Smart Fish Wealthlink Holdings Limited - Proxy Solicitation & Information Statement 2008

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in China Electronics Corporation Holdings 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, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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

**CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED ***

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability) (Stock Code: 00085)

MAJOR TRANSACTION, CONNECTED TRANSACTION

AND

CONTINUING CONNECTED TRANSACTIONS

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

A notice convening a special general meeting of the Company to be held at 3:00 p.m. on Monday, 21 July 2008 at Plaza I-III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong is set out on pages 158 to 160 of this circular. Whether or not you are able to attend the special general meeting, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tricor Abacus Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the special general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjournment thereof should you so wish.

A letter from the independent board committee of the Company containing its recommendation to the independent shareholders of the Company is set out on pages 34 to 35 of this circular. A letter from Altus Capital Limited, the independent financial adviser, containing its advice to the independent board committee and the independent shareholders of the Company is set out on pages 36 to 53 of this circular.

* For identification purpose only

30 June 2008

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
The Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
China Hua Da Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Beijing Shoufa Xinan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
The Other Vendors Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Consideration Shares to be issued pursuant to the Acquisition . . . . . . . . .	13
Conditions precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Information on Hua Da Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Excluded assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Reasons for and benefits of the Acquisition . . . . . . . . . . . . . . . . . . . . . . .	19
Shareholding structure of the Company . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Financial effects of the Acquisition on the Group . . . . . . . . . . . . . . . . . . .	22
Financial and trading prospects of the Group. . . . . . . . . . . . . . . . . . . . . . .	23
Listing Rules implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Hua Da Business Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Hua Da Deposit Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Hua Da Tenancy Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29
Listing Rules implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32
Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .	34
Letter from Altus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Appendix I – Accountant’s Report of Target Group. . . . . . . . . . . . . . . . . . . .	54
Appendix II – Financial Information of the Group . . . . . . . . . . . . . . . . . . . . .	95
Appendix III – Management Discussion and Analysis of Hua Da Electronics .	140
Appendix IV – Financial Information of the Enlarged Group . . . . . . . . . . . . .	144
Appendix V – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	149
Notice of the SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	158
– i –

DEFINITIONS

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

“Acquisition”

together, the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition

“Altus” Altus Capital Limited, a licensed corporation to carry out type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Acquisition and the terms of the Non-exempt Continuing Connected Transactions

“associates”
has the meaning ascribed to this term under the Listing Rules
“Beijing Hua Da Xinan” (Beijing Huada Infosec
Technology Co., Ltd.), a company established under the law of the PRC
“Beijing Huada Zhibao” (Beijing Huada Zhibao
Electronic System Co., Ltd.), a company established under the law of the PRC
“Beijing Shoufa Xinan” (Beijing Shoufa Xinan Data System Technology Company Limited), a company established under the law of the PRC, the vendor under the Beijing Shoufa Xinan Agreement
“Beijing Shoufa Xinan the acquisition of a 7.50% equity interest in Hua Da Acquisition” Electronics by the Company from Beijing Shoufa Xinan pursuant to the Beijing Shoufa Xinan Agreement
“Beijing Shoufa Xinan the conditional equity transfer agreement dated 20 June Agreement” 2008 entered into between the Company and Beijing Shoufa Xinan in relation to the Beijing Shoufa Xinan Acquisition
“Board” the board of Directors

– 1 –

DEFINITIONS

“Business Day”	a day (excluding Saturdays) on which banks in Hong
	Kong and the PRC are generally open for the transaction
	of normal banking business
“Business Services Agreement”	the business services agreement dated 17 June 2004 and
	entered into between CEC and Sang Fei as supplemented
	by the supplemental business services agreement dated
	21 December 2006 and entered into between Sang Fei
“CEC”	and CEC (China Electronics Corporation), a state-owned enterprise established under
	the laws of the PRC, the Company’s ultimate controlling
“CEC Finance”	Shareholder (China Electronics Corporation Finance Co., Ltd.)
“CEC Group” “China Hua Da”	CEC and its subsidiaries (other than the Group) (China Huada Integrated Circuit Design (Group) Co., Ltd.), a company
	established under the laws of the PRC, the vendor under
	the China Hua Da Agreement
“China Hua Da Acquisition”	the acquisition of the 64.75% equity interest in Hua Da
	Electronics by the Company pursuant to the China Hua
	Da Agreement
“China Hua Da Agreement”	the conditional equity transfer agreement dated 20 June
	2008 entered into between the Company and China Hua
	Da in relation to the China Hua Da Acquisition
“CIDC”	CIDC (H.K.) Limited, a company incorporated in Hong
	Kong
“Company”	China Electronics Corporation Holdings Company
	Limited
“Completion”	completion of the China Hua Da Acquisition, the Beijing
	Shoufa Xinan Acquisition and the Other Vendors
	Acquisition in accordance with the terms of the China
	Hua Da Agreement, the Beijing Shoufa Xinan Agreement
	and the Other Vendors Agreement, respectively

– 2 –

DEFINITIONS

“connected person”	has the meaning ascribed to this term under the Listing
	Rules
“Consideration Shares”	608,000,000 new Shares to be allotted and issued at the
	Issue Price for settlement of the consideration for the
	Acquisition and a “Consideration Share” shall be
	construed accordingly
“Continuing Connected	the continuing connected transactions described in the
Transactions”	paragraph headed “Continuing Connected Transactions”
	in the section headed “Letter from the Board” of this
	circular
“Deposit Services Agreement”	the deposit services agreement dated 20 September 2007
	and entered into between Sang Fei and CEC Finance
“Directors”	the directors of the Company
“Enlarged Group”	the Group immediately after completion of the
	Acquisition
“Excluded Assets”	together, a 71.26% equity interest in Beijing Hua Da
	Xinan, a 80% equity interest in Guangdong Hua Da and
	Hua Da Electronics’ entire shareholding in CIDC
“Great Wall Tenancy Agreement”	the tenancy agreement dated 3 July 2006 entered into
	between Great Wall Technology Company Limited and
	China Great Wall Computer (Shenzhen) Co., Ltd. as
	landlords and Sang Fei as tenant in relation to the lease of
	the factory premises situated at Nanshan District,
	Shenzhen, PRC
“Group”	the Company and its subsidiaries
“Guangdong Hua Da”	(Guangdong
	Huada Electronic Design Co., Ltd.), a company
	established under the law of the PRC
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC

– 3 –

DEFINITIONS

“Hua Da Business Services Agreement”
the business services agreement dated 20 June 2008 entered into between CEC and Hua Da Electronics
“Hua Da Deposit Services Agreement”
- the deposit services agreement dated 20 June 2008 entered into between CEC Finance and Hua Da Electronics
“Hua Da Electronics” or
“Target Company”
(CEC Huada
Electronic Design Co., Ltd.), a company established under the laws of the PRC
“Hua Da Tenancy Agreement”
the tenancy agreement dated 20 June 2008 entered into between Beijing Huada Zhibao as landlord and Hua Da Electronics as tenant in relation to the lease of the premises located at Beijing, PRC
“Hua Da Group” or
- Hua Da Electronics and its then subsidiaries
“Target Group”
“Independent Board Committee” the committee of Directors consisting of Mr. Chan Kay Cheung, Mr. Wong Po Yan and Mr. Yin Yongli, being all the independent non-executive Directors, formed to advise the Independent Shareholders in respect of the terms of the Acquisition and the Non-exempt Continuing Connected Transactions
“Independent Shareholders”
Shareholders other than CEC and its associates
“Issue Price”
the issue price of HK$2.50 per Consideration Share
“Last Trading Day” 20 June 2008, being the last trading day prior to the entering into of the Agreement
“Latest Practicable Date”
27 June 2008, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular
“Listing Committee” the listing committee of the Stock Exchange
“Listing Rules” the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

– 4 –

DEFINITIONS

“Non-exempt Continuing the continuing connected transactions contemplated Connected Transactions” under the Hua Da Business Services Agreement, such transactions and agreement are further described under the paragraph headed “Continuing Connected Transactions” in the section headed “Letter from the Board” of this circular
“Option(s)” option(s) which have been granted under the Company’s share option scheme approved and adopted by the Shareholders on 20 June 2002
“Other Vendors” Ms. Wang Qinsheng, Mr. Liu Weiping, Mr. Dong Haoran, Mr. Huang Guoyong, Mr. Sun Xiaonian, Mr. Cheng Jinge, Mr. Xiao Gang and Mr. Jiang Shiping, being all the vendors under the Other Vendors Agreement
“Other Vendors Acquisition” the acquisition of an aggregate of 27.75% equity interest in Hua Da Electronics by the Company pursuant to the Other Vendors Agreement
“Other Vendors Agreement” the conditional equity transfer agreement dated 20 June 2008 entered into between the Company and the Other Vendors in relation to the Other Vendors Acquisition
“PRC” the People’s Republic of China “RMB” Renminbi, the lawful currency of the PRC “Sang Da Tenancy Agreement” the tenancy agreement dated 9 April 2008 entered into between (Shenzhen SED Industry Co., Ltd.), a member of the CEC Group, as landlord and Sang Fei as tenant in relation to the lease of the premises situated at Levels 2 to 5 and a multi-purpose room on Level 4 of Sang Da Technology Building, Keji Road, Technology and Industrial Park, Nanshan District, Shenzhen, PRC
“Sang Fei” (Shenzhen Sang Fei Consumer Communications Company Limited), a sinoforeign equity joint venture company established in the PRC and owned as to 65% by the Company
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

– 5 –

DEFINITIONS

“SGM”	the special general meeting of the Company convened to
	be held on 21 July 2008 to consider and, if thought fit, to
	approve the Acquisition and the Non-exempt Continuing
	Connected Transactions, notice of which is set out at the
	end of this circular
“Share(s)”	ordinary shares in the Company’s issued share capital
	with a par value of HK$0.01 per share which are listed on
	the Stock Exchange
“Shareholder(s)”	shareholder(s) of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“%”	per cent.

For ease of reference only, the names of PRC established companies and entities have been included in this circular in both Chinese and English 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 Chinese names, the Chinese names shall prevail.

– 6 –

LETTER FROM THE BOARD

CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability) (Stock Code: 00085)

Non-executive Directors: Xiong Qunli (Chairman) Tong Baoan (Vice Chairman)

Executive Directors:

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

Fan Qingwu (Managing Director)

Hua Longxing

Independent Non-executive Directors:

Chan Kay Cheung Wong Po Yan Yin Yongli

Principal place of business in Hong Kong: Room 3503, 35th Floor China Resources Building 26 Harbour Road Wanchai Hong Kong

30 June 2008

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION, CONNECTED TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

On 20 June 2008, the Board announced that the Company had, on the same date after trading hours, entered into the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement in respect of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition, respectively.

Pursuant to the China Hua Da Agreement, the Company has conditionally agreed to purchase and China Hua Da has conditionally agreed to sell a 64.75% equity interest in Hua

* For identification purpose only

– 7 –

LETTER FROM THE BOARD

Da Electronics at a consideration of HK$984.20 million. Pursuant to the Beijing Shoufa Xinan Agreement, the Company has conditionally agreed to purchase and Beijing Shoufa Xinan has conditionally agreed to sell a 7.50% equity interest in Hua Da Electronics at a consideration of HK$114 million. Pursuant to the Other Vendors Agreement, the Company has conditionally agreed to purchase and the Other Vendors have conditionally agreed to sell an aggregate equity interest of 27.75% in Hua Da Electronics at an aggregate consideration of HK$421.80 million. Completions of each of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement are not conditional upon each other.

The aggregate consideration payable by the Company under the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement is HK$1,520 million, which shall be satisfied by the Company allotting and issuing an aggregate of 608,000,000 Consideration Shares, credited as fully paid, at an issue price of HK$2.50 per Consideration Share, among which, 393,680,000 Consideration Shares will be allotted and issued to China Hua Da, 45,600,000 Consideration Shares will be allotted and issued to Beijing Shoufa Xinan and an aggregate of 168,720,000 Consideration Shares will be allotted and issued to the Other Vendors. The Consideration Shares will be allotted and issued on the completion date of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement.

After Completion, Hua Da Electronics will be converted into a wholly foreign-owned enterprise and will become a wholly-owned subsidiary of the Company and the financial statements of Hua Da Electronics will be consolidated into those of the Group.

China Hua Da is owned as to 50% by CEC, the ultimate controlling shareholder of the Company holding approximately 74.98% of the issued Shares as at the Latest Practicable Date. Accordingly, China Hua Da is a connected person of the Company and the China Hua Da Acquisition constitutes a connected transaction of the Company.

Since the China Hua Da Acquisition also constitutes a connected transaction of the Company and that CEC is considered to have a material interest in the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition, CEC and its associates are required to abstain from voting on the ordinary resolutions approving the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acqusition. Each of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition is conditional upon, among other things, the approval by the Independent Shareholders at the SGM.

After completion of the China Hua Da Acquisition, the transactions contemplated under the Hua Da Business Services Agreement, the Hua Da Deposit Services Agreement and the Hua Da Tenancy Agreement will constitute continuing connected transactions of the Company under the Listing Rules.

– 8 –

LETTER FROM THE BOARD

Apart from the Hua Da Business Services Agreement, Sang Fei, the principal operating subsidiary of the Company, has also entered into the Business Services Agreement with CEC to set out the framework for the ongoing business relationship between the CEC Group and Sang Fei. Apart from the Hua Da Deposit Services Agreement, Sang Fei has also entered into the Deposit Services Agreement with CEC Finance, pursuant to which Sang Fei will utilise the deposit services offered by CEC Finance. Apart from the transactions contemplated under the Hua Da Tenancy Agreement, the Group has also been leasing and licensing certain properties from members of the CEC Group through the Sang Da Tenancy Agreement, the Great Wall Tenancy Agreement and other rental arrangements.

Since the applicable percentage ratios set out in Rule 14.07 of the Listing Rules in respect of the transactions under the Hua Da Business Services Agreement and the Business Services Agreement, as aggregated, are more than 2.5%, the Hua Da Business Services Agreement is, pursuant to Rule 14A.35 of the Listing Rules, subject to the reporting, announcement and independent shareholders’ approval requirements.

Since the applicable percentage ratios set out in Rule 14.07 of the Listing Rules in respect of the transactions under the Hua Da Deposit Services Agreement and the Deposit Services Agreement, as aggregated, are less than 2.5%, the Hua Da Deposit Services Agreement is, pursuant to Rule 14A.34 of the Listing Rules, only subject to the reporting and announcement requirements and is exempt from the independent shareholders’ approval requirements.

Since the applicable percentage ratios set out in Rule 14.07 of the Listing Rules in respect of the transactions under the Hua Da Tenancy Agreement, the Sang Da Tenancy Agreement, the Great Wall Tenancy Agreement and other rental arrangements, as aggregated, are less than 2.5%, the Hua Da Tenancy Agreement is, pursuant to Rule 14A.34 of the Listing Rules, only subject to the reporting and announcement requirements and is exempt from the independent shareholders’ approval requirements.

An Independent Board Committee has been established to advise the Independent Shareholders in respect of the terms of the Acquisition and the terms of the Non-exempt Continuing Connected Transactions. In this respect, Altus has been retained as the independent financial adviser to the Independent Board Committee and the Independent Shareholders.

The purpose of this circular is to provide you with further information relating to the Acquisition and the Continuing Connected Transactions and to seek your approval of the ordinary resolutions set out in the notice of the SGM at the end of this circular. The recommendation from the Independent Board Committee to the Independent Shareholders is set out on pages 34 to 35 of this circular and the letter from Altus is set out on pages 36 to 53 of this circular.

– 9 –

LETTER FROM THE BOARD

THE ACQUISITION

(1) China Hua Da Agreement

Date : 20 June 2008 Vendor : China Hua Da Purchaser : the Company Subject assets : 64.75% of the equity interest of Hua Da Electronics Consideration : The consideration for the sale and purchase of 64.75% of the equity interest of Hua Da Electronics owned by China Hua Da shall be HK$984.20 million, which shall be satisfied by the Company allotting and issuing 393,680,000 Consideration Shares to China Hua Da, credited as fully paid, at an issue price of HK$2.50 per Consideration Share.

China Hua Da is a state-owned enterprise established under the laws of the PRC. The equity interest of China Hua Da is contributed as to 50% by CEC and as to 50% by SDIC High-Tech Investment Co., Ltd.. China Hua Da is principally engaged in the design and manufacturing of integrated circuits chips as well as research and development of integrated circuits designing tools and integrated circuits application systems.

CEC, a state-owned enterprise established under the laws of the PRC, is the ultimate controlling shareholder of the Company holding approximately 74.98% of the issued Shares as at the Latest Practicable Date. 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 PRC government. CEC actively focuses on communications, consumer electronics, semi-conductor and software sectors in the PRC. As China Hua Da is owned as to 50% by CEC, China Hua Da is therefore a connected person of the Company.

SDIC High-Tech Investment Co., Ltd. is a wholly-owned subsidiary of The State Development and Investment Corporation, which is a state-owned investment holding company established under the laws of the PRC. SDIC High-Tech Investment Co., Ltd. engages in investments in high technology projects. SDIC High-Tech Investment Co., Ltd. and The State Development and Investment Corporation are third parties independent of the Company and connected persons of the Company.

As at the Latest Practicable Date, China Hua Da did not own any Shares. China Hua Da will cease to hold any equity interest in Hua Da Electronics after completion of the China Hua Da Acquisition.

– 10 –

LETTER FROM THE BOARD

(2) Beijing Shoufa Xinan Agreement

Date : 20 June 2008 Vendor : Beijing Shoufa Xinan Purchaser : the Company Subject assets : 7.50% of the equity interest of Hua Da Electronics

Consideration : The consideration for the sale and purchase of 7.50% of the equity interest of Hua Da Electronics owned by Beijing Shoufa Xinan shall be HK$114 million, which shall be satisfied by the Company allotting and issuing 45,600,000 Consideration Shares to Beijing Shoufa Xinan, credited as fully paid, at an issue price of HK$2.50 per Consideration Share.

Beijing Shoufa Xinan is a company established under the laws of the PRC. It is principally engaged in the research and development, manufacturing and sales of information security products and the provision of safety solution services for information system. Beijing Shoufa Xinan and its ultimate beneficial shareholders are third parties independent of the Company and connected persons of the Company.

As at the Latest Practicable Date, Beijing Shoufa Xinan did not own any Shares. Beijing Shoufa Xinan will cease to hold any equity interest in Hua Da Electronics after completion of the Beijing Shoufa Xinan Acquisition.

(3) The Other Vendors Agreement

Date : 20 June 2008

Vendors : (1) WANG Qinsheng, who has agreed to sell 9.1668% of the equity interests of Hua Da Electronics for a consideration of HK$139,334,600
(2) LIU Weiping, who has agreed to sell 5.4251% of the equity interests of Hua Da Electronics for a consideration of HK$82,461,900
(3) DONG Haoran, who has agreed to sell 5.2078% of the equity interests of Hua Da Electronics for a consideration of HK$79,157,800

– 11 –

LETTER FROM THE BOARD

(4) HUANG Guoyong, who has agreed to sell 2.1506% of the equity interests of Hua Da Electronics for a consideration of HK$32,689,500
(5) SUN Xiaonian, who has agreed to sell 1.2395% of the equity interests of Hua Da Electronics for a consideration of HK$18,840,400
(6) CHENG Jinge, who has agreed to sell 1.2811% of the equity interests of Hua Da Electronics for a consideration of HK$19,473,100
(7) XIAO Gang, who has agreed to sell 1.8454% of the equity interests of Hua Da Electronics for a consideration of HK$28,049,700
(8) JIANG Shiping, who has agreed to sell 1.4337% of the equity interests of Hua Da Electronics for a consideration of HK$21,793,000

Purchaser : the Company

Subject assets : an aggregate of 27.75% of the equity interest of Hua Da Electronics
Consideration : The aggregate consideration for the sale and purchase of the aggregate of 27.75% of the equity interest of Hua Da Electronics under the Other Vendors Agreement shall be HK$421.80 million, which shall be satisfied by the Company allotting and issuing an aggregate of 168,720,000 Consideration Shares to the Other Vendors, credited as fully paid, at an issue price of HK$2.50 per Consideration Share, of which:
(i) 55,733,840 Consideration Shares will be allotted and issued to Ms. Wang Qinsheng;
(ii) 32,984,760 Consideration Shares will be allotted and issued to Mr. Liu Weiping;
(iii) 31,663,120 Consideration Shares will be allotted and issued to Mr. Dong Haoran;
(iv) 13,075,800 Consideration Shares will be allotted and issued to Mr. Huang Guoyong;

– 12 –

LETTER FROM THE BOARD

(v) 7,536,160 Consideration Shares will be allotted and issued to Mr. Sun Xiaonian;
(vi) 7,789,240 Consideration Shares will be allotted and issued to Mr. Cheng Jinge;
(vii) 11,219,880 Consideration Shares will be allotted and issued to Mr. Xiao Gang; and
(viii)8,717,200 Consideration Shares will be allotted and issued to Mr. Jiang Shiping;

Ms. Wang Qinsheng and Mr. Sun Xiaonian currently are directors of Hua Da Electronics and Mr. Liu Weiping is a director and president of Hua Da Electronics. Mr. Dong Haoran and Mr. Jiang Shiping are employees of Hua Da Electronics. The remaining Other Vendors, being Mr. Huang Guoyong, Mr. Cheng Jinge and Mr. Xiao Gang are third parties independent of the Company and connected persons of the Company.

As at the Latest Practicable Date, none of the Other Vendors owned any Shares. The Other Vendors will cease to hold any equity interest in Hua Da Electronics after completion of the Other Vendors Acquisition.

Consideration Shares to be issued pursuant to the Acquisition

The aggregate consideration payable by the Company under the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement is HK$1,520 million, which shall be satisfied by the Company allotting and issuing an aggregate of 608,000,000 Consideration Shares to China Hua Da, Beijing Shoufa Xinan and the Other Vendors, credited as fully paid, at an issue price of HK$2.50 per Consideration Share. The Consideration Shares will be allotted and issued on the completion date of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement.

The Consideration Shares to be issued under the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement shall rank pari passu in all respects with the Shares in issue on the date of allotment and issue of such Consideration Shares. The Consideration Shares are not subject to any lock-up restrictions.

As at the Latest Practicable Date, the Company had 1,083,560,000 Shares in issue. The 393,680,000 Consideration Shares to be issued as consideration under the China Hua Da Agreement, the 45,600,000 Consideration Shares to be issued as consideration under the Beijing Shoufa Xinan Agreement and the 168,720,000 Consideration Shares to be issued as consideration under the Other Vendors Agreement represent:

(i) approximately 36.33%, 4.21% and 15.57% of the existing issued share capital of the Company, respectively; and

– 13 –

LETTER FROM THE BOARD

(ii) approximately 23.27%, 2.70% and 9.97% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares, respectively.

The Consideration Shares will be allotted and issued pursuant to a specific mandate to be sought at the SGM and will be allotted and issued to China Hua Da, Beijing Shoufa Xinan and the Other Vendors upon Completion. An application has been made by the Company to the Listing Committee for the listing of, and permission to deal in, the Consideration Shares.

The Issue Price of HK$2.50 per Consideration Share represents:

(a) a premium of approximately 28.87% over the closing price of HK$1.94 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a premium of approximately 25.38% over the average closing price of approximately HK$1.994 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
(c) a premium of approximately 25.06% over the average closing price of approximately HK$1.999 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day;
(d) a premium of approximately 20.19% over the closing price of HK$2.08 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(e) a premium of approximately 5.74 times over the underlying net asset value per Share attributable to equity holders of the Company of approximately HK$0.435 per Share as at 31 December 2007 (based on the audited consolidated balance sheet of the Group as at 31 December 2007).

Based on the closing price of HK$1.94 per Share as quoted on the Stock Exchange on the Last Trading Day, the Consideration Shares were valued at HK$1,179.52 million. The consideration for the Acquisition represents a price to earnings ratio of Hua Da Electronics of approximately 12 times. The consideration was determined and agreed between the parties after arm’s length negotiations and was based on the said price to earnings ratio of Hua Da Electronics and other various factors, including the quality of the assets being acquired, their historical performance, the competitive advantages in their respective markets, as well as by reference to other financial and operational indicators and the industrial prospects of the integrated circuits industry in the PRC. The Issue price was determined and agreed between the parties after arm’s length negotiations with reference to the market prices of the Shares. After taken into account the factors set out above and the reasons and benefits set out in the paragraph headed “Reasons for and benefits of the Acquisition” below, the Directors consider that the consideration and the Issue Price are fair and reasonable when the interests of the Shareholders taken a whole are considered.

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LETTER FROM THE BOARD

Conditions precedent

Completions of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition are conditional upon the fulfilment (or waiver, in certain cases as stated below) of the following conditions on or before 30 June 2009:

(a) the Company having completed and satisfied with the results of the legal, financial and business due diligence exercise to be carried out by it on Hua Da Electronics;
(b) Hua Da Electronics having notified and obtained consent from other signing parties to certain agreements (to which Hua Da Electronics is a party) as required by such agreements in the event of a change in the shareholders or shareholding structure of Hua Da Electronics;
(c) in respect of the China Hua Da Acquisition:
(i) the passing of an ordinary resolution by the Independent Shareholders at the SGM approving the China Hua Da Agreement and the transactions contemplated thereunder;
(ii) all necessary approvals from government and relevant regulatory authorities in respect of the China Hua Da Agreement and the China Hua Da Acquisition having been obtained and such approvals not having in any way altered the rights and obligations of any party to the China Hua Da Agreement and the China Hua Da Acquisition;
(iii) the Listing Committee granting the listing of, and permission to deal in, the Consideration Shares to be issued under the China Hua Da Agreement;
(iv) the completion of the disposal by Hua Da Electronics of the Excluded Assets (other than CIDC);
(v) all representations and warranties being true and accurate in all respects and not misleading in any respect as of Completion; and
(vi) no notice having been received from the Stock Exchange and the Securities and Futures Commission to the effect that the listing of the Shares on the Stock Exchange will or is likely to be cancelled or suspended or that new onerous conditions will or are likely to be attached to such listing as a result of the China Hua Da Acquisition;

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LETTER FROM THE BOARD

(d) in respect of the Beijing Shoufa Xinan Acquisition:
(i) the passing of an ordinary resolution by the Independent Shareholders at the SGM approving the Beijing Shoufa Xinan Agreement and the transactions contemplated thereunder;
(ii) all necessary approvals from government and relevant regulatory authorities in respect of the Beijing Shoufa Xinan Agreement and the Beijing Shoufa Xinan Acquisition having been obtained and such approvals not having in any way altered the rights and obligations of any party to the Beijing Shoufa Xinan Agreement and the Beijing Shoufa Xinan Acquisition;
(iii) the Listing Committee granting the listing of, and permission to deal in, the Consideration Shares to be issued under the Beijing Shoufa Xinan Agreement;
(iv) the completion of the disposal by Hua Da Electronics of the Excluded Assets (other than CIDC);
(v) all representations and warranties being true and accurate in all respects and not misleading in any respect as of Completion; and
(vi) no notice having been received from the Stock Exchange and the Securities and Futures Commission to the effect that the listing of the Shares on the Stock Exchange will or is likely to be cancelled or suspended or that new onerous conditions will or are likely to be attached to such listing as a result of the Beijing Shoufa Xinan Acquisition; and
(e) in respect of the Other Vendors Acquisition:
(i) the passing of an ordinary resolution by the Independent Shareholders at the SGM approving the Other Vendors Agreement and the transactions contemplated thereunder;
(ii) all necessary approvals from government and relevant regulatory authorities in respect of the Other Vendors Agreement and the Other Vendors Acquisition having been obtained and such approvals not having in any way altered the rights and obligations of any party to the Other Vendors Agreement and the Other Vendors Acquisition;
(iii) the Listing Committee granting the listing of, and permission to deal in, the Consideration Shares to be issued under the Other Vendors Agreement;
(iv) the completion of the disposal by Hua Da Electronics of the Excluded Assets (other than CIDC);

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LETTER FROM THE BOARD

(v) all representations and warranties being true and accurate in all respects and not misleading in any respect as of Completion; and
(vi) no notice having been received from the Stock Exchange and the Securities and Futures Commission to the effect that the listing of the Shares on the Stock Exchange will or is likely to be cancelled or suspended or that new onerous conditions will or are likely to be attached to such listing as a result of the Other Vendors Acquisition;

Except for conditions (a), (b), (c)(v), (d)(v) and (e)(v) which may be waived by the Company at its sole discretion, none of the above conditions can be waived by any party to the agreements. As at the Latest Practicable Date, none of the above conditions have been fulfilled. The Company currently does not intend to waive any of such conditions. Completions of each of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition are not conditional upon each other.

If any of the above conditions have not been fulfilled or (in the case of conditions (a), (b), (c)(v), (d)(v) and (e)(v)) waived by the Company on or before 30 June 2009, the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement or the Other Vendors Agreement (as the case may be) will lapse.

Completion of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition shall take place on the tenth Business Day after all of the above conditions have been fulfilled or (in the case of conditions (a), (b), (c)(v), (d)(v) and (e)(v)) waived by the Company, or on such other date as agreed between the parties to the China Hua Da Agreement, the Beijing Shoufa Xinan Acquisition or the Other Vendors Agreement (as the case may be). On the date of Completion, an aggregate of 608,000,000 Consideration Shares will be allotted and issued to China Hua Da, Beijing Shoufa Xinan and the Other Vendors, credited as fully paid, by the Company to satisfy the consideration payable under the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement.

After Completion, Hua Da Electronics will become a wholly-owned subsidiary of the Company and the financial statements of Hua Da Electronics will be consolidated into those of the Group. Hua Da Electronics will also be converted into a wholly foreign-owned enterprise upon completion of the Acquisition.

Information on Hua Da Electronics

Hua Da Electronics is a leading company in the design of integrated circuits established under the laws of the PRC. It is principally engaged in the design and sale of integrated circuits and the research and development of electronic design automation tools. The technologies and products of Hua Da Electronics have been widely applied in the areas of telecommunications, social security, electronic payments and consumer electronics.

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LETTER FROM THE BOARD

The registered capital of Hua Da Electronics is RMB34,594,600 which is contributed as to 64.75% by China Hua Da, as to 7.50% by Beijing Shoufa Xinan and as to 27.75% by the Other Vendors (9.1668% by Ms. Wang Qinsheng, 5.4251% by Mr. Liu Weiping, 5.2078% by Mr. Dong Haoran, 2.1506% by Mr. Huang Guoyong, 1.2395% by Mr. Sun Xiaonian, 1.2811% by Mr. Cheng Jinge, 1.8454% by Mr. Xiao Gang and 1.4337% by Mr. Jiang Shiping).

As at the Latest Practicable Date, each of China Hua Da, Beijing Shoufa Xinan and the Other Vendors has fully contributed towards the registered capital of Hua Da Electronics in accordance with their respective capital contribution ratios. Save for the above capital contribution, none of China Hua Da, Beijing Shoufa Xinan nor the Other Vendors has advanced any shareholder’s loans to Hua Da Electronics.

