$’000	HK$’000
Segment results after provision
for impairment of goodwill (losses)	(23,717)	(67,758)

	As at 31/12/2003
	HK$’000
Segment assets	1,707
Segment liabilities	(43,691)
Segment assets less segment liabilities	(41,984)

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LETTER FROM THE BOARD

In view of the fact that CEC is not interested in continuing the businesses of the DIC Group and the Transonline Group after Completion, Winsan has agreed to (and Winsan International has agreed to procure) the Future Disposals. Given that the Transonline Group and the DIC Group are the only businesses of the Group at present and given the uncertainties surrounding Completion, the Board does not consider that it is desirable at this stage, as a matter of business efficacy, to initiate discussions with Independent Third Parties for the Future Disposals, if the Company’s intention to sell is uncertain. Accordingly, since the Listing Committee of the Stock Exchange has approved in principle Winsan’s new listing application on 17th June, 2004, Winsan will actively seek to enter into discussions with potential buyers of the DIC Group or the Transonline Group. The Future Disposals will not be made to any connected persons of the Company nor any Shareholders or their associates (as defined in the Takeovers Code), nor will they be involved in the participation in such businesses.

In the unlikely event that the Future Disposals could not be effected, CEC intends that the businesses currently carried on by the Transonline Group and the DIC Group be discontinued. For the BVI companies through which the Company holds its interests in these businesses, such companies could be struck off purely by the Company ceasing payment of registration fees. The Board considers it unlikely that the minority shareholders will support these businesses on the basis of the current shareholding structure.

Further announcements will be made as and when the Future Disposals are effected or when a decision has been made by CEC to discontinue the businesses of the DIC Group and the Transonline Group.

Apart from the Company Secretary who will remain with Winsan, all the other employees of Winsan intend to resign, at Completion. Winsan is not required to pay any compensation for loss of office to the employees who will resign at Completion. The remaining employees of Winsan Group are employed by the operating subsidiaries of Winsan which will be disposed of under the Future Disposals. CEC has stated in the Letter from CEC in pages 36 to 38 of this Circular that it does not intend to retain any such employees.

The Board considers that the Acquisition is on normal commercial terms and that such terms are fair and reasonable to Winsan. Pending Completion, which may or may not take place for the reasons already stated above, Winsan intends to continue dedicating its available resources on the operations of the Transonline Group and the DIC Group and in any event to seek to maintain the listing of Winsan’s Shares.

7. GENERAL OFFER IMPLICATION ON CEC

CEC has confirmed that neither it nor parties acting in concert with it have in the six months ending on the Last Dealing Date purchased or sold any Winsan Shares. None of them holds any Winsan Shares or has any other interest in the Winsan Shares on the Latest Practicable Date, other than pursuant to the Agreement.

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LETTER FROM THE BOARD

On Completion, CEC and parties acting in concert with it will have acquired statutory control of Winsan. Under the Takeovers Code, upon Completion, CEC would be obliged, by virtue of it having acquired 30% or more of the Winsan Shares then in issue, to make a general offer under Rule 26 of the Takeovers Code to purchase all the Winsan Shares other than the Consideration Shares and Winsan Shares held by parties acting in concert with it. CEC has applied for (and Completion is conditional upon) the grant of the Whitewash Waiver. The Executive has indicated that it will grant the Whitewash Waiver, subject to Independent Shareholders’ approval of it being obtained, as required by the Takeovers Code. Voting on the Whitewash Waiver will be conducted by poll. Winsan International being party to the Agreement, Mr. Chan and their associates and parties acting in concert with any of them with respect to Winsan for the purposes of the Takeovers Code are required to abstain from voting on the Whitewash Waiver. Ms. Chiu King Cheung has indicated that she will also abstain from voting on the Whitewash Waiver.

As CEC and parties acting in concert with it will have acquired over 52% of the voting rights of Winsan at Completion, CEC and parties acting in concert with it may increase their shareholding without incurring any further obligation under Rule 26 of the Takeovers Code to make a general offer.

8. REQUIREMENTS OF THE LISTING RULES

As would be apparent from information set out above, the profits and net asset value of Sang Fei greatly exceed those of Winsan. In addition, the Acquisition will result in the introduction of CEC as the new majority shareholder of Winsan, a total change in Winsan’s business and the composition of the majority of its board. Consequently, pursuant to the Listing Rules, the Acquisition constitutes a very substantial acquisition of Winsan and the Stock Exchange has indicated that it will treat Winsan as a new listing applicant if the Acquisition proceeds. Accordingly Winsan submitted on 24th December, 2003 the advance booking form (Form A1) together with a draft of this Circular and other requisite documents to the Stock Exchange to initiate the new listing application process. The Listing Committee has on 17th June, 2004 granted its approval in principle of Winsan’s new listing application. However, the Stock Exchange has indicated that listing of and permission to deal in the Consideration Shares (being that required in condition precedent numbered 5 described in paragraph 1 above) will only be granted after Winsan has demonstrated that it is able to comply with the requirements of Rule 8.08 of the Listing Rules on the date of Completion. Rule 8.08 of the Listing Rules contains provisions regarding the minimum amount of a listed issuer’s issued share capital which must be held by the public and the spread of public shareholders.

9. PROPOSED CHANGE OF NAME

Given that upon Completion, Winsan will become a part of the CEC Group and CEC has stated that it intends Winsan in due course to become its principal Main Board listed subsidiary operating in the communications, consumer electronics and related industries, the

– 33 –

LETTER FROM THE BOARD

Directors consider it desirable to change the name of the Company upon Completion so that it more appropriately reflects the circumstances of the New Group. Accordingly, they propose that subject to the approval of the Shareholders at the SGM and the Registrar of Companies in Bermuda, the name of the Company be changed to “China Electronics Corporation Holdings Company Limited” and subject to such change taking effect, “中國電子集團控股有限公司 ” be adopted as the Chinese name of the Company for identification purposes only.

Upon the Name Change becoming effective, which is when the Registrar of Companies enters the new name of the Company on the register and is expected to be on or before 8th October, 2004, 2004 on the assumption that Completion takes place on 6th October, 2004, all existing share certificates bearing the existing name of the Company will continue to be evidence of title to the Winsan Shares and to be valid for trading and settlement purposes but new share certificates will be issued under the new name. An announcement will be made in relation to arrangements for the exchange of existing share certificates for ones bearing the new name when the Name Change becomes effective.

10. SPECIAL MANDATE

At the forthcoming SGM, an ordinary resolution will be proposed to grant to the Directors special mandate to allot, issue and otherwise deal with up to 610,000,000 new Winsan Shares for the purpose of ensuring that there is sufficient Winsan Shares in the hands of the public (as defined in the Listing Rules) as contemplated under the Preliminary Placing Agreement.

11. SPECIAL GENERAL MEETING

A notice convening the SGM to be held at Tianshan and Lushan Rooms, 5/F., Island Shangri-La Hong Kong, Pacific Place, Supreme Court Road, Central, Hong Kong at 4:00 p.m. on 14th July, 2004 is set out on pages VI-1 to VI-3 of this Circular. At the SGM, ordinary resolutions will be proposed, among other things, to approve the Acquisition and the Nonexempt Ongoing Connected Transactions, the Whitewash Waiver and the Special Mandate and a special resolution will be proposed to approve the Name Change. Voting on the resolution to approve the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions will be conducted by poll as required under the Takeovers Code and the Listing Rules. The procedures for demanding a poll under the Bye-laws of Winsan are set out in paragraph 15 of Appendix V to this Circular.

If Shareholders are not able to attend the meeting in person, they are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the Branch Share Registrar of the Company in Hong Kong, Abacus Share Registrars Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting. Completion and return of the form of proxy will not preclude Shareholders from attending and voting in person at the meeting should they so wish.

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LETTER FROM THE BOARD

12. PROPOSED CHANGE IN BOARD LOT SIZE

The Directors propose that the board lot size for trading Winsan Shares will be increased from 2,000 Winsan Shares to 10,000 Winsan Shares with effect from 10:00 a.m. on the date of Completion. Further announcement will be made of the effective date for the proposed change in board lot size and arrangements for matching sale and purchase of odd lots.

13. RECOMMENDATIONS

An Independent Board Committee of Winsan comprising Mr. Wong Po Yan and Mr. Chan Kay Cheung has been constituted to make recommendations to the independent Shareholders in relation to the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions. Altus Capital Limited have been appointed to advise the Independent Board Committee and the Independent Shareholders with regard to the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions. The text of the letter from Altus Capital Limited containing their recommendation and the principal factors it has taken into account in arriving at their recommendation are set out on pages 40 to 85 of this Circular. The full text of the letter of recommendation from the Independent Board Committee is set out on page 39 of this Circular.

The Directors are of the opinion that the Acquisition and (based on the information on the transactions provided by CEC and Sang Fei and the confirmations of the New Directors in section 11 “Information on the New Group – Connected Transactions”) the Non-exempt Ongoing Connected Transactions are in the interests of Winsan and the Shareholders as a whole. The Directors, including the independent non-executive Directors, are of the opinion that the Name Change and the Special Mandate are in the interests of Winsan and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the respective resolutions to be proposed at the SGM.

14. FURTHER INFORMATION

Your attention is also drawn to the letter of recommendation from the Independent Board Committee, the letter of advice from Altus Capital Limited, the “Information on the New Group” and to the additional information set out in the appendices to this Circular.

Yours faithfully,

By order of the Board

Winsan (China) Investment Group Company Limited Chan Chak Shing

Chairman

– 35 –

LETTER FROM CEC

No. 27 Wanshou Road Beijing, China P. C. 100846

To the Independent Shareholders

Dear Sir or Madam,

PROPOSED CHANGE OF NAME

PROPOSED GRANT OF SPECIAL MANDATE TO ISSUE SHARES PROPOSED CHANGE IN BOARD LOT SIZE

1. INTRODUCTION

It was announced on 20th December, 2003 that Winsan has entered into the Acquisition Agreement with CEC and Winsan International, further details relating to which are set out in the letter from the Board on pages 16 to 35 of the circular of Winsan dated 21st June, 2004 (“Circular”) of which this letter forms part. Terms defined in the Circular have the same meanings when used in this letter.

The purpose of this letter is to provide you with information regarding the CEC Group (of which Winsan will form part upon Completion) and CEC’s intentions with respect to Winsan.

Additional information regarding Sang Fei is set out in the section headed “Information on the New Group” in the Circular and the Accountants’ Report set out in Appendix I to the Circular. Your attention is also drawn to the Letter from the Board, the Letter from the Independent Board Committee to the Independent Shareholders, the Letter from Altus Capital Limited and the additional information set out in the appendices to the Circular.

2. THE CEC GROUP

Established in 1989 with the approval of the State Council of the PRC, CEC is a nationwide electronics and information technology conglomerate directly administered by the central government of the PRC. Its registered capital was RMB5.734 billion as at the Latest Practicable Date.

– 36 –

LETTER FROM CEC

CEC actively focuses on and has made substantial investments in the communication/ consumer electronics, semi-conductor and software sectors. Its businesses in each of these fields are briefly set out below.

CEC’s communication/consumer electronics business

On the communication side, the members of the CEC Group are actively engaged in all key aspects of the production and supply chain in the mobile phone industry – covering R&D, production, distribution, repair and maintenance and sourcing of parts and components of mobile phones. For the year ended 31st December, 2003, the CEC Group (including Sang Fei) sold over 11 million mobile phones, of which approximately 8.5 million were sold in the PRC, accounting for approximately 9.7% of the total number of mobile phones sold in the PRC that year. Further information regarding CEC’s interests in these areas of businesses are set out in “Information on the New Group – Relationship with the CEC Group”. In addition, CEC Group is also a provider of network transmission and access equipment and related technology in the PRC. On the consumer electronics side, CEC Group possesses R&D, production and distribution capabilities over a broad range of consumer electronic products, in particular, audio/video products (such as digital television sets, DVD players, PDAs, MP3 players) and other ancillary products, parts and components, for both the PRC market and overseas markets.

CEC’s semiconductor business

Through its subsidiaries, CEC has, over the past ten years, developed the capability of designing, producing and testing of semi-conductors. The three IC design companies within the CEC Group have been ranked amongst the top ten IC design companies in the PRC in 2003 by CCID Consulting. At present, CEC Group owns a total of six 8-inch, 5-inch and 4- inch chip production lines (one further 8-inch and one 5-inch production lines are under development) and offers 5µm to 0.18µm IC manufacturing services. For the year ended 31st December, 2003, CEC achieved an annual output of approximately 1.68 billion IC, accounting for approximately 13.5% of PRC’s total IC output for that year.

CEC’s software business

Through its subsidiaries, CEC Group is a leading provider of software and system integration services in the PRC and a member of the CEC Group has been ranked first as an independent software vendor by Ministry of Information Industry in 2004. CEC Group offers a comprehensive range of system software, supporting software and application software. Through its subsidiaries, CEC principally focuses on public sector projects of different industry areas in the PRC, including amongst others the banking and finance, tax, insurance, telecommunications, transportation and tobacco sectors/industries.

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LETTER FROM CEC

3. THE INTENTIONS OF CEC WITH RESPECT TO WINSAN AND THE NEW GROUP

CEC intends that the New Group will in due course become the CEC Group’s principal Main Board listed subsidiary operating in the communications, consumer electronics and related industries. Upon Completion, CEC intends to strengthen and strategically support the continued growth of the New Group’s core business so as to maximise synergies between the New Group and the CEC Group, as its controlling shareholder.

Particulars of the New Directors who are proposed to be appointed to Winsan at Completion are set out in section 7A “Information on the New Group – New Directors, Senior Management and Staff”. CEC intends that Winsan’s existing business will be discontinued after Completion, whether by way of the Future Disposals or otherwise, so that as soon as practicable after Completion, Sang Fei will be the only operating subsidiary of the Company. In view of the change of Winsan’s core business, CEC does not intend to retain any of Winsan Group’s existing employees (other than the Company Secretary).

CEC considers that the Acquisition, instead of a placing and public offer, to be the more desirable means of listing its interests in Sang Fei on the Stock Exchange because CEC and Sang Fei would be able to benefit from a “red chip” listing status (i.e. a PRC owned listed entity which is not incorporated in the PRC) and would enjoy relatively more flexibility in future corporate and fund raising exercises. For example, as a result of the entire issued share capital of Winsan being listed, and in terms of employee incentive arrangements, through the administration of the Share Option Scheme. An additional benefit is that unlike a company which conducts an initial public offering at the time of its listing, Winsan is an existing listed company with a spread of public shareholders. Although certain Winsan Shares will have to be placed before Completion in order to maintain the minimum public float in the Winsan Shares, the effect of any change in the equity market conditions has considerably less influence over the Acquisition and hence there is a greater certainty of listing the interests in Sang Fei, when compared with a new listing exercise.

4. MISCELLANEOUS

During the period that began six months prior to the Last Dealing Date and ended on the Latest Practicable Date, none of CEC nor parties acting in concert with it have purchased or sold any Winsan Shares or acquired voting rights in the Company. Further, none of them holds any Winsan Shares or has any other interest in the Winsan Shares or control any shareholders in the Company as at the Latest Practicable Date, other than pursuant to the Acquisition Agreement. Save pursuant to the Acquisition Agreement neither CEC nor any party acting in concert with it has entered into any agreement, arrangement or understanding to transfer Winsan Shares held or to be held by it upon Completion.

Yours faithfully, on behalf of

China Electronics Corporation

Yang Xiaotang

President

– 38 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

*

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability)

21st June, 2004

To the Independent Shareholders

Dear Sirs or Madam,

We have been appointed by the Directors to advise you in connection with the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions. Details of the Acquisition, the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions are set out on pages 16 to 35 and 182 to 186 of the circular dated 21st June, 2004 (“Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter.

We wish to draw your attention to the letter from the Board set out on pages 16 to 35 of the Circular and the letter of advice from Altus Capital Limited set out on pages 40 to 85 of the Circular. Having taken into account the advice and recommendation of Altus Capital Limited, we consider the terms of the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions to be fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions numbered 1 and 2 set out in the notice convening the SGM to approve the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions at the SGM.

Yours faithfully, For and on behalf of Independent Board Committee Wong Po Yan Chan Kay Cheung

For identification purposes only

– 39 –

LETTER FROM ALTUS CAPITAL LIMITED

The following is the text of a letter received from Altus Capital Limited in respect of the Whitewash Waiver prepared for the purpose of incorporation in this Circular:

8/F Hong Kong Diamond Exchange Building 8 Duddell Street, Central Hong Kong

Tel: 2522 6122 Fax: 2522 6992

21st June, 2004

To the Independent Board Committee and Independent Shareholders of

Winsan (China) Investment Group Company Limited

Room 908, 9th Floor Sun Hung Kai Centre No. 30 Harbour Road Wanchai, Hong Kong

Dear Sirs,

INTRODUCTION

We refer to the Transactions, the details of which are set out in the circular of the Company (the “Circular”) dated 21st June, 2004 to the Independent Shareholders, of which this letter forms part. Altus Capital has been appointed as the independent financial adviser to advise the Independent Shareholders and the Independent Board Committee as to whether (a) the Whitewash Waiver; and (b) the Non-exempt Ongoing Connected Transactions, are fair and reasonable so far as the Independent Shareholders are concerned. Terms used in this letter shall have the same meanings as defined in the Circular unless the context requires otherwise.

On Completion, CEC and parties acting in concert with it would have acquired statutory control of Winsan and therefore CEC would be obliged, by virtue of it having acquired 30% or more of the Winsan Shares then in issue, to make a general offer under Rule 26 of the Takeovers Code. As CEC and parties acting in concert with it do not wish to make such a general offer, CEC has applied for the Whitewash Waiver. Upon Completion, the Company will become a subsidiary of CEC and the CEC Group therefore will be a connected person

– 40 –

LETTER FROM ALTUS CAPITAL LIMITED

under the Listing Rules. In addition, the Philips Group, which has 25% shareholding in Sang Fei, will also be a connected person. The Non-exempt Ongoing Connected Transactions between the Company and the CEC Group and the Philips Group respectively will therefore constitute connected transactions of the Company under the Listing Rules. Both the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions are subject to approval of the Independent Shareholders.

The Independent Board Committee has been appointed to advise the Independent Shareholders in relation to the Whitewash Waiver and the Non-exempt Ongoing Connected Transactions. In assessing the eligibility of the Directors to be members of the Independent Board Committee, we have considered and taken into account the confirmations by each of the Directors in respect of their interests in the Company.

Mr. Chan is the Chairman of the Board and is the ultimate controlling shareholder of Winsan with an interest in 814,372,870 Shares and options which are exercisable into 29,800,000 Shares. Mr. Chan Hon Ching, the President of the Company and the directors of certain members of the Winsan International group of companies, is the brother of Mr. Chan and is interested in 11,250,000 Shares and options which are exercisable into 25,000,000 Shares. Ms. Lo Mei Chun, an executive Director, is the directors of certain members of the Winsan International group of companies and is interested in options which are exercisable into 1,600,000 Shares. Ms. Chiu King Cheung is the directors of certain members of the Winsan International group of companies and is interested in 3,812,500 Shares and options which are exercisable into 24,000,000 Shares.

Based on the foregoing, we consider that Mr. Chan, Mr. Chan Hon Ching, Ms. Lo Mei Chun and Ms. Chiu King Cheung are not eligible to be members of the Independent Board Committee. The Independent Board Committee thus comprises Mr. Wong Po Yan and Mr. Chan Kay Cheung, both of whom are independent non-executive Directors.

BASIS OF OUR OPINION

In formulating our opinion, we have relied to a considerable extent on the information, statements, opinions and representations supplied to us by the Company, the Directors and the directors of CEC and Sang Fei respectively and we have assumed that all such information, statements, opinions and representations contained or referred to in the Circular were true and accurate and, unless otherwise stated, complete at the time they were made and continue to be true at the date of the Circular, and we have relied on the same. We have also assumed that all statements of belief, opinion and intention of the Directors as set out in the Letter from the Board in the Circular were reasonably made after due and careful inquiry. We have also sought and obtained confirmation from the Company that no material facts have been omitted from the information provided and referred to in the Circular.

– 41 –

LETTER FROM ALTUS CAPITAL LIMITED

We consider that we have been provided with, and we have reviewed, all currently available information and documents which are available under present circumstances to enable us to reach an informed view regarding the terms of the Transactions and the Non-exempt Ongoing Connected Transactions and to justify reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis of our opinions. We have no reason to suspect that any material facts or information (which is known to the Company, CEC or Sang Fei) have been omitted or withheld from the information supplied or opinions expressed in the Circular nor to doubt the truth and accuracy of the information and facts, or the reasonableness of the opinions expressed by the Company, its Directors and/or the directors of CEC and Sang Fei which have been provided to us. We have not, however, carried out any independent verification on the information provided to us by the Directors and the directors of CEC and Sang Fei, nor have we conducted an independent in-depth investigation into the business and affairs of Winsan Group and the New Group.

PRINCIPAL FACTORS TAKEN INTO CONSIDERATION

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

A. THE ACQUISITION

1. Background

Winsan is an investment holding company. The principal activities of the Winsan Group comprise the operation of the Transonline Project and, through the DIC Group, the provision of fully integrated broadband and cable television related platform and equipment for cable television and telecommunication services operators.

On 10th December, 2003, the Company has agreed to acquire from CEC the Target Equity Interest, being 65% of the equity interest in Sang Fei owned by CEC or its whollyowned subsidiary, at the Purchase Price of HK$260,000,000. The consideration of the Acquisition will be satisfied by the issuance of the Consideration Shares, being 6,500,000,000 new Winsan Shares at HK$0.04 per Winsan Share. Details of the Acquisition Agreement are set out in the Letter from the Board.

Sang Fei is a sino-foreign joint venture company incorporated in 1996 in the PRC principally engaged in the business of manufacturing and sale of mobile phones. Sang Fei is owned as to 65% by the CEC Group (excluding SZST), 25% by the Philips Group and 10% by SZST. CEC is a state-owned enterprise established in the PRC with the approval of the PRC State Council and is a nationwide conglomerate in the PRC’s information industry. Sang Fei, CEC, the Philips Group and SZST are Independent Third Parties prior to Completion.

Under the Listing Rules, the Acquisition will constitute a very substantial acquisition of Winsan and the Stock Exchange has indicated that it will treat Winsan as a new listing applicant if the Acquisition proceeds.

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LETTER FROM ALTUS CAPITAL LIMITED

On Completion, CEC and parties acting in concert with it would have acquired statutory control of Winsan and CEC would therefore be obliged, by virtue of it having acquired 30% or more of the Winsan Shares then in issue, to make a general offer under Rule 26 of the Takeovers Code to purchase all the Winsan Shares other than the Consideration Shares and Winsan Shares already held by parties acting in concert with it.

CEC has applied to the Executive for the Whitewash Waiver, without which it would be required under the Takeovers Code to make the general offer as described above. The granting of the Whitewash Waiver is conditional upon the approval of the Independent Shareholders at the SGM by poll and the Whitewash Waiver is a condition precedent to Completion.

2. Effects of the Acquisition

Change in Winsan Group’s principal business and management team

The Acquisition has been structured on the basis that Winsan will, upon Completion, become the Main Board listed vehicle through which CEC holds the Target Equity Interest.

CEC has informed Winsan that it does not wish to continue with the existing businesses of the Winsan Group and Winsan has agreed to (and Winsan International has agreed to procure) the Future Disposals. According to the Letter from the Board, Winsan will commence active discussions with potential buyers of these businesses upon receiving the new listing approval from the Stock Exchange. The Future Disposals will be made at a fair value to Independent Third Parties. In the event that the Future Disposals could not be effected, CEC intends that these businesses be discontinued. Based on the foregoing, there will be significant changes to the principal businesses of the Company immediately after the Acquisition. After Completion, the principal assets and businesses of the Company will be those of Sang Fei.

All executive and non-executive Directors (save for the independent non-executive Directors) will resign as directors of Winsan upon Completion and the New Directors will be appointed to the Board by CEC. The independent non-executive Directors will remain in office after Completion.

Material dilution to shareholdings of existing Shareholders

There will be significant changes to the shareholding structure of the Company immediately after the Acquisition. The Acquisition will entail the issuance of 6,500,000,000 new Winsan Shares to CEC as Consideration Shares and they represent about 417% and 80.7% of the existing and the enlarged issued share capital of Winsan immediately after Completion. Accordingly, the shareholding of all current Shareholders, including the public Shareholders, will be substantially diluted upon Completion.

– 43 –

LETTER FROM ALTUS CAPITAL LIMITED

After Completion, CEC (or its nominee) will hold about 80.7% of the issued share capital of the Company on a fully diluted basis. The shareholding interests of Mr. Chan, Winsan International (the existing controlling shareholder of the Company) and its associates and concert parties other than the Group will be reduced from about 52.3% to about 10.1%. The interest of public Shareholders (excluding the Directors and their associates) will be reduced from approximately 46.8% to approximately 9.2%.

The Stock Exchange has indicated that listing of and permission to deal in the Consideration Shares will be granted only if the Company can demonstrate that it is able to comply with the requirements of Rule 8.08 of the Listing Rules on the date of Completion. Accordingly, the Company and HSBC have on 17th June, 2004 entered into the Preliminary Placing Agreement whereby Winsan agreed to place through HSBC up to 610 million new Winsan Shares, at a price to be agreed between them with reference to the then prevailing market price for Winsan Shares at a date to be agreed between them, prior to Completion. The parties have also agreed that subject to relevant Shareholders’ approval being obtained at the SGM, they will in good faith negotiate and agree the placing price and the placing date and enter into a formal agreement for placing of those shares to the intent that such placing will be effected at or shortly before Completion. Further announcement will be made by the Company as and when such placing agreement is entered into between the parties. In this respect, Shareholders should note that if the terms of such placing could not be agreed with HSBC or any other placing agent and the Company is unable otherwise to demonstrate to the satisfaction of the Stock Exchange that it is able to comply with the requirements of Rule 8.08 of the Listing Rules on the date of Completion, the listing of and permission to deal in the Consideration Shares will not be granted and the Acquisition will not proceed.

Introduction of new majority Shareholder

CEC, which will own 6,500,000,000 new Winsan Shares upon Completion, will become the controlling Shareholder. CEC is a nationwide electronics and information technology conglomerate established in 1989 in the PRC with the approval of the PRC State Council and is under the direct administration of the central government of the PRC. CEC actively focuses on and has made substantial investments in the semiconductor, software and consumer electronics/communications fields. CEC intends that Winsan will become its principal Main Board listed subsidiary operating in the communications, consumer electronics and related industries.

Further information on CEC can be found in the “Letter from CEC” on pages 36 to 38 of this Circular.

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LETTER FROM ALTUS CAPITAL LIMITED

3. The Winsan Group

The principal activities of the Winsan Group comprise (a) the operation of the Transonline Project through the Transonline Group; and (b) the provision of fully integrated broadband and cable television related platform and equipment for cable television and telecommunications services operators through the DIC Group.

(a) Financial performance of Winsan Group

As set out in the Letter from the Board, below is a summary of the financial performance of the Winsan Group for the financial years ended 31st December, (“FY”) 2001, FY2002 and FY2003 and its financial position as at 31st December, 2001, 31st December, 2002 and 31st December, 2003:

	FY2001	FY2002	FY2003
	(HK$’000)	(HK$’000)	(HK$’000)
Turnover
– continuing operations	3,017	708	3,369
– discontinuing operations	237,359	–	–
(Loss) attributable to
shareholders	(479,400)	(47,177)	(85,756)
	As at	As at	As at
31st	December,	31st December,	31st December,
	2001	2002	2003
	(HK$’000)	(HK$’000)	(HK$’000)
Net current (liabilities)	(55,609)	(47,213)	(70,155)
Shareholders’ funds/
(capital deficiency)	14,503	18,533	(67,223)

(i) Profit and loss

Turnover of Winsan Group in FY2002 fell following the disposal of all its investment and development properties as well as its gas installation operations in October 2001 while both the Transonline Group and DIC Group reported lower than expected turnovers. Winsan Group reported net losses of approximately HK$479.4 million and HK$47.2 million in FY2001 and FY2002 respectively. Losses in FY2001 were significant due to provisions of impairment loss on goodwill in respect of the DIC Group.

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LETTER FROM ALTUS CAPITAL LIMITED

Turnover in FY2003 increased to about HK$3.4 million. Nevertheless, Winsan Group continued to record net loss of about HK$85.8 million due mainly to impairment loss on goodwill of about HK$56 million in relation to the operations of the DIC Group.

(ii) Balance sheet

As at 31st December, 2003, Winsan Group had capital deficiency of about HK$67.2 million. In particular, its net current liabilities which amounted to HK$70.2 million included a loan from Mr. Chan of about HK$54.0 million.

Overall, the Winsan Group has been sustaining losses in the past few financial years and has been relying on its principal bankers and Mr. Chan for financial support.

(b) The Transonline Group

Winsan had in 1999 and 2000 increased its investment in technology projects and established the Transonline Project, which was a joint venture between the Winsan Group and the Research Institute of Highway under the PRC Ministry of Communication, in which the Company has 70% effective interest. According to the annual report of Winsan for the year ended 31st December, 2003, the joint venture was engaged in the development of (a) a freight exchange information system; (b) provision of integrated logistics solution; and (c) value added services.

The Transonline Group has over the past few years focused both on the construction of the project’s technology platform as well as the expansion of its network coverage, which includes establishments of distribution outlets for providing basic services such as cargo matching, vehicle maintenance, insurance and lodging to its network members.

As set out in the Letter from the Board, the audited consolidated net losses before and after tax and extraordinary items attributable to the Transonline Group for FY2002 and FY2003 and the segment assets and segment liabilities of the Transonline Group as at 31st December, 2003 are summarised as follows:

	FY2002	FY2003
	(HK$’000)	(HK$’000)
Segment turnover	242	1,010
Segment (losses)	(4,850)	(3,322)

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LETTER FROM ALTUS CAPITAL LIMITED

	As at
	31st December,
	2003
	(HK$’000)
Segment assets	2,723
Segment (liabilities)	(7,377)
Segment net (liabilities)	(4,654)

As shown above, Transonline Group has recorded minimal turnover and incurred losses of HK$4.9 million and HK$3.3 million in FY2002 and FY2003 respectively. The Transonline Group also had a net liabilities position as at 31st December, 2003.

The Transonline Group has over the past few years focused both on developing its technology platform as well as expanding its network coverage. It has also been involved in the negotiations with a wireless operator and a platform provider in seeking to enable the Transonline Project to offer nationwide location based services (LBS) in conjunction with short messaging services (SMS) for the transport logistics service industry in the PRC.

The development of the Transonline Project has however been severely delayed by the outbreak of the Severe Acute Respiratory Syndrome (“SARS”) in 2003 and as a result, only a minimal amount of revenue was generated. Following the containment of the SARS outbreak, the Transonline Group has resumed the implementation of its full membership roll out program for the Transonline Project in the fourth quarter of 2003.

Overall, the Transonline Project is still in development stage and, due to the outbreak of SARS, only a limited amount of revenue has been generated since its launch. Although much investment and efforts have been put in, the development will continue to require substantial additional capital. Based on our discussions with the Directors, while its prospects are promising, the profitability of the Transonline Group is expected to be limited and is unlikely to make significant positive contribution to the results of the Winsan Group within the next two to three years.

(c) The DIC Group

The DIC Group is principally engaged in providing broadband and cable television related platform and equipment to cable television and telecommunications services operators. The Company acquired the DIC Group in 2001 in anticipation of its ability to participate in the perceived growth of the Digital Video Broadcasting-Cable (DVB-C) solutions market in the PRC. Such opportunity may arise when the transmission of cable broadcasting is converted from the analog systems commonly used currently to digital systems.

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As set out in the Letter from the Board, the audited consolidated net losses before and after tax and extraordinary items attributable to the DIC Group for FY2002 and FY2003 and the segment assets and segment liabilities of the DIC Group as at 31st December, 2003 are summarised as follows:

	FY2002	FY2003
	(HK$’000)	(HK$’000)
Segment turnover	466	2,359
Segments (losses)	(23,717)	(67,758)
		As at
		31st December,
		2003
		(HK$’000)
Segment assets		1,707
Segment (liabilities)		(43,691)
Segment net (liabilities)		(41,984)

The loss of DIC Group increased significantly in FY2003 due to the provision made for impairment loss on goodwill of about HK$56.0 million. As at 31st December, 2003, DIC Group had a net liabilities position of HK$42.0 million.

The DIC Group has generated minimal amount of revenue while incurring significant losses. The business has been stagnant in the past two years as the DIC Group awaits the setting of DVB-C standards by the relevant authorities. According to the Letter from the Board, it now appears that the relevant authorities are unlikely to ease the restrictions on the broadcast of foreign media content in the PRC in the near future. Given the above and in order to cope with changes in the market, the DIC Group has been working on vertical products. The Directors consider that much resource will be required to realise the full potential of the DIC Group and to produce any positive contributions. The business prospect of the DIC Group is therefore uncertain.

It is noted that the operations of the Transonline Group and the DIC Group have not been performing up to the expectations of the Winsan Group and have been incurring losses in the past few financial years. The Directors do not expect the Transonline Group and the DIC Group to contribute positively to the Winsan Group in the near term. Meanwhile, there are continuing funding requirements to further develop the businesses of the Transonline Group and the DIC Group. The Winsan Group has a net deficit financial position as discussed in the sub-section headed “Financial performance of Winsan Group” and as the operations of the Transonline Group and the DIC Group have not been profitable, the Winsan Group has been relying on its principal bankers and Mr. Chan for financial support.

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Therefore, notwithstanding the potential of the Transonline Group and the DIC Group, their full business potential will be substantially constrained by the weak financial position of the Winsan Group.

4. Future Disposals

CEC, which will become the controlling Shareholder upon Completion, has indicated that it is not interested in continuing the businesses of the Transonline Group and the DIC Group after Completion. Winsan has agreed to (and Winsan International has agreed to procure) the Future Disposals. If the Future Disposals are not successful, CEC intends that the businesses of the Transonline Group and the DIC Group be discontinued.

From a business perspective, we are of the view that the Future Disposals are reasonable. The continuing funding requirements of the Transonline Group and the DIC Group will result in financial strains on Winsan Group as they have yet to generate profits. As discussed above, the Winsan Group has a net deficit financial position and it has been relying on its principal bankers and Mr. Chan for financial support. We are therefore of the view that Winsan Group does not have sufficient financial resources and capacity to meet such ongoing funding requirements and to realise the business potentials of the Transonline Group and the DIC Group. Consequently, it will be reasonable that the businesses of the Transonline Group and the DIC Group be discontinued if the Future Disposals are not successful.

5. Background and businesses of Sang Fei

(a) History

Sang Fei, previously known as Philips Consumer Communications and SED Company Ltd, was established as a sino-foreign joint venture company in October 1996 as a joint venture between the Philips Group (which held 90% equity interest) and SZST (which held the remaining 10% interest), for a term of 25 years.

The Philips Group transferred 65% of its interest in Sang Fei to the CEC Group for a consideration of about RMB94.5 million in October 2001. The sale by the Philips Group was part of its plan to refocus its mobile phone business activities by ceasing to be an independent manufacturer while continuing to sell Philips branded mobile phones through its own sales and distribution channel. Following the transfer by the Philips Group, the Cooperation Agreement was entered into where Sang Fei was granted the exclusive right to manufacture mobile phones for the Philips Group.

Further information on the history of the establishment of Sang Fei can be found on pages 101 to 104 of the Circular.

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Notwithstanding the change in ownership, Sang Fei was established for the specific purpose, and has continued to be in the business, of manufacturing mobile phones. Sang Fei has had more than six years of mobile phone manufacturing experience and has maintained a profitable track record.

(b) Businesses

Sang Fei is principally engaged in the manufacturing and sale of mobile phones in the PRC. It has over six years of mobile phone manufacturing experience and has the capacity to produce over 10 million mobile phones per year.

Sang Fei manufactured mobile phones exclusively for the Philips Group prior to 2001 but has since then diversified its customer base to serve independent customers on OEM and ODM basis. In 2002, Sang Fei also began to develop and market its ownbranded mobile phones.

We are of the view that the Cooperation Agreement will enable Sang Fei to capitalise on its existing relationship with the Philips Group as it continues to receive orders from the Philips Group while developing its independent customer base and own-branded mobile phones. The Cooperation Agreement is valid until July 2005 and is renewable automatically on an annual basis unless terminated by the relevant parties.

Sang Fei has been expanding its production facilities where one new SMA production line has been added each year since FY2001. The expansion is to cater to its increasing production needs as evidenced by the substantial increase in the number of units of mobile phone produced. It had a total of five SMA production lines as at the end of FY2003. Additional FA and DC lines have also been installed to complement the increased production capacity. We noted that the monthly utilisation rates of the production lines ranged widely between 15% and 99%.

Based on past experience, large number of orders is typically received during the second half of the year which results in close to full utilisation of Sang Fei’s production facilities while fewer orders are received in the first quarter. The New Directors also noted that the historical utilisation rates have also been affected by the timing of the installation of new production lines. As discussed above, management of Sang Fei has added new production lines in each of the past three financial years in anticipation of increase in orders. The timing of installation was typically a few months ahead of the increase in orders and thus resulting in lower average utilisation rates.

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(c) Shareholders

CEC, together with its interest through SZST, has 75% interest in Sang Fei. CEC is a nationwide electronics and information technology conglomerate established in 1989 in the PRC with the approval of the PRC State Council and is under the direct administration of the central government of the PRC. CEC actively focuses on and has made substantial investments in the communication/consumer electronics, semi-conductor and software sectors.

The Philips Group has a 25% interest in Sang Fei. Based on information in the Circular, the Philips Group is one of the world’s largest electronics companies and has substantial presence in Europe, with sales of approximately EUR29.0 billion in 2003. The Philips Group has operations in over 60 countries and is active in areas of (a) lighting; (b) consumer electronics; (c) domestic appliances; (d) medical systems; and (e) semiconductors. Telecommunication products constitute a small proportion of Philips Group’s overall business activities.

Both the CEC Group and the Philips Group have had close business relationships with Sang Fei since its incorporation. Sang Fei expects to continue its relationship with the Philips Group as its sole supplier of mobile phones while maintaining the CEC Group as one of its major customers. Sang Fei will also capitalise on the strong platform and product design capabilities and extensive distribution and after sales service network of the CEC Group both to establish its own-branded products as well as to strengthen its capability to provide value added services to its customers.

We are of the view that Sang Fei’s relationships with the CEC Group and the Philips Group, both being sizable conglomerates, will be advantageous to its business development.

(d) Key customer

Philips branded products accounted for 99%, 98% and 91% respectively of Sang Fei’s sales for each of FY2001, FY2002 and FY2003. The business transactions between the Philips Group and Sang Fei are governed by the Cooperation Agreement entered into in October 2001. The Cooperation Agreement stipulated that Sang Fei would be the exclusive mobile phone supplier to the Philips Group and is valid until July 2005, renewable automatically on an annual basis unless terminated by any of the relevant parties. Further terms of the Cooperation Agreement can be found in the section headed “10C. Transactions with the Philips Group” in the Circular.

Sang Fei has been actively diversifying its customer base to reduce its reliance on the Philips Group. The Cooperation Agreement ensures that Sang Fei will have a steady income stream by acting as the only OEM manufacturer of Philips branded mobile phones while implementing its diversification plans.

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(e) Risks

The risk factors relating to the acquisition of Sang Fei are set out in the section headed “Information on the New Group – Risk factors”. In particular, we wish to draw your attention to the risks relating to “Reliance on Philips” and “Termination of the Cooperation Agreement”.

Given the strong reliance of Sang Fei on Philips Group as a customer, the financial performance of Sang Fei may be affected if orders from the Philips Group are reduced. It is also noted that the initial term of the Cooperation Agreement will expire in July 2005 and there is no assurance that Philips will continue to renew the Cooperation Agreement. The impact will be adverse if Sang Fei’s plans of customer diversification and development of its own-branded mobile phone are not successful.

Upon the expiry of the initial term of the Cooperation Agreement, Sang Fei will have to compete with other mobile phone manufacturers for business from Philips. Sang Fei’s financial performance will be adversely affected if Philips chooses to purchase from other manufacturers. We however believe that this is normal business practice, especially in the competitive telecommunication industry and Sang Fei would have to maintain its competitive advantages over its competitors.

(f) Competitive advantages, strength and strategies

The strengths and strategies of Sang Fei are set out in the section headed “Information on the New Group – Strengths and strategies”. In particular, Sang Fei has had an established relationship with the Philips Group, which, in addition to being a key customer, is also a major supplier of materials and also substantial shareholder of Sang Fei. Sang Fei intends to leverage on such relationship to maintain as an exclusive supplier of mobile phones to the Philips Group.

Sang Fei is also able to capitalise on its relationship with the CEC Group which has strong platform and product design capabilities as well as extensive distribution and after sales service network.

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(g) Financial track record

Set out below is the financial track record of Sang Fei for the three years ended 31st December, (“FY”) 2003 (the “Review Period”):

	FY2001(1)	FY2002	FY2003
	RMB million	RMB million	RMB million
Units sold	2,472,000	3,656,000	5,394,000
ASP (RMB)	1,113	555	563
– Turnover	2,751	2,031	3,036
Cost of sales	(2,071)	(1,834)	(2,872)
– raw materials	(1,970)	(1,718)	(2,741)
– labour costs	(8)	(11)	(24)
– production overheads	(93)	(105)	(107)
Gross profit	680	197	164
Gross profit margin	24.7%	9.7%(2)	5.4%
Other revenues	15	21	20
Distribution costs	(214)	(16)	(29)
Administrative expense	(206)	(99)	(56)
Other operating expense	(22)	(13)	(24)
Operating profit	253	90	75
Finance costs	–	(3)	(7)
Profit before taxation	253	87	68
Profit before tax margin	9.2%	4.3%	2.3%
Taxation	–	(9)	(5)
Profit after taxation	253	78	63

Notes:

(1) Turnover attributable to the OEM segment amounted to RMB2,423 million while ASP of OEM segment amounted to RMB980.
(2) The Philips Group granted one-off incentive discount for material purchase to Sang Fei in FY2002. No such discounts were granted in respect of FY2001 or FY2003. The gross profit margin for FY2002 would be 6.0% if excluding the aforesaid incentive discount granted by the Philips Group as further discussed below.

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Segment results

Segment result is defined as turnover for that segment less direct operating expenses but before unallocated revenue and unallocated costs.

	FY2001	FY2002	FY2003
	RMB million	RMB million	RMB million
_Philips_branded OEM
– turnover	2,382.6	1,993.5	2,752.5
– segment results	258.0	157.0	143.5
– segment margin	10.8%	7.9%(1)	5.2%
Other OEM
– turnover	40.6	33.1	163.5
– segment results	12.7	12.0	15.2
– segment margin	31.3%	36.2%	9.3%
Own-branded products
– turnover	–(2)	4.6	119.6
– segment results	–(2)	0.085	7.1
– segment margin	–(2)	1.9%	6.0%

Notes:

(1) The Philips Group granted one-off incentive discount for material purchase to Sang Fei in FY2002. No such discounts were granted in respect of FY2001 or FY2003. The segment margin would be 4.1% if excluding the incentive discount granted by the Philips Group as further discussed below.
(2) Sang Fei launched its first own-branded mobile phone in November 2002. Hence, no turnover was recorded in respect of FY2001.

As noted in the Circular, Sang Fei undertook the sales and distribution functions for Philips branded products in addition to being an OEM manufacturer and the revenue as well as the related costs and profit margins for such sales and distribution functions were included in its turnover prior to the partial sale of Sang Fei by the Philips Group to the CEC Group in April 2002 (the “Partial Sale”). Sang Fei has since the Partial Sale ceased to undertake these functions and the adjusted FY2001 figures relate only to the OEM segment and exclude such sales and distribution. For comparison purpose, we have therefore used the turnover based on the OEM segment only for FY2001.

According to the New Directors, sales by Sang Fei for Philips branded products are made to the Philips Group at a price determined on a cost-plus basis, whereby “cost” primarily relates to normal production costs, overhead and general

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and administrative expenses. Meanwhile, sales for other OEM products are made either on a cost-plus (also known as fixed charge) basis or on a fixed-price basis. Sang Fei’s own-branded products are normally sold either on an underwritten or non-underwritten basis to distributors.

When assuming the sales and distribution functions for Philips branded products prior to the aforesaid Partial Sale, Sang Fei incurred substantial distribution costs such as selling, marketing and after-sales expenses. These distribution costs reduced subsequent to the Partial Sale as Sang Fei ceased to provide such sales and distribution functions to the Philips Group.

Prior to the Partial Sale, Sang Fei paid technical assistance fees to the Philips Group while Sang Fei also enjoyed certain corporate services from Philips Group free of charge. The payments of technical assistance fee ceased after the Partial Sale and the fees currently paid by Sang Fei to the Philips Group are for the provision of corporate services only.

FY2001 to FY2002

Turnover for FY2002 decreased by about 16.4% to approximately RMB2.0 billion compared to the turnover of OEM segment for FY2001 of approximately RMB2.4 billion despite about 46.4% increase in output during the corresponding period. This was reflected by the decline in OEM ASP from RMB980 in FY2001 to RMB555 in FY2002. The reasons for the decline are (a) a general decline in costs of materials, where a majority of Sang Fei’s OEM sales were on a cost-plus basis; and (b) general erosion in selling prices of mobile phones as a result of intense competition in the PRC. The proportion of Philips branded products decreased marginally from 99% of total turnover of Sang Fei to about 98%. Meanwhile, Sang Fei recorded a nominal turnover for its own-branded products following the launch of its first own-branded mobile phones in November 2002.

Segment results decreased by about 56.3% to RMB169.1 million due to a reduction in the cost-plus margins for the Philips branded OEM products in FY2002 compared to FY2001, although this was partially offset by a reduction in material costs in FY2002 due to incentive discounts granted by the Philips Group for materials sourced through it. This was evidenced by the reduction in segment result margins of about 10.8% to 7.9% for Philips branded OEM products. For other OEM products, Sang Fei enjoyed a margin of about 36.2% in FY2002 compared with 31.3% in FY2001. According to the New Directors, in FY2001 and FY2002 Sang Fei had entered into contracts with certain OEM customers where products were sold on a fixed-price basis. Meanwhile, Sang Fei’s material costs decreased during the period in line with the then global trend and therefore enjoyed good margins for other OEM products during the period.

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Gross profit decreased to approximately RMB197 million in FY2002 and gross profit margin decreased to 9.7%. Excluding the effects of the incentive discounts described above, gross profit margin would have further decreased to about 6.0%. Distribution costs reduced significantly as Sang Fei no longer assumed the sales and distribution functions for the Philips branded products while administrative expenses declined as Sang Fei ceased payments of technical assistance fees to the Philips Group.

FY2002 to FY2003

Compared to FY2002, turnover for FY2003 increased by about 49.5% while output also increased by about 50.5%. ASP maintained stable at about RMB563. The increase in output was due mainly to general increase in demand for Philips branded, OEM and own-branded mobile phones during the year despite the adverse effects of the outbreak of SARS in the first half of 2003. Turnover attributable to the Philips branded products further decreased to 91% in FY2003 following Sang Fei’s effort to diversify its customer base. Turnover for other OEM products increased close to five times and accounted for about 5.4% of total turnover while Sang Fei recorded significant increase in turnover for own-branded products of about RMB119.6 million, or about 4.0% of its total turnover.

Segment results decreased marginally by 2.0% despite the substantial increase in turnover in FY2003. This was due to erosion in margins for both Philips branded products and other OEM products. The decline in margins for Philips branded products from 7.9% to 5.2% was due to the absence of the oneoff bulk purchase discount in materials sourced for Philips branded products. There was also a general decline in selling price of mobile phones. Meanwhile, the margins of other OEM products were adversely affected because (a) increased competition for OEM manufacturing; and (b) the absence of low material cost advantage for products sold on fixed-price basis which Sang Fei enjoyed in FY2001 and FY2002. Such decline was however offset by higher contribution from ownbranded products which contributed RMB7.2 million in FY2003 compared to about RMB85,000 in FY2002.

Consequently, gross profit declined by about 16.8% to RMB164 million in FY2003 and gross profit margin declined from 9.7% in FY2002 to 5.4% in FY2003 accordingly.

In line with the strong growth for its OEM and own-branded products, advertising and marketing expenses relating to these products increased correspondingly by about 88.8% to RMB29 million in FY2003. This was however more than offset by reduction in administrative expenses as Sang Fei relied less on the Philips Group for its corporate services. Overall, distribution, administrative

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and other operating expenses decreased from RMB128 million in FY2002 to RMB109 million in FY2003. Due to lower gross profit, profit before tax decreased by about 21.8% from about RMB87 million in FY2002 to RMB68 million in FY2003.

Sang Fei has experienced substantial growth in terms of production output. Turnover grew by a lesser extent due to drastic reduction in ASP. As a result of lower cost-plus margins and general reduction in selling prices of mobile phones, Sang Fei experienced significant reduction in gross profit margins. To remain competitive, Sang Fei has made an effort in lowering operating costs.

Sang Fei operates in the highly competitive mobile phone industry in the PRC. This risk factor is further elaborated in the Circular in the section headed “Information on the New Group – Risk Factors”. When considering the Acquisition, we recognise the competitive nature of Sang Fei’s business. We are however of the view that businesses of Sang Fei, despite the intense competition, has a better track record compared with those of the Transonline Group and the DIC Group.

(h) Outlook for the industry

An overview of the global and PRC mobile phone markets as well as the outlook and industry trends of the PRC’s market can be found on pages 190 to 194 of the Circular. Such information is derived from various public and private publications, including official sources, and we have assumed the accuracy of such information.

It is stated that vendors located in Japan, Korea and China have been gaining significant share of the mobile phone market. In terms of the PRC mobile phone market, although the PRC has the largest GSM mobile network in the world and has approximately 269 million mobile phone subscribers, the mobile penetration rate of approximately 21% remains low compared with 50% to 70% in North America and Europe. Although PRC is not expected to attain such high penetration rate within the next few years, the number of mobile phone subscribers is expected to progressively increase to about 405 million by year 2007. We believe the PRC’s domestic mobile phone market has immense potential for growth if its mobile penetration rate can progressively increase in tandem with its economic growth and development, given the large size of the PRC market.

There has also been significant growth in the production volume of mobile phones in the PRC, which grew from about 22.7 million units in 1999 to about 186.4 million units in 2003, due to PRC’s low cost advantage, high price performance ratio, creative product design and improving R&D capability. Another important aspect is that domestic mobile phone sales increased 56.1% year-on-year to approximately 183.2 million units in 2003 while total value of exports increased to approximately US$7,380 million in 2003 or about 39.4% higher than that of 2002. Being OEM and ODM manufacturers for

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mobile phone customers of other brands which both export overseas and sells in the domestic market, Sang Fei will benefit from the growths in domestic market as well as export markets. In addition, as Sang Fei sells its own-branded mobile phones in the PRC market, it will benefit from increased domestic mobile phone sales.

In 2003, Sang Fei produced about 5.5 million units of mobile phones, representing a nominal proportion of the total 186.4 million units produced in the PRC in 2003 as described above. As Sang Fei only started to launch its own-branded mobile phones only in November 2002, its share in the PRC domestic market is small.

In summary, mobile phone production activities and the PRC domestic mobile phone market are expected to experience growth in the next few years. This would present significant opportunities to the future prospects of mobile phone makers, such as Sang Fei. We however noted that the mobile phone market is highly competitive as explained in the section “Risks relating to the mobile phone industry”. Sang Fei would thus have to maintain a competitive advantage in order to benefit from such opportunities. To this end, we believe Sang Fei could leverage on its established relationships with the Philips Group and CEC Group, as well as on its mobile phone manufacturing experience in the PRC as further elaborated in the section “Information on the New Group – Strengths and strategies”. Capitalising on its strengths, Sang Fei should be well positioned to benefit from such opportunities.

6. CEC Group and its future intentions on the New Group

CEC will own 6,500,000,000 new Winsan Shares and become the controlling Shareholder upon Completion. CEC is a nationwide electronics and information technology conglomerate established in 1989 in PRC with the approval of the PRC State Council and is under the direct administration of the central government of the PRC. CEC actively focuses on and has made substantial investments in the communication/consumer electronics, semi-conductor and software sectors.

CEC intends that Winsan will become its principal Main Board listed subsidiary operating in the communications, consumer electronics and related industries. As stated in the Circular, CEC may in the future inject its other interests in certain of its mobile phone manufacturing or design subsidiaries into Winsan. CEC has also granted a right of first refusal over the sale of any company or business in the CEC Group which could or may compete with or is similar to the Business of the New Group.

Having reviewed information provided by the Company, CEC and Sang Fei, we are of the view that CEC has the financial resources required by and is committed towards the development of the New Group after the Acquisition. The resulting change in the controlling Shareholder pursuant to the Acquisition is therefore advantageous to Independent Shareholders.

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7. The Purchase Price and the Consideration Shares

The New Directors advised that they are not aware of any listed companies directly comparable with Sang Fei. The New Directors however informed that the businesses of Sang Fei are similar to certain business segments of several major contract manufacturing companies which also manufacture mobile phones on OEM and ODM basis in the PRC. As far as we are aware, these companies include Flextronics International Ltd (“Flextronics”), Solectron Corporation (“Solectron”), Celestica Inc. (“Celestica”) and Elcoteq Network Corporation (“Elcoteq”). In analysing the reasonableness of the Purchase Price, we have compared the valuation of Sang Fei with these contract manufacturing companies (“Comparables”). We wish to highlight that these Comparables may not be directly comparable as they are in general, of much larger size than Sang Fei and their scope of business activities is wider and not identical to that of Sang Fei.

(a) Price-to-Earnings Ratio

According to the Directors, the Purchase Price of HK$260,000,000 was arrived at after arm’s length negotiations among the relevant parties with reference to, inter alia, the historical earnings of Sang Fei. Price-to-earnings ratio (“PER”) is a commonly used reference for valuing an entity and we believe it is an acceptable method to value Sang Fei in this case as Sang Fei has a profitable track record and is not an asset-based company.

To analyse the valuation of Sang Fei, we have compared it with the trading multiples of several Comparables. We believe that the Comparables are the most relevant in this circumstance although as discussed above, they are in general of much larger size compared to Sang Fei and their scope of business activities is wider. The PERs of the Comparables, based on their share prices as at the Latest Practicable Date, are summarised in the table below:

	Principal				Price-to-
	stock	Forecast	Historical	Price-to-	net asset	Market
Company	exchange	PER	PER	sales	value	capitalisation
		(times)	(times)	(times)	(times)	(US$ billion)
Flextronics	Nasdaq	17.4(1)	N/A	0.60	2.00	8.69
Solectron	New York	24.2(2)	N/A	0.41	3.29	4.27
Celestica	New York	22.7(3)	N/A	0.64	1.09	4.66
Elcoteq	Helsinki	N/A	17.9	0.11	1.45	0.54
Sang Fei(4)	Unlisted	N/A	6.0	0.14	1.42	0.05(4)

Source: Yahoo Finance website

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Notes:

(1) For the financial year ending 31st March, 2006, by Reuters Group, a financial information company.
(2) For the financial year ending 31st August, 2005, by Reuters Group, a financial information company.
(3) For the financial year ending 31st December, 2005, by Reuters Group, a financial information company.
(4) For 100% of the share equity of Sang Fei, based on the Purchase Price.

Flextronics is a leading electronics manufacturing services provider focused on delivering operational services to technology companies and has design, engineering, manufacturing, and logistics operations in 29 countries and five continents. Revenue for its fiscal year ended 31st March, 2004 amounted to approximately US$14.5 billion.

Solectron is a leading global provider of electronics manufacturing and integrated supply chain services. It serves innovative companies in industries that rely on hightech electronics and has 66,000 employees globally. Its revenue for fiscal 2003 was about US$11.0 billion.

Celestica is a leading company in the delivery of innovative electronics manufacturing services. Celestica operates a sophisticated global manufacturing network with operations in Asia, Europe and the Americas, providing a broad range of services to leading original equipment manufacturers across a variety of industries. Its revenue for fiscal year 2003 was about US$6.7 billion.

Elcoteq is one of the largest electronics manufacturing services companies in the communications technology field. It provides globally end-to-end solutions consisting of design, manufacturing, supply chain management and after-sales services for the whole lifecycle of its customers’ products. It operates on three continents in 11 countries and has about 12,600 employees. Its revenue and net income for fiscal year 2003 were approximately Euro2.2 billion and Euro20.8 million respectively.

It is noted that Flextronics, Solectron and Celestica have incurred losses in the past financial year and as a result, historical PERs are not applicable. Elcoteq’s historical PER is about 17.9 times. Comparatively, Sang Fei has been profitable in the past year and the historical PER of Sang Fei based on its valuation under the Acquisition is 6.3 times. Profit projections of Sang Fei and Elcoteq are not available while the forecast PERs of Flextronics, Solectron and Celestica are in the range of about 17 times to 24 times. It is noted that the forecast PERs of Flextronics, Solectron and Celestica relate to their financial years ending in year 2005 or 2006.

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In terms of price-to-sales ratio, those of the Comparables (save for Elcoteq) range between 0.41 times and 0.64 times while the Acquisition values Sang Fei at a substantially lower price-to-sales ratio of 0.14 times, which is comparable to Elcoteq’s 0.11 times.

We are therefore of the view that the valuation of Sang Fei, on the basis of PER and price-to-sales, is fair and reasonable when compared with the Comparables.

(b) Net asset value

The audited net asset value of Sang Fei as at 31st December, 2003 was approximately RMB300.5 million. Based on the Purchase Price, the implied valuation of Sang Fei is HK$400 million, representing a price-to-net asset value of about 1.42 times. For the Comparables, their current prices-to-net asset values ranged from 1.09 times to 3.29 times. We are of the view that net asset value is not a preferred method in valuing contract manufacturing business as it is not an asset-based business. The value of Sang Fei lies primarily in its ability to generate profits instead of the value of its assets. Nevertheless, for comparison purposes, it is noted that the price-to-net asset value of Sang Fei based on the Purchase Price is lower than majority of the Comparables, save for Celestica.

(c) The Consideration Shares

The Purchase Price is to be satisfied by the issue of 6,500,000,000 new Winsan Shares at the Issue Price of HK$0.04 per Winsan Share. The Directors informed that the Issue Price was arrived at after arms’ length negotiations among the parties by reference to the average closing price per Winsan Share of HK$0.047 for the period of 23 consecutive trading days in the one month from 19th November, 2002 to 19th December, 2002.

It is noted that the price of Winsan Shares was on a downward trend from around HK$0.047 per Winsan Share in early December 2002 to a low of HK$0.035 per Winsan Share on 12th December, 2002. Trading volume during the period had been low, averaging about 68,000 Winsan Shares per day. The price of Winsan Shares increased substantially to HK$0.060 per Winsan Share on 17th December, 2002 and traded at HK$0.065 on the Last Dealing Date. Trading volume between 17th December, 2002 and the Last Dealing Date also increased correspondingly to more than 1.9 million Winsan Shares per day. On 17th December, 2002, the Company announced that it was in preliminary negotiation with various parties, which might lead to a possible acquisition or disposal by the Company (“Events”). We believe the sharp increases in the trading volume and prices of Winsan Shares from 17th December, 2002 to the Last Dealing Date was most probably driven by the Events.

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After the Announcement, the price of Winsan Shares increased substantially, closing at HK$0.37 per Winsan Share on 22nd December, 2003, the day where trading in Winsan Shares resumed. This represents an increase of more than 4.5 times compared to the closing price of HK$0.065 per Winsan Share on the Last Dealing Date. The price of Winsan Shares then progressively declined to a closing price per Winsan Share of HK$0.305 as at the Latest Practicable Date, which was in line with the general decline of the market. In addition to the increase in Share price, trading volume also increased substantially where average daily trading volume was about 4.8 million Winsan Shares during the period after the Announcement to the Latest Practicable Date.