The consolidated profit before income tax and profit for the year of Hua Da Electronics, as extracted from the audited financial statements of Hua Da Group prepared in accordance with the Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) as set out in Appendix I to this circular, were as follows:

Profit before income tax Profit for the year	Year ended 31 December 2006 (HK$’000) 128,716 120,026	Year ended 31 December
		2007 (HK$’000) 132,063 127,307

The consolidated net asset value of Hua Da Electronics as at 31 December 2007 based on the audited financial statements was approximately HK$302,636,000.

The shareholders of Hua Da Electronics had approved the payment of final dividends for the year ended 31 December 2007 in an aggregate amount of RMB138,378,400, to the existing shareholders of Hua Da Electronics. Other than the said profit appropriations, there were not, and will not be, any other distributions before completion of the Acquisition. The remaining retained earnings will remain with Hua Da Electronics upon completion of the Acquisition. The Directors consider that the payment of final dividends by Hua Da Electronics will not have any material adverse effect on the working capital position of Hua Da Electronics. Further details of the said profit appropriations are set out in Note 24 to the Accountant’s Report of Target Group as set out in Appendix I to this circular.

Excluded assets

Hua Da Electronics has carried out a restructuring to carve out the Excluded Assets after the year ended 31 December 2007. Such Excluded Assets include a 71.26% equity interest in Beijing Hua Da Xinan, a 80% equity interest in Guangdong Hua Da and Hua Da Electronics’ entire shareholding in CIDC. The purpose of the restructuring is to facilitate the future development of Hua Da Electronics’ core businesses.

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LETTER FROM THE BOARD

The Excluded Assets have an unaudited net asset value of an aggregate amount of HK$3,003,922 as at 31 December 2007 and have incurred a net loss of an aggregate amount of HK$1,746,010 for the year ended 31 December 2007, based on their respective unaudited management accounts.

Further details about the disposal of the Excluded Assets are set out in Note 29 to the Accountant’s Report of Target Group as set out in Appendix I to this circular.

Reasons for and benefits of the Acquisition

The Company is an investment holding company. Currently, Sang Fei is the principal operating subsidiary of the Company and is primarily engaged in the manufacturing and sales of mobile handsets and other portable electronic products.

The acquisition of Hua Da Electronics provides the Group with a valuable opportunity to enter into the integrated circuits chips design market, which is a high-tech area with better profit margin, and enables the Group to offer products for a wider range of applications such as telecommunications, home network, consumer electronics in the future. Hua Da Electronics has a strong presence in the integrated circuits industry. Integrated circuits have been widely applied in a wide range of areas including communications, home and personal entertainment, social and public business. The Group intends to leverage off Hua Da Electronics’ expertise in the integrated circuits industry to enhance its capability in the consumer electronics and communications products sector. Through the acquisition of Hua Da Electronics, the Group intends to transform itself from a manufacturer of mobile handsets and other portable electronic products to an active player in the industry possessing comprehensive capability in the upstream of the industry value chain.

The global information technology industry tends to focus on the advancement and development of their core technologies and businesses. The Group will seize this opportunity to continue the business development in its existing mobile handset operations and at the same time to explore new businesses at the upstream of the industry value chain. The Group’s ultimate objective is to advance its core technology from low end to mid-to-high end stream and to promote its core business to the upstream of the industry value chain.

The Directors consider that the Acquisition offers the Group a valuable opportunity to expand its business into the integrated circuits sector and the upstream of the industry value chain. Based on the aforesaid, the Directors consider that the terms of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement are fair and reasonable and on normal commercial terms and that the entering into of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement is in the interest of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

Shareholding structure of the Company

To the best knowledge of the Directors, having made all reasonable enquiries, (i) the existing shareholding structure of the Company; (ii) the shareholding structure of the Company upon the allotment and issue of the Consideration Shares and (iii) the shareholding structure of the Company upon the allotment and issue of the Consideration Shares and the exercise of the outstanding Options in full, are as follows:

Shareholders CEC China Hua Da Beijing Shoufa Xinan Other Vendors Ms. Wang Qinsheng (Note 3) Mr. Liu Weiping (Note 4) Mr. Dong Haoran Mr. Huang Guoyong Mr. Sun Xiaonian (Note 3) Mr. Cheng Jinge Mr. Xiao Gang Mr. Jiang Shiping Holders of Options Mr. Tong Baoan Mr. Fan Qingwu Mr. Hua Longxing Directors and chief executive of Sang Fei Aggregate of employees and other participants Other Public Shareholders Total Percentage of Public Float	As at the Latest Practicable Date (Note 1) No. of Shares % 812,500,000 74.98 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 271,060,000 25.02 1,083,560,000 100.00 25.02	Immediately after completion of the Acquisition (Note 1) No. of Shares % 812,500,000 48.03 393,680,000 23.27 45,600,000 2.70 55,733,840 3.30 32,984,760 1.95 31,663,120 1.87 13,075,800 0.77 7,536,160 0.45 7,789,240 0.46 11,219,880 0.66 8,717,200 0.51 – – – – – – – – – – 271,060,000 16.03 1,691,560,000 100.00 26.75	Immediately after completion of the Acquisition and exercise of the outstanding Options in full (Note 2) No. of Shares % 812,500,000 47.44 393,680,000 22.99 45,600,000 2.66 55,733,840 3.25 32,984,760 1.93 31,663,120 1.85 13,075,800 0.76 7,536,160 0.44 7,789,240 0.46 11,219,880 0.66 8,717,200 0.51 3,800,000 0.22 3,600,000 0.21 3,600,000 0.21 1,600,000 0.09 8,350,000 0.49 271,060,000 15.83 1,712,510,000 100.00 26.91	Immediately after completion of the Acquisition and exercise of the outstanding Options in full (Note 2) No. of Shares % 812,500,000 47.44 393,680,000 22.99 45,600,000 2.66 55,733,840 3.25 32,984,760 1.93 31,663,120 1.85 13,075,800 0.76 7,536,160 0.44 7,789,240 0.46 11,219,880 0.66 8,717,200 0.51 3,800,000 0.22 3,600,000 0.21 3,600,000 0.21 1,600,000 0.09 8,350,000 0.49 271,060,000 15.83 1,712,510,000 100.00 26.91
				100.00

				26.91

Notes:

The percentages stated above assume that the outstanding 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 the Company as at the Latest Practicable Date prior to the completion of the Acquisition.

* Public shareholders of the Company

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LETTER FROM THE BOARD

The percentages stated above assume that other than the allotment and issue of Shares as a result of the exercise of the Options, there will not be any changes to the total issued share capital of the Company as at the Latest Practicable Date prior to the completion of the Acquisition.
Ms. Wang Qinsheng and Mr. Sun Xiaonian currently are directors of Hua Da Electronics. In view of the Acquisition, Hua Da Electronics will dissolve its board of directors and Ms. Wang Qinsheng and Mr. Sun Xiaonian will resign from directorships of Hua Da Electronics before completion of the Acquisition. Accordingly, Ms. Wang Qinsheng and Mr. Sun Xiaonian will be regarded as public shareholders of the Company upon completion of the Acquisition.
Mr. Liu Weiping currently is a director and president of Hua Da Electronics. In view of the Acquisition, Hua Da Electronics will dissolve its board of directors and Mr. Liu Weiping will resign as director of Hua Da Electronics. Since Mr. Liu Weiping will continue to hold the position of president of Hua Da Electronics, he, being the chief executive of Hua Da Electronics, will be regarded as connected person of the Company and his shareholding in the Company will not be counted towards the public float of the Company.

The Acquisition which involves the issue of Consideration Shares will not result in change of control (as defined in the Code of Takeovers and Mergers) of the Company.

Set out below are the shareholding structures of the Company immediately prior and following completion of the Acquisition:

Corporate structure immediately prior to completion of the Acquisition

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Corporate structure immediately following completion of the Acquisition

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LETTER FROM THE BOARD

Notes:

The Other Vendors represent the vendors under the Other Vendors Agreement.
As at the Latest Practicable Date, the 27.75% equity interest of Hua Da Electronics was owned as to 9.1668% by Ms. Wang Qinsheng, as to 5.4251% by Mr. Liu Weiping, as to 5.2078% by Mr. Dong Haoran, as to 2.1506% by Mr. Huang Guoyong, as to 1.2395% by Mr. Sun Xiaonian, as to 1.2811% by Mr. Cheng Jinge, as to 1.8454% by Mr. Xiao Gang and as to 1.4337% by Mr. Jiang Shiping.
Immediately following completion of the Acquisition, Ms. Wang Qinsheng, Mr. Liu Weiping, Mr. Dong Haoran, Mr. Huang Guoyong, Mr. Sun Xiaonian, Mr. Cheng Jinge, Mr. Xiao Gang and Mr. Jiang Shiping will be interested in approximately 3.30%, 1.95%, 1.87%, 0.77%, 0.45%, 0.46%, 0.66% and 0.51% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares.

Financial effects of the Acquisition on the Group

The aggregate consideration for the Acquisition, being HK$1,520 million, will be satisfied by the Company allotting and issuing a total of 608,000,000 Consideration Shares. Accordingly, the cash and bank balances of the Group, as well as the amount of short-term borrowings of the Group, will not be affected by the Acquisition. Since the Group has applied principles of merger accounting as prescribed in Hong Kong Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by the HKICPA for the Acquisition, the total equity of the Company would increase by HK$296,653,000, representing the amount of increase in net asset value of Hua Da Electronics less an estimated transaction costs of approximately HK$5,983,000 as if the Acquisition was completed on 31 December 2007.

Upon completion of the Acquisition, Hua Da Electronics will become a wholly-owned subsidiary of the Company and the financial statements of Hua Da Electronics will be consolidated with those of the Group.

Earnings

For the year ended 31 December 2007, the Group recorded an audited consolidated loss before income tax of HK$19,117,000 and the net profit for the year attributable to the equity holders of the Company was HK$8,074,000.

Given the track record of Hua Da Electronics and the industrial prospects of the integrated circuits industry in the PRC, the Directors consider the Acquisition could benefit the results of the Enlarged Group in the future.

Net asset value

As at 31 December 2007, the audited consolidated net asset value of the Group amounted to approximately HK$600,836,000. Based on the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as set out in Appendix IV to this circular, the unaudited pro forma consolidated net asset value of the Enlarged Group immediately after completion of the Acquisition would be approximately HK$897,489,000.

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LETTER FROM THE BOARD

Financial and trading prospects of the Group

In the future, the Group will, on the one hand, continue the business development in its existing mobile handset operations and at the same time, explore new businesses at the upstream of the industry value chain. The ultimate objective is to advance its core technology from low end to mid-to-high end stream and to promote its core business to the upstream of the industry value chain and to bring the best return to its shareholders.

The Directors consider that the Acquisition provides the Group with valuable opportunity to enter into the integrated circuits chips design market, and enables the Group to offer products for a wider range of applications’ such as telecommunications, home network, consumer electronic appliances in the future. Integrated circuits industry has been one of the major development focuses in the PRC and will continue to be a development focus under the Eleventh Five-Year Plan. In the recent years, integrated circuits cards and smart cards have been increasingly used in the PRC in areas such as resident identity cards, social security cards and petrol cards. In the “Specific Project Regarding Integrated Circuits Industry in the Eleventh Five-Year” announced by the former Ministry of Information Industry, it is expected that the production volume of the integrated circuits industry in the PRC will have an annual growth rate of 30%. The government of the PRC pays high regards to the development of the integrated circuits industry. Integrated circuits enterprises are benefited from different preferential government policies including but not limited to preferential taxation policy. Although the prospects of the integrated circuits industry will attract new competitors and will therefore increase competition, the Directors believe that Hua Da Electronics, with its leading position in the industry, will continue to enjoy competitive advantages in the industry.

As the global consumer communications products markets is expected to maintain its growth momentum in the coming years and given the rising demand of technologically advanced products in the PRC, the Board is optimistic about the business of the Enlarged Group.

After completion of the Acquisition, the financial results of Hua Da Electronics will be consolidated into the Group’s results. The Directors believe that such consolidation will have positive impact on the Group’s operational and financial prospects.

Listing Rules implications

The China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition, when aggregated, constitute a major transaction of the Company and are subject to the shareholders’ approval requirements under the Listing Rules. There are no other prior transactions between the Company and the counterparties of the Acquisition which would require aggregation under the Listing Rules.

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LETTER FROM THE BOARD

Since the China Hua Da Acquisition also constitutes a connected transaction of the Company and that CEC is considered to have a material interest in the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition, CEC and its associates are required to abstain from voting on the ordinary resolutions approving the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition. Each of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition is conditional upon, among other things, the approval by the Independent Shareholders at the SGM.

CONTINUING CONNECTED TRANSACTIONS

Hua Da Electronics has on-going transactions with members of the CEC Group in its ordinary and usual course of business. These transactions will, after completion of the China Hua Da Acquisition, become continuing connected transactions of the Company. Hua Da Electronics and CEC have entered into certain continuing connected transactions agreements to regulate the continuing connected transactions between Hua Da Electronics and the CEC Group.

(1) Hua Da Business Services Agreement

On 20 June 2008 after trading hours, Hua Da Electronics entered into the Hua Da Business Services Agreement with CEC to set out the framework for the on-going business relationship between Hua Da Electronics and members of the CEC Group.

The Hua Da Business Services Agreement covers (i) the provision of products processing, testing and assembling services by the CEC Group and the purchase of raw materials and modules from the CEC Group; (ii) the sales of integrated circuit cards and smart cards modules, chips and electronic design automation (EDA) tools to the CEC Group; and (iii) the provision of canteen services by the CEC Group to Hua Da Electronics. The Hua Da Business Services Agreement takes effect from the date of completion of the China Hua Da Acquisition and will be valid until 31 December 2010.

Hua Da Electronics has been focusing on the design of integrated circuits and the development of new technology and has been subcontracting the processing, testing and assembling procedures to members of the CEC Group. The CEC Group also supplies raw materials and modules to Hua Da Electronics for its research and development uses. Members of the CEC Group are also customers of the products of Hua Da Electronics. The transactions contemplated under the Hua Da Business Services Agreement are, therefore, vital and integral to the business operations of Hua Da Electronics.

Details of the continuing connected transactions contemplated under the Hua Da Business Services Agreement are as follows:

(i) Provision of processing, testing and assembling services by the CEC Group and purchase of raw materials and modules from the CEC Group

Pursuant to the Hua Da Business Services Agreement, members of the CEC Group will provide processing, testing and assembling services to Hua Da Electronics for products including integrated circuit cards, smart cards and chips.

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LETTER FROM THE BOARD

The service fees chargeable by members of the CEC Group for the processing, testing and assembling services are determined after arm’s length negotiations between the parties with reference to market rates. The prices offered to Hua Da Electronics will be no less favourable than the prices of similar services offered by other third party service providers to Hua Da Electronics.

Hua Da Electronics will also, pursuant to the Hua Da Business Services Agreement, purchase from members of the CEC Group raw materials and modules for the research and development of integrated circuit cards, smart cards and chips, on a non-committed basis. Such raw materials and modules will include but not limited to wafer, integrated circuit modules, integrated circuit cards, integrated circuits and printed circuit boards. The Hua Da Business Services Agreement does not impose any obligation on the part of Hua Da Electronics to purchase raw materials and modules exclusively from the CEC Group. Hua Da Electronics may source raw materials and modules from any other parties.

The price of raw materials and modules to be supplied by the CEC Group to Hua Da Electronics is determined after arm’s length negotiations between the parties with reference to market rates. The prices offered to Hua Da Electronics are no less favourable than the prices of similar products offered by other third party suppliers to Hua Da Electronics.

(ii) Sales of products to the CEC Group

Pursuant to the Hua Da Business Services Agreement, Hua Da Electronics will sell products including integrated circuit cards and smart cards modules, chips and electronic design automation tools to members of the CEC Group.

The products supplied to members of the CEC Group are priced in accordance with their models and specifications. The prices are determined after arm’s length negotiations between the parties with reference to market rates. The prices offered to members of the CEC Group are no less favourable than the prices of similar products offered to other third party customers of Hua Da Electronics.

(iii) Provision of canteen services by CEC Group

Pursuant to the Hua Da Business Services Agreement, Hua Da Electronics retains members of the CEC Group to provide canteen facilities and meals to Hua Da Electronics’ staff. In return, Hua Da Electronics will pay members of the CEC Group an agreed service fee, which is determined by reference to the actual consumption and an agreed fixed service fees for such services. The service fees chargeable by members of the CEC Group for the canteen services are determined after arm’s length negotiations between the parties with reference to market rates. The prices offered to Hua Da Electronics will be no less favourable than those offered by other third party service providers to Hua Da Electronics.

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LETTER FROM THE BOARD

Historical figures of continuing connected transactions

In respect of the each category of continuing connected transactions contemplated under the Hua Da Business Services Agreement, the historical figures for each of the three financial years ended 31 December 2005, 2006 and 2007 are set out below:

Type of transaction Processing, testing and assembling services and purchase of raw materials and modules – Annual service charges paid by Hua Da Electronics Sales of products – Annual charges received by Hua Da Electronics Canteen services – Annual service charges paid by Hua Da Electronics	Historical figures for
	2005 2006 2007 (approximately RMB’000) (approximately RMB’000) (approximately RMB’000) 223,464 515,850 375,198 34,336 42,991 46,886 494 459 599

Proposed annual caps

It is expected that for the period commencing from the completion of the China Hua Da Acquisition until 31 December 2008 and the two financial years ending 31 December 2009 and 2010, the amount of consideration payable by Hua Da Electronics to the CEC Group for the provision of processing, testing and assembling services by the CEC Group and the purchase of raw materials and modules from the CEC Group, the amount of consideration receivable by Hua Da Electronics from the CEC Group for the sales of products and the amount of consideration payable by Hua Da Electronics to the CEC Group for the provision of canteen services will not exceed the amounts set out in the following table. Accordingly, these amounts have been set as the proposed annual caps for the relevant continuing connected transactions.

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LETTER FROM THE BOARD

For the period commencing from the completion of the China Hua Da Acquisition until 31 December	For the year ending 31 December	For the year ending 31 December
2008 (RMB’000) 284,640 550	2009 (RMB’000) 293,310 1,120	2010 (RMB’000) 421,140 1,160
*285,190* 19,620	*294,430* 36,000	*422,300*

		43,200

In arriving at the above annual caps for the provision of processing, testing and assembling services by the CEC Group and the purchase of raw materials and modules from the CEC Group, the Company has made reference to the historical service fees paid by Hua Da Electronics and the historical purchase volume of raw materials and modules from the CEC Group and has taken into account the expected demand of the products of Hua Da Electronics, the production plan of Hua Da Electronics and the costs of providing such services, raw materials and modules.

In arriving at the above annual caps for the sales of products to the CEC Group, the Company has made reference to the historical sales volume, the expected demand of Hua Da Electronics’ products by the CEC Group and the order status of the products.

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LETTER FROM THE BOARD

In arriving at the above annual caps for the provision of canteen services by the CEC Group to Hua Da Electronics, the Company has taken into account the historical consumption volume by Hua Da Electronics, the anticipated increase in headcount of Hua Da Electronics and the anticipated inflation rate over the period.

(2) Hua Da Deposit Services Agreement

Hua Da Electronics and CEC Finance entered into the Hua Da Deposit Services Agreement on 20 June 2008 after trading hours. CEC Finance is a subsidiary of CEC and therefore an connected person of the Company. CEC Finance is a non-bank financial institution approved and regulated by the People’s Bank of China and China Banking Regulatory Commission. CEC Finance was established for the purpose of enhancing the centralised management of funds among members of the CEC Group and for improving the fund utilisation efficiency of the CEC Group as a whole. As an intra-group service provider, CEC Finance generally has a better and more efficient communication with Hua Da Electronics which will allow expedient and efficient service provision by CEC Finance.

The Hua Da Deposit Services Agreement does not create any obligation on the part of Hua Da Electronics to utilise any particular services of CEC Finance. Other than the fixed deposits which have specified deposit terms, Hua Da Electronics may at any time withdraw the funds deposited with CEC Finance without incurring any penalty. CEC Finance is one of the financial institutions which provide deposit services to Hua Da Electronics. Hua Da Electronics may obtain deposit services available from any other financial institutions in addition to or instead of CEC Finance, as it sees fit.

The interest rates for deposit shall be the standard rates promulgated by the People’s Bank of China for the same type of deposits. Such interest rates will not be less than the rates offered to Hua Da Electronics by normal commercial banks in the PRC for comparable deposits.

The Hua Da Deposit Services Agreement takes effect from the date of completion of the China Hua Da Acquisition and will be valid until 31 December 2010. Upon expiry of the initial term of the Hua Da Deposit Services Agreement, the agreement may be renewed for further terms of three years automatically unless either party objects by giving a written notice at least one month prior to the expiry of the Hua Da Deposit Services Agreement.

The Company proposed that for the period commencing from the completion of the China Hua Da Acquisition until 31 December 2010, the maximum balance of deposits (including the interests accrued thereon) maintained by Hua Da Electronics with CEC Finance shall not exceed RMB10 million on any given day. In determining the above proposed cap, the Company has taken into account the cashflow position of Hua Da Electronics and the treasury policy of the Group.

– 28 –

LETTER FROM THE BOARD

(3) Hua Da Tenancy Agreement

On 20 June 2008 after trading hours, Hua Da Electronics and Beijing Huada Zhibao entered into the Hua Da Tenancy Agreement pursuant to which Beijing Huada Zhibao agreed to lease to Hua Da Electronics the premises which is situated in Gaojiayuan, Beijing, PRC.

Details of the Hua Da Tenancy Agreement is set out below:

Date: 20 June 2008 Landlord: Beijing Huada Zhibao Tenant: Hua Da Electronics Premises: Levels 1 to 3 and Level 5 of the building located at No. 1 Gaojiayuan, Chaoyang District, Beijing, PRC. Term: One (1) year commencing from 1 July 2008 and expiring on 30 June 2009 (both days inclusive). Hua Da Electronics has the right to request for the renewal of the Hua Da Tenancy Agreement by giving a written notice to Beijing Huada Zhibao three months prior to the expiry of the Hua Da Tenancy Agreement. Hua Da Electronics shall have priority over the others to lease the premises. Gross floor area approximately 3,960 square metres Rental: RMB2,082,544 per annum (which is exclusive of utilities charges which shall be borne by Hua Da Electronics). Usage Research and development and offices purposes

The aggregate rentals payable by Hua Da Electronics to Beijing Huada Zhibao under the Hua Da Tenancy Agreement for the period commencing from the completion of the China Hua Da Acquisition until 31 December 2008 and for the six months ending 30 June 2009 will not exceed RMB960,000 and RMB1,041,272, respectively. The annual caps for the transactions contemplated under the Hua Da Tenancy Agreement for the period commencing from the completion of the China Hua Da Acquisition until 31 December 2008 and for the six months ending 30 June 2009 are therefore set at such amounts accordingly.

– 29 –

LETTER FROM THE BOARD

Hua Da Electronics is currently occupying the premises as its research and development centre and offices. Since the old tenancy agreement in respect of the premises will expire in June 2008, Hua Da Electronics and Beijing Huada Zhibao entered into the Hua Da Tenancy Agreement to renew the tenancy. The terms of the Hua Da Tenancy Agreement have been arrived at after arm’s length negotiations between the parties and with reference to open market rent of properties of comparable size, use and location which is publicly available in the market.

Beijing Huadao Zhibao is a subsidiary of CEC and therefore a connected person of the Company. Beijing Huada Zhibao is principally engaged in the design, research and development, manufacture and sale of integrated circuits and electronics system software and the provision of system integration services.

Listing Rules implications

Apart from the Hua Da Deposit Services Agreement, Sang Fei has also entered into the Deposit Services Agreement with CEC Finance, pursuant to which Sang Fei will utilise the deposit services offered by CEC Finance. Details of the Deposit Services Agreement between Sang Fei and CEC are set out in the announcement of the Company dated 20 September 2007.

Apart from the transactions contemplated under the Hua Da Tenancy Agreement, the Group has also been leasing and licensing certain properties from members of the CEC Group through the Sang Da Tenancy Agreement, the Great Wall Tenancy Agreement and other rental arrangements. Details of the Sang Da Tenancy Agreement, the Great Wall Tenancy Agreement and the other rental arrangements are set out in the announcements of the Company dated 9 April 2008, 15 September 2006 and 18 June 2004, respectively.

Under the Listing Rules, the transactions under the Hua Da Business Services Agreement and the Business Services Agreement, the transactions under the Hua Da Deposit Services Agreement and the Deposit Services Agreement, the transactions under the Hua Da Tenancy Agreement, the Sang Da Tenancy Agreement, the Great Wall Tenancy Agreement and other rental arrangements, will in each case be aggregated and treated as if they were one transaction. Other than the above, there are no other prior continuing connected transactions between the Group and the counterparties of the continuing connected transactions which would require aggregation under the Listing Rules.

– 30 –

LETTER FROM THE BOARD

The Directors are of the view that the continuing connected transactions described above will be carried out in the ordinary and usual course of business of Hua Da Electronics and on normal commercial terms and that these continuing connected transactions and the proposed caps are fair and reasonable and in the interests of the Company and its shareholders as a whole.

SGM

A notice convening the SGM to be held at Plaza I-III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Monday, 21 July 2008 at 3:00 p.m. is set out on pages 158 to 160 of this circular. At the SGM, ordinary resolutions will be proposed to approve the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition and the Non-exempt Continuing Connected Transactions. The vote of the Independent Shareholders at the SGM shall be taken by poll.

In accordance with the Listing Rules, CEC, the Company’s ultimate controlling Shareholder holding 74.98% interest in the Company as at the Latest Practicable Date, and its associates, will abstain from voting on the ordinary resolutions approving the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition and the Non-exempt Continuing Connected Transactions at the SGM.

– 31 –

LETTER FROM THE BOARD

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend the SGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tricor Abacus Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 48 hours before the time appointed for holding the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish.

RECOMMENDATION

Altus has been retained as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Acquisition and the terms of the Non-exempt Continuing Connected Transactions. Altus considers that the terms of the Acquisition are on normal commercial terms, and that the terms of the Non-exmpt Continuing Connected Transactions are on normal commercial terms and are conducted in the ordinary and usual course of business of the Group. Furthermore, Altus considers that the terms of the Acquisiton and the terms of the Non-exempt Continuing Connected Transactions to be fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, Altus advises the Independent Shareholders, as well as the Independent Board Committee to recommend the Independent Shareholders, to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Acquisition and the Non-exempt Continuing Connected Transactions. The text of the letter from Altus containing its advice and the principal factors and reasons it has taken into consideration in arriving at its advice is set out on pages 36 to 53 of this circular.

The Independent Board Committee, after considering the advice from Altus, concurs with the views of Altus and considers that the terms of the Acquisition and the terms of the Non-exempt Continuing Connected Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Acquisition and the Non-exempt Continuing Connected Transactions. The text of the letter from the Independent Board Committee is set out on pages 34 to 35 of this circular.

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LETTER FROM THE BOARD

FURTHER INFORMATION

Your attention is also drawn to the letter from the Independent Board Committee which sets out its recommendation to the Independent Shareholders, the letter from Altus which contains its advice to the Independent Board Committee and the Independent Shareholders, and the additional information set out in the appendices to this circular.

Yours faithfully

For and on behalf of the Board

China Electronics Corporation Holdings Company Limited Xiong Qunli

Chairman

– 33 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED

*

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability) (Stock Code: 00085)

30 June 2008

To the Independent Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION, CONNECTED TRANSACTION AND

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular (the “ Circular ”) dated 30 June 2008 issued by the Company to its Shareholders of which this letter forms part. The terms defined in the Circular shall have the same meanings when used in this letter, unless the context otherwise requires.

On 20 June 2008, the Board announced that the Company has, on the same date, entered into the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement in respect of the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition, respectively.

We have been appointed by the Board to advise you as to whether the terms of the Acuqisiton and the terms of the Non-exempt Continuing Connected Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Details of the Acquisition and the Non-exempt Continuing Connected Transactions are set out in the section headed “Letter from the Board” of the Circular.

Altus has been retained as independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Acquisition and the terms of the Non-exempt Continuing Connected Transactions. The text of the letter of advice from Altus containing its advice and the principal factors and reasons it has taken into consideration in arriving at its advice is set out on pages 36 to 53 of the Circular.

* For identification purpose only

– 34 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We, after considering the advice from Altus, concur with the views of Altus and consider that the terms of the Acquisition and the terms of the Non-exempt Continuing Connected Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Acquisition and the Non-exempt Continuing Connected Transactions, as detailed in the notice of the SGM set out at the end of the Circular.

Yours faithfully Independent Board Committee Chan Kay Cheung Wong Po Yan

Yin Yongli

– 35 –

LETTER FROM ALTUS

The following is the text of a letter of advice from Altus to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition and the Non-exempt Continuing Connected Transactions which have been prepared for the purpose of inclusion in this circular.

8th Floor, Hong Kong Diamond Exchange Building 8 Duddell Street, Central Hong Kong

30 June 2008

The Independent Board Committee and the Independent Shareholders China Electronics Corporation Holdings Company Limited Room 3503, 35th Floor China Resources Building 26 Harbour Road Wanchai, Hong Kong

Dear Sirs,

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF 100% EQUITY INTERESTS IN HUA DA ELECTRONICS

NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as independent financial adviser to advise the Independent Board Committee and Independent Shareholders in respect of the Acquisition and the Non-exempt Continuing Connected Transactions. Their details are set out in the letter from the Board contained in the circular of the Company dated 30 June 2008 (“ Circular ”) to the Shareholders, of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular unless the context requires otherwise.

The Acquisition constitutes a major transaction of the Company under the Listing Rules as the applicable percentage ratios calculated per Rule 14.07 of the Listing Rules exceed 25% but are less than 100%. As at the Latest Practicable Date, CEC was the ultimate controlling shareholder of the Company with shareholding of approximately 74.98%. One of the vendors of the Acquisition, China Hua Da is owned as to 50% by CEC and is therefore a connected person of the Company. On this basis, the China Hua Da Acquisition constitutes a connected transaction of the Company.

– 36 –

LETTER FROM ALTUS

CEC, which is interested in the China Hua Da Acquisition, is also considered to have a material interest in the Beijing Shoufa Xinan Acquisition and the Other Vendors Acquisition. Consequently, CEC and its associates are required to abstain from voting on the proposed resolutions approving the Acquisition.

Upon completion of the Acquisition, the transactions contemplated under the Hua Da Business Services Agreement, when aggregated with the Business Service Agreement, will constitute non-exempt continuing connected transactions which require reporting, announcement and independent shareholders’ approval requirements under the Listing Rules. CEC and its associates are accordingly required to abstain from voting on the relevant resolution approving the Non-exempt Continuing Connected Transactions.

The Independent Board Committee has been established to advise whether the Acquisition and the Non-exempt Continuing Connected Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to voting. The Independent Board Committee comprises Messrs. Chan Kay Cheung, Wong Po Yan and Yin Yongli, all being independent non-executive Directors.

BASIS OF OUR ADVICE

In formulating our opinion, we have relied on the information, facts and representations contained or referred to in the Circular and the information, facts and representations provided by, and the opinions expressed by the Directors, the Company and its management. We have assumed that all statements, information, facts, opinions and representations made or referred to in the Circular were true, accurate and complete at the time they were made and continued to be true, accurate and complete as at the date of the Circular. We have no reason to doubt the truth, accuracy and completeness of the statements, information, facts, opinions and representations provided to us by the Directors, the Company and its management. The Directors have confirmed to us that no material facts have been omitted from the information supplied and opinions expressed; thus we have no reason to doubt that any relevant material facts have been withheld or omitted from the information provided and referred to in the Circular, or the reasonableness of the opinions and representations provided to us by them.

All the Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that, to the best of their knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration and that there are no other facts not contained in the Circular the omission of which would make any statement in the Circular misleading. We have relied on such information and opinions and have not however, conducted any independent investigation into the business, financial conditions and affairs or the future prospects of the Group and Hua Da Electronics.

– 37 –

LETTER FROM ALTUS

PRINCIPAL FACTORS TAKEN INTO CONSIDERATION

I. THE ACQUISITION

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

1. Background of the transaction

As at the Latest Practicable Date, Hua Da Electronics was owned as to 64.75%, 7.50% and 27.75% by China Hua Da, Beijing Shoufa Xinan and the Other Vendors respectively.

The Company has on 20 June 2008 entered into the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement in respect of the Acquisition. Under the Acquisition, the Company will acquire the entire equity interests of Hua Da Electronics for a total consideration of HK$1,520 million, which is payable to China Hua Da, Beijing Shoufa Xinan and the Other Vendors in the proportion of their stakes in Hua Da Electronics. The consideration is to be satisfied by the allotment and issuance of an aggregate of 608,000,000 Consideration Shares at the Issue Price of HK$2.50 to China Hua Da, Beijing Shoufa Xinan and the Other Vendors respectively.

It is noted that the completions of each of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement are not conditional upon each other. Hence, while the Company’s intention is to acquire the entire interests of Hua Da Electronics, its eventual shareholding is dependent on the outcome of each of the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement.

2. Hua Da Electronics

The business

Hua Da Electronics, a company established under the laws of the PRC, is principally engaged in the design and sale of integrated circuits (“IC”), and the research and development of electronic design automation tools. According to the Directors, China Hua Da group of companies is one of the first IC design companies established in the PRC. It is also one of the first authorised suppliers to be recognised by several PRC government departments for supply of ICs for various applications.

The ICs designed by Hua Da Electronics are used in a wide range of products including Smart chips for personal identity cards and petrol cards and Subscriber Identity Module (SIM) cards. Its major customers include government agencies responsible for identity card issuance, petrol companies and petrol station operators.

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LETTER FROM ALTUS

Compared with the Group’s existing business of manufacturing and sales of mobile handsets and other portable electronic products, the businesses of Hua Da Electronics represent a high-technology area which offers higher profit margins. The Acquisition enables the Group to acquire a leading company in the PRC market and allows the Group to expand its business scope and diversify its sources of revenue as the wide ranging IC applications enable the Group to expand its range of products.

Industry background and prospects

Since its initial development in the middle of 20th century, ICs have become the basis for information delivery, management and storage; and is an integral part for the areas of consumer electronics, internet and telecommunications, computing and home network, transportation and manufacturing activities.

According to CCID Consulting[1] , the IC market in the PRC has grown from RMB380 billion in 2005 to about RMB560 billion in 2007. It expects the IC market to continue to grow in the next few years, reaching approximately RMB1.1 trillion in 2011. The demand is expected to be spurred by the advent of new areas of applications of ICs. Meanwhile, for the specific area of IC design, CCID Consulting[1] expects annual growth of more than 20% in the next few years.

Note 1: CCID Consulting is a market research consulting company established under the supervision of the China Center of Information Industry Development of the Ministry of Information Industry.

Based on the information above, Hua Da Electronics operates in a high growth albeit highly competitive market. Having considered Hua Da Electronics’ leading position in the PRC market, we are of the view that the Acquisition allows the Group an opportunity to participate in this high growth area of business.

– 39 –

LETTER FROM ALTUS

Financial performance

The financial performance of Hua Da Group (including the Excluded Assets) in the past three years are summarised below:

Year ended 31 December (“FY”) 2005 2006 2007 (HK$’000) (HK$’000) (HK$’000) 295,524 508,717 652,767 (215,823) (327,554) (399,877) 79,701 181,163 252,890 (60,699) (73,339) (130,428) 22,814 20,892 9,601 41,816 128,716 132,063 (2,383) (8,690) (4,756) 39,433 120,026 127,307 919 176 136 40,352 120,202 127,443	Year ended 31 December (“FY”) 2005 2006 2007 (HK$’000) (HK$’000) (HK$’000) 295,524 508,717 652,767 (215,823) (327,554) (399,877) 79,701 181,163 252,890 (60,699) (73,339) (130,428) 22,814 20,892 9,601 41,816 128,716 132,063 (2,383) (8,690) (4,756) 39,433 120,026 127,307 919 176 136 40,352 120,202 127,443	Year ended 31 December (“FY”) 2005 2006 2007 (HK$’000) (HK$’000) (HK$’000) 295,524 508,717 652,767 (215,823) (327,554) (399,877) 79,701 181,163 252,890 (60,699) (73,339) (130,428) 22,814 20,892 9,601 41,816 128,716 132,063 (2,383) (8,690) (4,756) 39,433 120,026 127,307 919 176 136 40,352 120,202 127,443
2005 (HK$’000) 295,524 (215,823) 79,701 (60,699) 22,814 41,816 (2,383) 39,433 919	2006 (HK$’000) 508,717 (327,554) 181,163 (73,339) 20,892 128,716 (8,690) 120,026 176	2007 (HK$’000) 652,767 (399,877
		252,890 (130,428 9,601
		132,063 (4,756
		127,307 136
40,352	120,202

The revenue of Hua Da Group has increased by more than 120% between FY2005 and FY2007. Over the same period, gross profit increased by a higher rate about 217% with the improvement of gross margins due to higher efficiency achieved in product design as well as economies of scale achieved in outsourcing. Between FY2005 and FY2007, operating and financing expenses rose by approximately 115%, in line with the increase in revenue. Other income and gains consist of mainly grants from government which amounted to HK$22.5 million, HK$19.0 million and HK$7.5 million respectively. The government grants are subject to the qualification of each of the project undertaken by Hua Da Group. Hence, the amount of grants receivable in the future will depend on the nature of each projects.

In line with the substantial increase in gross profit, profit after income tax rose by more than 220% between FY2005 and FY2007, notwithstanding the decrease in government grant over the same period.

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LETTER FROM ALTUS

In summary, Hua Da Group has experienced substantial revenue growth and improved profitability in the past few years. The Acquisition will therefore enhance the profitability of the Group if such trend continues, in line with the positive outlook of the IC industry and markets.

Financial position

The financial position of Hua Da Group (including the Excluded Assets) as at 31 December 2007 is simmarised below:

Balance sheet Non-current assets Current assets Total assets Total liabilities Net assets	As at 31 December 2007 (HK$’000) 40,794 574,528 615,322 (312,686) 302,636

Consistent with the nature of its business of design, research and development, Hua Da Group maintained relatively small investments in plants and equipment and hence has relatively small non-current assets. Of the current assets, it maintained cash and cash equivalent of about HK$188.9 million as at 31 December 2007. The liabilities of Hua Da Group comprised mainly trade and other payables. It has short-term bank borrowing of HK$64.5 million as at 31 December 2007 and has no long-term borrowings. The net assets of Hua Da Group amounted to approximately HK$302.6 million as at 31 December 2007.

The shareholders of Hua Da Electronics had approved the payment of the final dividend for the year ended 31 December 2007 in an aggregate amount of approximately HK$148.8 million and it will not have any other distributions before the completion of the Acquisition. The payment of this final dividend will reduce the net asset value of Hua Da Group. The effects of this final dividend on the net asset value based on the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as if the Acquisition has been taken place on 31 December 2007 will be further discussed in Section 7 below. Hua Da Group has net current assets of approximately HK$261.8 million and cash balance of approximately HK$188.9 million as at 31 December 2007. Based on the above, we believe Hua Da Electronics has the ability to make the aforesaid dividend payment without having material adverse effect on its working capital position.

– 41 –

LETTER FROM ALTUS

Based on the balance sheet above, we are of the view that Hua Da Group has a healthy financial position.

Having considered Hua Da Group’s principal businesses and prospects, its past financial performance and financial position as discussed above, we are of the view that the Acquisition is in the interests of the Company and the Shareholders from the business development point of view.

3. The Group’s business and development strategy

The Company is an investment holding company. Sang Fei, its principal operating subsidiary, is primarily engaged in the manufacturing and sales of mobile handsets and other portable electronic products.

It is the management’s strategy to progressively transform the Group’s businesses from the lower-end OEM manufacturing, to the mid-and-high end value chain, thereby becoming a comprehensive business solution provider in the long run. To this end, the Group has been exploring merger and acquisition opportunities of new businesses at the upstream of the information technology (“IT”) industry value chain. Recognising that CEC is one of the leading enterprises in the IT industry in the PRC, it has been the intention of the management to leverage on the Company’s relationship with CEC for this development. The Acquisition is therefore consistent with business development strategy of the Company.

4. Valuation of the Acquisition

We have attempted to identify companies which are engaged in similar business with Hua Da Electronics. As far as we are aware, we have identified Shanghai Fudan Microelectronics Company Limited (“Shanghai Fudan”) which is listed on the Stock Exchange and several companies listed on the New York Stock Exchange/Nasdaq, being Atmel Corporation (“Atmel”), Infineon Technologies AG (“Infineon”) and Atheros Communications Inc. (“Atheros”). When analysing the reasonableness of the valuation of the Acquisition, we have made comparisons with the aforesaid companies (the “Comparables”). We wish to highlight that these Comparables may differ from Hua Da Electronics in terms of size, and their scope of business activities may not be identical to that of Hua Da Electronics.

– 42 –

LETTER FROM ALTUS

(a) Price-to-earnings ratio

The total consideration for the Acquisition of HK$1,520 million was arrived at after arm’s length negotiations among the relevant parties with reference to, inter alia, the historical earnings of Hua Da Electronics. Price-to-earnings ratio (“PER”) is a commonly used reference for valuing an entity and we believe it is an acceptable method to value Hua Da Electronics in this case as it has a profitable track record and is not an asset-based company. In this regard, we have compared it with the PERs of the Comparables, based on their share prices as at the Latest Practicable Date as follows:

		Principal
	Principal	stock	Forecast	Historical		Gross	Market
Company	activities	exchange	PER	PER	Revenue	Profit	capitalisation
					(HK$	(HK$
			(times)	(times)	billion)	billion)	(HK$ billion)
Shanghai Fudan	Designs,	Stock	n/a	10.6	0.3	0.1	0.2
	develops &	Exchange
	sells IC
	products &
	provision of
	testing
	services for IC
	products
Atmel	Designs,	Nasdaq	16.91	76.7	12.9	4.5	12.5
	develops,
	manufactures,
	& markets
	semiconductors
Infineon	Designs,	New	48.62	n/a	96.3	17.7	52.6
	develops,	York
	manufactures,
	& markets
	semiconductors
	& system
	solutions used
	in various
	microelectronics
	applications
Atheros	Develops	Nasdaq	21.13	55.0	3.4	1.6	13.4
	integrated
	semiconductor
	system
	solutions for
	communication
	IC products
Hua Da	Designs & sells	Unlisted	n/a	11.9	0.7	0.3	1.5
Electronics	IC & research
	& develops
	electronic
	design
	automation
	tools

Source: Yahoo Finance website

– 43 –

LETTER FROM ALTUS

Notes:

For the financial year ending 31 December 2009, by Thomson Group, a financial information company
For the financial year ending 30 September 2009, by Thomson Group, a financial information company
For the financial year ending 31 December 2009, by Thomson Group, a financial information company

Compared with Hua Da Electronics, it is noted that the market capitalisation and revenue of Infineon, Atmel and Atheros are substantially larger, while Shanghai Fudan is smaller. For the larger Comparables, it is noted that Infineon has incurred losses in the past financial year and as a result, historical PER is not applicable. The historical PERs of Atmel and Atheros are 76.7 times and 55.0 times respectively. For the smaller Comparable, the historical PER of Shanghai Fudan is 10.6 times. Hua Da Electronics has been profitable in the past year and the historical PER based on its valuation under the Acquisition is 11.9 times. Profit projections of Hua Da Electronics and Shanghai Fudan are not available while the forecast PERs of the larger Comparables range from 16.9 times to 48.6 times. It is noted that the forecast PERs relate to financial years ending in 2009 and 2010.

Given their larger scale of operations, the market may accord the larger Comparables with higher PERs. Notwithstanding, in this case, the PERs of the larger Comparables are substantially higher. Meanwhile, the historical PER based on the valuation under the Acquisition is comparable to the current PER of the smaller Comparable. Having considered the above, we are of the view that the valuation of Hua Da Electronics is fair and reasonable when compared with the Comparables.

5. Issue price of the Consideration Shares

To satisfy the consideration of HK$1,520 million for the Acquisition, 608,000,000 Consideration Shares will be issued at an issue price of HK$2.50 per Consideration Share. This issue price represents:

(a) a premium of approximately 28.87% over the closing price of HK$1.94 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a premium of approximately 25.38% over the average closing price of approximately HK$1.994 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
(c) a premium of approximately 25.06% over the average closing price of approximately HK$1.999 per Share as quoted on the Stock Exchange for the last 10 consecutive trading days up to and including the Last Trading Day; and
(d) a premium of approximately 20.19% over the closing price of approximately HK$2.08 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

– 44 –

LETTER FROM ALTUS

In the past three months, the Shares have been trading at below the issue price of the Consideration Shares, at within the range of HK$1.94 and HK$2.39 per Share as shown below.

==> picture [304 x 183] intentionally omitted <==

The issue price of the Consideration Shares represents a premium of approximately 5.74 times over the underlying net asset value per Share attributable to equity holders of the Company of approximately HK$0.435 per Share as at 31 December 2007. Based on the Company’s earnings per Share of HK$0.0075 for the financial year ended 31 December 2007, the issue price represents a price-to-earnings ratio of more than 300 times. This compares favourably with the valuation of the Acquisition as discussed in the preceding paragraph and on this basis, we are of the view that the issue price of the Consideration Shares are fair and reasonable.

6. Effects on shareholding of existing Shareholders

As consideration for the Acquisition, 608,000,000 Consideration Shares will be issued. The Consideration Shares represent approximately 56.1% of the existing issued share capital and approximately 35.9% of the enlarged share capital of the Company. The table below sets out the shareholding structure of the Company as at the Latest Practicable Date and immediately after issuance of the Consideration Shares for the Acquisition.

Shareholder CEC Group −CEC −China Hua Da Beijing Shoufa Xinan Other Vendors Existing public Shareholders	As at the Latest Practicable Date 812,500,000 74.98% 812,500,000 74.98% – – – – 271,060,000 25.02% 1,083,560,000 100.00%	Immediately after issuance of the Consideration Shares for the Acquisition 1,206,180,000 71.30% 812,500,000 48.03% 393,680,000 23.27% 45,600,000 2.70% 168,720,000 9.97% 271,060,000 16.03% 1,691,560,000 100.00%

– 45 –

LETTER FROM ALTUS

As shown above, the percentage shareholding interests of the existing public Shareholders in the Company will be diluted from about 25.02% as at the Latest Practicable Date to approximately 16.03% upon issuance of the Consideration Shares. Notwithstanding the dilution, it is noted that (i) the economic benefits accruing to Shareholders in terms of earnings per Share will improve after the Acquisition as further discussed in “Financial effects of the Acquisition” below; and (ii) the Issue Price represents a premium to the historical trading prices of the Shares in the past three months. We are therefore of the view that the dilution effects of the Acquisition on the shareholding of existing Shareholders while in itself is not favourable, is acceptable.

It is also noted that upon completion of the Acquisition, CEC together with China Hua Da, will have shareholding of about 71.3% in the Company. Consequently, there will be no change in the ultimate controlling shareholder of the Company after the Acquisition.

7. Financial effects of the Acquisition

Profit and loss accounts and earnings per Share

The Group recorded net profit attributable to Shareholders of HK$8.07 million for the financial year ended 31 December 2007. Based on 1,083,560,000 Shares in issue as at the Latest Practicable Date, this translates into earnings per Share of HK$0.0075.

Upon the Completion, Hua Da Electronics will become a wholly-owned subsidiary of the Company and its financial results will be consolidated into the Group. Hua Da Group has recorded a profit attributable to the equity holders for the year ended 31 December 2007 of HK$127.4 million, as set out in Appendix I to this Circular. Without taking into account the nominal impact of the Excluded Assets[1] , the Group’s total profit attributable to Shareholders for the financial year ended 31 December 2007 (assuming the Acquisition has taken place on 1 January 2007 and the profit contribution of Hua Da Group is added to the Group’s profit) will therefore be HK$135.5 million. Based on the enlarged issued share capital of 1,691,560,000 Shares after the Completion, this result in earnings per Share of HK$0.08. The Acquisition will therefore enhance the earnings per Share of the Company and is favourable to the Shareholders.

Note 1: Based on their respective unaudited management accounts, the Excluded Assets have an unaudited net asset value of an aggregate amount of approximately HK$3.0 million as at 31 December 2007 and have incurred a net loss of an aggregate amount of HK$1.75 million for the year ended 31 December 2007.

– 46 –

LETTER FROM ALTUS

The following table sets forth:

(i) the net asset value and net assets value per share of the Group; and
(ii) the net asset value and net assets value per share of the Enlarged Group as further adjusted to give effect to the dividend declared and paid by Hua Da Electronics after 31 December 2007.

The net assets before dividend payment of the Enlarged Group as shown in the following table is determined using the information contained in the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as set out in Appendix IV to this Circular.

Non-current assets Current assets Total assets Current liabilities Net assets before dividend payment Dividend Net assets after dividend payment Number of Shares outstanding Net asset value per Share	The Group (HK$’000) 103,882 1,713,080	The Enlarged Group (HK$’000) 144,676 2,281,625 2,426,301 (1,528,812) 897,489 (148,794) 748,695 1,691,560,000 HK$0.44
	1,816,962 (1,216,126) 600,836 −	2,426,301 (1,528,812 897,489 (148,794
	600,836 1,083,560,000 HK$0.55

After the Acquisition, the net asset value of the Group will increase from HK$600.8 million as at 31 December 2007 to approximately HK$897.5 million of the Enlarged Group. However, after taking into account the total amount of dividend declared for the year ended 31 December 2007 of approximately HK$148.8 million, net asset value of the Enlarged Group will be approximately HK$748.7 million. Net asset value per Share will decline to HK$0.44 compared with HK$0.55 prior to the Acquisition.

The Acquisition will therefore enlarge the financial position of the Group, but will result in dilution of net asset value per Share. Notwithstanding the dilution to the net asset value per Share, the dividend payment will not have material adverse effect on the operation and the working capital position of Hua Da Electronics having taking into consideration its financial position as at 31 December 2007.

Working capital position

The consideration for the Acquisition will be fully satisfied by the allotment and issuance of the Consideration Shares. Consequently, the liquidity and working capital position of the Group will not be affected by the Acquisition.

– 47 –

LETTER FROM ALTUS

II. THE NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS

In formulating our opinion on the Non-exempt Continuing Connected Transactions, we have taken into consideration the following principal factors and reasons:

1. Background

Hua Da Electronics has had close relationship with the CEC Group where it has on-going business transactions with members of the CEC Group in its ordinary and usual course of business. These transactions can be categorised as follows:

(i) provision of processing, testing and assembling services by CEC Group and purchase of raw materials and modules from CEC Group (“Outsourcing and Purchase Transactions”);
(ii) sales of IC cards and smart card modules, chips and EDA tools to CEC Group (“Sale Transactions”); and
(iii) provision of canteen services by CEC Group to Hua Da Electronics (“Canteen Transactions”).

To regulate such continuing relationship between Hua Da Electronics and members of the CEC Group and to set out the framework for future transactions, the Hua Da Business Services Agreement has been entered into on 20 June 2008. This agreement will take effect from the date of completion of the China Hua Da Acquisition and expires on 31 December 2010.

2. Reasons for the Non-exempt Continuing Connected Transactions

Outsourcing and Purchase Transactions

Hua Da Electronics focuses on the design of ICs and research and development of new technology. It does not own facilities for conducting processing, testing and assembling procedures on IC products as these are not considered its core businesses. Consequently, these procedures have been outsourced to the relevant service providers and they include certain members of the CEC Group.

CEC Group 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. It actively focuses on and has made substantial investments in the communication/consumer electronics, semi-conductor and software sectors. Consequently, members of the CEC Group have established themselves as reliable and competitive providers of processing, testing and assembling services to IC design companies such as Hua Da Electronics.

– 48 –

LETTER FROM ALTUS

In the past three years, the Outsourcing and Purchase Transactions with members of the CEC Group constituted more than 90% of Hua Da Electronics’ total outsourcing and purchase requirements, with the balance being procured and purchased from independent third party suppliers.

According to the Directors, for projects undertaken by Hua Da Electronics, the customers typically dictates the panel of outsourcing service providers and suppliers. CEC Group, being a leading conglomerate in this field in the PRC, has regularly been part of the panel of suppliers and service providers identified by the customers. The management of Hua Da Electronics has confirmed that members of the CEC Group have been providing high quality services at competitive prices.

Sale Transactions

Hua Da Electronics sells its products such as IC cards and smart card modules, chips and EDA tools to members of the CEC Group. The major products under the Sale Transactions are petrol cards to a member of CEC Group and this company is the sole distributor of petrol cards for a major petroleum company. Hua Da Electronics also supplies USB keys and smart card modules to members of the CEC Group which are major distributors of bank cards of financial institutions and so forth. Consequently, if Hua Da Electronics is to participate in the relevant projects, these members of CEC Group will be the major channels.

Canteen Transactions

Under the Canteen Transactions, members of the CEC Group have been engaged to provide canteen facilities and meals to staff of Hua Da Electronics as its management believes such services to staff are ancillary activities. The aforesaid canteen service provider is located in close proximity to its office and has large canteen operations with economies of scale, thereby able to provide such services at comparatively lower costs than if Hua Da Electronics is to operate its own canteen.

We are of the view that the Non-exempt Continuing Connected Transactions are entered into for commercial reasons such as (i) procuring services of designated suppliers of Hua Da Electronics’ customers under the Outsourcing and Purchase Transactions; (ii) expanding the source of revenue of Hua Da Electronics by working with designated distributors of major companies under the Sale Transactions; and (iii) sub-contracting ancillary activities which are not Hua Da Electronics’ core businesses under the Canteen Transactions. On this basis, we are of the view that it is fair and reasonable to enter into the Non-exempt Continuing Connected Transactions.

– 49 –

LETTER FROM ALTUS

3. Historical and future transaction amount

Outsourcing and Purchase Transactions

The historical figures and the proposed annual caps for the Outsourcing and Purchase Transactions are summarised below:

Annual service charges paid/ to be paid	Historical figures for 2005 2006 2007 RMB’000 RMB’000 RMB’000 223,464 515,850 375,198	Proposed annual caps for
		20081 2009 2010 RMB’000 RMB’000 RMB’000 284,640 293,310 421,140

For the period commencing from the Completion to 31 December 2008

Between 2005 and 2007, the amount of service charges paid had increased, in line with the growth of Hua Da Electronics’ business. The proposed annual caps for 2008, 2009 and 2010 are estimated based on the amount of outsourcing and purchase of raw materials Hua Da Electronics will require for its projects on-hand and future projects. For each of its project, the panel of outsourcing service providers and suppliers are normally identified at the outset and consequently, the amount of service charges payable may be estimated based on the forecast revenue for each project. Notwithstanding, Hua Da Electronics is not obligated nor committed to purchasing only from members of CEC Group if their prices are not competitive, and is able to engage other third party suppliers.

For the remaining year of 2008, the annual service charges are estimated to increase due to increased sale in an ongoing project which a member of the CEC Group has been designated as outsourcing service provider. The amount of service charges are expected to reduce in 2009 as current projects on hand expected to be launched next year involve fewer suppliers which are members of the CEC Group. We believe the above is a reasonable basis to arrive at the proposed annual caps.

The service charges by members of the CEC Group will be determined based on arm’s length negotiations with reference to market rates of similar services and products. We have reviewed the prices charged by members of the CEC Group in the past and found that they are comparable to the prices offered by independent third party service providers for similar services and products.

– 50 –

LETTER FROM ALTUS

Sale Transactions

The historical figures and the proposed annual caps for the Sale Transactions are summarised below:

Payment for sales received/to be received	Historical figures for 2005 2006 2007 RMB’000 RMB’000 RMB’000 34,336 42,991 46,886	Proposed annual caps for
		20081 2009 2010 RMB’000 RMB’000 RMB’000 19,620 36,000 43,200

For the period commencing from the Completion to 31 December 2008

The amount of sales to members of the CEC Group has increased between 2005 and 2007 due to the increase in Hua Da Electronics’ range of products, which in turn resulted in more projects undertaken with members of the CEC Group. The proposed annual caps for the remaining year of 2008 and in 2009 and 2010 are expected to decrease as certain current projects with members of the CEC Group are expected to end while launches for new products have yet to be confirmed. We believe the above is a reasonable basis to arrive at the proposed annual caps.

The sale prices to members of the CEC Group will be determined based on arm’s length negotiations with reference to market rates of similar products. We have reviewed the sale prices charged to members of the CEC Group in the past and found that they are comparable to the sale prices to independent third party customers for similar products.

Canteen Transactions

The historical figures and the proposed annual caps for the Canteen Transactions are summarised below:

Service fees paid/to be paid	Historical figures for 2005 2006 2007 RMB’000 RMB’000 RMB’000 494 459 599	Proposed annual caps for
		20081 2009 2010 RMB’000 RMB’000 RMB’000 550 1,120 1,160

For the period commencing from the Completion to 31 December 2008

– 51 –

LETTER FROM ALTUS

The amount of canteen service fees paid to members of the CEC Group will be dependent on the number of Hua Da Electronics’ staff using such services and the rates charged for such services. The number of Hua Da Electronic staff has increased since 2005. Consequently, the amount of service fees paid has increased between 2005 and 2007.

The proposed annual caps for the remaining year of 2008 and in 2009 and 2010 are expected to increase substantially. The management explained that this is due to the revision of service fees per meal in 2008 by more than 30%, which is negotiated as a result of high rate of inflation in recent months. Based on our discussion with the management, notwithstanding the increase in service fees, they remain lower than the costs Hua Da Electronics will have to incur if it is to operate the canteen facilities itself. In addition, the revised service fees are competitive compared with other third party suppliers. Another major consideration in the Canteen Transactions is the proximity of Hua Da Electronics’ premise to the canteen facilities of the member of CEC Group.

Based on the above, the annual caps have been determined on a reasonable basis with reference to the current projects and expected projects that will be undertaken with members of the CEC Group. The basis for determining the prices for the Non-exempt Continuing Connected Transactions are also fair and reasonable as they will be made with reference to market rates for similar services and products.

RECOMMENDATIONS

The Acquisition

We are of the view that the terms of the Acquisition are on normal commercial terms. Notwithstanding that the Acquisition will result in a dilution of net asset value per Share, having considered the overall benefits of the Acquisition, we believe it is in the interest of the Company and the Shareholders as a whole. We are also of the view that the terms of the agreements relating to the Acquisition are fair and reasonable as far as the Independent Shareholders are concerned.

Based on the above, we recommend the Independent Board Committee and the Independent Shareholders to vote in favour of the proposed resolution approving the Acquisition at the SGM.

– 52 –

LETTER FROM ALTUS

The Non-exempt Continuing Connected Transactions

Having considered the principal factors discussed above, we are of the view that the Non-exempt Continuing Connected Transactions with the CEC Group are conducted in the ordinary and usual course of business of the Group. The terms and conditions of the Non-exempt Continuing Connected Transactions, including the proposed annual caps for the Outsourcing and Purchase Transactions, the Sales Transactions and the Canteen Transactions are on normal commercial terms, fair and reasonable and are in the interest of the Group and the Shareholders as a whole. 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 Arnold Ip

Executive Director

– 53 –

APPENDIX I ACCOUNTANT’S REPORT OF TARGET GROUP

The following is the text of a report received from the Company’s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

30 June 2008

The Directors

China Electronics Corporation Holdings Company Limited

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) of (CEC Huada Electronic Design Co., Ltd.) (the “Target Company”) and its subsidiaries (together, the “Target Group”) set out in Section I to III below, for inclusion in the circular of China Electronics Corporation Holdings Company Limited (the “Company” or “CEC Holdings”) dated 30 June 2008 (the “Circular”) in connection with the proposed acquisition of the Target Group by the Company (the “Proposed Acquisition”). The Financial Information comprises the consolidated balance sheets of the Target Group and the balance sheets of the Target Company as at 31 December 2005, 2006 and 2007, and the consolidated income statements, the consolidated statements of changes in equity and the consolidated cash flow statements of the Target Group for each of the years ended 31 December 2005, 2006 and 2007 (the “Relevant Periods”), and a summary of significant accounting policies and other explanatory notes.

The Target Company was established in the People’s Republic of China (the “PRC”) on 6 June 2002 as a company with limited liability under the Company Law of the PRC.

At the date of this report, the Target Company has direct interests in the subsidiaries as set out in Note 7 of Section II. All companies comprising the Target Group are private companies and have adopted 31 December as their financial year end date for statutory reporting and/or management reporting purpose.

The consolidated financial statements of the Target Group for each of the years ended 31 December 2005, 2006 and 2007 which have been prepared in accordance with the Accounting System for Business Enterprise and the Accounting Standards for Business Enterprises (“PRC GAAP”) were audited by (Reanda Certified Public Accountants).

The Financial Information has been prepared based on the audited consolidated financial statements of the Target Group prepared in accordance with PRC GAAP, after making such adjustments as are appropriate.

– 54 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

RESPONSIBILITY OF DIRECTORS

The directors of the Target Company during the Relevant Periods are responsible for the preparation and the fair presentation of the consolidated financial statements of the Target Group in accordance with PRC GAAP. The directors of the Company and the Target Company are responsible for the preparation and the true and fair presentation of the Financial Information in accordance with Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of Financial Information that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

RESPONSIBILITY OF REPORTING ACCOUNTANT

Our responsibility is to express an opinion on the Financial Information based on our examination and to report our opinion to you. We examined the audited consolidated financial statements of the Target Group prepared in accordance with PRC GAAP for the Relevant Periods and the related adjustments made in preparing the Financial Information, and carried out such additional procedures as we considered necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by HKICPA.

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 Target Company and of the Target Group as at 31 December 2005, 2006 and 2007 and of the Target Group’s results and cash flows for the Relevant Periods.

– 55 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

I. FINANCIAL INFORMATION

The following is the Financial Information of the Target Group as at 31 December 2005, 2006 and 2007 and for each of the years ended 31 December 2005, 2006 and 2007.