The Issue Price of HK$0.04 per new Winsan Share represents (a) discount of approximately 14.9% to the average closing price per Winsan Share of HK$0.047 for the period of 23 consecutive trading days in the one month from 19th November, 2002 to the Last Dealing Date; (b) discount of approximately 14.9% to the 10-day average closing price per Winsan Share of HK$0.047 up to the Last Dealing Date; and (c) discount of about 38.5% to the closing price of HK$0.065 per Winsan Share on the Last Dealing Date.

Considering that the price on the Last Dealing Date was likely driven by the announcement of the Events on 17th December, 2002 and that the trading volume of Winsan Shares had been low, we are of the view that the Issue Price is fair and reasonable. In addition, it is noted that the price of Winsan Shares increased significantly after the Announcement and such increase might have reflected the general positive response to the Acquisition. The price of Winsan Shares gradually decreased thereafter, which was in line with the general decline of the stock market.

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8. Financial effects of the Acquisition

Based on the audited consolidated capital deficiency of Winsan Group as at 31st December, 2003, the following sets out the pro forma statement of unaudited adjusted combined assets and liabilities of Winsan Group, reflecting the effects of the Acquisition:

Fixed assets and other non-current assets Goodwill and intangible assets Non-current assets Current assets Current liabilities Net current assets/(liabilities) Non-current liabilities Minority interests (Capital deficiency)/net assets	Winsan Group (HK$’000) 4,166 – 4,166 3,368 (73,523) (70,155) (1,234) – (67,223)	Winsan Group after Completion (HK$’000) 92,238 106,626 198,864 1,292,346 (1,145,340) 147,006 – (99,236) 246,634

After the Acquisition, the financial position of the Winsan Group would recover from a capital deficiency of about HK$67.2 million as at 31st December, 2003 to a net asset position of approximately HK$246.6 million. Working capital position would improve from a net current liabilities position of about HK$70.2 million to net current assets of approximately HK$147.0 million. Thus, the Acquisition will strengthen the financial position of Winsan Group and is therefore favourable to the Shareholders as a whole.

9. Dilution effects of the Acquisition

There will be significant changes to the shareholding structure of the Company immediately after the Acquisition as the Acquisition entails the issuance of 6,500,000,000 new Winsan Shares to CEC as Consideration Shares which represent about 417% and 80.7% of the existing and the enlarged issued share capital of Winsan immediately after Completion.

The shareholding of all current Shareholders will be substantially diluted upon Completion. In particular, the interest of public Shareholders will decrease from approximately 46.8% to approximately 25.0%.

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We believe that the dilution effect is acceptable as the Acquisition would result in the Shareholders having shareholdings, albeit smaller, in a company with profitable track record. The financial position of the New Group would also improve in terms of asset backing and the New Group has a proven and viable business model as compared to the existing businesses of Winsan Group, the prospects of which are uncertain.

B. NON-EXEMPT ONGOING CONNECTED TRANSACTIONS

PRINCIPAL FACTORS CONSIDERED

In arriving at our advice with regard to the Non-exempt Ongoing Connected Transactions, we have considered the following principal factors:

1. Background

The CEC Group

Immediately after the Completion, CEC will be the controlling shareholder (as defined in the Listing Rules) of the Company. For so long as such shareholding relationship is maintained, the CEC Group (including SZST and its subsidiaries) will constitute connected persons of the Company for the purposes of the Listing Rules. SZST by virtue of being a substantial shareholder of Sang Fei and a subsidiary of CEC is also a connected person of the Company.

As stated in the Circular, the CEC Group has had close relationship with Sang Fei since the formation of Sang Fei. In order to promote its own-branded products in the PRC market and in selected overseas market and to strengthen its ability to provide value added services to its customers, the New Group looks to capitalise on the strong platform and product design capabilities, as well as on the extensive distribution and after sales service network of, the CEC Group. As such, certain existing transactions between Sang Fei and the CEC Group (including SZST and its subsidiaries) are expected to continue after the Completion.

The Philips Group

The Philips Group is a substantial shareholder of and has an 25% equity interest in Sang Fei. Accordingly, the Philips Group is a connected person of the Company (as defined in the Listing Rules).

As a joint venture company set up between the Philips Group and the CEC Group for the purpose of, inter alia, being the exclusive supplier of mobile phones to the Philips Group, Sang Fei has had close relationship with the Philips Group since its incorporation. It is expected that the New Group will continue to remain as the exclusive supplier to the Philips Group and accordingly certain existing transactions between Sang Fei and the Philips Group will continue after the Completion.

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2. The Non-exempt Ongoing Connected Transactions

With the CEC Group

To comply with the requirements of the Listing Rules, CEC and Sang Fei have entered into the Business Services Agreement for a term of three years expiring on 31st December, 2006. The Business Services Agreement covers (i) sale of products by Sang Fei to the CEC Group; (ii) purchases of raw material by Sang Fei from the CEC Group; (iii) the provision of product design services by the CEC Group to Sang Fei; (iv) provision of after sales services by the CEC Group to Sang Fei; (v) provision of canteen services by the CEC Group to Sang Fei; and (vi) provision of renovation services by the CEC Group to Sang Fei. In addition, CEC and Sang Fei have entered into three lease agreements in respect of the leasing of factory premises and staff quarters, all of which are expiring on 31st December, 2008, and a processing contract for a term of three years expiring on 31st December, 2006.

Business Services Agreement

(i) Sale of products

Sang Fei does not have its own sales and distribution network and therefore its mobile phones (including the Philips branded products in FY2001) are sold through distributors. One of the two existing distributors of Sang Fei’s own-branded mobile phones is a member of the CEC Group, namely, Shenzhen SED Coalition Electronics Co., Ltd. Under the existing arrangements, Sang Fei sells its own-branded mobile phones at pre-determined prices above cost to its distributors on an underwritten basis. In addition, Sang Fei may sell small quantities of semi-finished or finished products to CECW and Cellon France for their in-house design testing purposes.

For each of the financial years ended 31st December, (“FY”) 2001, FY2002 and FY2003, the total amount of sales by Sang Fei to the CEC Group is as follows:

	Amount (RMB’000) and	Amount (RMB’000) and	as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002	% FY2003	%
Sale of products	872,427	31.7 37,655	1.9 95,493	3.1

As mentioned previously, Sang Fei acted as the OEM manufacturer and distributor of Philips branded products through members of the CEC Group prior to the Partial Sale and consequently the amount of the sales of products to the CEC Group was high in FY2001. Following the Partial Sale, Sang Fei ceased to distribute Philips branded products. As a result, sales to the CEC Group from FY2002 onwards represented sales

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of its own-branded mobile phones and declined significantly from about RMB872.4 million to RMB37.7 million in FY2002. With an increase in sales of its own-branded mobile phones in FY2003, sales to the CEC Group increased correspondingly to RMB95.5 million in FY2003.

As mentioned above, distributors of Sang Fei’s own-branded mobile phones undertake to acquire all of Sang Fei’s own-branded phones for their distribution, in other words, on an underwritten basis. Such distribution arrangements are usually negotiated at the initial development stage and the distribution price, which is on a cost plus basis, is set with reference to phone design, functions, features and the number of units that the distributors are willing to take up.

Direct comparison of prices on the mobile phones sold to members of the CEC Group for distribution could not be made against prices offered to third party distributors as the models and/or functions of the mobile phones distributed are not identical. Nevertheless, we have reviewed prices of comparable products and based on information provided by the New Directors, Sang Fei’s own-branded phones have been sold to the CEC Group at prices above its production costs and the margins are comparable to those sold to independent third party distributors.

Having considered that:

(a) the sale of its own-branded mobile phones and products to the CEC Group for distribution are in the Group’s ordinary course of business and are on normal commercial terms;
(b) the New Group does not have its own sales network while the CEC Group already has an established and extensive distribution network for consumer electronics/communication products;
(c) the CEC Group has provided efficient distribution services as demonstrated by past dealings between Sang Fei and the CEC Group;
(d) the distribution prices negotiated between the Company and the CEC Group will not be less than the production costs incurred and the terms of the distribution arrangement, including factors such as price and quantity underwritten, are no less favourable than those sold to third party distributors; and
(e) Sang Fei is not obliged to sell its mobile phones through members of the CEC Group,

we are of the view that the engagement of the CEC Group for distribution services and the sale of mobile phones to the CEC Group are in the interests of the Company and its Shareholders as a whole.

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(ii) Purchase of raw materials

Sang Fei from time to time purchases raw materials and components such as batteries for its manufacturing activities from members of the CEC Group. Sang Fei also expects to purchase toolings from the CEC Group in the future.

According to the New Directors, the choice of suppliers, prices and major parts and components used in Sang Fei’s OEM manufacturing activities are normally determined by its customers. With respect to its own-branded mobile phones, Sang Fei normally obtains quotations for its raw material and component supplies based on design specifications. As a reference, we have compared the respective prices of batteries acquired from the CEC Group and from independent third party suppliers. We noted that the batteries are not identical in specifications but are of similar range and have similar functions and the prices of batteries sourced from the CEC Group were comparable to prices quoted by independent third party suppliers.

From time to time Sang Fei purchases spare parts for use in maintenance and repair of mobile phone and these parts could only be procured from overseas through licensed import and export companies since Sang Fei does not have the requisite licenses to trade on raw materials and parts. As the CEC Group has the licenses to conduct import and export activities and typically purchases in bulk, it is in a position to negotiate better terms with the overseas suppliers. In view of such benefits, Sang Fei is able to leverage on its close relationship with the CEC Group to import raw material and/or parts required.

The total amount of purchases by Sang Fei from the CEC Group for each of FY2001, FY2002 and FY2003 is as follows:

	Amount (RMB’000) and	Amount (RMB’000) and	as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002	% FY2003	%
Purchase of raw
material and toolings	–	– –	– 333	0.01

Sang Fei began to purchase from the CEC Group since 2003 when it became a qualified supplier of raw material to Philips branded mobile phones that year.

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Having considered that:

(a) the purchases of raw material and components from the CEC Group have been and will be in the New Group’s ordinary course of business and are on normal commercial terms;
(b) the CEC Group has the requisite license and is able to supply raw material and components which are required by Sang Fei’s OEM customers and its own-branded mobile phones at competitive prices and consistent quality;
(c) the terms of the purchases from the CEC Group are on normal commercial terms and are no less favourable compared to those offered by third party suppliers; and
(d) Sang Fei is able to achieve logistics and administrative efficiencies by purchasing from the CEC Group,

we are of the view that the purchases of raw material and components from the CEC Group for both its repair requirements, OEM manufacturing and own-branded mobile phone businesses are fair and reasonable.

(iii) Design services

Sang Fei commenced to develop its own-branded mobile phones in 2002 and has engaged mobile phone design houses, including CECW and Cellon France, to provide mobile phone design services since 2003. CECW and Cellon France are members of the CEC Group which specialise in the research and development of mobile phones and their other minority shareholders are members of the Cellon Group, which holds itself out to be one of the leading independent design house for wireless terminals and module design in the world.

Sang Fei has launched one model of its own-branded mobile phone in 2004 which was designed by Cellon France and will be launching another model designed by Cellon France in 2004. In addition, Sang Fei is negotiating with Cellon France on the provision of design services in respect of additional own-branded products to be launched in 2004.

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The payment for design services to the CEC Group for each of FY2001, FY2002 and FY2003 is as follows:

	Amount (RMB’000) and	Amount (RMB’000) and	as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002	% FY2003	%
Design services	–	– –	– 2,421	0.08

No payments were made prior to FY2003 as Sang Fei only started to develop its own-branded mobile phones in late 2002. According to the New Directors, the design service fee payable to design houses for the development of a new model ranges from RMB1.8 million to RMB2.0 million, depending on, inter alia , the complexity of the designs.

We have compared the design services fees paid by Sang Fei to both members of the CEC Group and independent third party design house for two of its own-branded mobile phone models which have similar features and target market. We found that the design fees paid to the CEC Group were comparable to the fees paid to the third party design house.

Based on the above and that:

(a) the engagement of members of the CEC Group for design services has been and will be in the New Group’s ordinary course of business and are on normal commercial terms;
(b) CECW and Cellon France, being members of one of the leading mobile phone design houses, are able to offer competitive prices no less favourable than prices of third party design houses for similar services; and
(c) Sang Fei is under no obligation to engage members of the CEC Group for design services if third party design houses can provide better or more commercially feasible phone designs,

we are of the view that the engagement of members of the CEC Group for design services for Sang Fei’s own-branded mobile phone is in the interests of the Company and its Shareholders as a whole.

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(iv) After sales services

Sang Fei engages Shenzhen SED ARC Co. Ltd. and Shenzhen SED Coalition Electronics Co. Ltd, both of which are members of the CEC Group, for product repair services in respect of its own-branded mobile phones. The relationship between Sang Fei and the CEC Group for after sales services commenced in 1997 when Shenzhen SED ARC became a repair service provider of Philips branded products.

Sang Fei has over 33 repair services providers in addition to Shenzhen SED Coalition Electronics Co. Limited. The New Directors advised that these after sales service providers are engaged based on business efficiency, quality of service as well as terms of services (including the pricing of services, payment terms and scope of services). We have reviewed the quotations provided by third party service providers and found that the prices charged by members of the CEC Group are comparable to those charged by third parties after sale service providers.

The payment for after sales services to the CEC Group for each of FY2001, FY2002 and FY2003 is as follows:

	Amount (RMB’000) and as a percentage	Amount (RMB’000) and as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002 % FY2003	%
After sales services	17,459	0.63 9,093 0.45 2,323	0.08

Sang Fei provided after sales services for Philips branded phones it manufactured through members of the CEC Group before the Philips Group disposed of its 65% equity interest in Sang Fei to the CEC Group. Consequently, it recorded payment for after sales services of about RMB17.5 million in FY2001. Following the above disposal of interests in 2001, Sang Fei ceased to provide such after sales services for Philips branded phones as they became the responsibility of Philips Group. As the typical product warranty period for Philips branded phones is 15 months, Sang Fei continued to pay after sales service fees to CEC Group in FY2002 although the amount declined to RMB9.1 million in FY2002. With the launch of Sang Fei’s own-branded mobile phones, it also engages the after sales services of CEC Group. As Sang Fei only first launched its own-branded products at the end of 2002, a small portion of payments in FY2002 was attributable to the own-branded mobile phones. After sale service fees paid for FY2003 which amounted to approximately RMB2.3 million and were solely attributable to after sales services provided in relation to Sang Fei’s own-branded phones.

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Based on the above and that:

(a) the provision of after sales services is ancillary to the Company’s principal businesses and is in the New Group’s ordinary course of business;
(b) such services have been provided by members of the CEC Group on normal commercial terms;
(c) the competence of the after sale service provider such as Shenzhen SED ARC Co. Ltd. is instrumental to the satisfaction of buyers of the Company’s own-branded phones;
(d) terms of the CEC Group for the after sales services are no less favourable compared to terms offered by third party after sale services providers,

we are of the view that the engagement of members of the CEC Group for the provision of after sales services for Sang Fei’s own-branded mobile phone is beneficial to the development of the New Group’s business in the long term.

(v) Canteen services

Bai Li, which is a member of the CEC Group, operates canteen facilities for its staff. As the production facilities of Sang Fei are located near Bai Li’s canteen, Sang Fei has made use of such facilities to provide meals to its employees in return for a service fee calculated based on the number of meals consumed plus a fixed premium. The payment made in respect of the canteen services to Bai Li for each of FY2001, FY2002 and FY2003 is as follows:

	Amount (RMB’000) and as a percentage	Amount (RMB’000) and as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002 % FY2003	%
Canteen services	299	0.01 2,158 0.11 3,543	0.12

Fees paid by Sang Fei for canteen services increased substantially from FY2001 to FY2002 because prior to and in FY2001, Sang Fei operated its own canteen. Sang Fei began to fully engage the canteen services by Bai Li in FY2002. The New Directors advised that Sang Fei has previously operated its own canteen facilities but the costs involved in operating its own canteen facilities was comparable, if not higher, than the amount currently paid to Bai Li and the operation of canteen facilities requires substantial capital expenditure. Furthermore, Bai Li is able to provide high quality meals. Taking the above into consideration and that:

(a) operating canteen facilities is not a core business of Sang Fei;

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(b) establishing new canteen facilities would require substantial capital expenditure and operating its own canteen facilities would not result in cost saving;
(c) the provision of canteen services to Sang Fei by Bai Li has been and will continue to be on normal commercial terms;
(d) the proximity of Sang Fei’s production facilities to Bai Li’s canteen facilities; and
(e) the terms in relation to the provision of canteen services were negotiated with Bai Li on an arm’s length basis and normal commercial terms,

we are of the view that the provision of canteen services by Bai Li to the employees of Sang Fei facilitates its daily operations and is therefore in the interests of the Company and its Shareholders as a whole.

(vi) Renovation services

The production facilities of Sang Fei are located within an industrial complex owned by the CEC Group. Sang Fei has engaged members of the CEC Group for renovation services for its factory premises between October 2003 and early 2004 and the total contract sum involved was approximately RMB2.6 million.

In view of the overall expansion of its production facilities which will entail increase in production space being leased from SZST and building of additional “clean room” facilities, Sang Fei has retained the services of the CEC Group to undertake its future renovation works. Sang Fei has obtained and compared tenders from contractors who are Independent Third Parties and such quotations and terms were similar to those offered by the CEC Group. Sang Fei has also appointed independent third party surveyors to supervise and monitor the progress of renovation projects in order to ensure that the CEC Group could meet the renovation schedule and quality requirements.

Having considered that (i) the engagement of members of the CEC Group for renovation services was on a tender basis and the terms were comparable, if not lower than, those of the other tenders and on normal commercial terms; and (ii) the quality of the CEC Group’s renovation work will be monitored by independent third party surveyors, we are of the view that the terms of the engagement of the CEC Group for renovation services for Sang Fei’s factory premise are fair and reasonable and such arrangement is in the interests of the Company and its Shareholders as a whole.

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A majority of the transactions under the Business Services Agreement has been in existence in the past as intra-group transactions amongst the then members of the CEC Group and have been conducted on normal commercial terms. Such transactions are integral to the business operations of Sang Fei.

(vii) Rental arrangements

The production facilities of Sang Fei are located within an industrial complex owned by the CEC Group. Sang Fei has leased factory premises and 60 apartments as staff quarters from the CEC Group under five leases, all of which for a period of five years expiring on 31st December, 2008 which can be extended for a further term of five years prior to 1st October, 2008 at a rate (i) comparable to the market rate; and (ii) to be agreed between Sang Fei and the CEC Group. The CEC Group has also granted Sang Fei a license for the use of an additional floor of the same industrial complex free of rental charge; however, Sang Fei would be responsible for the maintenance costs, management fee and utility charges associated with the use of that floor.

The amount of rental paid by Sang Fei to the CEC Group for each of FY2001, FY2002 and FY2003 is as follows:

	Amount (RMB’000) and	Amount (RMB’000) and	as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002	% FY2003	%
Rental	5,760	0.2 5,760	0.3 5,875	0.2

As stated in the Letter from the Board, Sallmanns (Far East) Limited, an independent property valuer, is of the view that the terms, including the amounts of rental, of the lease arrangements in respect of the factory premises and staff quarters are fair and reasonable so far as Sang Fei is concerned. The New Directors informed that the CEC Group also leases parts of the complex where Sang Fei’s production facilities are situated, to Independent Third Parties and they advised that the terms offered by the CEC Group to the Independent Third Parties is comparable and not more favourable compared to the terms offered to Sang Fei.

Taking into consideration (i) the independent valuer’s view that the terms of the lease arrangement are fair and reasonable; and (ii) the average rental charged by the CEC Group to Independent Third Parties is comparable to those charged to Sang Fei; (iii) Sang Fei has occupied the premise since it commenced business and relocating its production facilities would incur substantial and unnecessary expenses and its production may be interrupted as a result of such relocation, we believe it is in the interest of the Company and the Shareholders as a whole for Sang Fei to continue leasing the production premises and staff quarters from the CEC Group.

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In addition, it is noted that the aforesaid leases are for a term of five years instead of three years as required under the Listing Rules. We believe that given the terms of the lease arrangement are fair and reasonable and are at market rate, it is reasonable for Sang Fei to enter into a lease which is longer than three years. Such longer term ensures that the Group may remain within the premise for a reasonable period of time after setting up its production facilities and reduce the possibility of it having to relocate frequently as that will inevitably result in additional costs and disruptions to its business operations.

(viii) Processing arrangements

Sang Fei entered into a processing contract in August 2003 with Bai Li, which is a member of the CEC Group, for the dedicated processing services of a complete SMA production line by Bai Li for an annual fee of not less than RMB5,110,000. The contract is for a term of three years expiring on 31st July, 2006.

Based on our discussion with the New Directors, Sang Fei has entered into the processing arrangement with Bai Li as the terms of the processing contract are competitive and comparable to, if not better than, terms offered by other independent SMA processing service providers in Shenzhen. In addition, as Bai Li and Sang Fei are located within the same production complex, Sang Fei is able to streamline its logistics operations and keep warehousing and transportation costs to a minimum through such arrangement. The New Directors informed us that the services provided by Bai Li has met the quality required by Sang Fei and, with the expected growth in production, Sang Fei may secure additional processing services from Bai Li on substantially the same terms in the second half of 2004 subject to the condition that the terms will be no less favourable than those offered by the independent service providers in Shenzhen.

Based on (i) that the processing contract was entered into on normal commercial terms and the terms of which are no less favourable to those offered by Independent Third Parties; (ii) that Sang Fei is able to realise savings on warehousing and logistics operations due to the proximity of the SMA line; and (iii) the Company’s affirmation that the quality of services provided by Bai Li meets Sang Fei’s requirements, we are of the view that the processing arrangements are in the interests of the Company and its Shareholders as a whole.

With the Philips Group

As mentioned previously, the OEM manufacturing arrangements between Sang Fei and the Philips Group are governed by the Cooperation Agreement dated 22nd October, 2001. The agreement is for an initial period of four years expiring on 30th June, 2005 and will automatically be extended annually thereafter.

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(i) Sale of products and purchase of raw material

Pursuant to the Cooperation Agreement, Sang Fei has been granted the exclusive rights to manufacture mobile phones designed and developed by the CEC Group for the Philips Group and the products are to be priced on a cost-plus basis. Such exclusive manufacturing arrangements are subject to the conditions that (i) the Philips Group continuing to hold not less than 25% interest in Sang Fei; (ii) Sang Fei offering competitive terms for the manufacturing of products to the Philips Group; and (iii) Sang Fei purchasing from the Philips Group at least 50% of the basic integrated circuit chips and components used in the production of the Philips branded mobile phones. Meanwhile, the purchases by Sang Fei are subject to the condition that the Philips Group being able to supply semiconductor chips and components at competitive prices and quality.

The sale of products as a percentage of Sang Fei’s turnover and purchase of raw materials as a percentage of Sang Fei’s cost of sales for each of FY2001, FY2002 and FY2003 are as follows:

	Amount (RMB million)	Amount (RMB million)	and as a percentage of	and as a percentage of
		the audited turnover of Sang Fei
	FY2001	% FY2002	% FY2003	%
Sale of products	570	20.7 1,993	98.1 2,751	90.6
	Amount (RMB million)		and as a percentage of
		the cost of sales of Sang Fei
	FY2001	% FY2002	% FY2003	%
Purchase of raw materials	754	36.4 544	29.7 918	32.0

The prices for sale of products to Philips Group are determined on a cost-plus basis. In other words, the arrangements under the Cooperation Agreement would ensure that sale price charged by Sang Fei to the Philips Group would not be less than the allin costs incurred and that a profit margin is maintained. In terms of purchases under the Cooperation Agreement, Sang Fei may purchase from any other independent third party suppliers if they can provide raw materials on terms more favourable than those offered by and of a quality higher than the products of the Philips Group.

In this regard, we therefore concur with the New Directors that the arrangements under the Cooperation Agreement are on normal commercial terms and are fair and reasonable, and are in the interests of the Shareholders as a whole.

It is noted that the term of the Cooperation Agreement is for four years commencing October 2001 and expiring on 30th June, 2005 and will automatically be extended annually thereafter unless terminated by either party. Such term is longer than

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the three years as required under the Listing Rules. Having considered that the Cooperation Agreement has been entered into since 2001 and that its terms are fair and reasonable, we are of the view that it is reasonable and normal business practice that the Cooperation Agreement is for a longer period as it ensures the Group continues to be the only OEM manufacturer of Philips branded mobile phones.

(ii) Corporate services arrangements

The Philips Group provides certain in-house treasury, fiscal and legal services as well as non-product related services to Sang Fei from time to time. Sang Fei is not obliged to use the services of Philips Group while the provision of non-product related services by the Philips Group enables Sang Fei to leverage on the former’s bargaining power in obtaining better rates for professional services where applicable. For instance, Sang Fei is able to enjoy preferential and competitive premium rates on insurance purchases because of the business relationships among Philips Group and the various insurers. Sang Fei has in the past independently obtained quotations for insurance premium from insurers for comparison and the New Directors informed that the rates obtained were significantly higher than those obtained through the Philips Group.

The corporate services are provided as requested by Sang Fei at rates agreed pursuant to two service agreements entered into between Sang Fei and two members of the Philips Group respectively in May 2001. The services fee paid by Sang Fei for each of the years ended FY 2001, FY2002 and FY 2003 is set out below:

	Amount (RMB’000) and	Amount (RMB’000) and	as a percentage	of
		the audited turnover of Sang Fei
	FY2001	% FY2002	% FY2003	%
Corporate services fee	–	– 41,339	2.0 15,370	0.5

As Sang Fei was a subsidiary of the Philips Group in FY2001, such corporate services were provided to Sang Fei at no charge. Following the Partial Sale in FY2001, Sang Fei had to pay the Philips Group for the provision of corporate services commencing FY2002.

The New Directors advised that Sang Fei has since FY2002 began to establish its own administrative departments as well as engaging independent third parties for the provision of such services and hence the amount of corporate service fee paid to the Philips Group decreased by approximately RMB25.9 million from approximately RMB41.3 million to approximately RMB15.4 million in FY2003. Sang Fei confirmed that from time to time it obtains quotations for services from independent third parties for comparison purpose and it will engage the services of the Philips Group if the quotations from the Philips Group are lower than those offered by independent third parties. Having considered that the corporate services arrangement was negotiated on

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LETTER FROM ALTUS CAPITAL LIMITED

normal commercial terms and on an arm’s length basis, we are of the view that the corporate services arrangement is in the interest of the Company and its Shareholders as a whole.

The service agreements entered into in May 2001 cover the general terms of a wide range of corporate services including in-house treasury, fiscal and legal services as well as non-product related services which Sang Fei may require as it continues to operate. Such corporate services are provided as and when requested by Sang Fei and details of the specific services and fees are decided between Philips Group and Sang Fei each time they are requested. Given the above, the New Directors consider that it is not commercially practicable to have fixed duration for these service agreements. We are of the view that it is normal business practice that there is no fixed duration for such type of arrangements. Notwithstanding, we noted that the Proposed Caps in respect of corporate services arrangements are for up to 31st December, 2006.

(iii) Waiver application

The Non-exempt Ongoing Connected Transactions are subject to Rule 14A.35 of the Listing Rules which require disclosure and Independent Shareholders’ approval.

The following table summarises the historical amounts of the Non-exempt Ongoing Connected Transactions for the three years ended 31st December, 2003 (the “Historical Amounts”) and the proposed annual caps (the “Proposed Caps”) for the three years ending 31st December, 2006 for the respective transactions:

RMB’000	Historical Amounts	Historical Amounts	Historical Amounts	Proposed Caps	Proposed Caps	Proposed Caps
	FY2001	FY2002	FY2003	FY2004	FY2005	FY2006
With the CEC Group
(a) Sale of products	872,427	37,655	95,493	610,000	760,000	950,000
(b) Purchase of raw materials	–	–	333	11,000	14,000	17,000
(c) Design services	–	–	2,421	12,000	15,000	19,000
(d) After sales services	17,459	9,093	2,323	27,000	33,000	41,000
(e) Canteen services	299	2,158	3,543	7,000	8,000	10,000
(f) Renovation services	–	–	3,039	15,000	15,000	15,000
(g) Rental arrangements_(note)_	5,760	5,760	5,875	7,086	7,696	7,696
(h) Processing arrangements	–	–	2,210	10,220	15,330	15,330
With the Philips Group
(i) Sale of products	569,673	1,992,682	2,750,689	4,197,000	5,250,000	6,560,000
(j) Purchase of raw materials	754,277	544,265	918,093	1,480,000	1,850,000	2,305,000
(k) Corporate service
arrangements	–	41,339	15,370	17,000	21,000	26,000

Note: As the lease agreements are expiring on 31st December, 2008, the proposed caps for (g) rental arrangement in respect of FY2007 and FY2008 are both RMB7,696,000.

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LETTER FROM ALTUS CAPITAL LIMITED

The Proposed Caps for each of the transaction are higher than the respective Historical Amount. The Proposed Caps for items (a) to (d) are directly related to the potential sales amount of Sang Fei’s own-branded mobile phones. It is noted that in respect of FY2005 and FY2006, the maximum aggregate value of transactions for each year has been determined on the assumption of a 25% growth in sales of own-branded products, OEM sales to the Philips Group and staff. Having taken into account (a) the 2,518% growth in sales of own-branded phones from FY2002 to FY2003; (b) the number of models of own-branded phones to be launched (c) the 38% growth in sales to the Philips Group from FY2002 to FY2003; and (d) the 120% increase in number of staff from FY2002 to FY2003, we believe the above assumption of 25% growth is reasonable.

Items (a) & (d)

Items (a) and (d) are set based on the budgeted sales of Sang Fei’s ownbranded products which are expected to increase over the next few years. Sang Fei produced two models of own-branded mobile phones in FY2003. Together with the one model of own-branded mobile phones launched in FY2002, the New Directors advised that Sang Fei sold approximately 92,000 units in aggregate in FY2003. For FY2004 to date, Sang Fei has launched an additional model of its own-branded mobile phone. The number of units sold in FY2004 to date of the new model together with own-branded mobile phones launched in the past, has exceeded the units sold in the whole of FY2003. According to the New Directors, Sang Fei plans to introduce in total five to six new own-branded mobile phones in 2004. As one of Sang Fei’s existing distributors and one of its after sales service providers are members of the CEC Group, the Proposed Caps for FY2004 under item (a) and (d) are therefore significantly higher than the historical amount for FY2003.

It is intended that Sang Fei will continue developing and manufacturing its own-branded mobile phones and diversify its product mix in order to expand its sources of revenue and ultimately enhancing its profitability. The amount of after sales services is expected to increase in line with the increase in sales. As one of Sang Fei’s existing distributors and one of its after sales service providers are members of the CEC Group, the significant expansion of Sang Fei’s own-branded products will result in substantial increase in both sales as well as after sales service fee payments to the CEC Group in FY2004 onwards. The New Directors expect such businesses to grow at an annual rate of 25% in FY2005 and FY2006 and the Proposed Caps for FY2005 and FY2006 are therefore determined on this basis.

Taking into consideration of the above, the historical and expected growth in sales to the CEC Group and Sang Fei’s existing and future manufacturing capacity, we are of the view that the Proposed Caps for items (a) and (d) set out in the table above are fair and reasonable.

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LETTER FROM ALTUS CAPITAL LIMITED

Item (b)

Item (b) assumes that about 50% of Sang Fei’s raw material and component requirements for its own-branded products, principally batteries and toolings, will be purchased from qualified suppliers within the CEC Group.

According to the New Directors, the prices of raw material and components offered by the CEC Group have been competitive and the services have been of good and of consistent quality. The Proposed Caps for the purchases of raw material and components are determined with reference to the anticipated growth in sales, production and turnover which are expected to increase at an annual rate of 25%. In view of the above and the anticipated growth of the PRC and overseas mobile phone markets, we agree with the New Directors that the Proposed Caps for FY2005 and FY2006 for the purchase of raw materials are fair and reasonable and are in line with the New Group’s future business development.

Item (c)

The Proposed Cap for design services for FY2004 has been determined on the basis that Sang Fei will engage CECW and Cellon France to design up to seven models in FY2004 at an average design fee of about RMB1.7 million per model and continue to increase at an annual rate of 25% thereafter. The New Directors advised that CECW and Cellon France are well-known in the industry for their professional services and past experience indicates that they have been able to deliver design services which meet the quality and standards demanded by Sang Fei. The New Directors therefore expect that design services required will increase accordingly as turnover increases at an expected rate of 25%. On this basis, we are of the view that the Proposed Caps for design services are fair and reasonable.

Item (e)

The Proposed Cap for FY2004 for item (e) has been determined based on (i) Sang Fei’s aggregate headcount of about 2,000 staff; (ii) historical rate of consumption; and (iii) historical meal allowance granted to its staff and is expected to grow at an annual rate of 25% thereafter until FY2006. We are of the view that such estimate is fair and reasonable and is in line with the expected growth in sales.

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LETTER FROM ALTUS CAPITAL LIMITED

Item (f)

The Proposed Cap for Item (f) for FY2004 is arrived at based on the expansion plans of Sang Fei’s production premises, the historical quotations for and costs of renovation services from contractors. The Proposed Caps for FY2005 and FY2006 are expected to remain at the current level as the New Directors do not anticipate any additional and major renovation costs to be incurred in the near future and we are of the view that such estimate is fair and reasonable.

Item (g)

As mentioned in the section headed “Rental arrangements” above, the respective lease agreements have a term of five years from the date thereof up to 31st December, 2008 and hence the Proposed Caps will cover the period from FY2004 to FY2008. Including floor area which was additionally leased from 2004 to date, Sang Fei is currently leasing a gross floor area of approximately 19,562 sq.m. from the CEC Group at an aggregate annual rental of approximately RMB7.7 million.

In determining the Proposed Cap for FY2004, FY2005 and FY2006, the New Directors have taken into consideration (i) the duration of and the rental fees set out in the respective lease agreements; (ii) prevailing market rate of similar properties in the vicinity for similar purposes; and (iii) the area currently leased and additional floor space planned to be leased by Sang Fei. Based on the above, we are of the view that the Proposed Caps for rental arrangements are fair and reasonable as far as the Shareholders are concerned.

Item (h)

The Proposed Caps for the processing arrangements are determined based on the processing fee stipulated in the contract entered into between Sang Fei and the CEC Group in August 2003 and the number of SMA lines to be engaged by Sang Fei. In view of the historical and expected growth in sales of Sang Fei and to accommodate the anticipated increase in production, Sang Fei expects to engage the CEC Group for the provision of further processing services of two complete SMA lines in FY2004 and a total of three SMA lines for FY2005 and FY2006. Based on the above, we are of the view that the Proposed Caps for item (h) set out in the table above are fair and reasonable.

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LETTER FROM ALTUS CAPITAL LIMITED

Items (i) & (j)

The sale of products to and purchase of raw materials from the Philips Group have been increasing since FY2002 and the Proposed Caps for FY2005 and FY2006 in respect of such sales and purchases are arrived at based on the expected growth rate of 25% in turnover and production. The amount of sales to Philips Group is determined based on manufacturing orders from Philips Group and the amount of raw material purchases is normally in line with such manufacturing orders as substantially all raw materials purchased from Philips Group are used for Philips Group’s orders. Having regard to (a) the overall increase of approximately 49.5% in Sang Fei’s turnover; (b) an approximately 38.0% increase in sales to Philips Group; (c) the corresponding increase of approximately 68.8% in purchases from the Philips Group from FY2002 to FY2003; and (d) the expected annual growth of 25% in turnover and production in FY2005 and FY2006, we concur with the New Directors that the Proposed Caps for FY2004 to FY2006 in respect of items (i) and (j) are fair and reasonable.

We noted that the Cooperation Agreement which governs the above sale of products and purchases of raw materials will expire on 30th June, 2005 and be automatically extended annually thereafter unless terminated by either party. As the terms of the Cooperation Agreement will not change if it is automatically extended and the Proposed Caps are for the period up to 31st December, 2006, the Company will not seek approval from Independent Shareholders if the Cooperation Agreement is automatically extended prior to 31st December, 2006. However, if there is material change in the Cooperation Agreement or a new agreement is entered into prior to 31st December, 2006, the Company will seek approval from Independent Shareholders. We are of the view that the above arrangement is fair and reasonable.

Item (k)

The Proposed Cap for FY2004 is determined with reference to the service agreements entered into between Sang Fei and the Philips Group in May 2001. The New Directors expect that the service fees for such services will increase at an annual rate of 25% in proportion to the expected increase in sales.

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LETTER FROM ALTUS CAPITAL LIMITED

3. Reasons for the Non-exempt Ongoing Connected Transactions

The New Directors consider that the Non-exempt Ongoing Connected Transactions have been conducted in the ordinary and usual course of business of Sang Fei, on normal commercial terms and on an arm’s length basis. They are also of the view that these transactions are and will be essential to the New Group’s operations and business development.

As mentioned previously, the New Directors advised that the quality of products supplied by the CEC Group has been consistent and of high quality and that the proximity of the New Group’s premises to those of CEC provides cost savings to the New Group’s logistics system as well as facilitates its overall operations. The New Directors are also convinced by past experience that members of the CEC Group have been able to deliver professional and quality services at competitive market rates. In addition, as the New Group intends to remain as the exclusive manufacturer for the Philips branded products and that the agreements governing the arrangements between the Company and the Philips Group were negotiated on terms no less favourable than those offered by independent third parties, we concur with the New Directors that it is in the interest of the Company to continue carrying out the respective Nonexempt Ongoing Connected Transactions with the CEC Group and with the Philips Group.

The Non-exempt Ongoing Connected Transactions are subject to the reporting, announcement and the Independent Shareholders’ approval requirements pursuant to Rule 14A.35 of the Listing Rules at the SGM by poll.

The Company will seek the approval of the Independent Shareholders of the Nonexempt Ongoing Connected Transactions and the respective Proposed Caps for a period of three financial years ending 31st December, 2006 on the conditions that:

(a) the transactions shall be:
(i) entered into by the New Group in the ordinary and usual course of its business;
(ii) either (i) on normal commercial terms; or (ii) on terms no less favourable to the Company than those available to (or from) independent third parties; or (iii) where there is no available comparison for the purpose of determining whether (i) or (ii) is satisfied, on terms that are fair and reasonable so far as the Shareholders as a whole are concerned; and
(iii) entered into in accordance with the terms of the relevant agreements;
(b) the value of the transaction for each of the Non-exempt Ongoing Connected Transactions does not exceed the Proposed Caps;

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LETTER FROM ALTUS CAPITAL LIMITED

(c) in respect of sales and purchases to the Philips Group and the corporate services from the Philips Group, the Group does not commit to sell, purchase or seek corporate services after the year ending 31st December, 2006 to an extent that the aggregate value of these transactions falls outside the scope of Rules 14A.33 or 14A.34 of the Listing Rules, unless the requisite shareholders’ approval have been obtained in accordance with the Listing Rules;
(d) compliance by the Company with all other requirements under the Listing Rules;

The Listing Rules further require that:

(e) details of the Non-exempt Ongoing Connected Transactions will be disclosed in the Company’s next and each successive annual report and accounts, each accompanied with a statement of opinion of the independent non-executive New Directors in such manner as referred to in paragraph (f) below;
(f) the independent non-executive Directors of the New Group will review annually the Non-exempt Ongoing Connected Transactions and will confirm in the Company’s annual report and accounts for the year in question that such Nonexempt Ongoing Connected Transactions under their review were conducted in the manner as stated in paragraphs (a) and (b) above;
(g) the auditors of the New Group will review annually the Non-exempt Ongoing Connected Transactions and confirm in the form of a letter to the New Directors (a copy of which letter will be provided to the Stock Exchange at least 10 business days prior to the bulk printing of the annual report of the Company) in respect of each relevant financial year, during which the Non-exempt Ongoing Connected Transactions were conducted, stating that:
(i) the Non-exempt Ongoing Connected Transactions have been approved by the New Directors;
(ii) the Non-exempt Ongoing Connected Transactions have been entered into in accordance with the terms of relevant agreement governing the transactions;
(iii) the value of the Non-exempt Ongoing Connected Transactions has not exceeded their respective Proposed Caps; and
(iv) the Non-exempt Ongoing Connected Transactions have been entered into in accordance with the pricing policy of the New Group,

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LETTER FROM ALTUS CAPITAL LIMITED

and where for whatever reasons, if the auditors of the Company decline to accept the engagement or are unable to provide the auditors’ letter, the New Directors will inform the Listing Division of the Stock Exchange immediately;

(h) so long as its shares are listed on the Stock Exchange, the Company will, and will procure the CEC Group and the Philips Group to, provide the auditors of the Company sufficient access to the relevant records of the Non-exempt Ongoing Connected Transactions for the purpose of auditors’ review and reporting as referred to in paragraph (e) above; and
(i) the Company will comply with the applicable provisions of the Listing Rules governing connected transactions in the event that the total amount of any of the Non-exempt Ongoing Connected Transactions exceeds their respective Proposed Caps, or that there is any material amendment to the terms of the relevant agreements.

RECOMMENDATIONS

The Acquisition

We have considered the principal factors summarised below when assessing the Acquisition:

(a) the existing operations of the Winsan Group have been incurring losses in the past few financial years and their prospects are uncertain. Winsan Group has a net deficit financial position and has been relying on its principal bankers and Mr. Chan for financial support;
(b) Sang Fei has a profitable track record although its profits have declined in the past few years due to intense competition in the mobile phone industry. Under the Cooperation Agreement, Sang Fei will be the exclusive mobile phone supplier to the Philips Group while it is free to expand its customer base for its OEM and ODM manufacturing businesses as well as own-branded mobile phone business. Notwithstanding intense competition, there is potential for growth in the PRC domestic mobile phone market as well as export sectors and Sang Fei can leverage on its competitive advantage to benefit from such opportunities;
(c) the Issue Price is with reference to the average closing price of Winsan Shares and notwithstanding the effects of dilution from the issuance of the Consideration Shares, the Acquisition would improve the financial position of Winsan Group in terms of asset backing and would result in the Shareholders having shareholdings, albeit smaller, in a company with profitable track record.

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LETTER FROM ALTUS CAPITAL LIMITED

Having considered the principal factors above, we are of the view that the Acquisitions are in the interest of Independent Shareholders and their terms are fair and reasonable so far as the Independent Shareholders are concerned. To facilitate the Acquisition, the granting of the Whitewash Waiver is required. On this basis, we would advise the Independent Shareholders, and the Independent Board Committee to recommend to the Independent Shareholders, to approve the resolutions in relation to the Whitewash Waiver at the SGM.

The Non-exempt Ongoing Connected Transactions

Having considered the principal factors discussed above, we are of the view that the terms and conditions of the Non-exempt Ongoing Connected Transactions with the CEC Group and with the Philips Group are fair and reasonable insofar as the Independent Shareholders are concerned. We would therefore advise the Independent Shareholders and the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM.

Yours faithfully,

For and on behalf of

Altus Capital Limited

Sean Pey, Chang Executive Director

Arnold Ip Executive Director

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INFORMATION ON THE NEW GROUP – SUMMARY

The following information relating to the New Group has been prepared for the purposes of the Company’s new listing application pursuant to Rule 14.16(1) of the Listing Rules, and on the assumption that Completion and the Future Disposals have taken place as contemplated under the Acquisition Agreement. Historical financial information and other information contained in this section regarding the New Group refer, unless the context otherwise requires, to that of Sang Fei, which will be the sole operating subsidiary of the New Group upon Completion and completion of the Future Disposals.

1. SUMMARY

This summary aims to give you an overview of the information contained in this Circular with regards to Sang Fei and the New Group. As this is a summary, it does not contain all information that may be important to you. You should read the whole document before you decide whether or not to vote in favour of the resolutions to be proposed at the SGM or otherwise make a decision with respect to your investment in Winsan.

(a) Overview

The principal companies within the New Group will comprise Winsan and its sole operating subsidiary, Sang Fei. Winsan is an investment holding company. It has been listed on the Main Board since 25th July, 1997. Sang Fei is a sino-foreign equity joint venture established in October 1996 in the PRC. It is principally engaged in the manufacturing and sale of mobile phones in the PRC. At present, its sales are made mainly on an OEM basis (to both domestic and overseas customers), although it has since 2002 also started sales of its own-branded products in the PRC. Sang Fei is currently owned as to 65% by the CEC Group (excluding SZST), 25% by the Philips Group and 10% by SZST. Upon Completion, Sang Fei will be owned as to 65% by Winsan.

Established in the PRC in 1989 with the approval of the PRC State Council, CEC is a nationwide electronics and information technology conglomerate in PRC. It is under the direct administration of the central government of the PRC. CEC actively focuses on and has made substantial investments in the communication/consumer electronics, semi-conductor and software sectors. In the context of the communication/consumer electronics sector, in addition to its manufacturing interests in communication/consumer electronics products, it also has major research and development capabilities as well as an extensive distribution and after sales service network for consumer electronics/communication products in the PRC. Further information on the CEC Group is set out in the Letter from CEC in the Circular and also in “Relationship with the CEC Group” below.

Sang Fei is currently one of the CEC Group’s key mobile phone manufacturing subsidiaries equipped with advanced production technologies. CEC has stated that it intends the New Group will in due course become its principal Main Board listed subsidiary operating in the communications, consumer electronics and related industries. As the New Group’s sole operating company immediately after Completion and the Future Disposals, Sang Fei seeks to establish itself as the major mobile phone provider for the CEC Group, the Philips Group and its other OEM and ODM customers with a long term view to becoming a leading consumer communications products provider in the PRC with a balanced portfolio of products, comprising its own-branded products and other OEM and ODM products.

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INFORMATION ON THE NEW GROUP – SUMMARY

Sang Fei has been producing mobile phones since 1997. For the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, Sang Fei achieved total production output of approximately 2.5 million, 3.7 million and 5.5 million mobile phones respectively. Sang Fei now has annual production capacity (including the production capacity of its outsourced SMA production line) of over 10 million mobile phones. It currently has ISO 9002:1994, Quality Standard Management System Certification, ISO 14001:1996, ISO 9002:2000 and QS-9000 Quality Standard Management System Certification.

While it has been and still is the exclusive mobile phones manufacturing base for the Philips Group, since CEC became Sang Fei’s majority shareholder in October 2001, Sang Fei has actively sought to develop independent customers on an OEM/ODM basis as well as its own-branded mobile phone products, in addition to capitalizing on its existing relationship with the Philips Group and the CEC Group. For the year 2003, Sang Fei has produced 8 series of Philips branded mobile phones (with 15 models) and 11 models of other OEM branded mobile phones and 3 models of own-branded mobile phones. For the year 2004, up to the Latest Practicable Date, Sang Fei has further produced 4 series of Philips branded mobile phones (with 7 models), 19 other OEM branded models of mobile phones and has launched one own-branded model of mobile phone.

(b) Summary of risk factors

The New Directors consider that the business and operations of the New Group are subject to a number of risk factors that may be broadly categorised into: (i) risks relating to the Acquisition; (ii) risks relating to the New Group; (iii) risks relating to mobile phone industry; (iv) risks relating to the PRC, which are summarised as follows:

Risks relating to the Acquisition

Uncertainty of Completion

Risks relating to the New Group

Reliance on Philips

Termination of the Cooperation Agreement

Concentration of customers who are also connected persons of the New Group

Competition with mobile phone manufactures within the CEC Group

Limited experience in the development and sales of own-branded products and ODM products

Key management risks

Liquidity risks

Exposure to foreign exchange rates fluctuation

Potential conflict of interests between the Company and CEC

Risks relating to the leasing of sole operating premises

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INFORMATION ON THE NEW GROUP – SUMMARY

Effect of discontinuation of Sang Fei’s marketing and distribution operations for Philips branded products

Risks relating to the use of the trademark

Dividend risks

Reduction of export VAT refund

Uncertainty relating to the continuation of preferential tax treatment

Risks relating to incomplete formalities for leasing of staff quarters

Risks relating to the mobile phone industry

Competition

Short product cycles and product substitution

Licensing regime

Risks relating to the PRC

Economic and political considerations

Currency conversion and exchange control risks

Legal considerations

Risks relating to PRC’s accession to the World Trade Organisation

Reliability of industry statistics

(c) Strengths and strategies

As mentioned above, Sang Fei seeks to establish itself as the major mobile phone provider for the CEC Group, the Philips Group and its other OEM and ODM customers with a long term view to becoming a leading consumer communications products provider in the PRC with a balanced portfolio of products, comprising its own-branded products and other OEM and ODM products. The New Group intends to continue to maintain and enhance Sang Fei’s current exclusive OEM manufacturing arrangements with the Philips Group, and in the meantime to broaden its OEM/ODM customer base and to continue to develop its ownbranded mobile phones. The New Group’s key strategy to realise such objectives is to capitalise and build upon, what the New Directors believe are, the New Group’s strengths. Its strategies and related strengths are summarised as follows:

To maintain and enhance its established relationship with the Philips Group as its exclusive supplier of mobile phones.

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INFORMATION ON THE NEW GROUP – SUMMARY

To broaden its OEM/ODM customer base and continue to develop its ownbranded mobile phone products.
To capitalise on its know-how and technology in mobile phone manufacturing so as to offer assured quality services at competitive prices.
To enhance its global material sourcing supply chain.
To capitalise on the strong and comprehensive platform of the CEC Group with product design capabilities and extensive distribution and after sales service network.

(d) Trading Record

The following is a summary of the audited results of Sang Fei for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003. The summary below should be read in conjunction with the Accountants’ Report set out in Appendix I to this Circular.

Turnover Cost of sales Gross profit Other revenues Distribution costs Administrative expenses Other operating expenses Operating profit Finance costs Profit before taxation Taxation Profit after taxation Dividend Earnings per share	Year 2001 RMB’000 2,750,814 (2,070,942) 679,872 15,495 (214,161) (205,548) (22,057) 253,601 – 253,601 – 253,601 200,814 N/A	ended 31st December, 2002 2003 RMB’000 RMB’000 2,031,164 3,035,687 (1,833,969) (2,871,432) 197,195 164,255 20,931 19,930 (15,381) (29,042) (99,335) (55,984) (13,111) (23,952) 90,299 75,207 (2,852) (6,877) 87,447 68,330 (8,686) (5,499) 78,761 62,831 – – N/A N/A

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INFORMATION ON THE NEW GROUP – RISK FACTORS

2. RISK FACTORS

The New Directors have used and exercised due care in preparation of this Circular. Shareholders should consider carefully all the information contained in this Circular including the risk factors set out below.

Risks Relating to the Acquisition

Uncertainty of Completion

Completion is subject to the fulfilment of a number of conditions precedent which must be fulfilled or waived by the relevant party to the Acquisition Agreement on or before 30th September, 2004 (or such later date as the parties may agree). These conditions involve the decisions of third parties, for example, the approvals of Shareholders and of regulators in Hong Kong are required for the Acquisition, the Whitewash Waiver and the continued listing of Winsan Shares. If the Placing does not proceed or if the Placing Price is much lower than the issue price of the Consideration Shares (so as to affect the market capitalisation of the Winsan Shares or those held in the hands of the public at Completion), the listing of and permission to deal in the Consideration Shares (being a condition precedent to Completion) will not be granted. As the fulfilment of the conditions precedent are not all within the control of Winsan, there is no assurance that they will be fulfilled on or before the relevant date, or at all. If the parties to the Acquisition Agreement do not extend the deadline for the fulfilment of these conditions, or if any of the conditions could not be fulfilled in any event and is not or could not be waived, the Acquisition will not proceed.

Risks Relating to the New Group

Reliance on Philips

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, sales by Sang Fei of Philips branded products accounted for approximately 99%, 98% and 91% of the audited turnover of Sang Fei for the respective years. The Philips Group was the single largest supplier (in terms of value) of raw materials (mainly of integrated circuit chipsets and LCDs) to Sang Fei, accounting for approximately 42%, 33% and 31% by value of Sang Fei’s total purchases of raw material made during the years referred to above. Further information in relation to the extent of the business relationship between Sang Fei and the Philips Group is set out in section 10 “Relationship with the Philips Group”.

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INFORMATION ON THE NEW GROUP – RISK FACTORS

There is no assurance that the Philips Group will continue to place substantial orders with Sang Fei nor that it will continue to supply raw materials to Sang Fei, on terms acceptable to Sang Fei. Any reduction in business from the Philips Group in the future, may adversely affect the revenue or the overall financial performance of the New Group.

Termination of the Cooperation Agreement

The term of the Cooperation Agreement (as disclosed in section 10C “ Relationship with the Philips Group – Transactions with the Philips Group”) which forms the basis of the manufacturing relationship between Sang Fei and the Philips Group, is for an initial term which expires on 30th June, 2005, and would (unless terminated by not less than 120 days notice before the expiry of the prevailing term or if earlier, due to default or liquidation of other parties) automatically be extended annually. Accordingly, there is no assurance that the Philips Group will continue to use Sang Fei after 30th June, 2005, whether on the terms of the Cooperation Agreement or at all. Also, there is no assurance that Philips Group will continue only to use Sang Fei for the production of Philips branded mobile phones. If the Philips Group does not use Sang Fei exclusively or at all, or if the Philips Group requires Sang Fei to provide its OEM services on different terms which are less favourable than those already set out in the Cooperation Agreement, the business, financial performance and prospects of the New Group (which historically and still relies materially on business from the Philips Group) could be materially and adversely affected.

Concentration of customers who are also connected persons of the New Group

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, sales by Sang Fei to members of the CEC Group accounted for approximately 32%, 2% and 3% of the audited turnover of Sang Fei for the respective financial years.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total sales of products by Sang Fei to the Philips Group accounted for approximately 21%, 98% and 91% of the audited turnover of Sang Fei for the respective years.

For the year ended 31st December, 2001, sales by Sang Fei to members of the CEC Group included the revenue in respect of the products marketed and sold to distributors of the Philips Group (certain members of the CEC Group), which were recorded in Sang Fei’s turnover that year. In fact, for the year ended 31st December, 2001, nearly all of the customers of Sang Fei (which include a member of the CEC Group that is a mobile phone distributor in the PRC) were customers of the Philips Group. However for the two years ended 31st December, 2002 and 31st December, 2003 such sales were no longer recorded by Sang Fei.

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Accordingly the CEC Group and the Philips Group together accounted for approximately 100% and 94% of the audited turnover of Sang Fei for the year ended 31st December, 2002 and 31st December, 2003 and if business from the CEC Group and/or the Philips Group reduces or the terms on which either group is prepared to place orders with Sang Fei are less favourable than those which applied for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003 and Sang Fei is unable to develop business from other customers, the revenue and/or the financial performance of the New Group may be materially and adversely affected.

Competition with mobile phone manufacturers within the CEC Group

As described in section 9D “Relationship with the CEC Group – Competition” below, the CEC Group currently has a number of subsidiaries which are engaged in the production and sales of mobile phones or PDAs with mobile communications functions. The products produced by these members of the CEC Group compete or could compete with Sang Fei’s own-branded mobile phones, as both are currently targeted at the PRC domestic market. In addition, in view of their manufacturing capabilities, each of these companies could also compete with Sang Fei for orders from the same target group of potential customers for OEM services. While CEC has stated that if a conflict of interest arises between CEC and the New Group in respect of any issue, New Directors who are also directors of certain members of the CEC Group will abstain from voting at meetings of the board of directors of the Company on those issues, there is no assurance that CEC will not support its other subsidiaries in their efforts to secure market share for their own-branded mobile phones, or the provision of OEM services for mobile phones. There is also no assurance that the other mobile phone manufacturing subsidiaries of the CEC Group (one of which is listed in the PRC) will not secure orders from potential customers which are also targeted by the New Group. If Sang Fei is unable to compete effectively, whether in the case of its own-branded products or its OEM business, the New Group’s business, financial performance and prospects will be materially and adversely affected.

Limited experience in the development and sales of own-branded products and ODM products

Sang Fei commenced the development, production and sales of its own-branded mobile phones in 2002 and commenced its ODM business towards the end of 2003 and expects that the contribution of such business to the New Group’s revenue and profits will become more significant in the future. In view of the New Group’s limited operating experience in this line of business and the competitive nature of the mobile phone industry in the PRC, there is no assurance that the own-branded mobile phones offered by the New Group will become generally accepted by consumers and in turn mobile phone distributors or that the New Group will be able to generate sustainable and increasing profits from the sales of its own-branded mobile phones or from its ODM business.

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Key management risks

The profit track record of Sang Fei for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003 have been the result of the efforts of Sang Fei’s core management team which includes Messrs. Hua Long Xing, Robert Chen, Brian Chan and Jeff Wong (further information regarding which is set out in section 7 “New Directors, Senior Management and Staff” below). There is no assurance that all members of the core management team will continue to serve the New Group for any period of time nor that there will not be any adverse impact on the financial performance of the New Group if all or any of them should leave the New Group (whether due to retirement or otherwise).

Liquidity risks

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, Sang Fei recorded net cash inflow/(outflow) of approximately RMB327,829,000, RMB(512,846,000) and RMB(10,059,000) respectively and net operating cash inflow/(outflow) of approximately RMB515,197,000, RMB(444,421,000) and RMB(140,487,000) respectively. As at the end of each of the relevant year, Sang Fei had available consolidated banking facilities of up to, RMB0, RMB300,000,000 and RMB600,000,000 respectively, and among these balances, RMB0, RMB182,397,000 and RMB485,000,000 were utilised during the relevant year. Sang Fei’s operating activities are generally financed by funds generated by operating activities and short term bank loans. Sang Fei’s net cash outflows were mainly attributable to fluctuating debtor turnover days and the fluctuating cash level throughout the year, which is generally due to the need for it to build up inventory for the purposes of production to meet the orders for the following months thereby creating a time lag between the time when Sang Fei’s obligation to pay its suppliers crystallises and when Sang Fei gets paid by its customers. If it is unable to finance its operations continuously by funds generated by operating activities and bank financing, the operations and the financial position of the New Group could be materially and adversely affected.

Exposure to foreign exchange rates fluctuation

Sang Fei imports some of the raw materials and most of the SMA and testing equipment used for its production from various offshore suppliers. Payments are made predominantly in US dollars, Japanese Yen and Euros. At present, most of Sang Fei’s exports sales revenue (which accounted for over 52% of its total revenue in the year ended 31st December, 2003) are invoiced in US dollars and all of its domestic sales are invoiced in RMB. Accordingly, the New Group may suffer from foreign exchange losses or unsustainable foreign exchange gains as a result of the mismatch in the positions of sales and cost of sales in foreign currencies and the fluctuations in the value of the currencies involved.

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Potential conflict of interests between the Company and CEC

Immediately after the Placing and Completion and assuming no changes to the issued share capital of Winsan, CEC will own approximately 74.98% of the issued share capital of the Company. For so long as it has statutory control over the Company, it has significant influence over major policy decisions, including overall strategic and investment decisions, through exercising its voting rights on the election of Directors, payments of dividends or other distributions, the approval of significant corporate transactions, including issue of shares and other securities, and acquisitions and disposals by the New Group. The interests of CEC as the Company’s controlling shareholder could conflict with those of the New Group. In particular, CEC has certain interests in businesses which compete or are likely to compete, either directly or indirectly, with the businesses of the New Group (see section 9D “Relationship with the CEC Group – Competition” below). Accordingly, CEC may take actions that further its own interests and which may not be in the best interests of the other Shareholders.

Risks relating to the leasing of sole operating premises

Sang Fei does not own its sole operating premises. Those premises are leased for a term expiring on 31st December, 2008 with an option to renew for a further five years period. Further particulars of such leases are set out in section 9C “Relationship with the CEC Group – Transactions with the CEC Group” below. If the landlord of the premises terminates the leases (whether or not it is entitled to do so) and requires Sang Fei to vacate the premises, notwithstanding the terms of the lease, the financial performance of Sang Fei may be adversely affected as a result of interruptions to its operations if its relocation could not be made in a manner which does not disrupt services effectively and as a result of costs which have to be incurred for such relocation. In addition, the realty title certificate of Level 8 of Factory Building No. 2 (which is comprised of an office and recreation space) which has been rebuilt in 2004 has yet to be issued. As advised by the PRC lawyer of the New Group, unless and until the realty title certificate is obtained, the licence agreement of Level 8 of Factory Building No. 2 may not be enforceable.