Consolidated Balance Sheets

As	at 31 December	at 31 December
2005 HK$’000 5,195 8,377 1,468 2,504 3,845 21,389 28,024 173,162 24,766 225,952	2006 HK$’000 7,199 9,825 1,625 – 4,000 22,649 180,992 270,260 87,952 539,204	2007 HK$’000 22,296 5,333 8,865 – 4,300
		40,794
		158,059 227,567 188,902
		574,528
247,341	561,853	615,322

32,642 11,410 13,435 30,483 87,970 1,157 89,127 127,665 1,703 28,846 158,214	32,642 25,968 45,045 97,850 201,505 1,065 202,570 336,165 3,118 20,000 359,283	32,642 48,025 148,794 72,219
		301,680
		956
		302,636
		239,822 8,348 64,516
		312,686
247,341 67,738 89,127	561,853 179,921 202,570	615,322

		261,842

		302,636

– 56 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

Balance Sheets – Target Company

As	at 31 December	at 31 December
2005 HK$’000 4,966 3,670 1,468 4,808 2,885 3,845 21,642 27,031 176,554 19,462 223,047	2006 HK$’000 6,454 6,287 1,625 12,715 – 4,000 31,081 180,453 271,431 76,674 528,558	2007 HK$’000 21,569 2,644 8,865 8,347 – 4,300
		45,725
		157,087 219,775 183,799
		560,661
244,689	559,639	606,386

32,642 11,333 13,435 30,684 88,094 126,046 1,703 28,846 156,595	32,642 25,892 45,045 99,439 203,018 333,503 3,118 20,000 356,621	32,642 48,171 148,794 75,688
		305,295
		228,227 8,348 64,516
		301,091
244,689 66,452 88,094	559,639 171,937 203,018	606,386

		259,570

		305,295

– 57 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

Consolidated Income Statements

Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 295,524 508,717 652,767 (215,823) (327,554) (399,877) 79,701 181,163 252,890 (8,525) (11,741) (15,928) (50,000) (59,974) (111,905) 22,316 19,900 8,457 43,492 129,348 133,514 498 992 1,144 (2,174) (1,624) (2,595) (1,676) (632) (1,451) 41,816 128,716 132,063 (2,383) (8,690) (4,756) 39,433 120,026 127,307 40,352 120,202 127,443 (919) (176) (136) 39,433 120,026 127,307 13,435 45,045 148,794	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 295,524 508,717 652,767 (215,823) (327,554) (399,877) 79,701 181,163 252,890 (8,525) (11,741) (15,928) (50,000) (59,974) (111,905) 22,316 19,900 8,457 43,492 129,348 133,514 498 992 1,144 (2,174) (1,624) (2,595) (1,676) (632) (1,451) 41,816 128,716 132,063 (2,383) (8,690) (4,756) 39,433 120,026 127,307 40,352 120,202 127,443 (919) (176) (136) 39,433 120,026 127,307 13,435 45,045 148,794	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 295,524 508,717 652,767 (215,823) (327,554) (399,877) 79,701 181,163 252,890 (8,525) (11,741) (15,928) (50,000) (59,974) (111,905) 22,316 19,900 8,457 43,492 129,348 133,514 498 992 1,144 (2,174) (1,624) (2,595) (1,676) (632) (1,451) 41,816 128,716 132,063 (2,383) (8,690) (4,756) 39,433 120,026 127,307 40,352 120,202 127,443 (919) (176) (136) 39,433 120,026 127,307 13,435 45,045 148,794
2005 HK$’000 295,524 (215,823) 79,701 (8,525) (50,000) 22,316 43,492 498 (2,174) (1,676) 41,816 (2,383)	2006 HK$’000 508,717 (327,554) 181,163 (11,741) (59,974) 19,900 129,348 992 (1,624) (632) 128,716 (8,690)	2007 HK$’000 652,767 (399,877
		252,890 (15,928 (111,905 8,457
		133,514 1,144 (2,595
		(1,451
		132,063 (4,756
39,433	120,026
40,352 (919)	120,202 (176)	127,443 (136
39,433 13,435	120,026 45,045

– 58 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

Consolidated Statements of Changes in Equity

	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company
Paid-in capital HK$’000 (Note 13) 30,154 – − – – 2,488 – –	Reserves HK$’000 (Note 14) 1,996 1,240 1,240 – 1,240 2,350 – 5,824	Retained earnings HK$’000 9,390 – − 40,352 40,352 – – (5,824)	Total HK$’000 41,540 1,240 1,240 40,352 41,592 4,838 – –	Minority interests HK$’000 – 11 11 (919) (908) – 2,065 –	Total equity HK$’000 41,540 1,251
					1,251 39,433
					40,684 4,838 2,065 –
32,642	11,410	43,918	87,970	1,157	89,127

32,642 – – – – – – –	11,410 6,768 6,768 – 6,768 – – 7,790	43,918 – – 120,202 120,202 (13,435) – (7,790)	87,970 6,768 6,768 120,202 126,970 (13,435) – –	1,157 42 42 (176) (134) – 42 –	89,127 6,810
					6,810 120,026
					126,836 (13,435 42 –
32,642	25,968	142,895	201,505	1,065	202,570

32,642 – – – – – – –	25,968 17,777 17,777 – 17,777 – – 4,280	142,895 – – 127,443 127,443 (45,045) – (4,280)	201,505 17,777 17,777 127,443 145,220 (45,045) – –	1,065 74 74 (136) (62) – (47) –	202,570 17,851
					17,851 127,307
					145,158 (45,045 (47 –
32,642	48,025	221,013	301,680	956	302,636

– 59 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

Consolidated Cash Flow Statements

Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 (20,881) 98,070 121,387 (2,174) (1,624) (2,595) (1,310) (7,564) (7,933) (24,365) 88,882 110,859 498 992 1,144 (2,255) (8,924) (17,606) – – 81 – – 376 (3,603) 2,433 (47) (5,360) (5,499) (16,052) – (13,435) (45,045) 47,618 33,980 83,333 (33,333) (43,689) (41,667) 4,838 – – 19,123 (23,144) (3,379) 614 2,947 9,522 (9,988) 63,186 100,950 34,754 24,766 87,952 24,766 87,952 188,902	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 (20,881) 98,070 121,387 (2,174) (1,624) (2,595) (1,310) (7,564) (7,933) (24,365) 88,882 110,859 498 992 1,144 (2,255) (8,924) (17,606) – – 81 – – 376 (3,603) 2,433 (47) (5,360) (5,499) (16,052) – (13,435) (45,045) 47,618 33,980 83,333 (33,333) (43,689) (41,667) 4,838 – – 19,123 (23,144) (3,379) 614 2,947 9,522 (9,988) 63,186 100,950 34,754 24,766 87,952 24,766 87,952 188,902	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 (20,881) 98,070 121,387 (2,174) (1,624) (2,595) (1,310) (7,564) (7,933) (24,365) 88,882 110,859 498 992 1,144 (2,255) (8,924) (17,606) – – 81 – – 376 (3,603) 2,433 (47) (5,360) (5,499) (16,052) – (13,435) (45,045) 47,618 33,980 83,333 (33,333) (43,689) (41,667) 4,838 – – 19,123 (23,144) (3,379) 614 2,947 9,522 (9,988) 63,186 100,950 34,754 24,766 87,952 24,766 87,952 188,902
2005 HK$’000 (20,881) (2,174) (1,310) (24,365) 498 (2,255) – – (3,603) (5,360) – 47,618 (33,333) 4,838 19,123 614 (9,988) 34,754	2006 HK$’000 98,070 (1,624) (7,564) 88,882 992 (8,924) – – 2,433 (5,499) (13,435) 33,980 (43,689) – (23,144) 2,947 63,186 24,766	2007 HK$’000 121,387 (2,595 (7,933
		110,859
		1,144 (17,606 81 376 (47
		(16,052
		(45,045 83,333 (41,667 –
		(3,379
		9,522
		100,950
		87,952
24,766	87,952

– 60 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

II. NOTES TO THE FINANCIAL INFORMATION

1. BACKGROUND OF THE TARGET GROUP

The Target Company was established in the PRC on 6 June 2002 as a limited liability company under the Company Law of the PRC. The Target Group is engaged in design and sale of integrated circuit. The address of the Target Company’s registered office is No.1. Gaojiayuan, Chaoyang District, Beijing, the People’s Republic of China.

The Target Company is controlled by China Huada Integrated Circuit Design (Group) Co., Ltd. (“CIDC”) which owns 64.75% of the Target Company’s interests. CIDC is jointly owned and controlled by China Electronics Corporation (“CEC”) and State Development & Investment Corp. (“SDIC”). Both CEC and SDIC are state-owned enterprises established in the PRC.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of the Financial Information are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The Financial Information of the Target Group have been prepared in accordance with HKFRS issued by the HKICPA. The Financial Information has been prepared under the historical cost convention.

The preparation of Financial Information in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Target Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Information, are disclosed in Note 4.

The Financial Information is the first set of the Target Group’s financial statements prepared in accordance with HKFRS. The Financial Information has been prepared in accordance with disclosure requirements for the first time adoption of HKFRS. HKFRS 1, “First-time Adoption of Hong Kong Financial Reporting Standards”, has been applied in preparing this Financial Information.

In preparing these Financial Information in accordance with HKFRS 1, the Target Group has applied one optional exemptions from full retrospective application of HKFRS 2, “Share-based Payment”. It applied HKFRS 2 from 1 January 2005 to those share that were granted after 7 November 2002.

The directors of the Target Company have prepared the consolidated financial statements of the Target Group for each of the years ended 31 December 2005, 2006 and 2007 in accordance with PRC GAAP. PRC GAAP differs in certain aspects from HKFRS. Reconciliations and descriptions of the effect of the conversion from PRC GAAP to HKFRS on the Target Group’s total equity and profit for the year are as follows:

Amounts per PRC GAAP GAAP Adjustments: To write back the over-accrual of welfare according to the HKFRS Deferred tax assets Other retrospective adjustments: Revenue cut-off adjustment and related tax impact Reversal of over-accrual of cost of sales and related tax impact Provision of inventory impairment to write down carrying value of certain inventories to their net realizable value and related tax impact Cut-off adjustment to recognise expenses/income relating to government grants and related tax impact Provision of additional income tax liabilities based on taxable income for the year Others Amount per HKFRS	Total equity as at 1 January 2005 HK$’000 39,107 1,597 834 1,448 1,495 – (3,171) – 230 41,540	Total equity as at 31 December 2007 HK$’000 252,921 499 8,865 25,480 13,215 (942) 4,355 (2,304) 547 302,636	Profit for the year ended 31 December 2007 HK$’000 99,052 (3,694) 6,895 22,822 (1,548) (912) 5,550 (283) (575) 127,307

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APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

(a) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted.

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Target Group’s accounting periods beginning on or after 1 January 2008 or later periods, and the Target Group has not early adopted them:

HKAS 1 (Revised), ‘Presentation of Financial Statements’ (effective from 1 January 2009). HKAS 1 (Revised) requires all owner changes in equity to be presented in a statement of changes in equity. All comprehensive income is presented in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). It requires presenting a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when there are retrospective adjustments or reclassification adjustments. However, it does not change the recognition, measurement or disclosure of specific transactions and other events required by other HKFRS. The Target Group will apply HKAS 1 (Revised) from 1 January 2009. The directors of the Target Group are assessing the impact.

HKAS 23 (Revised), ‘Borrowing costs’ (effective from 1 January 2009). The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Target Group will apply HKAS 23 (Revised) from 1 January 2009 which is not expected to have any impact on the Target Group’s financial statements.

HK(IFRIC) – Int 11, ‘HKFRS 2 – Group and treasury share transactions’, (effective from 1 March 2007). HK(IFRIC) – Int 11 provides guidance on whether share-based transactions involving treasury shares or involving Group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have an impact on the Target Group’s financial statements.

HK(IFRIC) – Int 12, ‘Service concession arrangements’ (effective from 1 January 2008). HK(IFRIC) – Int 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. HK(IFRIC) – Int 12 is not relevant to the Target Group’s operations because none of the Target Group’s companies provide public sector services.

HK(IFRIC) – Int 13, ‘Customer loyalty programmes’ (effective from 1 July 2008). HK(IFRIC) – Int 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. HK(IFRIC) – Int 13 is not relevant to the Target Group’s operations because none of the Target Group’s companies operate any loyalty programmes.

HKAS 27 (Revised) ‘Consolidated and Separate Financial Statements’ (effective from annual period beginning on or after 1 July 2009). The amendment requires non-controlling interests (i.e. minority interests) to be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. When control of a subsidiary is lost, the assets and liabilities and related equity components of the former subsidiary are derecognised. Any gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. The Target Group will apply HKAS 27 (Revised) from 1 January 2010. The directors of the Target Group are assessing the impact.

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APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

HKFRS 3 (Revised) ‘Business Combination’ (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The amendment may bring more transactions into acquisition accounting as combinations by contract alone and combinations of mutual entities are brought into the scope of the standard and the definition of a business has been amended slightly. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’. It requires considerations (including contingent consideration), each identifiable asset and liability to be measured at its acquisition-date fair value, except leases and insurance contracts, reacquired right, indemnification assets as well as some assets and liabilities required to be measured in accordance with other HKFRS. They are income taxes, employee benefits, share-based payment and non current assets held for sale and discontinued operations. Any non-controlling interest in an acquiree is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The Target Group will apply HKFRS 3 (Revised) from 1 January 2010. The directors of the Target Group are assessing the impact.

HKFRS 2 Amendment ‘Share-based Payment Vesting Conditions and Cancellations’ (effective from 1 January 2009). The amendment clarifies the definition of ‘vesting conditions’ and specifies the accounting treatment of “cancellations” by the counterparty to a share-based payment arrangement. Vesting conditions are service conditions (which require a counterparty to complete a specified period of service) and performance conditions (which require a specified period of service and specified performance targets to be met) only. All ‘non-vesting conditions’ and vesting conditions that are market conditions shall be taken into account when estimating the fair value of the equity instruments granted. All cancellations are accounted for as an acceleration of vesting and the amount that would otherwise have been recognised over the remainder of the vesting period is recognised immediately. The Target Group will apply HKFRS 2 Amendment from 1 January 2009 which it is not expected to have any impact on the Target Group’s financial statements.

2.2 Consolidation

(a) Subsidiaries

Subsidiaries are all entities over which the Target Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Target Group controls another entity.

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

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

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Target Group.

In the Target Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses (Note 2.7). The results of subsidiaries are accounted for by the Target Company on the basis of dividend received and receivable.

(b) Associates

Associates are all entities over which the Target Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Target Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition (Note 2.6).

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APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

The Target Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Target Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Target Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Target Group and its associates are eliminated to the extent of the Target Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Target Group.

Dilution gains and losses in associates are recognised in the consolidated income statement.

In the Target Company’s balance sheet the investments in associated companies are stated at cost less provision for impairment losses (Note 2.7). The results of associated companies are accounted for by the Company on the basis of dividend received and receivable.

2.3 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Target Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The Financial Information are presented in Hong Kong dollar (“HK dollar”), which is different from the Target Company’s functional currency of Renminbi. The Directors of the Company consider that presentation of Financial Information in Hong Kong dollars will facilitate analysis of Financial Information of the Target Group.

(b) Transactions and balances

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

(c) Group companies

The results and financial position of all the Target Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
all resulting exchange differences are recognised as a separate component of equity.

When a foreign operation is partially disposed of or sold, such exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

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ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

2.4 Segment reporting

The Target Group operates and manages its business as a single segment. The Target Group also operates within one geographical segment because its revenues are generated in the PRC and its assets are located in the PRC. Accordingly, no geographical segment data is presented.

2.5 Property, plant and equipment

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

Depreciation of property, plant and equipment is calculated using the straight-line method to allocate cost to their residual values over their estimated useful lives, as follows:

–	Machinery	5-10 years
–	Motor vehicles	10 years
–	Furniture and fixtures	3 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.7).

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement.

2.6 Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Target Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

(b) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (four to five years).

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Target Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the employee costs incurred as a result of developing software and an appropriate portion of relevant overheads.

Computer software development costs recognised as assets are amortised over their estimated useful

lives.

– 65 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

2.7 Impairment of investments in subsidiaries, associate and non-financial assets

Assets that have an indefinite useful life or have not yet available for use are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

2.8 Financial assets

The Target Group classifies its financial assets in the following categories: loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

(a) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 2.10).

(b) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Target Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Target Group has transferred substantially all risks and rewards of ownership. However, the available-for-sale financial assets that do not have a quoted market price, the range of reasonable fair value estimates is significant and the possibilities of the various estimates can not be reasonably assessed, is measured at cost. Loans and receivables are carried at amortised cost using the effective interest method.

When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement.

Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of other income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Target Group’s right to receive payments is established.

The Target Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets in impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in Note 2.10.

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ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

2.9 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw material, manufacturing cost of subcontractors, testing and packaging. It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

2.10 Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Target Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within administrative expenses. Where evidence exists that a receivable can not be collected, either due to long time overdue or the customer is liquidated or dissolved, the receivable is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against administrative expenses in the income statement.

2.11 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, financial institutions and entities, other short-term highly liquid investments with original maturities of three months or less.

2.12 Paid-in capital

Paid-in capital represents contributions made by investors in accordance with the amount specified in the contracts, agreements or the enterprise’s application document for incorporation.

2.13 Government grants

Government grants are recognised at their fair values where there is a reasonable assurance that the grant will be received and the Target Group will comply with all attached conditions. Grants relating to assets are included in non-current liabilities, which are credited to the income statement on a straight-line basis over the expected lives of the related assets. Grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate.

2.14 Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

2.15 Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Target Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

2.16 Current and deferred income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Target Company and its subsidiaries and associates operate and generate taxable income. Management of the Target Company periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

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APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

Deferred income tax 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 Financial Information. However the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income 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 income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Target Group and it is probable that the temporary difference will not reverse in the foreseeable future.

2.17 Provision

Provisions are recognised when: the Target 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 the amount has been reliably estimated. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

2.18 Employee benefits

(a) Pension obligations

The Target Group’s subsidiaries operating in the People’s Republic of China (the “PRC”) have to make contribution to staff retirement scheme managed by local government authorities in accordance with the relevant rules and regulations. Contributions to these schemes are charged to the income statement as and when incurred.

Full time employees in Mainland China are covered by a state-sponsored defined contribution pension scheme under which the employees are entitled to an annual pension equal to a fixed proportion of their basic salaries at their retirement dates. The PRC government is responsible for the pension liability to these retired employees. The Target Group was required to make defined contributions to the pension scheme at the rate of 20% of the employees’ basic salaries for each of the years ended 31 December 2005, 2006 and 2007. Under this scheme, the Target Group has no obligation for post-retirement benefits beyond the annual contributions.

(b) 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.

(c) Bonus plans

The expected cost of bonus payments are recognised as a liability when the Target Group 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 bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

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ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

2.19 Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existent will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Target 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.

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.

2.20 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods, net of value-added tax, and returns. Revenue is recognised when the goods are delivered to customers, the customers has accepted the goods or the product quality inspection time period has elapsed and collectability of the related receivables is reasonably assured.

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Target Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income.

Dividend income is recognised when the right to receive payment is established.

2.21 Operating leases (as the lessee for operating leases)

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

2.22 Research and development

Research and development costs are expensed as incurred.

2.23 Dividend distribution

Dividend distribution to the Target Company’s shareholders is recognised as a liability in the Target Group’s financial statements in the period in which the dividends are approved by the Target Company’s shareholders.

3. FINANCIAL RISK MANAGEMENT

3.1 Financial risk factors

The Target Group’s activities expose it to a variety of financial risks: foreign exchange risk, credit risk, liquidity risk and fair value interest rate risk. The Target Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Target Group’s financial performance.

(a) Foreign exchange risk

The Target Group has no significant concentrations of foreign exchange risk. Foreign exchange risks of the Target Group occur due to the fact that the Target Group has some business activities denominated in foreign currencies, primarily with respect to the United States dollar (“US dollar”) and HK dollar. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities, including cash and cash equivalents and trade and other payable which are denominated in foreign currencies. In addition, the conversion of Renminbi into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC government.

The Target Group currently does not have a foreign currency hedge policy.

– 69 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

As less than 10% of the Target Group’s transactions are denominated in foreign currencies, the directors of the Target Group are of the view that foreign exchange risk in relation to transactions denominated in foreign currencies is low. Therefore, no sensitivity analysis for these currencies is presented.

(b) Credit risk

The Target Group has no significant concentrations of credit risk. Credit risk arises from cash and cash equivalents and trade and other receivables. The carrying amounts of these balances represent the Target Group’s maximum exposure to credit risk.

The Target Group has policies to ensure that the bank balances and short term deposits are placed with banks and financial institutions with good reputation and credit quality. During the Relevant Periods, the Target Group’s bank balances and short term deposits were placed with the Bank of Beijing, Hua Xia Bank, Industrial Bank Co, Ltd., China Electronics Corporation Finance Co., Ltd. and New Times Securities Co., Ltd..

The counterparties of the trade and other receivables are mainly state-owned enterprises or related companies. As there was no recent history of defaults by them that have resulted into material bad debts expenses during the Relevant Period, the directors of the Target Group are of the view that credit quality of the trade and other receivables is high.

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient working capital, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying business, the Target Group maintains flexibility in funding by keeping availability of committed credit lines.

The table below analyses the Target Group and the Target Company’s financial liabilities that will be settled into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

Less than 1 year Short term bank loans Interest payment on short term bank loans Trade and other payables	Target Group	Target Company
	As at 31 December	As at 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 28,846 20,000 64,516 956 946 3,402 112,501 328,501 193,014	2005 2006 2007 HK$’000 HK$’000 HK$’000 28,846 20,000 64,516 956 946 3,402 112,231 326,605 182,289

(d) Fair value interest rate risk

The Target Group has no significant concentrations of fair value interest rate risk.

Other than deposits held in banks which were fixed rates, the Target Group does not have significant interest-bearing assets. The average rates of deposits held in banks as at 31 December 2005, 2006 and 2007 were approximately 1.69%, 1.52% and 1.07% per annum, respectively.

The Target Group is also exposed to fair value interest rate risk in relation to its fixed rate bank borrowings.

Since the financial assets and liabilities that are exposed to fair value interest rate risk are accounted for at amortised cost based on effective interest rate, its income statement and equity would not be affected by interest rate variability, therefore no sensitivity analysis has been presented.

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ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

3.2 Capital risk management

The Target Group’s objectives when managing capital are to safeguard the Target Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Target Group reviews its capital structure regularly to ensure acceptable returns to its equity owner and accesses its future capital requirements, if necessary.

The Target Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including bank borrowings as shown in the consolidated balance sheets) less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.

Total capital of the Target Group were HK$93,207,000, HK$134,618,000 and HK$178,250,000 as at 31 December 2005, 2006 and 2007, respectively. The gearing ratio as at 31 December 2005 was 4%. As at 31 December 2006 and 2007, the cash and cash equivalents balances were greater than the balances of total borrowings. The directors are of the opinion that the Target Group does not have significant capital risk.

3.3 Fair value estimation

The Target Group’s financial instruments mainly consist of cash and cash equivalents, trade and other receivables (excluding prepayment), available-for-sale financial assets, trade and other payables and short term bank loans.

The carrying amounts of financial instruments approximated their fair values at December 31, 2005, 2006 and 2007 because of the short-term maturities of these financial assets and financial liabilities.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

(a) Estimated impairment of non-financial assets

At each balance sheet date, the Target Group considers both internal and external sources of information to assess whether there is any indication that assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and an impairment loss is recognised to reduce the carrying amount of the asset to its recoverable amount. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the assets.

(b) Income taxes

The Target Group is subject to income taxes in several jurisdictions. Significant judgement is required in determining the total provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Target Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(c) Revenue recognition

Goods shipped to certain customers are subject to quality inspection procedures. The customers have the right to return all the goods delivered during the inspection period. Since the quality inspection is performed by customers, the fulfilment of the quality standard is subject to various risks, including the quality checking method, tools and sampling risk. Management can not reasonably estimate the possibility of return, therefore, revenue is recognised when the products are formally accepted by the customer or the quality inspection period has elapsed.

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ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

5. PROPERTY, PLANT AND EQUIPMENT

Target Group

Machinery HK$’000 9,077 (4,728)	Motor vehicles HK$’000 857 (42)	Furniture and fixtures HK$’000 – –	Total HK$’000 9,934 (4,770) 5,164 5,164 102 2,169 163 (2,403) 5,195 12,485 (7,290) 5,195 5,195 258 3,595 138 (121) (1,866) 7,199 16,702 (9,503) 7,199 7,199 995 16,894 (131) (2,661) 22,296 28,638 (6,342) 22,296
4,349 4,349 83 1,763 163 (2,274) 4,084 11,201 (7,117) 4,084 4,084 214 3,343 138 (121) (1,667) 5,991 15,111 (9,120) 5,991 5,991 866 15,225 – (2,371) 19,711 25,402 (5,691)	815 815 19 406 – (129) 1,111 1,284 (173) 1,111 1,111 44 178 – – (195) 1,138 1,517 (379) 1,138 1,138 124 1,533 (131) (207) 2,457 3,021 (564)	– – – – – – – – – – – – 74 – – (4) 70 74 (4) 70 70 5 136 – (83) 128 215 (87)	5,164
			5,164 102 2,169 163 (2,403
			5,195
			12,485 (7,290
			5,195
			5,195 258 3,595 138 (121 (1,866
			7,199
			16,702 (9,503
			7,199
			7,199 995 16,894 (131 (2,661
			22,296
			28,638 (6,342
19,711	2,457	128

– 72 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

Depreciation expense has been charged in selling and marketing costs and administrative expenses as follows:

Year	ended 31 December 2006 2007 HK$’000 HK$’000 47 213 1,819 2,448 1,866 2,661 Motor vehicles Total HK$’000 HK$’000 857 9,934 (42) (4,770) 815 5,164 815 5,164 18 99 298 1,644 – – (106) (1,941) 1,025 4,966 1,175 11,790 (150) (6,824) 1,025 4,966 1,025 4,966 38 237 – 2,990 – (397) (119) (1,342) 944 6,454 1,222 14,933 (278) (8,479) 944 6,454 944 6,454 111 943 1,533 16,758 (126) (131) (156) (2,455) 2,306 21,569 2,707 26,601 (401) (5,032) 2,306 21,569	ended 31 December 2006 2007 HK$’000 HK$’000 47 213 1,819 2,448 1,866 2,661 Motor vehicles Total HK$’000 HK$’000 857 9,934 (42) (4,770) 815 5,164 815 5,164 18 99 298 1,644 – – (106) (1,941) 1,025 4,966 1,175 11,790 (150) (6,824) 1,025 4,966 1,025 4,966 38 237 – 2,990 – (397) (119) (1,342) 944 6,454 1,222 14,933 (278) (8,479) 944 6,454 944 6,454 111 943 1,533 16,758 (126) (131) (156) (2,455) 2,306 21,569 2,707 26,601 (401) (5,032) 2,306 21,569
2005 HK$’000 112 2,291	2006 HK$’000 47 1,819	2007 HK$’000 213 2,448
2,403 Machinery HK$’000 9,077 (4,728)	1,866 Motor vehicles HK$’000 857 (42)
4,349 4,349 81 1,346 – (1,835) 3,941 10,615 (6,674) 3,941 3,941 199 2,990 (397) (1,223) 5,510 13,711 (8,201) 5,510 5,510 832 15,225 (5) (2,299) 19,263 23,894 (4,631)	815 815 18 298 – (106) 1,025 1,175 (150) 1,025 1,025 38 – – (119) 944 1,222 (278) 944 944 111 1,533 (126) (156) 2,306 2,707 (401)	5,164
		5,164 99 1,644 – (1,941
		4,966
		11,790 (6,824
		4,966
		4,966 237 2,990 (397 (1,342
		6,454
		14,933 (8,479
		6,454
		6,454 943 16,758 (131 (2,455
		21,569
		26,601 (5,032
19,263	2,306

– 73 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

6. INTANGIBLE ASSETS

	Target Group		Target Company Computer software HK$’000 9,401 (3,726) 5,675 5,675 22 − – (2,120) 93 3,670 9,610 (5,940) 3,670 3,670 4,932 – (2,534) 219 6,287 15,075 (8,788) 6,287 6,287 709 – (4,848) 496 2,644 11,422 (8,778) 2,644
Goodwill HK$’000 – – – – – − – – – – – – – – 398 – – 20 418 418 – 418 418 3 – – 32 453 453 –	Computer software HK$’000 9,401 (3,726) 5,675 5,675 82 6,293 – (3,810) 137 8,377 16,024 (7,647) 8,377 8,377 4,932 – (4,257) 355 9,407 21,745 (12,338) 9,407 9,407 709 – (5,780) 544 4,880 18,594 (13,714)	Total HK$’000 9,401 (3,726) 5,675 5,675 82 6,293 – (3,810) 137 8,377 16,024 (7,647) 8,377 8,377 5,330 – (4,257) 375 9,825 22,163 (12,338) 9,825 9,825 712 – (5,780) 576 5,333 19,047 (13,714)	Computer software HK$’000 9,401 (3,726
			5,675
			5,675 22 − – (2,120 93
			3,670
			9,610 (5,940
			3,670
			3,670 4,932 – (2,534 219
			6,287
			15,075 (8,788
			6,287
			6,287 709 – (4,848 496
			2,644
			11,422 (8,778
453	4,880	5,333

The amortisation of computer software has been expensed in administrative expenses.

– 74 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

7. INVESTMENTS IN SUBSIDIARIES – TARGET COMPANY

Investments – unlisted shares, at cost Impairment provision	As at 31 December	As at 31 December	As at 31 December
	2005 HK$’000 5,827 (1,019)	2006 HK$’000 13,775 (1,060)	2007 HK$’000 9,487 (1,140
	4,808	12,715	8,347

(a) The following is a list of all subsidiaries as at 31 December 2005.

		Place of		Particulars of
		incorporation/	Principal	issued share
	Date of	establishment	activities and	capital/
	incorporation/	and kind of	place of	registered and	Interest
Name	establishment	legal entity	operation	paid-in capital	held
Directly held:
CIDC (H.K.) Limited	31 July 1984	Hong Kong,	Hong Kong,	Issued and fully	100%
		limited	sale of digital	paid share
		liability	video and	capital of
		company	related	HK$1,000,000
			technology
Beijing Huada Infosec	23 May 2000	PRC, limited	PRC,	Registered and	70%
Technology Co., Ltd.		liability	development	paid-in
		company	and sale of	capital of
			digital system	RMB17,000,000
			software and
			hardware

(b) The following is a list of all subsidiaries as at 31 December 2006.