Effect of discontinuation of Sang Fei’s marketing and distribution operations for Philips branded products

Following the transfer of 65% equity interest in Sang Fei by the Philips Group to a wholly-owned subsidiary of CEC, Sang Fei became an OEM manufacturer of Philips branded mobile phones only and was no longer involved in the sales and distribution of those products, as that function had been retained by the Philips Group. Whilst Sang Fei is no longer required to bear the expenses in relation to such marketing and distribution operations in relation to Philips branded products, Sang Fei also no longer enjoys the profit margin that would be derived from such marketing and distribution operations.

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There is no assurance that Sang Fei will in the future be able to achieve the levels of profit after taxation or profit margin that it enjoyed in the year ended 31st December, 2001 before it ceased the marketing and distribution functions of Philips branded mobile phones.

Risks relating to the use of the trademarks

The SED trademark currently used by Sang Fei together with two other trademarks as set out in section 6K “Operations – Intellectual Property” are licensed to Sang Fei free of charge. The date of expiry of the licence for the three trademarks is 1st June, 2007. As at the Latest Practicable Date, Sang Fei has only used the SED trademark on its own-branded products. If Sang Fei requires the use of the trademarks after the expiry of the licence period, it will require a further licence to be granted by the CEC Group. There is no assurance that a licence to use the trademarks after the expiry of the licence term will be granted. In addition, there is no assurance that the CEC Group will not charge the New Group licence fees if Sang Fei wishes to continue to use some or all of the three trademarks after the expiry of the term of the licence. Non-renewal or the charging of licence fee for renewal may have an adverse effect on the financial performance of the New Group. Furthermore, as the trademarks are also being used by its owner on products other than mobile phone products, any adverse publicity in relation to the quality or other aspects of those products (the production and/or marketing of which is not within the control of Sang Fei) could have a material adverse effect on consumer perception of the quality of Sang Fei’s products and may in turn adversely affect the sales and the financial performance of Sang Fei.

Dividend risks

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, Sang Fei declared dividends of approximately RMB201 million, RMB0 and RMB0, representing approximately 79%, 0% and 0% of the respective years’ net profit attributable to shareholders. The amount of dividends which may be declared by the Company in the future (if any) will be subject to, among other things, the full discretion of the New Directors, taking into consideration the amount of the New Group’s earnings, financial position, cash requirements and availability, the provisions of the applicable laws and regulations and other relevant factors. The dividend distribution record of Sang Fei during the last three financial years should not be used as a reference or basis to determine the level of dividends that may be declared by the New Group in the future.

Reduction of export VAT refund

Pursuant to Notice of Adjusting Rates of Tax Rebate of Export Goods issued by Ministry of Finance and State Administration of Tax on 13th October, 2003 《財政部、國家稅務總局關於調整出口貨物退稅率的通知》, export VAT refund has been reduced

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from 17% to 13% with effect from 1st January, 2004. During each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, for raw materials sourced within the PRC and for which Sang Fei has paid VAT (being 17% on purchase price) and used in the production of mobile phone which are exported by Sang Fei, Sang Fei enjoyed a VAT refund credit at 17% of export value. Sang Fei submits VAT tax calculations to local tax bureau on a monthly basis (subject to final review and adjustment at the end of the year) by setting off the VAT input (the amount of deductible VAT for that year) against the VAT output (the amount of VAT required to be paid for that year), taking into account local sales, export sales, local purchases and import purchases of raw materials by Sang Fei. The following table sets out the net refund credit or net payment required to be paid to or to be paid by Sang Fei at the end of each of the following year:

For the year ended 31st December, 2001 Net VAT payment of RMB27,444,012 For the year ended 31st December, 2002 Net VAT deductible credit balance of RMB22,028,525 For the year ended 31st December, 2003 Net VAT deductible credit balance of RMB9,156,929

Accordingly, unless Sang Fei is able to lower costs of manufacturing export mobile phones or to negotiate terms of sale with its customers or suppliers so that such any additional VAT cost arising from the reduction of export VAT refund is absorbed by either or both of them, Sang Fei’s overall financial performance could be adversely affected.

Uncertainty relating to the continuation of preferential tax treatment

As a sino-foreign joint venture enterprise, Sang Fei is entitled to a tax exemption for the first two profit making years and 50% tax reduction for the three years following such tax exemption. According to the relevant PRC laws, if a sino-foreign joint venture enterprise is recognised as an “Advanced Technology Enterprise”, it will be entitled to a further three-year extension of the 50 percent tax reduction benefit. The reduced tax rate of 7.50% which Sang Fei is now enjoying will expire after the year ending 31st December, 2004. There is no assurance as to whether or not Sang Fei could then qualify for preferential tax treatment as an “Advanced Technology Enterprise” or on other grounds. If it does not qualify, Sang Fei’s profitability could be adversely affected.

Risks relating to incomplete formalities for leasing of staff quarters

Sang Fei has leased two apartment buildings (comprising 168 residential units) from an Independent Third Party for use as staff quarters for a term expiring on 31st October, 2004, subject to the right of termination by either party by giving two months’

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prior notice. The landlord of the buildings has not obtained the necessary title documents to those buildings and the tenancy agreement has not been registered with the relevant PRC regulatory authorities. If for any reason it transpires that the landlord does not have the power to lease the buildings to Sang Fei, Sang Fei may be required to vacate the premises on short notice. This may result in additional costs of having to relocate its staff quarters and also cause disruption to its staff’s daily lives, which may in turn have an adverse effect on the operations of Sang Fei.

Risks Relating to the Mobile Phone Industry

Competition

Competition in the mobile phone industry in the PRC is intense. As a mobile phone manufacturer, the New Group will have to compete with other local manufacturers who may have greater resources or who are able to offer services on more competitive terms. In addition, the New Group’s results and operations could be materially and adversely affected if its customers are not able to compete effectively in the mobile phone market. In addition, the own-branded mobile phones of the New Group will have to compete with established foreign mobile phone vendors and domestic mobile phone vendors operating in the PRC, who may have advantages over the New Group, including greater brand recognition, wider range of products, or greater product development, marketing and/or financial resources. There is no assurance that the New Group will be able to compete successfully with its competitors, and if it fails to do so, its profitability and financial performance may materially and adversely be affected.

Short product cycles and product substitution

Product cycles (from development to delivery of a product) of mobile phones tend to be very short, because of the volatility of customer demands and the intense competition in the market. In addition, the mobile phone industry is subject to changes in technology and the development of new products with enhanced designs and/or applications that may render the New Group’s existing products obsolete. Any delay in the delivery by Sang Fei of mobile phone products for whatever reason could result in the delay in the launch of the product by Sang Fei or its customers, and in turn could affect the price and the demand for the product by end users. If Sang Fei is unable to launch new products that meet consumers’ changing demands promptly or if any mobile phone product launched by Sang Fei or its customers is not well received by the market, the revenue and profit which Sang Fei could derive from that product may materially and adversely be affected. Furthermore, if the New Group fails to respond to changing technologies and users’ demand for mobile phones of different designs or applications, its financial performance could adversely be affected.

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Licensing regime

As described in more detail in section 13B “Information on the Mobile Phone Manufacturing Industry – Legal and Regulatory Information” below, the manufacturing and sale of mobile phones require a number of licences/certificates. If any of the mobile phones produced by Sang Fei does not meet the applicable requirements and licences are not issued in time, the sale of such mobile phones could materially be delayed and could in turn materially and adversely affect Sang Fei’s revenue derived from such mobile phones.

Risks Relating to the PRC

Economic and political considerations

All of the New Group’s business, assets and operations are located in China. Approximately 79%, 58% and 48% of the New Group’s sales for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003 were made to customers in China and the New Group expects that this is likely to continue in the near future. As such, the New Group’s operations are and will be significantly affected by economic and political developments in China.

The economy of China differs from the economies of most developed countries in many aspects, including structure, government involvement, level of development, capital reinvestment, control of currency conversion, rate of inflation and allocation of resources. The economy of China has been in a state of transition from a planned economy to a more market-oriented economy. In recent years, the PRC government has implemented economic reforms which resulted in a more significant role played by market forces in the allocation of resources and greater management autonomy for enterprises. However, many of the reforms implemented by the PRC government are still at their initial stages of development and require further refinement and revision. There is no assurance that any changes brought about by these economic reforms or macro-economic control measures adopted by the PRC government will have positive effects on the economic development of China. There is also no assurance that any measures taken or policies implemented by the PRC government will not materially and adversely affect the operation and/or profitability of the New Group.

Currency conversion and exchange control risks

At present, the RMB is not freely convertible to other currencies. Pursuant to the Foreign Exchange Control Regulations (《外匯管理條例》) and the Regulations on the Foreign Exchange Settlement, Sale and Payments (《外匯管理條例及結算、售賣及付款管理規定》) of the PRC, foreign investment enterprises are permitted to remit their net profit or dividends in foreign currencies out of the PRC or repatriate such profit or dividends after converting the same from RMB to foreign currencies through

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banks which are authorised to engage in foreign exchange business. Foreign investment enterprises are permitted to convert RMB to foreign currencies for items in the current account, including trade and service related foreign exchange transactions and payment of dividends to foreign investors.

Additionally, foreign exchange transactions on capital account, including the foreign currency capital in any foreign investment enterprise in the PRC, the repayment of the principal amount of foreign currency loans and the payment pursuant to foreign currency guarantees, continue to be subject to significant foreign exchange controls and require the prior approval of the SAFE.

Although the PRC government has stated publicly that it intends to make RMB freely convertible in the future, the New Group cannot predict whether the PRC government will continue its existing foreign exchange policy or when the PRC government will allow free conversion of RMB to foreign currencies. There is also no assurance that the New Group will obtain sufficient foreign exchange for payment of dividends or other settlements in foreign exchange.

Fluctuations in exchange rates may adversely affect the value, translated or converted into HK dollars or US dollars, of the New Group’s net assets, earnings and financial position. The New Group did not experience any material exchange gain or loss for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003. Part of Sang Fei’s payments in foreign currencies could be matched by receipts in foreign currencies derived from its export sales. Nevertheless, as the New Group does not carry out any hedging activities against changes to RMB value, any future movements in RMB could have a material and adverse effect on the financial position of the New Group.

Legal considerations

Since 1979, the PRC has promulgated various laws and regulations relating to economic issues in general as well as issues involving foreign investment. In 1982, the National People’s Congress of the PRC resolved to amend the Constitution of the PRC to allow foreign investment and to protect the “legal interests” of foreign investors in the PRC. Since then there is a tendency for the PRC government to promulgate legislation which affords more protection to foreign investors and which gives foreign investors greater controlling power over sino-foreign joint ventures. However, despite such and other significant progress in the legal system of the PRC, it is still considered underdeveloped. The enforcement of existing laws and regulations can be uncertain or inconsistent, and the interpretation of laws and regulations is subject to change. These factors could have a negative impact on the business of the New Group and materially and adversely affect its profitability.

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Risks relating to PRC’s accession to the World Trade Organisation

The WTO regulates the trade and tariffs of member countries with an aim to promote free trade among signatory countries. On 11th December, 2001 China became a member of the WTO. As a member of the WTO, China is required to reduce significantly the trade barriers for imports that have historically existed and that currently exist in China, such as significantly reducing tariffs. China is also required to make commitments in respect of, among others, non-tariff barriers, market entry and equal treatment to domestic and foreign companies. This would result in more foreign manufacturers being able to establish production facilities and sale channels in China, many of which may be large companies with advanced and sophisticated facilities which provide high quality products at low costs. As a result, competition is likely to intensify and the profitability of the New Group may be adversely affected.

Reliability of industry statistics

Statistical and other information relating to the PRC, the mobile phone manufacturing industry contained in this Circular have been compiled from various sources including officially published information and statistics. Although reasonable steps have been taken by the Directors and the New Directors to ensure that such officially published information and statistics were extracted accurately from reliable sources, neither the New Group, the Directors, the New Directors, the Sponsor nor any of the parties involved in the Company’s new listing application have independently verified, or make any representation as to, the accuracy of such information and statistics. There is no assurance that statistics derived from multiple official sources were prepared on a comparable basis or that such information and statistics were stated or prepared to the same standard or level of accuracy as, or consistent with, those in other publications within or outside the PRC. Accordingly, such information and statistics may not be accurate and should not be unduly relied upon.

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3. HISTORY AND DEVELOPMENT

A. The Company

The Company was first listed on the Main Board on 25th July, 1997. Founded by Mr. Chan in 1991, it (through its then subsidiaries) previously was engaged in property development and investment business in the PRC. In 2000, the Company launched the Transonline Project, while continuing with its property business in Hong Kong and the PRC. In October 2001, through a major and connected transaction of the Company, it disposed of its entire PRC property portfolio to Winsan International and discontinued its property business, and acquired its 70% interest in DIC Group, which provides broadband and cable TV related platforms and equipment for cable television and telecommunications service operators.

The Company and its subsidiaries are now principally engaged in the operation of the Transonline Project and, through DIC Group, the provision of fully integrated broadband and cable television-related platforms and equipment for cable television and communication services operators in the PRC.

Immediately after completion of the Acquisition and the Future Disposals, Sang Fei will be the sole operating company of the New Group.

B. Sang Fei

Sang Fei, then named 飛利浦桑達消費通信（深圳）有限公司 (Philips Consumer Communications and SED Company Ltd), was established as a sino-foreign equity joint venture company in October, 1996 between the Philips Group (then holding a 90% equity interest in Sang Fei) and SZST (then holding a 10% equity interest in Sang Fei). Profit distribution by Sang Fei is to be made pro rata to the equity interest held by each joint venture partner in Sang Fei. Upon its establishment, Sang Fei had a registered capital of US$27 million and a total investment amount of US$28.8 million, for a term of 25 years (expiring on 25th October, 2021). According to the joint venture agreement for the establishment of Sang Fei, the Philips Group was entitled to appoint 5 out of 6 directors of Sang Fei and SZST was entitled to appoint the remaining one director of Sang Fei. The scope of business of Sang Fei was to engage in the manufacturing and sale of pagers, wired phones, cordless phones, mobile phones, automatic answering machines, and their accessories, software, and parts and components, and the provision of technology consultancy services.

In conjunction with the signing of the joint venture agreement for the establishment of Sang Fei, the Industrial Cooperation Contract was signed in December 1996. Pursuant to that contract, the Philips Group granted Sang Fei the right to use certain technology of the Philips Group for the manufacture of specified pagers, wired phones, cordless phones (including automatic answering machine), mobile phones, and to provide Sang Fei with related technological support and consultancy services for an initial term of ten

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years expiring in December 2006. In return for such rights, support and services, Sang Fei was to pay on a quarterly basis, a technological support fee to the Philips Group calculated by reference to an agreed percentage of the amount of sales for each type product, and in certain cases, is subject to an annual cap. At that time and until 2001, so far as Sang Fei is aware, the products manufactured and sold by Sang Fei were designed in-house by the Philips Group.

Sang Fei commenced production in 1997, and was then engaged in the manufacturing of wired phones and in the assembly and distribution configuration of mobile phones for the Philips Group. By the end of 1998, Sang Fei has sold a cumulative total of 505,000 mobile phones.

Sang Fei was granted “advanced technology enterprise” (先進技術企業 ) certification by the Shenzhen Municipality Economic Development Bureau on 23rd December, 1998.

Towards the end of 1998 and in 1999, Sang Fei acquired its first SMA production line and related FA and DC production line facilities, thereby enabling it to carry out the entire production process of mobile phones from the production of the integrated circuit board for mobile phones, the assembly of the mobile phones to their distribution configuration. Sang Fei’s production capacity grew steadily through the addition of one further SMA production line and the related FA and DC production line facilities per year in each of 2000 and 2001, and achieved a total product output and sales of about 2.50 million mobile phones in 2001.

Sang Fei was first awarded ISO 9001:2000 certification with an original approval date of 30th June, 2000, to be followed by ISO 14001:1996 certification with an original approval date of 19th December, 2000 and ISO 9002:1994 and QS 9000 certifications with original approval dates of 8th February, 2002. Further details regarding these certifications are set out in section 6C “Operations – Quality Control” below.

During the last quarter of 2000, Sang Fei established branch offices in Shanghai, Beijing, Guangzhou, Shenyang and Chengdu as part of its sales and distribution network for Philips branded phones in the PRC.

It received recognition by Shenzhen Municipality Economic Bureau in 2001 and Trade Bureau and Shenzhen Municipality Statistics Bureau in 2002 as one of top 100 industrial and commercial enterprises in Shenzhen Municipality.

In October 2001, Philips Group agreed to transfer 65% equity interest in Sang Fei to a wholly-owned subsidiary of CEC for a total consideration of RMB94,535,350. Payment for such transfer was made by the CEC Group in December 2001. Registration of such transfer took place in April 2002. This sale formed part of the Philips Group’s

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plan to refocus its mobile phone business activities by ceasing to be an independent manufacturer of mobile phones while continuing to sell Philips branded mobile phones through its sales and distribution channels. In view of the Philips Group’s strategy, the OEM manufacturing arrangements which then existed between Sang Fei (as an OEM manufacturer) and the Philips Group (as customer) were formalised and set out in the Cooperation Agreement, pursuant to which Sang Fei was granted the exclusive right to manufacture mobile phones for the Philips Group. In addition, Sang Fei has since 22nd October, 2001 appointed a member of the Philips Group as the exclusive distributor of Philips branded products worldwide to facilitate the retention of the right to sell and distribute Philips branded mobile phones in the PRC by the Philips Group. Further details regarding the Cooperation Agreement are set out in section 10C “Relationship with the Philips Group – Transactions with the Philips Group” below. As the Philips Group also disposed of part of its GSM mobile phone research and development activities in 2001, the Industrial Cooperation Contract was terminated.

As Sang Fei ceased to be a subsidiary of Philips, Sang Fei adopted its current name. Since then Sang Fei has been owned as to 65% by the CEC Group (excluding SZST), 25% by the Philips Group and 10% by SZST. The composition of the board of directors of Sang Fei was adjusted so that CEC (or its wholly-owned subsidiaries which hold directly its interest in Sang Fei) is entitled to appoint three out of five directors of Sang Fei, and SZST and the Philips Group is each entitled to appoint one director. The quorum for meetings of the board of directors is two-thirds of the total number of directors. Notwithstanding the transfers of equity interest referred to above, the core management team of Sang Fei remained in place.

After completion of the transfer of equity interest in Sang Fei between the CEC Group and the Philips Group, Sang Fei decided to capitalise on the know-how and experience it has gained, the continuous support from the Philips Group as its main customer, and the support which the CEC Group could provide in the PRC in terms of design capabilities and distribution channels and to actively diversify its business to build up an alternative OEM customer base and also to develop its own-branded mobile phone products and related ODM capabilities. As the Philips Group has retained the sales and distribution functions for Philips branded products and as Sang Fei’s strategy in respect of its own-branded mobile phone products was to sell its products through distributors, its board of directors resolved in April 2002 to close down all of Sang Fei’s branch offices.

Sang Fei acquired its fourth SMA production line and related FA and DC production line facilities in 2002 and its total product output for 2002 was increased to about 3.66 million mobile phones.

On 31st July, 2002 Sang Fei received approval from MOC pursuant to which its registered capital and total investment were increased from US$27 million and US$28.8 million to US$33 million and US$40.8 million respectively. US$3 million of the increased portion of registered capital was paid up by capitalising part of the profits distributable to its shareholders for the year ended 31st December, 2001. The remaining US$3 million

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was paid up by capitalising the entire credit standing in the enterprise expansion fund of Sang Fei as at 31st December, 2002 of approximately RMB24.3 million (US$2.94 million) and the balance by cash payment by shareholders in proportion to their equity interest in Sang Fei.

On 20th September, 2002, Sang Fei was awarded “high and new technology enterprise certificate” (高新技術企業認定証書) by the Shenzhen Municipality Science and Technology Bureau.

In 2002 Sang Fei’s diversification into the development and sale of its ownbranded mobile phones bore fruit with the launch of its first own-branded mobile phone 彩蝶 860 (Butterfly 860) in November 2002 that year.

This was successively followed by the introduction to the mobile phone market of two to three new models of mobile phones per quarter in each of the second, third and fourth quarter of 2003, with 彩韻 688 (Pony) being its showpiece mobile phone for 2003. On 31st July, 2003, Sang Fei officially celebrated its achievement of cumulative total production output (since it first commenced mobile phone production) of 10 million mobile phones earlier that year.

In order to cater for additional production needs, Sang Fei secured the processing services of a dedicated SMA production line from Bai Li, a subsidiary of SZST in August 2003 for an initial term of three years expiring on 31st July, 2005. Further particulars of such processing arrangements are set out in section 9C “Relationship with the CEC Group – Transactions with the CEC Group” below.

Sang Fei achieved a record high level of production output in the second half of 2003 since its establishment, having produced over 3.5 million mobile phones during that period.

For the year 2003, Sang Fei has produced 8 series of Philips branded mobile phones (with 15 models) and 11 other OEM branded models, in addition to the 3 models launched under its own brand. It is capable of producing GSM, CDMA or PHS mobile phones with a large variety of functions specified by customers, as well as assembling LCD modules for mobile phones. In December 2003, Sang Fei secured its first ODM order from an Independent Third Party.

For the year 2004, up to the Latest Practicable Date, Sang Fei has further produced 4 series of Philips branded mobile phones (with 7 models), 19 other OEM branded models of mobile phones and has further launched one own-branded model of mobile phone.

As at 20th April, 2004, the 65% equity interest in Sang Fei was transferred from the CEC Group (other than SZST) by way of administrative allocation to Sang Fei BVI.

The structure of the New Group is as set out in paragraph 1 of the Letter from the Board in this Circular.

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INFORMATION ON THE NEW GROUP – BUSINESS OVERVIEW

4. BUSINESS OVERVIEW

Sang Fei principally engages in the manufacturing and sale of mobile phones in the PRC. At present, the sales of Sang Fei are mainly on an OEM basis (to both domestic and overseas customers), although Sang Fei has since 2002 also started sales of its own-branded products in the PRC. Having been producing mobile phones since 1997, Sang Fei achieved its record high monthly production output of 917,626 mobile phones in December, 2003. It currently has ISO 9001:2000, ISO 14001:1996, ISO 9002:1994 and QS-9000 certifications.

While it has been and still is the exclusive mobile phones manufacturing base for the Philips Group, since CEC became Sang Fei’s majority shareholder, Sang Fei has actively sought to develop independent customers on an OEM/ODM basis as well as its own-branded mobile phone products, in addition to capitalizing on its existing relationship with the Philips Group and the CEC Group. For the year 2003, Sang Fei has produced 8 series of Philips branded mobile phones (with 15 models) and 11 other OEM branded models of mobile phones and launched 3 own-branded models of mobile phones. For the year 2004, up to the Latest Practicable Date, Sang Fei has further produced 4 series of Philips branded mobile phones (with 7 models), 19 other OEM branded models of mobile phones and has further launched one own-branded model of mobile phone.

Sang Fei’s major customers are the Philips Group (for which Sang Fei is currently the exclusive supplier of mobile phones) and the CEC Group which together accounted for approximately 100% of Sang Fei’s audited turnover for the year ended 31st December, 2002 and approximately 94% of Sang Fei’s audited turnover for the year ended 31st December, 2003.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, a summary of the audited turnover/net profit attributable to shareholders of Sang Fei is as follows:

	Year	ended 31st December,	ended 31st December,
	2001	2002	2003
	RMB’000	RMB’000	RMB’000
Turnover	2,750,814	2,031,164	3,035,687
Net profit attributable to shareholders	253,601	78,761	62,831

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INFORMATION ON THE NEW GROUP – STRENGTHS AND STRATEGIES

5. STRENGTHS AND STRATEGIES

The New Group’s prime strategy to realise such objectives is to capitalise and build upon, what the New Directors believe are, the New Group’s strengths. Its strategies and related strengths are as follows:

• To maintain and enhance its established relationship with the Philips Group as its exclusive supplier of mobile phones

The New Group intends to continue to maintain and enhance Sang Fei’s established position as the exclusive supplier of Philips branded mobile phone products.

Sang Fei is currently the Philips Group’s exclusive provider of mobile phone products. Under the current exclusive OEM arrangements, Sang Fei sells Philips branded mobile phones directly to the Philips Group. This offers Sang Fei a significant and sustainable source of revenue which, though fluctuating along with the production orders from Philips in response to market demand of Philips branded mobile phones, provides Sang Fei with a relatively high level of visibility of its turnover, and a sustainable margin.

In addition, as the Philips Group’s exclusive provider of mobile phones on global basis, Sang Fei also benefits from the well-recognised Philips brand name for both the PRC market as well as overseas markets, and the continuous support from the Philips Group as its main customer.

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INFORMATION ON THE NEW GROUP – STRENGTHS AND STRATEGIES

To broaden its OEM/ODM customer base and continue to develop its ownbranded mobile phone products

In addition to maintaining its position as the exclusive mobile phone supplier for the Philips Group, the New Group aims to develop more OEM/ODM customers to bolster its OEM/ODM customer base, as well as to further develop its ownbranded mobile phones. The New Group believes that these initiatives could diversify its sources of revenue without compromising sales of Philips branded mobile phones, allow it to benefit from increased economies of scale and hence increase its cost efficiency and overall profitability.

To capitalise on its know-how and technology in mobile phone manufacturing so as to offer assured quality services at competitive prices

The New Group intends to continue to capitalise on its extensive mobile phone manufacturing experience in the PRC, its know-how and technology in mobile phone manufacturing up to international standards, as well as considerable experience of its senior management in the mobile phone production operations.

Through on the job training and strategic alliances with the Philips Group and other foreign players, Sang Fei has ensured and will continue to ensure that it could offer a full range of products which could satisfy different requirements of customers. At present, Sang Fei has the capability of producing GSM, CDMA and PHS mobile phones on 2G and 2.5G platforms. It plans to upgrade and, where necessary, replace part of its production facilities and related testing equipment and to acquire the ability to produce 3G mobile phones in the second half of 2004 for overseas markets as well as the domestic markets upon the issuance of the 3G licences and its roll-out in the relevant jurisdiction.

In addition, supported by its stringent quality control procedures (which help reduce wastage necessitated by re-working of its finished and semi-finished products), and its centralised procurement capabilities for managing materials used in production (which enables it to make planned bulk purchases to satisfy customers’ and its in-house requirements), Sang Fei aims to offer to its customers prompt delivery of the above mentioned variety of products to specifications within a short production lead time on competitive terms. The New Group will continue to explore means of controlling overall production costs to its customers, without compromising the quality of its services.

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INFORMATION ON THE NEW GROUP – STRENGTHS AND STRATEGIES

To enhance its global material sourcing supply chain

Benefiting from its established position as the exclusive manufacturer of Philips branded mobile phones, amongst other factors, Sang Fei has established a reliable network of suppliers from different parts of the world who are able to offer competitive terms for materials supplied. This, the New Directors believe, enables the New Group to help its customers, if required, to better control their overall cost, without adversely affecting the New Group’s profit margin, by giving practical advice on choices of suppliers and, in certain cases, by providing materials procurement services. With the continued growth in its production output and the diversification of its customer base, Sang Fei will seek to enhance further its material sourcing chain to cover materials which are used for different mobile phone platforms. The New Directors perceive that the intense competition in the mobile phone market and the short product cycle will continue in the foreseeable future, and therefore believe that this strategy could help both Sang Fei and its customers to ensure the timely launch/delivery of products to market and to enhance potential return.

To capitalise on the strong and comprehensive platform of the CEC Group with product design capabilities and extensive distribution and after sales service network

The members of the CEC Group are actively engaged in all key aspects of the production and supply chain in the mobile phone industry, covering R&D, production, distribution, repair and maintenance and sourcing of parts and components of mobile phones. Such comprehensive platform could enhance Sang Fei in its overall product development and offering. The CEC Group has strong mobile phone design capabilities (from platform development to outlook design) through its subsidiaries, CECW and Cellon France. In addition, two subsidiaries of SZST (CEC’s A share listed subsidiary) are respectively the exclusive mobile phone repair services provider and one of the distributors for Philips branded mobile phones in the PRC. The repair services provider is 深圳桑達消費通信產品維修服務有限公司 (Shenzhen SED ARC Co. Ltd.) and the distributor is 深圳市桑達匯通電子有限公司 (Shenzhen SED Coalition Electronics Co. Ltd.). Sang Fei aims, where practicable, to take advantage of these resources of the CEC Group, both to establish its own-branded products within the PRC market and to develop its ODM capabilities for overseas customers.

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INFORMATION ON THE NEW GROUP – OPERATIONS

6. OPERATIONS

A. Product range

The New Group is principally engaged in the manufacturing and sale of mobile phones in the PRC. It also exports its mobile phone products as may be required by its OEM or ODM customers. It is capable of producing GSM, CDMA or PHS mobile phones on 2G or 2.5G platforms with a broad range of specifications and final assembly of LCD modules for mobile phones. Sang Fei plans to have the capability of producing 3G mobile phones in the second half of 2004 for both overseas markets as well as the domestic market upon the issuance of 3G licences and its roll-out in the relevant jurisdictions. For the year 2003, Sang Fei has produced 8 series of Philips branded mobile phones (with 15 models) and 11 models of other OEM branded mobile phones and 3 models of own-branded mobile phones. Sang Fei successfully secured its first ODM customer in December 2003. For the year 2004, up to the Latest Practicable Date, Sang Fei has further produced 4 series of Philips branded mobile phones (with 7 models), 19 other OEM branded models of mobile phones and has further launched one ownbranded model of mobile phone.

Mobile phones produced by Sang Fei can have the following specifications/ functions, catering for the requirements of different customers or targeted consumers: clamshell form or bar-type; single band, dual-band (GSM 900/1800) or tri-band (GSM 900/1800/1900) and/or GPRS reception/transmission; PDA, MMS, SMS, WAP, JAVA, MPEG, multiple ring tones, built in digital camera, monochrome or colour LCD, single or dual LCDs, amongst others. Examples of mobile phones produced by Sang Fei under its own brand are as follows:

Mobile phone

Specifications/functions

彩韻 688 (Pony)

==> picture [68 x 122] intentionally omitted <==

This is a clamshell form, dual band GSM (900/ 1800)/GPRS mobile phone, with a monochrome LCD and a colour LCD and built-in 100,000 pixel digital camera, PDA, WAP, MMS and Chinese/ English bilingual dictionary functions and supports USB interface for connection with personal computers. Its size is 75mm x 40mm x 23.5mm.

The New Directors believe that when 彩韻 688 (Pony) was first launched in the PRC in July 2003, it was amongst the first domestically manufactured and branded mobile phones to have the MMS function and a built in digital camera offered in the PRC.

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INFORMATION ON THE NEW GROUP – OPERATIONS

Mobile phone

Specifications/functions

彩蝶 860 (Butterfly 860)

==> picture [62 x 104] intentionally omitted <==

This is the first own-branded mobile phone launched by Sang Fei. It is a clamshell form, dual band GSM (900/1800)/GPRS mobile phone, with a monochrome LCD and a colour LCD, WAP, PDA, Chinese/English bilingual dictionary functions, and supports e-mail transmissions and RS-232 serial port for connection with computers. It also supports an external digital camera.

B. Production

The production of mobile phones by Sang Fei comprises principally four stages: product development, surface mount assembly (SMA), final assembly (FA) and distribution configuration (DC). Sang Fei also has LCD module assembly capability.

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INFORMATION ON THE NEW GROUP – OPERATIONS

The following diagram illustrates the principal stages involved in the manufacture of Sang Fei’s products:

==> picture [103 x 44] intentionally omitted <==

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

product development
----- End of picture text -----

Sang Fei engages in “back-end” product development only for its own-branded products and ODM products. It currently outsources the development and design of the technology platform of its own-branded mobile phones products to external design houses while concentrating inhouse on the back-end product development (being mainly the “look & feel” aspects) of its mobile phone.

Moreover, insofar as its OEM products is concerned, Sang Fei assesses for its customers the feasibility of mass production of its customers’ product as designed and liaises with design houses regarding modifications to the design, tooling or component or software which may be necessary for such purposes. It handles the technical documentation and manages engineering changes which are required to be made by the design houses during the course of production.

==> picture [103 x 211] intentionally omitted <==

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

surface mount assembly
LCD module
assembly
----- End of picture text -----

==> picture [103 x 117] intentionally omitted <==

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

final assembly
distribution configuration
----- End of picture text -----

Mass production of designed mobile phones usually commences with the mounting of integrated circuit chips onto PCBs to create the “backbone” of a mobile phone. At present, Sang Fei has five fully automated SMA production lines, of which four is owned and operated in-house and one is outsourced to its dedicated sub-contractor, Bai Li.

At present, if not otherwise acquired from external suppliers and where required for the production of its ownbranded mobile phones or by its OEM/ODM customers, Sang Fei assembles the LCD modules in its two production lines. For the year 2003, Sang Fei has assembled 0.8 million LCD modules.

The circuit boards, plastic tooling as provided by preferred suppliers and other component modules (whether assembled in-house or externally sourced) are assembled to produce the mobile phones and the products are the tested. Sang Fei currently owns and operates 17 semi-automated FA production lines.

Designed software is downloaded to the products and the products are packaged (together with specified accessories) as required by the customer. Sang Fei currently owns and operates 13 semi-automated DC production lines.

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INFORMATION ON THE NEW GROUP – OPERATIONS

Sang Fei only commences production upon receipt of orders from its OEM customers, who may require that Sang Fei performs all or only part of the above production process. For example, export products for the Philips Group provided by Sang Fei are typically bulk packaged at the DC stage, and software (which are usually market specific) are downloaded to the mobile phones after export at the destination market or region.

The New Group’s production premises are located at Factory Building No. 2 and a portion of Factory Building No. 3, Sangda Industrial Building, Keji Road, Science and Technology Industrial Park, Nanshan District, Shenzhen City, Guangdong Province, leased/licensed from SZST. The existing leases in respect of Levels 1 to 7 of Factory Building No. 2 and portion of Factory Building No. 3 will expire on 31st December, 2008 and Sang Fei has an option to renew the leases for a further term of 5 years at prevailing market rental. Level 8 of Factory Building No. 2 is licensed by Sang Fei for a term co-terminus with the term of the lease in respect of the Levels 1 to 7 of the same building and Sang Fei has an option to lease the premises for a further term of 5 years at prevailing market rental. As at the Latest Practicable Date, its production department occupies 6 floors, comprising gross floor area of 12,000 sq.m. (approximately 130,800 sq.ft.) at which its SMA, LCD, FA and DC production lines are located. It also has a dedicated SMA production line owned and operated by Bai Li located at Sang Fei’s production premises at Factory Building No. 3, comprising gross floor area of 4,680 sq.m. (approximately 51,012 sq.ft.) exclusively for Sang Fei. The terms of arrangement are described further in section 9C “Relationship with the CEC Group – Transactions with the CEC Group” below. To ensure the quality of the New Group’s final product, relevant quality inspection stations are installed as an integral part of each production line (see section 6C “Operations – Quality control” below).

All of the SMA production equipment and the testing equipment employed by Sang Fei in its production lines are high precision equipment of international standards, most of which have been imported from well established suppliers from different parts of the world. Sang Fei’s first three production lines were already in place before the transfer of equity interest to CEC in 2001 and the machineries for such production lines were sourced from or through the Philips Group and are owned by Sang Fei. Although machinery and equipment sourced from or through the Philips Group would naturally be suited for manufacturing Philips mobile phones to the standards and qualifications it requires, Sang Fei’s production lines are also capable of being deployed flexibly to cater for the production requirements for different customers and its in-house products.

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INFORMATION ON THE NEW GROUP – OPERATIONS

Set out below is a chart showing further information in relation to the production line facilities of Sang Fei located at Factory Building No. 2 (in respect of its 4 SMA production lines, its FA and DC production lines) and Factory No. 3 (in respect of the 5th production line operated by Bai Li), Sangda Industrial Building, Keji Road, Science and Technology Industrial Park, Nanshan District, Shenzhen City, Guangdong Province:

		As at 31st December,	As at 31st December,	As at 31st December,
		2001	2002	2003
Number of production lines
(i)	SMA_(Note 1)_	3	4	5
(ii)	FA	9	14	17
(iii)	DC	6	8	13
Space	occupied by all productions lines	4,570m2	6,400m2	7,180m2
		For the	year ended 31st December,
		2001	2002	2003
Total	output	2,497,000	3,655,000	5,499,000
		units	units	units
Range of monthly
utilization rate_(Note 2)_
(i)	SMA	18%-72%	28%-90%	17%-86%
(ii)	FA	15%-90%	19%-54%	15%-82%
(iii)	DC	15%-99%	19%-54%	15%-79%

Note 1: Each line is capable of providing surface mount on both sides of the PCB.

Note 2: The utilisation rate has been calculated by comparing actual output against the full capacity of the respective production lines. Product capacity is the maximum output of each type of production line under normal work shift, work days, level of staffing and assuming immediate availability of necessary production materials.

To ensure efficient utilisation of production capacity and resources and to help customers achieve its “time to market” objectives, Sang Fei had a dedicated production logistics team of 16 persons as at 31st March, 2004. That team is responsible for Sang Fei’s production schedules, working alongside its sourcing and sales and marketing teams. As at 31st March, 2004, Sang Fei’s production lines are staffed by 1,365 workers working in three shifts and 41 supervisory staff members. They are further supported by 59 engineering staff, responsible for the maintenance and repairs of plant and machinery.

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INFORMATION ON THE NEW GROUP – OPERATIONS

C. Quality control

As Sang Fei’s products are ultimately used by both domestic and overseas consumers and in order to comply with PRC regulatory requirements as quality standards which must be satisfied before such products could be sold (and connected to the public communications network) in the PRC or other standards specified by customers, Sang Fei places strong emphasis on the quality control of its products. As at 31st March, 2004, Sang Fei had a quality control team of 85 members in the PRC who are responsible for the implementation of Sang Fei’s quality control policy, of which 35 are stationed at Sang Fei’s production lines.

Sang Fei’s quality control procedures are carried out throughout its operations from the sourcing of raw materials, at each stage of its production process up to the delivery of products to customers. Those procedures could be illustrated by the following chart:

==> picture [368 x 371] intentionally omitted <==

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

At the SMA production stage:
• x-ray checks and inspections are Rework
performed after completion of
soldering and mounting [(1)]
IQC • after PCBA milling, control
information, basic electronic
performance and performance SMA
optimisation call tests are performed [(2)] OQC [(3)]
reworking and repairs are carried out,
where necessary, after each inspection/test.
At the DC stage, FA [(6)] At the FA production stage, two groups of tests areperfor m ed:
for correct software loadingproducts are tested OQC • FA auto test – being a series of tests on the
and configuration [(7)] electronic/transmission aspects of the mobile
phone products, including tests for signals, the
mobile phone antenna and 2.5G transmission
tests; [(4)]
• Function tests – being a series of tests of end-
user functions, such as the key pad functions,
FA rework communication function, ring tones, LCD back
light; [(5)]
Repairs are effected, where necessary after each
group of tests.
Outgoing OQC [(8)] Shipment
DC rework
----- End of picture text -----

In the diagram above:

IQC means incoming quality control OQC means outgoing quality control (1)-(8) indicates each process stage of critical quality inspection

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INFORMATION ON THE NEW GROUP – OPERATIONS

In brief, these procedures comprise the following:

Raw materials – As mentioned below, apart from materials dictated by customers or the design house for the relevant mobile phone product, Sang Fei sources its raw materials only through its preferred suppliers who qualify under Sang Fei’s in-house standards, in terms of quality of raw materials and services (see section 6E “Operations – Raw Materials and Sourcing” below). In addition, production and delivery of materials by suppliers are authorised by Sang Fei only after “first article approval” has been given, that is, when the sample materials could satisfy specifications and quality requirements designated by Sang Fei or its customers. Materials delivered are also examined on an agreed sampling basis before acceptance.
Production – quality inspections are carried out during and at completion of each stage of production. At a specified point of each stage of production, each semi-finished item goes through quality audit and are reworked, where necessary. Inspection on a sampling basis (either in accordance with Sang Fei’s standard sampling plan or as required by customer) is further carried out at the end of each stage of production.
Finished product – the packaged products are checked on a sampling basis prior to delivery to customers.

Sang Fei was accredited with the ISO 9001:2000 with an original approval date of 30th June, 2000; ISO 14001:1996 certification with an original approval date of 19th December, 2000 and ISO 9002:1994 QS-9000 certifications with original approval dates of 8th February, 2002.

D. Environmental and pollution control

Waste materials, waste water and noise are generated during the production of mobile phones. In order to monitor the environmental impact of its operations, Sang Fei has during 2000 to 2002 commissioned annually from an independent third party environmental assessments reports on Sang Fei’s operation. Since November 2002, Sang Fei engages an independent third party to control the disposal of industrial waste generated during its production processing. Sang Fei was accredited with the ISO 14001: 1996 Environmental Management System Certification in December 2000.

The New Group has not been prosecuted for or charged with any material violation under any of the environmental laws, regulations and administrative rules since its establishment.

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INFORMATION ON THE NEW GROUP – OPERATIONS

E. Raw materials and sourcing

Raw materials used by Sang Fei could broadly be divided into four main categories: electrical parts (such as LCD modules, integrated circuit chipsets, PCB, and built-in digital cameras), mechanical parts (such as plastics tooling and keypads), packaging materials (primarily boxes and manuals) and accessories (such as batteries, chargers, earphones and external digital cameras).

The following table shows a breakdown of the New Group’s purchases by types of raw materials for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003:

Electrical parts Mechanical parts Packaging materials Accessories Others Total	Amount (RMB’000) of purchases and percentage that represents of purchases of the New Group 2001 % 2002 % 2003 % 890,425 49 865,830 52 1,578,875 53 105,620 6 92,513 6 131,405 4 10,495 1 12,601 1 26,731 1 270,175 15 203,011 12 181,763 6 524,111 29 476,783 29 1,060,259 36 1,800,826 100 1,650,738 100 2,979,033 100	Amount (RMB’000) of purchases and percentage that represents of purchases of the New Group 2001 % 2002 % 2003 % 890,425 49 865,830 52 1,578,875 53 105,620 6 92,513 6 131,405 4 10,495 1 12,601 1 26,731 1 270,175 15 203,011 12 181,763 6 524,111 29 476,783 29 1,060,259 36 1,800,826 100 1,650,738 100 2,979,033 100
		100

Sang Fei’s customers (other than the Philips Group) provide and manage the supply of most, if not all, of the materials required for production of mobile phones for them. A majority (in terms of value) of the materials used in production are dictated by the platform and design of the relevant mobile phone product. Accordingly, as an OEM manufacturer, Sang Fei tends to have limited input on the choice of supplier by customers or the design houses used by those customers. With those OEM customers who involve Sang Fei while the product is still in development stage, and for ODM customers, Sang Fei could provide useful input on choice of suppliers (in terms of quality of service and pricing) and provide material procurement services. While most of Sang Fei’s OEM customers continue to provide and manage the supply of production materials for their own mobile phone orders, since 2001, Sang Fei started to provide limited materials procurement services at the request of some of its customers (in addition to the Philips Group) subject to there being appropriate guarantee for payment of those materials from those relevant customers.

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INFORMATION ON THE NEW GROUP – OPERATIONS

Sang Fei adopts a centralised procurement policy for common materials which it needs to purchase for the production of different mobile phone products, where practicable. Typically, OEM/ODM customers are required to provide to Sang Fei their projected requirements for different mobile phone products on a rolling six months basis and to confirm their orders 16 weeks prior to the date on which they expect to terminate production for the product in question. Sang Fei prepares and works out a consolidated production schedule for both its own-branded products and its OEM/ODM products and is therefore able to estimate its requirements for different materials on a rolling basis. Suppliers managed by Sang Fei are then notified of the planned order requirements, based on which they could start production and products are shipped in stages upon confirmation by Sang Fei of release dates. This process enables Sang Fei to reduce the lead-time for the supplies of materials and to control inventory level, and better adjust its production plans due to changes in requirements and demands of its customers. It is the policy of Sang Fei not to accumulate excessive raw materials in anticipation for future uncertain demand of products as it will only commence production upon the receipt of orders from its OEM customers. As at 31st March, 2004, Sang Fei’s sourcing and inventory functions were covered by a team of 134 members. For OEM customers who provide and manage the supply of raw materials themselves, Sang Fei monitors the level of materials which have been and are required to be supplied according to the agreed production schedule and frequently updates its customers on the particulars of the materials which are then or are expected to be in shortage.

The New Directors believe, that due to the volatility of demand, and the intense competition, the mobile phone market in the PRC is typified by having very short product cycles (i.e. from development to delivery of that product). Sang Fei’s strategy, to enable it to better control the “time to market” aspect of mobile phones produced by it (which could make crucial difference to market response to a new mobile phone product), is to have a number of preferred supplier partners with whom Sang Fei deals direct (and not through intermediaries) for different materials used in production with a view to ensuring that raw materials could be provided on a “just in time” basis. In the case of OEM/ODM production, preferred suppliers are used with the agreement of customers where the supplier has not already been designated by its customers prior to Sang Fei’s engagement. The perceived benefit of this strategy is that it gives Sang Fei’s preferred suppliers the opportunity to familiarise themselves with Sang Fei’s production cycles and quality requirements. Also, the New Directors believe that a stable supplier/ customer relationship would generally result in more reliable services with better quality and pricing for services.

Each of Sang Fei’s preferred suppliers will have passed its qualification review procedures, and are typically chosen by reference to the quality of product and service, production capacities and pricing offered by the supplier. Sang Fei also implements a supplier re-certification program whereby its preferred suppliers have to undergo annual inspections by Sang Fei and will only be “re-certified” as a preferred supplier if it is

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INFORMATION ON THE NEW GROUP – OPERATIONS

able to meet Sang Fei’s requirements. During the year, Sang Fei provides to its preferred suppliers monthly performance reports, based on its in-house quality control records and customers’ comments, and carries out routine performance reviews and develops improvement plans with its preferred suppliers.

Sang Fei maintains good relationships with its suppliers with whom Sang Fei has had business relationship for periods ranging from over two to over four years.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total purchases from Sang Fei’s top five suppliers accounted for approximately 65%, 54% and 51% of the total purchases made by Sang Fei for the respective years. In compliance with the Cooperation Agreement (further information regarding which is set out in section 10C “Relationship with the Philips Group – Transactions with the Philips Group” below) and as may be required by the designed platform for the mobile phones Sang Fei produces for the Philips Group, the Philips Group is Sang Fei’s preferred supplier of semi-conductor chips and components. Purchases from the Philips Group accounted for approximately 42%, 33% and 31% of the total purchases of Sang Fei for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003.

Apart from members of the Philips Group and CEC Group, none of the Directors, the New Directors, Winsan International or CEC or their respective associates (as defined in the Listing Rules) or any shareholder (which to the knowledge of the New Directors will own more than 5% of the issued share capital of the Company immediately after Completion) has any interest in any of the New Group’s five largest suppliers.

Purchases made by the New Group are usually settled by letters of credit for imported materials and by cash (normally with 60 days credit) for materials sourced domestically.

Sang Fei pays for its purchases in a variety of currencies, mainly RMB, US dollars, Euro, Japanese Yen and Hong Kong dollars. For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, approximately 25%, 32% and 27% of Sang Fei’s purchases were settled in RMB, approximately 33.4%, 47% and 59% in US dollars, approximately 30%, 8% and 2.4% in Euro and approximately 9.5%, 13% and 10.8% in Japanese Yen. The currencies in which the remainder of the purchases were denominated vary from year to year and include Hong Kong dollars, French francs, Singapore dollars and Deutsche marks. The Group does not carry out any hedging activities against foreign currency exchange rates movements, although part of Sang Fei’s payments in foreign currencies could be matched by receipts in foreign currencies derived from its export sales. Sang Fei’s trade payables turnover for each of the years ended 31st December, 2001, 2002 and 2003 was approximately 50 days, 34 days and 87 days, respectively. Trade payables turnover decreased from 50 days in 2001 to 34 days in 2002 due to the settlement of certain accounts payable incurred

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INFORMATION ON THE NEW GROUP – OPERATIONS

historically and along with a decrease in inventories, which was mainly attributable to the stringent measures adopted by Sang Fei to strengthen the control and management for inventories and keep inventories at low level, and the fact that it no longer assumes the responsibility of distributing Philips branded mobile phones. Trade payables turnover increased substantially from 34 days in 2002 to 87 days in 2003, along with the robust increasing trend in sales and orders received during the later part of 2003.

F. Inventory control

Sang Fei manages all materials used in production through its computerised management resources planning system (MRP System), which facilitates smooth production and helps minimise wastage. By being able to consolidate the materials requirements for production of its own-branded products and (to the extent that materials procurement services are being provided by Sang Fei) OEM products and to monitor closely its inventory level and future demands, Sang Fei is able to source more cost effectively and aims generally to maintain a low level of supply of raw materials, typically of one month’s supply of common materials (which could be used generally in mobile phone production) and, depending on its production requirements, one month’s supply of key materials, such as LCD and integrated circuit chips (which are higher valued and tend to be more product specific).

Raw materials not immediately deployed in production are stored in Sang Fei’s warehouse (provided by an Independent Third Party warehousing services provider) under controlled conditions – semiconductor parts are stored in a temperature and humidity controlled environment to ensure that they are kept in good condition, while high value parts (such as LCD monitors and digital camera parts) are kept under lock at all times when not used in production. For each of the two years ended 31st December, 2001 and 31st December, 2002, full provision is made against inventory which is not covered by orders for over 6 months. Starting from the year ended 31st December, 2003, inventory level is reviewed by management of Sang Fei on a monthly basis. Full provision is made against inventory which the management considers, having regard to historical utilisation level and also expected production orders, is excess to requirement.

As at 31st December, 2001, 31st December, 2002 and 31st December, 2003 Sang Fei’s inventory amounted to approximately RMB145.0 million, RMB69.2 million and RMB270.2 million, respectively. As at 31st March, 2004, Sang Fei’s inventory amounted to approximately RMB350.7 million.

The inventory turnover of Sang Fei for each of the years ended 31st December, 2001, 2002 and 2003 was about 19 days, 12 days and 32 days, respectively. Inventory turnover fluctuation has been and will continue to be attributable mainly to various factors including the timing of launch of new products and Sang Fei’s production

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requirements over the following months relative to the relevant balance sheet date. Sang Fei’s inventories turnover decreased from 19 days in 2001 to 12 days in 2002, as it no longer assumes the responsibility of distributing Philips branded mobile phones. Also, Sang Fei generally adopts the policy of manufacturing only according to orders received and such stringent measures adopted by Sang Fei to strengthen the control and management of inventories in order to reduce raw materials kept for production also contributed to the decrease. Sang Fei’s inventories turnover increased sharply from 12 days in 2002 to 32 days in 2003 since orders during the later part of 2003 were largely on an increasing trend and the figure also reflected the need to fulfil the orders received in later part of 2003 to be delivered in the following months.

G. Sales and marketing

Sang Fei had a sales and marketing team of 22 members as at 31st March, 2004.

The strategy of Sang Fei is to maintain the Philips Group as a core customer, and to develop independent OEM and ODM customers as well as to offer its own-branded products. The New Directors believe that this strategy will broaden the New Group’s income base, and help improve overall profitability by providing value added service to customers both in terms of materials procurement and design capabilities. Accordingly, the sales and marketing team is primarily responsible for the development of independent OEM and ODM customers, sales and promotion of Sang Fei’s own-branded products, while the Philips Group is served direct by dedicated project managers in the NPI team (see section 6J “Operations – Product Development” below).

The sales and marketing team focuses on developing as its OEM and ODM customers, local and foreign mobile phone vendors who outsource their design and/or production. Sang Fei promotes its products and services outside the PRC principally through a major business-to-business (b2b) website and trade magazines.

Sang Fei works closely with its OEM customers and/or, the design house which undertakes the product design for its customers to finalise the specifications of the product which needs to be produced, to agree the terms of sales and (where applicable) materials procurement arrangements. Its management’s extensive experience in mobile phone manufacturing enables Sang Fei to provide useful input in this process in terms of recommendations for suitable raw materials suppliers and designers in terms of pricing, reliability in the delivery and quality of goods, as these could have a material impact on the customers’ overall cost and enhance its ability to launch its products as planned.

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For Sang Fei’s own-branded or ODM products, its sales and marketing team works with its product development team in the selection of mobile phone technology platform and functions offered by external design houses and Sang Fei’s in-house “backend” product development by sharing with them the fruits of their market research on industry trends and consumer preferences. Prior to production, the sales and marketing team is responsible for soliciting orders from potential customers, including Sang Fei’s distributors and ODM customers. With technical support from the design house from which the relevant mobile phone platforms are sourced, the team is also responsible for obtaining the relevant FTAs (if this is not done by the external design houses) and network access certificates which are required before Sang Fei’s own-branded mobile phone products could be sold in the PRC.

In addition to promotional campaigns which are undertaken by the New Group through the media (primarily through 中國中央電視台 (CCTV) and printed media), event sponsorship, advertising in billboards and other public locations and Internet websites to enhance overall market awareness of Sang Fei’s mobile phone brands, the New Group also works with its distributors on “roadshows” and advertising efforts (which includes local television advertising, placing advertisements on newspapers, magazine and Internet websites, advertising on public transportation vehicles and stations) for the promotion of its new products. As at 31st December, 2003, one of the two distributors of Sang Fei’s own-branded mobile phones is a member of the CEC Group and is one of the distributors of Philips mobile phones in the PRC. Given that the development, production and sales of own-branded mobile phones is a recent diversification of business by Sang Fei, its output has been small and need not be served by many distributors. In view of Sang Fei’s previous business relationship with this distributor (for Philips branded mobile phones when Sang Fei was a subsidiary of Philips) and the distributor’s distribution network in Southern China, Sang Fei considered it to be commercially desirable to use this distributor for the sale of its own-branded mobile phones. However, with the growth of this line of business, the New Directors intend to expand the distribution base for Sang Fei’s own-branded mobile phones at the appropriate time by increasing the number of distributors.

Sang Fei’s distributors purchase products from Sang Fei at pre-agreed prices for re-sale and on a product by product basis. In line with industry practice, Sang Fei does not enter into long term distribution agreements with its distributors. Instead, the terms of distribution are negotiated on a product by product basis, and may include certain minimum sales obligations on the part of the distributor.

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All of Sang Fei’s own-branded mobile phones are currently sold in the PRC. OEM products are sold both overseas and in the PRC. The following is a breakdown by geographical region of Sang Fei’s audited turnover for the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003:

		Amount (RMB’000) and percentage of	Amount (RMB’000) and percentage of	Amount (RMB’000) and percentage of	Amount (RMB’000) and percentage of
		the	audited turnover of Sang		Fei
	2001	%	2002	%	2003	%
PRC	2,181,141	79	1,172,120	58	1,443,469	48
Europe	331,231	12	549,791	27	1,131,823	37
Asia (excluding PRC
and Hong Kong)	213,734	8	281,912	14	407,330	13
Hong Kong	24,708	1	27,341	1	53,065	2

During the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, Sang Fei sold its products principally to various members of the Philips Group or its customers and the CEC Group. Sales of Philips branded products accounted for approximately 99%, 98% and 91% of the audited turnover of Sang Fei for the respective financial years.

The Philips Group accounted for approximately 21%, 98% and 91% of the audited turnover of Sang Fei for the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003. The CEC Group accounted for approximately 32%, 2% and 3% of the audited turnover of Sang Fei for the respective financial year. It is noted that for the year ended 31st December, 2001, sales by Sang Fei to members of the CEC Group included the revenue in respect of the products marketed and sold to distributors of the Philips Group (certain members of the CEC Group) which were recorded in Sang Fei’s turnover. In fact, for the year ended 31st December, 2001, nearly all of the customers of Sang Fei were customers of the Philips Group. However for each of the years ended 31st December, 2002 and 31st December, 2003 such sales were no longer recorded by Sang Fei as the Philips Group retained the sales and distribution functions for its own-branded mobile phones for those years.

Apart from the Philips Group and CEC Group, none of the Directors, the New Directors, Winsan International or CEC or their respective associates (as defined in the Listing Rules) or any shareholder (which to the knowledge of the New Directors will own more than 5% of the issued share capital of the Company immediately upon Completion) has any interest in any of the New Group’s five largest customers.

Sang Fei generally requires its customers to make payment on delivery, unless promissory notes or other guarantee for payment are provided in which case a credit period of up to 30 days after delivery may be allowed. In accordance with the terms of

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the Cooperation Agreement, certain members of the Philips Group enjoy credit periods of 45 days for PRC sales and 60 days for exports, where their payment obligations are covered by bank guarantee or documents against acceptance arrangements.

Customers of Sang Fei pay for their purchases in a variety of currencies, mainly RMB, US dollars and Euro. For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, approximately 4.4%, 0% and 0% in Euro and approximately 17.8%, 42.3% and 52% in US dollars. The balance is settled principally in RMB.

Sang Fei’s trade receivables turnover for each of the years ended 31st December, 2001, 2002 and 2003 was approximately 35 days, 87 days and 121 days, respectively. The trade receivables turnover days fluctuate mainly due to the varying sales amount and timing of launch of new products during the period immediately preceding the relevant balance sheet date. It is noted that trade receivables turnover is calculated by dividing the trade receivables balance as at the relevant balance sheet date by the turnover figure for the period (the “Period”) immediately preceding the said balance sheet date and thus any major sales fluctuations within the Period could correspondingly have a large impact on the trade receivables balance as at a particular date and the calculated turnover figure.

Sang Fei’s trade receivables turnover rose from 35 days in 2001 to 87 days in 2002, mainly due to the better than expected sales in the later part of 2002 (monthly sales volume of Sang Fei increased from approximately 253,000 units in January 2002 to approximately 314,000 units in December 2002). In addition, the credit policy of 45 days for PRC sales and 60 days for export of Philips products, with payment obligations covered by bank guarantee or documents against acceptance arrangements, compared with a cash on delivery or a 30-day credit period for PRC sales and 60 days for export as adopted previously, contributed to such change. However, most of Sang Fei’s trade receivables have been outstanding for 30 days or less, representing approximately 93.5% of the corresponding total trade receivables balances as of 31st December, 2002, in line with Sang Fei’s 30-60 day credit policy. Sang Fei’s trade receivables turnover increased from 87 days in 2002 to 121 days in 2003, mainly due to a sharp increase in period end trade receivables balance as a result of introduction of some well-received new mobile phone models in the second half of 2003 translating into higher sales amount towards the end of the year (monthly sales volume of Sang Fei increased from approximately 168,000 units in January 2003 to approximately 864,000 units in December 2003). In addition, there was in general an increasing sales trend from mid 2003 onwards after the extinguishment of SARS in the PRC, also resulting in an increase in period end trade receivables. However, out of the trade receivables balance as at 31st December, 2003, approximately 99.5% have been outstanding for 30 days or less, which was in line with the existing credit policy adopted by Sang Fei.

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H. After sales services

In addition to ensuring the quality of its products, Sang Fei places much importance to the after sales services it offers both to end users of its own-branded products and its OEM customers and, in due course, ODM customers (except the Philips Group who arranges its own after sales services).

To serve its own-branded mobile phone users, Sang Fei operates a toll-free customer hotline and maintains through its distributors and third party service providers, a total of 33 basic service centres throughout the PRC and 2 major repair centres situated in Shenzhen and Shanghai as at 31st March, 2004. While Sang Fei has outsourced its repair and maintenance works to these service and repair centres, it reimburses these centres for repair works carried out during the statutory product warranty period of 12 months after sales at a pre-agreed rate. Charges imposed by these service and repair centres on end users for work done after the expiry of the warranty period are also fixed in advance, to ensure that its own-branded mobile phone users continue to enjoy after sales services at a reasonable rate.

Sang Fei provides both its OEM customers and its various service and repair centres with continued technical support and product repair training. In the case of OEM customers, Sang Fei will also examine any returned products (within typically a 12–15 month contractual warranty period) and provide a report on the reasons for faults which may have been uncovered (for example, whether there is a design fault which could be rectified).

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total amount of warranty provisions charged to profit and loss accounts was approximately RMB30.2 million, RMB0.1 million and RMB4.2 million.

I. Competition

The New Directors believe that the establishment of mobile phone manufacturing operations with full production and testing capabilities requires substantial capital investment, which could be a disincentive for new entrants in view of the competitiveness of the mobile phone market as a whole and the mobile phone manufacturing industry. The New Directors further believe that few new entrants would be able to compete effectively in delivering products and services of quality comparable to those offered by the New Group, as that would entail a much higher level of technical know-how on the production process and also strong business relationships with suppliers.

Overall competition in the mobile phone retail market is intense. Accordingly, Sang Fei’s strategy for its own-branded products is not to gain market share on the established brands. Rather, Sang Fei intends to focus on establishing its brand as offering an affordable multifunctional range of mobile phones, initially in provincial capitals in the PRC and to generate ODM sales from its in-house products and to produce and sell products in such a manner which generates for it reasonable return.

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J. Product Development

Sang Fei’s product development functions comprise two elements: NPI and NPD. As at 31st December, 2003, Sang Fei had a product development team of 30 members, of which 17 are dedicated towards NPI and 13 are dedicated towards NPD.

The NPI team is responsible for overseeing and managing the entire process by which a newly designed product (whether OEM or own-branded) is brought into mass production. A team of project managers who, as at 31st December, 2003 all have engineering backgrounds, serve as the interface between Sang Fei’s production team, its customers and the design houses employed by its customers or (for own-branded products) Sang Fei. Each project manager is responsible for designated products and looks after the entire process from contract stage (for OEM products) and project “kick-off” stage (for own-branded products) to the “end of life” of each such product (namely, when production of that product is to be terminated), and is responsible for ensuring timely delivery of products.

In addition, NPI also has a product engineering team (comprising staff with electronic engineering and mechanical engineering background) who are responsible for the formation of the BoM, creation and up-dating of the technical documentation necessary for production, management of engineering changes required according to customer’s specifications and from time to time by design houses, evaluation of whether or not the product could be mass produced as designed, and evaluation, management and capacity review of tooling and management of tooling budget. They also provide technical support, including, failure analysis of products and preliminary assessments on the suitability of alternative sources of materials (where required) for recommendation to customers or design houses.

Sang Fei’s NPD team is dedicated to the development of its own-branded mobile phones and to carry out industrial, mechanical and structural designs for its OEM customers, if required. Team members comprise staff with engineering, industrial design, mechanical design and/or software design backgrounds. Having been established in January 2003, the NPD team has focused primarily in the industrial design (i.e. the “look and feel”) of Sang Fei’s own-branded mobile phones and ODM products. The design and development of the mobile phone platform is currently outsourced to external design houses.

The NPD team works closely with both Sang Fei’s sales and marketing team, which undertakes research on industry trend and consumer preferences for mobile phones, and also the design houses with which Sang Fei works to develop specific mobile phone products (or a series of such products). By 31st December, 2003, Sang Fei has partnered with an Independent Third Party design house based in Taiwan for the development of the first series of its own-branded mobile phones, and also with Cellon France and CECW in respect of products to be launched in 2004. Typically, design houses develop and provide mobile phone platforms and software codes, technical support for the mechanical design, testing and type approvals and production support at the manufacturing stage, and licenses on a non-exclusive basis its platform designs to its customers on an agreed fee basis. Fee arrangements may comprise lump sum payments for services provided and/or fees charged by reference to sales or manufacturing volume.

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As the New Group’s products gain market recognition, the New Group plans to expand the capability to include mobile phone hardware and software applications development in 2004, further information regarding which are set out in section 12 “Future Plans and Prospects” below.

In order to keep abreast of new technologies and remain competitive in the mobile phone manufacture market, Sang Fei organizing training sessions by mobile phone technology providers for its relevant production and product development staff from time to time. It is at present, in discussions with an Independent Third Party for the acquisition of 3G mobile phone production technology. Sang Fei aims to be able to offer 3G mobile phone production services to its customers in the second half of 2004 for both overseas markets as well as the domestic market upon the issuance of 3G licences and its roll-out in the relevant jurisdiction.

For each of the year ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, Sang Fei’s expenditure in product development (excluding fees paid to design houses) were approximately RMB10,233,000, RMB6,652,000 and RMB6,198,000. The amount of fees paid to design houses for the year ended 31st December, 2003 was approximately RMB2,421,000 and all of which were paid to members of the CEC Group. For the year ended 31st December, 2002, the amount of fees paid to Independent Third Party design houses was approximately RMB1,522,000. Further information regarding the accounting policies adopted by Sang Fei in relation to such expenditure is set out in the “Notes to the Accounts” section in Appendix I of this Circular.

K. Intellectual property

As at the Latest Practicable Date, the following intellectual property rights are material to the New Group’s business:

(a) Trademarks

None of the members of the New Group have registered or are the proprietor of any trade or service marks.

As at the Latest Practicable Date, Sang Fei uses for its mobile phones the following trademarks (registered in the PRC under Clause 9) under licence from SZST:

Trademark	Registration number	Date of expiry of licence
	1328697	01/08/2003 – 01/06/2007
	1328699	01/08/2003 – 01/06/2007
	1353734	01/08/2003 – 01/06/2007

Note: During the period from 1st June, 2003 to 30th July, 2003, the above trademarks were licensed to Sang Fei by SZST free of charge.

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As at the Latest Practicable Date, out of the three trademarks, only the trademark is used by Sang Fei. The SED brand was at the time and still is a wellknown brand, in particular in South China, for various electronic products (other than mobile phones) produced by SZST. Sang Fei therefore considered that the SED brand could facilitate promotion of products that it develops in-house. SZST (as a shareholder of Sang Fei) agreed to the royalty free licence. The trademarks have not been transferred to Sang Fei because the SED brand is registered for products other than the mobile phone products, including but not limited to computer, monitors, electronic typewriters, sound equipment and systems, telephone equipment and other electronic equipment and devices which are produced by the SZST.

(b) Domain name

As at the Latest Practicable Date, members of the New Group have registered the following domain name:

Domain name	Registration date	Expiry date
www.sangfei.com.cn	16th April, 2002	16th April, 2006
www.sangfei.com	11th April, 2002	11th April, 2006
www.sed-mobile.com	11th July, 2002	11th July, 2004

Note: The content of the website does not constitute part of this Circular.

Save as aforesaid, there are no other trade or service marks, patents, other intellectual or industrial property rights which are material in relation to the New Group’s business.

L. Insurance

Sang Fei is insured against losses arising from product liability, damage to its properties and its contents and stock, public liability, shipment of goods and merchandise relating to its business and business interruption in the PRC.

Winsan is insured against damage to its properties and employee compensation in Hong Kong and damage to its property.

The New Directors consider that the insurance policies taken out by the New Group provide adequate cover for the risks involved.

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7. NEW DIRECTORS, SENIOR MANAGEMENT AND STAFF

A. New Directors

At Completion, the following persons are proposed to be appointed as Directors:

Non-executive Directors

Mr. Yang Xiaotang（楊曉堂） , aged 61, is proposed to be the Chairman of the new Board of Directors and a non-executive Director. He graduated from Yangzhou University, the PRC. He is currently the president and legal representative of CEC. Prior to joining CEC in 2001, he has been the Vice Governor of the State Development Bank of China for 4 years. During 1992 to 1998, Mr. Yang was the deputy provincial governor of Jiangsu Province, and the general secretary of Suzhou City. Before that, he had been the Deputy City Mayor and thereafter the Mayor of Changzhou City, Jiangsu Province during the period from 1988 to 1992. Before 1988, he was the vice president and subsequently president of JinLing Petrochemical Corp.

Mr. Tong Baoan（佟保安） , aged 56, is proposed to be the Vice Chairman of the new Board of Directors and a non-executive Director. He graduated from Tianjin University, the PRC. Mr. Tong is currently the Vice President of CEC. Prior to joining CEC in 2001, he was initially the General Manager of Shenzhen Sang Da Electronics Corporation during the period from 1996 to 2001.

Executive Directors

Mr. Fan Qingwu（范卿午） , aged 41, is proposed to be an executive Director. He graduated from the Renmin University of China in the PRC. From 1996 to 1999, Mr. Fan was the Executive vice president of China Securities Industry Institute. After that, he was the General Manager of the Investment Banking Department and the Asset Management Department of CEC until the year 2003. He became a director of Sang Fei on 28th August, 2003. He is currently the vice president of China Electronics Industry Corporation.

Mr. Hua Longxing（華龍興） , aged 62, is proposed to be an executive Director. He graduated from the Faculty of Wireless Engineering of Southeast University in the PRC. He is the Chairman of the board of directors of Sang Fei, and has been in office since the establishment of Sang Fei. From 1993 to 2000, Mr. Hua was the Vice-Chairman of the board of directors and General Manager of SZST. Before that, he was the Deputy General Manager of Shenzhen Sang Da Electronics Corporation. From 1983 to 1987, he was the director of the Liaison Division of the office of Ministry of Electronics Industry in Shenzhen Economic Zone.

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Independent Non-executive Directors

Mr. Yin Yongli (尹永利 ) , aged 64, is proposed to be an independent nonexecutive director of the Company. He graduated from Shandong Finance Institute, the PRC. He is currently (and has since September, 2001 been) the Chairman of China Rightson Certified Public Accountants. He was the chairman of another firm of auditors in the PRC for the period from 1998 to 2001. Before that, he spent over 20 years in the petroleum industry in the PRC as an accountant of Sinopec Corporation. From the years 1985 to 1988, he became the chief accountant of the financial planning department. From 1988 to 1998 he was the deputy department head of the financial department.

The two existing independent non-executive Directors, Mr. Wong Po Yan and Mr. Chan Kay Cheung, whose brief particulars are set out in paragraph 2 of Appendix V to this Circular, have agreed to remain in office after Completion.

There is no service contract between the Company and any of the New Directors. For the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, there were no emoluments, salaries, housing allowances, other allowances and benefits, contributions to pension schemes or bonuses paid or payable by Sang Fei or the Company to any of the New Directors (save and except for one New Director who was entitled to an aggregate emolument of RMB300,000 for the year ended 31st December, 2003) and there were no payments made or received by any of the New Directors as an inducement to join or upon joining the Company nor as payment for compensation for loss of office. In addition, none of the New Directors waived or agreed to waive any emoluments during the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003. The proposed monthly remuneration of the New Directors is between HK$30,000 to HK$50,000 each. Assuming the New Directors are appointed to the board of directors of the Company on 1st July, 2004, the proposed aggregate emoluments, salaries, housing allowances, other allowances and benefits, contributions to pension schemes or bonuses payable to the New Directors for the year ended 31st December, 2004 are approximately HK$1,003,000.

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B. Senior management

Sang Fei has established a management committee comprising its general manager, deputy general manager, financial controller and the heads of various departments of Sang Fei, to ensure efficient management of Sang Fei’s business. Upon Completion, the management committee will be the senior managers of the Group. All major business decisions of Sang Fei (ranging from taking on new major customers, alterations to established operating procedures and the hiring and require the approval of the management committee dismissal of senior staff). The management committee reports to the board of directors of Sang Fei. Its members as at the Latest Practicable Date are as follows:

Mr. Robert Chen ( 程宏勛 ), 60, the General Manager of Sang Fei. Mr. Chen graduated with a bachelor’s degree in business administration from National Cheng Kung University, Taiwan in 1969. Mr. Chen is responsible for the overall management of Sang Fei’s operation. Mr. Chen has over 14 years’ of experience in the communications equipment manufacturing industry in the PRC. Mr. Chen joined Philips’ Group as the Greater China general manager of the Philips’ Consumer Electronics Division in 1997. He was appointed Sang Fei’s general manager in 1999 when, at the same time, he was the Greater China general manager of Philips’ Consumer Communications Division. Since March 2001, he acted as part time senior consultant to Sang Fei, initially focusing on formalising the terms of the OEM manufacturing arrangement between Sang Fei and the Philips Group under the Cooperation Agreement and continued to be involved in the affairs and the management of Sang Fei. Mr. Chen became general manager of Sang Fei again in November 2002.

Mr. James Li ( 李勁松 ), 34, the Deputy General Manager of Sang Fei. Mr. Li obtained his bachelor’s degree in engineering from Harbin Institute of Technology in 1992, where he was also awarded his master’s degree in engineering later in 1995. Mr. Li joined 深圳桑達國際電子器件有限公司 (Shenzhen SEDIPD International Electronic Device Company Limited), a subsidiary of SZST, in 1995 where he served in the research and development and the production departments. Just before Mr. Li joined Shenzhen Sang Fei in November 2002, he was deputy general manager of Shenzhen SED-IPD International Electronic Device Company Limited.

Mr. Jeff Wong ( 黃保忠 ), 41, the Senior Financial Controller of Sang Fei. Mr. Wong holds a bachelor’s degree in business administration from Hong Kong Baptist University, and is a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Society of Accountants. Prior to joining Sang Fei in November 1999, he had spent a total of 4 years as financial controller of two members of the Philips Group’s in the PRC. From 1993 to 1995, Mr.

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Wong was the Group Chief Accountant of the Dransfield Group Limited (now known as China Merchants DiChan (Asia) Limited), a company whose shares are listed on the Main Board.

Mr. Jerry Fu ( 傅志遠 ), 54, the Industrial Operation Director of Sang Fei. Mr. Fu graduated from Chung Yuan University, Taiwan in 1971 where he obtained his engineering degree. Mr. Fu is responsible for all production – related matters in Sang Fei. Prior to joining Sang Fei in April 2003, he spent the preceding 20 years in management positions responsible for production and operations in three computer peripheral, personal computer manufacturer and optical component companies in the United States of America.

Mr. Kevin Kuan ( 管家文 ), 41, the Director of the Commercial Division of Sang Fei. Mr. Kuan graduated from University of North Texas with a master’s degree in science in 1991. Mr. Kuan joined Sang Fei in June 2002 to set up its Commercial Division which he now heads and which is responsible for all sales and marketing contracting activities of Sang Fei. Prior to joining Sang Fei, Mr. Kuan was the China sales manager and before that, the Asia Pacific product marketing manager for certain products in the Philips Group.

Mr. Brian Chan ( 陳耀榮 ), 37, the Director of the Products Department of Sang Fei. Mr. Brian Chan obtained in 1991 his bachelor’s degree in chief electronics engineering from Hong Kong Polytechnic University, where he also obtained his master’s degree in electronics and information engineering in 2003. Mr. Brian Chan first joined Sang Fei in 1997. Prior to that he had worked as electronics chief engineer for the Philips Group in Hong Kong for 3 years.

C. Continuity of management track record

As a sino-foreign equity joint venture company, Sang Fei’s board of directors comprised representatives of its shareholders, in proportion of the equity interests held by the respective shareholders at the time. During the period from 1st January, 2001 to the Latest Practicable Date (the “Relevant Period”), the day-to-day business and operations of Sang Fei has been managed by a core management team comprising (a) Mr. Hua Long Xing, a New Director and the chairman and de facto chief executive of Sang Fei; (b) Mr. Robert Chen, the general manager of Sang Fei (who was consultant of Sang Fei from March 2001 to November 2002 during which he was responsible for the formulation and negotiation of the terms of the Cooperation Agreement while continuing to be involved in the affairs and the management of Sang Fei); (c) Mr. Qiu Pei Shou, who was the deputy general manager of Sang Fei up to November 2002 and has continued thereafter as a consultant of Sang Fei; (d) Mr. Brian Chan, a member of the management committee of Sang Fei responsible for products management; and (e) Mr. Jeff Wong, a member of the management committee of Sang Fei and the financial controller of Sang

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Fei. The New Directors believe that this core management team is most responsible for the profit track record of Sang Fei during the Relevant Period. Apart from Mr. Brian Chan who is responsible for overseeing and managing the NPI process which underscores Sang Fei’s OEM manufacturing process, all the other members of Sang Fei’s core management team regularly attend and deliver their proposals and reports at board meetings of Sang Fei. During the period when Mr. Robert Chen was not a general manager, Mr. John Kou initially (for about four months) and thereafter Mr. Raymond Hope stepped in as general manager of Sang Fei (to fill up the position as required by PRC laws and the articles of association of Sang Fei). Mr. John Kou prior to taking up office as general manager was responsible for sales and marketing operations of Sang Fei, while Mr. Raymond Hope was previously (together with Mr. Qiu Pei Shou) deputy general manager of Sang Fei, primarily responsible for production processes. Mr. Qiu Pei Shou was not appointed to fill that role primarily because he was closer to retirement age than both Mr. John Kou and Mr. Raymond Hope. Mr. John Kou was initially appointed since his responsibilities involved external relations of Sang Fei to a greater degree than Mr. Raymond Hope. However, with the transfer of the Philips branded mobile phones distribution functions to the Philips Group, he was also transferred to the Philips Group. Neither Mr. John Kou nor Mr. Raymond Hope were regarded as part of the team which was most responsible for the profit track record for Sang Fei during the Relevant Period, because while both participated in the relevant board and management meetings and performed the basic functions of general manager, both had been incumbent for a short time during the Relevant Period, and in the case of Mr. Hope, skill set continues to be primarily focused on production related aspects. In the meantime Mr. Robert Chen continued his influence and contribution to management as consultant as described above together with the remaining members of the core management team which remained unchanged.

Apart from Mr. Hua Long Xing who works at Sang Fei, none of the directors of Sang Fei (whether appointed by the Philips Group or the CEC Group) were at any time during the Relevant Period based at Sang Fei. They have been and are based at the offices of their nominating shareholder group entities where they have their respective work responsibilities. In fact, their participation had been limited mainly to attendance (in person or by proxy) at board meetings of Sang Fei (which averaged 2 to 3 per year), at which they had endorsed all recommendations by Sang Fei’s core management team and had neither sought to interfere with or object to the management and operational decisions of that core management team (whether it be decisions relating to business dealings between Sang Fei and its customers or suppliers) nor to remove any of its members. During 2001 when Philips Group was still the majority shareholder of Sang Fei, at any one time only two of five directors nominated by the Philips Group attended board meetings in person.

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There has been no change in substance in the relationship between the Philips Group and Sang Fei’s core management team during the Relevant Period, whether before or after the sale by the Philips’ Group of 65% equity interest in Sang Fei in 2001 to the CEC Group. Sang Fei believes that the primary interest of the Philips Group in Sang Fei then was and now still is to ensure that Sang Fei is able to supply on an OEM basis the volume of Philips branded products to meet the needs of the Philips Group as agreed between the Philips Group and Sang Fei (through its core management team) in the ordinary course of Sang Fei’s business. With the Philips Group’s publicly stated strategy in June 2001 to refocus its activities on the sale and marketing of its mobile phones and its disposal of part of its GSM mobile phone research and development activities, the Industrial Cooperation Contract (by which it receives technological support fees from Sang Fei for the manufacture and sale of products which designed in-house by the Philips Group) was terminated. Also as a result of this strategy, the OEM manufacturing arrangements which then existed between Sang Fei (as an OEM manufacturer) and the Philips Group (as customer) were formalised and set out in the Cooperation Agreement. The Cooperation Agreement covers substantially the same matters as are provided for in other OEM contracts entered into by Sang Fei with its other customers. It was the result of arms’ length commercial negotiations of the terms of a long term and exclusive (on the part of the Philips Group) OEM manufacturing arrangement and does not confer on the Philips Group the right to control or participate in Sang Fei’s operations or management or its performance of the terms of the OEM manufacturing arrangement.

D. Company Secretary, authorised representatives and qualified accountant

Mr. Lo Wai Chuen will continue to be Company Secretary and an authorised representative of the Company for the purposes of the Listing Rules after Completion.

Mr. Fan Qingwu, a New Director is proposed to be appointed the second authorised representative of the Company for the purposes of the Listing Rules upon Completion.

Mr. Jeff Wong is proposed to be appointed as the qualified accountant of the Company for the purposes of the Listing Rules upon Completion. Mr. Wong is a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Society of Accountants.

E. Audit Committee

After Completion, the audit committee of the Company will comprise Mr. Chan Kay Cheung, Mr. Wong Po Yan and Mr. Yin Yongli, the three independent non-executive Directors. The chairman of the audit committee of the Company will be Mr. Chan Kay Cheung.

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F. Staff

As at 31st March, 2004, Sang Fei had a workforce of 1,802 employees. The following is a breakdown of Sang Fei’s workforce as at the Latest Practicable Date in terms of function:

	Number of employees
Administration	166
Product Development	30
Marketing	22
Production	1,365
Sourcing and Logistics	134
Quality Control	85

During the year ended 31st December, 2003, Sang Fei experienced a net increase of new staff by 855 of which 753 are production staff due to Sang Fei’s expansion of the production capacity.

Sang Fei has not experienced any material disruption of its operations due to labour disputes. The New Directors consider that the New Group maintains a good working relationship with its employees.

Sang Fei has in place a series of employee incentive initiatives whereby its employees are rewarded for outstanding performance, on an individual basis and on a team basis. This could take the form of non- monetary rewards and discretionary bonuses. In addition, it provides housing and meal subsidies, on-the-job continuous training for its employees and may offer to long serving employees, on a discretionary basis, additional benefits, such as education subsidies, long service bonuses.

In addition to making contributions to employee compensation, medical, retirement and unemployment insurances and housing fund as required by PRC laws, Sang Fei provides medical subsidies for basic medical care and an in-house doctor to look after the physical well being of its staff.

After Completion, employees of the New Group will constitute eligible employees under the New Share Option Scheme, particulars of which have been set out in the Company’s circular to Shareholders dated 25th April, 2002.

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G. Five Highest Paid Individuals of Sang Fei

The emoluments payable to the five highest paid individuals during the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003 were as follows:

Basic salaries, allowances and benefits in kind Bonuses Contributions to retirement schemes	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 7,272 5,636 6,071 2,169 1,421 1,997 952 420 507 10,393 7,477 8,575	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 7,272 5,636 6,071 2,169 1,421 1,997 952 420 507 10,393 7,477 8,575
		8,575

The emoluments fell within the following bands:

Emolument bands RMB1,000,001 – RMB1,500,000 RMB1,500,001 – RMB2,000,000 RMB2,000,001 – RMB2,500,000 RMB2,500,001 – RMB3,000,000	Number of individuals Year ended 31st December, 2001 2002 2003 – 3 3 2 1 1 1 1 – 2 – 1 5 5 5	Number of individuals Year ended 31st December, 2001 2002 2003 – 3 3 2 1 1 1 1 – 2 – 1 5 5 5
		5

No payments have been or will be made by Sang Fei or the Company to any person as an inducement to join or upon joining the Company nor as payment for compensation for loss of office.

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8. FINANCIAL INFORMATION

A. Trading record

The following is a summary of the audited results of Sang Fei for each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003. The audited results should be read in conjunction with the Accountants’ Report set out in Appendix I to this Circular.

Profit and Loss Accounts

Turnover Cost of sales Gross profit Other revenues Distribution costs Administrative expenses Other operating expenses Operating profit Finance costs Profit before taxation Taxation Profit after taxation Dividend Earnings per share	Year 2001 RMB’000 2,750,814 (2,070,942) 679,872 15,495 (214,161) (205,548) (22,057) 253,601 – 253,601 – 253,601 200,814 N/A	ended 31st December, 2002 2003 RMB’000 RMB’000 2,031,164 3,035,687 (1,833,969) (2,871,432) 197,195 164,255 20,931 19,930 (15,381) (29,042) (99,335) (55,984) (13,111) (23,952) 90,299 75,207 (2,852) (6,877) 87,447 68,330 (8,686) (5,499) 78,761 62,831 – – N/A N/A

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B. Management’s discussion and analysis of results of operations

The following discussion of Sang Fei’s results of operations for the three years ended 31st December, 2001, 2002 and 2003 should be read in conjunction with the audited financial statements of Sang Fei and the related notes thereto included elsewhere in this Circular.

(a) Overview

Overview of Sang Fei’s business

Sang Fei is principally engaged in the manufacturing and sale of mobile phones in the PRC. At present, its sales are made mainly on an OEM basis (to both domestic and overseas customers), although it has since 2002 also started sales of its own-branded products in the PRC. Sang Fei is currently the Philips Group’s exclusive provider of mobile phone products on global basis, and one of the CEC Group’s key mobile phone manufacturing subsidiaries. Sang Fei currently has a total production capacity of over 10 million mobile phones per annum and operates five SMA production lines (including the dedicated SMA production line of Bai Li). It is capable of producing GSM, CDMA and PHS mobile phones with a large variety of functions specified by customers as well as assembling LCD modules for mobile phones.

Pursuant to the Industrial Cooperation Contract signed in December 1996, the Philips Group granted Sang Fei the right to use certain technology of the Philips Group for the manufacture of specified products, and provided Sang Fei with related technological support and consultancy services in return for technological support fees. Sang Fei has benefited greatly from the transfer by the Philips Group of its know-how and technology in mobile phone production. In view of the Philips Group’s publicly stated plan to refocus its mobile phone business activities by ceasing to be an independent manufacturer of mobile phones while continuing to sell Philips branded mobile phones through its sales and distribution channels, in October 2001 the Philips Group agreed to transfer 65% equity interest in Sang Fei to CEC Group (see section 3 “History and Development” above). Concurrently, the Industrial Cooperation Contract was terminated and the Cooperation Agreement was signed, pursuant to which Sang Fei was granted the exclusive right to manufacture mobile phones for the Philips Group.

To capitalise on the know-how and experience it has gained, the continuous support from the Philips Group as its main customer, and the support which the CEC Group could provide in the PRC in terms of design capabilities and distribution channels, since 2002, Sang Fei has been actively seeking to build up an alternative OEM customer base and also to develop its own-branded mobile phone products and related ODM capabilities, with a long term view to becoming a leading consumer communications products provider in the PRC with a balanced portfolio of products, comprising its own-branded products and other OEM and ODM products.

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Overview of key drivers of Sang Fei’s turnover and profitability

Sang Fei being principally an OEM mobile phone manufacturer, fluctuations of Sang Fei’s turnover and profitability are primarily subject to the following factors:

(i) In respect of Philips branded products:
production orders from Philips;
level of costs for manufacturing Philips branded mobile phones; and
its ability to control other costs.

Sales by Sang Fei of Philips branded products are made to the Philips Group at a price determined using a cost-plus basis, whereby “cost” primarily represents normal production costs, overheads, and general and administrative expenses. That notwithstanding, Sang Fei could enjoy incentive benefits on a case by case basis for improvement of its production processes and reduction of material cost. This business arrangement has been documented and formalised in 2002 pursuant to the Cooperation Agreement. As a result, the turnover in respect of Philips branded mobile phones is a function of (a) production orders from Philips; and (b) costs of manufacturing Philips branded mobile phones.

The sales of Philips branded products offer Sang Fei a significant source of revenue which, though fluctuating along with the production orders from Philips in response to market demand of Philips branded mobile phones, provides Sang Fei with a relatively high level of visibility of its turnover, and a sustainable margin.

(ii) In respect of other OEM products:
its ability to attract and retain new OEM customers;
market price level; and
its ability to control costs.

Sang Fei’s alternative OEM business is no different in substance from the OEM business of Philips branded products. Sales by Sang Fei of other OEM products are made at either a price determined using a cost-plus basis or “fixed charge” basis, whereby the manufacturing cost per unit is pre-agreed between Sang Fei and its OEM customers, or a pre-agreed market price or “fixed price” basis, whereby the sale price per unit is pre-agreed between Sang Fei and its OEM customers. As a result, the turnover in respect of other OEM mobile phone products is a function of (a) production orders from alternative OEM customers; (b) in the case where sales are made on a cost-plus basis, costs of manufacturing other OEM mobile phones; and (c) in the other cases, market price level.

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(iii) In respect of own-branded products:
the ability of its product development to match the taste and demand of consumers;
its ability to market new models of mobile phones to consumers;
its ability to control costs;
prices of raw materials, fluctuations of which affect Sang Fei’s cost of sales; and
selling prices of mobile phones in general in the PRC mobile phone market.

A general decline trend in same-model ASPs of mobile phones has been observed over the past several years in the PRC mobile phone market along with a general decrease in cost of raw materials and an increase in competition. As such, Sang Fei has been actively pursuing its diversification strategy and has continuously produced new models of mobile phones. In addition, the impact of declining ASPs has been in large offset by the reduction in raw material costs as a result of decline in raw material prices as well as increasing economies of scale enjoyed by Sang Fei.

Sang Fei’s business has been characterised by rapid growth in mobile phone production output over the track record period, which was mainly attributable to continuously increasing sale of Philips branded mobile phones throughout the track record period as well as fast-growing sale of own-branded mobile phones starting from 2002. Sang Fei’s mobile phone production output has more than doubled during the track record period, increasing from approximately 2.5 million units in 2001 to approximately 5.5 million units in 2003.

Sang Fei’s turnover has increased from approximately RMB2.8 billion in 2001 to approximately RMB3.0 billion in 2003, representing a CAGR of approximately 5.1%.

(b) Sources of revenues

Turnover

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

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The table below sets out the breakdown of Sang Fei’s turnover by business segments for each of the three years ended 31st December, 2001, 2002 and 2003, respectively:

Philips brand products: Distribution through wholesalers Philips brand products: OEM Elimination Philips branded products OEM other products Own brand products Total Turnover Growth (YoY)	2001 % of RMB’000 Total 2,140,577 2,382,561 (1,812,888) 2,710,250 99% 40,564 1% – – 2,750,814 100.0% – –	2002 % of RMB’000 Total – 1,993,491 – 1,993,491 98% 33,105 2% 4,568 0% 2,031,164 100.0% (26.2%) –	2003 % of RMB’000 Total – 2,752,548 – 2,752,548 91% 163,512 5% 119,627 4% 3,035,687 100.0% 49.5% –	2003 % of RMB’000 Total – 2,752,548 – 2,752,548 91% 163,512 5% 119,627 4% 3,035,687 100.0% 49.5% –
	2,710,250 40,564 –		2,752,548 163,512 119,627	91% 5% 4%
	2,750,814 –		3,035,687 49.5%	100.0% –

Sang Fei is currently the Philips Group’s exclusive manufacturer of mobile phone products. Philips branded products have been a major contributor to Sang Fei’s turnover during the track record period. Nevertheless, since 2002 Sang Fei has been taking initiatives to diversify its sources of revenues by building up an alternative OEM customer base, and developing its own-branded mobile phone products and related ODM capabilities. Consequently for the year ended 31st December, 2003 the sales of non- Philips branded products corresponded to approximately 9% of the turnover, compared with approximately 2% in 2002 and approximately 1% in 2001. For the year ended 31st December, 2003, the absolute amount of sales of Philips branded mobile phones increased by approximately 38.1% compared with 2002, but its proportion in Sang Fei’s total turnover declined to about 91%, from approximately 98% of the total turnover in 2002 and approximately 99% in 2001, due to the growing importance of sales of other OEM as well as own-branded mobile phones.

As an OEM manufacturer, Sang Fei generally does not engage in sales and distribution of its OEM customers’ mobile phone products, except for certain Philips branded products sold in the PRC prior to 2002 when Sang Fei also handled liaison and negotiations with the PRC distributors of Philips branded products, and the administration and execution of arrangements with those distributors, at the request of the Philips Group being Sang Fei’s major OEM customer. Since 2002 following the transfer of its 65% equity interest in Sang Fei to CEC Group, the Philips Group has retained the sales and distribution functions for Philips branded products and Sang Fei has started to sell Philips branded products in the PRC directly to the Philips Group instead of handling the

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distribution for the Philips Group in the PRC. As a result, the revenue and related costs attributable to the sales and distribution functions for Philips branded products were no longer booked by Sang Fei. The turnover of Philips branded products on an OEM basis increased from approximately RMB2.4 billion in 2001 to approximately RMB2.8 billion in 2003, representing a CAGR of approximately 7.5%.

Set out below is a geographical analysis of Sang Fei’s turnover for each of the three years ended 31st December, 2001, 2002 and 2003, respectively:

Mainland China Hong Kong Other Asia EMEA-Europe Total Turnover	2001 RMB’000 % 2,181,141 79% 24,708 1% 213,734 8% 331,231 12% 2,750,814 100%	2002 RMB’000 % 1,172, 120 58% 27, 341 1% 281,912 14% 549,791 27% 2,031,164 100%	2003 RMB’000 % 1,443,469 48% 53,065 2% 407,330 13% 1,131,823 37% 3,035,687 100%	2003 RMB’000 % 1,443,469 48% 53,065 2% 407,330 13% 1,131,823 37% 3,035,687 100%
				100%

Mainland China represents the biggest market of Sang Fei, accounting for approximately 48% of Sang Fei’s total turnover in 2003, followed by EMEA – Europe, Other Asia and Hong Kong.

Other revenues

The following is a breakdown of total revenues by sources for each of the three years ended 31st December, 2001, 2002 and 2003, respectively:

Turnover Other revenues (Note) Total revenues Growth (YoY)	2001 RMB’000 % 2,750,814 99% 15,495 1% 2,766,309 100% – –	2002 RMB’000 % 2,031,164 99% 20,931 1% 2,052,095 100% (25.8%) –	2003 RMB’000 % 3,035,687 99% 19,930 1% 3,055,617 100% 48.9% –	2003 RMB’000 % 3,035,687 99% 19,930 1% 3,055,617 100% 48.9% –
				100% –

Note: Other revenues comprise mainly interest income, write-off of long-term outstanding payables, OEM processing fees, margin recovery and profit on disposal of fixed assets. Write-off of long-term outstanding payables amounted to approximately RMB6.5 million, RMB5.8 million and nil in 2001, 2002 and 2003, respectively. Sang Fei has lost contact with and received no payment request from certain third party suppliers for over 4 years (up to 31st March, 2004). Therefore, such long outstanding payables were written-off accordingly. Margin recovery is a charge to the Philips Group for the mobile phone manufacturing processes outsourced to manufacturers other than Sang Fei, pursuant to the Cooperation Agreement under which Sang Fei was granted the exclusive right to manufacture mobile phones for the Philips Group.

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Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

(c) Cost of sales

Sang Fei’s cost of sales mainly comprise cost of raw materials consumed, labour costs and production overheads.

Cost of raw materials represented over 90% of cost of sales during the track record period and is a major component of the cost basis of Sang Fei. As a result, the fluctuations of Sang Fei’s cost of raw materials have a significant impact on the overall cost structure as well as the turnover in respect of sales of Philips branded products and of certain other OEM products, as they are made at a price calculated on cost-plus basis.

(d) Operating expenses

Operating expenses are recognised on an accrual basis.

Sang Fei’s operating expenses mainly consist of distribution costs, administrative expenses and other operating expenses.

Distribution costs are mainly comprised of selling expenses, marketing expenses and after-sales services costs, whose details will be further provided in “(g) Results of operations” below.

Administrative expenses mainly include staff costs, depreciation charges, technical assistance fees to the Philips Group (for the year ended 31st December, 2001), corporate service fees made to the Philips Group (from 2002 onwards), inventories provisions and consulting fees, which will be described in more detail in “(g) Results of operations” below.

For each of the two years ended 31st December, 2001 and 31st December, 2002, full provision is made against inventory which is not covered by orders for over 6 months. Starting from the year ended 31st December, 2003, inventory level is reviewed by management of Sang Fei on a monthly basis. Full provision is made against inventory which the management considers, having regard to historical utilisation level and also expected production orders, is excess to requirement.

Other operating expenses comprise mainly loss on disposal of fixed assets, repairment charges, bank charges and exchange differences.

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(e) Segment Results

Each segment result is defined as turnover for that segment less direct operating expenses but before unallocated revenue and unallocated costs.

(f) Taxation

Sang Fei’s income is subject to the PRC corporate income tax. As Sang Fei qualifies as a foreign investment production enterprise and is established in Shenzhen Special Economic Zone in the PRC, the prevailing enterprise income tax rate is 15%. As approved by the tax authorities in 1998, Sang Fei is entitled to exemption from income taxes for two years followed by a 50% tax reduction for three years, commencing from the year ended 31st December, 2000, the first cumulative profit-making year net of losses carried forward. Enterprise income taxes have been provided at the rate of zero, 7.5% and 7.5% on the estimated fiscal assessable profit for each of the three years ended 31st December, 2001, 2002 and 2003, respectively. This explains the relatively low or zero effective tax rates that Sang Fei experienced during the track record period, which were approximately zero, 9.9% and 8.0% for the three years ended 31st December, 2001, 2002 and 2003, respectively, as set out in the table below. The difference between the fiscal and effective tax rates comes from the difference between the fiscal and accounting assessable profits, which is mainly attributable to the different depreciation annual rates adopted by Sang Fei and the PRC tax authority.

Profit before taxation Taxation Effective tax rate	2001 RMB’000 253,601 – –	2002 RMB’000 87,447 8,686 9.9%	2003 RMB’000 68,330 5,499
			8.0%

On 30th June, 2003, Sang Fei received a notification from Shenzhen Nanshan District State Tax Bureau requiring it to pay additional export taxation of RMB9,550,409.54. Sang Fei has paid the additional taxation as required, but filed an application on 12th September, 2003 with the Shenzhen State Tax Bureau for administrative review against the decision made by Shenzhen Nanshan District State Tax Bureau. On 12th December, 2003, the Shenzhen State Tax Bureau overruled the decision of the Shenzhen Nanshan District State Tax Bureau and ordered that it should make a new decision on the appropriate way to handle this matter. As at 12th March, 2004, Shenzhen Nanshan District State Tax Bureau

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issued another notification to Sang Fei to confirm their original decision. Sang Fei is seeking review of their decision and has on 14th May, 2004 lodged its appeal application with the Shenzhen State Tax Bureau and the application has been accepted by Shenzhen State Tax Bureau and is in process.

(g) Results of operations

Year ended 31st December, 2001

Turnover

As at 31st December, 2001, with the introduction of the third SMA production line in the second half of 2001, Sang Fei achieved a total production output of approximately 2.5 million mobile phones for the year ended 31st December, 2001.

Turnover amounted to approximately RMB2.8 billion, of which approximately RMB2.7 billion or approximately 99% of total turnover was attributable to the sales of Philips branded products and the remaining RMB40.6 million or approximately 1% of total turnover was attributable to sales of other OEM products. The turnover of Philips branded products consisted approximately RMB2.1 billion and RMB2.4 billion attributable to the distribution through wholesalers and sales on an OEM basis respectively before the elimination of internal sales of approximately RMB1.8 billion.

The ASP amounted to approximately RMB1,113 in 2001. Nevertheless, based on the OEM (both Philips branded OEM and other OEM) turnover of approximately RMB2.4 billion, the ASP was approximately RMB980.

Cost of sales

Cost of sales mainly comprised cost of raw materials consumed, labour costs and production overheads representing approximately 95.1%, 0.4% and 4.5% of the total cost of sales, respectively, totalling approximately RMB2.1 billion.

Gross margin

Gross profit was approximately RMB679.9 million, representing a gross margin of approximately 24.7%.

Distribution costs

Distribution costs comprised mainly selling expenses, marketing expenses and after-sales services costs incurred in distributing Philips branded products in the PRC, totalling approximately RMB214.2 million. This amount was incurred as Sang Fei was required to handle the sales and distribution functions for Philips branded products.

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Administrative expenses

Administrative expenses amounted to approximately RMB205.5 million, comprising mainly technical assistance fees to the Philips Group, staff costs, depreciation charges, inventories provisions and consulting fees.

Segment results

Segment results amounted to approximately RMB386.9 million, of which Philips branded products distributed through wholesalers represented approximately RMB116.1 million or 30% of the total segment results, Philips branded OEM products represented approximately RMB258.0 million or 67% of the total segment results, with other OEM products contributing to the balance.

The overall segment results margin was approximately 14.1%, the segment results margin of Philips branded products (which consist of Philips branded products distributed through wholesalers and Philips branded OEM products) was approximately 13.8%, and the segment results margin of other OEM products was approximately 31.3%.

Operating margin and net margin

Sang Fei’s operating profit amounted to approximately RMB253.6 million and the operating margin was approximately 9.2%.

Net profit was approximately RMB253.6 million, representing a net margin of approximately 9.2%, with nil taxation and finance costs incurred.

Year ended 31st December, 2002 compared to year ended 31st December, 2001

In October 2001, the Philips Group agreed to transfer 65% equity interest in Sang Fei to CEC Group and registration of such transfer took place in April 2002 (please see section 3 “History and Development” above). Concurrently, the Industrial Cooperation Contract was terminated and the Cooperation Agreement was signed. In addition, as explained above, Sang Fei has started to sell Philips branded products directly to the Philips Group instead of handling the distribution for the Philips Group in the PRC as requested by the Philips Group previously.

These said changes had an impact on Sang Fei’s financial results from 2002 onwards, in particular in the following aspects:

The revenue attributable to the sales and distribution functions for Philips branded products was no longer booked in Sang Fei’s turnover.

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– Correspondingly, selling, marketing and after-sales service expenses incurred by the sales and distribution functions for Philips branded products ceased to exist. Regarding after-sales service expenses, Sang Fei gives 15-month warranties on certain products and undertakes to repair or replace items that fail to perform satisfactorily. Provisions are recognised for expected warranty claims based on past experience of the level of repairs and returns. Warranty expenses generally decline from 2002 onwards when compared to previously, as Sang Fei is no longer responsible for the warranty of Philips branded products. Warranty expenses increased in 2003 compared to 2002, which were incurred for Sang Fei’s own-branded products.

Sang Fei is no longer required to pay any technical assistance fees pursuant to the Industrial Cooperation Contract (by which the Philips Group receives technical assistance fees from Sang Fei for the manufacture and sale of products which are designed in-house by the Philips Group) to the Philips Group.
Sang Fei started to pay service fees for certain corporate services from the Philips Group which Sang Fei used to enjoy free of charge when it was a subsidiary of Philips (see section 10C(ii) “Relationship with the Philips Group – Transactions with the Philips Group – Corporate services arrangement” below).

Turnover

Sang Fei’s business continued to grow as an OEM manufacturer in 2002 compared with 2001. In the first half of 2002 a fourth SMA production line was added in anticipation of an increase in orders from the Philips Group. Sang Fei’s total output amounted to approximately 3.7 million mobile phones for the year ended 31st December, 2002, up approximately 46.4% compared with the previous year.

Turnover of Sang Fei, however, decreased by approximately 26.2% to approximately RMB2.0 billion, of which sales of Philips branded products accounted for approximately 98%. The decrease in turnover was primarily due to (a) the revenue attributable to the sales and distribution functions for Philips branded products was no longer booked in Sang Fei’s turnover; and (b) a decline in the turnover of OEM products (both Philips branded OEM and other OEM products), which outweighed the sale of own-branded products amounting to approximately RMB4.6 million in 2002.

Sang Fei’s OEM turnover decreased by approximately 16.4% from approximately RMB2.4 billion in 2001 to approximately RMB2.0 billion in 2002, primarily due to (a) a general reduction in cost of materials, as the majority of Sang Fei’s OEM sales were made at a price determined by adding a fixed margin to its costs; and (b) a general decline in selling prices of mobile phones in light of the intense competition in the PRC. The above mentioned reasons outweighed the effect of an increase in output and sales volume.

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The overall ASP dropped by approximately 50.0% to approximately RMB556 in 2002 from the actual ASP of RMB1,113 in 2001, which was mainly attributable to (a) the fact that Sang Fei no longer captured the margin attributable to the sales and distribution functions for Philips branded products; (b) the above mentioned decrease in cost of materials; and (c) the said general price erosion in the PRC mobile phone market. The OEM ASP dropped by approximately 43.4% from approximately RMB980 in 2001 to approximately RMB555 in 2002, mainly due to reasons stated in (b) and (c) above.

In November 2002, Sang Fei launched its first own-branded mobile phone 彩蝶 860 (Butterfly 860) in light of its diversification strategy to build up an alternative OEM customer base and to develop its own-branded mobile phone products and related ODM capabilities.

Cost of sales

Cost of sales decreased by approximately 11.4% to approximately RMB1.8 billion, mainly due to a decline in cost of raw materials, which declined by approximately 12.8% due to lower unit raw material prices during the year as a result of lower prevailing market prices and also an approximately 4.3% discount by way of incentive given by the Philips Group under the Cooperation Agreement for materials bulk purchased through it (as in 2001 but with Sang Fei being involved in direct negotiations with ultimate vendors which has help reduced material costs significantly that year). Raw materials represented approximately 93.7% of the total cost of sales, labour costs represented approximately 0.6%, and production overheads represented the remaining balance of approximately 5.7%.

Gross margin

Gross profit decreased by approximately 71.0% to approximately RMB197.2 million representing a gross margin of approximately 9.7%, which declined from approximately 24.7% in the previous year, mainly due to sales made by Sang Fei no longer capturing margin attributable to the sales and distribution functions for Philips branded products and a lower cost-plus margin compared to that enjoyed by certain products manufactured in 2001. This outweighed the effect of the incentive discount given by the Philips Group for materials sourced through it described above. Without the incentive discount, the gross margin would have been reduced further to approximately 6.0%.

Distribution costs

The distribution costs were slashed by approximately 92.8% to RMB15.4 million approximately, as the selling, marketing and after-sales service expenses incurred by the sales and distribution functions for Philips branded products were no longer recorded by Sang Fei. The distribution costs incurred were mainly for promotion of Sang Fei’s own brand name, sales and advertising of its ownbranded products and the development of alternative OEM and ODM customers.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Administrative expenses

Administrative expenses were reduced by approximately 51.7% to approximately RMB99.3 million, mainly because Sang Fei no longer needed to pay any technical assistance fees to the Philips Group. Sang Fei, instead, commenced paying corporate service fees to the Philips Group.

Segment results

Segment results decreased by approximately 56.3% to approximately RMB169.1 million, of which Philips branded OEM products represented approximately RMB157.0 million or 93% of the total segment results, other OEM products represented approximately RMB12.0 million or 7% of the total segment results, with minimal contribution from the newly developed own-branded products.

The overall segment results margin declined from approximately 14.1% in 2001 to approximately 8.3% in 2002, primarily due to that sales made by Sang Fei no longer captured margin attributable to the sales and distribution functions for Philips branded products and the decline in segment results margin of Philips OEM products as explained below.

The segment results margin of OEM products (both Philips branded OEM and other OEM products) decreased from approximately 11.2% in 2001 to approximately 8.3% in 2002, mainly due to a decline in segment results margin of Philips OEM products as a result of a lower cost-plus margin than that for certain products manufactured in 2001, which outweighed the effects of the incentive discount given by the Philips Group for materials sourced through it described above. Without the incentive discount, the segment results margin of Philips branded OEM products and of OEM products as a whole would be reduced further to approximately 4.1% and 4.6% respectively. The segment results margin of other OEM products increased from approximately 31.3% to 36.2% mainly due to a decline in raw material costs for products sold on a fixed price basis. The segment results margin of the own-branded products was approximately 1.9%.

Operating margin and net margin

Operating profit was approximately RMB90.3 million representing an operating margin of approximately 4.4%, compared to approximately 9.2% in 2001.

Net profit was approximately RMB78.8 million with a taxation of approximately RMB8.7 million and finance costs of approximately RMB2.9 million, leaving net margin at approximately 3.9% compared to approximately 9.2% in the previous year.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Year ended 31st December, 2003 compared to year ended 31st December, 2002

Turnover

Sang Fei’s annual production capacity was increased to over 10 million mobile phones in 2003 in anticipation of a pick-up in mobile phone sales in the second half of the year and the total output for the year ended 31st December, 2003 reached approximately 5.5 million mobile phones, rising by approximately 50.5% compared with the previous year.

Sang Fei achieved a turnover of approximately RMB3.0 billion, of which approximately 91% was attributable to sales of Philips branded mobile phones. The turnover went up by approximately 49.5% when compared to 2002 with increased sales volume for Philips branded, other OEM and own-branded mobile phones, despite the negative impact of the Severe Acute Respiratory Syndrome (SARS) disease on the PRC mobile phone sales in general during the first half of 2003. Sang Fei’s OEM turnover increased by approximately 43.9% from approximately RMB2.0 billion in 2002 to approximately RMB2.9 billion in 2003, and turnover of own-branded products increased substantially, mainly due to (a) certain new models launched by Sang Fei after SARS were well received by the market; and (b) an increase in cost of materials (for products sold on cost-plus basis), which was primarily attributable to the introduction of new mobile phone models with more advanced features and new technologies hence demanding more complicated and expensive materials. In 2003, Sang Fei has produced 8 series of Philips branded mobile phones (with 15 models) and 11 models of other OEM mobile phones and 3 models of own-branded mobile phones.

The overall ASP was approximately RMB563, which increased moderately by approximately 1.3% when compared to 2002, as higher prices of newly introduced models with more advanced features and new technologies offset the effect of the declining selling prices of older models. The OEM ASP remained broadly unchanged at approximately RMB550 in 2003, compared to approximately RMB555 in 2002.

Cost of sales

Cost of sales rose by approximately 56.6% when compared to 2002 amounting to approximately RMB2.9 billion, of which cost of raw materials, labour costs and production overheads represented approximately 95.5%, 0.8% and 3.7%, respectively. Cost of raw materials went up by approximately 59.6% when compared to 2002 despite a general decline in unit raw material prices, which was mainly attributable to (a) an increase in sales volume; and (b) the introduction of new models with more advanced features and new technologies hence demanding more complicated and expensive materials.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Gross margin

Sang Fei’s gross profit reached approximately RMB164.3 million, representing a gross margin of approximately 5.4% in 2003, compared with approximately 9.7% in 2002 (or approximately 6.0% without the 2002 incentive discount). The decrease in gross margin was mainly due to the increase in overall cost of sales as stated above. The general decline in selling price in the PRC mobile phone industry and the SARS outbreak adding further pressure on mobile phone prices in the first half of 2003 also contributed to such decrease.

Distribution costs

In line with the strong turnover growth for OEM and own-branded products, distribution costs comprising, inter alia, advertising and marketing expenses for new products, increased by approximately 88.8% to reach approximately RMB29.0 million.

Administrative expenses

Administrative expenses amounted to approximately RMB56.0 million, a decrease of approximately 43.6% when compared to 2002, mainly attributable to a decrease in service fees paid to the Philips Group as less corporate services were demanded by Sang Fei from the Philips Group during the year.

Segment results

Segment results decreased moderately by approximately 2.0% to approximately RMB165.8 million, of which Philips branded OEM products represented approximately RMB143.5 million or 87% of total segment results, other OEM products represented approximately RMB15.2 million or 9% of total segment results, with the balance of approximately RMB7.1 million or 4% of total segment results for own-branded products.

The overall segment results margin declined from approximately 8.3% in 2002 to approximately 5.5% in 2003 mainly due to a decline in the segment results margin of OEM products (both Philips branded OEM and other OEM products), which outweighed an increase in the segment results margin of ownbranded products.

The segment results margin of OEM products decreased from approximately 8.3% in 2002 to approximately 5.4% in 2003, due to (a) the absence of the incentive discount given by Philips Group for materials sourced through it; and (b) a decline in segment results margin of other OEM products to 9.3% mainly

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due to the said increase in cost of raw materials and an increase in the proportion of other OEM products manufactured on a fixed charge basis. Without the incentive discount in 2002, the segment results margin of OEM products in 2002 would have been approximately 4.6%, being comparable to the 2003 segment results margin. The segment results margin of own-branded products increased from approximately 1.9% in 2002 to approximately 6.0% in 2003, mainly due to reduced cost through economies of scale due to an increase in sales volume.

Operating margin and net margin

Sang Fei’s operating profit decreased by approximately 16.7% year-onyear to reach approximately RMB75.2 million, and the operating margin declined to approximately 2.5% compared to approximately 4.4% in 2002.

Its net profit declined accordingly by approximately 20.2% to reach approximately RMB62.8 million, representing a net margin of approximately 2.1% compared to approximately 3.9% in 2002.

C. Indebtedness

Borrowings, security and guarantees

As at the close of business on 31st March, 2004 being the latest practicable date for the purpose of ascertaining such information prior to the printing of this Circular, Sang Fei had outstanding borrowings of RMB480 million.

Contingent liabilities

As at the close of business on 31st March, 2004, Sang Fei did not have any contingent liabilities.

Disclaimers

Save as disclosed in this section 8C “Indebtedness” and in Appendix I of this Circular and apart from intra group liabilities, Sang Fei did not have outstanding at the close of business on 31st March, 2004 any loan capital, bank overdrafts and liabilities, debentures, mortgages, charges or loans or similar indebtedness or liabilities under acceptances (other than normal trade bills), acceptance credits, debentures, mortgages, charges, finance leases or hire purchases commitments, guarantees or other material contingent liabilities. The New Directors confirm that there are no material covenants on the outstanding bank loans and guarantees of Sang Fei.

Save as disclosed in this section 8C “Indebtedness” and in Appendix I of this Circular, Sang Fei does not have any debt securities issued and outstanding, and authorised or otherwise created but unissued, and term loans, distinguishing between guaranteed, unguaranteed, secured and unissued since 31st March, 2004.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Save as disclosed in this section 8C “Indebtedness”, the New Directors are not aware of any material change in the financial or trading position or prospects of Sang Fei since 31st December, 2003, the date to which the latest audited financial statements of Sang Fei were made up nor were they aware of any interruptions in the business of Sang Fei which may have or have had a significant effect on the financial position for the 12 months period up to the Latest Practicable Date.

The New Directors confirmed that they have performed sufficient due diligence on Sang Fei to ensure that there has not been material changes in the financial position of Sang Fei since 31st December, 2003 and that there is no event which is not otherwise disclosed in the Circular that would materially affect the information as shown in the accountants’ report as set out in the Circular.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the rates of exchange prevailing at the close of business on 31st March, 2004.

D. Disclosure under Rules 13.13 to 13.16 of the Listing Rules

As at 31st December, 2003, the aggregate receivables due to the New Group from Philips Group was RMB876.4 million, the percentage ratios (as defined in the Listing Rules) in respect of which exceed 8% of (using for the purpose of the “assets test” and “revenue test”) the relevant pro forma combined figures of the New Group as at 31st December, 2003 as shown in Appendix III to this Circular and the market capitalisation of Winsan as at the Latest Practicable Date. A breakdown of these receivables, all of which are interest free, are as follows:

	Balance as at
Nature of receivables	31st December, 2003
	RMB’000
Trade receivables, in the ordinary and
usual course of business, for the sales of mobile phones	861,678
Other receivables	14,708

Save as disclosed above, as at the Latest Practicable Date, the Directors are not aware of any circumstances which would require disclosure under Rules 13.13 to 13.16 of the Listing Rules immediately after Completion.

E. Liquidity, capital resources and capital expenditures

During the track record period Sang Fei’s principal sources of liquidity have been cash generated from its operations and short-term bank loans.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Working capital

Sang Fei’s working capital surplus (defined as net current assets, being the difference between current assets and current liabilities) was approximately RMB223.4 million, RMB141.7 million, and RMB203.1 million for each of the years ended 31st December, 2001, 2002 and 2003, respectively. As at 31st March, 2004, the working capital surplus of Sang Fei was approximately RMB230.9 million.

The decrease in Sang Fei’s working capital surplus from 2001 to 2002 was mainly due to the decrease in inventories, reduced cash balances and increased short term bank loans, partially offset by the increase in trade and other receivables, and decrease in trade and other payables.

The increase in Sang Fei’s working capital surplus from 2002 to 2003 was principally attributable to the increase in trade and other receivables and increase in inventories, partially offset by the increase in trade and other payables and increased short term bank loans.

Short term bank loans were raised periodically to meet liquidity needs in light of the fluctuating working capital requirements, being mainly the changes in trade receivables, inventories and trade payables. Set out below is an analysis on the fluctuation of trade receivables, inventories and trade payables as of 31st December, 2001, 2002 and 2003.

Trade receivables, inventories and trade payables

The following table contains detailed information relating to Sang Fei’s trade receivables turnover days, inventories turnover days, and trade payables turnover days as of 31st December, 2001, 2002 and 2003, respectively:

	2001	2002	2003
Trade receivables – net
(RMB’000)	265,087	482,719	1,002,848
Turnover days(1)	35	87	121
Inventories_(RMB’000)_	144,972	69,174	270,163
Turnover days(2)	19	12	32
Trade payables_(RMB’000)_	377,789	188,117	724,151
Turnover days(3)	50	34	87

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

(1) Calculated as: (Trade receivables/Turnover) * 365 days (2) Calculated as: (Inventories/Turnover) * 365 days
(3) Calculated as: (Trade payables/Turnover) * 365 days

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Trade receivables
Trade payables
Inventories
Orders Delivery of Settlement Settlement
received orders of trade of trade
payables receivables
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As part of Sang Fei’s operations, Sang Fei’s fluctuating trade receivables, inventories and trade payables are mainly due to fluctuations in orders received throughout each of the years during the track record period. Sang Fei needs to build up inventory for the purposes of meeting the orders received which have to be delivered in the following months. This creates a time lag between the time when Sang Fei is obliged to pay its suppliers and when Sang Fei is paid by its customers. Sang Fei’s management considers that the incongruity between the trade receivables’ and trade payables’ turnover period to be manageable as: (a) most of Sang Fei’s trade receivables were due within 30 days historically, reflecting its 30-60 day credit policy (the trade receivables of Sang Fei due within 30 days as of 31st December, 2001, 2002 and 2003 representing approximately 100.0%, 93.5% and 99.5% of the corresponding total trade receivables balances respectively); (b) a significant part of trade receivables is covered by bank guarantee provided by its customers as per Sang Fei’s request; and (c) if there is any temporary cash flow shortfall, it can be covered by its available banking facilities, which amounted to approximately RMB800 million as at 31st March, 2004, of which approximately RMB120 million was unutilised as of the same date.

Sang Fei’s trade receivables turnover rose from 35 days in 2001 to 87 days in 2002, mainly due to the better than expected sales in the later part of 2002; monthly sales volume of Sang Fei increased from approximately 253,000 units in January 2002 to approximately 314,000 units in December 2002. In addition, the credit policy of 45 days for PRC sales and 60 days for export of Philips branded products, with payment obligations covered by bank guarantee or documents against acceptance arrangements, compared with a cash on delivery or a 30-day credit period for PRC sales and 60 days for export as adopted previously, contributed to such change. However, most of Sang Fei’s trade receivables as of 31st December, 2003 have been outstanding for a period of 30 days or less, representing approximately 93.5% of the corresponding total trade receivables

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

balances as of 31st December, 2002, in line with Sang Fei’s 30-60 day credit policy. Sang Fei’s inventories turnover decreased from 19 days in 2001 to 12 days in 2002, as it no longer assumes the responsibility of distributing Philips branded mobile phones. Also, Sang Fei in general adopts the policy of manufacturing only according to orders received and such stringent measures adopted by Sang Fei to strengthen the control and management for inventories in order to reduce raw materials kept for production also contributed to the decrease. Trade payables turnover decreased from 50 days in 2001 to 34 days in 2002 due to the settlement of certain accounts payable incurred historically and along with the said decrease in inventories.

Sang Fei’s trade receivables turnover increased from 87 days in 2002 to 121 days in 2003, mainly due to a sharp increase in period end trade receivables balance as a result of introduction of some well-received new mobile phone models in the second half of 2003 translating into higher sales amount towards the end of the year; monthly sales volume of Sang Fei increased from approximately 168,000 units in January 2003 to approximately 864,000 units in December 2003 (see graph below). In addition, there was in general an increasing sales trend from mid 2003 onwards after the extinguishment of SARS in the PRC, also resulting in an increase in period end trade receivables. However, out of the trade receivables balance as at 31st December, 2003, approximately 99.5% were within 30 days, which was in line with the existing credit policy adopted by Sang Fei. Sang Fei’s inventories turnover increased sharply from 12 days in 2002 to 32 days in 2003 since orders during the later part of 2003 were largely on an increasing trend and the figure also reflected the need to fulfil the orders received in later part of 2003 to be delivered in the following months. Trade payables turnover increased substantially from 34 days in 2002 to 87 days in 2003, along with the robust increasing trend in sales and orders received during the later part of 2003.