		Place of		Particulars of
		incorporation/	Principal	issued share
	Date of	establishment	activities and	capital/
	incorporation/	and kind of	place of	registered and	Interest
Name	establishment	legal entity	operation	paid-in capital	held
Directly held:
CIDC (H.K.) Limited	31 July 1984	Hong Kong,	Hong Kong,	Issued and fully	100%
		limited	sale of digital	paid share
		liability	video and	capital of
		company	related	HK$1,000,000
			technology
Beijing Huada Infosec	23 May 2000	PRC, limited	PRC,	Registered and	70%
Technology Co., Ltd.		liability	development	paid-in
		company	and sale of	capital of
			digital system	RMB17,000,000
			software and
			hardware
Guangdong Huada	27 August 2003	PRC, limited	PRC, design	Registered and	99.38%
Electronic Design		liability	and sale of	paid-in
Co., Ltd.		company	integrated	capital of
			circuit	RMB8,000,000

– 75 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

		Place of		Particulars of
		incorporation/	Principal	issued share
	Date of	establishment	activities and	capital/
	incorporation/	and kind of	place of	registered and	Interest
Name	establishment	legal entity	operation	paid-in capital	held
Directly held:
CIDC (H.K.) Limited	31 July 1984	Hong Kong,	Hong Kong,	Issued and fully	100%
		limited	sale of digital	paid share
		liability	video and	capital of
		company	related	HK$1,000,000
			technology
Beijing Huada Infosec	23 May 2000	PRC, limited	PRC,	Registered and	71.26%
Technology Co., Ltd.		liability	development	paid-in
		company	and sale of	capital of
			digital system	RMB16,700,000
			software and
			hardware
Guangdong Huada	27 August 2003	PRC, limited	PRC, design	Registered and	100%
Electronic Design		liability	and sale of	paid-in
Co., Ltd.		company	integrated	capital of
			circuit	RMB3,000,000

Pursuant to a shareholders’ resolution on 25 December 2007, the Target Company decided to deregister CIDC (H.K.) Limited. As at 31 December 2007, the deregistration process has not been completed yet.

(d) Acquisition

Acquisition of Beijing Huada Infosec Technology Co., Ltd.:

During the year ended 31 December 2005, the Target Company acquired 70% of interests in Beijing Huada Infosec Technology Co., Ltd.. The carrying amounts of the assets and liabilities acquired approximated their fair value, details are as follows:

Cash and cash equivalents Property, plant and equipment Intangible assets Trade and other payables Net assets Minority interests in equity (30%) Net assets acquired Purchase consideration settled in cash Cash and cash equivalents in subsidiary acquired Cash outflow on acquisition	Carrying amount HK$’000 1,215 163 6,293 (788)
	6,883
	(2,065) 4,818
	4,818 (1,215)
	3,603

– 76 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

Acquisition of Guangdong Huada Electronic Design Co., Ltd.:

During the year ended 31 December 2006, the Target Company acquired additional 61.88% interest in Guangdong Huada Electronic Design Co., Ltd.. After the acquisition, the Target Company held totalling 99.38% interest. The carrying amounts of the assets and liabilities acquired approximated their fair value, details are as follows:

Cash and cash equivalents Property, plant and equipment Inventories Trade and other receivables Trade and other payables Net assets Minority interests in equity (0.62%) Goodwill Net assets held Equity interest held Net assets acquired Purchase consideration settled in cash Cash and cash equivalents in subsidiary acquired Cash inflow on acquisition	Carrying amount HK$’000 6,966 138 371 4,383 (5,116
	6,742
	(42 402 7,102 (2,569
	4,533
	4,533 (6,966
	(2,433

8. INVESTMENT IN AN ASSOCIATE

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 – – – 2,504 – –			As at 31 December
2005 HK$’000 – 2,504	2006 HK$’000 – –		2005 HK$’000 2,885 –	2006 HK$’000 – –	2007 HK$’000 – –
2,504	–	–	2,885	–	–

The Target Group’s share of the results of its associate, which is unlisted, and its aggregated assets (including goodwill) and liabilities, are as follows:

	Particulars of	Place of					Interest
Name	registered capital	establishment	Assets	Liabilities	Revenues	Loss	held
			HK$’000	HK$’000	HK$’000	HK$’000
2005
Guangdong Huada Electronic	Registered	PRC	12,176	5,500	8,237	(198)	37.50%
Design Co., Ltd.	capital of
	RMB8,000,000

– 77 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

9. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Available-for-sale financial assets are equity interest held by the Target Group in Beijing Huada Zhibao Electronic System Co., Ltd. and Beijing Huada Test Co., Ltd, with equity interest of 5% and 10%, respectively. These companies are unlisted.

10. INVENTORIES

Target Group

Finished goods Goods in transit Work in progress	As at 31 December	As at 31 December	As at 31 December
	2005 HK$’000 13,341 1,211 13,472	2006 HK$’000 64,266 136 116,590	2007 HK$’000 125,901 146 32,012
	28,024	180,992	158,059

Target Company

Finished goods Goods in transit Work in progress	As at 31 December	As at 31 December	As at 31 December
	2005 HK$’000 12,348 1,211 13,472	2006 HK$’000 63,727 136 116,590	2007 HK$’000 124,929 146 32,012
	27,031	180,453	157,087

The cost of inventories included in cost of sales amounted to HK$196,882,000, HK$316,712,000 and HK$382,729,000 for the years ended 31 December 2005, 2006 and 2007, respectively.

For the year ended 31 December 2005 and 2006, the Target Group did not provide any provision for net realisable value of inventory. Write down of inventories to net realisable value of HK$2,269,000 was included in cost of sales for the year ended 31 December 2007.

11. TRADE AND OTHER RECEIVABLES

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 174,108 272,020 226,588 (2,196) (2,895) (1,710) 171,912 269,125 224,878 96 – – 2 427 330 1,152 708 2,359			As at 31 December
2005 HK$’000 174,108 (2,196) 171,912 96 2 1,152	2006 HK$’000 272,020 (2,895) 269,125 – 427 708		2005 HK$’000 180,197 (5,881) 174,316 96 – 2,142	2006 HK$’000 275,806 (6,593) 269,213 – – 2,218	2007 HK$’000 216,772 (1,237
					215,535 – 199 4,041
173,162	270,260	227,567	176,554	271,431	219,775

– 78 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

The directors of the Target Company are of the opinion that the carrying amounts of trade and other receivables (excluding prepayments) approximate their fair values. All trade and other receivables are due within 1 year and non interest-bearing.

Trade and other receivables from related parties of HK$32,762,000, HK$29,458,000 and HK$37,346,000 were included in the above balances as at 31 December 2005, 2006 and 2007, respectively (Notes 28(a) and (b)).

The Target Group’s trade and other receivables are all denominated in Renminbi.

(a) The majority of the Target Group’s sales are with credit term of 30 to 135 days, the remaining sales are due immediately after the delivery of goods. The ageing analysis of the Target Group and the Target Company’s gross trade receivables was as follows:

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 96,416 54,821 138,817 55,711 83,863 10,397 18,743 129,791 74,375 3,238 3,545 2,999			As at 31 December
2005 HK$’000 96,416 55,711 18,743 3,238	2006 HK$’000 54,821 83,863 129,791 3,545		2005 HK$’000 95,012 55,711 18,743 10,731	2006 HK$’000 54,469 82,563 127,277 11,497	2007 HK$’000 137,120 10,797 67,508 1,347
174,108	272,020	226,588	180,197	275,806	216,772

(b) The maximum exposure to credit risk at 31 December 2005, 2006 and 2007 is the fair value of the trade and other receivables (excluding prepayments) mentioned above. The Target Group does not hold any collateral as security.

Trade receivables of HK$2,196,000, HK$2,895,000 and HK$1,710,000 of the Target Group were impaired and fully provided as at 31 December 2005, 2006 and 2007 respectively.

Trade receivables of HK$5,881,000, HK$6,593,000 and HK$1,237,000 of the Target Company were impaired and fully provided as at 31 December 2005, 2006 and 2007 respectively.

Movement on the provision for impairment of the Target Group and Target Company’s trade receivables are as follows:

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 1,325 2,196 2,895 837 594 1,032 – – (2,468) 34 105 251			As at 31 December
2005 HK$’000 1,325 837 – 34	2006 HK$’000 2,196 594 – 105		2005 HK$’000 4,972 800 – 109	2006 HK$’000 5,881 463 – 249	2007 HK$’000 6,593 336 (6,200 508
2,196	2,895	1,710	5,881	6,593	1,237

The trade receivables past due but not impaired were HK$16,467,000, HK$24,012,000 and HK$19,958,000 of the Target Group at 31 December 2005, 2006 and 2007 respectively.

The trade receivables past due but not impaired were HK$14,891,000, HK$20,506,000 and HK$7,894,000 of the Target Company at 31 December 2005, 2006 and 2007 respectively.

– 79 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 3,750 4,076 1,934 11,674 19,241 16,717 1,043 695 1,307			As at 31 December
2005 HK$’000 3,750 11,674 1,043	2006 HK$’000 4,076 19,241 695		2005 HK$’000 3,731 10,290 870	2006 HK$’000 3,810 16,020 676	2007 HK$’000 259 7,507 128
		19,958	14,891 20,506 7,894 Target Company		7,894

As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 140 2,736 – – – 36,766 23,376 85,216 121,112 23,516 87,952 157,878 – – 30,268 1,250 – 756 1,250 – 31,024			As at 31 December
2005 HK$’000 140 – 23,376 23,516 – 1,250 1,250	2006 HK$’000 2,736 – 85,216 87,952 – – –		2005 HK$’000 140 – 19,322 19,462 – – –	2006 HK$’000 2,736 – 73,938 76,674 – – –	2007 HK$’000 – 36,766 116,009
					152,775
					30,268 756
					31,024
24,766 87,952 Target Group		188,902	19,462 76,674 183,799 Target Company		183,799

As at 31 December			As at 31 December
2005 2006 2007 ’000 ’000 ’000 20,427 82,475 176,650 3,975 5,413 – 148 5 2			2005 2006 2007 ’000 ’000 ’000 19,044 76,635 170,904 – – – 148 5 2

12. CASH AND CASH EQUIVALENTS

China Electronics Corporation Finance Co., Ltd. is a non-bank financial institution approved by the People’s Bank of China. The deposits yielded interest at prevailing saving deposit rates ranged from 0.72% to 2.25% during the Relevant Periods.

New Times Securities Co., Ltd. is a securities company approved by China Securities Regulatory Commission. The deposits yielded interest at prevailing saving deposit rates.

The annual interest rate of deposits with banks and financial institutions other than China Electronics Corporation Finance Co., Ltd. ranged from 0.72% to 1.71% during the Relevant Periods.

– 80 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

13. REGISTERED AND PAID-IN CAPITAL

At 1 January 2005 Capital injection from shareholders At 31 December 2005, 2006 and 2007	Registered and paid-in capital HK$’000 30,154 2,488
	32,642

Pursuant to a resolution of the shareholders’ meeting held on 6 September 2005, the shareholders approved the capital injection from Beijing Shoufa Xinan Data System Technology Company Limited of RMB5,000,000. Out of the total amount, RMB2,594,600 was recorded as increase of registered and paid-in capital and the remaining balance of RMB2,405,400 was recorded in the capital reserve.

14. RESERVES

Target Group

Capital reserve HK$’000 (Note (a)) 441 2,350 – – 2,791	Statutory surplus reserves HK$’000 (Note (b)) 1,538 – 5,824 – 7,362	Currency translation reserve HK$’000 17 – – 1,240 1,257	Total HK$’000 1,996 2,350 5,824 1,240
			11,410

2,791 – –	7,362 7,790 –	1,257 – 6,768	11,410 7,790 6,768
2,791	15,152	8,025	25,968

2,791 – –	15,152 4,280 –	8,025 – 17,777	25,968 4,280 17,777
2,791	19,432	25,802	48,025

– 81 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

Target Company

Capital reserve HK$’000 (Note (a)) 441 2,294 – – 2,735	Statutory surplus reserves HK$’000 (Note (b)) 1,538 – 5,824 – 7,362	Currency translation reserve HK$’000 30 – – 1,206 1,236	Total HK$’000 2,009 2,294 5,824 1,206
			11,333

2,735 – –	7,362 7,790 –	1,236 – 6,769	11,333 7,790 6,769
2,735	15,152	8,005	25,892

2,735 – –	15,152 4,280 –	8,005 – 17,999	25,892 4,280 17,999
2,735	19,432	26,004	48,171

(a) Capital reserve

Capital reserve represents premium paid on capital contributed by shareholders.

(b) Statutory surplus reserves

The Target Company and its subsidiaries are required to appropriate at least 10% of its profit after tax as reported in their PRC statutory accounts to the statutory surplus reserve fund until the cumulative amounts reach 50% of the registered capital. The statutory reserve can only be used, upon approval obtained from the relevant authority, to offset accumulated losses or increase capital.

According to the relevant resolution of shareholders’ meetings, the Target Company appropriated statutory surplus reserve from its profit after tax of approximately HK$5,824,000, HK$7,790,000 and HK$4,280,000 during the year ended 31 December 2005, 2006 and 2007, respectively. As of 31 December 2007, the statutory surplus reserves balances of the Target Company has already reached 50% of the registered capital.

– 82 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

15. TRADE AND OTHER PAYABLES

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 21,677 202,477 30,074 56,794 92,575 112,794 1,257 1,823 2,069 11,988 15,860 34,769 7,715 832 17,113 202 956 1,745 22,894 17,748 16,173 5,138 2,951 24,875 – 943 210			As at 31 December
2005 HK$’000 21,677 56,794 1,257 11,988 7,715 202 22,894 5,138 –	2006 HK$’000 202,477 92,575 1,823 15,860 832 956 17,748 2,951 943		2005 HK$’000 21,677 56,794 1,257 11,136 7,699 203 22,624 4,656 –	2006 HK$’000 202,477 90,889 3,169 14,686 925 956 17,610 1,848 943	2007 HK$’000 30,074 102,259 2,069 33,764 17,252 1,742 15,982 24,875 210
127,665	336,165	239,822	126,046	333,503	228,227

Notes payable represents non interest bearing commercial paper issued to suppliers with maturity period within 6 months.

Trade and other payables to related parties amounted to HK$67,256,000, HK$84,283,000 and HK$101,826,000 were included in the above balance as at 31 December 2005, 2006 and 2007, respectively (Note 28(a)).

Trade payables dominated in US dollar amounted to HK$39,000, HK$65,000 and nil were included in the above balance as at 31 December 2005, 2006 and 2007 respectively.

The carrying amount of notes payables and trade payables approximate their fair values.

The ageing analysis of the Target Group’s trade payables was as follows:

Current to 30 days 31 – 60 days Over 60 days	As at 31 December	As at 31 December	As at 31 December
	2005 HK$’000 22,067 30,284 4,443	2006 HK$’000 43,597 30,109 18,869	2007 HK$’000 16,266 21,073 75,455
	56,794	92,575	112,794

16. SHORT TERM BANK LOANS

The bank loans as at 31 December 2005 were guaranteed by China Huada Integrated Circuit Design (Group) Co., Ltd. and repayable within one year. The bank loans as at 31 December 2006 and 2007 were dominated in Renminbi, unsecured and repayable within one year. The weighted average effective borrowing rate are 6.14%, 6.12% and 7.29% per annum as at 31 December in 2005, 2006 and 2007, respectively.

The carrying amounts of the short term bank loans approximate their fair value.

The Target Group has unutilised loan facilities of approximately HK$9,615,000, HK$20,000,000 as at 31 December 2005 and 2006 respectively. The Target Group has fully utilised the loan facilities as at 31 December 2007.

– 83 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

17. EXPENSES BY NATURE

Expenses included in cost of sales, selling and marketing costs and administrative expenses are analysed as follows:

Depreciation and amortisation expenses (Notes 5 and 6) Employee benefit expenses (Note 18) Changes in inventories Purchase of finished goods Royalty fee for intellectual patent Write down of inventories Impairment provision for receivables Operating lease expenses on property Research and development costs Others	Year	ended 31 December	ended 31 December
	2005 HK$’000 6,213 29,725 31,546 165,336 18,941 – 837 2,152 10,694 8,904	2006 HK$’000 6,123 44,689 (152,968) 469,680 10,842 – 594 2,309 14,143 3,857	2007 HK$’000 8,441 76,518 20,592 362,137 14,879 2,269 1,032 3,716 26,374 11,752
	274,348	399,269	527,710

18. EMPLOYEE BENEFIT EXPENSES

Basic salaries, allowances and benefits in kind Contributions to retirement schemes	Year	ended 31 December	ended 31 December
	2005 HK$’000 28,819 906	2006 HK$’000 43,342 1,347	2007 HK$’000 74,602 1,916
	29,725	44,689	76,518

19. OTHER GAINS – NET

Government grants Other income Other losses	Year	ended 31 December	ended 31 December
	2005 HK$’000 22,469 32 (185)	2006 HK$’000 18,956 1,075 (131)	2007 HK$’000 7,535 996 (74
	22,316	19,900	8,457

– 84 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

20. DIRECTORS’, SUPERVISORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ and supervisors’ emoluments

The remuneration of every Director and supervisor for the year ended 31 December 2005 is set out below:

Name of Director and supervisor Ms. Wang Qinsheng Mr. Liu Weiping Mr. Ji Xiaozhong Mr. Tao Quanyou Mr. Huang Guoyong Mr. Liu Huamao Mr. Fan Qingwu Mr. Zhuang Qinghai Mr. Hou Jinsong	Fees HK$’000 – – – – – – – – – –	Salaries, allowance and benefits in kind HK$’000 457 821 – – 249 338 – – 325 2,190	Total HK$’000 457 821 – – 249 338 – – 325
			2,190

The remuneration of every Director and supervisor for the year ended 31 December 2006 is set out below:

Name of Director and supervisor Mr. Lu Ming Mr. Liu Jinping Mr. Liu Weiping Mr. Ji Xiaozhong Ms. Wang Qinsheng Mr. Sun Xiaonian Mr. Cheng Shuguang Mr. Zhang Wenxiong Mr. Hou Jinsong	Fees HK$’000 – – – – – – – – – –	Salaries, allowance and benefits in kind HK$’000 – – 1,660 – 78 – – – 347 2,085	Total HK$’000 – – 1,660 – 78 – – – 347
			2,085

– 85 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

The remuneration of every Director and supervisor for the year ended 31 December 2007 is set out below:

Name of Director and supervisor Mr. Lu Ming Mr. Liu Jinping Mr. Liu Weiping Mr. Ji Xiaozhong Ms. Wang Qinsheng Mr. Sun Xiaonian Mr. Cheng Shuguang Mr. Zhang Wenxiong Mr. Hou Jinsong	Fees HK$’000 – – – – – – – – – –	Salaries, allowance and benefits in kind HK$’000 – – 1,583 – 125 – – – 361 2,069	Total HK$’000 – – 1,583 – 125 – – – 361
			2,069

These directors and supervisors are employees of certain subsidiaries of CEC Group and receive emoluments from these subsidiaries. No appropriation has been made as the directors and supervisors of the Target Company considered it is impracticable to apportion this amount between their services to the Target Group and certain subsidiaries of CEC Group.

During the Relevant Periods, no director or supervisor had waived or agreed to waive any emolument. No director or supervisor received any compensation for loss of office during the Relevant Periods.

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Target Group for the year include one director whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining four individuals during the Relevant Periods are as follows:

Basic salaries, allowances and benefits in kind Bonuses	Year ended 31 December	Year ended 31 December	Year ended 31 December
	2005 HK$’000 1,595 14	2006 HK$’000 4,945 358	2007 HK$’000 4,048 1,199
	1,609	5,303	5,247

The emoluments fell within the following band:

HK$nil – HK$1,000,000 HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000	Number of individuals	Number of individuals	Number of individuals
	2005 4 – –	2006 – 2 2	2007 1 2 1
	4	4	4

– 86 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

21. FINANCE COSTS – NET

Interest income on short-term deposits Interest on bank loans Net financial costs	Year	ended 31 December 2006 2007 HK$’000 HK$’000 (992) (1,144) 1,624 2,595 632 1,451
	2005 HK$’000 (498) 2,174 1,676	2006 HK$’000 (992) 1,624 632

22. TAXATION

(a) Income tax expense

The amount of taxation charged to the consolidated income statement represents:

Current taxation – PRC enterprise income tax Deferred taxation Currency translation difference	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 3,017 8,847 11,996 (611) (96) (6,895) (23) (61) (345) 2,383 8,690 4,756	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 3,017 8,847 11,996 (611) (96) (6,895) (23) (61) (345) 2,383 8,690 4,756	Year ended 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 3,017 8,847 11,996 (611) (96) (6,895) (23) (61) (345) 2,383 8,690 4,756
	2005 HK$’000 3,017 (611) (23)	2006 HK$’000 8,847 (96) (61)	2007 HK$’000 11,996 (6,895 (345
	2,383	8,690

(b) The Target Company was certified as a high/new technology enterprise established in Beijing New Technology Industry Development Zone in the PRC. Therefore, the applicable income tax rate is 15%. As approved by the tax authorities in 2003, the Target Company was exempted from income tax for the year ended 31 December 2003 and 2004, followed by a 50% deduction for the years ended 31 December 2005, 2006 and 2007.

CIDC (H.K.) Limited assessed its profit tax liability in Hong Kong using a tax rate of 17.5%. During the years ended 31 December 2005, 2006 and 2007, CIDC (H.K.) Limited did not have any assessable profits sourced from Hong Kong.

Beijing Huada Infosec Technology Co., Ltd. and Guangdong Huada Electronic Design Co., Ltd. were registered in the PRC and were subject to 33% statutory income tax rate in the years ended 31 December 2005, 2006 and 2007.

– 87 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

(c) The taxation on the Target Group’s profit before taxation differs from the theoretical amount that would arise using the taxation rate in the PRC as follows:

Year ended 31 December	Year ended 31 December	Year ended 31 December
2005 HK$’000 41,816 13,799 (9,607) 235 1,010 (3,054)	2006 HK$’000 128,716 42,476 (30,090) 562 184 (4,442)	2007 HK$’000 132,063
		43,581 (32,655 1,110 275 (7,555
2,383	8,690	4,756

(d) Deferred income tax

The movement on the deferred tax assets during the years ended 31 December 2005, 2006 and 2007 are as follows:

Impairment provision for receivables HK$’000 91 188 4 283	Salary payable HK$’000 445 378 12 835	Government grants HK$’000 298 45 7 350	Impairment of inventories HK$’000 – – – –	Revenue recognition HK$’000 – – – –	Total HK$’000 834 611 23
					1,468

283 88 14	835 226 40	350 (218) 7	– – –	– – –	1,468 96 61
385	1,101	139	–	–	1,625

385 (229) 22	1,101 7,030 310	139 5,880 200	– 567 18	– (6,353) (205)	1,625 6,895 345
178	8,441	6,219	585	(6,558)	8,865

– 88 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

The amounts shown in the balance sheet include the following:

Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months	As at 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 – – – 1,468 1,625 8,865

Deferred income tax assets are recognised for tax loss carrying-forwards to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Target Group did not recognise deferred income tax assets of HK$1,010,000, HK$1,194,000 and HK$1,402,000 at 31 December 2005, 2006 and 2007 respectively, in respect of losses amounting HK$3,061,000, HK$3,619,000 and HK$4,452,000, that can be carried forward against future taxable income. Losses amounting to HK$3,061,000, HK$558,000 and HK$833,000 will expire in 2010, 2011 and 2012 respectively.

On 16 March 2007, the Corporate Income Tax Law of the PRC (the “new CIT Law”) was approved and became effective 1 January 2008. Accordingly, the Target Company’s applicable tax rate will be 25% from January 2008. In this regard, the new applicable tax rates are adopted in computing the deferred taxation as at 31 December 2007. The change of tax rates resulted a tax credit of approximately HK$4,106,000 for the year ended 31 December 2007.

23. PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE TARGET COMPANY

The profit attributable to equity holders of the Target Company is dealt within the financial statements of the Target Company to the extent of HK$44,070,000, HK$121,590,000, HK$129,323,000 for the years ended 31 December 2005, 2006 and 2007, respectively.

24. DIVIDENDS

Final dividend related to year 2005 of the Target Company totalling approximately HK$13,435,000 (RMB13,838,000) was declared and paid in March 2006.

Final dividend related to year 2006 of the Target Company totalling approximately HK$45,045,000 (RMB43,243,000) was declared and paid in March 2007.

At the shareholders’ meeting held on 19 March 2008, the shareholders of the Target Company approved the payment of a final dividend for the year ended 31 December 2007 of approximately HK$74,397,000 (equivalent to RMB69,189,000). Furthermore, at the shareholders’ meeting held on 16 June 2008, the shareholders of the Target Company approved an additional payment of final dividend for the year ended 31 December 2007 of approximately HK$74,397,000 (equivalent to RMB69,189,000). Totalling HK$148,794,000 (equivalent to RMB138,378,000) final dividends for the year ended 31 December 2007 will be reflected as an appropriation of retained earnings during the year ended 31 December 2008.

– 89 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

25. CASH GENERATED FROM OPERATIONS

2005 HK$’000 Profit before income tax 41,816 Adjustment for: Depreciation 2,403 Amortisation of intangible assets 3,810 Loss on disposal of property, plant and equipment – Interest income (498) Interest expense 2,174 Dividend received – Changes in working capital Decrease/(increase) of Inventories 32,437 (Increase)/decrease of trade and other receivables (80,349) (Decrease)/increase of trade and other payables (22,674) Net cash (used in)/generated from operations (20,881) (a) Proceeds from disposal of property, plant and equipment include: 2005 HK$’000 Net book value (Note 5) – Loss on disposal of property, plant and equipment – Cash proceeds from disposal of property, plant and equipment –	2006 HK$’000 128,716 1,866 4,257 121 (992) 1,624 – (147,051) (83,120) 192,649 98,070 2006 HK$’000 121 (121) –	2007 HK$’000 132,063 2,661 5,780 50 (1,144) 2,595 (376) 35,415 61,064 (116,721
		121,387

		2007 HK$’000 131 (50)
		81

26. COMMITMENTS

(a) Capital lease commitments

As at 31 December 2005, 2006 and 2007, the Target Group did not have any capital commitments.

(b) Operating lease commitments

As at 31 December 2005, 2006 and 2007, the Target Group had future aggregate minimum lease payments under non-cancellable operating leases for office premises as follows:

Target Group	Target Group	Target Group	Target Company	Target Company	Target Company
As at 31 December 2005 2006 2007 HK$’000 HK$’000 HK$’000 1,899 2,913 1,879 2,171 664 430			As at 31 December
2005 HK$’000 1,899 2,171	2006 HK$’000 2,913 664		2005 HK$’000 1,899 2,171	2006 HK$’000 2,760 664	2007 HK$’000 1,599 –
4,070	3,577	2,309	4,070	3,424	1,599

– 90 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

27. CONTINGENT LIABILITIES

The Target Group did not have any material outstanding contingent liabilities as at 31 December 2005, 2006 and 2007.

28. RELATED-PARTY TRANSACTIONS AND BALANCES

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

(a) Transaction and balances with CEC and its subsidiaries

(1) Sales of integrated circuit products:

Beijing Huada Zhibao Electronic System Co., Ltd. Shanghai Hsic Application System Co., Ltd. Beijing Hengtai Technologies Co., Ltd. (2) Purchases of goods and services: Shanghai Hua Hong NEC Electronics Co., Ltd. China Electronics Smart Card Co., Ltd. Beijing Huada Test Co., Ltd. (3) Other transactions: Receipt of interests: China Electronics Corporation Finance Co., Ltd. China Huada Integrated Circuit Design (Group) Co., Ltd. Payment of interests: China Electronics Corporation Finance Co., Ltd. Rental expenses: Beijing Huada Zhibao Electronic System Co., Ltd. Canteen services: Beijing Huada Zhibao Electronic System Co., Ltd.	Year ended 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 27,880 30,706 26,338 4,733 11,033 22,311 88 – 191 Year ended 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 155,379 393,258 262,623 41,289 83,338 92,006 16,155 24,229 36,202 Year ended 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 127 50 181 – 20 50 85 51 – 1,644 1,631 2,099 470 446 624

– 91 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

(4) Year-end balance arising from sales, purchases and other transactions:

As at 31 December	As at 31 December	As at 31 December
2005 HK$’000 25,645 4,402	2006 HK$’000 22,024 7,434	2007 HK$’000 13,946 23,400
30,047	29,458	37,346

23,496 15,837 7,982 67 47,382 16,989 2,885 19,874	37,964 32,323 6,969 178 77,434 3,849 3,000 6,849	74,260 16,384 7,764 192
		98,600
		– 3,226
		3,226
67,256 140	84,283 2,736	101,826

		30,268

(b) Transaction and balance with an associate – Guangdong Huada Electronic Design Co., Ltd.

(1) Sales of integrated circuit products:

Sales of products	Year ended 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 5,073 – –

(2) Year-end balance arising from sales and other transactions:

Trade receivables Other receivables Trade and other receivables in total	As at 31 December	As at 31 December	As at 31 December
	2005 HK$’000 2,619 96	2006 HK$’000 – –	2007 HK$’000 – –
	2,715	–	–

– 92 –

APPENDIX I

ACCOUNTANT’S REPORT OF TARGET GROUP

(c) Additional information on other state-owned enterprises

The Target Company is controlled by CEC and SDIC and is ultimately controlled by Mainland China government, which also controls a significant portion of the productive assets and entities in the Mainland China. In accordance with Hong Kong Accounting Standard 24 “Related Party Disclosures” (“HKAS 24”), state-owned enterprises and their subsidiaries, other than CEC, are also defined as related parties of the Target Company and its subsidiaries (“Other State-owned Enterprises”).

(i) Summary of significant transactions with Other State-owned Enterprises

Sales of products and materials Purchases of materials	Year ended 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 225,824 421,684 497,520 66 20,874 8,831

(ii) Summary of balances with Other State-owned Enterprises

Trade receivables Trade payables Bank deposits in state-owned banks	As at 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 130,754 210,998 129,336 194 3,725 3 – 2,844 3,570

Balances with Other State-owned Enterprises, except for bank deposits, were unsecured and interest-free.

The majority of the business activities of the Target Company and its subsidiaries are conducted with state-owned enterprises. For the purpose of the related party transactions disclosure in accordance with HKAS 24, the Target Company and its subsidiaries have established procedures to determine, to the extent possible, the identification of the ownership structure of its customers and suppliers as to whether they are state-owned enterprises. However, many state-owned enterprises have a multi-layered corporate structure and the ownership structures change over time as a result of transfers and privatization programs. Nevertheless, management believes that all material related party balances and transactions have been adequately disclosed.

29. EVENTS AFTER THE BALANCE SHEET DATE

(1) Sale of Beijing Huada Infosec Technology Co., Ltd.

At the shareholders’ meeting held on 20 January 2008, the shareholders of the Target Company approved to sell 71.26% of its share in Beijing Huada Infosec Technology Co., Ltd. in 2008.

As at 21 May 2008, the Target Company entered into a share transfer agreement with Beijing Xu An Da Technology Co., Ltd. to sell its interestin Beijing Huada Infosec Technology Co., Ltd. for cash consideration of RMB5,000,000. As at 17 June 2008, 100% of the cash consideration was received by the Target Company.

(2) Sale of Guangdong Huada Electronic Design Co., Ltd.

At the shareholders’ meeting held on 19 March 2008, the shareholders of the Target Company approved to sell 80% of its interest in Guangdong Huada Electronic Design Co., Ltd. in 2008.

The shares will be traded through the equity exchange authorised by the government as required by regulations. As at the report day, the Target Company has not entered into any share transfer agreement.

– 93 –

ACCOUNTANT’S REPORT OF TARGET GROUP

APPENDIX I

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared for the Target Company and its subsidiaries in respect of any period subsequent to 31 December 2007. In addition, except for the dividends as disclosed in Note 24 of section II above, no other dividends or distribution has been declared, made or paid by the Target Company or its subsidiaries in respect of any period subsequent to 31 December 2007.

Yours faithfully, PricewaterhouseCoopers Certificated Public Accountants Hong Kong

– 94 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

1. SUMMARY OF FINANCIAL INFORMATION

The following consolidated balance sheets and consolidated income statements are extracted from the audited consolidated financial statements of the Group for each of the years ended 31 December 2005, 2006 and 2007.

Consolidated Balance Sheets

As at 31 December 2005, 2006 and 2007

(All amounts in HK dollars thousands unless otherwise stated)

As	at 31 December	at 31 December
2005 79,051 14,113 4,514 97,678 447,034 1,084,944 306,381 1,838,359	2006 61,685 16,251 8,916 86,852 335,802 493,179 419,809 1,248,790	2007 41,047 16,144 46,691
		103,882
		444,189 877,150 391,741
		1,713,080
1,936,037	1,335,642	1,816,962

370,074 35,062 21,671 3,209 430,016 138,379 568,395	370,074 55,137 17,337 21,815 464,363 138,775 603,138	370,074 71,807 – 29,889
		471,770 129,066
		600,836

– 95 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

As	at 31 December	at 31 December
2005 1,129,194 5,573 230,769 2,106 1,367,642 1,936,037 470,717 568,395	2006 717,826 2,044 – 12,634 732,504 1,335,642 516,286 603,138	2007 741,030 3,725 394,111 77,260
		1,216,126
		1,816,962

		496,954

		600,836

– 96 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Income Statements

For the year ended 31 December 2005, 2006 and 2007

(All amounts in HK dollars thousands unless otherwise stated)

Year ended 31 December 2005 2006 2007 4,768,526 3,549,329 3,167,708 (4,537,491) (3,317,032) (2,608,047) 231,035 232,297 559,661 13,822 5,130 9,699 (41,706) (42,457) (259,104) (106,401) (125,118) (331,740) 96,750 69,852 (21,484) 4,697 8,109 11,442 (11,501) (6,444) (9,075) (6,804) 1,665 2,367 89,946 71,517 (19,117) (5,598) (2,358) 31,640 84,348 69,159 12,523 49,899 43,276 8,074 34,449 25,883 4,449 84,348 69,159 12,523 4.61 3.99 0.75 4.61 3.99 0.74 21,671 17,337 –	Year ended 31 December 2005 2006 2007 4,768,526 3,549,329 3,167,708 (4,537,491) (3,317,032) (2,608,047) 231,035 232,297 559,661 13,822 5,130 9,699 (41,706) (42,457) (259,104) (106,401) (125,118) (331,740) 96,750 69,852 (21,484) 4,697 8,109 11,442 (11,501) (6,444) (9,075) (6,804) 1,665 2,367 89,946 71,517 (19,117) (5,598) (2,358) 31,640 84,348 69,159 12,523 49,899 43,276 8,074 34,449 25,883 4,449 84,348 69,159 12,523 4.61 3.99 0.75 4.61 3.99 0.74 21,671 17,337 –	Year ended 31 December 2005 2006 2007 4,768,526 3,549,329 3,167,708 (4,537,491) (3,317,032) (2,608,047) 231,035 232,297 559,661 13,822 5,130 9,699 (41,706) (42,457) (259,104) (106,401) (125,118) (331,740) 96,750 69,852 (21,484) 4,697 8,109 11,442 (11,501) (6,444) (9,075) (6,804) 1,665 2,367 89,946 71,517 (19,117) (5,598) (2,358) 31,640 84,348 69,159 12,523 49,899 43,276 8,074 34,449 25,883 4,449 84,348 69,159 12,523 4.61 3.99 0.75 4.61 3.99 0.74 21,671 17,337 –
2005 4,768,526 (4,537,491) 231,035 13,822 (41,706) (106,401) 96,750 4,697 (11,501) (6,804) 89,946 (5,598)	2006 3,549,329 (3,317,032) 232,297 5,130 (42,457) (125,118) 69,852 8,109 (6,444) 1,665 71,517 (2,358)	2007 3,167,708 (2,608,047
		559,661 9,699 (259,104 (331,740
		(21,484 11,442 (9,075
		2,367
		(19,117 31,640
84,348	69,159
49,899 34,449	43,276 25,883	8,074 4,449
84,348 4.61 4.61 21,671	69,159 3.99 3.99 17,337

– 97 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following are the audited consolidated balance sheet of the Group and the balance sheet of the Company as at 31 December 2007, the audited consolidated income statement of the Group for the year ended 31 December 2007, the audited consolidated statement of changes in equity and the audited consolidated cash flow statement of the Group for the year ended 31 December 2007, together with the accompanying notes as extracted from the annual report of the Company for the year ended 31 December 2007:

Consolidated Balance Sheet

As at 31 December 2007

(All amounts in HK dollars thousands unless otherwise stated)

Note ASSETS Non-current assets Property, plant and equipment 6 Intangible assets 7 Deferred income tax assets 22(e) Current assets Inventories 9 Trade and other receivables 10 Cash and cash equivalents 11 Total assets EQUITY Capital and reserves attributable to the Company’s equity holders Issued equity 12 Other reserves 13 Retained earnings – Proposed final dividend 25 – Unappropriated retained earnings Minority interests in equity Total equity	As at 31 December	As at 31 December
	2007 41,047 16,144 46,691 103,882 444,189 877,150 391,741 1,713,080	2006 61,685 16,251 8,916
		86,852
		335,802 493,179 419,809
		1,248,790
	1,816,962	1,335,642

	370,074 71,807 – 29,889 471,770 129,066 600,836	370,074 55,137 17,337 21,815
		464,363 138,775
		603,138

– 98 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Note LIABILITIES Current liabilities Trade and other payables 14 Current income tax liabilities Short term bank loans 15 Provision for warranty 16 Total liabilities Total equity and liabilities Net current assets Total assets less current liabilities	As at 31 December	As at 31 December
	2007 741,030 3,725 394,111 77,260 1,216,126 1,816,962 496,954 600,836	2006 717,826 2,044 – 12,634
		732,504
		1,335,642

		516,286

		603,138

– 99 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Balance Sheet

As at 31 December 2007

(All amounts in HK dollars thousands unless otherwise stated)

Note ASSETS Non-current assets Property, plant and equipment 6 Investments in subsidiaries 8 Current assets Other receivables 10 Cash and cash equivalents 11 Total assets EQUITY Capital and reserves Share capital 12 Other reserves 13 Retained earnings – Proposed final dividend 25 – Unappropriated retained earnings Total equity Current liabilities Other payables 14 Total equity and liabilities Net current assets Total assets less current liabilities	As at 31 December	As at 31 December
	2007 758 271,700 272,458 918 222,546 223,464	2006 900 271,700
		272,600
		469 196,156
		196,625
	495,922	469,225

	335,891 73,635 – 82,340 491,866 4,056	335,891 71,898 17,337 41,355
		466,481
		2,744
	495,922 219,408 491,866	469,225

		193,881

		466,481

– 100 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Income Statement

For the year ended 31 December 2007

(All amounts in HK dollars thousands unless otherwise stated)

Note Revenue 5 Cost of sales 18 Gross profit Other gains – net 17 Selling and marketing costs 18 Administrative expenses 18 Operating (loss)/profit Finance income Finance costs Finance income – net 21 (Loss)/profit before income tax Income tax credit/(expense) 22 Profit for the year Attributable to: Equity holders of the Company 23 Minority interests Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in HK cents per share) – basic 24 – diluted 24 Dividends 25	Year ended 31 December 2007 2006 3,167,708 3,549,329 (2,608,047) (3,317,032) 559,661 232,297 9,699 5,130 (259,104) (42,457) (331,740) (125,118) (21,484) 69,852 11,442 8,109 (9,075) (6,444) 2,367 1,665 (19,117) 71,517 31,640 (2,358) 12,523 69,159 8,074 43,276 4,449 25,883 12,523 69,159 0.75 3.99 0.74 3.99 – 17,337	Year ended 31 December 2007 2006 3,167,708 3,549,329 (2,608,047) (3,317,032) 559,661 232,297 9,699 5,130 (259,104) (42,457) (331,740) (125,118) (21,484) 69,852 11,442 8,109 (9,075) (6,444) 2,367 1,665 (19,117) 71,517 31,640 (2,358) 12,523 69,159 8,074 43,276 4,449 25,883 12,523 69,159 0.75 3.99 0.74 3.99 – 17,337
	2007 3,167,708 (2,608,047) 559,661 9,699 (259,104) (331,740) (21,484) 11,442 (9,075) 2,367 (19,117) 31,640	2006 3,549,329 (3,317,032
		232,297 5,130 (42,457 (125,118
		69,852 8,109 (6,444
		1,665
		71,517 (2,358
	12,523
	8,074 4,449	43,276 25,883
	12,523 0.75 0.74 –

– 101 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Statement of Changes in Equity

For the year ended 31 December 2007

(All amounts in HK dollars thousands unless otherwise stated)

Attributable to equity holders of the Company Issued equity Other reserves Retained earnings Total (Note 12) (Note 13) 370,074 35,062 24,880 430,016 – – (21,671) (21,671) – 3,654 – 3,654 – 7,333 (7,333) – – 9,088 – 9,088 – – 43,276 43,276 370,074 55,137 39,152 464,363	Attributable to equity holders of the Company Issued equity Other reserves Retained earnings Total (Note 12) (Note 13) 370,074 35,062 24,880 430,016 – – (21,671) (21,671) – 3,654 – 3,654 – 7,333 (7,333) – – 9,088 – 9,088 – – 43,276 43,276 370,074 55,137 39,152 464,363	Attributable to equity holders of the Company Issued equity Other reserves Retained earnings Total (Note 12) (Note 13) 370,074 35,062 24,880 430,016 – – (21,671) (21,671) – 3,654 – 3,654 – 7,333 (7,333) – – 9,088 – 9,088 – – 43,276 43,276 370,074 55,137 39,152 464,363	Attributable to equity holders of the Company Issued equity Other reserves Retained earnings Total (Note 12) (Note 13) 370,074 35,062 24,880 430,016 – – (21,671) (21,671) – 3,654 – 3,654 – 7,333 (7,333) – – 9,088 – 9,088 – – 43,276 43,276 370,074 55,137 39,152 464,363	Minority interests 138,379 (25,449) – – (38) 25,883 138,775	Total equity 568,395 (47,120) 3,654 – 9,050 69,159 603,138 603,138 (39,085) 1,737 22,523 12,523 600,836
Issued equity (Note 12) 370,074 – – – – – 370,074	Other reserves (Note 13) 35,062 – 3,654 7,333 9,088 – 55,137	Retained earnings 24,880 (21,671) – (7,333) – 43,276 39,152
370,074 – – – –	55,137 – 1,737 14,933 –	39,152 (17,337) – – 8,074	464,363 (17,337) 1,737 14,933 8,074	138,775 (21,748) – 7,590 4,449	603,138 (39,085 1,737 22,523 12,523
370,074	71,807	29,889	471,770	129,066

– 102 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31 December 2007

(All amounts in HK dollars thousands unless otherwise stated)

Note Cash flows from operating activities Cash (used in)/generated from operations 26 Interest paid Income tax paid Net cash (used in)/generated from operating activities Cash flows from investing activities Interest received Purchase of property, plant and equipment and intangible assets Proceeds on disposal of property, plant and equipment 26(a) Net cash used in investing activities Cash flows from financing activities Dividends paid to Company’s shareholders Dividends paid to minority interests Proceeds from bank loans Repayment of bank loans borrowed Net cash generated from/(used in) financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year	Year ended 31 December 2007 2006 (362,808) 432,159 (8,257) (6,444) (4,454) (10,289) (375,519) 415,426 11,216 8,109 (19,931) (32,260) 1,140 42 (7,575) (24,109) (17,337) (21,671) (21,748) (25,449) 1,387,440 1,194,175 (993,329) (1,424,944) 355,026 (277,889) (28,068) 113,428 419,809 306,381 391,741 419,809	Year ended 31 December 2007 2006 (362,808) 432,159 (8,257) (6,444) (4,454) (10,289) (375,519) 415,426 11,216 8,109 (19,931) (32,260) 1,140 42 (7,575) (24,109) (17,337) (21,671) (21,748) (25,449) 1,387,440 1,194,175 (993,329) (1,424,944) 355,026 (277,889) (28,068) 113,428 419,809 306,381 391,741 419,809
	2007 (362,808) (8,257) (4,454) (375,519) 11,216 (19,931) 1,140 (7,575) (17,337) (21,748) 1,387,440 (993,329) 355,026 (28,068) 419,809	2006 432,159 (6,444 (10,289
		415,426
		8,109 (32,260 42
		(24,109
		(21,671 (25,449 1,194,175 (1,424,944
		(277,889
		113,428 306,381
	391,741

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Consolidated Financial Statements

For the year ended 31 December 2007

(All amounts in HK dollars thousands unless otherwise stated)

1. GENERAL INFORMATION

China Electronics Corporation Holdings Company Limited (the “Company”) was incorporated in the Cayman Islands and continued in Bermuda with limited liability. The Company has its shares listed on The Stock Exchange of Hong Kong Limited.

The principal activities of the Company and its subsidiaries (collectively the “Group”) comprise the manufacturing and sale of mobile handsets and other portable electronics products.

The address of the Company’s registered office is Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

These consolidated financial statements are presented in thousands of units of Hong Kong dollar (HK$’000), unless otherwise stated. These consolidated financial statements have been approved for issue by the Board of Directors on 25 April 2008.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants. The consolidated financial statements have been prepared under the historical cost convention.

The preparation of financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.

(a) Standards, amendment and interpretations effective in 2007

HKFRS 7, ‘Financial instruments: Disclosures’, and the complementary amendment to HKAS 1, ‘Presentation of financial statements – Capital disclosures’, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group’s financial instruments, or the disclosures relating to taxation and trade and other payables.

HK(IFRIC) – Int 8, ‘Scope of HKFRS 2’, requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of HKFRS 2. This standard does not have any impact on the Group’s financial statements.

HK(IFRIC) – Int 10, ‘Interim financial reporting and impairment’, prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group’s financial statements.

HK(IFRIC) – Int 7, ‘Applying the restatement approach under HKAS 29, Financial reporting in hyperinflationary economies’ and HK(IFRIC) – Int 9, ‘Re-assessment of embedded derivatives’. These standards are not relevant to the Group’s operations.

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FINANCIAL INFORMATION OF THE GROUP

(b) Standards, amendments and interpretations to existing standards that are not yet effective

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 March 2007 or later periods, and the Group has not early adopted them:

HKAS 1 (Revised), ‘Presentation of Financial Statements’ (effective from 1 January 2009). The revised standard requires presentational changes and further disclosures in the financial statements but does not change the recognition and measurement of specific transactions. The directors of the Group are assessing the impact and believe that the impact on the Group’s consolidated financial statements is not significant.

HKAS 23 (Amendment), ‘Borrowing costs’ (effective from 1 January 2009). The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group will apply HKAS 23 (Amended) from 1 January 2009 but is not expected to have material impact on the Group’s consolidated financial statements.

HKFRS 8, ‘Operating segments’ (effective from 1 January 2009). HKFRS 8 replaces HKAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply HKFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that the number of reportable segments, as well as the manner in which the segments are reported, will change in a manner that is consistent with the internal reporting provided to the chief operating decision-maker.

HK(IFRIC) – Int 14, ‘HKAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective from 1 January 2008). HK(IFRIC) – Int 14 provides guidance on assessing the limit in HKAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Group will apply HK(IFRIC) – Int 14 from 1 January 2008, but it is not expected to have any impact on the Group’s financial statements.

HK(IFRIC) – Int 12, ‘Service concession arrangements’ (effective from 1 January 2008). HK(IFRIC) – Int 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. HK(IFRIC) – Int 12 is not relevant to the Group’s operations because none of the Group’s companies provide for public sector services.

HK(IFRIC) – Int 13, ‘Customer loyalty programmes’ (effective from 1 July 2008). HK(IRFIC) – Int 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. HK(IFRIC) – Int 13 is not relevant to the Group’s operations because none of the Group’s companies operate any loyalty programmes.

HKAS 27 (Revised) ‘Consolidated and Separate Financial Statements’ (effective from annual period beginning on or after 1 July 2009). The amendment requires non-controlling interests (i.e. minority interests) to be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity. When control of a subsidiary is lost, the assets and liabilities and related equity components of the former subsidiary are derecognised. Any gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. The Group will apply HKAS 27 (Revised) from 1 January 2010.

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FINANCIAL INFORMATION OF THE GROUP

HKFRS 3 (Revised) ‘Business Combination’ (effective for business combinations with acquisition date on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The amendment may bring more transactions into acquisition accounting as combinations by contract alone and combinations of mutual entities are brought into the scope of the standard and the definition of a business has been amended slightly. It now states that the elements are ‘capable of being conducted’ rather than ‘are conducted and managed’. It requires considerations (including contingent consideration), each identifiable asset and liability to be measured at its acquisition-date fair value, except leases and insurance contracts, reacquired right, indemnification assets as well as some assets and liabilities required to be measured in accordance with other HKFRSs. They are income taxes, employee benefits, share-based payment and non current assets held for sale and discontinued operations. Any non-controlling interest in an acquiree is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The Group will apply HKFRS 3 (Revised) from 1 January 2010.

HKFRS 2 Amendment ‘Share-based Payment Vesting Conditions and Cancellations’ (effective from 1 January 2009). The amendment clarifies the definition of ‘vesting conditions’ and specifies the accounting treatment of “cancellations” by the counterparty to a share-based payment arrangement. Vesting conditions are service conditions (which require a counterparty to complete a specified period of service) and performance conditions (which require a specified period of service and specified performance targets to be met) only. All ‘non-vesting conditions’ and vesting conditions that are market conditions shall be taken into account when estimating the fair value of the equity instruments granted. All cancellations are accounted for as an acceleration of vesting and the amount that would otherwise have been recognised over the remainder of the vesting period is recognised immediately. The Group will apply HKFRS 2 Amendment from 1 January 2009, but it is not expected to have any impact on the Group’s financial statements.

2.2 Consolidation

The consolidated financial statements include the financial statements of the Company and all its subsidiaries made up to 31 December.

(a) Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

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

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

In the Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses (Note 2.7). The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

(b) Transactions with minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parities external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the consolidated income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

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APPENDIX II

2.3 Segment reporting

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

2.4 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Hong Kong dollars, which is different from the Group’s functional currency of Renminbi. The Directors consider that presentation of consolidated financial statements in Hong Kong dollars will facilitate analysis of financial information of the Group.

(b) Transactions and balances

(c) Group companies

The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, such exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

2.5 Property, plant and equipment

Property, plant and equipment are stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.

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

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FINANCIAL INFORMATION OF THE GROUP

Depreciation of property, plant and equipment is calculated using the straight-line method to allocate cost to their residual values over their estimated useful lives, as follows:

–	Leasehold improvements	5 years (or over the lease term, whichever is shorter)
–	Plant and machinery	3-4 years
–	Motor vehicles	5 years
–	Furniture and fixtures	3-5 years

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement.

2.6 Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

If the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition exceeds the cost of acquisition, the excess should be recognised immediately in the income statement.

(b) Computer software

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the employee costs incurred as a result of developing software and an appropriate portion of relevant overheads.

Computer software development costs recognised as assets are amortised over their estimated useful lives.

(c) 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.

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FINANCIAL INFORMATION OF THE GROUP

2.7 Impairment of investments in subsidiaries and non-financial assets

Assets that have an indefinite useful life or have not yet available for use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

2.8 Financial assets

The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

(a) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.

(b) Loans and receivables

(c) Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. During the year, the Group did not hold any investments in this category.

(d) Available-for-sale financial assets

Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method.

Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment testing of loan and receivable is set out in Note 2.10.

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

2.9 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out method. The cost of finished goods and work in progress comprises design costs, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

2.10 Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within administrative expenses. When the receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against administrative expenses in the income statement.

2.11 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts.

2.12 Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

2.13 Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

2.14 Borrowings

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

2.15 Deferred income tax

Deferred income tax 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 consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income 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 income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

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APPENDIX II

2.16 Provision

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 the amount has been reliably estimated. Provisions are not recognised for future operating losses.

The Group recognises a provision for repair or replacement 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.

2.17 Employee benefits

(a) 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 and are expensed as incurred.

The Group’s subsidiaries operating in the People’s Republic of China (the “PRC”) have to make contribution to staff retirement scheme managed by local government authorities in accordance with the relevant rules and regulations. Contributions to these schemes are charged to the income statement as and when incurred.

(b) Employee leave entitlements

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

(c) Bonus plans

The expected cost of bonus payments are recognised as a liability when the Group 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.

(d) Share-based compensation

The Group operates an equity-settled, share-based compensation plan. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

2.18 Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existent 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.

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FINANCIAL INFORMATION OF THE GROUP

2.19 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods, net of value-added tax, returns, rebates and discounts. Revenue is recognised when the goods are delivered to customers, the customers has accepted the goods and collectibility of the related receivables is reasonably assured.

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income.

Dividend income is recognised when the right to receive payment is established.

2.20 Operating leases (as the lessee for operating leases)

2.21 Dividend distribution

Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

3. FINANCIAL RISK MANAGEMENT

3.1 Financial risk factors

The Group’s activities expose it to a variety of financial risks: foreign exchange risk, credit risk, liquidity risk and cash flow and fair value interest rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

(a) Foreign exchange risk

The foreign exchange risks of the Group occur due to the fact that the Group has business activities denominated in foreign currencies, primarily with respect to the United States dollar (“US dollar”), Hong Kong dollar, Euro and Japanese Yen. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities. Nevertheless, the conversion of Renminbi into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC government.

The Group currently does not have a foreign currency hedge policy.

At 31 December 2007, if RMB had strengthened/weakened by 5% against US dollar with all other variables held constant, post-tax profit for the years would have been HK$3,678,000 higher/lower (2006: HK$10,483,000 lower/higher), mainly as a result of foreign exchange gains or losses on translation of US dollar denominated trade receivables, cash and cash equivalents and financial liabilities.

At 31 December 2007, if RMB had strengthened/weakened by 5% against HK dollar with all other variables held constant, post-tax profit for the years would have been HK$5,086,000 higher/lower (2006: HK$4,319,000 higher/lower), mainly as a result of foreign exchange gains or losses on translation of HK dollar denominated trade receivables, cash and cash equivalents and financial liabilities.

At 31 December 2007, if RMB had strengthened/weakened by 5% against Euro with all other variables held constant, post-tax profit for the year would have been HK$24,064,000 lower/higher (2006: HK$306,000 higher/lower), mainly as a result of foreign exchange gains or losses on translation of Euro denominated trade receivables, cash and cash equivalents and financial liabilities.

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FINANCIAL INFORMATION OF THE GROUP

As less than 10% of the Group’s foreign currency transactions are denominated in Japanese Yen and other foreign currencies, the directors of the Group are of the view that foreign exchange risk in relation to transactions denominated in Japanese Yen and other foreign currencies is low. Therefore, no sensitivity analysis for these currencies is presented.

(b) Credit risk

The Group has no significant concentrations of credit risk. Credit risk arises from cash and cash equivalents, and trade and other receivables.

As at 31 December 2007, all the Group’s bank deposits are placed in high quality financial institutions without significant exposure to credit risk.

For trade and other receivables, the credit quality of the counterparties is assessed by taking into account their financial position, credit history and other factors. Individual credit limits are set based on the assessment of the credit quality. Given the constant repayment history, the directors are of the opinion that the risk of default by these counterparties is not significant.

The Group’s credit sales are only made to customers with an appropriate credit history and at credit period of 30 to 60 days.

(c) Liquidity risk

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

The table below analyses the Group’s financial liabilities that will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

Less than 1 year	2007	2006
Short term bank loans	394,111	–
Interest payment on short term bank loans	7,935	–
Trade and other payables	741,030	717,826
Provision for warranty	77,260	12,634
Current income tax liabilities	3,725	2,044

(d) Cash flow and fair value interest rate risk

Other than deposits held in banks, the Group does not have significant interest-bearing assets. The average rate of deposits held in banks as at 31 December 2007 was approximately 2.46% per annum (2006: 1.68%). Any change in the interest rate from time to time is not considered to have significant impact to the Group.

The Group’s interest rate risk which affects its income and operating cash flows mainly arises from bank borrowings. The bank borrowings were at fixed rates and expose the Group to fair value interest rate risk. As all the Group’s bank borrowings were short term loans and any change in the interest rate from time to time is not considered to have significant impact to the Group.

3.2 Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, issue new shares or sell assets to reduce debt.

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FINANCIAL INFORMATION OF THE GROUP

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including bank borrowings, finance lease liabilities and the borrowing component of convertible notes as shown in the consolidated balance sheets) less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheets, plus net debt.

The Company’s strategy is to maintain an operation with minimal capital risk. The gearing ratio as at 31 December 2007 was 0.4%. The Group did not have any borrowing at 31 December 2006 and all its capital was sourced from equity. The directors are of the opinion that the Group does not have significant capital risk.

3.3 Fair value estimation

The carrying value less impairment provision of trade receivables and payables are a reasonable approximation of their fair values. The fair values of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

(a) Estimated impairment of non-financial assets

The Group tests annually whether non-financial assets, mainly including property, plant and equipment and intangible assets has suffered any impairment in accordance with the accounting policy stated in Note 2.7. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates.

(b) Income taxes

The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(c) Share option

The Group operates a share option scheme. The fair value of the options granted during the year (Note 13 (c)) is determined by using valuation techniques. The Group uses its judgements to select the valuation method and make assumptions for the significant inputs into the valuation model. At each balance sheet date, the Group Reviews its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period.

(d) Provision for warranty

The Group generally offers warranties for its certain products and undertakes to repair and replace items that fail to operate satisfactorily. Management estimates the related provision for future warranty claims based on historical warranty claim information, as well as recent trends that might suggest that past cost information may differ from future claims.

Factors that could impact the estimated claim information include the success of the Group’s productivity and quality initiatives, as well as parts and labour costs. The estimates and judgments used are however not expected to have a significant risk of causing a material adjustment to the carrying amounts of the provision for warranty within the next financial year.

Should the estimated annual warranty expenses rate differ by 10% from management’s estimates, the Group would have charged additional warranty expenses amount to approximate HK$11,749,000 for the year ended 2007 (2006: HK$2,109,000).

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

5. SEGMENT INFORMATION

Primary reporting format – business segments

The Group is principally engaged in manufacturing and sale of mobile handsets and other portable electronics products.

Own branded and other mobile handsets 2007 2006 535,309 654,053 36,400 82,320 56,748 118,693 8,243 170,488	Multi-media players 2007 2006 687,817 308,566 28,717 17,212 139,481 38,040 3,378 48,983	Multi-media players 2007 2006 687,817 308,566 28,717 17,212 139,481 38,040 3,378 48,983	Total 2007 2006 3,167,708 3,549,329 233,836 232,297 9,699 5,130 (265,019) (167,575) (21,484) 69,852 2,367 1,665 (19,117) 71,517 31,640 (2,358) 12,523 69,159 894,865 515,433 922,097 820,209 1,816,962 1,335,642 238,666 591,233 977,460 141,271 1,216,126 732,504 19,931 32,260 44,240 49,646 28,174 (4,952)	Total 2007 2006 3,167,708 3,549,329 233,836 232,297 9,699 5,130 (265,019) (167,575) (21,484) 69,852 2,367 1,665 (19,117) 71,517 31,640 (2,358) 12,523 69,159 894,865 515,433 922,097 820,209 1,816,962 1,335,642 238,666 591,233 977,460 141,271 1,216,126 732,504 19,931 32,260 44,240 49,646 28,174 (4,952)
2007 535,309 36,400 56,748 8,243	2007 687,817 28,717 139,481 3,378		2007 3,167,708 233,836
			9,699 (265,019) (21,484) 2,367 (19,117) 31,640	5,130 (167,575
				69,852 1,665
				71,517 (2,358
		38,040 48,983	12,523
			894,865 922,097	515,433 820,209
			1,816,962
			238,666 977,460	591,233 141,271
			1,216,126 19,931 44,240 28,174

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(a) “ Philips ” mobile handsets were OEM products which all sold to Philips Group (See definition in Note 29 (a)) in 2006. During the year, the Group assumed the business of “ Philips ” mobile products and sold such products directly to distributors.

Unallocated costs consist primarily of selling and marketing costs and administrative expenses, which contribute to all business segments.

Segment assets consist primarily of inventories and trade receivables. Unallocated assets comprise property, plant and equipment, intangible assets, deferred taxation, other receivables and cash and cash equivalents.

Segment liabilities comprise trading liabilities. Unallocated liabilities comprise items such as taxation, borrowings, provisions and other payables.

Secondary reporting format – geographical segments

The Group’s three business segments operate in five main geographical areas – Mainland China, Europe, Hong Kong, Asia (excluding Mainland China and Hong Kong) and North America. The segment sales based on the geographical location of its customers are presented below:

Sales Mainland China Europe (Note b) Asia excluding Mainland China and Hong Kong (Note b) Hong Kong (Note b) North America	2007 1,243,354 630,047 228,762 1,041,209 24,336 3,167,708	2006 1,676,916 6,540 1,030,871 835,002 –
		3,549,329

(b) In 2006, most of “ Philips ” branded mobile products for the Europe market was arranged through the Philips Group companies located in Asia. In 2007, sales to Europe market was mostly made to distributors located in Europe directly.

No segment assets and liabilities are presented as over 90% of the Group’s assets are located in Mainland China.

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

6. PROPERTY, PLANT AND EQUIPMENT

Group

Leasehold improvements At 1 January 2006 Cost 37,834 Accumulated depreciationand and impairment (25,851) Net book amount 11,983 Year ended 31 December 2006 Opening net book amount 11,983 Exchange differences 342 Additions 2,853 Disposals – Depreciation charge (4,323) Closing net book amount 10,855 At 31 December 2006 Cost 24,795 Accumulated depreciation and impairment (13,940) Net book amount 10,855 Year ended 31 December 2007 Opening net book amount 10,855 Exchange differences 665 Additions 1,096 Disposals – Depreciation charge (4,619) Closing net book amount 7,997 At 31 December 2007 Cost 27,197 Accumulated depreciation and impairment (19,200) Net book amount 7,997	Plant and machinery 286,627 (229,047) 57,580	Motor vehicles 3,265 (2,055) 1,210	Furniture and fixtures 29,068 (20,790) 8,278	Total 356,794 (277,743) 79,051 79,051 1,772 26,234 (48) (45,324) 61,685 369,465 (307,780) 61,685 61,685 3,321 15,569 (803) (38,725) 41,047 407,553 (366,506) 41,047
11,983 342 2,853 – (4,323)	57,580 1,259 19,024 (12) (34,792)	1,210 17 1,375 – (592)	8,278 154 2,982 (36) (5,617)	79,051 1,772 26,234 (48 (45,324
10,855	43,059	2,010	5,761
24,795 (13,940)	307,331 (264,272)	4,743 (2,733)	32,596 (26,835)	369,465 (307,780
10,855	43,059	2,010	5,761
10,855 665 1,096 – (4,619)	43,059 2,295 8,462 (20) (29,334)	2,010 78 446 – (715)	5,761 283 5,565 (783) (4,057)	61,685 3,321 15,569 (803 (38,725
7,997	24,462	1,819	6,769
27,197 (19,200)	336,411 (311,949)	5,458 (3,639)	38,487 (31,718)	407,553 (366,506
7,997	24,462	1,819	6,769

Depreciation expense of HK$29,577,000 (2006: HK$35,415,000) has been expensed in cost of sales, HK$237,000 (2006: HK$200,000) in selling and marketing costs and HK$8,911,000 (2006: HK$9,709,000) in administrative expenses.