Robust increasing trend in sales volume of Sang Fei in 2H 2003 (’000 units)

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900
800
700
600
500
400
300
200
100
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Cash flows

The table below summarises Sang Fei’s cash flow data for each of the years ended 31st December, 2001, 2002 and 2003, respectively:

Net cash inflow/(outflow) from operating activities Net cash (outflow)/inflow from financing activities Net cash (outflow)/inflow from investing activities Increase/(decrease) in cash and cash equivalents	2001 RMB’000 515,197 (152,150) (35,218) 327,829	2002 RMB’000 (444,421) (25,984) (42,441) (512,846)	2003 RMB’000 (140,487) 178,520 (48,092) (10,059)

For each of the years ended 31st December, 2001, 2002 and 2003, Sang Fei recorded net cash inflow/(outflow) of approximately RMB327.8 million, RMB(512.8) million and RMB(10.1) million, respectively. Cash and cash equivalents were approximately RMB547.8 million, RMB34.9 million and RMB24.9 million as of 31st December, 2001, 2002 and 2003, respectively.

In 2001 Sang Fei had a net cash inflow from operating activities of approximately RMB515.2 million, which arose mainly from a healthy operating profit, a decrease in inventories and a decrease in trade and other receivables. Net cash outflow from financing activities was approximately RMB152.2 million, which was for payment of dividends. Sang Fei’s net cash outflow from investing activities was approximately RMB35.2 million, which was mainly due to capital expenditure of approximately RMB46.0 million incurred mainly for the purchase of an SMA production line.

In 2002 Sang Fei had net cash outflow from operating activities of approximately RMB444.4 million, which was principally due to a moderate operating profit, an increase in trade and other receivables and a decrease in trade and other payables as explained above. Net cash outflow from financing activities was approximately RMB26.0 million, which was primarily attributable to payment of dividends of approximately RMB200.8 million, partially offset by net borrowings in bank loans (defined as cash received from new bank loans minus cash paid to repay bank loans) of RMB150 million. Sang Fei’s net cash outflow from investing activities was approximately RMB42.4 million, which was principally due to capital expenditure of approximately RMB46.9 million incurred mainly for the purchase of one SMA production line.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

In 2003 Sang Fei recorded net cash outflow from operating activities of approximately RMB140.5 million, which was principally due to a moderate operating profit, an increase in inventories and an increase in trade and other receivables, partially offset by an increase in trade and other payables as explained above. Net cash inflow from financing activities was approximately RMB178.5 million, which was principally attributable to net borrowings in bank loans (defined as cash received from new bank loans minus cash paid to repay bank loans) of RMB178 million. Sang Fei’s net cash outflow from investing activities was approximately RMB48.1 million, which was principally due to capital expenditure of approximately RMB48.6 million incurred mainly for the addition of one further SMA production line.

Short-term bank loans and banking facilities

Sang Fei’s short-term bank loans as at 31st December, 2001, 2002 and 2003, respectively, are set out as follows:

	2001	2002	2003
	RMB’000	RMB’000	RMB’000
Bank loans repayable within
one year, unsecured	–	150,000	328,000

The bank loans bear interest at the average borrowing rate of 4.526% per annum in both 2002 and 2003.

As at 31st March, 2004, Sang Fei had short-term bank loans of approximately RMB480 million and total available banking facilities of RMB800 million.

Capital expenditures

Sang Fei’s principal requirements for capital are in relation to the acquisition of production lines, machinery, equipments and facilities to expand its production capacity.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

The following table sets out Sang Fei’s purchases of fixed assets and intangible assets for each of the years ended 31st December, 2001, 2002 and 2003, respectively:

	2001	2002	2003
	RMB’000	RMB’000	RMB’000
Purchases of fixed assets
and intangible assets	46,006	46,929	48,608
Growth (YoY)	–	2.0%	3.6%

As at 31st March, 2004, Sang Fei had capital commitments (contracted but not executed) for acquisition of machinery of approximately RMB24,367,968.

The information in relation to Sang Fei’s future plans of expansion and related capital requirements will be provided in further details in section 12 “Future Plans and Prospects”.

F. Dividend policy and working capital

Dividend policy

For each of the year ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, Sang Fei declared dividends of approximately RMB201 million, nil and nil representing approximately 79%, nil and nil of the respective years’ net profit attributable to shareholders. The various dividends were declared to reward the shareholder’s investments in Sang Fei. The New Directors consider the level of distributions appropriate and in the best interests of the New Group as a portion of the net profits from ordinary activities attributable to shareholders has also been retained to support the New Group’s expansion. The New Directors consider that it is beneficial to utilise a combination of retained profits and bank borrowings to finance the New Group’s working capital needs rather than to rely solely on retained profits for the following reasons:

(i) it maximizes the return on equity;
(ii) it maintains the commercial relationship with the banks; and
(iii) it rewards the Shareholders for their investments in the New Group and Shareholders may be inclined to invest further in the Company.

In the absence of unforeseen circumstances, the New Directors, at present, do not intend to recommend the payment of a final dividend in respect of the year ending 31st December, 2004.

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INFORMATION ON THE NEW GROUP – FINANCIAL INFORMATION

Future payment of cash dividends, if any, will be at the discretion of the New Directors and will depend on, among other things, the New Group’s future operations and earnings, cash requirements and surplus, general financial condition and other factors as the Directors may deem relevant from time to time.

Working capital

Taking into account the financial resources available to the New Group, including funds generated by operating activities and the available banking facilities but without taking into account any proceeds which may be generated from the possible Placing, the New Directors are of the opinion that the New Group has sufficient working capital for the present requirements (i.e. for the next 12 months from the date of this Circular).

G. Distributable reserves

As at 31st December, 2003, Sang Fei had distributable reserves of approximately RMB2.7 million.

H. Property interests

As at the Latest Practicable Date, the New Group does not own any properties. It leases its factory premises and staff quarters in the PRC and its principal offices in Hong Kong.

Properties leased in Hong Kong

As at the Latest Practicable Date, the Company leased its principal offices in Hong Kong at Units 904-912, 9th Floor, Sun Hung Kai Centre, 30 Harbour Road, Wanchai, Hong Kong with a total gross floor area of approximately 238 sq.m. (approximately 2,594 sq.ft.) from an independent third party. The property is used for offices only.

Properties leased in the PRC

As at the Latest Practicable Date, the New Group leased/licensed from SZST an 8-storey industrial building and portion of the adjacent industrial building in Sangda Industrial Building in Shenzhen with a total gross floor area of approximately 19,562 sq.m. (approximately 213,226 sq.ft.). Levels 1 to 6 of the 8-storey industrial building and portion of the adjacent industrial building are used as production workshops while the remaining floors of the 8-storey industrial building are occupied as offices and recreation space. Reference is made to property numbered 6 in the property valuation report in Appendix IV to this Circular in relation to the 8-storey industrial building. It is stated in the property valuation

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report that SZST has not obtained the realty title certificate of Level 8 of the building. According to a Supplemental Agreement dated 15th June, 2004, SZST warrants that it has the right to license Level 8 of the building to Sang Fei and undertakes to take all necessary steps to ensure that Level 8 of the building can be validly licensed to Sang Fei and to complete all relevant procedures (including but not limited to obtaining the realty title certificate). SZST further agrees to indemnify all loss and damages suffered by Sang Fei arising from its occupation and use of Level 8 of the building or SZST’s breach of the aforesaid warranty and undertaking within 30 days from its written demand. As advised by the PRC legal adviser of CEC, this Supplemental Agreement is binding on the parties thereto. According to a letter of undertaking by CEC dated 1st June, 2004, CEC agrees to indemnify all loss and damages suffered by Sang Fei arising from its occupation and use of Level 8 of the building within 30 days from its written demand. As advised by the PRC legal adviser of CEC, this letter of undertaking is valid and legally binding on CEC.

In addition, Sang Fei has leased as staff quarters, 60 apartments with gross floor area of approximately 2,336 sq.m. (approximately 25,462.4 sq.ft.) at Hitech Dormitory Building Nanshan District Shenzhen City and two 8-storey dormitory buildings with 168 residential units of a total gross floor area of approximately 7,162.40 sq.m. (approximately 78,070.16 sq.ft.) at Songpingshan Residential Area, Nanshan District.

Reference is made to property numbered 9 in the property valuation report in Appendix IV to this Circular in relation to the two 8-storey dormitory buildings. It is stated in the property valuation report that the lessor has not obtained the realty title certificate of the property and the tenancy agreement has not been registered with the relevant real estate management authority. The New Directors consider that there will not be any material adverse effect on the business operations of Sang Fei in the event that the office and recreation space on level 8 of the industrial building in Sangda Industrial Building and/or the staff quarters of Sang Fei is/are required to be relocated since those are not operating premises of Sang Fei, alternative residential accommodations are readily available in the vicinity and each resident employee is responsible for moving his own furnishings and belongings. In addition, CEC has provided indemnities in favour of Sang Fei against loss suffered by Sang Fei resulting from the lack of the requisite title documents and proper registration of the tenancy agreement in respect of such premises.

Information regarding the property interests of the Winsan Group is set out in section 7 of Appendix II of this Circular.

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE CEC GROUP

9. RELATIONSHIP WITH THE CEC GROUP

A. Overview

Immediately after Completion, CEC will be the controlling shareholder (as defined in the Listing Rules) of the Company. For so long as such shareholding relationship is maintained, the CEC Group (including SZST and its subsidiaries) will constitute connected persons of the Company for the purposes of the Listing Rules. SZST by virtue of being a substantial shareholder of Sang Fei and a subsidiary of CEC is also a connected person of the Company.

The CEC Group has since the formation of Sang Fei had close business relationship with Sang Fei. The New Group looks to capitalise on the strong platform and product design capabilities and extensive distribution and after sales service network of the CEC Group, both to establish its own-branded products within the PRC market and in selected markets overseas, and to strengthen its ability to provide value added services to its customers. Accordingly, certain transactions between Sang Fei and the CEC Group (including SZST and its subsidiaries) which exist as at the date of this Circular are expected to continue after Completion, further information in relation to which is set out in “Transactions with the CEC Group” below.

In addition, as Sang Fei constitutes but a small part of the business of the CEC Group, the CEC Group will after Completion continue to have businesses or investments in companies which may compete with the business of the New Group. See “Competition” below.

B. The CEC Group

Established in 1989 with the approval of the PRC State Council, CEC is a nationwide electronics and information technology conglomerate directly administered by the central government of the PRC. CEC actively focuses on and has made substantial investments in the communication/consumer electronics, semi-conductor and software sectors. In the context of the communication/consumer electronics sector, in addition to its manufacturing interests in communication/consumer electronics products, it also has major research and development capabilities as well as an extensive distribution and after sales service network for consumer electronics/communication products in the PRC. Further information on the CEC Group is set out in the Letter from CEC and also in “Competition” and “Independence of operations from/reliance on CEC” below.

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE CEC GROUP

C. Transactions with the CEC Group

Sang Fei is a joint venture company set up between CEC Group and the Philips Group and has a close business relationship with both groups. In order to comply with the requirements of the Listing Rules, CEC and Sang Fei have on 17th June, 2004, entered into the Business Services Agreement to set out the framework for the ongoing business relationship between the CEC Group and Sang Fei. The Business Services Agreement is for a term of three years expiring on 31st December, 2006. It may be renewed by the parties prior to termination for further terms, subject to compliance by Winsan with the applicable requirements under the Listing Rules. The Business Services Agreement covers (i) sale of products by Sang Fei to the CEC Group and purchase of raw materials and tooling by Sang Fei from the CEC Group; (ii) the provision of product design services by the CEC Group to Sang Fei; (iii) the provision of after sales services by the CEC Group to Sang Fei; (iv) the provision of canteen services by the CEC Group to Sang Fei; and (v) the provision of renovation services by various members of the CEC Group to Sang Fei. Such services are required to be provided, upon request by Sang Fei, on terms no less favourable than those offered to Independent Third Parties.

Apart from the Business Services Agreement, the other business relationships with the CEC Group are governed by (a) the lease agreements in relation to its factory premises and staff quarters; (b) the processing contract with Bai Li in relation to the dedicated processing services of a complete SMA production line; and (c) the trademark licence agreement. These agreements are also expected to continue after Completion.

Further details of the various types of transactions under the above agreements are set out below.

(i) Business Services Agreement
Sale of products and purchase of raw materials and tooling

Members of the CEC Group from time to time purchase products or semi-finished products from Sang Fei. One of the two existing distributors of Sang Fei’s own-branded mobile phones is a member of the CEC Group. Further, from time to time CECW and Cellon France may purchase semifinished products or products from Sang Fei for their in-house design testing purposes. Sang Fei from time to time purchases raw materials from the members of the CEC Group, such as mobile phone batteries and going forward also tooling. For the purposes of effecting maintenance and repairs of mobile phone products, Sang Fei also needs to import from time to time spare parts, which could only be done through licensed import and export companies. As the CEC Group sources spare parts for its mobile phone repair operations and it is therefore in a position to negotiate better terms of sales with foreign suppliers, Sang Fei uses it to import its requirements for spare parts.

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• Product design services

As mentioned below, CECW and Cellon France, being members of the CEC Group, are engaged in the research and development of mobile phones. Further information in relation to CECW and Cellon France is set out in section 9D “Competition” below. Apart from their holding company CEC, their minority shareholders are members of the Cellon Group, which holds itself out to be one of the leading independent design houses for wireless terminals and module design in the world. From time to time, Sang Fei may engage the services of CECW and/or Cellon France for the development of new products. Sang Fei has launched one own-branded product designed by Cellon France in 2004 and agreed to launch another one in 2004. It is also negotiating with Cellon France on additional ownbranded products for the year 2004.

• After sales services

In order to discharge its statutory product warranty obligations in respect of its own-branded products, Sang Fei has engaged 深圳桑達消費通信產品維修服務有限公司 (Shenzhen SED ARC Co. Ltd.) and 深圳市桑達㶅通電子有限公司 (Shenzhen SED Coalition Electronics Co. Ltd.), both being members of the CEC Group and subsidiaries of SZST, for product repair services in respect of its own-branded products. Shenzhen SED ARC Co. Ltd. has since 1997 been the sole repair services provider for Philips branded products and operates two major repair centres in Shenzhen and Shanghai. The New Directors consider that it is implicit from the continued appointment of Shenzhen SED ARC Co. Ltd. as a repair services provider by the Philips Group that it is capable of providing at least a reasonable quality of services. Shenzhen SED Coalition Electronics Co. Ltd. is one of Sang Fei’s 33 minor repair services providers. Sang Fei’s other minor repair services providers are Independent Third Parties. The decision to use these repair services providers are based purely on business efficacy – by reference to the quality and terms of services (including the pricing of services, payment terms and scope of services) that they could provide, and not by reason of CEC Group’s common indirect controlling ownership of those companies and Sang Fei. The principal terms of their services are no less favourable than terms on which Independent Third Party service providers retained by Sang Fei provide their services to Sang Fei.

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• Canteen services

Bai Li operates canteen facilities for its own staff. Sang Fei, instead of establishing its own canteen facilities, retains the services of Bai Li to provide canteen facilities and meals to Sang Fei’s production staff, in return for an agreed service fee (which is calculated by reference to actual consumption and an agreed fixed premium for such services). Settlement is effected by Sang Fei on a monthly basis, by reference to consumption records as meals are not paid for by Sang Fei’s staff in cash, but are credited against their smart staff identity cards on each occasion.

• Renovation services

Sang Fei has engaged the services of a subsidiary of SZST (the “Connected Contractor”), for works carried out since October 2003 to early 2004 at its factory premises at Factory No. 2, Sangda Industrial Building for a total contract sum of approximately RMB2,555,000.

With the expansion of the production premises of Sang Fei in 2003, Sang Fei has retained the services of a subsidiary of SZST to undertake renovation works, after having invited tenders from various parties, including Independent Third Parties. In order to ensure that the renovation works are executed to standard, Sang Fei also retains an Independent Third Party architect/surveyor to supervise/monitor the works. As stated in section 12 “Future Plans and Prospects”, Sang Fei plans to expand its production capacity overall, as well as its LCD module production capacity. This has entailed increased production space leased from SZST (which requires renovation) and also, for LCD mobile production, the need to create additional “clean room” facilities in 2004. Further renovation works will continue to be required if Sang Fei needs to expand further its production facilities, which it expects will be required in 2005, if not 2006.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total amount of sales made by Sang Fei to the CEC Group and the total amount of fees paid by Sang Fei for the

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after sales service provided by the CEC Group, and the percentage of the audited turnover of Sang Fei for the relevant year represented by such amounts were as follows:

	Amount	(RMB’000) and percentage of the audited turnover	(RMB’000) and percentage of the audited turnover	(RMB’000) and percentage of the audited turnover	(RMB’000) and percentage of the audited turnover	(RMB’000) and percentage of the audited turnover
	of Sang Fei for the relevant year			represented by such amounts
	2001	%	2002	%	2003	%
Sale of products_(Note 1)_	872,427	32	37,655	2	95,493	3
Purchase of raw
materials and tooling
(including spare parts)	0	0	0	0	333	0.01
Amounts charged against
Sang Fei for product
design services_(Note 2)_	0	0	0	0	2,421	0.08
Amounts charged against
Sang Fei for after sales
services_(Note 3)_	17,459	0.63	9,093	0.45	2,323	0.08
Amounts charged against
Sang Fei for canteen
services	299	0.01	2,158	0.11	3,543	0.12
Amounts charged against
Sang Fei for renovation
services	0	0	0	0	3,039	0.10

Notes:

As stated above a member of the CEC Group was and is still distributor of Philips branded mobile phones in the PRC. Also stated above was in 2001, Sang Fei assumed the distribution functions for Philips branded mobile phones in the PRC. Starting from 2002, the Philips Group has retained that distribution function while it has disposed of its manufacturing operations (by selling part of its interest in Sang Fei to the CEC Group so that its interest in Sang Fei is reduced to 25%). Accordingly, sales to the CEC Group in 2002 and 2003, represented only sales of Sang Fei’s ownbranded products.
Sang Fei has only commenced the development of its own-branded mobile phones in 2002 and has only retained the services of Cellon France in 2003.
The CEC Group provides after sales services for Philips branded mobile phones. In order to discharge statutory warranty obligations for products sold by it for distribution in the PRC, Sang Fei pays for after sales services in respect of Philips branded mobile phones sold by it in 2001. After sales services for Philips branded mobile phones sold after 2001 (see note 1 above) were the responsibility of the Philips group. As the typical product warranty period for Philips branded mobile phones is 15 months, Sang Fei continues to pay in 2002 after sales services fees for Philips branded mobile phones sold in 2001. Sang Fei also incurred in 2002 and 2003 after sales services fees for its own-branded mobile phones.

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The transactions under the Business Services Agreement are integral to the business operations of Sang Fei. Having regard to the fact that (i) the transactions under the Business Services Agreement were principally intra-group transactions amongst the then members of the CEC Group, which came into existence some time ago before Winsan contemplated acquiring Sang Fei, (ii) the transactions under the Business Service Agreement are all integral to the operations of Sang Fei, and (iii) the terms of services provided by members of the CEC Group have been negotiated on an arms’ length basis and are no less favourable than those offered to Sang Fei by Independent Third Parties, the New Directors are of the view the transactions under the Business Service Agreement are on normal commercial terms and are fair and reasonable and are in the interests of the Shareholders as a whole.

(ii) Rental arrangements and processing arrangements

The production facilities of Sang Fei are located within an industrial complex owned by SZST. Accordingly, in addition to being Sang Fei’s landlord, certain members of the CEC Group also provide processing facilities and canteen facilities for Sang Fei.

Sang Fei leases/licenses its factory premises and some of its staff quarters from SZST under five leases and a licence. Its factory premises comprise (i) the whole block of Factory Building No. 2, Sangda Industrial Building of gross floor area of approximately 14,882 sq.m. (approximately 162,213.8 sq.ft.); and (ii) levels 3 and 4 of Factory Building No. 3 Sangda Industrial Building of gross floor area of approximately 4,680 sq.m. (approximately 51,012 sq.ft.). Such premises (except level 8 of Factory Building No. 2, Sangda Industrial Building) are leased for a period of five years expiring on 31st December, 2008 at RMB441,000 and RMB140,400 respectively per month, exclusive of management fees and water and electricity charges. Level 8 of Factory Building No. 2, Sangda Industrial Building is licensed by Sang Fei for a term co-terminus with the lease of levels 1 to 7 of the same building. Sang Fei is responsible for the construction cost of level 8, the management fees and water and electricity charges. 60 apartments amongst Sang Fei’s staff quarters, having gross floor area of approximately 2,336 sq.m. (approximately 25,462.4 sq.ft.) are leased from SZST for a period of 5 years expiring on 31st December, 2008 at RMB60,000 per month in aggregate. For each of the above leases, Sang Fei has the right, prior to 1st October, 2008, to require an extension of above leases for a further term of 5 years, at prevailing market rental to be agreed between Sang Fei and SZST. For the aforesaid licence, Sang Fei has the right, prior to 1st October, 2008, to lease level 8 of Factory Building No. 2, Sangda Industrial Building for a further term of 5 years, at prevailing market rental to be agreed between Sang Fei and SZST.

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Sallmanns (Far East) Limited, an independent property valuer, has confirmed that terms of the above leases and licence arrangements, including the rental payable, are fair and reasonable so far as Sang Fei is concerned. So far as Sang Fei is aware, SZST also leases other parts of the complex to Independent Third Parties on terms no less favourable (from Sang Fei’s perspective) than those offered to Sang Fei. Sang Fei has been occupying such premises since incorporation, at a time when it was majority owned by the Philips Group and was on favourable terms with the independent valuers confirming that the terms of the lease (including the rental) are fair and reasonable so far as Sang Fei is concerned. Accordingly, the New Directors do not see any commercial reason for relocating its factory premises to other premises and incurring unnecessary costs for doing so.

As Sang Fei’s sole operating premises are leased from SZST, if the leases are terminated early without cause, Sang Fei will be required to relocate its production facilities. However, Sang Fei could easily relocate its production facilities to other sites and continue its operations without material adverse impact, except for incurring necessary costs involved for relocation and arrangements which need to be made to reduce the impact on production during the relocation period. Sang Fei’s production lines are not fixtures at the premises and could be dismantled, transported and installed at a new production site without much difficulty. Based on Sang Fei’s enquiries as at 12th May, 2004, there were then available at least 3 sites in Shenzhen having production area of between 20,000 to 25,000 sq.m. (218,000 to 272,500 sq.ft.) (being the area occupied and planned to be occupied by Sang Fei at its current side) with rental comparable to that being paid by Sang Fei at present. Sang Fei estimates, based on expected levels of production for 2004, it will take approximately 2 weeks to relocate its entire production facilities if relocation were to be effected without any material disruption to its ability to deliver products to customers on schedule. Such relocation is expected to cost approximately RMB3 million.

Since the landlord of the premises is a subsidiary of CEC, Sang Fei considers that the possibility of early termination of the lease without cause (which could amount to a breach by the landlord of the terms of the leases) to be remote. In the event that the leases are not renewed when they expire, Sang Fei will have advance notice to make arrangements for smooth relocation, such as staggered transfer of its production lines and/or temporary sub-contracting arrangements to maintain its production level.

SZST charges Sang Fei for the water used by Sang Fei’s factory premises on a consumption basis at cost. The charges were less than HK$1,000,000 per annum.

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In August 2003, Sang Fei entered into a processing contract with Bai Li, a subsidiary of SZST, pursuant to which, for an initial term of three years expiring on 31st July, 2006, Sang Fei has secured the dedicated processing services of a complete SMA production line from Bai Li (together with operational management rights) for an annual processing fee of not less than RMB5,110,000 per annum. The SMA production line is currently situated at Sang Fei’s factory premises. The processing services had been secured from Bai Li because (i) the terms of such services are acceptable to Sang Fei (and are competitive when compared to terms offered by other SMA processing services providers in Shenzhen); and (ii) Bai Li occupies premises which are in the same industrial complex as the premises of Sang Fei, therefore enabling Sang Fei to enjoy logistic benefits arising from such vicinity (i.e. convenience in terms of warehousing and transportation arrangements) and convenience in management and supervision of the assembly process.

With the expected growth in production requirements, Sang Fei plans to acquire a further SMA production line as well as securing a further dedicated SMA production line from Bai Li on substantially the same terms in 2004. Any such decision will be made by reference to terms and quality of services which could be offered by Bai Li and also other service providers in respect of which there are many in Shenzhen.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total rental paid by Sang Fei to SZST, and the percentage of the audited turnover of Sang Fei represented by such fees were as follows:

	Amount	(RMB’000) and percentage of the audited turnover of	(RMB’000) and percentage of the audited turnover of
		Sang Fei represented by such transactions
	2001	% 2002 % 2003	%
Rental	5,760	0.21 5,760 0.28 5,875	0.19
Processing services fee	–	– – – 2,210	0.07

In relation to the lease agreements in this section, as stated above, Sallmanns (Far East) Limited has confirmed that the terms of such lease agreements, including the rent payable, are fair and reasonable so far as Sang Fei is concerned. Based on the confirmation of Sallmanns (Far East) Limited, the New Directors are of the view that the terms of the above lease agreements are on normal commercial terms and are fair and reasonable and are in the interests of the Shareholders as a whole.

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In relation to the processing services, having regard to the fact that the terms of such arrangement are competitive compared to terms offered by other SMA processing service providers in Shenzhen and that Bai Li occupies premises in the same industry complex such that Sang Fei can enjoy logistic benefits from such close vicinity, the New Directors are of the view that the processing arrangement is on normal commercial terms and is fair and reasonable and is in the interests of the Shareholders as a whole.

(iii) Trademark licences

Pursuant to a trademark licence agreement dated 26th August, 2003 between SZST and Sang Fei, Sang Fei has been licensed the use of the , and trademarks on mobile phone products for a period from 1st August, 2003 to 1st June, 2007 free of charge. As at the Latest Practicable Date, Sang Fei has only used the trademark on its own-branded products. This trademark has not been acquired by Sang Fei as it is used by SZST on other products for which the trademark has been registered and are produced and sold by SZST (further details of which are set out in section 6K “Operations – Intellectual Property”). With the continued growth of this line of business, the New Directors and Sang Fei’s management will consider the desirability and the appropriate time to introduce to the market alternative brands of mobile phones as and when required.

D. Competition

Apart from the exclusive SMA processing sub-contractor of Sang Fei, CEC has the following businesses, subsidiaries or associates (as defined in the Listing Rules) which may compete with the business of the New Group (all of which are excluded from the non-compete undertaking given by CEC under the Acquisition Agreement referred to in paragraph 1 “Letter from the Board – The Acquisition – The Acquisition Agreement” (in pages 18 to 24 of this Circular)):

Manufacturing

Subsidiaries of CEC, namely Amoi, Dopod and Golden Cellular and associates of CEC, namely CECT and CECM, are engaged in the production/ processing and sales of GSM or CDMA mobile phones and/or PDA under CECT , 夏新, Amoi, Dopod and Sharp-CEC brands mainly in the PRC as described further below. Certain of these entities also engage in the design and development of mobile phones, as well as production and sales of other digital audio, video and consumer communication products and other audio and video home appliances. The A shares of Amoi are listed on the Shanghai Stock Exchange. Wuhan Dopod Communication Corp, CEC Telecom Co. Ltd. and CEC Mobile Co., Ltd are all sino foreign joint

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venture companies while Amoi and Golden Cellular Communications Co., Ltd. are limited liability companies. Sang Fei has not manufactured any mobile phones for any of the above companies except for CECT, for whom Sang Fei has provided some mobile phones to CECT on an OEM manufacturing basis in the years 2001 and 2002.

None of the New Directors or senior management of Sang Fei are directors of or otherwise hold management positions in the companies named above (the “Excluded Companies”) or vice versa. The Excluded Companies and Sang Fei employ separate staff. None of the New Directors, senior management or staff of Sang Fei are on the Excluded Companies’ payroll, nor is Sang Fei paying for any person who is a director, senior management or staff of the Excluded Companies.

Amoi, being a listed company itself operates independently. The New Directors do not consider that businesses of Sang Fei and Amoi are directly comparable to nor do they compete with each other in the PRC mobile phone manufacturing industry. With the growth in the sales of Sang Fei’s own-branded products, there may be competition between Sang Fei’s ownbranded products and those of Amoi’s in the future. The New Directors do not consider that this will affect the core OEM/ODM business of the New Group. Their business models and the markets they serve are different. In terms of nature of products, Amoi is a consumer electronics products manufacturer and vendor (which offers, as mentioned above, products other than mobile phones) with focus on the design, manufacturing, sales and distribution principally of its own-branded 夏新 and Amoi GSM mobile phones while Sang Fei is mainly an OEM mobile phone manufacturer which is developing its own-branded products in conjunction with its ODM capabilities. In terms of the market for their mobile phone products, Amoi sells mainly to the PRC domestic market with a small amount of export sales, while the majority of Sang Fei’s products are manufactured for Philips and other OEM vendors (under brands including Konka, NES, Chosen, Kejian, Photar) which control the markets in which the products will be distributed. Sales of foreign branded mobile phones by Sang Fei, predominantly Philips branded mobile phones at present, have been and are expected to continue to form a major part of Sang Fei’s business. In terms of production facilities and technology, Amoi’s production facilities are located at Haicang District, Xiamen City, its production lines and equipments are purchased mainly from suppliers based in Japan and domestically. While Sang Fei’s production facilities are located in Shenzhen City Technology Park, its production lines sourced mainly from Europe and the United States based suppliers. In terms of production technology, Amoi has developed its

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own mobile phone research and development capabilities and technology by cooperation with overseas companies like Ericsson and Korea-based companies, while Sang Fei uses mobile phone technologies which originated from vendors like Cellon France and Taiwan Inventec Corporation. Amoi’s published PRC audited turnover from the sale of mobile phones was approximately RMB3,701 million and RMB5,963 million for the years ended 31st December, 2002 and 2003 respectively.

Apart from CECT in respect of which a small number of its CECT branded mobile phones are sold overseas, Dopod, Golden Cellular, CECT and CECM mainly manufacture mobile phones or PDAs with mobile communication functions under their own brand for sale in the PRC domestic market. The New Directors consider that PDAs with mobile communication functions and CDMA phones (produced and sold by Golden Cellular and CECM respectively) as opposed to GSM mobile phones (which currently represent 100% of the mobile phones produced by Sang Fei) may attract different types of consumers due to functionality and pricing, even though they are all generally available to the consumer public. GSM mobile phones which are produced and sold by CECT and Dopod could compete in the consumer market with Sang Fei’s own-branded mobile phones, which currently accounts for a small part of Sang Fei’s existing business.

Dopod develops, manufactures (at its facilities in Wuhan) and sells its own-branded communication products with PDA function, using technology originating from Taiwan and machinery which is locally produced. Dopod (which was established in 2002) recorded turnover of approximately RMB100 million and RMB148 million respectively.

Golden Cellular’s production facilitates are located in Beijing and focuses on production of PDA products with mobile communication functions using technology provided by and machinery sourced through Sharp Corporation. Golden Cellular had a turnover for the years ended 31st December, 2001, 2002 and 2003 of approximately RMB17 million, RMB23 million and RMB42 million respectively.

CECT in which CEC holds at 25% interest is engaged in the business of producing and selling GSM and CDMA mobile phones. It has its production base in Beijing and Huizhou in the PRC. It uses PRC and Korean technology and equipment produced either domestically or in the USA to manufacture and sell GSM and CDMA mobile phones under the CECT brand. CECT’s turnover for the years ended 31st December, 2001, 2002 and 2003 was approximately RMB68 million, RMB945 million and RMB1,450 million respectively.

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CECM (an associate of CECT) is engaged in the business of producing and selling CDMA mobile phones and produces CEC branded CDMA mobile phones using technology from the USA and Korea and machinery from both the USA and the PRC, at its production facilities in Beijing. For the years ended 31st December, 2002 and 2003, CECM (which was established in 2002) had a turnover of approximately RMB151 million and RMB265 million respectively.

Product design

中電賽龍通信研究中心有限責任公司 (CEC Wireless R&D Ltd), is a sino-foreign equity joint venture headquartered in Beijing between the Cellon group and CEC Group, and in which the CEC Group holds 50.1% equity interest, which is engaged in the research and development of mobile phones, communication equipment and systems engineering technology. It was established in December 1999 as a subsidiary of the CEC Group. It became a sino-foreign equity joint venture on 26th August, 2002. It and its subsidiary Cellon France, specialise in GSM/GPRS/UMTS platforms and terminal design. Cellon France is also a certified FTA testing house. CECW does not itself engage in the manufacturing of mobile phones in the PRC, but provides design services for customers, which includes mobile phone manufacturers and distributors, who may compete with the New Group. The unaudited turnover of CECW for each of the years ended 31st December, 2000, 2001 and 2002 were RMB870,000, RMB18 million and RMB85 million respectively and the registered capital is RMB40 million. The unaudited turnover of Cellon France for the year ended 31st December, 2002 was 39,841,217 Euro (approximately RMB420,099,598) and its registered capital is 37,000 Euro (approximately RMB390,137.83). Based on published information on Cellon France and CECW, their customers include the Philips Group, Siemens and Haier, amongst others. So far as Sang Fei is concerned, Cellon France and CECW are two of many service providers who Sang Fei considers to have the expertise and capabilities to deliver the quality of services it requires.

Product distribution

Subsidiaries of CEC, namely 武漢中原電子信息公司 (Wuhan Zhongyuan Electronic Communications Company), 中國電子器材總公司 (China Electronic Appliances Corporation), 深圳市桑達㶅通電子有限公司 (Shenzhen SED Coalition Electronics Co., Ltd.) together distribute a number of brands of mobile phones in different parts of the PRC, including an exclusive distributorship for certain series of Philips mobile phones in the PRC. Shenzhen SED Coalition Electronics Co. Ltd. is currently one of two

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distributors of Sang Fei’s own-branded mobile phones. Wuhan Zhongyuan Electronic Communications Company, China Electronic Appliances Corporation are state-owned enterprises and Shenzhen SED Coalition Electronics Co. Ltd is a subsidiary of SZST. The unaudited combined turnover of the above subsidiaries of CEC for each of the years ended 31st December, 2000, 2001 and 2002 were approximately RMB939 million, RMB1,347 million and RMB1,287 million respectively; and their total registered capital as at 31st March, 2004 was approximately RMB161 million.

Amongst the New Directors, Mr. Tong Baoan is one of 7 directors of SZST and Mr. Fan Qingwu (who became a director of Sang Fei on 28th August, 2003) is one of 7 directors of CECW. Mr. Hua Longxing is not a director of CEC or any of its subsidiaries and is remunerated by Sang Fei. Save as aforesaid, none of the New Directors have any interest (whether as a director, other than an independent non-executive director, substantial shareholder (as defined in the Listing Rules) or partner or sole proprietor) in any business apart from that in the New Group which competes or is likely to compete, either directly or indirectly, with the New Group. Mr. Yang Xiaotang is the president and legal representative of CEC. He is responsible for the overall management and operations of the CEC Group.

The above businesses and subsidiaries have not been included in the New Group because it is impracticable for CEC to do so at this stage as it would entail substantial PRC regulatory approvals, reorganisation and third party consents. Also, it is not desirable for the Company at this stage to acquire CEC’s interests in these companies (considering the relative size of the Company and the aggregate size of these interests and Sang Fei). As for the remaining interests, given that CEC is a minority shareholder in those companies and therefore have little or no control over the business and consent to transfer from the majority shareholders may not be forthcoming, CEC considers it impracticable and undesirable for those interests now to be transferred to the Company. CEC may in the future inject its interests in certain of its mobile phone manufacturing or design subsidiaries into the Company. The Company will comply with the relevant requirements of the Listing Rules as and when that happens.

CEC has undertaken in favour of the Company not to engage or participate in any business which is similar to or compete (whether directly or indirectly) with Sang Fei’s business of manufacturing of mobile communication equipment in Hong Kong and the PRC or to own any interest in such business in excess of 25% (save for those disclosed prior to Completion as set out above) and has granted pre-emption rights in favour of the Company over future transfers of its interest in businesses which may compete with Sang Fei, both of which takes effect from Completion and for so long as CEC remains a controlling shareholder (as defined in the Listing Rules) of the Company. This noncompete undertaking from the CEC Group does not prevent those existing mobile phone

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manufacturing subsidiaries of the Group, namely, Amoi, CECT, CECM, Dopod and Golden Cellular from competing with the New Group in respect of their respective own-branded mobile phone products which are primarily targeted at the PRC domestic market as is Sang Fei’s own-branded mobile phone products. Those CEC Group companies could also compete with Sang Fei on its mobile phone OEM business.

In addition, CEC has granted the Company a right of first refusal over the sale of any company or business in the CEC Group which could or may compete with or is similar with the Business of the New Group. Under the Acquisition Agreement, CEC is required to give written notice to Sang Fei of its intention to dispose of any such business and the proposed terms of such sale, upon receipt of which the Company will convene a board meeting to be attended by at least 2 independent non-executive directors to consider whether or not the Company should exercise its first right of refusal. Any decision made by the board of directors must include the approval of a majority of independent non-executive Directors (or a minimum of 2 independent non-executive Directors). The Company is to notify CEC of its decision within 30 business days of its receipt of notice from CEC. If the parties are unable to agree the detailed terms of the sale and purchase within 30 business days after the Company’s notification to CEC of its intention to acquire the competing business or where the terms are agreed but the Company is unable to obtain necessary approval from shareholders, within 90 business days thereafter, then CEC is free to dispose of the business in question to the third party on terms no more favourable than those specified in its original notice.

E. Independence of operations from/reliance on CEC

Sang Fei has been and still is managed by a core management team, further detail in respect of which are described in section 7 “New Directors, Senior Management and Staff” above. CEC intends that this arrangement will continue after Completion. In addition, at level of the Company, where an issue which is put before the New Directors involves a conflict between the interests of Winsan and that of the CEC Group (excluding the New Group), CEC intends that those New Directors who have offices or senior management positions in the CEC Group (excluding the New Group) will abstain from voting on those matters. A decision on that matter will then be determined by a majority amongst Mr. Hua and the then independent non-executive Directors. As described above, all transactions with the CEC Group are based on business decisions.

Section 9C “Transactions with the CEC Group” above describes the various business relationships between Sang Fei and the CEC Group which are expected to continue after Completion. These include various members of the CEC Group providing to Sang Fei product design services, sale and distribution services, after sales services, and leasing to Sang Fei its sole operating premises. As explained in that section, in respect of each such types of transactions, there were and are cogent business reasons for doing business with the relevant members of the CEC Group, not in the least

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE CEC GROUP

because they have demonstrated their capabilities in providing those services to third party customers. In each case Sang Fei considers the CEC Group to be one of the various services providers which could be retained by Sang Fei. It is under no obligation to use those members of the CEC Group and would not have retained the relevant services had the terms not been commercially acceptable to Sang Fei and, in most cases, comparable to or better than other service providers. There is therefore no question of reliance by Sang Fei on the CEC Group as the services provided could be replaced by third part providers. The New Directors do not however believe that Sang Fei should deprive itself of the opportunity to consider the CEC Group members as possible service providers should they be suitable candidates for consideration in terms of quality and terms of service and relevant expertise.

Accordingly, the New Directors consider that the New Group is capable of carrying on its business independently of the CEC Group after the deemed new listing of Winsan.

F. Undertaking in respect of Rule 10.07 of the Listing Rules

CEC has undertaken to the Stock Exchange that (i) in the period commencing the date of Completion and ending on the date which is six months thereafter, it will not dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interest or encumbrances in respect of any Consideration Shares; and (ii) in the six months period after the period referred to in (i) above, it will not dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of the Consideration Shares if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interest or encumbrances, CEC would cease to be a controlling shareholder (as defined in the Listing Rules) of the Company.

CEC has also undertaken to the Company and the Stock Exchange that, within the period commencing on date of Completion and ending on the date which is 12 months from that it will: (i) when it pledges/charges any securities beneficially owned by him/them in favour of an authorised institution pursuant to Note (2) to Rule 10.07(2) of the Listing Rules, immediately inform the Company of such pledge/charge together with the number of securities so pledged/charged; and (ii) when it receives indications, either verbal or written, from the pledgee/chargee that any of the pledged/charged securities will be disposed of, immediately inform the Company of such indications.

The Company will inform the Stock Exchange as soon as it has been informed of matters referred to above by CEC and disclose such matters by way of an announcement which is published in the newspapers as soon as possible.

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE PHILIPS GROUP

10. RELATIONSHIP WITH THE PHILIPS GROUP

A. Overview

The Philips Group has since the formation of Sang Fei had close business relationship with Sang Fei. The New Group expects to continue its established relationship with the Philips Group, as their exclusive supplier of mobile phone, and to enhance the New Group’s materials procurement base and production capabilities through such relationship. Accordingly, certain transactions between Sang Fei and the Philips Group which exist as at the date of this Circular are expected to continue after Completion, further information in relation to which is set out in “Transactions with the Philips Group.”

In addition, as set out in “C. Transactions with the Philips Group” below, the OEM manufacturing arrangements between Sang Fei and the Philips Group are governed by the Cooperation Agreement. The New Directors believe that the Philips Group has a commercial incentive to continue such relationship and the basis for such beliefs is set out in “D. Reliance on the Philips Group” below.

B. The Philips Group

The Philips Group is headquartered in the Netherlands, and is one of the world’s biggest electronics companies and has a substantial presence in Europe, with sales of EUR 29 billion in 2003. It considers itself to be one of the global leaders in colour television sets, lighting, electric shavers, medical diagnostic and patient monitoring and one-chip TV products. The Philips Group has publicly stated that it has operations in over 60 countries and is active in areas of lighting, consumer electronics, domestic appliances, semiconductors and medical systems. Philips is quoted on the New York Stock Exchange (symbol: PHG) and the Amsterdam Stock Exchange.

C. Transactions with the Philips Group

(i) Sale of products to and purchase of raw materials from the Philips Group

The OEM manufacturing arrangements between Sang Fei and the Philips Group are governed by the Cooperation Agreement dated 22nd October, 2001 between Sang Fei (as the OEM manufacturer), a member of the Philips Group (as OEM customer), Cellon France and CECW (as the mobile phone design house). Under the Cooperation Agreement, Sang Fei is granted (subject to certain conditions being fulfilled) exclusivity in the manufacture of mobile phones to be designed and developed by the CEC Group for the Philips Group. The price of products to be supplied by Sang Fei under the Cooperation Agreement are to be determined using a pre-agreed cost-plus basis. Please refer to section 8B “Financial

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE PHILIPS GROUP

Information - Management’s discussion and analysis of results of operations” for the composition of “cost” for such purposes. Sang Fei and Philips agreed in principle that Sang Fei should be provided incentive for improvements in production processes (including production quality, delivery and product return rate) and reduction of material cost, with a view to increasing product competitiveness. The nature and value of such incentive is to be agreed on a case by case basis. The term of the agreement is for an initial period of 4 years expiring on 30th June, 2005, and would (unless terminated by not less than 120 days notice before the expiry of the prevailing term or if earlier, due to default or liquidation of other parties) automatically be extended annually. The conditions for the exclusive manufacturing arrangement in general and in respect of each product, include (i) the Philips Group continuing to hold not less than 25% interest in Sang Fei, whether directly or indirectly; (ii) Sang Fei offering competitive terms for the manufacturing of products to the Philips Group; and (iii) Sang Fei purchasing from the Philips Group at least 50% of its requirements for basic integrated circuit chips and components (excluding for this purpose, its requirements for platform design and specification for other independent OEM customers). Sang Fei’s purchase obligations are subject to the condition that the Philips Group is able to supply semiconductor chips and components at competitive prices and quality. In general, Sang Fei negotiates pricing with the Philips Group by reference to the list prices of such materials offered by the Philips Group. Products and semi-finished products supplied by Sang Fei under the Cooperation Agreement are to be sold to the Philips Group on a cost-plus basis in accordance with the Cooperation Agreement.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total sales of products and purchases of raw materials by the New Group and the percentage of audited turnover (for sales) or audited cost of sales (for purchases) of Sang Fei for the relevant year represented by such transactions were as follows:

	Amount (RMB’000) and	Amount (RMB’000) and	percentage (for sales)	percentage (for sales)	of
	the audited turnover/(for purchases) of			audited cost of
	sales of Sang	Fei represented by such		transactions
	% of		% of		% of
	turnover/		turnover/		turnover/
	cost of		cost of		cost of
	2001 sales	2002	sales	2003	sales
Sale of products	569,673 21	1,992,682	98	2,750,689	91
Purchase of raw
materials	754,277 36	544,265	30	918,093	32

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE PHILIPS GROUP

Having regard to the terms of the Cooperation Agreement as described above, the New Directors are of the view that in the context of the acquisition under the Acquisition Agreement, the sale of products and purchase of raw materials arrangements between Sang Fei and the Philips Group are on normal commercial terms and are fair and reasonable and are in the interests of the Shareholders as a whole.

(ii) Corporate services arrangement

From time to time, the Philips Group provides certain in-house treasury, fiscal, legal services, and non product related services to Sang Fei. Non product related services include the facilitation of purchase of insurances, for example, by which Sang Fei is able to enjoy preferential premium rates from insurers. These services are provided at the request of Sang Fei and at pre-agreed rates pursuant to two services agreements entered into between Sang Fei and two members of the Philips Group in May 2001.

For each of the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003, the total amount of service fees paid by Sang Fei for such services, and the percentage of the audited turnover of Sang Fei represented by such amount were as follows:

Amount (RMB’000) and percentage of the audited turnover

		of Sang	Fei represented	by such	service fees
	2001	%	2002	%	2003	%
Service fees	0	0	41,339	2.04	15,370	0.51

Note: In 2002, Sang Fei obtained, in addition to the legal services and fiscal services of the Philips Group it uses in the ordinary course, also non product related services (in particular logistic services) from the Philips Group as in that year, Sang Fei started direct negotiations with the various suppliers of raw materials (which had previously been managed by the Philips Group through their in-house centralised sourcing function).

Having regard to the fact that Sang Fei has confirmed that the rates offered for such services are preferential and that such arrangements are pre-existing arrangements between Sang Fei and its substantial shareholder, the New Directors are of the view that the provision of corporate services by the Philips Group is on normal commercial terms and is fair and reasonable and is in the interests of the Shareholders as a whole.

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE PHILIPS GROUP

(iii) Purchase of fixed assets from the Philips Group

In May 2004, Sang Fei has agreed to purchase from a member of the Philips Group SMA machinery for use on its sixth production line referred to in Section 12 “Future Plans and Prospects”. The purchase cost was approximately USD2.25 million. The terms of purchase from the Philips Group for the SMA production line are not less favourable than those offered by independent third parties, having regard to the specifications, output and quality of machinery offered. Sang Fei currently expects that the whole sixth production line will commence production in July 2004, for the production of PCBs. Further information regarding the production process of Sang Fei is contained in section 6B “Operations – Production” above.

D. Reliance on the Philips Group

The Philips Group has been and still is the single largest customer of Sang Fei. It is also a major supplier of Sang Fei raw materials for mobile phone production, mainly as a result of the prominent position of the Philips Group as the supplier of those materials and also because those materials are commonly required for the production of Philips branded mobile phones. Information in relation to the nature of such “reliance” in respect of the manufacturing arrangements relationship with the Philips Group and the supplier of raw material is set out in section 10C “Transactions with the Philips Group” above. The New Directors believe that the reliance on key customers, even to a significant degree, reflects strong partnership which is built upon mutual reliance and creates mutual benefits.

Sale of products to the Philips Group

The relationship between Sang Fei (as an OEM manufacturer) and the Philips Group (as customer) is governed by the Cooperation Agreement (see section 10C “Transactions with the Philips Group” above). As described in that section, the Cooperation Agreement may be terminated by the parties thereto after the initial period which will expire on 30th June, 2005 or other specified circumstances. There is no undertaking or contractual assurance from the Philips Group or Cellon France or CECW (which are parties to the Cooperation Agreement) that they will not terminate the Cooperation Agreement. However, the New Directors believe that the Philips Group has an incentive to continue its relationship with Sang Fei for commercial reasons on the following basis:

(i) the relationship and cooperation between Philips and Sang Fei are of long term nature. This relationship started in 1996 upon the establishment of Sang Fei as a member of the Philips Group. Sang Fei believes that it was, until 2001, one of the mobile phone

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE PHILIPS GROUP

manufacturing bases for the Philips Group worldwide. Since 2001, Sang Fei has been appointed the exclusive manufacturer of Philips branded mobile phone pursuant to the Cooperation Agreement. The Cooperation Agreement is the result of arms’ length negotiations between the parties, having regard to the commercial and relevant regulatory implications. The management of the Philips Group meets regularly with that of Sang Fei to discuss the strategies and requirements of each side in terms of production, development and distribution of Philips branded mobile phones. This business relationship (exclusive on Philips side) is based on mutual benefit, and is based on arms-length commercial considerations;

(ii) Sang Fei is able to provide mobile phone products to the Philips Group at up-to-standard quality, proven by Philips’ continuous and growing production orders to Sang Fei. The products which Sang Fei manufactures specifically cater to requirements specified by the Philips Group and the New Directors believe that the switching cost (both direct and indirect) of the Philips Group could be high should it decide to terminate its established relationship with Sang Fei;
(iii) there is relatively high barrier of entry to mobile phone manufacturing and sales of mobile phones in the PRC due to its licensing system. Under PRC regulation mobile phone manufacturers in the PRC must obtain the approvals issued by relevant government authorities to engage in the mobile phone manufacturing. There are currently 37 mobile phone manufacturers in the PRC who have been licensed, among them 30 holding GSM mobile phone manufacturing licence and 20 holding CDMA licence, with 13 holding both licences. Sang Fei has a GSM manufacturing licence. Among the 37 existing licenceholders, most of them are either joint-venture companies or have existing foreign partners. If the Philips Group were to establish an alternative manufacturing base/subsidiary in the PRC (which will involve, amongst others, the issue of a new mobile phone manufacturing licence) or if they were to import all its Philips branded mobile phones to be manufactured offshore, they will need to obtain a plethora of PRC regulatory approvals, which could take a considerable period of time. Sang Fei perceives this to provide further disincentive for Philips Group to terminate its existing and long established cooperation with Sang Fei.

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INFORMATION ON THE NEW GROUP – RELATIONSHIP WITH THE PHILIPS GROUP

Purchase of raw materials from the Philips Group

Under the current exclusive arrangement as described in section 10C “Transactions with the Philips Group” above, Sang Fei is required to purchase from the Philips Group at least 50% of its requirement for basic IC chips and components (excluding its requirements for other independent OEM customers). Integrated circuit (IC) chipsets and LCDs are the most expensive items of raw materials used in the production of mobile phones. Philips Group is the major supplier of both to Sang Fei. Based on public information available from the Philips Group website, based on information from Dataquest 2002, Philips ranked 9th (in terms of revenue) amongst worldwide semiconductor suppliers. So far as Sang Fei is aware (based on public information available from the Philips Group website), other mobile phone vendors or manufacturers such as Samsung, Nokia, Sony Ericsson, Siemens, Motorola (in the communications sector) also source semi-conductor chips from the Philips Group. So far as Sang Fei is aware, Philips Group is one of the top three mobile phone LCD suppliers in the world. Philips branded mobile phone products naturally use Philips IC chips and LCDs. As Sang Fei is not confined to using Philips IC chips in the productions for other independent OEM customers, the New Directors consider that the extent of its “reliance” on Philips for IC chips and LCDs is no different from other OEM manufacturers of mobile phones which use Philips platforms, given the dominance of the Philips Group in the semiconductor chips and mobile phone LCD markets.

– 181 –

INFORMATION ON THE NEW GROUP – CONNECTED TRANSACTIONS

11. CONNECTED TRANSACTIONS

A. Overview

As stated in section 9A “Relationship with the CEC Group – Overview”, immediately after Completion, CEC will be the controlling shareholder (as defined in the Listing Rules) and accordingly, the CEC Group (including SZST and its subsidiaries) will constitute connected persons of the Company under the Listing Rules. Similarly, immediately after Completion, the Philips Group will become a substantial shareholder of Sang Fei, a subsidiary of the Company and accordingly, will constitute a connected person of the Company. Transactions between (i) members of the New Group and (ii) the CEC Group and the Philips Group, immediately after Completion, will constitute connected transactions of the Company under the Listing Rules.

B. Exempted Connected Transactions

The following connected transactions will constitute exempted transactions under Rule 14A.31 of the Listing Rules and be exempted from the disclosure and shareholders’ approval requirements because the applicable percentage ratios calculated pursuant to Rule 14.07(1) of the Listing Rules are less than 0.1%:

the water supply arrangement referred to in section 9C(ii) above; and
the trademark licensing arrangements referred to in section 9C(iii) above.

C. Non-exempt Ongoing Connected Transactions requiring Independent Shareholders’ approval

The Business Services Agreement, the rental arrangements and processing arrangements, the sale of products to the Philips Group, the purchase of raw materials from the Philips Group and the corporate services arrangement referred to in Section 9C(i) and (ii) and 10C(i) and (ii) respectively are non-exempt continuing connected transactions under Chapter 14A of the Listing Rules and are subject to disclosure and independent shareholders’ approval requirements set out in Chapter 14A of the Listing Rules. The transactions under the Business Services Agreement, the rental arrangements and processing arrangements, the sale of products to the Philips Group, the purchase of raw materials from the Philips Group and the corporate services arrangement are on normal commercial terms.

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INFORMATION ON THE NEW GROUP – CONNECTED TRANSACTIONS

The maximum aggregate annual value of the transactions set out in section 11D “Conditions of Shareholders’ Approval of Non-exempt Ongoing Connected Transactions” below were determined as follows:–

in respect of 2004, the maximum aggregate value of transactions for (i) the sale of products by and after sales services from the CEC Group are respectively based on budgeted sales of own-branded products in respect of which the CEC Group is a key distributor (after taking into account the planned launch of 5 to 6 new models of own-branded mobile phones in 2004 compared to the launch of one model of own-branded mobile phone in 2002 and two models in 2003, the fact that models launched in 2003 will also be sold in 2004, the different types and estimated sale prices of each new model of products which have different functionalities); (ii) the purchase of raw materials has been determined on the assumption that about 50% of Sang Fei’s requirements for raw materials for that year, principally batteries and tooling, for its own-branded products will be sourced from qualified suppliers within the CEC Group; (iii) design services has been determined on the assumption of an average design fee of RMB1,656,000 per model of mobile phone, up to 7 models being developed by the CEC Group and budgeted sales of own-branded products; (iv) the provision of canteen services, on the assumption of an aggregate headcount of 2,000 staff members, historical consumption rate and meal allowance granted by Sang Fei to its staff; (v) the provision of renovation services, on the basis of the planned expansion of production premises and historical costs of renovation services; (vi) the rental arrangements and the processing arrangements are based on the rental or processing fee payable under the respective contracts; (vii) the sale of OEM products to the Philips Group is based on budgeted sales of products determined by reference to discussions with the Philips Group on their estimated requirements for Philips branded mobile phones on a non-committed basis for the year; and (viii) the purchase of raw materials from the Philips Group is based on both the expected volume of purchases (for both Philips branded products and other OEM/own-branded products which require such raw materials based on the designed platform for those products) and the average unit cost of purchase in 2003;
in respect of 2005 and 2006, the maximum aggregate value of transactions for each year has been determined on the assumption of a 25% growth in sales of own-branded products, OEM sales to the Philips Group and staff, which the New Directors consider to be reasonable, having regard to the 2,519% growth in sales of own-branded products, 38% growth in sales to the Philips Group and the 120% growth in staff respectively in the year ended 31st December, 2003 as compared with that of 31st December, 2002.

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INFORMATION ON THE NEW GROUP – CONNECTED TRANSACTIONS

The maximum aggregate annual value of the transactions set out in section 11D “Conditions of Shareholders’ Approval of Non-exempt Ongoing Connected Transactions” below in respect of the provision of corporate services by the Philips Group were determined by reference to historical value of services received in 2002 and 2003.

D. Conditions of Shareholders’ approval of Non-exempt Ongoing Connected Transactions

The Company seeks the approval of the Shareholders in relation to the Nonexempt Ongoing Connected Transactions in relation to the Business Services Agreement (described in section 9C(i) “Relationship with the CEC Group – Transactions with the CEC Group – Business Services Agreement”), the rental arrangements and processing arrangements (described in section 9C(ii) “Relationship with the CEC Group – Transactions with the CEC Group – Rental arrangements and processing arrangements”), the sales of products and purchases of raw materials from the Philips Group as contemplated under Cooperation Agreement (described in section 10C(i) “Relationship with the Philips Group – Transactions with the Philips Group – Sale of products to and purchase of raw materials from the Philips Group”) and the corporate services arrangements (described in section 10C(ii) “Relationship with the Philips Group – Transactions with the Philips Group – Corporate services arrangement” on the following conditions:

(I) the transactions shall be:
(a) entered into by the New Group in the ordinary and usual course of its business; and
(b) either (i) on normal commercial terms, or (ii) on terms no less favourable to the Company than those available to (or from) independent third parties; or (iii) where there is no available comparison for the purpose of determining whether (i) or (ii) is satisfied, on terms that are fair and reasonable so far as the Shareholders as a whole are concerned;

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INFORMATION ON THE NEW GROUP – CONNECTED TRANSACTIONS

(II) the value of the transactions contemplated under the Business Services Agreement and the corporate services arrangements do not exceed the annual caps set out below:

Annual Caps

		For the	For the	For the	For the	For the
		year ending	year ending	year ending	year ending	year ending
		31st December,	31st December,	31st December,	31st December,	31st December,
	Types of transaction(Note 1)	2004	2005	2006	2007	2008
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
(a)	Sale of products to
	the CEC Group	610,000	760,000	950,000	not applicable	not applicable
(b)	Purchases of raw materials
	from the CEC Group	11,000	14,000	17,000	not applicable	not applicable
(c)	Design services from
	the CEC Group	12,000	15,000	19,000	not applicable	not applicable
(d)	After sales services
	from the CEC Group	27,000	33,000	41,000	not applicable	not applicable
(e)	Provision of canteen services
	by the CEC Group	7,000	8,000	10,000	not applicable	not applicable
(f)	Renovation services from
	the CEC Group	15,000	15,000	15,000	not applicable	not applicable
(g)	Rental arrangements with
	the CEC Group_(Note 2)_	7,086	7,696	7,696	7,696	7,696
(h)	Processing arrangements	10,220	15,330	15,330	not applicable	not applicable
(i)	Sale of products to
	the Philips Group	4,197,000	5,250,000	6,560,000	not applicable	not applicable
(j)	Purchase of raw materials
	from the Philips Group	1,480,000	1,850,000	2,305,000	not applicable	not applicable
(k)	Corporate services arrangements
	with the Philips Group	17,000	21,000	26,000	not applicable	not applicable

Notes:

For detailed description of the relevant transactions and the historical value of the transactions, please refer to sections 9 “Relationship with the CEC Group” and 10 “Relationship with the Philips Group”.
The five year caps are co-terminus with the relevant rental agreements.
“Not applicable” in the above table means that no transaction caps for the relevant transactions in respect of the years ending 31st December, 2007 and 31st December, 2008 are now proposed to be sought from Shareholders.

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INFORMATION ON THE NEW GROUP – CONNECTED TRANSACTIONS

(III) in respect of sales and purchases to the Philips Group and the corporate services from the Philips Group, the Group does not commit to sell, purchase or seek corporate services after the year ending 31st December, 2006 to an extent that the aggregate value of these transactions falls outside the scope of Rules 14A.33 or 14A.34 of the Listing Rules, unless the requisite shareholders’ approval has been obtained in accordance with the Listing Rules.
(IV) compliance by the Company with all other requirements under the Listing Rules.

The New Directors are of the view that the Non-exempt Ongoing Connected Transactions were entered into on terms which are on normal commercial terms and are fair and reasonable as far as the Shareholders are concerned as a whole on the various bases set out in section 9C “Relationship with the CEC Group – Transactions with the CEC Group” and section 10C “Relationship with the Philips Group – Transactions with the Philips Group” above.

F. Views of the Sponsor on the Ongoing Connected Transactions

Based on the information provided by the New Directors and CEC in relation to the ongoing connected transactions set out in sections 11C and D above and in reliance upon (i) confirmations and representations made by the New Directors, Sang Fei and CEC; (ii) the independent professional opinions provided in this Circular (other than the opinion and recommendations of Altus Capital Limited set out in their letter reproduced in pages 40 to 85 of this Circular); (iii) the confirmation from the property valuer that the rental arrangement described in section 9C (ii) “Relationship with the CEC Group – Transactions with the CEC Group – Rental arrangements and processing arrangements” above is fair and reasonable so far as Sang Fei is concerned, the Sponsor is of the view that the terms of such ongoing connected transactions are fair and reasonable so far as the Shareholders are concerned. In reaching its opinion, the Sponsor has assumed and relied, without conducting any independent verification, upon the accuracy and completeness of the documentation, information, historical figures, representations and confirmations provided by the New Directors.

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INFORMATION ON THE NEW GROUP – FUTURE PLANS AND PROSPECTS

12. FUTURE PLANS AND PROSPECTS

CEC has stated that it intends the New Group in due course to become its principal Main Board listed subsidiary operating in the communications, consumer electronics and related industries. As the New Group’s sole operating company immediately after Completion and the Future Disposals, Sang Fei seeks first to establish itself as the major mobile phone provider for the CEC Group, the Philips Group and its other OEM and ODM customers and in the long term, aims to become a leading consumer communications products provider in the PRC with a balanced portfolio of products, comprising own-branded products and other OEM and ODM products.

Customer base and business lines

To maintain and enhance the current exclusive OEM manufacturing arrangements with the Philips Group

The New Group intends to continue to capitalise on and enhance Sang Fei’s continuing exclusive OEM supplier/customer relationship with the Philips Group. Sang Fei is currently the Philips Group’s exclusive provider of mobile phone products. Under the current exclusive OEM arrangements, Sang Fei sells Philips branded mobile phones directly to the Philips Group. This offers Sang Fei a significant and sustainable source of revenue which, though fluctuating along with the production orders from Philips in response to market demand of Philips branded mobile phones, provides Sang Fei with a relatively high level of visibility of its turnover, and a sustainable margin. In addition, Sang Fei has accumulated extensive mobile phone manufacturing experiences by providing the Philips Group with mobile phone manufacturing services and benefited greatly from the transfer by the Philips Group of its know-how and technology in mobile phone production.

To broaden OEM/ODM customer base

In addition to maintaining its position as the exclusive mobile phone supplier for the Philips Group, in the near term, the New Group aims to develop more OEM/ODM customers to bolster its OEM/ODM customer base. The New Group believes that these initiatives could diversify its sources of revenue without compromising sales of Philips branded mobile phones, allow it to benefit from increased economies of scale and hence increase its cost efficiency and overall profitability.

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INFORMATION ON THE NEW GROUP – FUTURE PLANS AND PROSPECTS

To further develop own-branded mobile phone products

The New Group intends to capitalise on the know-how and experience it has gained and the support which the CEC Group could provide in the PRC in terms of design capabilities and distribution channels to further develop its own-branded mobile phones, with a view to further diversifying its product mix and sources of revenue and to enhancing its profitability. The New Group intends to achieve this objective by, among other things:

strengthening its product development capabilities, and
adopting appropriate distribution channels. Sang Fei’s distribution strategy in respect of own-branded products is to sell them through established distributors.

Product and services range

With the broadening of its customer base and continued development of its ownbranded mobile phones, the New Group plans to increase the range of its products. At least, 10 new models of its own-branded/ODM phones using three to four different mobile phone platforms, with a large variety of functions are planned to be launched in 2004. While Sang Fei will continue to rely on external design houses as the source for platform design, it aims to reduce overall production development cost and to enhance its ability to respond to market demands for mobile phones on a timely basis by enhancing its in-house product design capability to include mobile phone hardware and software application development. To this end, Sang Fei has recruited and will continue to recruit additional personnel with software, electrical and/or other relevant engineering and design background, and expects to expand its product development team to 25 strong by the end of 2004. In terms of product capabilities, the New Group plans to have the capability of producing 3G mobile phones in the second half of 2004 through the upgrading of its existing production facilities and the acquisition of its sixth SMA production line referred to below. It also plans to expand its capability of producing key modules for mobile phones, such as LCD modules and digital camera modules.

With the increase in production capacity of its mobile phones, to reduce the exposure in having to rely on its external suppliers, the New Group intends to enlarge its LCD module assembly capacity in 2004 through the acquisition of further production equipment, increase of production space and recruitment of additional staff, to meet internal requirements of Sang Fei. It is estimated that an additional of up to RMB15 million capital expenditure is required to increase its LCD module assembly capacity. In addition, the New Group may develop its camera module assembly capability. The extent to which the LCD module assembly capacity and camera module assembly capability are to be increased/developed depends to a large extent on demand for such module assembly services.

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INFORMATION ON THE NEW GROUP – FUTURE PLANS AND PROSPECTS

Production capacity

The New Group plans to increase its production capacity through its own production capacity and by strategically outsourcing its SMA production process, thereby limiting additional capital expenditure. Based on current production projections, Sang Fei expects to acquire its sixth SMA production line and also, through processing arrangements, to acquire the use of a seventh SMA production line before the end of 2004.

In anticipation of the launch of 3G mobile phones in Europe in 2004 and to have in place a full complement of testing equipment necessary for the production of a comprehensive range of mobile phone products, Sang Fei plans to commence the upgrading and replacement of its existing production facilities starting in 2004, and to acquire 3G mobile phone production capability in the second half of 2004 for both overseas markets and the domestic market upon the issue of 3G licences and its roll-out in the relevant jurisdiction.

Based on current plans of Sang Fei, an aggregate of approximately RMB145 million is projected by Sang Fei as the required capital expenditure in 2004, of which a sum of approximately RMB120 million is planned to be used for the acquisition of production line related equipment and facilities for Philips branded mobile phones and other OEM/ODM as well as own-branded mobile phones (including the purchase of LCD module assembly equipment), with the remaining amount of approximately RMB25 million for the acquisition of general facilities and upgrading of Information Technology (IT) hardware infrastructure and software. Sang Fei has confirmed that orders in the aggregate sum of approximately RMB6 million have been placed so far for the acquisition of production line related equipments and facilities. These are expected to be funded by Sang Fei’s funds generated by operating activities and/or, where appropriate, short term bank loans.

At the same time, the New Directors will consider expanding the New Group’s overall production capabilities by acquisitions of existing manufacturing operations, if suitable opportunities arise, whether from third parties or the CEC Group.

Future injection of interests in Sang Fei

CEC does not have any plans to inject SZST’s interest in Sang Fei into the Company. There have been no negotiations or agreements between CEC and SZST in this respect. As SZST is a listed company itself and any sale of its interest in Sang Fei will constitute connected transactions of SZST under the Shenzhen listing rules, which requirements will need to be complied with as a condition precedent for such injections.

So far as CEC and Sang Fei are aware, the Philips Group has not indicated any intention to sell its interest in Sang Fei to the Company nor have there been any discussions in this respect. CEC has confirmed that there have been and are no negotiations or agreements between CEC or the Philips Group for such disposals.

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INFORMATION ON THE NEW GROUP – INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

13. INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

A. Industry information

The information presented in this section is derived from various public and private publications. The information may not be consistent with other information compiled within or outside the PRC.

Overview of Global Mobile Phone Market

Global Mobile Phone Market Overview

According to Gartner, worldwide mobile phone unit sales amounted to 520 million units in 2003, 20.5% higher than that in 2002.

Overall, the growth of the global mobile phone market is mainly driven by higher subscriber net additions and improving replacement sales in Europe, the United States, and China.

The mobile phone market is in a replacement cycle in North America and Western Europe. Mobile users are showing strong demand for new phones with games, cameras and colour screen. Vendors located in Japan, Korea and China have been gaining significant share of the mobile phone market.

IDC said that shipments of mobile phones are projected to increase from 391 million units in 2002 to 606 million units in 2006, with a compounded annual growth rate of 11.6% during those years. Shipments of 2.5G mobile phones are expected to surpass second generation (2G) mobile phones by 2005. Shipments of converged devices such as personal digital assistant cum mobile phones are forecasted to hit nearly 63 million units in 2006.

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INFORMATION ON THE NEW GROUP – INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

Overview of PRC’S Mobile Phone Market

PRC Mobile Phone Market Overview

In 2003, PRC’s GDP maintained a growth rate of approximately
9.1% and reached approximately US$1,400 billion.

According to Ministry of Information Industry (MII) of China, as at the end of 2003, PRC had the largest GSM mobile network in the world with approximately 257 million mobile subscribers. The mobile phone penetration rate is around 20.9% as of end of 2003 as compared to around 50% to 70% in North American and European countries.

The following table shows the forecast data for 2003 to 2007 of PRC’s mobile subscribers:

Mobile Subscribers Growth in China 2003-2007E

==> picture [245 x 178] intentionally omitted <==

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

(mn)
450
405
400 375
339
350
300
300
257
250
202
200
150
100
50
0
2003 2004E 2005E 2006E 2007E
----- End of picture text -----

Source: The Development Guidance for China Telecom Industry (2003), MII

As shown in the above table, it is forecasted that mobile subscribers will continue to grow from 2003 to 2007. By 2007, it is forecasted that the total number of mobile subscribers in the PRC will increase from 257 million in 2003 to approximately 405 million.

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INFORMATION ON THE NEW GROUP – INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

Mobile Phones

The growth in China’s mobile communication market is boosting China’s mobile phone market. According to MII’s Statistics Report of Electronic Information Industry in 2003, domestic mobile phone production has been growing at around 69.29% compound annual growth rate from 22.7 million units in 1999 to 186.44 million units in 2003. Domestic mobile phone sale has increased 56.1% year-on-year to 183.21 million units in 2003. Total mobile exports reached US$7,380 million in 2003, 39.4% higher than that of 2002.

China Domestic Mobile Phone Production Volume

==> picture [273 x 204] intentionally omitted <==

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

(Units in million)
200 186.44
180
160
140 131.6
120 106.2
100
83.5
80
60
40
22.7
20
0
1999 2000 2001 2002 2003
Source: MII
----- End of picture text -----

GSM Mobile Phones 2003

According to MII, GSM mobile phones remained the mainstream, accounting for 87.5% of total mobile phone sales (including exports) in the PRC in 2003.

30 GSM mobile phone manufacturers produced a total of 161 million units GSM mobile phones in 2003, a 38.55% year-on-year increase. GSM mobile phone exports reached 52.4 million units in 2002, recording a 31.6% growth over last year.

CDMA mobile phones 2003

According to MII, CDMA mobile phones’ market sale share still remained low at 12.5% despite of China Unicom’s mobile phone subsidy program.

– 192 –

INFORMATION ON THE NEW GROUP – INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

According to MII, in 2003, the 20 CDMA mobile phone manufacturers produced a total of 23.11 million CDMA mobile phones, 234.9% higher than that of 2002. CDMA total sales reached approximately 22.66 million units.

Global Mobile Phone Manufacturing and Outsourcing

According to IDC, just 29% of global mobile phone production is outsourced by the first half of 2003, far less than notebook’s 71% production outsourcing ratio. The 29% of mobile phone production that was outsourced in the first half of 2003 amounted to about 69 million units. There is significant room for expansion over the next few years.

China’s Mobile Phone Manufacturing and Outsourcing

It is clear that China’s domestic handset vendors have effectively captured the growth opportunity in the booming handset market in the past three years. According to MII’s Statistics Report of Electronic Information Industry in 2003, domestic brand mobile phone vendors have gained more and more market share in China due to its high price performance ratio, good service, time to market capability and government support. In 2003 the domestic brand GSM mobile handset production is 48.3 million units, accounting for 30% of the total GSM production in China. The domestic brand mobile GSM handset sale reached 47.329 million units, accounting for 29.5% of the total GSM sale.

The number of mobile phone manufacturers in the PRC has grown from five in 1997 to 37 in 2002, with 30 producing GSM mobile phones and 20 CDMA mobile phone manufacturers, according to MII. 13 companies hold both GSM and CDMA manufacturing licenses.

Future Outlook and Industry Trends of PRC’s Mobile Phone Market

Replacement cycles and new features such as colour screen and camera are becoming the dominant force in driving unit sales versus subscriber net addition. In 2003, MII expected the growth in mobile phone shipments to slow to approximately 17.4% year on year in 2003, from approximately 42.0% year on year in 2002 and approximately 59.4% year on year in 2001.

Competition and expanding production capacity is pushing down mobile phone price, the price competition is expected to be increasingly fierce amongst vendors. Meanwhile, the launch of new models is expected

– 193 –

INFORMATION ON THE NEW GROUP – INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

to slow down the drop of ASP. It has also been suggested that future mobile phone sales business model to be cooperation amongst the manufacturers; retailers/distributors and wireless operators.

With the development of GPRS and CDMA wireless applications, 2.5G highlighted the PRC’s telecommunications market in the first half of 2003. In respect of the development of 3G in the PRC, as at the Latest Practicable Date, three standards, being WCDMA, CDMA2000 and TDSCDMA, are being tested and are in the process of technical preparation.

The New Group expects China to continue to gain market share for global mobile phone production. The New Directors expects consolidation to take place in the PRC mobile phone market. During the consolidation process among foreign and local vendors, domestic players are expected to continue to gain market share in China because of their cost and product design advantages. However, foreign vendors with strong technical capabilities, such as Nokia, Motorola and Samsung, are expected to continue to hold a significant share of the markets.

B. Legal and regulatory information

There is a large number of PRC laws and regulations governing the production, quality and sales of mobile phones in the PRC, certain requirements relating to which are set out below.

Production

《生產無㵟電發射設備的管理規定》 (Provisions of Administration of Production of Radio Transmission Equipment) jointly promulgated by the then State Wireless Communications Administration Committee and the State Administration of Technology Supervision which took effect on 1st January, 1999 require that a mobile phone manufacturer in the PRC must have been issued a 《無㵟電發射設備型號核准証》 (Radio Transmission Equipment Type Approval Certificate) before it could produce mobile phones. In addition, the manufacturer may also comply with local government licensing requirements. In the case of Shenzhen at which Sang Fei’s production premises are located, a 《無㵟電發射設備生產許可証》 (Licence of Production of Radio Transmission Equipment) must also be obtained.

– 194 –

INFORMATION ON THE NEW GROUP – INFORMATION ON THE MOBILE PHONE MANUFACTURING INDUSTRY

Quality and sales

PRC regulations restrict access to the public communications network by mobile phones which do not comply with the specified quality standards. Under the 《強制性產品認證管理規定》 (Provisions of Administration of Compulsory Products Certification) promulgated by the Ministry of Information Industry which took effect on 2nd July, 2001, communications equipment which have not passed quality certification are prohibited access to the public telecommunications network. In addition, 《電信設備進網管理辦法》 (Administrative Measures of Network Access of Telecommunication Equipment) promulgated by the Ministry of Information Industry which took effect on 1st June, 2001 prohibits access to public telecommunications network and domestic sales of any telecommunications equipment which have not obtained a 《電信設備進網許可証》 (network access certificate), which is valid for three years from issue. The certified relevant equipment must bear a “ label of network access certificate” issued by the Ministry of Information Industry. In Shenzhen, the vendors of wireless telecommunications equipment must have obtained a 《無㵟電通訊設備銷售許可証》 (Licence of Sale of Radio Transmission Equipment) issued by Shenzhen Radio Administration Office, before they could sell such equipment.

After a manufacturer is issued a network access certificate for its products, random inspections may be carried out against its products (whether obtained from the manufacturer or the market) for compliance with specified quality standards. Where products are found to be sub-standard and the manufacturer does not pass a further quality inspection after being given the opportunity to rectify defects, the Ministry of Information Industry may cancel the network access certificate and publish that fact.

Under the 《移動電話機商品修理更換退貨責任規定》 (Provisions of Liabilities of Reparation, Replacement and Refund of Mobile Phones) issued jointly by the General Administration of Quality Supervision, Inspection and Quarantine, the State Administration for Industry and Commerce and the Ministry of Information Industry on 17th September, 2001, a seller of mobile phones sold in the PRC has a “three warranty” (三包 ) obligation, whereby it is required to offer a refund for any faulty mobile phone product returned within 7 days after sale, to replace without charge any faulty mobile phone product within 15 days after sale and to repair without charge any faulty mobile phone product within 12 months after sale.

– 195 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

The following is the text of a report, prepared for the purpose of inclusion in this circular, received from the reporting accountants, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong.

==> picture [110 x 53] intentionally omitted <==

PricewaterhouseCoopers 22nd Floor, Prince’s Building Central, Hong Kong

21st June, 2004

The Directors

Winsan (China) Investment Group Company Limited China Electronics Corporation The Hongkong and Shanghai Banking Corporation Limited

Dear Sirs,

We set out below our report on the financial information regarding Shenzhen Sang Fei Consumer Communications Company Limited (the “Company”) for each of the three years ended 31st December, 2003 (collectively the “Relevant Periods”) for inclusion in the circular of Winsan (China) Investment Group Company Limited dated 21st June, 2004 (the “Circular”) in connection with its proposed acquisition (the “Acquisition”) of a 65% equity interest in the Company from China Electronics Corporation.

The Company was established in the People’s Republic of China (the “PRC”) on 25th October, 1996 as a sino-foreign equity joint venture enterprise. The Company is principally engaged in manufacturing and distribution of mobile telephones. The Company operates in the PRC and its reporting currency is Renminbi (“RMB”).

The statutory accounts of the Company for the years ended 31st December, 2001, 2002 and 2003 were audited by Shenzhen Dahua Tiancheng Certified Public Accountants, Ernst & Young Hua Ming Certified Public Accountants and PricewaterhouseCoopers Zhong Tian CPAs Company Limited respectively. The statutory audited accounts of the Company were prepared in accordance with the relevant PRC accounting principles and financial regulations applicable to sino-foreign equity joint venture enterprises established in the PRC.

We have examined the audited accounts for the Relevant Periods and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the Hong Kong Society of Accountants (the “HKSA”).

– I–1 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

The financial information as set out in sections I to III below (the “Financial Information”) has been prepared based on the audited accounts of the Company, on the basis set out in section II note 1(a) below, after making such adjustments as are appropriate to comply with accounting principles generally accepted in Hong Kong and accounting standards issued by the HKSA.

The directors of the Company are responsible for the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of the Company as at 31st December, 2001, 2002 and 2003 and the results and cash flows of the Company for the Relevant Periods.

– I–2 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

I. ACCOUNTS

(A) Profit and Loss Accounts

Note Turnover 2 Cost of sales Gross profit Other revenues 2 Distribution costs Administrative expenses Other operating expenses Operating profit 3 Finance costs 4 Profit before taxation Taxation 5 Profit after taxation Dividend 6 Earnings per share 8	Year 2001 RMB’000 2,750,814 (2,070,942) 679,872 15,495 (214,161) (205,548) (22,057) 253,601 – 253,601 – 253,601 200,814 N/A	ended 31st December, 2002 2003 RMB’000 RMB’000 2,031,164 3,035,687 (1,833,969) (2,871,432) 197,195 164,255 20,931 19,930 (15,381) (29,042) (99,335) (55,984) (13,111) (23,952) 90,299 75,207 (2,852) (6,877) 87,447 68,330 (8,686) (5,499) 78,761 62,831 – – N/A N/A

– I–3 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(B) Balance Sheets

Note Non-current assets Intangible assets 10 Fixed assets 11 Current assets Inventories 12 Trade and other receivables 13 Bank balances and cash Current liabilities Trade and other payables 14 Taxation payable Provisions 15 Short-term bank loans, unsecured 16 Net current assets Total assets less current liabilities Financed by: Paid-in capital 17 Retained earnings/ (accumulated losses) 18 Proposed final dividend Others Other reserves 18 Owners’ equity	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 2,086 1,788 4,074 108,924 93,706 93,356 111,010 95,494 97,430 144,972 69,174 270,163 276,339 499,836 1,071,289 547,770 34,924 24,865 969,081 603,934 1,366,317 708,268 307,420 831,135 – 4,708 2,826 37,408 108 1,243 – 150,000 328,000 745,676 462,236 1,163,204 223,405 141,698 203,113 -------------- -------------- -------------- 334,415 237,192 300,543 226,800 251,630 276,470 200,814 – – (108,152) (60,131) 2,700 14,953 45,693 21,373 334,415 237,192 300,543	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 2,086 1,788 4,074 108,924 93,706 93,356 111,010 95,494 97,430 144,972 69,174 270,163 276,339 499,836 1,071,289 547,770 34,924 24,865 969,081 603,934 1,366,317 708,268 307,420 831,135 – 4,708 2,826 37,408 108 1,243 – 150,000 328,000 745,676 462,236 1,163,204 223,405 141,698 203,113 -------------- -------------- -------------- 334,415 237,192 300,543 226,800 251,630 276,470 200,814 – – (108,152) (60,131) 2,700 14,953 45,693 21,373 334,415 237,192 300,543
		97,430
		270,163 1,071,289 24,865
		1,366,317
		831,135 2,826 1,243 328,000
		1,163,204
		203,113 -------------- 300,543

		276,470 – 2,700 21,373
		300,543

– I–4 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(C) Statements of Changes in Owners’ Equity

Retained
earnings/
Paid-in
Capital
Surplus (accumulated
capital
surplus
reserves
losses)
RMB’000
RMB’000
RMB’000
RMB’000
(Note 17)
(Note 18(a))
(Note 18(b))
(Note 18(c))
At 1st January, 2001
226,800
(2,947)
–
9,111
Profit for the year
–
–
–
253,601
Appropriation from
the prior year profit
– Appropriation for
reserve fund
–
–
8,950
(8,950)
– Appropriation for
enterprise expansion
fund
–
–
8,950
(8,950)
– Dividend
–
–
–
(152,150)
At 31st December, 2001
226,800
(2,947)
17,900
92,662
Profit for the year
–
–
–
78,761
Appropriation from
the prior year profit
– Appropriation for
reserve fund
–
–
15,370
(15,370)
– Appropriation for
enterprise expansion
fund
–
–
15,370
(15,370)
– Dividend
–
–
–
(200,814)
Capital injection
24,830
–
–
–
At 31st December, 2002
251,630
(2,947)
48,640
(60,131)
Profit for the year
–
–
–
62,831
Capital injection
520
–
–
–
Capitalisation of reserve
24,320
–
(24,320)
–
At 31st December, 2003
276,470
(2,947)
24,320
2,700

Total
RMB’000
232,964
253,601
–
–
(152,150)
334,415
78,761
–
–
(200,814)
24,830
237,192
62,831
520
–
300,543

– I–5 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(D) Cash Flow Statements

Note Operating activities Net cash inflow/ (outflow) from operations 19(a) Interest paid PRC income tax paid Net cash inflow/ (outflow) from operating activities Investing activities Purchase of fixed assets and intangible assets Cash received from disposal of fixed assets Interest received Net cash outflow from investing activities Net cash inflow/(outflow) before financing activities Financing activities 19(b) Cash received from capital injection New loans payable Repayment of loans borrowed Dividend paid Net cash (outflow)/ inflow from financing Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1st January Cash and cash equivalents at 31st December Analysis of balances of cash and cash equivalents: Bank balances and cash	Year 2001 RMB’000 515,197 – – 515,197 (46,006) 5,936 4,852 (35,218) 479,979 – – – (152,150) (152,150) 327,829 219,941 547,770 547,770	ended 31st December, 2002 2003 RMB’000 RMB’000 (437,783) (126,811) (2,660) (6,295) (3,978) (7,381) (444,421) (140,487) (46,929) (48,608) – – 4,488 516 (42,441) (48,092) (486,862) (188,579) 24,830 520 240,000 328,000 (90,000) (150,000) (200,814) – (25,984) 178,520 (512,846) (10,059) 547,770 34,924 34,924 24,865 34,924 24,865

– I–6 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

II. NOTES TO THE ACCOUNTS

1. Principal accounting policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the HKSA. They have been prepared under the historical cost convention.

(b) Translation of foreign currencies

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

(c) Intangible assets

(i) Computer software

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with identifiable and unique software products acquired by the Company and probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

Expenditure which enhances or extends the performance of computer software programmes beyond their original specifications is recognised as a capital improvement and added to the original cost of the software. Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives, not exceeding a period of 5 years.

(ii) Research and development costs

Research costs are expensed as incurred. Costs incurred on development projects relating to the design and testing of new or improved products are recognised as an intangible asset where the technical feasibility and intention of completing the product under development has been demonstrated and the resources are available to do so, costs are identifiable and there is an ability to sell or use the asset that will generate probable future economic benefits. Such development costs are recognised as an asset and amortised on a straight-line basis over a period of not more than 5 years to reflect the pattern in which the related economic benefits are recognised. Development costs that do not meet the above criteria are expensed as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

(iii) Impairment of intangible assets

At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that intangible assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account.

– I–7 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(d) Fixed assets

(i) Fixed assets

Fixed assets, comprising leasehold improvements, plant and machinery, motor vehicles and furniture and fixtures are stated at cost less accumulated depreciation and accumulated impairment losses.

(ii) Depreciation

Fixed assets are depreciated at rates sufficient to write off their cost less accumulated impairment losses to their residual value over their estimated useful lives on a straight-line basis. The principal estimated useful lives are as follows:

Leasehold improvements	5 years
Plant and machinery	3–4 years
Motor vehicles	5 years
Furniture and fixtures	4–5 years

Improvements are capitalised and depreciated over their expected useful lives to the Company.

(iii) Impairment and gain or loss on disposal

At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that fixed assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account.

The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account.

(e) 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 profit and loss account on a straight-line basis over the lease periods.

(f) Inventories

Inventories comprise raw materials, work in progress, semi-finished products and finished goods and are stated at the lower of cost and net realisable value. Cost, calculated on the first-in first-out basis, comprises materials, direct labour and an appropriate proportion of all production overhead expenditure. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(g) Accounts receivable

Provision is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such provision.

– I–8 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(h) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, cash investments with a maturity of three months or less from date of investment and bank overdrafts.

(i) Provisions

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

The Company recognises a provision for repairs or replacements of products still under warranty at the balance sheet date. This provision is calculated based on past history of the level of repairs and replacements.

(j) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave is recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date.

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

(ii) Bonus plans

The expected cost of bonus payments are recognised as a liability when the Company has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made.

Liabilities for profit sharing and bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

(iii) Retirement benefits

The Company has to make contributions to the staff retirement scheme managed by the local government in accordance with the relevant rules and regulations. Contributions to the retirement benefit scheme are charged to the profit and loss account as and when incurred.

(k) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

– I–9 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(l) Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that outflow is probable, they will then be recognised as a provision.

(m) Revenue recognition

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

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

(n) Borrowing costs

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

All other borrowing costs are charged to the profit and loss account in the year in which they are incurred.

(o) Segment reporting

In accordance with the Company’s internal financial reporting the Company has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format.

In respect of geographical segment reporting, sales are based on the country in which the customer is located. Total assets and capital expenditure are where the assets are located.

Unallocated costs represent corporate expenses. Segment assets consist primarily of receivables. Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to property, plant and equipment and intangible assets.

– I–10 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

2. Turnover, revenue and segment information

(a) The Company is principally engaged in manufacturing and distribution of mobile telephones. Revenues recognised are as follows:

Turnover – Sale of mobile telephones Other revenues – Interest income – Write-off of long-term outstanding payables – Others Total revenues	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 2,750,814 2,031,164 3,035,687 4,852 4,488 516 6,500 5,777 – 4,143 10,666 19,414 15,495 20,931 19,930 2,766,309 2,052,095 3,055,617	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 2,750,814 2,031,164 3,035,687 4,852 4,488 516 6,500 5,777 – 4,143 10,666 19,414 15,495 20,931 19,930 2,766,309 2,052,095 3,055,617
		516 – 19,414
		19,930
		3,055,617

(b) Primary reporting format – business segments

Year 2001

Own brand Philips brand products products Distribution Distribution through through OEM other wholesalers OEM wholesalers products Elimination RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Turnover 2,140,577 2,382,561 – 40,564 (1,812,888) Segment results 116,147 258,035 – 12,701 – Unallocated revenue Unallocated costs Operating profit Finance costs Profit before taxation Taxation Profit after taxation Segment assets 40,102 496,735 – 4,472 (250,898) Unallocated assets Total assets Segment liabilities (474,726) (221,388) – – 250,898 Unallocated liabilities Total liabilities Capital expenditure Depreciation Amortisation charge	Total RMB’000 2,750,814

	386,883 4,852 (138,134)
	253,601 –
	253,601 –
	253,601

	290,411 789,680
	1,080,091

	(445,216) (300,460)
	(745,676)

	46,006 47,824 989

– I–11 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

Year 2002

Own brand Philips brand products products Distribution Distribution through through OEM other wholesalers OEM wholesalers products Elimination RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Turnover – 1,993,491 4,568 33,105 – Segment results – 157,044 85 11,985 – Unallocated revenue Unallocated costs Operating profit Finance costs Profit before taxation Taxation Profit after taxation Segment assets – 494,739 – 5,097 – Unallocated assets Total assets Segment liabilities – (113,562) (5,615) – – Unallocated liabilities Total liabilities Capital expenditure Depreciation Amortisation charge	Total RMB’000 2,031,164

	169,114 4,488 (83,303)
	90,299 (2,852)
	87,447 (8,686)
	78,761

	499,836 199,592
	699,428

	(119,177) (343,059)
	(462,236)

	46,929 60,450 1,866

– I–12 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

Year 2003

Own brand Philips brand products products Distribution Distribution through through OEM other wholesalers OEM wholesalers products Elimination RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Turnover – 2,752,548 119,627 163,512 – Segment results – 143,464 7,150 15,170 – Unallocated revenue Unallocated costs Operating profit Finance costs Profit before taxation Taxation Profit after taxation Segment assets – 876,386 30,737 164,166 – Unallocated assets Total assets Segment liabilities – (143,601) (5,312) – – Unallocated liabilities Total liabilities Capital expenditure Depreciation Amortisation charge (c) Secondary reporting format – geographical segments	Total RMB’000 3,035,687

	165,784 516 (91,093)
	75,207 (6,877)
	68,330 (5,499)
	62,831

	1,071,289 392,458
	1,463,747

	(148,913) (1,014,291)
	(1,163,204)

	48,608 45,087 744

Mainland China EMEA – Europe Asia excluding mainland China and Hong Kong Hong Kong Unallocated assets	Year e 2001 RMB’000 2,181,141 331,231 213,734 24,708 2,750,814	Turnover nded 31st December, 2002 2003 RMB’000 RMB’000 1,172,120 1,443,469 549,791 1,131,823 281,912 407,330 27,341 53,065 2,031,164 3,035,687	As a 2001 RMB’000 31,441 186,280 54,542 4,076 803,752 1,080,091	Total assets t 31st December, 2002 2003 RMB’000 RMB’000 168,231 535,161 292,069 339,864 38,781 179,798 755 16,466 199,592 392,458 699,428 1,463,747	Capital expenditure Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 46,006 46,929 48,608	Capital expenditure Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 46,006 46,929 48,608

There were no sales between the geographical segments.

– I–13 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

3. Operating profit

Operating profit is stated after charging and crediting the following:

Charging
Depreciation of owned fixed assets
Loss on disposal of fixed assets
Staff costs (including directors’
remuneration)(Note 7)
Cost of inventories
Provision for inventories
Provision for warranty_(Note 15)
Operating leases of buildings
Research and development costs
Auditors’ remuneration
Amortisation of intangible assets
(included in administrative expenses)
_Crediting
Reversal of provision for bad and
doubtful debts
4.
Finance costs
Interest on bank loans and overdrafts

Year ended 31st December,
2001
2002
2003
RMB’000
RMB’000
RMB’000
47,824
60,450
45,087
12,601
129
841
63,991
42,380
63,035
1,967,047
1,718,008
2,740,868
3,701
2,850
1,000
30,198
108
4,222
9,298
6,208
11,332
10,233
6,652
6,198
1,782
391
507
989
1,866
744
6,735
–
–
Year ended 31st December,
2001
2002
2003
RMB’000
RMB’000
RMB’000
–
2,852
6,877

– I–14 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

5. Taxation

The amount of taxation charged to the profit and loss account represents:

		Year ended 31st December,	Year ended 31st December,
	2001	2002	2003
	RMB’000	RMB’000	RMB’000
Current taxation
– PRC income tax	–	8,686	5,499

Notes:

(a) As the Company qualifies as a foreign investment production enterprise and is established in Shenzhen Special Economic Zone in the PRC, the prevailing enterprise income tax rate is 15%. As approved by the tax authorities in 1998, the Company is entitled to exemption from income taxes for two years followed by a 50% tax reduction for three years, commencing from the year ended 31st December, 2000, the first cumulative profit-making year net of losses carried forward. Enterprise income taxes have been provided at the rate of zero, 7.5% and 7.5% on the estimated assessable profit for each of the three years ended 31st December, 2001, 2002 and 2003 respectively.
(b) The taxation on the Company’s profit before taxation differs from the theoretical amount that would arise using the taxation rate of the home country of the Company as follows:

Profit before taxation Calculated at a taxation rate of zero in 2001 and 7.5% in 2002 and 2003 Expenses not deductible for taxation purposes Taxation charge	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 253,601 87,447 68,330 – 6,559 5,125 – 2,127 374 – 8,686 5,499	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 253,601 87,447 68,330 – 6,559 5,125 – 2,127 374 – 8,686 5,499
		5,125 374
		5,499

As at 31st December, 2001, 2002 and 2003 the Company did not have any significant deferred tax assets and liabilities.

6. Dividend

The final dividend of RMB200,814,000 declared for the year ended 31st December, 2001 was paid and accounted for in the year ended 31st December, 2002.

No dividend was proposed by the board of directors for the years ended 31st December, 2002 and

– I–15 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

7. Staff costs

Staff costs, including directors’ emoluments, were analysed as follows:

Salaries, allowances and bonuses Contributions to a retirement scheme_(Note (a))_ Others	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 55,550 34,767 52,007 3,977 3,239 4,111 4,464 4,374 6,917 63,991 42,380 63,035	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 55,550 34,767 52,007 3,977 3,239 4,111 4,464 4,374 6,917 63,991 42,380 63,035
		63,035

(a) The Company participates in a defined contribution retirement scheme based on laws and regulations in the PRC. Each employee covered by the scheme is entitled, after their retirement from the Company, to a pension equal to the basic salary of the employees as at their retirement dates in the PRC. The local government authority of the PRC is responsible for the pension liabilities to these retired employees in the PRC. The Company made monthly contributions to the retirement scheme at a minimum rate of 8% of the basic salaries of employees in the PRC.

8. Earnings per share

No earnings per share figure is presented as the Company is a sino-foreign equity joint venture and its paid-in capital is not limited by shares.

9. Directors’ and senior management’s emoluments

(a) Directors’ emoluments

The emoluments payable to director during the Relevant Periods were as follows:

Basic salaries, allowances or benefits in kind Bonuses Contributions to retirement schemes	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 – – 300 – – – – – – – – 300	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 – – 300 – – – – – – – – 300
		300

The emoluments fell within the following band:

		Number of individual
		Year ended 31st December,
Emolument band	2001	2002	2003
RMBnil – RMB1,000,000	–	–	1

No directors waived any emoluments during the Relevant Periods.

During the Relevant Periods, the Company did not pay any amount to the five highest paid individuals (including directors and employees) nor any other directors of the Company as an inducement to join or upon joining the Company as compensation for loss of office.

– I–16 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(b) Five highest paid individuals

The emoluments payable to the five highest paid individuals during the Relevant Periods were as follows:

Basic salaries, allowances and benefits in kind Bonuses Contributions to retirement schemes	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 7,272 5,636 6,071 2,169 1,421 1,997 952 420 507 10,393 7,477 8,575	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 7,272 5,636 6,071 2,169 1,421 1,997 952 420 507 10,393 7,477 8,575
		8,575

The emoluments fell within the following bands:

Emolument bands RMB1,000,001 – RMB1,500,000 RMB1,500,001 – RMB2,000,000 RMB2,000,001 – RMB2,500,000 RMB2,500,001 – RMB3,000,000	Number of individuals Year ended 31st December, 2001 2002 2003 – 3 3 2 1 1 1 1 – 2 – 1 5 5 5	Number of individuals Year ended 31st December, 2001 2002 2003 – 3 3 2 1 1 1 1 – 2 – 1 5 5 5
		5

10. Intangible assets

Computer software Opening net book amount Additions Amortisation charge Closing net book amount Cost Accumulated amortisation Net book amount	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 2,542 2,086 1,788 533 1,568 3,030 (989) (1,866) (744 2,086 1,788 4,074 5,768 7,336 10,366 (3,682) (5,548) (6,292 2,086 1,788 4,074	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 2,542 2,086 1,788 533 1,568 3,030 (989) (1,866) (744 2,086 1,788 4,074 5,768 7,336 10,366 (3,682) (5,548) (6,292 2,086 1,788 4,074
		4,074

		10,366 (6,292
		4,074

– I–17 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

11. Fixed assets

Leasehold improvements RMB’000 Cost: At 1st January, 2001 19,343 Additions 1,320 Disposals – At 31st December, 2001 and 1st January, 2002 20,663 Additions 1,496 Disposals – At 31st December, 2002 and 1st January, 2003 22,159 Additions 5,093 Disposals – At 31st December, 2003 27,252 Accumulated depreciation: At 1st January, 2001 9,681 Charge for the year 3,144 Disposals – At 31st December, 2001 and 1st January, 2002 12,825 Charge for the year 5,288 Disposals – At 31st December, 2002 and 1st January, 2003 18,113 Charge for the year 4,035 Disposals – At 31st December, 2003 22,148 Net book value: At 31st December, 2003 5,104 At 31st December, 2002 4,046 At 31st December, 2001 7,838	Plant and machinery RMB’000 166,801 38,751 (52,628) 152,924 39,266 (80) 192,110 30,005 (10) 222,105 56,193 41,589 (37,870) 59,912 52,701 – 112,613 37,559 – 150,172 71,933 79,497 93,012	Motor vehicles RMB’000 1,800 90 (35) 1,855 301 – 2,156 442 (322) 2,276 641 322 (24) 939 197 – 1,136 335 (289) 1,182 1,094 1,020 916	Furniture and fixtures RMB’000 13,951 5,312 (5,693) 13,570 4,298 (173) 17,695 10,038 (2,596) 25,137 5,568 2,769 (1,925) 6,412 2,264 (124) 8,552 3,158 (1,798) 9,912 15,225 9,143 7,158	Total RMB’000 201,895 45,473 (58,356) 189,012 45,361 (253) 234,120 45,578 (2,928) 276,770 72,083 47,824 (39,819) 80,088 60,450 (124) 140,414 45,087 (2,087) 183,414 93,356 93,706 108,924

– I–18 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

12. Inventories

Raw materials Work in progress Semi-finished products Finished goods _Less:_provision	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 116,847 61,044 189,689 6,350 1,492 14,702 1,613 12,747 34,076 28,224 4,803 33,283 153,034 80,086 271,750 (8,062) (10,912) (1,587 144,972 69,174 270,163	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 116,847 61,044 189,689 6,350 1,492 14,702 1,613 12,747 34,076 28,224 4,803 33,283 153,034 80,086 271,750 (8,062) (10,912) (1,587 144,972 69,174 270,163
		271,750 (1,587
		270,163

At 31st December, 2001, 2002 and 2003, no inventories are carried at net realisable value.

13. Trade and other receivables

Trade receivables_(note (a)) Notes receivable(note (b)) Other receivables from related parties(note 21(c))_ Prepayments and deposits Other receivables	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 265,087 482,719 1,002,848 – – 28,657 772 12,772 17,202 3,356 773 6,688 7,124 3,572 15,894 276,339 499,836 1,071,289	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 265,087 482,719 1,002,848 – – 28,657 772 12,772 17,202 3,356 773 6,688 7,124 3,572 15,894 276,339 499,836 1,071,289
		1,071,289

(a) The credit terms of the Company generally range from 30 to 60 days. The ageing analysis of the trade receivables was as follows:

Current to 30 days 31–60 days 61–360 days	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 265,087 451,183 997,810 – 9,208 2,630 – 22,328 2,408 265,087 482,719 1,002,848	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 265,087 451,183 997,810 – 9,208 2,630 – 22,328 2,408 265,087 482,719 1,002,848
		1,002,848

Included in the balance were trading receivables from related parties of RMB244,665,000, RMB482,719,000 and RMB881,318,000 as at 31st December, 2001, 2002 and 2003 respectively. About 95% of the trade receivables from related parties as at 31st December, 2003 was covered by bank-issued guarantee documents.

(b) The balance represents bank acceptance notes with maturity periods within six months. Included in the balance were notes receivable from related parties of RMB11,650,000 as at 31st December, 2003.

– I–19 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

14. Trade and other payables

Trade payables Other payables to related parties Accrued expenses Other payables	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 377,789 188,117 724,151 191,994 46,685 41,244 100,792 45,592 20,203 37,693 27,026 45,537 708,268 307,420 831,135	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 377,789 188,117 724,151 191,994 46,685 41,244 100,792 45,592 20,203 37,693 27,026 45,537 708,268 307,420 831,135
		831,135

The ageing analysis of the trade payables was as follows:

Current to 30 days 31–60 days Over 60 days	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 294,549 181,841 719,757 1,386 67 1,560 81,854 6,209 2,834 377,789 188,117 724,151	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 294,549 181,841 719,757 1,386 67 1,560 81,854 6,209 2,834 377,789 188,117 724,151
		724,151

Included in the balance were trading payables to related parties of RMB151,559,000, RMB61,211,000 and RMB100,054,000 as at 31st December, 2001, 2002 and 2003 respectively.

15. Provisions

Warranty As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 27,936 37,408 108	Warranty As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 27,936 37,408 108	Warranty As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 27,936 37,408 108
30,198 –	108 –	4,222 –
30,198 (20,726) 37,408	108 (37,408) 108	4,222 (3,087) 1,243
37,408 –	– 108	– 1,243

The Company gives 15-month warranties on products distributed by Sang Fei for end users in the PRC market and undertakes to repair and replace items that fail to operate satisfactorily. Provision has been recognised for expected warranty claims based on past experience of the level of repairs and returns. No provision for warranty is required for OEM products.

– I–20 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

16. Short-term bank loans, unsecured

		As at 31st December,
	2001	2002	2003
	RMB’000	RMB’000	RMB’000
Repayable within one year
– Unsecured	–	150,000	328,000

The bank loans bear interest at the average borrowing rate of 4.526% per annum in both 2002 and 2003.

17. Paid-in capital

At beginning of the year Capital injection and capitalisation of reserve At end of the year	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 226,800 226,800 251,630 – 24,830 24,840 226,800 251,630 276,470	Year ended 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 226,800 226,800 251,630 – 24,830 24,840 226,800 251,630 276,470
		276,470

Pursuant to a resolution passed by the board of directors on 23rd April, 2002, the Company’s registered capital was increased by US$6,000,000 to US$33,000,000. Additional capital of US$3,000,000 (equivalent to RMB24,830,000) was paid in 2002.

According to the revised Articles of the Company, the remaining US$3,000,000 was satisfied by transferring from reserve fund of RMB24,320,000 and by cash of RMB520,000 in November 2003 based on the respective proportion of equity owners’ interests in the Company.

18. Reserves

(a) Capital surplus

Capital surplus represents the exchange differences arising from paid-in capital received in foreign currencies.

(b) Surplus reserves

In accordance with the “Law of the PRC on Joint Ventures Using Chinese and Foreign Investment” and the Company’s Articles of Association, appropriations of the reserve fund and the enterprise expansion fund from profit after taxation have to be made prior to profit distribution to the equity owners. The percentage of appropriation of reserve fund and the enterprise expansion fund is decided by the board of directors.

Upon approval from the board of directors, the reserve fund can be used to offset against accumulated losses or to increase capital while the enterprise expansion fund can be used to expand production or to increase capital.

(c) Retained earnings/(accumulated losses)

The Company adopted the Accounting System for Business Enterprises (the “New Accounting System”) which was implemented by the relevant PRC authorities on 1st January, 2002. Based on the New Accounting System, certain expenses should be accrued for and charged to prior years’ accounts. The impact of these changes in the accounting policies had been adjusted retrospectively resulting in accumulated losses at the end of 2002.

(d) The detail movements of reserves have been stated in the statement of changes of owners’ equity.

– I–21 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

19. Notes to the cash flow statements

(a) Reconciliation of operating profit to net cash inflow/(outflow) from operating activities is as below:

Operating profit
Depreciation
Amortisation
Loss on disposal of
fixed assets
Provision for inventories
Reversal of provision for
bad and doubtful debts
Write-off of long-term
outstanding payables
Interest income
Operating profit before
working capital changes
Decrease/(increase)
in inventories
Decrease/(increase) in trade
and other receivables
(Decrease)/increase in trade and
other payables
Net cash inflow/(outflow)
from operations
(b)
Analysis of changes in financing
At 1st January, 2001
Dividend declared
Dividend paid
At 31st December, 2001
Capital injection
New loans raised
Repayment of loans borrowed
Dividend declared
Dividend paid
At 31st December, 2002
Capital injection
Capital transferring from reserve fund
New loans raised
Repayment of loans borrowed
At 31st December, 2003

Year ended 31st December,
2001
2002
2003
RMB’000
RMB’000
RMB’000
253,601
90,299
75,207
47,824
60,450
45,087
989
1,866
744
12,601
129
841
3,701
2,850
1,000
(6,735)
–
–
(6,500)
(5,777)
–
(4,852)
(4,488)
(516)
300,629
145,329
122,363
116,899
72,948
(201,989)
100,697
(223,497)
(571,453)
(3,028)
(432,563)
524,268
515,197
(437,783)
(126,811)
Paid-in
Dividend
capital
payable
Bank loans
RMB’000
RMB’000
RMB’000
226,800
–
–
–
152,150
–
–
(152,150)
–
226,800
–
–
24,830
–
–
–
–
240,000
–
–
(90,000)
–
200,814
–
–
(200,814)
–
251,630
–
150,000
520
–
–
24,320
–
–
–
–
328,000
–
–
(150,000)
276,470
–
328,000

– I–22 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

20. Commitments

(a) Capital commitments for fixed assets

		31st December,
	2001	2002	2003
	RMB’000	RMB’000	RMB’000
Contracted but not provided for	–	12,058	14,072

(b) Commitments under operating leases

The Company had future aggregate minimum lease payments under non-cancellable operating leases as follows:

Not later than one year Later than one year and not later than five years	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 5,469 6,283 15,704 14,280 9,360 34,207 19,749 15,643 49,911	As at 31st December, 2001 2002 2003 RMB’000 RMB’000 RMB’000 5,469 6,283 15,704 14,280 9,360 34,207 19,749 15,643 49,911
		49,911

– I–23 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

21. Related party transactions

Before 2002, the major shareholder of the Company was Philips Consumer Communications B.V. (“PCCBV”) (incorporated in Holland) which owned 90% of the Company’s interest. Since 2002, after certain transfer of interests in the Company among its owners, the Company is then controlled by Shenzhen SED Electronics Industry Corporation (“SED”) (incorporated in the PRC) which owns 65% of the Company’s interest. In October 2003, SED has transferred its 40% equity interest in the Company to China Electronics Industry Corporation, a subsidiary of China Electronics Corporation (incorporated in the PRC) with nil consideration. Before this transaction, the ultimate holding company of the Company is Koninklijke Philips Electronics (“KPE”) (incorporated in Holland).

The following transactions were carried out with related parties:

(a) Sales of goods, samples, materials, and margin recovery

Sales of goods:
Philips Electronics
(Shanghai) Co., Ltd.
Philips France S.A.S
Shenzhen SED Coalition
Electronics Co., Ltd.
Philips Electronics
Singapore Pte.
Ltd-Consumer
Communications
CEC Telecom Technology
Co., Ltd.
Philips Electronics
Hong Kong Ltd.
Sales of samples and materials:
CEC Wireless R&D Ltd
Philips Electronics
(Shanghai) Co., Ltd.
Shenzhen SED Coalition
Electronics Co., Ltd.
Margin recovery:
Philips France S.A.S

Year ended 31st December,
2001
2002
2003
RMB’000
RMB’000
RMB’000
–
1,134,447#
1,158,471#
331,231
548,982#
1,131,823#
831,863#
4,568
95,493
213,734
281,912#
407,330#
40,564#
33,087
–
24,708
27,341#
53,065#
7,857#
813
–
–
1,259#
3,620#
–
–
5,001
254*
6,432#
–

* Fellow subsidiaries at the time of the related party transactions

# Subsidiaries or fellow subsidiaries of other equity holder of the Company

In 2001, goods were sold to KPE and its subsidiaries (the “Philips Group”) at prices agreed by Philips Group and the Company. Since 2002, sales to the Philips Group were based on a longterm agreement in which the Philips Group was entitled to purchase goods from the Company at a price determined using a “cost plus” basis.

During the Relevant Periods, sales to other related parties were carried out on commercial terms and conditions and at market prices.

– I–24 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(b) Purchases of goods, services, royalties, rental and fixed assets

Purchases of goods:
Philips Trading & Services Co.
Philips Components PEC MOB
Philips France S.A.S
Philips Electronics Singapore
Pte. Ltd – Consumer
Communications
Philips Electronics
Hong Kong Ltd.
Keytec Tilburg B.V.
Oesterreichische Philips
Purchases of services:
Consulting services:
Philips (China) Investment
Company Limited
Philips Electronics
Hong Kong Ltd.
Technical assistance:
Koninklijke Philips
Electronics
Fitment & decoration:
Shenzhen SED Fitment &
Decoration Co., Ltd.
Canteen Services:
Shenzhen SED Industry Co., Ltd.
Repair and maintenance services:
Shenzhen SED ARC Co., Ltd.
Royalties:
Philips (China) Investment
Company Limited
Philips France S.A.S
Rental:
Shenzhen SED Industry Co., Ltd.
Purchases of fixed assets:
Philips France S.A.S
Philips Electronics Singapore
Pte. Ltd – Consumer
Communications
Cellon France S.A.S
CEC Wireless R&D Ltd

Year ended 31st December,
2001
2002
2003
RMB’000
RMB’000
RMB’000
12,765
361#
–
34,495
33,449#
–
392,845
64,969#
18,399#
47,614
388#
–
218,688
436,436#
893,003#
37,902
–
–
9,968
8,662#
6,691#
–
32,900#
–
–
8,439#
15,370#
133,907
–
–
–
–
3,039
299#
2,158
3,543
17,459#
9,093
2,323
14,576
–
–
4,265
–
–
5,760#
5,760
5,875
5,997
39,450#
3,490#
16,723
119#
–
–
–
9,035
–
–
3,601

* Fellow subsidiaries at the time of the related party transactions

# Subsidiaries or fellow subsidiaries of other equity holder of the Company

Purchases of goods were carried out in the ordinary course of business and on commercial terms and conditions, and with incentive discount from the Philips Group from time to time.

Purchases of services and royalties were based on agreements entered into by the related parties and the Company.

Purchases of fixed assets were based on agreements entered by the related parties and the Company.

– I–25 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

(c) Year-end balances arising from sales/margin recovery/purchases of goods/services/royalties/ rental

Receivables from related parties:
Philips France S.A.S
Philips Electronics (Shanghai)
Co., Ltd.
Philips Electronics Singapore
Pte. Ltd-Consumer
Communications
Shenzhen SED Coalition
Electronics Co., Ltd
Philips Electronics Hong Kong
Ltd.
Payables to related parties:
Philips France S.A.S
Philips Electronics Hong Kong
Ltd.
Philips Electronics Singapore
Pte. Ltd-Consumer
Communications
Koninklijke Philips Electronics
Philips (China) Investment
Co., Ltd
Philips Components PEC MOB
Shenzhen SED Coalition
Electronics Co., Ltd
Cellon France S.A.S

As at 31st December,
2001
2002
2003
RMB’000
RMB’000
RMB’000
186,280
292,069#
339,864#
555
156,391#
339,877#
54,542
38,781#
179,798#
–
–
30,737
4,460
7,498#
16,847#
35,383
35,391#
9,295#
74,733
27,860#
105,392#
78,820
10,301#
4,669#
62,627
–
–
79,352
33,924#
14,576#
7,468
420#
–
4,968#
–
–
–
–
6,794

Fellow subsidiaries at the time of the related party transactions
# Subsidiaries or fellow subsidiaries of other equity holder of the Company

The receivables/payables from/to related parties were interest-free, unsecured and settled within one year. All sales made to the related parties in 2002 and 2003 were covered by bankissued guarantee documentation.

22. Ultimate holding company

As at 31st December, 2001, 2002 and 2003, the directors of the Company regard China Electronics Corporation, a company established in the PRC, as being the ultimate holding company.

23. Subsequent events

(a) SED has sold its 25% equity interests in the Company to China Electronics Industry Corporation, a subsidiary of China Electronics Corporation in April 2004.
(b) According to the announcement of Winsan (China) Investment Group Company Limited (“Winsan”) dated 22nd December, 2003, the directors of Winsan proposed to acquire 65% equity interest in the Company at a price of HK$260,000,000 from China Electronics Corporation and its subsidiaries. The purchase price is to be satisfied by the issue of 6,500,000,000 new shares of Winsan at HK$0.04 per share.

– I–26 –

ACCOUNTANTS’ REPORT ON SANG FEI

APPENDIX I

III. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared by the Company in respect of any period subsequent to 31st December, 2003, and no dividends nor other distributions have been declared by the Company in respect of any period subsequent to 31st December, 2003.

Yours faithfully, PricewaterhouseCoopers Certified Public Accountants Hong Kong

– I–27 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

1. SHARE CAPITAL

On the assumption that no Winsan Shares will be issued other than the Consideration Shares or purchased by Winsan at any time on or before Completion, the authorised and issued share capital of the Company as the Latest Practicable Date were, and immediately following Completion will be, as follows:

HK$

Authorised:

30,000,000,000 Winsan Shares as at the Latest Practicable Date Issued and fully paid: 1,558,480,000 Winsan Shares in issue as at 31st December, 2003 (being the end of the last financial year of the Company) and as at the Latest Practicable Date 6,500,000,000 Consideration Shares 8,058,480,000 Winsan Shares in issue upon Completion	300,000,000

	15,584,800 65,000,000
	80,584,800

Note: Winsan has entered into the Preliminary Placing Agreement where Winsan agreed to place through HSBC up to 610 million new Shares prior to Completion.

All the existing issued Winsan Shares rank pari passu in all respects including all rights as to dividends, voting and return of capital. All the Consideration Shares when issued will rank pari passu in all respects with each other and with all Winsan Shares then in issue, including as regards rights to dividends, voting and return of capital.

The Company has on 20th June, 2002 adopted the New Share Option Scheme, further particulars of which are set out in the Company’s circular to Shareholders dated 25th April, 2002.

As at the Latest Practicable Date, the Company had outstanding only the Existing Options granted pursuant to the Old Share Option Scheme and no options granted pursuant to the New Share Option Scheme. The holders of the Existing Options are entitled to subscribe for up to 80,480,000 Winsan Shares at an exercise prices ranging from HK$0.173 per Winsan Share and HK$1.53 per Winsan Share. At Completion, these holders will waive their subscription rights pursuant to their Existing Options.

Save as disclosed in this section headed “1. Share Capital” above no share or loan capital of the Company has been put under option or agreed conditionally or unconditionally to be put under option and no warrant or conversion right affecting the Winsan Shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted.

– II–1 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

Save as disclosed above and in the section headed “7. Changes in Share Capital” in Appendix V of this circular, the Company has no options, warrants, conversion rights and convertible debt securities convertible or exchangeable into Winsan Shares. Within the two years preceding the date of this Circular, no share or loan capital of the Company has been issued or is proposed to be issued for cash or otherwise and no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of such capital.

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

2. SUMMARY OF CONSOLIDATED RESULTS

The following consolidated profit and loss accounts have been extracted from the audited consolidated accounts of the Winsan Group for each of three years ended 31st December, 2003.

Turnover
Continuing operations
Discontinued operations
Cost of sales
Gross profit/(loss)
Other revenue
Selling expenses
Administrative expenses
Provision for impairment on goodwill
Other operating expenses, net
Operating loss
Finance costs
Loss before taxation
Taxation
Loss after taxation
Minority interests
Loss attributable to shareholders
Loss per share – basic

For the year ended 31st December,
2001
2002
2003
HK$’000
HK$’000
HK$’000
3,017
708
3,369
237,359
–
–
240,376
708
3,369
(171,764)
(2,746)
(5,773)
68,612
(2,038)
(2,404)
4,031
6
3
(13,041)
(5,894)
(1,178)
(47,905)
(27,245)
(25,142)
(382,331)
–
(55,977)
(68,504)
(9,805)
(17)
(439,138)
(44,976)
(84,715)
(32,433)
(3,279)
(1,041)
(471,571)
(48,255)
(85,756)
(10,821)
–
–
(482,392)
(48,255)
(85,756)
2,992
1,078
–
(479,400)
(47,177)
(85,756)
HK cents
HK cents
HK cents
(44.0)
(3.6)
(5.5)

– II–2 –

APPENDIX II FINANCIAL INFORMATION ON THE WINSAN GROUP

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the audited consolidated profit and loss account of the Winsan Group for the year ended 31st December, 2003, the consolidated balance sheet of the Winsan Group and the balance sheet of the Company as at 31st December, 2003, the consolidated statement of changes in equity and the consolidated cash flow statement of the Winsan Group for the year ended 31st December, 2003, together with the accompanying notes as extracted from the annual report of the Company for the year ended 31st December, 2003:

CONSOLIDATED PROFIT AND LOSS ACCOUNT

Note Turnover 2 Cost of sales Gross loss Other revenue 2 Selling expenses Administrative expenses Provision for impairment on goodwill Other operating expenses, net Operating loss 3 Finance costs 4 Loss before taxation Taxation 5 Loss after taxation Minority interests Loss attributable to shareholders 6 and 21 Loss per share – basic 8	For the year ended 31st December, 2002 2003 HK$’000 HK$’000 708 3,369 (2,746) (5,773) (2,038) (2,404) 6 3 (5,894) (1,178) (27,245) (25,142) – (55,977) (9,805) (17) (44,976) (84,715) (3,279) (1,041) (48,255) (85,756) – – (48,255) (85,756) 1,078 – (47,177) (85,756) HK cents HK cents (3.6) (5.5)

– II–3 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

CONSOLIDATED BALANCE SHEET

Note
Goodwill
11
Fixed assets
12
Current assets
Inventories
14
Amounts due from customers for
contract work
Trade and other receivables
15
Bank balances and cash
Current liabilities
Amounts due to customers for
contract work
Amounts due to related companies
16
Trade and other payables
17
Current portion of long-term bank loans
22
Short-term loans, unsecured
18
Bank overdrafts
19
Net current liabilities
Financed by:
Share capital
20
Reserves
21
Shareholders’ funds/(capital deficiency)
Minority interests
Long-term bank loans
22

As at 31st December,
2002
2003
HK$’000
HK$’000
59,116
–
8,088
4,166
2,796
115
1,580
–
3,690
2,019
1,013
1,234
9,079
3,368
---------------
---------------
730
–
19,983
53,957
11,391
12,626
7,228
2,893
12,069
3,583
4,891
464
56,292
73,523
---------------
---------------
(47,213)
(70,155)
19,991
(65,989)
15,585
15,585
2,948
(82,808)
18,533
(67,223)
–
–
1,458
1,234
19,991
(65,989)

– II–4 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

BALANCE SHEET

Note Fixed assets 12 Interests in subsidiaries 13 Current assets Prepayments 15 Bank balances and cash Current liabilities Amount due to related companies 16 Trade and other payables 17 Current portion of long-term bank loans 22 Bank overdraft Net current liabilities Financed by: Share capital 20 Reserves 21 Shareholders’ funds/(capital deficiency) Long-term bank loans 22	As at 31st December, 2002 2003 HK$’000 HK$’000 110 117 30,891 443 233 1,706 455 469 688 2,175 --------------- --------------- 3,534 27,150 1,073 2,720 2,200 1,458 4,891 464 11,698 31,792 --------------- --------------- (11,010) (29,617) 19,991 (29,057) 15,585 15,585 2,948 (44,642) 18,533 (29,057) 1,458 – 19,991 (29,057)

– II–5 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Note Total equity as at 1st January Loss for the year 21 Issue of shares 20 and 21 Total equity as at 31st December	For the year ended 31st December, 2002 2003 HK$’000 HK$’000 14,503 18,533 (47,177) (85,756) 51,207 – 18,533 (67,223)

– II–6 –

APPENDIX II FINANCIAL INFORMATION ON THE WINSAN GROUP

CONSOLIDATED CASH FLOW STATEMENT

Note
Net cash outflow from operations
24(a)
Income tax paid
Net cash outflow from operating activities
Investing activities
Interest received
Interest paid
Purchase of fixed assets
Proceeds from disposal of fixed assets
Net cash outflow from investing activities
Net cash outflow before financing
Financing
Issue of ordinary shares
24(b)
(Decrease)/increase in amounts
due to related companies
24(b)
Net repayment of bank loans
24(b)
Decrease in loans with original
maturity within three months
Net cash inflow from financing
(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1st January
Cash and cash equivalents at 31st December
Analysis of cash and cash equivalents
Bank balances and cash
Bank overdrafts

For the year ended
31st December,
2002
2003
HK$’000
HK$’000
(26,732)
(14,911)
–
–
(26,732)
(14,911)
6
3
(3,279)
(1,041)
(371)
(332)
466
–
(3,178)
(1,370)
---------------
---------------
(29,910)
(16,281)
---------------
---------------
51,207
–
(27,543)
33,974
(608)
(13,045)
1,031
–
24,087
20,929
---------------
---------------
(5,823)
4,648
1,945
(3,878)
(3,878)
770
1,013
1,234
(4,891)
(464)
(3,878)
770

– II–7 –

APPENDIX II FINANCIAL INFORMATION ON THE WINSAN GROUP

NOTES TO THE ACCOUNTS

1 Principal accounting policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

As at 31st December, 2003, the Group had a capital deficiency of HK$67,223,000 (2002: shareholders’ funds of HK$18,533,000) and a net current liability of HK$70,155,000 (2002: HK$47,213,000) (inclusive of amounts due to related companies of HK$53,957,000 (2002: HK$19,983,000)).