Lease rental expense amounting to HK$25,791,000 (2006: HK$14,860,000) relating to the lease of property and machinery are included in the income statement.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Company

Motor vehicles 684 (182) 502 502 488 – (211) 779	Furniture and fixtures 124 (21) 103 103 57 (10) (29) 121	Total 808 (203) 605 605 545 (10) (240) 900 1,338 (438) 900 900 158 (17) (283) 758 1,471 (713) 758
1,172 (393)	166 (45)	1,338 (438
779	121
779 134 – (254)	121 24 (17) (29)	900 158 (17 (283
659	99
1,307 (648)	164 (65)	1,471 (713
659	99

– 118 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

7. INTANGIBLE ASSETS −GROUP

At 1 January 2006
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2006
Opening net book amount
Exchange differences
Additions
Amortisation charge
Closing net book amount
At 31 December 2006
Cost
Accumulated amortisation and impairment
Net book amount
Year ended 31 December 2007
Opening net book amount
Exchange differences
Additions
Amortisation charge
Closing net book amount
At 31 December 2007
Cost
Accumulated amortisation and impairment
Net book amount

Computer
software
23,918
(9,805)
14,113
14,113
434
6,026
(4,322)
16,251
30,900
(14,649)
16,251
16,251
1,046
4,362
(5,515)
16,144
37,588
(21,444)
16,144

Amortisation of HK$1,778,000 (2006: HK$634,000) has been expensed in cost of sales, HK$42,000 (2006: HK$32,000) in selling and marketing costs and HK$3,695,000 (2006: HK$3,649,000) in administrative expenses.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

8. INVESTMENTS IN SUBSIDIARIES – COMPANY

Investments – unlisted shares, at cost (Note (a)) Amounts due from subsidiaries (Note (b))	2007 260,000 11,700 271,700	2006 260,000 11,700
		271,700

(a) The following is a list of the principal subsidiaries as at 31 December 2007.

Place of

	Place of
	incorporation	Principal	Particulars of
	and kind of legal	activities and	issued share	Interest
Name	entity	place of operation	capital	held
Indirectly held:
Shenzhen Sang Fei	PRC, a Sino-	PRC, manufacture	Registered capital	65%
Consumer	foreign equity	and sale of	of
Communications Co.,	joint venture	mobile handsets	US$33,000,000
Ltd. (“Sang Fei”)	company	and other
		portable
		electronics
		products
China Electronics	Hong Kong,	Hong Kong,	2 ordinary shares	100%
Corporation	limited company	provision of	of HK$1 each
Management Limited		group
		management
		services

(b) The balance is unsecured, interest free and has no fixed repayment term. It is classified as investment in subsidiaries.

9. INVENTORIES – GROUP

Raw materials Work in progress Finished goods	2007 257,504 46,950 139,735 444,189	2006 230,856 54,850 50,096
		335,802

The cost of inventories recognised as expense and included in cost of sales amounted to HK$2,400,076,000 (2006: HK$3,127,030,000).

Written down of inventories to net realisable value of HK$27,908,000 (2006: reversal of written down with amount of HK$4,952,000) has been included in cost of sales during the year.

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

10. TRADE AND OTHER RECEIVABLES

Group	Group	Company	Company
2007 755,474 (266) 755,208 15,081 7,091 64,526 14,129 21,115	2006 415,932 – 415,932 799 24,026 21,011 25,739 5,672	2007 – – – – – 428 – 490	2006 – –
			– – – 219 – 250
877,150	493,179	918	469

The Directors are of the opinion that the carrying amounts of trade and other receivables approximate their fair values. All trade and other receivables are due within 1 year and non interest-bearing.

(a) The majority of the Group’s sales are on letter of credit or documents against payment. The remaining amounts are with credit term of 30 to 60 days. At 31 December 2007, the ageing analysis of the Group’s gross trade receivables was as follows:

Ageing Current to 30 days 31 – 60 days Over 60 days and within 1 year Over 1 year	2007 734,238 12,151 8,324 761 755,474	2006 410,109 2,561 1,725 1,537
		415,932

Including in the balance were trade and other receivables from related parties of HK$61,305,000 (2006: HK$382,828,000) (Note 29(c)).

(b) The maximum exposure to credit risk at 31 December 2007 and 2006 is the fair value of the trade receivables mentioned above. The Group does not hold any collateral as security.

Movement on the provision for impairment at the Group’s trade receivables are as follows:

At 1 January Provision for impairment At 31 December	2007 – 266 266	2006 – –
		–

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

At 31 December 2007, trade receivables of HK$31,063,000 (2006: HK$7,888,000) were past due but not impaired. These related to a number of customers which had no history of default, the ageing analysis of these trade receivable is as follows:

Ageing Current to 30 days 31 – 60 days Over 60 days and within 1 year Over 1 year	2007 10,093 12,151 8,324 495 31,063	2006 2,065 2,561 1,725 1,537
		7,888

As at 31 December 2007, trade receivables of HK$266,000 were impaired and fully provided for (2006:

nil).

The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:

Currency Renminbi HK dollar US dollar Euro Other currencies	2007 170,672 918 165,208 540,225 127 877,150	2006 156,454 469 336,256 – –
		493,179

11. CASH AND CASH EQUIVALENTS

Group	Group	Company	Company
2007 – 163,841 163,841 227,900	2006 51,595 170,131 221,726 198,083	2007 – 6,105 6,105 216,441	2006 – 9,151
			9,151 187,005
391,741	419,809	222,546	196,156

China Electronics Corporation Finance Co., Ltd. is a non-bank financial institution approved by the People’s Bank of China. The deposits yield interest at prevailing saving deposit rates.

The effective interest rate on short-term bank deposits was 1.68% per annum (2006: 2.46%). The maturity days of these deposits ranged from 2 to 18 days (2006: 5 to 29 days).

– 122 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

12. ISSUED EQUITY/SHARE CAPITAL

(a) Issued equity – Group

As 1 January and 31 December 2006 As 1 January and 31 December 2007	Number of shares 1,083,560,000 1,083,560,000	Issued equity 370,074

		370,074

(i) The number of share reflect the company’s ordinary
(ii) On 10 December 2003, China Electronics Corporation (“CEC”), the Company, the Company’s then holding company, Winsan International Holdings Limited entered into a sale and purchase agreement. Pursuant to the agreement, the Company acquired CEC’s 65% equity interest in Sang Fei (the “Acquisition”) and the consideration was satisfied by the issuance of the Company’s 6,500,000,000 shares to CEC. The Acquisition was completed on 24 September 2004 and has been accounted for as a reverse acquisition. For accounting purpose, Sang Fei is regarded as the acquirer while the Company and its then subsidiaries are deemed to have been acquired by Sang Fei. Accordingly, the amount recognised as issued equity of the Group, which consists of share capital and share premium, has been determined by adding to the issued equity of Sang Fei immediately before the completion of the Acquisition the cost of the acquisition of the Company and its then subsidiaries.

(b) Share capital – Company

At 1 January and 31 December 2006 At 1 January and 31 December 2007	Number of shares – ordinary share of HK$0.01 each Authorised Issued and fully paid 30,000,000,000 1,083,560,000 30,000,000,000 1,083,560,000	Share capital 10,836 10,836	Share premium 325,055 325,055	Total 335,891 335,891

13. OTHER RESERVES Group

Capital reserve (Note (a)) (1,806) – – – (1,806)	Surplus reserves (Note (b)) 25,992 – 7,333 – 33,325	Share option (Note (c)) 6,572 3,654 – – 10,226	Translation reserve 4,304 – – 9,088 13,392	Total 35,062 3,654 7,333 9,088
				55,137

(1,806) – –	33,325 – –	10,226 1,737 –	13,392 – 14,933	55,137 1,737 14,933
(1,806)	33,325	11,963	28,325	71,807

– 123 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(a) Capital reserve

Capital reserve represents the exchange differences arising from paid-in capital paid by foreign currencies in the principal subsidiary, Sang Fei.

(b) Surplus reserves

In accordance with the “Laws of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment” and Sang Fei’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 approved 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 and to increase capital.

Under the Companies Act 1981 of Bermuda, the contributed surplus of the Company is distributable to shareholders in certain circumstances as specified in section 54 thereof.

(c) Share option

On 25 October 2005, 28,450,000 options were granted to certain directors, employees and other participants at an exercise price of HK$1.488 under the Share Option Scheme. 40% of the options granted are exercisable from 1 November 2005 to 31 October 2008, another 30% are exercisable from 1 November 2006 to 31 October 2009 and the remaining 30% are exercisable from 1 November 2007 to 31 October 2010. The options have an option term of 3 years commencing from the exercisable date. No option was exercised during the year.

Movements in the number of share options outstanding are as follows:

At 1 January Lapsed At 31 December	2007 21,150,000 (200,000) 20,950,000	2006 28,450,000 (7,300,000)
		21,150,000

All share options outstanding as at 31 December 2007 were exercisable (2006: 14,805,000).

Share options outstanding at 31 December 2007 and 2006 have the following expiry date:

Expiry date – 31 October 2008 2009 2010	2007 8,380,000 6,285,000 6,285,000 20,950,000	2006 8,460,000 6,345,000 6,345,000
		21,150,000

Expense arising from the Share Option Scheme recognised in administrative expenses during the year amounted to HK$1,737,000 (2006: HK$3,654,000).

– 124 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Company

Contributed surplus 61,672 – 61,672	Share option 6,572 3,654 10,226	Total 68,244 3,654
		71,898

61,672 –	10,226 1,737	71,898 1,737
61,672	11,963	73,635

14. TRADE AND OTHER PAYABLES

Trade payables Other payables from related parties (Note 29(c)) Accrued expenses Advance from customers Other payables	Group	Group	Company	Company
	2007 381,597 1,332 192,149 65,197 100,755	2006 511,472 17,072 47,205 52,870 89,207	2007 – – 4,040 – 16	2006 – – 2,744 – –
	741,030	717,826	4,056	2,744

At 31 December 2007, the ageing analysis of the Group’s trade payables was as follows:

Current to 30 days 31 – 60 days Over 60 days	2007 367,655 474 13,468 381,597	2006 487,812 14 23,646
		511,472

Included in the balance of trade and other payables to related parties amounted to HK$17,834,000 (2006: HK$48,159,000) (Note 29(c)).

The Directors are of the opinion that the carrying amount of trade and other payables approximate their fair values.

– 125 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

15. SHORT TERM BANK LOANS – GROUP

The bank loans as at 31 December 2007 were unsecured, repayable within one year and bear interest at the average borrowing rate of 6.19% per annum.

The Group’s bank loans as at 31 December 2007 exposured to interest rate changes and the contractual repricing dates within 6 months.

The carrying amounts of the short term bank loans approximate their fair value, which are denominated in the following currencies:

Renminbi US dollar	2007 354,839 39,272 394,111	2006 – –
		–

The Group has undrawn borrowing facilities of approximately HK$466,104,000 as at 31 December 2007 (2006: HK$1,000,000,000). The facilities are at floating rate and expiring within one year which are subject to review at various dates during 2008.

16. PROVISION FOR WARRANTY – GROUP

The Group provides free repair and replacement services ranging from 12 to 15 months after sales. The cost of the warranty obligation under which the Group agrees to remedy defects in its products is accrued at the time the related sales are recognised. As at 31 December 2007, the Group had provided for expected warranty claims on own mobile products and certain ODM products based on past experience of the level of repairs and returns.

At 1 January Charged for the year (a) Provision related to OEM products (b) Less: utilised during the year At 31 December	2007 12,634 64,437 53,055 (52,866) 77,260	2006 2,106 21,089 – (10,561)
		12,634

(a) Provision for warranty of HK$64,437,000 (2006: HK$21,089,000) has been charged to selling and marketing costs;

(b) Provision for warranty of HK$53,055,000 was related to OEM products which were sold to Philips Group before 1 April 2007 (see Note 5(a)). In this respect, Philips Group reimbursed nearly the same amount to the Group.

17. OTHER GAINS – NET

Sales of samples and materials Written off of payables (Note a) Others	2007 1,633 7,504 562 9,699	2006 5,355 – (225)
		5,130

(a) These represented long-aged trade payables which the Directors are of the opinion that the obligation for future settlement is remote and therefore write off them in current year.

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

18. EXPENSES BY NATURE

Expenses included in cost of sales, selling and marketing costs and administrative expenses are analysed as follows:

	2007	2006
Depreciation and amortisation expenses (Notes 6 and 7)	44,240	49,646
Employee benefit expenses (Note 19)	173,221	149,056
Changes in inventories of finished goods and work in progress	(91,023)	61,363
Raw materials and consumables used	2,491,099	3,065,667
Impairment provision for receivables	266	–
Written down/(reversal) of inventories to
net realisable value (Note 9)	27,908	(4,952)
Provision for warranty (Note 16)	64,437	21,089
Operating lease expenses on property and machinery	25,791	14,860
Research and development costs	49,071	34,667
Auditors’ remuneration	1,890	1,247

19. EMPLOYEE BENEFIT EXPENSE

Basic salaries, allowances and benefits in kind Contributions to retirement schemes (Note (a) and (b)) Share-based compensation (Note 13(c))	2007 156,359 15,125 1,737 173,221	2006 137,000 8,402 3,654
		149,056

(a) The Group operates a 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 and expensed as incurred.

(b) The principal subsidiary, Sang Fei, 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 Sang Fei, to a pension equal to the basis 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. Sang Fei made monthly contributions to the retirement scheme at a minimum rate of 8% (2006: 8%) of the basis salaries of employees in the PRC.

– 127 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

20. DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

The remuneration of every director for the year ended 31 December 2007 is set out below:

Name of Director Mr. Chen Zhaoxiong* Mr. Tong Baoan Mr. Fan Qingwu Mr. Hua Longxing Mr. Chan Kay Cheung Mr. Wong Po Yan Mr. Yin Yongli	Fees – 500 – – 180 180 180 1,040	Salaries, allowance and benefits in kind Employer’s contribution to pension scheme – – – – 400 49 526 – – – – – – – 926 49	Share- based payment – 333 315 315 – – – 963	Total – 833 764 841 180 180 180
				2,978

During the year, no director has waived emolument or has agreed to waived the directors’ emoluments (2006:

nil).

Resigned on 14 January 2008

The remuneration of every director for the year ended 31 December 2006 is set out below:

Name of Director Mr. Chen Zhaoxiong Mr. Yang Xiaotang Mr. Tong Baoan Mr. Fan Qingwu Mr. Hua Longxing Mr. Chan Kay Cheung Mr. Wong Po Yan Mr. Yin Yongli	Fees – 167 500 – – 180 180 180 1,207	Salaries, allowance and benefits in kind Employer’s contribution to pension scheme – – – 8 – 19 400 20 404 – – – – – – – 804 47	Share- based payment – – 960 909 909 – – – 2,778	Total – 175 1,479 1,329 1,313 180 180 180
				4,836

– 128 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(b) Five highest paid individuals

The emoluments payable to the five individuals (2006: three individuals, and two directors whose emoluments are reflected in the analysis presented above) whose emoluments were the highest in the Group during the year are as follows:

Basic salaries, allowances and benefits in kind Bonuses Contributions to retirement schemes Share-based compensation (Note 13(c))	2007 12,434 2,192 460 109 15,195	2006 4,064 1,194 179 315
		5,752

(c) The emoluments fell within the following band:

HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000 HK$2,000,001 – HK$2,500,000 HK$2,500,001 – HK$3,000,000 HK$3,000,001 – HK$3,500,000 HK$3,500,001 – HK$4,000,000 HK$4,000,001 – HK$4,500,000 HK$4,500,001 – HK$5,000,000 HK$5,000,001 – HK$5,500,000 FINANCE INCOME – NET Interest income on short-term deposits Interest on bank loans Net finance income	Number of individuals	Number of individuals
	2007 1 – 2 – – 1 – – 1	2006 1 – 2 – – – – – –
	5 2007 11,442 (9,075) 2,367	3

		2006 8,109 (6,444)
		1,665

21. FINANCE INCOME – NET

– 129 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

22. TAXATION

(a) Income tax (credit)/expense

The amount of taxation (credited)/charged to the consolidated income statement represents:

Current taxation – PRC enterprise income tax Deferred taxation	2007 6,135 (37,775) (31,640)	2006 6,760 (4,402) 2,358

(b) No provision for Hong Kong profits tax has been made as the Group has no assessable profit for the year (2006: nil).
(c) The principal subsidiary, Sang Fei, is a foreign investment production enterprise established in Shenzhen Special Economic Zone in the PRC, the prevailing PRC enterprise income tax rate is 15%. As approved by the tax authoristies in 1998, Sang Fei is entitled to exemption from income tax for two years followed by a 50% tax reduction for three years, commencing from the year ended 31 December 2000, the first cumulative profit-making year net of losses carried forward. Accordingly, the tax holiday ended at 31 December 2004.

Sang Fei was certified as a high-tech enterprise from 2002 and as approved by the tax authorities in 2004, Sang Fei is entitled to 50% tax reduction from enterprise income tax for further three years starting from 2005. Consequently, enterprise income tax has been provided at the rate of 7.5% (2006: 7.5%) for the year. Such tax reduction ended at 31 December 2007.

(d) The taxation on the Group’s profit before taxation differs from the theoretical amount that would arise using the taxation rate in the PRC as follows:

(Loss)/profit before income tax Calculated at a taxation rate of 15% (2006: 15%) Effect of tax concession Expenses not deductible for taxation purposes Tax losses for which no deferred income tax asset was recognised Effect on change of tax rate (Note (e)) Income tax (credit)/expense	2007 (19,117)	2006 71,517 10,728 (9,804) 313 1,121 – 2,358
	(2,868) (406) 136 266 (28,768)	10,728 (9,804 313 1,121 –
	(31,640)

– 130 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(e)

Deferred taxation

The movement on the deferred tax assets during the year is as follows:

Impairment of inventories Accelerated depreciation of property, plant and equipment At 1 January 2006 2,939 540 (Charged)/credited to the income statement (405) 4,177 At 31 December 2006 2,534 4,717 At 1 January 2007 2,534 4,717 Credited/(charged) to the income statement 9,028 8,314 At 31 December 2007 11,562 13,031	Impairment of inventories Accelerated depreciation of property, plant and equipment At 1 January 2006 2,939 540 (Charged)/credited to the income statement (405) 4,177 At 31 December 2006 2,534 4,717 At 1 January 2007 2,534 4,717 Credited/(charged) to the income statement 9,028 8,314 At 31 December 2007 11,562 13,031	Provision for warranty and other accruals 158 790 948	Others 877 (160) 717	Total 4,514 4,402
				8,916

2,534 9,028	4,717 8,314	948 21,150	717 (717)	8,916 37,775
11,562	13,031	22,098	–	46,691

The amounts shown in the balance sheet include the following:

Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months	2007 10,879 35,812 46,691	2006 7,251 1,665
		8,916

Deferred income tax assets are recognised for tax loss carrying-forwards to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group did not recognise deferred income tax assets of HK$4,250,000 (2006: HK$3,984,000) in respect of losses amounted to HK$23,210,000 (2006: HK$22,184,000) that can be carried forward against future taxable income.

On 16 March 2007, the Corporate Income Tax Law of the PRC (the “new CIT Law”) was approved and became effective 1 January 2008. In accordance with the new CIT law, Sang Fei’s applicable tax rate will be changed to 25% with a transitional period of 5 years from 2008 in which the tax rate will be changed to 18%, 20%, 22%, 24% and 25% for the five years from 2008 to 2012 respectively. In this regard, the new applicable tax rates are adopted in computing the deferred taxation as at 31 December 2007 (31 December 2006: 7.5%). The change of tax rates resulted a tax credit of HK$28,768,000 in 2007.

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APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

23. PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The profit attributable to equity holders of the Company is dealt with the financial statements of the Company to the extent of the HK$40,985,000 (2006: HK$58,692,000).

24. EARNINGS PER SHARE

(a) Basic earnings per share

The calculation of the basic earnings per share is based on the Group’s profit attributable to equity holders of the Company for the year ended 31 December 2007 of HK$8,074,000 (2006: HK$43,276,000) and the 1,083,560,000 (2006: 1,083,560,000) ordinary shares in issue during the year.

(b) Diluted earnings per share

Diluted earnings per share for the year ended 31 December 2007 is calculated by adjusting the number of 1,083,560,000 ordinary shares by adding 6,405,096 to assume conversion of all dilutive potential ordinary shares granted under the Share Option Scheme of the Company. A calculation is done to determine the number of shares that could have been acquired at fair value (determine as the average market price during the year) based on the monetary value of subscription rights attached to outstanding share options as following:

Profit attributable to equity holders of the Company (HK$) Weighted average number of shares outstanding Weighted average number of shares under Share Option Scheme Weighted average number of shares that would have been issued at average market price Weighted average number of ordinary shares in issue on fully diluted basis Diluted earnings per share (HK$)	8,074,000 1,083,560,000 15,712,500 (9,307,404) 1,089,965,096 0.0074

For the year ended 31 December 2006, potential diluted ordinary shares were not included in the calculation of diluted earnings per share because they were anti-dilutive.

25. DIVIDENDS

2006 final dividend of HK$0.016 (2005 final: HK$0.02) per ordinary share totalling HK$17,337,000 (2005 final: HK$21,671,000) was declared in March 2007 and paid in June 2007.

The Board does not recommend the payment of a dividend for the year ended 31 December 2007 (2006: HK$0.016 per share).

– 132 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

26. CASH GENERATED FROM OPERATIONS

(Loss)/profit before income tax Adjustment for: Depreciation of owned property, plant and equipment Amortisation of intangible assets (Gain)/loss on disposal of property, plant and equipment Interest income Interest expense Share-based compensation Effect of foreign exchange translation Changes in working capital Inventories Trade and other receivables Trade and other payables Provision for warranty Net cash (used in)/generated from operations (a) Proceeds from disposal of property, plant and equipment include: Net book value (Note 6) Gain/(loss) on disposal of property, plant and equipment Cash proceeds from disposal of property, plant and equipment	2007 (19,117) 38,725 5,515 (337) (11,442) 9,075 1,737 18,156	2006 71,517 45,324 4,322 6 (8,109 6,444 3,654 6,844
	(108,387) (383,745) 22,386 64,626	111,232 591,765 (411,368 10,528
	(362,808) 2007 803 337 1,140	432,159

		2006 48 (6
		42

27. COMMITMENTS

(a) Capital commitments – Group

At 31 December 2007, the Group’s capital commitment which were contracted but not provided for were as follows:

	2007	2006
Purchase of property, plant and equipment
and computer software	2,502	1,259

(b) Operating lease commitments

As at 31 December 2007, the Group had future aggregate minimum lease payments under non-cancellable operating leases for factories and office premises as follows:

Not later than one year In the second to fifth years	Group	Group	Company	Company
	2007 30,612 21,901	2006 26,218 19,774	2007 343 344	2006 651 –
	52,513	45,992	687	651

– 133 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

28. CONTINGENT LIABILITY

The Group did not have any material contingent liabilities outstanding as at 31 December 2007 (2006: nil).

29. RELATED-PARTY TRANSACTIONS AND BALANCES

During the year, the Group entered into transactions with companies under common control of:

China Electronics Corporation, the ultimate holding company. These companies are denoted by * below;
Koninklijke Philips Electronics N.V. (“KPE”) (a company incorporated in Holland), the ultimate holding company of the minority shareholder with significant influence on operation of the principal subsidiary, Sang Fei. These companies are denoted by # below.

In March 2007, KPE disposed of its equity interests, through its subsidiary in Sang Fei to Shenzhen SED Electronics Group Co., Ltd., a subsidiary of China Electronics Corporation and ceased its significant influence on Sang Fei. From then onward, KPE and the companies under its common control are not the Group’s related parties. Consequently, the Group’s transactions with them since 1 April 2007 and the balances with them as at 31 December 2007 are not disclosed as related party transactions and balances.

(a) Sales of products, samples and materials:

Sales of products: Philips (China) Investment Co., Ltd # Philips Electronics Singapore Pte. Ltd. # Philips Electronics Hong Kong Ltd. # Shenzhen SED Coalition Electronics Co., Ltd. Philips Consumer Electronics B.V. # Philips France S.A.S. # Philips Electronics Trading Services (Shanghai) Co., Ltd. # Shenzhen SED Electronics Sales Corporation Shenzhen SED Electronics Group Company Ltd Shanghai SED ARC Co., Ltd. China Electronic Appliance Corporation _ Sales of samples and materials: Philips Consumer Electronics B.V. # Philips (China) Investment Co., Ltd. # Philips Electronics Singapore Pte Ltd. # Philips Electronics Hong Kong Ltd. # Shenzhen SED Coalition Electronics Co., Ltd. _ Shenzhen Sang Da Baili Electronics Co., Ltd. Shenzhen SED International Electronic Device Co., Ltd. Shenzhen SED Electronics Sales Corporation Philips Group, others #_ Sales of maintenance services:* Philips (China) Investment Co., Ltd #_	2007 207,345 171,609 67,253 330,310 156 – – 8,136 51 8 78,033 2007 336 311 660 81 40 1,822 – 64 – 3,158	2006 1,561,368 1,014,335 273,944 2,448 949 2,175 1,241 – – – –

		2006 4,353 34,494 950 682 860 407 713 – 24

		25,338

Members of KPE and its subsidiaries (the “Philips Group”) and members of CEC and its group companies (the “CEC Group”) are the major customers of the Group.

– 134 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(b) Other transactions

Receipt of interests: China Electronics Corporation Finance Co., Ltd. _ Purchase of goods: (i) Philips Electronics Hong Kong Ltd. # Philips (China) Investment Co., Ltd. # Philips France S.A.S. # Philips Electronics Trading Services (Shanghai) Co., Ltd. # Philips Electronics Beijing Co., Ltd. # Shenzhen SED Electronics Sales Corporation _ Shenzhen Sang Da Baili Electronics Co., Ltd. SED (Hong Kong) Company Limited CEC Group, others Philips Group, others #_ Processing services: (ii) Shenzhen Sang Da Baili Electronics Co., Ltd. _ Shenzhen SED Industry Co., Ltd. _ Fitment and decoration services: (iii) Shenzhen SED Fitment & Decoration Co., Ltd. _ Canteen services: (iv) Shenzhen Sang Da Baili Electronics Co., Ltd. _ Repair and maintenance services: (v) Shenzhen SED Coalition Electronics Co., Ltd. _ Shanghai SED ARC Co., Ltd. Shenzhen SED ARC Co., Ltd. Rental: (vi) Shenzhen SED Industry Co., Ltd. China Great Wall Computer Shenzhen Co., Ltd. Great Wall Technology Company Limited _ Licence fee: (vii) Shenzhen SED Electronics Group Co., Ltd _ Comprehensive services: (viii) P-Marshall Hong Kong Limited P-Marshall Singapore Pte. Limited	2007 – 288 559 – – – 867 75,726 44,178 – – 6,532 4,379 221 11,899 26 1,321 11,088 8,018 1,762 1,250 14,063 26,910 13,149	2006 214

		214,168 1,085 2,531 946 646 – 20,895 – 638 42

		6,645 4,898

		1,820

		10,918

		– 2,144 628

		7,473 493 655

		–

		– –

– 135 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(i) Members of the Philips Group are the suppliers of raw materials. Purchases of raw materials from the Philips Group were carried out in the ordinary course of business and on commercial terms and conditions.

The Group from time to time purchases raw materials from members of the CEC Group. Purchases of goods from the CEC Group were carried out in the ordinary course of business and on commercial terms and conditions.

(ii) The Group secured dedicated processing services of surface mount assembly production lines from members of the CEC Group. The processing services were carried out on commercial terms and conditions.
(iii) The Group engaged members of the CEC Group to undertake renovation works in connection with the expansion of the Group’s production premises. The fitment and decoration services were carried out in the ordinary course of business and were on commercial terms and conditions.
(iv) Shenzhen Sang Da Baili Electronics Co., Ltd. provides canteen services to the production staff of the Group. The fee of the canteen services were calculated by reference to actual consumption and an agreed fixed premium and were carried out on commercial terms and conditions.
(v) The Group engaged Shenzhen SED ARC Co., Ltd. and Shanghai SED ARC Co., Ltd. for after sales product repair services in respect of its own-branded products. The repair and maintenance services were carried out on commercial terms and conditions.
(vi) The production facilities and some of the staff quarters of the Group were located within an industrial complex owned by members of the CEC Group. The rentals were based on lease agreements entered into by the relevant parties and the Group and were calculated on commercial terms and conditions.
(vii) Members of the CEC Group licence the “ Xenium ” trademark to the Group for use. The licensing were based on the licence agreement and were carried out on normal commercial terms and conditions with reference to market rates.
(viii) The Group engaged members of the CEC Group to provide various business support services in relation to sales of products. The business support services were based on the comprehensive services agreements and were carried out on normal commercial terms and conditions with reference to market rates.

(c) Year-end balance arising from sales and other transactions

Trade receivables due from related parties: Philips Electronics Singapore Pte. Ltd. #, (i) Philips (China) Investment Co., Ltd. #, (i) Philips Electronics Hong Kong Ltd. #, (i) Philips Electronics Trading Services (Shanghai) Co., Ltd. #, (i) Shenzhen SED Coalition Electronics Co., Ltd. Shenzhen SED Electronics Sales Corporation Shenzhen Sang Da Baili Electronics Co., Ltd. China Electronic Appliance Corporation	2007 – – – – 5,503 737 695 24,483 31,418	2006 223,114 93,525 35,407 551 – – – –
		352,597

– 136 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Other receivables due from related parties: Philips Electronics Hong Kong Ltd. #, (i) Philips (China) Investment Co., Ltd. #, (i) Philips Consumer Electronics B.V #, (i) Philips France S.A.S. #, (i) Philips Electronics Singapore Pte. Ltd. #, (i) Shenzhen SED Coalition Electronics Co., Ltd. Shenzhen SED Electronics Sales Corporation Shenzhen SED International Electronic Device Co., Ltd. Shenzhen SED Electronics Group Company Ltd. Shenzhen Sang Da Baili Electronics Co., Ltd. _ Prepayments: Shenzhen Sang Da Baili Electronics Co., Ltd. _ SED (Hong Kong) Company Limited Trade and other receivables due from related parties in total (Note 10)_ Trade payables due to related parties: Philips Electronics Hong Kong Ltd. #, (i) Philips (China) Investment Co., Ltd. #, (i) Philips France S.A.S. #, (i) Philips Electronics Singapore Pte. Ltd. #, (i) Philips Electronics (Beijing) Co., Ltd. #, (i) Philips Electronics Trading Services (Shanghai) Co., Ltd. #, (i) Shenzhen SED Electronics Sales Corporation _ SED (Hong Kong) Company Limited Shenzhen Sang Da Baili Electronics Co., Ltd. Langfang CEC Dacheng Electronic Co., Ltd. *	2007 – – – – – 23 16 141 6,667 244 7,091	2006 11,621 10,035 1,867 164 139 – – 101 – 99
		24,026

	15,411 7,385	6,205 –
	22,796 61,305	6,205

		382,828

	– – – – – – 150 2,283 11 –	16,263 6,223 4,248 287 180 22 – – 1,823 14
	2,444	29,060

– 137 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Other payables due to related parties: Philips France S.A.S. #, (i) Philips Electronics Hong Kong Ltd. #, (i) Philips Electronics Singapore Pte. Ltd. #, (i) Philips (China) Investment Co., Ltd. #, (i) Philips Electronics Trading Services (Shanghai) Co., Ltd. #, (i) Shenzhen Sang Da Baili Electronics Co., Ltd. Shenzhen SED ARC Co., Ltd. Shanghai SED ARC Co., Ltd. Shenzhen SED Fitment and Decoration Co., Ltd. Advance from customers: China Electronic Appliance Corporation Shenzhen SED Electronics Group Company Ltd. Shenzhen SED Electronics Sales Corporation Shanghai SED ARC Co., Ltd. Shenzhen SED Coalition Electronics Co., Ltd. Trade and other payables due to related parties in total (Note 14)_ Deposits: China Electronics Corporation Finance Co., Ltd. _	2007 – – – – – 461 864 7 – 1,332 10,753 261 2,158 102 784 14,058 17,834 –	2006 6,244 6,197 2,408 399 285 998 448 – 93
		17,072

		– – – – 2,027
		2,027

		48,159

		51,595

(i) As detailed above, KPE and the companies under its common control are not the Group’s related parties since 1 April 2007. Consequently, the balances with them as at 31 December 2007 are not disclosed as related party balances.