As announced by the Company on 20th December, 2003, the Company had entered into a conditional acquisition agreement (“Acquisition Agreement”) with China Electronics Corporation (“CEC”), a state-owned enterprise established in the PRC with the approval of the PRC State Council, and Winsan International Holdings Limited (“WIHL”), the ultimate shareholder of the Company. Under the Acquisition Agreement, the Company conditionally agreed to acquire from CEC its entire 65% equity interest in Shenzhen Sang Fei Consumer Communications Company Limited (“Sang Fei”), a sino-foreign joint venture company incorporated in the PRC principally engaged in the manufacturing and sale of mobile phones (the “Acquisition”).

The completion of the Acquisition will be subject to the satisfactory fulfillment of the condition precedents including, among others, the obtaining of the PRC regulatory approvals required to give effect to the transaction under the Acquisition Agreement, the approval by the Listing Committee of The Stock Exchange of Hong Kong Limited (“Stock Exchange”) of the new listing application being made by the Company as a result of the Acquisition, and the approval by shareholders of the Company at a special general meeting.

Upon completion of the Acquisition, the business operations currently undertaken by Sang Fei will become the principal business of the Group. The Directors are of the view that this Acquisition and the resulting change in the Group’s business will result in significant improvements to the results and financial position of the Group. Mr Chan Chak Shing, the existing major shareholder and Chairman of the Company, has confirmed that he will continue to provide the financial support to the Group as and when necessary up to completion of the Acquisition. Mr Chan also confirmed that in the event that the Acquisition could not be completed, the Group will continue to carry on the DICO and Transonline Operations as well as looking for other business opportunities and Mr Chan will continue to provide the financial support to the Group as and when necessary. Accordingly, the accounts have been prepared on a going concern basis.

The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Society of Accountants (“HKSA”). They have been prepared under the historical cost convention.

In the current year, the Group adopted the following revised Statements of Standard Accounting Practice (“SSAPs”) issued by the HKSA which are effective for accounting periods commencing on or after 1st January, 2003:

SSAP 12 (revised) : Income tax

The adoption of these revised SSAPs has no significant effect to the accounts of the Group.

– II–8 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

(b) Group accounting

(i) Consolidation

The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31st December. Subsidiaries are those entities in which the Company has the power to govern the financial and operating policies; controls the composition of the board of directors, controls more than half of the voting power or holds more than half of the issued share capital.

All significant intercompany transactions and balances within the Group are eliminated on consolidation.

The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the disposal and the Group’s share of its net assets including any unamortised goodwill/negative goodwill and any related accumulated foreign currency translation reserve.

Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries of the Group.

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

(ii) Translation of foreign currencies

Transactions in foreign currencies are translated at exchange rates ruling at the transactions dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

The balance sheets of subsidiaries expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date whilst the profit and loss account is translated at an average rate. Exchange differences are dealt with as movements in reserves.

(c) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary at the date of acquisition.

Goodwill on acquisitions is included in intangible assets and is amortised using the straightline method over its estimated useful life. Goodwill is amortised over a maximum period of 20 years.

Where an indication of impairment exists, the carrying amount of intangible assets are assessed and written-down immediately to its recoverable amount.

(d) Fixed assets

Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Fixed assets are depreciated at rates sufficient to write-off their costs less accumulated impairment losses over their estimated useful lives on a straight-line basis. The principal annual rates are as follows:

Leasehold improvement 2 % Computer equipment, furniture and fixtures 20 % Motor vehicles 20 %

– II–9 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

Major costs incurred in restoring other tangible fixed assets to their normal working condition to allow continued use of the overall asset are charged to the profit and loss account. Improvements are capitalised and depreciated over their expected useful lives to the Group.

The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant assets, and is recognised in the profit and loss account.

(e) Operating leases

(f) Inventories

Inventories comprise stocks and work in progress and are stated at the lower of cost and net realisable value. Cost, calculated on the first-in, first-out basis, comprises materials, direct labour and an appropriate proportion of all production overhead expenditure. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(g) Contract work in progress

Contract work in progress is stated at cost plus attributable profit less provisions for foreseeable losses and progress payments on account. Cost includes direct materials, direct labour and an appropriate proportion of overhead.

Where contract costs incurred to date plus recognised profits less losses exceed progress payments on account, the net amount is shown as amounts due from customers for contract work.

Where progress payments on account exceed contract costs incurred to date plus recognised profits less losses, the net amount is shown as amounts due to customers for contract work.

(h) Accounts receivable

Provision is made against accounts receivable to the extent that they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such provision.

(i) Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposit held at call with banks, cash investments with a maturity of three months or less from date of investment and bank overdraft.

(j) Provisions

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

– II–10 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

(k) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date.

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

(ii) Pension obligations

The Group operates a mandatory provident fund scheme (“MPF”) for the eligible employees in Hong Kong. The Group’s contributions to MPF are set at 5% of employees’ salaries, including basic salaries and other cash allowances, up to a maximum of HK$1,000 per employee per month, and are expensed as incurred. The MPF contributions are fully and immediately vested in the employees as accrued benefits once they are paid.

The Group’s subsidiaries operating in the PRC participate in defined contribution retirement schemes organised by the relevant local government authorities in the PRC. The contributions to these schemes are calculated based on certain percentage of the salaries of employees and are expensed as incurred.

(l) Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

(m) Deferred taxation

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

In prior years, deferred taxation was accounted for at the prevailing taxation rate in respect of timing differences between profit as computed for taxation purposes and profit as stated in the accounts to the extent that a liability or an asset was expected to be payable or recoverable in the foreseeable future. The adoption of this new accounting policy has no significant effect to the accounts of the Group.

– II–11 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

(n) Revenue recognition
(i) Revenue from system integration contracts is recognised using the stage of completion method, based on the stage of completion of the contract work by reference to terms of the respective contracts in relation to the delivery of goods and the rendering of services. Provision is made for foreseeable losses as soon as they are anticipated.
(ii) Revenue from sale of Transonline membership cards is recognised based on the terms of membership.
(iii) Revenue from the consultancy fee income is recognised when services are provided.
(iv) Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.
(o) Borrowing costs

Borrowing costs are charged to the profit and loss account in the period in which they are incurred.

(p) Research and development costs

Research and development costs are expensed as incurred, except for development costs where the technical feasibility of the product under development has been demonstrated, costs are identifiable and a market exists for the product such that it is probable that it will be profitable. Such development costs are recognised as an asset and amortised on a straight-line basis over a period of not more than three years to reflect the pattern in which the related economic benefits are recognised.

(q) Segment reporting

The Group presents business segments analysis only. No geographical segment analysis is prepared as less than 10% of the consolidated turnover and results of the Group are attributable to markets outside the PRC.

Unallocated costs represent corporate expenses. Segment assets consist primarily of goodwill, fixed assets, inventories, receivables and operating cash. Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to fixed assets.

– II–12 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

2 Turnover, revenue and segment information

The principal activities of the Group comprise the DICO and Transonline operations. Revenues recognised during the year are as follows:

Turnover System integration services income Sale of Transonline membership cards Provision of consultancy service Sales of goods Other revenue Interest income Total revenues	2002 HK$’000 466 242 – – 708 --------------- 6 --------------- 714	2003 HK$’000 2,359 192 806 12
		3,369 --------------- 3 ---------------
		3,372

– II–13 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

Business segment analysis

Turnover Segment results Provision for impairment on goodwill Unallocated costs Operating loss Finance costs Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Unallocated capital expenditure Depreciation Unallocated depreciation Amortisation of goodwill	System integration 2003 HK$’000 2,359 (11,781) (55,977) (67,758) 1,707 43,691 – 2,181 3,139	Transonline 2003 HK$’000 1,010 (3,322) – (3,322) 2,723 7,377 143 922 –	Group 2003 HK$’000 3,369 (15,103) (55,977) (71,080) (13,635) (84,715) (1,041) (85,756) – (85,756) – (85,756) 4,430 3,104 7,534 51,068 23,689 74,757 143 189 332 3,103 51 3,154 3,139

– II–14 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

Turnover Segment results Unallocated costs Operating loss Finance costs Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Minority interests Total liabilities Capital expenditure Unallocated capital expenditure Depreciation Unallocated depreciation Amortisation of goodwill	System integration 2002 HK$’000 466 (23,717) 71,126 44,990 145 3,730 3,139	Transonline 2002 HK$’000 242 (4,850) 4,068 5,401 108 930 –	Group 2002 HK$’000 708 (28,567) (16,409) (44,976) (3,279) (48,255) – (48,255) 1,078 (47,177) 75,194 1,089 76,283 50,391 7,359 – 57,750 253 118 371 4,660 43 4,703 3,139

No geographical analysis is provided as less than 10% of the consolidated turnover and results of the Group are attributable to markets outside the PRC.

– II–15 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

3 Operating loss

Operating loss is stated after charging/(crediting) the following:

Auditors’ remuneration Depreciation of fixed assets Staff costs_(note 9) Operating leases Amortisation of goodwill(note 11)_ Included in other operating expenses, net – Provision for/(writeback of) slow moving inventories – Provision for doubtful debt – Loss on disposal of fixed assets Finance costs Interests on loans and overdrafts from banks and financial institutions wholly repayable within five years Interests on other loans	2002 HK$’000 500 4,703 13,472 2,672 3,139 7,674 1,661 1,087 2002 HK$’000 2,215 1,064 3,279	2003 HK$’000 250 3,154 11,049 2,523 3,139 (376) 2,648 1,100 2003 HK$’000 1,041 – 1,041

4 Finance costs

5 Taxation

No provision for Hong Kong profits tax has been made in the accounts as the Group has no assessable profit for the year ended 31st December, 2003 (2002: Nil).

Under PRC income tax law, except for certain preferential treatments available to certain of the Company’s subsidiaries operating in the PRC, the entities in the PRC are subject to enterprise income tax (“EIT”) at a rate of 33% on the taxable income as reported in their statutory accounts which are prepared in accordance with accounting principles and financial regulations applicable to PRC enterprises. No provision for EIT has been made in the accounts as the subsidiaries of the Company operating in the PRC have no assessable profit for the year ended 31st December, 2003 (2002: Nil).

The taxation on the Group’s loss before taxation differs from the theoretical amount that would arise using the taxation rate in the PRC as follows:

Loss before taxation Tax calculated at the applicable tax rate Expense not deductible for taxation purposes – Provision for impairment and amortisation of goodwill – Tax losses not recognised Taxation	2002 HK$’000 (47,177) (8,229) 471 7,758 –	2003 HK$’000 (85,756) (13,682) 8,867 4,815 –

– II–16 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

6 Loss attributable to shareholders

The loss attributable to shareholders is dealt with in the accounts of the Company to the extent of HK$47,590,000 (2002: HK$47,177,000).

7 Dividends

The directors do not recommend the payment of a dividend for the year ended 31st December, 2003 (2002: Nil).

8 Loss per share

The calculation of basic loss per share is based on the Group’s loss attributable to shareholders of HK$85,756,000 (2002: HK$47,177,000) and the weighted average of 1,558,480,000 (2002: 1,319,645,000) ordinary shares in issue during the year.

The exercise of the share options granted by the Company would have an anti-dilutive effect on the loss per share for the years ended 31st December, 2002 and 2003 and therefore no diluted loss per share has been presented.

9 Staff costs (including directors’ remuneration)

Wages and salaries Compensation for termination Retirement benefit contributions	2002 HK$’000 12,300 799 373 13,472	2003 HK$’000 10,658 85 306
		11,049

10 Directors’ and senior management’s emoluments*

(a) The aggregate amounts of emoluments paid to directors of the Company during the year are as follows:

Directors’ fees Basic salaries, housing allowances, other allowances and benefits in kind Contributions to pension schemes	2002 HK$’000 360 2,781 34 3,175	2003 HK$’000 360 2,220 39
		2,619

The emoluments of the directors of the Company fell within the following bands:

Emolument bands HK$Nil to HK$1,000,000 HK$1,500,001 to HK$2,000,000	2002 Number of directors 7 1 8	2003 Number of directors 5 1
		6

– II–17 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

The directors’ fees paid to independent non-executive directors of the Company for the year ended 31st December, 2003 amounted to HK$360,000 (2002: HK$360,000).

None of the directors of the Company has waived any emolument in respect of the year ended 31st December, 2003 (2002: Nil).

Additional information not originally included in the 2003 Annual Report of the Company on the emoluments of each Director during the year is disclosed in Paragraph 8D to Appendix V of this Circular.
(b) The five individuals whose emoluments were the highest in the Group for the year include four (2002: three) directors of the Company whose emoluments are reflected in the analysis presented above. The emoluments paid to the remaining individual (2002: two individuals) during the year are as follows:

Basic salaries, housing allowances, other allowances and benefits in kind Contributions to pension schemes	2002 HK$’000 3,248 24 3,272	2003 HK$’000 2,400 12
		2,412

The emoluments of the highest paid individuals fell within the following bands:

Emolument bands HK$Nil to HK$1,000,000 HK$2,000,001 to HK$2,500,000 HK$2,500,001 to HK$3,000,000	2002 Number of individuals 1 – 1 2	2003 Number of individuals – 1 –
		1

11 Goodwill

Opening net book amount Amortisation charge Impairment charge Closing net book amount Cost Accumulated amortisation and impairment losses Net book amount	Group 2002 2003 HK$’000 HK$’000 62,255 59,116 (3,139) (3,139 – (55,977 59,116 – 448,322 448,322 (389,206) (448,322 59,116 –	Group 2002 2003 HK$’000 HK$’000 62,255 59,116 (3,139) (3,139 – (55,977 59,116 – 448,322 448,322 (389,206) (448,322 59,116 –
		–

		448,322 (448,322
		–

– II–18 –

APPENDIX II

FINANCIAL INFORMATION ON THE WINSAN GROUP

The goodwill was derived from the acquisition of a 70% interest in Shenzhen DIC Information Technologies Co., Ltd. (“Dico”) by the Group in 2001. Dico has been engaged in the provision of fullyintegrated broadband and cable television related platform and equipment for cable television and telecommunication services operators in the PRC. Since the relevant authorities in the PRC has not set the relevant standards for the digital video broadcasting – cable industry in the last two years as the directors of the Company had expected and it appears that the relevant authorities are unlikely to ease the current restrictions limiting the broadcasting of foreign media content in the PRC in the near future which further clouded the future of the industry, the directors of the Company has fully provided for the remaining unamortised balance of goodwill amounting to HK$55,977,000 as at 31st December, 2003.

12 Fixed assets

Leasehold improvement, computer equipment, furniture and fixtures HK$’000 Cost At 1st January, 2003 10,186 Additions 200 Disposals (2,299) At 31st December, 2003 8,087 --------------- Accumulated depreciation At 1st January, 2003 3,860 Charge for the year 2,666 Disposals (1,288) At 31st December, 2003 5,238 --------------- Net book value At 31st December, 2003 2,849 At 31st December, 2002 6,326	Group Motor vehicles HK$’000 2,723 132 (180) 2,675 --------------- 961 488 (91) 1,358 --------------- 1,317 1,762	Total HK$’000 12,909 332 (2,479) 10,762 --------------- 4,821 3,154 (1,379) 6,596 --------------- 4,166 8,088

The fixed assets of the Company represent furniture and fixtures.

13 Interests in subsidiaries

Unlisted shares, at cost Amounts due from subsidiaries Amounts due to subsidiaries _Less:_Provisions	Company 2002 2003 HK$’000 HK$’000 – 777,006 776,208 639 (188) – 776,020 777,645 (745,129) (777,202) 30,891 443

Particulars of the subsidiaries of the Group as at 31st December, 2003 are set out in note 28 to the accounts.

The amounts due from and to subsidiaries are unsecured, interest free and have no fixed repayment

terms.

– II–19 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

14 Inventories

Raw materials Finished goods Provision for slow moving stock	Group 2002 2003 HK$’000 HK$’000 6,842 6,090 11,042 8,737 17,884 14,827 (15,088) (14,712 2,796 115	Group 2002 2003 HK$’000 HK$’000 6,842 6,090 11,042 8,737 17,884 14,827 (15,088) (14,712 2,796 115
		14,827 (14,712
		115

At 31st December, 2003, the carrying amount of inventories that are carried at net realisable value amounted to HK$115,000 (2002: HK$2,573,000).

15 Trade and other receivables

Trade receivables Other receivables and prepayments	Group 2002 2003 HK$’000 HK$’000 1,787 24 1,903 1,995 3,690 2,019	Company 2002 2003 HK$’000 HK$’000 – – 233 1,706 233 1,706	Company 2002 2003 HK$’000 HK$’000 – – 233 1,706 233 1,706
			1,706

The Group’s revenues from the provision of system integration services are billed based on terms of the sale and purchase contracts and are normally receivable upon issue of invoices.

At 31st December, 2003, the ageing analysis of the trade receivables was as follows:

Current to 90 days 91 to 180 days Over one year	Group 2002 2003 HK$’000 HK$’000 5 – – 24 1,782 – 1,787 24	Group 2002 2003 HK$’000 HK$’000 5 – – 24 1,782 – 1,787 24
		24

16 Amounts due to related companies

These represent the amounts due to companies beneficially owned by the Chairman of the Company, Mr Chan Chak Shing. The amounts are unsecured, interest free (2002: interest bearing at prime rate) and repayable on demand.

– II–20 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

17 Trade and other payables

Trade payables Other payables and accrued charges	Group 2002 2003 HK$’000 HK$’000 2,058 4,548 9,333 8,078 11,391 12,626	Company 2002 2003 HK$’000 HK$’000 – 2,490 1,073 230 1,073 2,720	Company 2002 2003 HK$’000 HK$’000 – 2,490 1,073 230 1,073 2,720
			2,720

At 31st December, 2003, the ageing analysis of the trade payables was as follows:

Below one year Over one year Short-term loans, unsecured Bank and financial institution, unsecured Government loans, unsecured_(note)_	Group 2002 2003 HK$’000 HK$’000 – 2,490 2,058 2,058 2,058 4,548 Group 2002 2003 HK$’000 HK$’000 8,486 – 3,583 3,583 12,069 3,583	Group 2002 2003 HK$’000 HK$’000 – 2,490 2,058 2,058 2,058 4,548 Group 2002 2003 HK$’000 HK$’000 8,486 – 3,583 3,583 12,069 3,583
		3,583

18 Short-term loans, unsecured

Note: The government loans comprise a loan of HK$755,000 (2002: HK$755,000) granted by Shenzhen Futian District Science and Technology Bureau, the PRC, which is interest bearing at 2.5% (2002: 2.5%) per annum, and an interest free loan of HK$2,828,000 (2002: HK$2,828,000) granted by Shenzhen Finance Bureau, the PRC. Each of these loans is guaranteed, respectively, by a third party.

19 Bank overdrafts

The bank overdraft facility is guaranteed by Mr Chan Chak Shing, the Chairman of the Company. Subsequent to the balance sheet date, on 15th March, 2004, the bank overdraft was fully settled.

– II–21 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

20 Share capital

		Company	Company
		2002		2003
	Number of	Share	Number of	Share
	shares	capital	shares	capital
		HK$’000		HK$’000
Ordinary shares of HK$0.01 (2001: HK$0.10) each
Authorised:
At 1st January	1,500,000,000	150,000	30,000,000,000	300,000
Increase during the year	1,500,000,000	150,000	–	–
Subdivision of share capital from
HK$0.10 each to HK$0.01 each	27,000,000,000	–	–	–
At 31st December	30,000,000,000	300,000	30,000,000,000	300,000

Issued and fully paid:
At 1st January,	1,113,200,000	111,320	1,558,480,000	15,585
Issue of capital from open offer	445,280,000	44,528	–	–
Capital reduction	–	(140,263)	–	–
At 31st December,	1,558,480,000	15,585	1,558,480,000	15,585

At 31st December, 2003, the share options outstanding under the Share Option Scheme of the Company were as follows:

Year granted 1997 1998 2000	Number of options Exercise price Expiry date HK$ 18,600,000 1.53 August 2007 55,500,000 0.36 March 2008 6,380,000 0.173 to 0.24 February 2010 to October 2010 80,480,000

– II–22 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

21 Reserves

Group

At 1st January, 2003 Loss for the year At 31st December, 2003 At 1st January, 2002 Issue of shares, net of expenses Loss for the year Set off against accumulated losses Contributed surplus arising from reduction of share capital At 31st December, 2002	Share premium Contributed account surplus HK$’000 HK$’000 – 140,263 – – – 140,263 616,669 – 6,679 – – – (623,348) – – 140,263 – 140,263	Foreign currency translation Accumulated reserve losses HK$’000 HK$’000 17 (137,332) – (85,756) 17 (223,088) 17 (713,503) – – – (47,177) – 623,348 – – 17 (137,332)	Total HK$’000 2,948 (85,756) (82,808) (96,817) 6,679 (47,177) – 140,263 2,948

Company

At 1st January, 2003 Loss for the year At 31st December, 2003 At 1st January, 2002 Issue of shares Loss for the year Set off against accumulated losses Contributed surplus arising from reduction of share capital At 31st December, 2002	Share premium Contributed Accumulated account surplus losses HK$’000 HK$’000 HK$’000 – 140,263 (137,315) – – (47,590) – 140,263 (184,905) 934,212 – (1,031,029) 6,679 – – – – (47,177) (940,891) – 940,891 – 140,263 – – 140,263 (137,315)	Total HK$’000 2,948 (47,590) (44,642) (96,817) 6,679 (47,177) – 140,263 2,948

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus of the Company is distributable to shareholders in certain circumstances as specified in Section 54 thereof.

As at 31st December, 2003, the Company does not have any reserve available for distribution to the shareholders (2002: Nil).

– II–23 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

22 Long-term bank loans

Long-term bank loans, unsecured Amounts repayable within one year	Group 2002 2003 HK$’000 HK$’000 8,686 4,127 (7,228) (2,893) 1,458 1,234	Company 2002 2003 HK$’000 HK$’000 3,658 1,458 (2,200) (1,458) 1,458 –	Company 2002 2003 HK$’000 HK$’000 3,658 1,458 (2,200) (1,458) 1,458 –
			–

At 31st December, 2003, the long-term bank loans were repayable as follows:

Within one year In the second year	Group 2002 2003 HK$’000 HK$’000 7,228 2,893 1,458 1,234 8,686 4,127	Company 2002 2003 HK$’000 HK$’000 2,200 1,458 1,458 – 3,658 1,458	Company 2002 2003 HK$’000 HK$’000 2,200 1,458 1,458 – 3,658 1,458
			1,458

The bank loans are interest bearing and guaranteed by Mr Chan Chak Shing, the Chairman of the Company. Subsequent to the balance sheet date, on 15th March, 2004, the above bank loans were fully settled.

23 Deferred taxation

The Group has no material deferred tax liability not provided for.

Deferred tax assets are recognised for tax loss carried forward to the extent that realisation of the related tax benefit through future taxable profits is probable. No deferred tax asset has been recognised by the Group.

The Group has tax losses, the related deferred tax assets of which have not been recognised, of HK$157,534,000 (2002 :HK$130,019,000) to carry forward against future taxable income. Out of such tax losses, approximately HK$11,558,000, HK$11,885,000, HK$16,921,000, HK$19,851,000 and HK$13,200,000 will be such expired in the years ending 31st December, 2004, 2005, 2006, 2007 and 2008, respectively, and the remaining balance of HK$84,119,000 has no expiry date.

– II–24 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

24 Notes to the consolidated cash flow statement

(a) Reconciliation of operating loss to net cash outflow from operating activities

Operating loss Provision for impairment of goodwill Provision for/(writeback of) slow moving inventories Provision for amounts due from customers for contract works Provision for doubtful debts Amortisation of goodwill Depreciation of fixed assets Loss on disposal of fixed assets Interest income Decrease in inventories Decrease in net amounts due from customers for contract work Decrease/(increase) in trade and other receivables Increase/(decrease) in net amounts due to customers for contract work (Decrease)/increase in trade and other payables Net cash outflow from operations	2002 HK$’000 (44,976) – 7,674 1,579 1,661 3,139 4,703 1,087 (6) 1,447 613 1,894 29 (5,576) (26,732)	2003 HK$’000 (84,715) 55,977 (376) – 2,648 3,139 3,154 1,100 (3) 3,057 1,580 (977) (730) 1,235
		(14,911)

(b) Analysis of changes in financing during the year

At 1st January Cash items: Open offer New loans raised Repayment of loans (Repayment)/advance of amounts due to related companies Non-cash items: Off set against accumulated losses Share of losses of subsidiaries At 31st December	Share capital, share premium and contributed surplus 2002 2003 HK$’000 HK$’000 727,989 155,848 51,207 – – – – – – – (623,348) – – – 155,848 155,848	Short-term and long-term bank loans 2002 2003 HK$’000 HK$’000 21,363 20,755 – – 13,794 – (14,402) (13,045) – – – – – – 20,755 7,710	Minority 2002 HK$’000 1,078 – – – – – (1,078) –	interests 2003 HK$’000 – – – – – – – –	Amounts due to related companies 2002 2003 HK$’000 HK$’000 47,526 19,983 – – – – – – (27,543) 33,974 – – – – 19,983 53,957	Amounts due to related companies 2002 2003 HK$’000 HK$’000 47,526 19,983 – – – – – – (27,543) 33,974 – – – – 19,983 53,957
						53,957

– II–25 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

25 Commitments under operating leases

At 31st December, 2003, the Group had future aggregate minimum lease payments under noncancellable operating lease in respect of land and buildings as follows:

Not later than one year In the second to fifth years	Group 2002 2003 HK$’000 HK$’000 833 992 – 270 833 1,262	Group 2002 2003 HK$’000 HK$’000 833 992 – 270 833 1,262
		1,262

26 Contingent liabilities

At 31st December, 2003, Dico, a subsidiary of the Company, provided a corporate guarantee in respect of banking facilities granted by a bank (the “Lender”) to a third party (the “Borrower”) to the extent of HK$6,675,000 (2002: HK$6,675,000).

Arbitration proceedings have been commenced in April 2003 by the Lender against the Borrower and Dico. It was held on 26th September, 2003 by the Shenzhen Arbitration Tribunal that the Borrower is liable to repay the outstanding amount to the Lender and that Dico is also liable for the remaining payment of such amount. Dico has not received any further notice from the Lender on this matter. In the opinion of the directors of the Company, it is not possible to quantify the remaining amount of payment for which Dico is liable and therefore no provision has been made in the accounts.

27 Related party transactions

Apart from those disclosed in notes 16, 19 and 22 above, other significant related party transactions carried out during the year in the normal course of the Group’s business were as follows:

		Group
	2002	2003
	HK$’000	HK$’000
Interest payable to related companies_(note 16)_	1,064	–
Consultancy fee income from related companies_(note)_	–	806

Note: This represented the consultancy fee income received from related companies beneficially owned by Mr Chan Chak Shing, the Chairman of the Company. The fee was set based on arms-length negotiation between the Group and the related companies.

– II–26 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

28 Subsidiaries

At 31st December, 2003, the Company held interest in the following principal subsidiaries which, in the opinion of the directors, were significant to the results of the year and/or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would result in particulars of excessive length.

	Place of
	incorporation		Particulars of	Effective
	and kind of	Principal activities	issued/registered	interest
Company	legal entity	and place of operation	capital	held
Indirectly held:
Evergrow High Technology	Hong Kong,	Investment holding in	2 ordinary shares	100%
Investment Group Ltd.	limited liability	Hong Kong	of HK$1 each
	company
Cheeryork Investment Ltd.	Hong Kong,	Property investment in	2 ordinary shares	100%
	limited liability	Hong Kong	of HK$1 each
	company
Shenzhen DIC Information	PRC, limited	Provision for broadband	RMB40,000,000	70%
Technologies Co., Ltd.	liability company	and cable television
		related platform and
		equipment for television
		and telecommunication
		services in PRC
Evergrow Trans China Beijing	PRC, limited	Provision of network based	HK$7,000,000	70%
Information Technology	liability company	transport logistics
Co., Ltd.		services in PRC
Evergrow Trans China Network	PRC, limited	Provision of network based	RMB10,000,000	70%
Beijing Information	liability company	transport logistics
Technology Co., Ltd.		services in PRC

29 Ultimate holding company

The directors regard Winsan International Holdings Limited, a company incorporated in the British Virgin Islands, as being the ultimate holding company.

30 Approval of accounts

The accounts were approved by the board of directors on 22nd April, 2004.

– II–27 –

APPENDIX II FINANCIAL INFORMATION ON THE WINSAN GROUP

4. NO MATERIAL CHANGES SINCE 31ST DECEMBER, 2003

Save as disclosed in section 5 of Appendix II, the Directors are not aware of any material change in the financial or trading position or prospects of the Winsan Group since 31st December, 2003, the date to which the latest audited financial statements of the Company were made, up to the Latest Practicable Date.

5. INDEBTEDNESS

Borrowings, security and guarantees

As at the close of business on 31st March, 2004, being the latest practicable date for the purpose of ascertaining such information prior to the printing of this Circular, the Winsan Group had outstanding borrowings of HK$67,630,000 which comprised the following:

Advances from Winsan International_(Note 1) Other loans(Note 2)_	HK$’000 64,047 3,583
	67,630

Notes:

The advances from Winsan International is interest bearing.
Other loans comprised a fixed rate loan of HK$755,000 at 2.5% per annum granted by Shenzhen Futian District Science and Technology Bureau, the PRC and an interest free loan of HK$2,828,000 from Shenzhen Finance Bureau, the PRC. Each of the loans is guaranteed respectively, by a third party.

Contingent liabilities

As at the close of business on 31st March, 2004, a subsidiary of the Company provided a corporate guarantee in respect of banking facilities granted by banks to a third party, to the extent of HK$6,675,000.

– II–28 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

September, 2003 by the Shenzhen Arbitration Tribunal that the Borrower is liable to repay the remaining outstanding amount to the Lender and that Dico is also liable for the payment of such amount by reason that it is the guarantor of the Borrower. As at the Latest Practicable Date, Dico has not received further notice from the Lender on this matter.

Save as aforesaid and apart from intra-group liabilities, the Winsan Group did not have any outstanding mortgages, charges, debentures or other loan capital or bank overdrafts, loans or similar indebtedness or hire purchase or finance lease commitments or any guarantees or other material contingent liabilities at the close of business on 31st March, 2004, being the latest practicable date for ascertaining such information.

As disclosed in paragraph 1 of the Letter from the Board, Winsan International has undertaken, at its own costs, to procure the repayment of all existing loans and to discharge all guarantees and securities of the Winsan Group (other than those of the Transonline Group and the DIC Group).

Foreign currency amounts have been translated at the exchange rates prevailing at the close of business on 31st March, 2004.

6. PROPERTY INTERESTS

As at the Latest Practicable Date, the Winsan Group does not own any properties. It leases its office premises in Hong Kong and in the PRC.

Properties leased in Hong Kong

As at the Latest Practicable Date, the Company leased its principal offices in Hong Kong at Units 904–912, 9th Floor, Sun Kung Kai Centre, No. 30 Harbour Road, Wanchai, Hong Kong with a total gross floor area of approximately 238 sq.m. (approximately 2,592 sq.ft.) from an independent third party. The property is used as offices only.

Properties leased in the PRC

As at the Latest Practicable Date, the Winsan Group leased 3 office premises in Beijing with a total gross floor area of approximately 415 sq.m. (approximately 4,523.5 sq.ft.) at Rooms 3001 and 3001A on Level 3, No. 9 Chuangxin Road, Changping Park of Beijing Zhongguancun Technology Park, Changping District, Beijing, the PRC and Rooms 06, 07 and 08A on Level 21 Aiweike Building, No. 2 Dong Huan Road South, Chaoyang District, Beijing, the PRC from independent third parties. The properties are used as offices only.

– II–29 –

FINANCIAL INFORMATION ON THE WINSAN GROUP

APPENDIX II

As at the same date, the Winsan Group also leased a residential unit in Shenzhen with a total gross floor area of approximately 39.02 sq.m. (approximately 425.32 sq.ft.) at Room 502, Block A of Tai An Xuan, Tairan Gongmao Yuan, Chegongmiao, Futian District, Shenzhen City, Guangdong Province, the PRC from an independent third party. The property is used as staff quarters.

Sallmanns (Far East) Limited, an independent property valuer, has valued the properties interests of the Winsan Group as at 30th April, 2004. The text of their letter, summary of valuation and the valuation certificates are set out in Appendix IV to this Circular.

– II–30 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

For illustrative purpose only, set out below is the unaudited pro forma combined financial information of the Winsan Group after Completion of the Acquisition (the “Enlarged Group”). The pro forma combined financial information is prepared in accordance with Paragraph 4.29 of the Listing Rules for the purpose of providing investors with information to illustrate the effect of the Acquisition on (a) financial statements of the Enlarged Group; and (b) net tangible assets of the Enlarged Group.

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The following are the unaudited pro forma financial statements of the Enlarged Group which have been prepared on the basis stated in note 1 of section D below. The statements have been prepared for illustrative purpose only and because of their nature, they may not give a true picture of the financial statements of the Enlarged Group had the Acquisition actually been completed as at the relevant dates as set out in the basis stated.

– III–1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(A) PRO FORMA COMBINED PROFIT AND LOSS ACCOUNT

For the year ended 31st December, 2003

Turnover
Cost of sales
Gross (loss)/profit
Other revenues
Selling expenses
Administrative
expenses
Provision for impairment
on goodwill
Other operating
expenses, net
Operating (loss)/profit
before financing
Finance costs
(Loss)/profit before taxation
Taxation
(Loss)/profit after taxation
Minority interests
(Loss)/profit attributable to
shareholders

Pro forma
Winsan
Pro forma
combined
Group
Sang Fei
Aggregated adjustments
balance
HK$’000
HK$’000
HK$’000
HK$’000
Notes
HK$’000
3,369
2,863,856
2,867,225
2,867,225
(5,773)
(2,708,899)
(2,714,672)
(2,714,672)
(2,404)
154,957
152,553
152,553
3
18,802
18,805
18,805
(1,178)
(27,398)
(28,576)
(28,576)
(25,142)
(52,815)
(77,957)
(10,278)
3(c)
(88,235)
(55,977)
–
(55,977)
(55,977)
(17)
(22,596)
(22,613)
(22,613)
(84,715)
70,950
(13,765)
(24,043)
(1,041)
(6,488)
(7,529)
(7,529)
(85,756)
64,462
(21,294)
(31,572)
–
(5,188)
(5,188)
(5,188)
(85,756)
59,274
(26,482)
(36,760)
–
–
–
(20,746)
3(b)
(20,746)
(85,756)
59,274
(26,482)
(57,506)

– III–2 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(B) PRO FORMA COMBINED BALANCE SHEET

As at 31st December, 2003

Goodwill Intangible assets Fixed assets Current assets Inventories Trade and other receivables Bank balances and cash Current liabilities Amounts due to related companies Trade and other payables Taxation payables Current portion of long-term bank loans Provisions Short-term loans, unsecured Bank overdrafts Net current (liabilities)/assets	Winsan Group HK$’000 – – 4,166 115 2,019 1,234 3,368 ------------- 53,957 12,626 – 2,893 – 3,583 464 73,523 ------------- (70,155) (65,989)	Pro forma Sang Fei Aggregated adjustments HK$’000 HK$’000 HK$’000 Notes – – 102,783 3(b) 3,843 3,843 88,072 92,238 254,871 254,986 1,010,650 1,012,669 23,457 24,691 1,288,978 1,292,346 ------------- ------------- – 53,957 (26,688) 3(a) 784,090 796,716 4,500 3(b) 2,666 2,666 – 2,893 (2,893) 3(a) 1,172 1,172 309,434 313,017 – 464 (464) 3(a) 1,097,362 1,170,885 ------------- ------------- 191,616 121,461 283,531 217,542	Pro forma combined balance HK$’000 102,783 3,843 92,238 254,986 1,012,669 24,691
			1,292,346 ------------- 27,269 801,216 2,666 – 1,172 313,017 –
			1,145,340 -------------
			147,006
			345,870

– III–3 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(B) PRO FORMA COMBINED BALANCE SHEET (Continued)

As at 31st December, 2003

Winsan Group HK$’000 15,585 – 140,280 (223,088)	Pro forma Proforma combined Sang Fei Aggregated adjustments balance HK$’000 HK$’000 HK$’000 Notes HK$’000 260,821 276,406 (195,821) 80,585 65,000 3(b) (260,821) 3(b) – – 151,288 3(b) 151,288 20,163 160,443 (147,337) 3(b) 13,106 2,547 (220,541) 222,196 1,655	Pro forma Proforma combined Sang Fei Aggregated adjustments balance HK$’000 HK$’000 HK$’000 Notes HK$’000 260,821 276,406 (195,821) 80,585 65,000 3(b) (260,821) 3(b) – – 151,288 3(b) 151,288 20,163 160,443 (147,337) 3(b) 13,106 2,547 (220,541) 222,196 1,655	Pro forma Proforma combined Sang Fei Aggregated adjustments balance HK$’000 HK$’000 HK$’000 Notes HK$’000 260,821 276,406 (195,821) 80,585 65,000 3(b) (260,821) 3(b) – – 151,288 3(b) 151,288 20,163 160,443 (147,337) 3(b) 13,106 2,547 (220,541) 222,196 1,655	Pro forma Proforma combined Sang Fei Aggregated adjustments balance HK$’000 HK$’000 HK$’000 Notes HK$’000 260,821 276,406 (195,821) 80,585 65,000 3(b) (260,821) 3(b) – – 151,288 3(b) 151,288 20,163 160,443 (147,337) 3(b) 13,106 2,547 (220,541) 222,196 1,655	Pro forma Proforma combined Sang Fei Aggregated adjustments balance HK$’000 HK$’000 HK$’000 Notes HK$’000 260,821 276,406 (195,821) 80,585 65,000 3(b) (260,821) 3(b) – – 151,288 3(b) 151,288 20,163 160,443 (147,337) 3(b) 13,106 2,547 (220,541) 222,196 1,655
			31,279 190,917	3(a) 3(b)
(67,223) 1,234 – (65,989)	283,531 – – 283,531	216,308 1,234 (1,234) 3(a) – 99,236 3(b) 217,542			246,634 – 99,236
					345,870

– III–4 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(C) PRO FORMA COMBINED CASH FLOW STATEMENT

For the year ended 31st December, 2003

Net cash outflow from operations Interest paid PRC income tax paid Net cash outflow from operating activities Investing activities Interest received Purchase of fixed assets and intangible assets Net cash outflow from investing activities Net cash outflow before financing Financing activities Increase in amounts due to related companies Cash received from capital injection New loans Repayment of bank loans Net cash inflow from financing Increase/(decrease) in cash and cash equivalents	Winsan Group HK$’000 (14,911) (1,041) – (15,952) ------------- 3 (332) (329) ------------- (16,281) ------------- 33,974 – – (13,045) 20,929 ------------- 4,648	Aggregated and pro forma combined Sang Fei balance HK$’000 HK$’000 (119,635) (134,546) (5,939) (6,980) (6,963) (6,963) (132,537) (148,489) ------------- ------------- 487 490 (45,857) (46,189) (45,370) (45,699) ------------- ------------- (177,907) (194,188) ------------- ------------- – 33,974 491 491 309,434 309,434 (141,508) (154,553) 168,417 189,346 ------------- ------------- (9,490) (4,842)

– III–5 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(D) NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

1. Basis of preparation

It was announced by the Directors on 20th December, 2003 that the Group has entered into the Acquisition Agreement with CEC, a state owned enterprise in the PRC to acquire from CEC its entire 65% equity interest in Sang Fei, a sino-foreign joint venture company incorporated in the PRC principally engaged in the manufacturing and sale of mobile phones, at a consideration of HK$260,000,000. The consideration will be satisfied by the issuance of 6,500,000,000 Winsan Shares at HK$0.04 per Winsan Share.

The pro forma combined profit and loss account and the pro forma combined cash flow statement for the year ended 31st December, 2003 and the pro forma combined balance sheet as at 31st December, 2003 of the Enlarged Group have been prepared based on the audited accounts of the Company as set out on pages II-3 to II-27 and the accounts of Sang Fei as set out in the Accountants’ Report on Sang Fei in Appendix I, after making certain pro forma combination adjustments as set out in note 3 below. For the purpose of the unaudited pro forma financial statements, the balance sheet of Sang Fei as at 31st December, 2003 has been translated from Renminbi to Hong Kong dollars at the exchange rate ruling at 31st December, 2003 whilst the profit and loss account and the cash flow statement have been translated at the average rate for the year ended 31st December, 2003.

The pro forma combined profit and loss account and the pro forma combined cash flow statement for the year ended 31st December, 2003 of the Enlarged Group have been prepared assuming that the Acquisition had been completed on 1st January, 2003.

The pro forma combined balance sheet as at 31st December, 2003 of the Enlarged Group has been prepared assuming that the Acquisition had been completed as at 31st December, 2003.

2. Reverse acquisition and goodwill

(a) The Acquisition will be accounted for as a reverse acquisition under generally accepted accounting practice in Hong Kong since the issuance of the Consideration Shares in exchange of the 65% equity interest in Sang Fei will result in CEC replacing Winsan International to become the controlling shareholder of Winsan. For accounting purpose, Sang Fei is regarded as the acquiror while the Winsan Group is deemed to have been acquired by Sang Fei.

Sang Fei will apply the purchase method in accounting for the deemed acquisition of the Winsan Group. In applying the purchase method, the purchase consideration deemed to be paid by Sang Fei represents the shares of Sang Fei, measured at the fair value of Sang Fei at the date of Completion, that are deemed to be issued for the acquisition of the Winsan Group (assuming the completion of the settlement of liabilities as described in note 3(a) below). The assets and liabilities of the Winsan Group will be recorded on the balance sheet of the Enlarged Group at their fair value as at the date of Completion. Any goodwill or negative goodwill arising from the Acquisition represents the excess or deficit of the cost of acquisition deemed to be incurred by Sang Fei over the fair value of the separable assets and liabilities of the Winsan Group at the date of Completion.

For the purpose of preparation of the unaudited pro forma financial information and for illustrative purpose, the goodwill arising from the Acquisition is estimated to be HK$102,783,000. The goodwill is determined as the excess of the estimated cost of acquisition deemed to be incurred by Sang Fei of HK$62,339,000 and the expenses of HK$4,500,000 to be incurred in relation to the Acquisition, totalling approximately HK$66,839,000, over the fair value of the separable assets and liabilities of the Winsan Group at the date of Completion which is taken to be a net liability value of approximately HK$35,944,000. This pro forma net liability value of the Winsan Group represents the book value of the assets and liabilities of the Winsan Group as stated in its audited consolidated financial statements as at 31st December, 2003, being a net liability value of approximately HK$67,223,000, as adjusted to reflect the settlement of liabilities amounting to HK$31,279,000 by Winsan International on behalf of the Winsan Group (note 3(a) below).

– III–6 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(D) NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Continued)

(b) The audited net liability value of the Winsan Group as at 31st December, 2003 of HK$67,223,000 included a net liability value of HK$35,833,000 attributable to the DIC Group and the Transonline Group which will be disposed of within two weeks after Completion according to the Acquisition Agreement (the “Future Disposals”). On the assumption that the Future Disposals are to be completed and that the consideration of the Future Disposals is nil, the net liability value of the Winsan Group will decrease by approximately HK$35,833,000, based on the audited financial statements of the Winsan Group as at 31st December, 2003. The decrease in net liability value of the Winsan Group resulting from the Future Disposals will have a corresponding downward adjustment to the goodwill arising from the Acquisition.
(c) On Completion, the cost of acquisition deemed to be incurred by Sang Fei and the fair value of the separable tangible and intangible assets and liabilities of the Winsan Group will have to be assessed. As a result of the assessment, the cost of acquisition consideration deemed to be incurred by Sang Fei and the fair value of the separable assets and liabilities of the Winsan Group may be different from the amounts estimated based on the basis stated in note 2(a) above for the purpose of the preparation of the unaudited pro forma financial statements. Accordingly, the actual goodwill at date of Completion may be different from that presented above.

3. Pro forma adjustments

(a) The adjustments reflect the amounts of liabilities to be settled by Winsan International, the ultimate shareholder of the Company, upon Completion. Under the Acquisition Agreement, Winsan International has undertaken, at its own cost, to repay all existing loans of the Winsan Group (other than those of the Transonline Group and the DIC Group) and related interest and the release of all guarantees and other securities before Completion. It will also, at Completion, waive all amounts receivable by it or its associates from the Winsan Group (other than those of the Transonline Group and the DIC Group) and bear all indebtedness and expenses incurred by the Winsan Group prior to Completion (apart from certain agreed expenses associated with the Acquisition which will continue to be borne by the Winsan Group).
(b) The adjustments reflect:
(i) The issuance of the 6,500,000,000 Consideration Shares of HK$0.01 each to CEC on Completion;
(ii) Expenses to be incurred in relation to the Acquisition;
(iii) The elimination of the share capital and reserves, and the creation of capital reserve due to the reverse acquisition;
(iv) Goodwill arising from the deemed acquisition of the Winsan Group by Sang Fei (see note 2 (a) above); and
(v) The minority’s share of the profit for the year ended 31st December, 2003 and the net assets as at 31st December, 2003 of Sang Fei.
(c) This adjustment reflects the amortisation of goodwill arising from the deemed acquisition of the Winsan Group by Sang Fei, over an estimated useful life of 10 years. The amount of amortisation as stated does not reflect the effect of the Future Disposals on the goodwill balance as mentioned in note 2(b) above. On the assumption that the Future Disposals are to be completed and the estimated useful life of goodwill is taken to be 10 years, the annual amount of amortisation of goodwill would be reduced by approximately HK$3,583,000.

– III–7 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

II. UNAUDITED PRO FORMA COMBINED NET TANGIBLE ASSETS STATEMENT

The following is the unaudited pro forma combined net tangible assets statement of the Enlarged Group as at 31st December, 2003 which has been prepared on the basis stated in the notes below. The statement has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group immediately following the Completion of the Acquisition.

	As at 31st		Pro forma
	December, 2003	Adjustments	adjusted
	HK$’000	HK$’000	HK$’000
	(Note 1)	(Note 2)
Unaudited net tangible (liabilities)/assets
at 31st December, 2003	(67,223)	208,576	141,353

Notes:

The amount of net tangible liabilities of the Winsan Group as at 31st December, 2003 equals the capital deficiency of the Group as at the same date, which has been extracted without adjustments from the 2003 published annual report of the Company.
The adjustment comprises:
(a) the decrease in the net tangible liabilities of the Winsan Group as at 31st December, 2003 by HK$31,279,000 assuming the completion of the settlement of liabilities by Winsan International, details of which are set out in the pro forma adjustments in note 3(a) of section I (D) of this appendix;
(b) the addition of the net tangible assets of Sang Fei as at 31st December, 2003 attributable to the Winsan Group of HK$181,797,000, which is calculated as follows:

Net assets of Sang Fei at 31st December, 2003 _Less:_Intangible assets Net tangible assets at 31st December, 2003 65% attributable to the Winsan Group	HK$’000 283,531 (3,843)
	279,688

	181,797

the net assets and intangible assets as at 31st December, 2003 represent the net assets and intangible assets of Sang Fei as at 31st December, 2003 of RMB300,543,000 and RMB4,074,000 respectively, according to the Accountants’ Report on Sang Fei as set out in Appendix I of this circular, and translated from Renminbi to Hong Kong dollars at the exchange rate ruling at 31st December, 2003; and

(c) the accrual for the expenses to be incurred in relation to the Acquisition of approximately HK$4,500,000.
The above unaudited pro forma adjusted net tangible assets does not reflect the effect of the Future Disposals as mentioned in note 2(b) of Section I (D) of this appendix. On the assumption that the Future Disposals are to be completed and that the consideration of the Future Disposals is nil, the net tangible assets of the Winsan Group and therefore the Enlarged Group will increase by approximately HK$35,833,000.

– III–8 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

III. LETTER ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

21st June, 2004

The Directors

Winsan (China) Investment Group Company Limited Room 908, 9th Floor

Sun Hung Kai Centre No. 30 Harbour Road Wanchai Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information of Winsan (China) Investment Group Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages III-1 to III-8 under the headings of unaudited pro forma financial statements and unaudited pro forma combined net tangible assets statement in sections I and II respectively of Appendix III of the Company’s circular dated 21st June, 2004 in connection with the proposed acquisition by the Company of a 65% equity interest in Shenzhen Sang Fei Consumer Communications Company Limited (“Sang Fei”) (the “Acquisition”). The unaudited pro forma financial information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Acquisition might have affected the relevant financial information of the Group assuming completion of the Acquisition (the “Enlarged Group”).

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”).

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

– III–9 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Basis of opinion

We conducted our work with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma combined financial information with the directors of the Company.

Our work does not constitute an audit or review in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants, and accordingly, we do not express any such assurance on the unaudited pro forma financial information.

The unaudited pro forma financial information has been prepared on the basis set out in the note 1 on page III-6 for illustrative purpose only and, because of its nature, it may not be indicative of:

(a) the results and cash flows of the Enlarged Group for any future periods; or
(b) the financial position of the Enlarged Group at any future date.

Opinion

In our opinion:

(a) the unaudited pro forma combined financial information set out on pages III-1 to III-8 has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29 of the Listing Rules.

Yours faithfully,

PricewaterhouseCoopers

Certified Public Accountants Hong Kong

– III–10 –

PROPERTY VALUATION

APPENDIX IV

The following is the text of a letter, summary of values and valuation certificate, prepared for the purpose of incorporation in this circular received from Sallmanns (Far East) Limited, an independent valuer, in connection with its valuation as at 30th April, 2004 of the relevant property interests in Hong Kong and the PRC.

==> picture [166 x 63] intentionally omitted <==

22nd Floor, Siu On Centre 188 Lockhart Road Wanchai

21st June, 2004

The Board of Directors Winsan (China) Investment Group Company Limited Room 908, 9th Floor

Sun Hung Kai Centre No. 30 Harbour Road Wanchai Hong Kong

Dear Sirs,

In accordance with your instructions to value the property interests held by Winsan (China) Investment Group Company Limited (the “Company”) and its subsidiaries (the “Group”) and Shenzhen Sang Fei Consumer Communications Company Limited (“Sang Fei”) in which the Company proposes to acquire 65% equity interest in Sang Fei from China Electronics Corporation (“CEC”), we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the values of the property interests as at 30th April, 2004 (the “date of valuation”).

Our valuations of the property interests represent the open market value which we would define as intended to mean “an opinion of the best price at which the sale of an interest in a property would have been completed unconditionally for cash consideration on the date of valuation, assuming:

(a) a willing seller;
(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of the price and terms and for the completion of the sale;

– IV–1 –

PROPERTY VALUATION

APPENDIX IV

(c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;
(d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”

Our valuations have been made on the assumption that the seller sells the property interests on the open 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 property interests.

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

Based on the open market approach, the property interests in Groups I, II and III have no commercial value due mainly to the short-term nature or the prohibition against assignment or sub-letting or otherwise due to the lack of substantial profit rents.

In valuing the property interests, we have complied with all the requirements contained in the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited and the Hong Kong Guidance Notes on the Valuation of Property Assets (2nd Edition) published by the Hong Kong Institute of Surveyors in March 2000.

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

We have been, in some instances, provided by the Group with the tenancy agreements relating to the property interests and have caused searches to be made at the Hong Kong Land Registries in respect of Hong Kong properties. However, we have not searched the original documents to verify the existing titles to the properties in the PRC or any material encumbrances that might be attached to the properties or any lease amendments, which may not appear on the copies handed to us. We have relied on the advice given by the relevant PRC legal advisers concerning the validity of the relevant titles to the property interests in the PRC.

– IV–2 –

PROPERTY VALUATION

APPENDIX IV

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the property interests 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. No on-site measurement has been taken.

We have inspected the exterior and, where possible, the interior of the properties. However, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report whether the properties are free of rot, infestation or any other structural defects. No tests were carried out on any of the services.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Group and CEC. We have also sought and received confirmation from the Group and CEC 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.

Unless otherwise stated, all monetary sums stated in this report are in Hong Kong Dollars.

Our valuations are summarised below and the valuation certificates are attached.

Yours faithfully, for and on behalf of Sallmanns (Far East) Limited Paul L. Brown BSc. FRICS FHKIS Director

Note: Paul L. Brown is a Chartered Surveyor who has 21 years’ experience in the valuation of properties in the PRC and 24 years of property valuation experience in Hong Kong, the United Kingdom and the AsiaPacific region.

– IV–3 –

PROPERTY VALUATION

APPENDIX IV

SUMMARY OF VALUES

No. Property

Open market value in existing state as at 30th April, 2004 HK$

GROUP I – PROPERTY INTEREST RENTED AND OCCUPIED BY THE GROUP IN HONG KONG

Units 904-912 (inclusive) on the 9th Floor Sun Hung Kai Centre No. 30 Harbour Road Wanchai Hong Kong

No commercial value

GROUP II – PROPERTY INTERESTS RENTED AND OCCUPIED BY THE GROUP IN THE PRC

Room 3001A on Level 3 No. 9 Chuangxin Road Changping Park of Beijing Zhongguancun Technology Park Changping District Beijing The PRC

No commercial value

Room 3001 on Level 3 No. 9 Chuangxin Road Changping Park Beijing Zhongguancun Technology Park Changping District Beijing The PRC

No commercial value

– IV–4 –

PROPERTY VALUATION

APPENDIX IV

No. Property

Open Market Value in existing state as at 30th April, 2004 HK$

Rooms 06, 07 and 08A on Level 21 Aiweike Building No. 2 Dong Huan Road South Chaoyang District Beijing The PRC

No commercial value

Room 502 Block A of Tai An Xuan Tairan Gongmao Yuan Chegongmiao Futian District Shenzhen City Guangdong Province The PRC

No commercial value

GROUP III – PROPERTY INTERESTS TO BE ACQUIRED BY THE GROUP IN THE PRC

The whole block of Factory Building No. 2 Sangda Industrial Building Keji Road Science and Technology Industrial Park Nanshan District Shenzhen City Guangdong Province The PRC

No commercial value

– IV–5 –

PROPERTY VALUATION

APPENDIX IV

No. Property

Open market value in existing state as at 30th April, 2004

HK$

60 units on Levels 1 to 7 of Block 4 No commercial value Hi-tech Dormitory Building Keji Road South Nanshan District Shenzhen City Guangdong Province The PRC 8. Levels 3 and 4 No commercial value Sangda Technology Industrial Building (Factory Building No. 3 Sangda Industrial Building) Keji Road Science and Technology Industrial Park Nanshan District Shenzhen City Guangdong Province The PRC 9. Apartment Building Nos. 38 and 39 No commercial value Songpingshan Residential Area Nanshan District Shenzhen City Guangdong Province The PRC

No commercial value

Total:

NIL

– IV–6 –

PROPERTY VALUATION

APPENDIX IV

VALUATION CERTIFICATE

GROUP I – PROPERTY INTEREST RENTED AND OCCUPIED BY THE GROUP IN HONG KONG

Description and tenure

Property

Units 904-912 The property comprises 9 units on (inclusive) the 9th Floor of a 56-storey office on the 9th Floor building completed in about 1980. Sun Hung Kai Centre No. 30 Harbour Road The property has a total saleable Wanchai floor area of approximately 238 Hong Kong sq.m.. According to a Tenancy Agreement, the property is leased to Winsan Technology Company Limited, a wholly owned subsidiary of the Company, for a term of 2 years commencing from 19th May, 2003 and expiring on 18th May, 2005 (both days inclusive) at a monthly rental of HK$45,682 exclusive of Government Rates, service and management charges with 4 months’ rent free period.

	Open market
	value in
	existing state
	as at
Particulars of	30th April,
occupancy	2004
	HK$
The property is	No commercial
currently occupied by	value
the Group for office
purposes.

Note:

The registered owner of the property is Sun Hung Kai Properties Consultants Limited.

– IV–7 –

PROPERTY VALUATION

APPENDIX IV

GROUP II – PROPERTY INTERESTS RENTED AND OCCUPIED BY THE GROUP IN THE PRC
Open market value in
existing state as at
Particulars of 30th April,
Property Description and tenure occupancy 2004 HK$
1. Room 3001A on The property comprises an office The property is currently No commercial Level 3 unit on Level 3 of a 5-storey occupied by the Group value No. 9 Chuangxin Road office building completed in for office purposes. Changping Park of about 1997. Beijing Zhongguancun Technology Park The property has a gross floor Changping District area of approximately 30 sq.m.. Beijing the PRC According to a Tenancy Agreement, the property is leased to Evergrow Trans China Beijing Information Technology Company Limited (囱力運通（北京）信息技術有限公司 ) (the “lessee”) from an independent third party (the “lessor”) for a term of 1 year commencing from 22nd March, 2003 and expiring on 22nd March, 2004 at an annual rental of RMB28,000 inclusive of drinking water, lighting, electricity and heating charges but exclusive of telecommunication fees.

Notes:

Evergrow Trans China Beijing Information Technology Company Limited (囱力運通（北京）信息技術有限公司 ) is a 70%-owned subsidiary of the Company as at the date of valuation.
According to the opinion given by the Company’s PRC legal adviser, Global Law Office:
i. the lessor leased the property together with other premises from 北京市昌平國土資源和房產管理局 (“the Owner”) under a Cooperation Agreement dated 24th September, 2002 for a term from 1st October, 2002 and expiring on 1st October, 2007;
ii. according to the confirmation from the Owner dated 23rd January, 2003, the Owner confirmed that (a) it is the owner of the property, and the lessor has the right to sub-lease the property and (b) the application of the Building Ownership Certificate of the property is now being processed;
iii. the lessor has the right to sub-lease the property to the lessee and the Tenancy Agreement is lawful and enforceable and the rights and obligations created thereby are binding on the Owner, the lessor and the lessee;
iv. notwithstanding that the term of the Tenancy Agreement has expired, the property is currently occupied by the lessee for an unspecified term upon same terms and conditions of the Tenancy Agreement. In such circumstances, the Tenancy Agreement is still valid but it can be terminated by either party by giving reasonable prior notice.
As confirmed by the Company, the lessee is currently occupying the property and paying the contracted rent although without renewing the Tenancy Agreement. The lessor and the lessee are now negotiating for renewal of the Tenancy Agreement.

– IV–8 –

PROPERTY VALUATION

APPENDIX IV

				Open market
				value in
				existing state
				as at
			Particulars of	30th April,
	Property	Description and tenure	occupancy	2004
				HK$
3.	Room 3001 on	The property comprises an office	The property is currently	No commercial
	Level 3	unit on Level 3 of a 5-storey	occupied by the Group	value
	No. 9 Chuangxin Road	office building completed in	for office purposes.
	Changping Park	about 1997.
	Beijing Zhongguancun
	Technology Park	The property has a gross floor
	Changping District	area of approximately 30 sq.m..
	Beijing
	the PRC	According to a Tenancy
		Agreement, the property is leased
		to Evergrow Trans China Network
		Beijing Information Technology
		Company Limited
		(北京囱力華通網絡信息技術有
		限公司) (the “lessee”) from an
		independent third party (the
		“lessor”) for a term of 1 year
		commencing from 22nd March,
		2003 and expiring on 22nd
		March, 2004 at an annual rental
		of RMB28,000 inclusive of
		drinking water, lighting,
		electricity and heating charges but
		exclusive of telecommunication
		fees.

Notes:

Evergrow Trans China Network Beijing Information Technology Company Limited (北京囱力華通網絡信息技術有限公司 ) is a 70%-owned subsidiary of the Company as at the date of valuation.
According to the opinion given by the Company’s PRC legal adviser, Global Law Office:
i. the lessor leased the property together with other premises from 北京市昌平國土資源和房產管理局 (“the Owner”) under a Cooperation Agreement dated 24th September, 2002 for a term from 1st October, 2002 and expiring on 1st October, 2007;
ii. according to the confirmation from the Owner dated 23rd January, 2003, the Owner confirmed that (a) it is the owner of the property and the lessor has the right to sub-lease the property and (b) the application of the Building Ownership Certificate of the property is now being processed;
iii. the lessor has the right to sub-lease the property to the lessee and the Tenancy Agreement is lawful and enforceable. The rights and obligations created thereby are binding on the Owner, the lessor and the lessee;
iv. notwithstanding that the term of the Tenancy Agreement has expired, the property is currently occupied by the lessee for an unspecified term upon same terms and conditions of the Tenancy Agreement. In such circumstances, the Tenancy Agreement is still valid but it can be terminated by either party by giving reasonable prior notice.
As confirmed by the Company, the lessee is currently occupying the property and paying the contracted rent although without renewing the tenancy agreement. The lessor and the lessee are now negotiating for renewal of the tenancy agreement.

– IV–9 –

PROPERTY VALUATION

APPENDIX IV

Property Description and tenure

Rooms 06,07 and The property comprises 3 office 08A on Level 21 units on Level 21 of a 26-storey Aiweike Building composite building completed in No.2 Dong Huan about 2001. Road South Chaoyang District The property has a gross floor Beijing area of approximately 355 sq.m.. the PRC

Open market value in existing state as at Particulars of 30th April, occupancy 2004 HK$ The property is currently No commercial occupied by the Group value for office purposes.

According to a Tenancy Agreement, the property is leased to Evergrow Trans China Network Beijing Information Technology Company Limited (北京囱力華通網絡信息技術有限公司 ) (the “lessee”) from an independent third party (the “lessor”) for a term of 1 year commencing from 1st July, 2003 and expiring on 30th June, 2004 at a monthly rental of US$6,567.5 inclusive of management fees

Notes:

Evergrow Trans China Network Beijing Information Technology Company Limited (北京囱力華通網絡信息技術有限公司 ) is a 70%-owned subsidiary of the Company as at the date of valuation.
According to the opinion given by the Company’s PRC legal adviser, Global Law Office:
i. 中國航空工業總公司第六三四研究所 (the “Owner”) has obtained the Building Ownership Certificate of the property;
ii. the Owner has authorised the lessor to lease the property to any third party and enter into relevant tenancy agreement;
iii. the Tenancy Agreement is lawful and enforceable and the rights and obligations created thereby are binding on the Owner, the lessor and the lessee.

– IV–10 –

PROPERTY VALUATION

APPENDIX IV

Description and tenure

Property

Room 502 The property comprises a Block A of residential unit on Level 5 of a Tai An Xuan 29-storey residential building Tairan Gongmao Yuan completed in about 2000. Chegongmiao Futian District The property has a gross floor Shenzhen City area of approximately 39.02 Guangdong Province sq.m.. The PRC

Open market value in existing state as at Particulars of 30th April, occupancy 2004 HK$ The property is No commercial currently occupied by value the Group as staff quarter.

According to a Tenancy Agreement, the property was leased to Shenzhen DIC Information Technologies Company Limited (深圳迪科信息技術有限責任公司 ) (the “lessee”) from an independent third party (the “lessor”) for a term commencing from 1st July, 2002 and expiring on 31st December, 2002 at a monthly rental of RMB1,200 exclusive of management fees.

Notes:

Shenzhen DIC Information Technology Company Limited (深圳迪科信息技術有限責任公司 ) is a 70%-owned subsidiary of the Company as at the date of valuation.
According to the opinion given by the Company’s PRC legal adviser, Global Law Office:
i. the lessor has obtained the Realty Title Certificate of the property, and has the legal rights to lease the property;
ii. the Tenancy Agreement is lawful and enforceable and the rights and obligations created thereby are binding on the parties thereto;
iii. notwithstanding that the term of the Tenancy Agreement has expired, the property is currently occupied by the Group for an unspecified term at a monthly rental of RMB1,200. In such circumstances, the Tenancy Agreement is still valid and can be terminated by either party by giving reasonable prior notice;
iv. the property is subject to a mortgage in favour of Shenzhen City Commercial Bank Wuzhou Branch.

– IV–11 –

PROPERTY VALUATION

APPENDIX IV

GROUP III – PROPERTY INTERESTS TO BE ACQUIRED BY THE GROUP IN THE PRC

Description and tenure

Property

The whole block of The property comprises a whole Factory Building No. 2 block of an 8-storey industrial Sangda Industrial building completed in about 1995 Building and 2004. Keji Road Science and The property has a total gross Technology floor area of approximately Industrial Park 14,882 sq.m.. Nanshan District Shenzhen City According to a Tenancy Guangdong Province Agreement, Levels 1 to 7 of the The PRC property with a total gross floor area of approximately 14,000 sq.m. is leased to Sang Fei from SZST, a shareholder of Sang Fei, for a term of 5 years commencing from 1st January, 2004 and expiring on 31st December, 2008 at a monthly rental of RMB441,000 exclusive of management fees and water and electricity charges. Sang Fei is entitled to continue to lease the property for the period from 1st January, 2009 to 31st December, 2013 at market rent by giving prior written notice to SZST before 1st October, 2008.

	Open market
	value in
	existing state
	as at
Particulars of	30th April,
occupancy	2004
	HK$
The property is currently	No commercial
occupied by Sang Fei for	value
industrial and ancillary
office purposes.

Level 8 was constructed in January 2004 and contains a gross floor area of approximately 882 sq.m.. According to a Licence Agreement, Level 8 is licensed to Sang Fei for a term co-terminus with the above Tenancy Agreement. Sang Fei is responsible for the construction cost of Level 8, the management fee and water and electricity charges thereof. Sang Fei is entitled to lease Level 8 for the period from 1st January, 2009 to 31st December, 2013 at market rent by giving prior written notice to SZST before 1st October, 2008.

– IV–12 –

PROPERTY VALUATION

APPENDIX IV

Notes:

According to a Supplemental Agreement in respect of Levels 1 to 7 of the property entered into between Sang Fei and SZST dated 15th June, 2004:
i. Sang Fei is entitled to continue to lease and occupy the property for the term from 1st January, 2009 to 31st December, 2013;
ii. Sang Fei must give prior written notice to SZST before 1st October, 2008 of its decision to continue to lease and occupy Levels 1 to 7 of the property and shall sign and register a new tenancy agreement within the statutory prescribed time period;
iii. the rent of Levels 1 to 7 for the renewal period shall be market rent.
According to a Supplemental Agreement in respect of Level 8 of the property entered into between Sang Fei and SZST dated 15th June, 2004:
i. Sang Fei is entitled to lease Level 8 for the term from 1st January, 2009 to 31st December, 2013;
ii. Sang Fei must give prior written notice to SZST before 1st October, 2008 of its decision to lease and occupy Level 8 of the property and shall sign and register a new tenancy agreement within the statutory prescribed time period;
iii. the rent of Level 8 for the renewal period shall be at market rent.
According to the opinion given by the PRC legal adviser for CEC, King & Wood:
i. SZST has obtained the Realty Title Certificate of Levels 1-7 of the property and has the legal rights to lease the property;
ii. the Tenancy Agreement and the Supplemental Agreement in respect of Levels 1-7 of the property are lawful and enforceable and the Tenancy Agreement has been registered with the relevant real estate management authority;
iii. unless and until SZST obtains the Realty Title Certificate of level 8 of the property, the Licence Agreement and the Supplemental Agreement in respect of Level 8 of the property may not be enforceable;
iv according to another Supplemental Agreement dated 15th June, 2004, SZST warrants that it has the right to license Level 8 of the property to Sang Fei and undertakes to take all necessary steps to ensure that Level 8 of the property can be validly licensed to Sang Fei and to complete all relevant procedures (including but not limited to obtaining the Realty Title Certificate). SZST further agrees to indemnify all loss and damages suffered by Sang Fei arising from its occupation and use of Level 8 of the property or SZST’s breach of the aforesaid warranty and undertaking within 30 days from its written demand. This Supplemental Agreement is binding on the parties thereto;
v. according to a letter of undertaking by CEC dated 1st June, 2004, CEC agrees to indemnify all loss and damages suffered by Sang Fei arising from its occupation and use of Level 8 of the property within 30 days from its written demand. This letter of undertaking is valid and legally binding on CEC.

– IV–13 –

PROPERTY VALUATION

APPENDIX IV

				Open market
				value in
				existing state
				as at
			Particulars	30th April,
	Property	Description and tenure	of occupancy	2004
				HK$
7.	60 units on	The property comprises 60	The property is currently	No commercial
	Levels 1 to 7 of	residential units on Levels 1 to 7	occupied by Sang Fei as	value
	Block 4	of a 7-storey dormitory building	staff quarter.
	Hi-tech Dormitory	completed in about 1997.
	Building
	Keji Road South	The property has a total gross
	Nanshan District	floor area of approximately 2,336
	Shenzhen City	sq.m..
	Guangdong Province
	The PRC	According to a Tenancy
		Agreement, the property is leased
		to Sang Fei from SZST, a
		shareholder of Sang Fei, for a
		term of 5 years commencing from
		1st January, 2004 and expiring on
		31st December, 2008 at a monthly
		rental of RMB60,000 exclusive of
		management fees and water and
		electricity charges. Sang Fei is
		entitled to continue to lease the
		property for the period from 1st
		January, 2009 to 31st December,
		2013 at market rent by giving
		prior written notice to SZST
		before 1st October, 2008.

Note:

According to a Supplemental Agreement entered into between Sang Fei and SZST dated 15th June, 2004:
i. Sang Fei is entitled to continue to lease and occupy the property for the term from 1st January, 2009 to 31st December, 2013;
ii. Sang Fei must give prior written notice to SZST before 1st October, 2008 of its decision to continue to lease and occupy the property and shall sign and register a new tenancy agreement within the statutory prescribed time period;
iii. the rent of the property for the renewal period shall be market rent.
According to the opinion given by the PRC legal adviser for CEC, King & Wood:
i. SZST has obtained the Realty Title Certificates of the property and has the legal rights to lease the property;
ii. the Tenancy Agreement and the Supplemental Agreement are lawful and enforceable and the tenancy agreement has been registered with the relevant real estate management authority.

– IV–14 –

PROPERTY VALUATION

APPENDIX IV

Open market value in
existing state as at
Particulars 30th April,
Property Description and tenure of occupancy 2004 HK$
1. Levels 3 and 4 The property comprises Levels 3 The property is currently No commercial Sangda Technology and 4 of a 6-storey industrial occupied by Sang Fei for value Industrial Building building completed in about 1995. production purposes. (Factory Building No. 3 The property has a total gross Sangda Industrial floor area of approximately Building) 4,680 sq.m.. Keji Road Science and According to 3 Tenancy Technology Agreements, the property is Industrial Park leased to Sang Fei from SZST, Nanshan District shareholder of Sang Fei, for a Shenzhen City term commencing from 1st Guangdong Province August, 2003, 1st May, 2004 and The PRC 1st July, 2004, respectively, and expiring on 31st December, 2008 at a total monthly rental of RMB140,400 exclusive of management fees and water and electricity charges. Sang Fei is entitled to continue to lease the property for the period from 1st January, 2009 to 31st December, 2013 at market rent by giving prior written notice to SZST before 1st October, 2008.

Notes:

According to a Supplemental Agreement entered into between Sang Fei and SZST dated 15th June, 2004:
i.. Sang Fei is entitled to continue to lease and occupy the property for the term from 1st January, 2009 to 31st December, 2013;
ii. Sang Fei must give prior written notice to SZST before 1st October, 2008 of its decision to continue to lease and occupy the property and shall sign and register a new tenancy agreement within the statutory prescribed time period;
iii. the rent of the property for the renewal period shall be market rent.
According to the opinion given by the PRC legal adviser for CEC, King & Wood:
i. SZST has obtained the Realty Title Certificate of the property and has the legal rights to lease the property;
ii. the Tenancy Agreements and the Supplemental Agreement are lawful and enforceable and the Tenancy Agreements have been registered with the relevant real estates management authority.

– IV–15 –

PROPERTY VALUATION

APPENDIX IV

				Open market
				value in
				existing state
				as at
			Particulars	30th April,
	Property	Description and tenure	of occupancy	2004
				HK$
9.	Apartment Building	The property comprises the whole	The property is currently	No commercial
	Nos. 38 and 39	of two 8-storey dormitory	occupied by Sang Fei as	value
	Songpingshan	buildings completed in about	staff quarter.
	Residential Area	1997.
	Nanshan District
	Shenzhen City	The property has in total 168
	Guangdong Province	residential units with a total gross
	The PRC	floor area of approximately
		7,162.40 sq.m..
		According to a Tenancy
		Agreement (supplemented by a
		Supplemental Agreement), the
		property is leased to Sang Fei (the
		“lessee”) from Shenzhen Yi
		Zhong Li Industrial Company
		Limited (深圳市意中利實業有
		限公司), an independent third
		party (the “lessor”), for a term of
		1 year commencing from 1st
		November, 2003 and expiring on
		31st October, 2004 at a monthly
		rental of RMB194,600 exclusive
		of management fees, water and
		electricity charges, security
		charges and repair and
		maintenance fund. Either party
		can terminate the tenancy by
		giving to the other party two
		months’ notice.

Notes:

According to the opinion given by the PRC legal adviser to CEC, King & Wood:
i. the lessor has not obtained the Realty Title Certificate of the property and the Tenancy Agreement has not been registered with the relevant real estate management authority;
ii. unless and until the lessor has obtained the Realty Title Certificate and registered the Tenancy Agreement, the Tenancy Agreement may not be valid;
iii. According to the Supplemental Agreement dated 26th February, 2004, the lessor warrants that it has the right to lease the property to Sang Fei and undertakes to take all necessary steps to ensure that the property can be validly leased to Sang Fei and to complete all relevant procedures (including but not limited to obtaining the Real Title Certificate and registering the Tenancy Agreement with the relevant real estate management authority). The lessor further agrees to indemnify all loss and damages suffered by Sang Fei arising from its occupation and use of the property or the lessor’s breach of the aforesaid warranty and undertaking within 30 days from its written demand. The Supplemental Agreement is binding on the parties thereto.
iv. According to a letter of undertaking by CEC dated 26th May, 2004, CEC agrees to indemnify all loss and damages suffered by Sang Fei arising from its occupation and use of the property within 30 days from its written demand. This letter of undertaking is valid and legally binding on CEC.

– IV–16 –

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This Circular includes particulars given in compliance with the Listing Rules and the Takeovers Code for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this Circular (other than those relating to CEC and Sang Fei) and confirm, having made all reasonable inquiries, that to the best of their knowledge and belief, opinions expressed in this Circular (other than those relating to CEC and Sang Fei) have been arrived at after due and careful consideration and there are no other facts not contained in this Circular, the omission of which would make any statement in this Circular misleading.

The New Directors collectively and individually accept full responsibility for the accuracy of the information contained in this Circular (other than those relating to the Winsan Group) and confirm, having made all reasonable inquiries, that to the best of their knowledge and belief, opinions expressed in this Circular (other than those relating to the Winsan Group) have been arrived at after due and careful consideration and there are no other facts not contained in this Circular, the omission of which would make any statement in this Circular misleading.

CEC accepts full responsibility for the accuracy of the information contained in this Circular (other than that in relation to the Winsan Group) and confirms, having made all reasonable enquiries, that to the best of its knowledge and belief, opinions expressed in this Circular have been arrived at after due and careful consideration and there are no other facts not contained in this Circular (other than that in relation to the Winsan Group) the omission of which would make any statement in this Circular misleading.

– V–1 –

GENERAL INFORMATION

APPENDIX V

2. PARTICULARS OF DIRECTORS

(i) Names And Addresses

The names and addresses of the existing Directors are as follows:

Name	Address	Nationality
Executive Directors
Mr. Chan Chak Shing	House C8	Chinese
	Hillgrove
	18 Cape Drive
	Hong Kong
Mr. Chan Hon Ching	House C8	Chinese
	Hillgrove
	18 Cape Drive
	Hong Kong
Ms. Lo Mei Chun	56 Yuan Dan Jie	Chinese
	Fuzhou
	PRC
Non-executive Director
Ms. Chiu King Cheung	Flat F, 15th Floor	Chinese
	Tin Li Mansion
	235 Wu Si Road
	Fuzhou
	PRC
Independent non-executive	Directors
Mr. Wong Po Yan	Flat C1, 16th Floor	Chinese
	41 Stubbs Road
	Hong Kong
Mr. Chan Kay Cheung	8th Floor	Chinese
	22A Broadway
	Mei Foo Sun Chuen
	Kowloon
	Hong Kong

– V–2 –

GENERAL INFORMATION

APPENDIX V

The following persons are proposed to be appointed to the new Board upon Completion to replace the existing Executive Directors and Non-executive Directors (who will resign at Completion):

Name	Address	Nationality
Executive Directors
Mr. Fan Qingwu	Unit 37, Block 46	Chinese
	26, Fu Xing Road
	Haidian District
	Beijing, PRC
Mr. Hua Longxing	Unit 601, Block 5	Chinese
	22, Hua Fa North Road
	Shenzhen
	Guangdong, PRC
Non-executive Directors
Mr. Yang Xiaotang	No. 18 South of	Chinese
	Huai Baishu Street
	Xuan Wu District
	Beijing, PRC
Mr. Tong Baoan	Unit 1, 27th Floor	Chinese
	Block 9
	4, Cui Wei Road
	Haidian District
	Beijing, PRC
Independent Non-executive	Director
Mr. Yin Yongli	12, Yumin Road	Chinese
	Chao Yang District
	Beijing, PRC

A new independent Non-executive Director will be appointed in addition to the existing two independent Non-executive Directors who have agreed to remain in office after Completion. The management committee referred to in Section 7B “Information on the New Group – New Directors, Senior Management and Staff – Senior Management” will be the senior management of the Group upon Completion.

– V–3 –

GENERAL INFORMATION

APPENDIX V

(ii) Biographical Details

The biographical details of the existing Directors are set out as follows:

Executive Directors

Mr. Chan Chak Shing (陳澤盛 ), aged 43, is the founder of the Group, and is currently the Chairman of the Board of directors of the Company. Mr. Chan has many years of solid experience in property development and investment. He is a commissar of the Chinese People’s Political Consultative Conference National Committee, an economic consultant of the Nanjing Municipal People’s Government and the Honorary Curator of the Nanjing Zijin Shan Observatory Museum.

Mr. Chan Hon Ching (陳翰青 ), aged 38, is currently a director and the Deputy Chairman of the Company. He is the younger brother of Mr. Chan Chak Shing. Mr. Chan Hon Ching has over 16 years of experience in property development, material trading, property decoration and property security.

Ms. Lo Mei Chun (盧美珍 ), aged 50, is a registered accountant in the PRC. Ms. Lo holds a master degree. Ms. Lo joined the Group in 1997 and is currently a director of the Company. She has been a member of the Chinese Institute of Certified Public Accountants and a registered accountant approved by the China Securities Regulatory Commission to conduct securities business. She has over 27 years of experience in finance management and auditing.

Non-executive Director

Ms. Chiu King Cheung (趙景璋 ), aged 51, joined the Group in 1991. She has over 22 years of experience in corporate management and property development. She is also a director of the Fujian Province Entrepreneurs Associations.

Independent non-executive Directors

Mr. Chan Kay Cheung (陳棋昌 ), aged 57, is an executive director and deputy chief executive of The Bank of East Asia, Limited. He joined the bank in 1965 and possesses extensive knowledge and experience in the banking industry. He is a fellow member of the Hong Kong Institute of Bankers and a member of the MPF Industry Schemes Committee. He is also an independent non-executive director of Chu Kong Shipping Development Company Limited and Four Seas eFood Holdings Limited.

Mr. Wong Po Yan (黃保欣), aged 81, is the chairman and managing director of United Oversea Enterprises Ltd. and the chairman of the Board, Asia Television Ltd. He is vice-chairman of the Basic Law Committee of Hong Kong Special

– V–4 –

GENERAL INFORMATION

APPENDIX V

Administrative Region. He was the chairman of the Airport Authority, a member of the Drafting Committee of Basic Law and a member of the Preparatory Committee of Hong Kong Special Administrative Region. He had been a member of the Legislative Council for 9 years.

The biographical details of the New Directors are set out in section 7A under “Information on the New Group – New Directors, Senior Management and Staff – New Directors”.

3. CORPORATE INFORMATION ON WINSAN

Registered office Clarendon House 2 Church Street Hamilton HM 11 Bermuda Head office and principal place Room 908, 9th Floor of business in Hong Kong Sun Hung Kai Centre No. 30 Harbour Road Wanchai Hong Kong Company secretary Mr. Lo Wai Chuen Audit committee Mr. Wong Po Yan Mr. Chan Kay Cheung Ms. Chiu King Cheung Qualified accountant Mr. Lee Tak Fai, FCCA, FHKSA Authorised representatives Mr. Chan Chak Shing Mr. Chan Hon Ching Principal share registrar and Butterfield Fund Services (Bermuda) Limited transfer office 65 Front Street Hamilton Bermuda

– V–5 –

GENERAL INFORMATION

APPENDIX V

Hong Kong branch share registrar Abacus Share Registrars Limited and transfer office G/F., Bank of East Asia Harbour View Centre 56 Gloucester Road Wanchai Hong Kong

Principal bankers

In Hong Kong: The Bank of East Asia Limited Bank of China (HK) Ltd.

In the PRC:

The Construction Bank of China

4. CORPORATE INFORMATION ON CEC

Registered office

No. 27, Wanshou Road Haidian District Beijing The People’s Republic of China

Legal representative

Mr. Yang Xiaotang

As a PRC state-owned enterprise, CEC does not have a board of directors.

– V–6 –

GENERAL INFORMATION

APPENDIX V

5. PARTIES INVOLVED IN THE ACQUISITION AND THE NEW LISTING APPLICATION

Winsan International

Winsan International East Asia Chambers P. O. Box 901 Road Town, Tortola British Virgin Islands CEC No. 27, Wanshou Road Haidian District Beijing The People’s Republic of China Independent Financial Adviser Altus Capital Limited of the Company 8th Floor Hong Kong Diamond Exchange Building 8 Duddell Street Central Hong Kong Financial Adviser of CEC and The Hongkong and Shanghai Banking Sponsor of Winsan’s new Corporation Limited listing application Level 15 1 Queen’s Road Central Hong Kong Legal advisers to the Company As to Hong Kong law: Richards Butler 20/F Alexandra House 16-20 Chater Road Central Hong Kong

As to PRC law: Global Law Office 87th Floor, Jing Guang Center Hu Jia Lu Chaoyang District Beijing 100020

As to Bermuda law: Conyers Dill & Pearman 2901, One Exchange Square 8 Connaught Place Central Hong Kong

– V–7 –

GENERAL INFORMATION

APPENDIX V

Legal advisers to CEC As to Hong Kong law: Linklaters 10/F Alexandra House 16-20 Chater Road Central Hong Kong As to PRC law: King & Wood Level 30, North Office Tower Beijing Kerry Center Beijing China 100020 Auditors and reporting accountants PricewaterhouseCoopers Certified Public Accountants 22nd Floor Prince’s Building Central Hong Kong Property valuer Sallmanns (Far East) Limited 15/F, Lucky Centre 165 Wanchai Road Hong Kong

6. THE COMPANY

The Company was incorporated in the Cayman Islands under the Companies Law as an exempted company on 22nd April, 1997 under the name of “Winsan Investment Group Company Limited” which was subsequently changed to its present name by a subscribers’ resolution dated 28th May, 1997. It was continued in Bermuda as an exempt company under the Companies Act on 4th December, 2002, as authorised by Shareholders’ resolutions on 7th November, 2002. The Company’s principal place of business is located at Room 908, 9/F., Sun Hung Kai Centre, No. 30 Harbour Road, Wanchai, Hong Kong and was registered in Hong Kong as an oversea company under Part XI of the Companies Ordinance of the laws of Hong Kong on 23rd June, 1997. Messrs. Chan Chak Shing and Chan Hon Ching are the agents of the Company for the acceptance of service of process. As the Company was incorporated in the Cayman Islands and continued in Bermuda, it is subject to Bermuda company law. Its constitution comprises its Memorandum of Association and Bye-laws as approved by Shareholders on 7th November, 2002.

– V–8 –

GENERAL INFORMATION

APPENDIX V

7. CHANGES IN SHARE CAPITAL

A. The Company

(a) During the year 2001, 3,100,000 ordinary shares of HK$0.10 each were issued and allotted at HK$0.173 per share pursuant to the exercise of share options by certain employees of the Group on various dates in January, 2001.
(b) At an extraordinary general meeting of the Company held on 20th June, 2002, the authorised share capital of the Company was increased from HK$150,000,000 to HK$300,000,000 by the creation of an additional 1,500,000,000 shares of HK$0.10 each.
(c) On 10th July, 2002, the Company made an open offer of 445,280,000 new ordinary shares of HK$0.10 at a subscription price of HK$0.115 each on the basis of an allotment of two offer shares for every five existing ordinary shares held by the qualifying shareholders which open offer was fully underwritten by Winsan International, information to which were set out in the Company’s circular dated 28th May, 2002. The net proceeds of the open offer were approximately HK$51,207,000 which were applied as to approximately HK$16,207,000 for the Winsan Group’s business requirements and the balance of HK$35,000,000 in or towards reduction of borrowings for Winsan International.
(d) By a special resolution passed at an extraordinary general meeting of the Company on 7th November, 2002, the shareholders of the Company approved the Company’s change of domicile from the Cayman Islands to Bermuda and the reorganisation of the Company’s share capital which involved, inter alia:
(i) the reduction of the nominal and paid up value of each ordinary share in the issued share capital of the Company from HK$0.10 to HK$0.01 each and the credit arising from the capital reduction of HK$140,263,200 was applied to the contributed surplus account of the Company;
(ii) the reduction of the nominal value for each of the authorised shares of the Company from HK$0.10 each to HK$0.01 each, such that the authorised share capital remained as HK$300,000,000 consisting of 30,000,000,000 shares of HK$0.01 each.

– V–9 –

GENERAL INFORMATION

APPENDIX V

(e) At the Annual General Meeting of the Company held on 20th June, 2002, the shareholders approved the termination of the Old Share Option Scheme adopted by the Company on 5th July, 1997 and the adoption of a New Share Option Scheme. No options have been granted under the New Scheme.
(f) At the Annual General Meeting of the Company held on 26th June, 2003, the shareholders approved the general mandates to issue and purchase shares on terms set out in resolutions numbered 4(A), (B) and (C) of the notice of that annual general meeting dated 24th April, 2003.

Save as expressly set out in this paragraph 7 headed “Changes in Share Capital, A. The Company”, there has been no alteration in the share capital of the Company within the two years preceding the date of this Circular.

B. Subsidiaries of the Company

On 28th March, 2003, 1,000,000 ordinary shares of HK$0.10 each in the share capital of Transonline Holdings were issued and allotted to the Company at par.

Save as expressly set out in this paragraph 7B headed “Changes in Share Capital, B. Subsidiaries of the Company”, there has been no other alteration in the share capital of the subsidiary of the Company in the two years preceding the date of this Circular. Save as disclosed herein, no capital of any member of the Group is under option or agreed conditionally or unconditionally to be put under option.

C. Members of the New Group (other than the Company)

The registered capital of Sang Fei on its establishment was US$27 million. On 22nd October, 2001, SZST, Philips Consumer Communications B.V. (飛利浦個人消費通訊有限公司 ), Shenzhen SED Electronics Industry Corporation (深圳桑達電子總公司 ) and Philips (China) Investment Company Ltd. (飛利浦（中國）投資有限公司 ) signed a new joint venture contract (the “New JV Contract”) for the operation of Sang Fei. Under the New JV Contract, the registered capital of Sang Fei remained US$27 million, held by SZST as to 10%, Philips as to 25% and CEC’s wholly-owned subsidiaries as to 65%. Sang Fei adopted its current name.

On 31st July, 2002, MOC approved the increase of Sang Fei’s registered capital to US$33 million. As at the Latest Practicable Date, US$3 million of the increased portion of registered capital has been paid up by capitalising part of the profits distributable to its shareholders for the year ended 31st December, 2001. The balance of the increased registered capital, being US$3 million has been paid up by 17th November, 2003 by capitalising the entire credit standing in the enterprise expansion fund of Sang Fei as at 31st December, 2002 of approximately RMB24.3 million (US$2.94 million) and the balance by cash payment by Sang Fei shareholders in proportion to their equity interest in Sang Fei.

– V–10 –

GENERAL INFORMATION

APPENDIX V

One ordinary share of US$1.00 each in the share capital of Sang Fei BVI was issued and allotted at par to China Electronics Corporation (BVI) Holdings Company Limited (being a wholly-owned subsidiary of CEC). The Target Equity Interest was transferred to Sang Fei BVI on 20th April, 2004 by way of administrative allocation.

Upon Completion, assuming no further change in the structure of the New Group, Sang Fei is expected to be the principal subsidiary of the Company whose profits or assets will make a material contribution to financial statements of the New Group for the year ending 31st December, 2004. Its particulars upon Completion (assuming no further changes to its registered capital and total investment account), are as follows:

Name	:	Sang Fei (unlisted)
Date of incorporation	:	25th October, 1996
Country of incorporation	:	PRC
Nature	:	Sino-foreign equity joint venture company
General nature of business	:	Manufacturing of mobile telecommunications
		equipment
Registered capital	:	US$33,000,000
Total investment amount	:	US$40,800,000
Term of operation	:	25th October, 1996 – 25th October, 2021
Attributable interest held	:	65%
by the Company

8. FURTHER INFORMATION ABOUT INTERESTS IN WINSAN SHARES AND DIRECTORS

A. Disclosure of Directors’ interests

As at the Latest Practicable Date, the interests of the Directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (“SFO”)) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO) or required to be entered in the register maintained by the Company pursuant to Section 352 of the SFO or which were notified to the Company and the Stock Exchange or are required, pursuant to the Model Code for Securities Transactions by Directors to be notified to the Company and the Stock Exchange were as follows:

Long Positions

				Approximate
		No. of	No. of Winsan	percentage
Name of		Winsan	Shares subject	of issued
Director	Capacity	Shares	to option	Shares
			(Note 1)	(Note 2)
Mr. Chan Chak Shing	Corporate	781,372,870	–	50.14%
	Beneficial	–	25,000,000	1.60%
	Family	33,000,000	4,800,000	2.43%
Mr. Chan Hon Ching	Beneficial	11,250,000	25,000,000	2.33%
Ms. Chiu King Cheung	Beneficial	3,812,500	24,000,000	1.78%
Ms. Lo Mei Chun	Beneficial	–	1,600,000	0.10%

– V–11 –

GENERAL INFORMATION

APPENDIX V

Notes:

Particulars of those options are set out below:

Exercise Name Date of grant price Director Mr. Chan Chak Shing 1-9-1997 HK$1.53 31-3-1998 HK$0.36 16-2-2000 HK$0.24 Mr. Chan Hon Ching 1-9-1997 HK$1.53 31-3-1998 HK$0.36 16-2-2000 HK$0.24 Ms. Chiu King Cheung 1-9-1997 HK$1.53 31-3-1998 HK$0.36 16-2-2000 HK$0.24 Ms. Lo Mei Chun 1-9-1997 HK$1.53 30-10-2000 HK$0.173	Number of options as at 1st January, 2003 16,000,000 11,500,000 2,300,000 1,000,000 22,000,000 2,000,000 1,000,000 22,000,000 1,000,000 600,000 1,000,000 80,400,000	Options lapsed during the year – – – – – – – – – – – –	Number of outstanding Options options exercised as at during 31st the December, year 2003 – 16,000,000 – 11,500,000 – 2,300,000 – 1,000,000 – 22,000,000 – 2,000,000 – 1,000,000 – 22,000,000 – 1,000,000 – 600,000 – 1,000,000 – 80,400,000	Number of outstanding Options options exercised as at during 31st the December, year 2003 – 16,000,000 – 11,500,000 – 2,300,000 – 1,000,000 – 22,000,000 – 2,000,000 – 1,000,000 – 22,000,000 – 1,000,000 – 600,000 – 1,000,000 – 80,400,000
				80,400,000

As required under the SFO, the relevant percentages are calculated by reference only to the shares in issue as at the Latest Practicable Date. These percentages are calculated based on there being a total of 1,558,480,000 Winsan Shares in issue as at the Latest Practicable Date

Associated Corporation

				Approximate
				percentage of
			No. of shares of	issued shares of
Name of			the associated	the associated
associated corporation	Name of director	Capacity	corporation	corporation
Winsan International	Mr. Chan Chak Shing	Personal	1	100%
Evergrow Technology	Mr. Chan Chak Shing	Corporate	5	5%
Company Limited

Save as disclosed this paragraph 8A headed “8. Further Information about Interests in Winsan Shares and Directors, A. Disclosure of Directors’ Interests”, none of the directors and chief executives or their associates has any interests or short positions in any shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of the SFO) as recorded in the register to be kept under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange.

– V–12 –

GENERAL INFORMATION

APPENDIX V

B. Substantial shareholders

As at the Latest Practicable Date, so far as is known to any Director or chief executive, the following person(s) (other than a director or chief executive of the Company) who have interests or short positions in the shares and underlying shares of the Company which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or who is, directly or indirectly, interested in 10% or more of the nominal value of the share capital of the Company carrying rights to vote in all circumstances at general meeting of the Company as recorded in the register required to be kept by the Company pursuant to Section 336 of the SFO:

			Approximate
			percentage of
Name	Capacity	Number of Shares	issued Shares
			(Note)
Winsan International	Beneficial	781,372,870	50.14%

Note: As required under the SFO, the relevant percentages are calculated by reference only to the shares in issue as at the Latest Practicable Date.

Save as disclosed in this paragraph 8B headed “8. Further Information about Winsan Shares and Directors, B. Substantial Shareholders”, no other person (other than a director or chief executive of the Company) has an interest or a short position in the shares and underlying shares as recorded in the register required to be kept by the Company pursuant to section 336 of the SFO.

As at the Latest Practicable Date, so far as is known to any Directors, or chief executive the following person(s) are directly or indirectly interested in 10% or more of the nominal value of any class of the share capital carrying right to vote in all circumstances at general meetings of the members of the Winsan Group:

Name of Company	Name of Substantial Shareholder	Interest held
Evergrow Technology	Langbourne International Limited	25%
Company Limited
北京恆力華通網絡信息	交通部公路科學研究所	25%
技術有限公司	(Research Institute of Highway)
(Evergrow Trans China
Network Beijing
Information Technology
Co., Ltd)
深圳迪科信息技術	上海富欣通信技術發展有限公司	30%
有限責任公司
Shenzhen DIC
Information Technologies
Co., Ltd

– V–13 –

GENERAL INFORMATION

APPENDIX V

As at the Latest Practicable Date, so far as is known to the New Directors and save as disclosed above, the following persons will, upon Completion, be interested directly or indirectly, in ten percent. or more of the nominal value of any class of share capital carrying right vote in all circumstances at general meetings of any member of the New Group (other than the Company):

	Name/description of
Name of Company	Substantial Shareholder	Interest held
Sang Fei	members of the Philips Group	25%
	SZST	10%

C. Particulars of service contracts

Each of Mr. Chan Chak Shing and Mr. Chan Hon Ching, being Executive Directors, and Ms. Chiu King Cheung, being a Non-executive Director, entered into a service agreement with the Company, that commenced 5th July, 1997, for initial term of three years, and shall continue to be in force now until three months’ notice in writing of termination has been served by either party. Save as disclosed herein, no other Director has entered into any service agreement with the Company.

D. Directors’ remuneration

None of the Directors has any existing or proposed service contracts with any member of the Group which is not expiring or terminable by the employer within one year without payment of compensation (other than statutory compensation). No contracts have been entered or amended within six months before the Last Dealing Date. There is no service contract between the Company and any of the New Directors.

– V–14 –

GENERAL INFORMATION

APPENDIX V

The aggregate amount of salaries, housing allowances, other allowances and benefits in kind paid by the Winsan Group to the Directors for the years ended 31st December, 2001, 31st December, 2002 and 31st December, 2003 was approximately HK$4,232,000, HK$3,175,000 and HK$2,619,000 respectively. The emoluments of each Director for each of the years ended 31st December, 2001, 2002 and 2003 were as follows:

Mr. Chan Chak Shing Mr. Chan Hon Ching Ms. Chiu King Cheung Ms. Lo Mei Chun Mr. Li Hok Wing (also known as Li Xue Rong)(Note 1) Mr. Pau Kwok Ping (also known as Bao Guo Ping)(Note 1) Mr. Shi Dan Wei_(Note 2) Mr. Wang Yi(Note 2)_ Mr. Wong Po Yan Mr. Chan Kay Cheung Total	2003 HK$’000 1,781 158 158 162 – – – – 180 180 2,619	2002 HK$’000 1,929 177 174 174 – – 61 300 180 180 3,175	2001 HK$’000 1,919 528 378 371 338 338 – – 180 180
			4,232

Notes:

Mr. Li Hok Wing and Mr. Pau Kwok Ping resigned as directors of the Company on 29th October, 2001.
Mr. Shi Dan Wei and Mr. Wang Yi were appointed as directors of the Company on 24th October, 2001 and resigned on 29th July, 2002.

Save as disclosed above, no other emoluments have been paid or are payable, in respect of the three years ended 31st December, 2003 by members of the Winsan Group to the Directors.

The aggregate amount of salaries, housing allowances, other allowances and benefits in kind paid by Sang Fei to the New Directors for the years ended 31st December, 2001, 31st December 2002 and 31st December, 2003 was approximately RMB0, RMB0 and RMB300,000 respectively. Save as disclosed, no other emoluments have been paid or are payable, in respect of the three years ended 31st December, 2003 by Sang Fei to the New Directors.

– V–15 –

GENERAL INFORMATION

APPENDIX V

Under the arrangements currently in force, the Company estimates that the aggregate remuneration including benefits in kind of the New Directors payable by the New Group for the year ending 31st December, 2004 will be approximately HK$1,003,000.

E. Interests in contracts with the Company

No Director has any interest in any assets which have been, since the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to any member of the Group.

9. SHARE DEALINGS AND SHAREHOLDINGS

(a) Dealings by the Company

The Company does not have any shareholding interest in CEC. The Company has not dealt for value in the shares of CEC during the period beginning 6 months prior to the Announcement and ending with the Latest Practicable Date.

(b) Dealings by the Directors

The PRC Government is the sole beneficial owner of CEC. None of the Directors nor any subsidiary of the Company, pension fund of the Company or the subsidiary of the Company, or by an adviser to the Company as specified in Class (2) of the definition of associate in the Takeovers Code (but excluding exempt principal traders) has any interest in CEC. None of the Directors has dealt for value in any shares of CEC during the period that began six months prior to the Announcement and ending on the Latest Practicable Date.

The interests of Directors in the Company are set out in paragraph 8A of this Appendix.

Save as disclosed in paragraph 8A of this Appendix, no Directors or any subsidiary of the Company, pension fund of the Company or the subsidiary of the Company, or by an adviser to the Company as specified in Class (2) of the definition of associate in the Takeovers Code (but excluding exempt principal traders) have dealt for value in the Shares during the period that began six months prior to the Announcement and ending on the Latest Practicable Date nor have any Shares.

(c) Dealings by CEC and parties acting in concert with it

CEC has confirmed save pursuant to the Acquisition Agreement to the Company that neither it nor any person acting in concert with it has acquired voting rights in the Company during the period that began six months prior to the Announcement and ending on the Latest Practicable Date.

– V–16 –

GENERAL INFORMATION

APPENDIX V

CEC has confirmed that neither it nor any persons acting in concert with it own any Shares or control any shareholders in the Company.

Save pursuant to the Acquisition Agreement neither CEC nor any party acting in concert with it has entered into any agreement, arrangement or understanding to transfer Winsan Shares held or to be held by it upon Completion.

(d) Other dealings

There are no shareholdings in the Company owned or controlled by person specified in paragraph 2(iii) of Schedule II of the Takeovers Code.

10. SHARE PRICES OF THE COMPANY

The closing price of the Winsan Shares have traded on the Stock Exchange at the end of each of the six calendar months preceding the Last Dealing Date were as follows:

2002	Per Winsan Share
	HK$
29th November	0.047
31st October	0.068
30th September	0.075
30th August	0.07
31st July	0.066
28th June	0.108

The closing price of Shares traded on the Stock Exchange on the Last Dealing Date was HK$0.065 per Winsan Share.

The closing price of Winsan Shares traded on the Stock Exchange on the Latest Practicable Date was HK$0.305 per Winsan Share.

The highest closing price per Winsan Share in the six calendar months preceding the Last Dealing Date was HK$0.116 on 5th, 9th, 10th and 11th July, 2002. The lowest closing price per Winsan Share in the six calendar months preceding the Last Dealing Date was HK$0.03 on 26th November, 2002.

– V–17 –

GENERAL INFORMATION

APPENDIX V

11. MATERIAL CONTRACTS

The following contracts have been entered into by members of the Group within the 2 years preceding the date of this Circular, otherwise than in the ordinary course of business, and are, or may be, material:

(a) an underwriting agreement dated 19th April, 2002 entered into between the Company and Winsan International whereby, inter alia, Winsan International agreed to fully underwrite shares to be offered under the Open Offer;
(b) the Acquisition Agreement;
(c) the Preliminary Placing Agreement.

Sang Fei has not within the 2 years preceding the Last Dealing Date, entered into any contracts which, otherwise than in the ordinary course of business are, or may be, material.

12. LITIGATION

As at the Latest Practicable Date, save as disclosed below, no member of the Group was party to any legal proceedings or claims which are of material importance. The Directors do not know of any legal proceedings or claims pending or threatened against the Company or any other member of the Group.

Arbitration proceedings have been commenced in April 2003 by 福建興業銀行深圳科技支行 (the “Lender”) against 深圳市迪科網絡有限公司 (the “Borrower”) and Shenzhen DIC Information Technologies Co. Ltd. (“Dico”), a subsidiary of the Company. Pursuant to the arbitration proceedings, the Lender claims against the Borrower an outstanding loan amount pursuant to a loan agreement in the principal sum of RMB7,080,000 together with interests of RMB696,769.27. It was alleged that Dico, acted as a guarantor in respect of the outstanding principal amount. It was held on 26th September, 2003 by the Shenzhen Arbitration Tribunal that the Borrower is liable to repay the remaining outstanding amount to the Lender and that Dico is also liable for the payment of such amount by reason that it is the guarantor of the Borrower. As at the Latest Practicable Date, Dico has not received further notice from the Lender on this matter.

Arbitration Proceedings have been commenced on 12th November, 2003 by Dico against 麗江廣電寬帶數據網絡有限公司 (the “Defendant”). Under the arbitration proceedings, Dico claims against the Defendant an outstanding contractual balance in the sum of RMB2,126,155 together with interests of RMB765,415 pursuant to contracts entered into between them. As at the Latest Practicable Date, the arbitration tribunal has not made an award in relation to the proceedings.

– V–18 –

APPENDIX V

GENERAL INFORMATION

Legal proceedings had been commenced by 中國電子器材深圳公司 (as plaintiff) against Dico at the Shenzhen People’s Court claiming against Dico outstanding contractual balance in the sum of RMB1,403,240.78 together with interests of RMB74,520 and interest calculated to the date of repayment. Judgement was made against Dico to repay the outstanding contractual balance together with interest as described above. An appeal was made by Dico to the Intermediate People’s Court of Shenzhen, Guangdong Province but was dismissed. Pursuant to enforcement proceedings administered by the Intermediate People’s Court of Shenzhen, certain electronic equipment of Dico was sold by auction for a total amount of RMB143,985.61 and paid over to the plaintiff of the proceedings (after deduction of auction expenses). On 16th January, 2004 the plaintiff of the legal proceedings have agreed in writing to accept the remaining electronic equipment of Dico in satisfaction of RMB500,000 of the outstanding judgement debt. Pursuant to application made by the plaintiff to the legal proceedings, Intermediate People’s Court of Shenzhen has ruled on 31st May, 2004 that enforcement proceedings be suspended, subject to the plaintiff’s right in the future to re-commence enforcement proceedings if Dico were found to have further assets for enforcement.

On 30th June, 2003, Sang Fei received a notification from Shenzhen Nanshan District Tax Bureau (“Nanshan Tax Bureau”). Sang Fei is required to pay additional export taxation of RMB9,550,000. Having paid the additional taxation as required, Sang Fei then sought administrative review against the decision on 12th September, 2002. The Shenzhen State Tax Bureau ruled on 12th December, 2003 that the Nanshan Tax Bureau to make a new decision on the appropriate way to handle this matter. As at 12th March, 2004, Shenzhen Nanshan District State Tax Bureau issued another notification to Sang Fei to confirm their original decision. Sang Fei is seeking review of their decision and has on 14th May, 2004 lodged its appeal application with the Shenzhen State Tax Bureau and the application has been accepted by Shenzhen State Tax Bureau and is in process.

As at the Latest Practicable Date, no member of the New Group (other than the Company) was party to any legal proceedings or claims which are of material importance. The New Directors do not know of any legal proceedings or claims pending or threatened against any member of the New Group (other than the Company).

13. ESTIMATED EXPENSES

The amount of expenses of the Winsan’s new listing application is estimated to be approximately HK$4.5 million, for the payment of such amount which is payable by Winsan.

14. PROCEDURES FOR DEMANDING A POLL

A resolution put to the vote of a 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 demanded:

(a) by the chairman of the meeting; or

– V–19 –

GENERAL INFORMATION

APPENDIX V

(b) by at least three Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or
(c) by a Shareholder or Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or
(d) by a Shareholder or Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all Shares conferring that right.

A demand by a person as proxy for a Shareholder or in the case of a Shareholder being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a Shareholder.

15. INDEMNITIES

CEC, the controlling shareholder of the Company immediately after Completion, has indemnified the Company in respect of any amount or liability (including, without limitation, taxation) incurred by Sang Fei and any other companies acquired by the Company under the Acquisition Agreement from CEC and any amount or liability which is not specifically provided for by Sang Fei in its management accounts and against all loss and expense arising out thereof.

CEC has also provided indemnities in favour of Sang Fei against loss suffered by Sang Fei resulting from the lack of the requisite title documents and proper registration of the tenancy agreement in respect of property numbered 9 in the property valuation report in Appendix IV of this Circular in relation to the two 8-storey dormitory buildings.

16. DISCLAIMERS

Save as disclosed in section 8 headed “8. Further Information about interests in Winsan Shares and Directors” and in section 9 headed “9. Share Dealings and Shareholdings”, in this Appendix V of this Circular or otherwise announced by the Company:

(a) none of the Directors has any interest or short positions in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which, once the shares are listed, will be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions

– V–20 –

APPENDIX V

GENERAL INFORMATION

which they are taken or deemed to have under such provisions of the SFO) or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein or which, once the shares are listed, will be required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies under the Listing Rules.

(b) so far as is known to the Directors and the New Directors, immediately following Completion, no other persons are expected to have interests or short positions in the shares and underlying shares of the Company which are required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, nor is it expected that there are any other persons, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the New Group.
(c) there is no existing or proposed service contract (excluding contracts expiring or terminable by the employer within one year without payment of compensation (other than statutory compensation)) between any member of the Winsan Group and any of the Directors or the New Directors.
(d) none of the Directors or the New Directors and any of the persons referred to in the paragraph headed “Qualifications and consents of experts” of this Appendix is interested in the promotion of, or in any assets which have been, within the two years immediately preceding the date of this Circular acquired or disposed of by or leased to, any Company within the New Group, or are proposed to be so acquired, disposed of or leased.
(e) none of the Directors is materially interested in any contract or arrangement subsisting at the date of this Circular which is significant in relation to the business of any company within the Winsan Group and the New Group.
(f) none of the persons referred to in paragraph headed “Qualifications and consents of experts” of this Appendix has any shareholding in any member of the Winsan Group or the New Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any company within the Winsan Group and the New Group.
(g) none of the Directors, the New Directors or their associates (as defined in the Listing Rules) or any shareholder of the Company (which to the knowledge of the directors owns more than 5% of the issued share capital of the Company following Completion) has any interest in any of the five largest suppliers or five largest customers of any company within the New Group.

– V–21 –

GENERAL INFORMATION

APPENDIX V

(h) no amount or benefit has been paid or given within the two years preceding the date of this Circular to any promoter, if any, of the Company nor is any such amount or benefit intended to be paid or given.
(i) no agreement, arrangement or understanding (including any compensation arrangement) exists between CEC or any person acting in concert with it and any of the Directors, recent Directors, Shareholders or recent Shareholders or any other person having any connection with or dependence upon on conditional on the Acquisition and the Whitewash Waiver.
(j) the Directors have been advised that no material liability for estate duty would likely to fall upon the Company and its subsidiaries in relation to the acquisition of Sang Fei.
(k) there are no arrangements under which future dividends are waived or agreed to be waived.
(l) there are no founder of management or deferred shares.

17. QUALIFICATION AND CONSENTS OF EXPERTS

The following are the qualifications of the experts who have given, or agreed to the inclusion of, their opinion or advice in this Circular:

Name

Qualification

Altus Capital Limited a deemed registered Institution for Type 1, 4, 6 and 9 regulated activities under the SFO Global Law Office PRC legal adviser King and Wood PRC legal adviser PricewaterhouseCoopers Certified Public Accountants Sallmanns (Far East) Limited Property valuers The Hongkong and Shanghai Banking a deemed registered institution for Corporation Limited Types 1, 4, 6, 7 and 9 regulated activities under the SFO and a licenced bank under the Banking Ordinance (Chapter 155 of the Law of Hong Kong)

Each of the experts referred to above have given and have not withdrawn their respective written consents to the issue of this Circular with the inclusion of their respective letter and report and/or reference to their respective names, as the case may be, in the form and context in which they respectively appear.

– V–22 –

GENERAL INFORMATION

APPENDIX V

18. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for public inspection at the office of Richards Butler at 20th Floor, Alexandra House, 16-20 Chater Road, Central, Hong Kong during normal business hours up to and including 14th July, 2004:

the memorandum of association of the Company and the bye-laws;
the articles of association of CEC;
the letter from Altus Capital Limited, the text of which is set out in pages 40 to 85 of this Circular;
the accountant’s report prepared by PricewaterhouseCoopers, the text of which is set out in Appendix I to this Circular and the related statement of adjustments;
the letter, summary of values and the valuation certificate prepared by Sallmanns (Far East) Limited of the property interests of the New Group, the text of which is set out in Appendix IV to this Circular;
the annual reports of the Company for the three financial years ended 31st December, 2003;
the Company’s circulars to Shareholders dated 8th August, 2001, 20th August, 2001, 28th May, 2002, 24th June, 2002, 7th October, 2002 and 30th April, 2003;
the rules of the New Share Option Scheme;
the Companies Act;
the material contracts referred to in paragraph 12 of this Appendix;
the service contracts referred to in paragraph 8C of this Appendix; and
the written consents referred to in paragraph 17 of this Appendix.

– V–23 –

NOTICE OF SPECIAL GENERAL MEETING

*

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Winsan (China) Investment Group Company Limited (the “Company”) will be held at Tianshan and Lushan Rooms, 5/F., Island Shangri-La Hong Kong, Pacific Place, Supreme Court Road, Central, Hong Kong on 14th July, 2004 at 4:00 p.m., for the purpose of considering, and, if thought fit, passing with or without amendment, the following Resolutions which will be proposed as ordinary and special resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT :
(a) the acquisition agreement (the “Acquisition Agreement”) dated 10th December, 2003 between China Electronics Corporation (“CEC”), the Company and Winsan International Holdings Limited (“WIHL”), a copy of which has been produced to the meeting marked “A” and signed by the chairman of the meeting by way of identification, pursuant to which the Company has agreed to purchase, and CEC has agreed to sell or procure the sale, of 65% equity interest in 深圳桑菲消費通信有限公司 (Shenzhen Sang Fei Consumer Communications Company Limited) through the acquisition of the entire issued share capital of Sang Fei (BVI) Company Limited a special purpose company established to hold such equity interest at a purchase price of HK$260,000,000, to be satisfied by the issue and allotment of 6,500,000,000 new shares (“Consideration Shares”) of HK$0.01 each (“Shares”) by the Company be and is hereby approved;
(b) that the Non-exempt Ongoing Connected Transactions be and are hereby approved, subject to the terms set out in section 11D headed “Information on the new Group – Connected Transactions – Conditions of Shareholders’ approval of Non-exempt Ongoing Connected Transactions”;
For identification purposes only

– VI–1 –

NOTICE OF SPECIAL GENERAL MEETING

(c) any Director or the secretary of the Company be and are hereby generally and unconditionally authorised to do all such acts and execute or caused to be executed all such documents on behalf of the Company as they may deem necessary, desirable or expedient to give effect to and complete the transactions contemplated under the Acquisition Agreement.”
“ THAT conditional upon the Resolution No. 1 set out in the notice of the meeting of the Company dated 21st June, 2004 being passed, and subject and pursuant to Note 1 of the “notes on dispensations from Rule 26” of the Hong Kong Code on Takeovers and Mergers (the “Code”), consent to CEC (as defined in Resolution No. 1 set out in the notice of the meeting of the Company dated 21st June, 2004) and parties acting in concert with it not being obliged to make any general offer for the Shares in issue (other than the Consideration Shares and those Shares held by CEC and parties acting in concert with it) which they would otherwise have to make under Rule 26 of the Code as a result of the issue and allotment of the Consideration Shares (as defined in Resolution No. 1 set out in the notice of the meeting of the Company dated 21st June, 2004), be and is hereby granted.”
“ THAT conditional upon Resolution No. 1 set out in the notice of the meeting of the Company dated 21st June, 2004 being passed, the Directors be and are hereby authorised to exercise all the powers of the Company to allot, issue and deal up to 610,000,000 Shares as contemplated under the preliminary placing agreement dated 17th June, 2004 between the Company, Winsan International Holdings Limited and The Hongkong and Shanghai Banking Corporation Limited.”

SPECIAL RESOLUTION

“ THAT subject to the approval of the Registrar of Companies in Bermuda and subject to the Acquisition being completed, the name of the Company be changed from “Winsan (China) Investment Group Company Limited” to “China Electronics Corporation Holdings Company Limited” and the Directors of the Company be and they are hereby generally and unconditionally authorised to arrange for the application to be made to the relevant Bermuda authorities for the aforesaid change of name for and on behalf of the Company.”

By order of the Board

Winsan (China) Investment Group Company Limited Lo Wai Chuen

Company Secretary

Hong Kong, 21st June, 2004

– VI–2 –

NOTICE OF SPECIAL GENERAL MEETING

Winsan has (i) three executive Directors, namely Mr. Chan Chak Shing (Chairman), Mr. Chan Hon Ching (Deputy Chairman) and Ms. Lo Mei Chun; (ii) one non-executive Director, namely Ms. Chiu King Cheung; and (iii) two independent non-executive Directors, namely Mr. Wong Po Yan and Mr. Chan Kay Cheung.

Notes:

A member entitled to attend and vote at the above Meeting is entitled to appoint another person as his proxy to attend and on a poll vote instead of him. A proxy need not be a member of the Company.
In order to be valid, a form of proxy and the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power of authority, must be deposited at the Company’s Branch Share Registrar in Hong Kong, Abacus Share Registrars Limited of G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not less than 48 hours before the time fixed for holding the Meeting.

– VI–3 –

AI assistant

Smart Fish Wealthlink Holdings Limited — Proxy Solicitation & Information Statement 2004

48979_rns_2004-06-21_bb714101-273c-45ba-bfe5-1825fd65f07c.pdf

This Circular does not constitute an offer of, nor is it calculated to invite offers for, shares in, or other securities of Winsan (China) Investment Group Company Limited.

*

PROPOSED CHANGE OF NAME

PROPOSED GRANT OF SPECIAL MANDATE TO ISSUE SHARES

PROPOSED CHANGE IN BOARD LOT SIZE

Altus Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

GLOSSARY OF TECHNICAL TERMS

GLOSSARY OF TECHNICAL TERMS

Note:

*

PROPOSED CHANGE OF NAME

PROPOSED CHANGE IN BOARD LOT SIZE

INTRODUCTION

LETTER FROM THE BOARD

1. THE ACQUISITION

Summary of the Acquisition

Before the Placing and Completion

After the Placing, Completion and the Future Disposals

The Acquisition Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Undertakings from CEC

LETTER FROM THE BOARD

2. POSSIBLE PLACING OF WINSAN SHARES

3. INFORMATION ON CEC AND SANG FEI

4. DIRECTORS AND MANAGEMENT OF WINSAN

5. EFFECTS OF THE ACQUISITION AND THE PLACING

(b) Financial effects of the Acquisition

6. REASONS FOR THE ACQUISITION AND THE FUTURE DISPOSALS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

7. GENERAL OFFER IMPLICATION ON CEC

LETTER FROM THE BOARD

8. REQUIREMENTS OF THE LISTING RULES

9. PROPOSED CHANGE OF NAME

LETTER FROM THE BOARD

10. SPECIAL MANDATE

11. SPECIAL GENERAL MEETING

12. PROPOSED CHANGE IN BOARD LOT SIZE

13. RECOMMENDATIONS

14. FURTHER INFORMATION

Yours faithfully,

1. INTRODUCTION

2. THE CEC GROUP

CEC’s communication/consumer electronics business

CEC’s semiconductor business

CEC’s software business

3. THE INTENTIONS OF CEC WITH RESPECT TO WINSAN AND THE NEW GROUP

4. MISCELLANEOUS

*

To the Independent Shareholders

Winsan (China) Investment Group Company Limited

INTRODUCTION

LETTER FROM ALTUS CAPITAL LIMITED

BASIS OF OUR OPINION

LETTER FROM ALTUS CAPITAL LIMITED

PRINCIPAL FACTORS TAKEN INTO CONSIDERATION

A. THE ACQUISITION

1. Background

LETTER FROM ALTUS CAPITAL LIMITED

2. Effects of the Acquisition

Change in Winsan Group’s principal business and management team

Material dilution to shareholdings of existing Shareholders

Introduction of new majority Shareholder

3. The Winsan Group

(a) Financial performance of Winsan Group

Smart Fish Wealthlink Holdings Limited Proxy Solicitation & Information Statement 2004