– 138 –

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

(d) Additional information on other state-owned enterprises

The Company is controlled by CEC, and is ultimately controlled by Mainland China government, which also controls a significant portion of the productive assets and entities in the Mainland China. In accordance with Hong Kong Accounting Standard 24 “Related Party Disclosures” (“HKAS 24”), state-owned enterprises and their subsidiaries, other than CEC Group, are also defined as related parties of the Company (“Other State-owned Enterprises”).

(i) Summary of significant transactions with Other State-owned Enterprises

Sales of products and materials Purchase of materials Interest income from state-owned banks Interest expenses to state-owned banks (ii) Summary of balances with Other State-owned Enterprises Trade receivables Trade payables Bank deposits in state-owned banks Bank borrowings from state-owned banks	2007 428,418 24,431 9,955 9,075 2007 13,383 170 311,477 394,111	2006 85

		–

		6,982

		6,444

		2006 394

		–

		341,292

		–

Balances with Other State-owned Enterprises, except for bank deposits and bank borrowings, were unsecured and interest-free.

– 139 –

MANAGEMENT DISCUSSION AND ANALYSIS OF HUA DA ELECTRONICS

APPENDIX III

FINANCIAL SUMMARY

The audited consolidated financial statements of Hua Da Group prepared in accordance with Hong Kong Financial Reporting Standards for the three years ended 31 December 2005, 2006 and 2007 are set out in Appendix I to this circular. Set out below are certain key financial information of Hua Da Group, as extracted from the audited consolidated financial statements of Hua Da Group:

Revenue Profit before income tax Net profit attributable to equity holders of Hua Da Electronics Net assets	Year ended 31 December
	2005 2006 2007 HK$’000 HK$’000 HK$’000 295,524 508,717 652,767 41,816 128,716 132,063 40,352 120,202 127,443 89,127 202,570 302,636

As shown from the above table, Hua Da Group has experienced high growth rate in both turnover and profit during the three years ended 31 December 2007. The main driver for the growth in turnover and profit is the healthy growth and expansion of Hua Da Electronics’ operations, which is attributable to the strong demand in the smart cards market, in particular, the rapid growth in products such as national identification cards, telecommunications smart cards and social security cards, and effective cost reduction.

As at 31 December 2007, the total assets of Hua Da Group was approximately HK$615,322,000, representing an approximately 148.8% increase as compared to Hua Da Group’s total assets as at 31 December 2005. The increase in net assets value during the three years ended 31 December 2007 almost doubled that of the growth of total assets during the same period, which shows that Hua Da Group has better asset management and utilisation during the three years ended 31 December 2007.

– 140 –

MANAGEMENT DISCUSSION AND ANALYSIS OF HUA DA ELECTRONICS

APPENDIX III

CAPITAL RESOURCES AND LIQUIDITY

Hua Da Group finances its operations primarily by internal resources and short term bank borrowings. As at 31 December 2007, Hua Da Group has cash and cash equivalent amounted to approximately HK$188,902,000, which were denominated in RMB, Hong Kong dollars and United States dollars. Hua Da Group’s source of funds is mainly derived from its operating activities and increasing cash flow was generated by Hua Da Group as a result of its healthy growth and expansion of its operations.

The consolidated total liabilities of Hua Da Group as at 31 December 2007 was approximately HK$312,686,000, all of which were accounted for as current liabilities. As at 31 December 2007, Hua Da Group had unsecured short-term bank loans of approximately HK$64,516,000, which was denominated in RMB. The weighted average effective borrowing rate was 7.29% per annum as at 31 December 2007. Hua Da Group has fully utilised its banking facilities as at 31 December 2007. As at 31 December 2007, Hua Da Group neither pledged any assets or bank deposits nor granted any guarantee to secure banking facilities.

Hua Da Group’s gearing ratio is calculated as net debt divided by total capital, whereby net debt is calculated as total borrowings less cash and cash equivalents and total capital is calculated as total equity plus net debt. As at 31 December 2007, the cash and cash equivalents balances were greater than the balances of total borrowings, thereby attributing to a negative gearing ratio. The directors of Hua Da Electronics are of the view that Hua Da Group does not have significant capital risk. Hua Da Electronics’ strategy is to maintain a low gearing ratio.

Hua Da Group’s business activities are primarily denominated in RMB. The directors of Hua Da Electronics are of the view that Hua Da Group has no significant concentrations of foreign exchange risk, hence it is not necessary to arrange for hedging of Hua Da Group’s foreign currency investments, nor to implement a foreign currency hedge policy.

CAPITAL COMMITMENT AND CONTINGENT LIABILITIES

As at 31 December 2007, Hua Da Group did not have any capital commitments. In addition, Hua Da Group did not have any material contingent liabilities outstanding as at 31 December 2007.

– 141 –

MANAGEMENT DISCUSSION AND ANALYSIS OF HUA DA ELECTRONICS

APPENDIX III

EMPLOYEE AND REMUNERATION POLICIES

As at 31 December 2007, Hua Da Group had approximately 290 employees, the majority of whom were based in the PRC. Employee benefit expenses during the year ended 31 December 2007 were HK$76,518,000, which includes basic salaries, allowances, benefits in kind and contribution to staff retirement schemes managed by local government authorities in the PRC.

Hua Da Group undertakes a review of salaries and the extent of salary increment annually, with close reference to Hua Da Group’s results, the relevant labour market and economic situation. Hua Da Group also provides bonuses based upon staff performance and profits of Hua Da Group. This acts as an incentive for motivating employees to provide greater contribution to Hua Da Group.

SEGMENTAL INFORMATION

Hua Da Group operates and manages its business as a single segment. Hua Da Group also operates within one geographical segment because its revenues are generated in the PRC and its assets are located in the PRC. Accordingly, no segmental data has been prepared and presented by Hua Da Group.

EXCLUDED ASSETS

During the year ended 31 December 2005, Hua Da Electronics acquired 70% equity interests in Beijing Hua Da Xinan, a limited liability company established under the laws of the PRC and principally engaged in the development and sale of digital system software and hardware. Hua Da Electronics’ equity interest in Beijing Hua Da Xinan was subsequently increased to 71.26%. On 21 May 2008, Hua Da Electronics entered into a share transaction agreement with Beijing Xu An Da Technology Co., Ltd. in relation to the disposal of 71.26% of equity interest in Beijing Hua Da Xinan for a consideration of RMB5,000,000.

In 2006, Hua Da Electronics acquired an additional 61.88% interest in Guangdong Hua Da, a limited liability company established under the laws of the PRC and principally engaged in the design and sale of integrated circuits. After such acquisition, Hua Da Electronics held a total of 99.38% equity interest in Guangdong Hua Da. Further in 2007, Hua Da Electronics acquired the remaining 0.62% equity interest in Guangdong Hua Da, whereby Guangdong Hua Da became a wholly-owned subsidiary of Hua Da Electronics as at the end of 2007. At the shareholders’ meeting held on 19 March 2008, the shareholders of Hua Da Electronics approved the disposal of 80% of its equity interest in Guangdong Hua Da. As at the Latest Practicable Date, Hua Da Electronics has not entered into any share transfer agreement regarding such disposal.

– 142 –

MANAGEMENT DISCUSSION AND ANALYSIS OF HUA DA ELECTRONICS

APPENDIX III

In addition, pursuant to a shareholders’ resolution dated 25 December 2007, Hua Da Electronics decided to deregister its wholly-owned subsidiary, CIDC, a limited liability company incorporated in Hong Kong and principally engaged in the sale of digital video and related technology. As at 31 December 2007, the deregistration process has not yet been completed.

The directors of Hua Da Electronics believe that by disposing the Excluded Assets Hua Da Electronics will be able to focus on the development of its core businesses in the future.

Hua Da Electronics will explore business opportunities to further develop its integrated circuit business. As at the Latest Practicable Date, no material investment nor capital assets acquisition opportunities have been identified yet. Should any such opportunities arise during the year, Hua Da Electronics will finance such investments or acquisitions by its capital, internal resources and/or bank borrowings.

FUTURE PROSPECTS

Hua Da Electronics has a strong presence in the integrated circuits industry. Integrated circuits have been widely applied in a wide range of areas including communications, home and personal entertainment, social and public business. The principal products of Hua Da Group includes chipset and module for smart cards, wireless local area network (WLAN) chips, and electronic design automation (EDA) tools.

Hua Da Electronics’ overall business strategy is to focus on and continue to expand its core business in relation to the production of smart cards, WLAN chips and EDA tools, and to stand as a leading supplier in the domestic market of such products. It is expected that the overall market demand of smart cards will experience stable growth due to the increasing application and utilisation of smart cards within the telecommunications, transportation, financial industries and social security, as well as for personal identification purposes. Hua Da Electronics will continue to invest in the development and production of smart cards, thereby further strengthening its position as a leading smart card producer in the PRC. In addition, the WLAN market has experienced substantial growth since 2004. It is expected that the WLAN market will continue to grow rapidly as a result of the broadening of the scope and capacity of the WLAN industry, with approximately a third of WLAN related products being produced in the PRC. Hua Da Electronics had established a team dedicated for the research and development, as well as design of new WLAN products, in particular, WLAN products for handheld and portable customer electronic products such as personal digital assistants and portable electronic gaming devices. The directors of Hua Da Electronics believe this will facilitate Hua Da Group in seizing the growing opportunities within the sector. Furthermore, Hua Da Electronics intends to extend its sales and marketing efforts to existing major domestic and international customers of EDA related products by customising EDA solutions and tools to such customers, and thereby strengthening customer loyalty and increasing revenue and profits generated from these products.

– 143 –

APPENDIX IV FINANCIAL INFORMATION OF THE ENLARGED GROUP

A. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The following is an illustrative and unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group, which has been prepared to illustrate the effect of the Acquisition.

The unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group is prepared on the basis of the notes set out below for the purpose of illustrating the effect of the Acquisition as if it has taken place on 31 December 2007.

This unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group has been prepared on the basis of the notes set out below and in a manner consistent with the accounting policies adopted by the Group. It has been prepared for illustrative purpose only and because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group that had the Acquisition been completed as at 31 December 2007 or at any future date.

The Group HK$’000 (Audited) (Note 1) 41,047 16,144 46,691 – 103,882 444,189 877,150 391,741 1,713,080	Pro forma adjustments
	Target Group Other pro forma adjustments HK$’000 HK$’000 (Audited) (Note 2) (Note 4) 22,296 5,333 8,865 4,300 40,794 158,059 227,567 188,902 (5,983) 574,528	Pro forma Enlarged Group HK$’000 63,343 21,477 55,556 4,300
103,882		144,676
444,189 877,150 391,741		602,248 1,104,717 574,660
1,713,080		2,281,625
1,816,962	615,322	2,426,301

– 144 –

FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

The Group HK$’000 (Audited) (Note 1) 741,030 3,725 394,111 77,260 1,216,126	Pro forma adjustments
	Target Group Other pro forma adjustments HK$’000 HK$’000 (Audited) (Note 2) (Note 4) 239,822 8,348 64,516 – 312,686	Pro forma Enlarged Group HK$’000 980,852 12,073 458,627 77,260
1,216,126		1,528,812
600,836	302,636	897,489

Notes to the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group

The figures are extracted from the audited consolidated balance sheet of the Group as included in the annual report for the year ended 31 December 2007.
The figures are extracted from the audited consolidated balance sheet of the Target Group as set out in appendix I of this Circular.
Pursuant to the China Hua Da Agreement, the Beijing Shoufa Xinan Agreement and the Other Vendors Agreement, the Company has conditionally agreed to purchase the entire equity interest in Hua Da Electronics by allotting and issuing an aggregate of 608,000,000 Consideration Shares.

Hua Da Electronics is controlled by China Hua Da which is jointly owned and controlled by CEC and State Development & Investment Corp. (“SDIC”). Both CEC and SDIC are state-owned enterprises and controlled by State-owned Assets Supervision and Administration Commission. Accordingly the Company treats the Acquisition as a transaction under common control and has applied the principles of merger accounting, as prescribed in Hong Kong Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by the Hong Kong Institute of Certified Public Accountants, in accounting for the Acquisition for the purpose of the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group.

For the purpose of this unaudited pro forma consolidated statement of assets and liabilities, the Group treats the acquisitions of 7.5% and 27.75% equity interests in Hua Da Electronics from Beijing Shoufa Xinan and Other Vendors (the minority shareholders of Hua Da Electronics) respectively as transactions with equity owners of the Group. The difference between any consideration paid and the relevant shares acquired of the carrying value of net assets of the Target Group is recorded in equity.

The adjustment relates to the transaction costs, such as professional fees and printing cost, of approximately HK$5,983,000 incurred for the Acquisition.
Since the carrying value of the Target Group at the date of completion of the Acquisition may be substantially different from the values used in the preparation of this unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group, the final amounts of assets and liabilities to be recognised in connection with the Acquisition will be different from the amounts stated herein.
No adjustments have been made to reflect any trading results or other transactions of the Group and the Target Group entered into subsequent to 31 December 2007.

– 145 –

APPENDIX IV FINANCIAL INFORMATION OF THE ENLARGED GROUP

B. REPORT ON THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The following is the text of a report received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

ACCOUNTANT’S REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED

We report on the unaudited pro forma financial information set out on pages 144 to 145 under the heading of “Unaudited Pro Forma Consolidated Statement of Assets and Liabilities of the Enlarged Group” (the “Unaudited Pro Forma Financial Information”) in Appendix IV of the circular dated 30 June 2008 (the “Circular”) of China Electronics Corporation Holdings Company Limited (the “Company”), in connection with the proposed acquisition of CEC Huada Electronic Design Co., Ltd. (the “Transaction”) by the Company. 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 Transaction might have affected the relevant financial information of the Company and its subsidiaries (hereinafter collectively referred to as the “Group”). The basis of preparation of the Unaudited Pro Forma Financial Information is set out on pages 144 to 145 of the Circular.

Respective Responsibilities of Directors of the Company and the Reporting Accountant

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by rule 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 146 –

APPENDIX IV

FINANCIAL INFORMATION OF THE ENLARGED GROUP

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted audited consolidated statement of assets and liabilities of the Group as at 31 December 2007 with the audited consolidated financial statements of the Group for the year ended 31 December 2007, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 31 December 2007 or any future date.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 30 June 2008

– 147 –

APPENDIX IV FINANCIAL INFORMATION OF THE ENLARGED GROUP

C. WORKING CAPITAL

Taking into consideration the financial resources available to the Enlarged Group, including the internally generated funds of the Enlarged Group, the banking facilities and other financial resources available to the Enlarged Group, and in the absence of unforeseen circumstances, the Directors are of the opinion that the Enlarged Group will, following completion of the Acquisition, have sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this circular.

D. INDEBTEDNESS

Borrowings

As at the close of business on 30 April 2008, being the latest practicable date for the purpose of this indebtedness statement, the Enlarged Group had outstanding unsecured short-term borrowings of approximately HK$699.1 million.

Disclaimer

Save as aforesaid and apart from intra-group liabilities and normal trade payables, the Enlarged Group did not have, at the close of business on 30 April 2008, any mortgages, charges, debentures, debt securities issued and outstanding, and authorised or otherwise created but unissued, outstanding borrowings or indebtedness in the nature of borrowing including term loans, bank overdrafts, liabilities under acceptances, acceptance credits, hire purchase and finance lease commitments or other similar indebtedness, or any guarantees or other material contingent liabilities.

E. BANKING FACILITIES AND CAPITAL COMMITMENT

As at 30 April 2008, the Enlarged Group had undrawn borrowing facilities of approximately HK$576.7 million.

As at 30 April 2008, the Enlarged Group has capital commitment in relation to the purchase of property, plant and equipment and computer software which were contracted but not provided for were approximately HK$2.2 million.

– 148 –

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

2. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and upon completion of the Acquisition were and will be as follows:

Authorised 30,000,000,000 Shares as at the Latest Practicable Date	HK$ 300,000,000

Issued and to be issued, fully paid or credited as fully paid 1,083,560,000 Shares in issue as at the Latest Practicable Date 608,000,000 Consideration Shares to be alloted and issued upon completion of the Acquisition	10,835,600 6,080,000
1,691,560,000 Shares	16,915,600

The Consideration Shares, when allotted and issued, will rank pari passu in all respects among themselves and with the Shares in issue on the date of allotment and issue of the Consideration Shares, including but not limited to the right to receive all dividends, distributions or entitlements declared, paid or made in respect of the Shares, the record date for which shall fall on or after the date of allotment and issue of the Consideration Shares.

– 149 –

GENERAL INFORMATION

APPENDIX V

3. DISCLOSURE OF INTERESTS

As at Latest Practicable Date, the following Directors and chief executive of the Company had, or were deemed to have, interests 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 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 and short positions which they were deemed or taken to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange.

Name of Directors Number and description of equity derivatives Tong Baoan 3,800,000 Options_(Note) Fan Qingwu 3,600,000 Options(Note) Hua Longxing 3,600,000 Options(Note)_ Total	No. of underlying Shares involved in the Options 3,800,000(L) 3,600,000(L) 3,600,000(L) 11,000,000	Approximate % of the issued capital of the Company 0.35% 0.33% 0.33%
		1.01%

L long position

Note:

The Options were all granted on 25 October 2005 under the share option scheme approved and adopted by the Shareholders on 20 June 2002. The Options represent personal interest held by the Directors as beneficial owners. Grantees of such Options are entitled to exercise the Options at a price of HK$1.488 per Share in the following periods:

(i) in respect of 40% of the Options granted, from 1 November 2005 to 31 October 2008;
(ii) in respect of a further 30% of the Options granted, from 1 November 2006 to 31 October 2009; and
(iii) in respect of the remaining 30% of the Options granted, from 1 November 2007 to 31 October 2010.

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

– 150 –

APPENDIX V

GENERAL INFORMATION

Mr. Xiong Qunli, the Chairman of the Company and a non-executive Director, is the chairman of CEC. Mr. Tong Baoan, the Vice Chairman of the Company and a non-executive Director, is a director of China Electronics Corporation (BVI) Holdings Company Limited (“ CEC (BVI) ”). Mr. Fan Qingwu, the Managing Director and an executive Director, is also a director of CEC (BVI). Details of the shareholding of CEC and CEC (BVI) in the Company are set out in the paragraph headed “Substantial Shareholders” in this Appendix. Save as disclosed herein, none of the Directors is a director or employee of a company which has, or is deemed to have, an interest or a short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

None of the Directors was materially interested in any contract or arrangement subsisting as at the Latest Practicable Date which is significant in relation to the business of the Enlarged Group taken as a whole.

Since 31 December 2007, being the date to which the latest published audited consolidated financial statements of the Group were made up, up to the Latest Practicable Date, none of the Directors nor any expert named in the paragraph headed “Qualifications of Experts” in this Appendix had any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Enlarged Group, or were proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

4. SUBSTANTIAL SHAREHOLDERS

So far as is known to the Directors and the chief executive of the Company, as at the Latest Practicable Date, the following persons had, or were deemed to have, interests or short positions in the Shares or the underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO:

		Approximate
		percentage or
		attributable
	Number or	percentage of
	attributable	total issued share
	number of Shares	capital of the
Name of Shareholder	held	Company
CEC (BVI)	812,500,000(L)	74.98%
China Hua Da	393,680,000(L)	36.33%
CEC_(Notes 1 and 2)_	1,206,180,000(L)	111.32%
SDIC High-Tech Investment
Co., Ltd.(Note 2)	393,680,000(L)	36.33%
The State Development and
Investment Corporation_(Note 2)_	393,680,000(L)	36.33%
Devon Fortune Limited (“Devon
Fortune”)	71,129,358(L)	6.56%
Chan Chak Shing (“Mr. Chan”)	75,254,358(L)(Note 3)	6.95%
Wang Qinsheng	55,733,840(L)(Note 4)	5.14%

L long position

Notes:

(1) CEC holds 100% interest in CEC (BVI) and is deemed to be interested in the shares held by CEC (BVI).

– 151 –

APPENDIX V

GENERAL INFORMATION

(2) On 20 June 2008, the Company entered into the China Hua Da Agreement with China Hua Da in relation to the acquisition of 64.75% equity interest in Hua Da Electronics for a consideration of HK$984.20 million which shall be satisfied by the Company allotting and issuing 393,680,000 Consideration Shares at an issue price of HK$2.50 per Consideration Share.

The equity interest of China Hua Da is contributed as to 50% by CEC and as to 50% by SDIC High-Tech Investment Co., Ltd. SDIC High-Tech Investment Co., Ltd. is a wholly-owned subsidiary of The State Development and Investment Corporation, which is a state-owned investment holding company established under the laws of the PRC. By virtue of the SFO, CEC, SDIC High-Tech Investment Co., Ltd. and The State Development and Investment Corporation are deemed to be interested in the 393,680,000 Shares (to be allotted and issued upon completion of the China Hua Da Acquisition) which China Hua Da is interested in.

(3) These 75,254,358 Shares represent the aggregate of: (i) the family interest of Mr. Chan of 4,125,000 Shares and (ii) the corporate interest of 71,129,358 Shares held by Devon Fortune. As Mr. Chan holds 100% interest in Devon Fortune, Mr. Chan is deemed to be interested in the shares held by Devon Fortune.
(4) On 20 June 2008, the Company entered into the Other Vendors Agreement with, among others, Ms. Wang Qinsheng, pursuant to which the Company agreed to purchase from Ms. Wang Qinsheng a 9.1668% equity interest in Hua Da Electronics for a consideration of HK$139,334,600 which shall be satisfied by the Company allotting and issuing 55,733,840 Consideration Shares at an issue price of HK$2.50 per Consideration Share.

So far as is known to the Directors and the chief executive of the Company, as at the Latest Practicable Date, the following corporations were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group:

Name of subsidiary	Name	of shareholder	Interest held
			(%)
Sang Fei	Shenzhen SED Electronics Group Co.,		25
	Ltd.	(Note 1)
Sang Fei	Shenzhen SED Industry Co., Ltd.(Note 2)		10
Notes:

(1) Shenzhen SED Electronics Group Co., Ltd. is a company established in the PRC and is a non wholly-owned subsidiary of CEC.
(2) Shenzhen SED Industry Co., Ltd. is a company established in the PRC with its A shares listed on the Shenzhen Stock Exchange. Shenzhen SED Industry Co., Ltd. is indirectly owned as to approximately 42.23% by CEC as at the Latest Practicable Date.

Save as disclosed above, there is no person known to the Directors or the chief executive of the Company who, as at the Latest Practicable Date, had, or was deemed to have, an interest or short position in the Shares or the underlying Shares, which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group, or any option in respect of such capital.

– 152 –

GENERAL INFORMATION

APPENDIX V

5. LITIGATION

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

6. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into, or proposed to enter into, any service contract with the Company or any member of the Enlarged Group (excluding contracts expiring or determinable by the employer within one year without payment of compensations (other than statutory compensation)).

7. COMPETING INTEREST

Mr. Xiong Qunli, the Chairman of the Company and a non-executive Director, is the chairman of CEC.

Currently, CEC is engaging in, or having subsidiaries or associates which are engaging in, mobile handset related businesses which compete or are likely to compete, either directly or indirectly, with the business of the Group.

The abovementioned competing businesses are operated and managed by independent management and administration. In addition, the Directors consider that the business model of, and the markets served by, the Group are different from those of the abovementioned competing businesses. The Board exercises independent judgment and is always acting for the interests of the Company and the Shareholders as a whole. Accordingly, the Group is capable of carrying on its business independently of, and at arm’s length from, the competing businesses mentioned above.

Apart from the above, none of the Directors nor his associates is or was interested in any business, apart from the Company’s business, that competes or competed or is or was likely to compete, either directly or indirectly, with the Company’s business.

8. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Enlarged Group within the two years immediately preceding the date of this circular, and are or may be material:

(i) the China Hua Da Agreement;
(ii) the Beijing Shoufa Xinan Agreement;
(iii) the Other Vendors Agreement;

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GENERAL INFORMATION

APPENDIX V

(iv) the Hua Da Business Services Agreement;
(v) the Hua Da Deposit Services Agreement;
(vi) the Hua Da Tenancy Agreement;
(vii) a share transaction agreement dated 20 November 2006 entered into between Guangzhou Technology Risk Investment Company Ltd. ( ) as transferor and Hua Da Electronics as transferee in relation to the
acquisition by Hua Da Electronics of 24.38% equity interests in Guangdong Hua Da for a consideration of RMB1,855,563.23;
(viii)a share transfer agreement dated 21 November 2006 entered into between Mr. Dong Haoran as transferor and Hua Da Electronics as transferee in relation to the acquisition by Hua Da Electronics of 12.50% equity interest in Guangdong Hua Da for a consideration of RMB1 million;
(ix) a share transfer agreement dated 21 November 2006 entered into between Mr. Yang Lin as transferor and Hua Da Electronics as transferee in relation to the acquisition by Hua Da Electronics of 0.62% equity interest in Guangdong Hua Da for a consideration of RMB50,000; and
(x) a share transaction agreement dated 21 May 2008 entered into between Hua Da Electronics as transferor and Beijing Xu An Da Technology Co., Ltd. ( ) as transferee in relation to the disposal by Hua Da Electronics of 71.26% equity interests in Beijing Hua Da Xinan for a consideration of RMB5,000,000.

9. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2007, being the date to which the latest published audited consolidated financial statements of the Group were made up.

10. QUALIFICATIONS OF EXPERTS

The following are the qualifications of the professional advisers who have given opinions or advice contained in this circular:

Names	Qualifications
Altus	a licensed corporation for types 4, 6 and 9 regulated
	activites under the SFO

PricewaterhouseCoopers certified public accountants

– 154 –

GENERAL INFORMATION

APPENDIX V

11. CONSENTS

Altus and PricewaterhouseCoopers have given and have not withdrawn their respective written consent to the issue of this circular with the inclusion of their reports and letters, as the case may be, and references to their names in the form and context in which they respectively appear.

None of Altus nor PricewaterhouseCoopers is beneficially interested in the share capital of any member of the Group and none of them has any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

12. PROCEDURES FOR DEMANDING A POLL AT THE SGM

In accordance with the Listing Rules, any vote taken at the SGM to approve the China Hua Da Acquisition, the Beijing Shoufa Xinan Acquisition, the Other Vendors Acquisition and the Non-exempt Continuing Connected Transactions must be taken by poll. According to bye-law 66 of the bye-laws of the Company, 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 such meeting; or
(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) any Shareholder or Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or
(d) any Shareholder or Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

A poll shall be taken in such manner (including the use of ballot or voting papers or tickets) and either forthwith or at such time (being not later than thirty (30) days after the date of the demand) and place as the chairman of the SGM directs. On a poll, votes may be given either personally or by proxy and every Shareholder present in person or by proxy (or, in the case of a Shareholder being a corporation, by its duly authorised representative) shall have one vote for every fully paid Share of which he is the holder. The result of such poll shall be deemed to be the resolution of the meeting at which the poll was demanded.

– 155 –

GENERAL INFORMATION

APPENDIX V

13. MISCELLANEOUS

(a) The qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules and the company secretary of the Company is Mr. Yam Pui Hung, Robert. Mr. Yam is a certified public accountant of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants.
(b) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The principal place of business of the Company in Hong Kong is at Room 3503, 35th Floor, China Resources Building, 26 Harbour Road, Wanchai, Hong Kong.
(c) Tricor Abacus Limited, the Company’s branch share registrar in Hong Kong, is at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong.
(d) The English text of this circular and form of proxy shall prevail over the Chinese text.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at Linklaters, 10th Floor, Alexandra House, Chater Road, Hong Kong during normal business hours on any business day from the date of this circular up to and including 21 July 2008 and at the SGM:

(a) the China Hua Da Agreement;
(b) the Beijing Shoufa Xinan Agreement;
(c) the Other Vendors Agreement;
(d) the Business Services Agreement;
(e) the Deposit Services Agreement;
(f) the Sang Da Tenancy Agreement;
(g) the Great Wall Tenancy Agreement;
(h) the memorandum and articles of association of the Company;
(i) the letter of recommendation from the Independent Board Committee to the Independent Shareholders, the text of which is set out on pages 34 to 35 of this circular;
(j) the letter of advice from Altus to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 36 to 53 of this circular;

– 156 –

GENERAL INFORMATION

APPENDIX V

(k) the consent letters from Altus and PricewaterhouseCoopers referred to in the paragraph headed “Consents” in this Appendix;
(l) the accountant’s report of Target Group from PricewaterhouseCoopers, the text of which is set out in Appendix I to this circular;
(m) the report from PricewaterhouseCoopers on the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;
(n) the audited consolidated financial statements of the Group for each of the years ended 31 December 2005, 2006 and 2007; and
(o) the material contracts referred to in the paragraph headed “Material Contracts” in this Appendix.

– 157 –

NOTICE OF THE SGM

CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED

*

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability) (Stock Code: 00085)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting of the shareholders of China Electronics Corporation Holdings Company Limited (the “ Company ”) will be held at Plaza I-III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Monday, 21 July 2008 at 3:00 p.m. for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolutions as ordinary resolutions:

ORDINARY RESOLUTIONS

“ THAT the conditional equity transfer agreement dated 20 June 2008 and entered into between the Company as purchaser and (China Huada Integrated Circuit Design (Group) Co., Ltd.) (“ China Hua Da ”) as vendor (the “ China Hua Da Agreement ”, a copy of which has been initialled by the chairman of this meeting and for the purpose of identification marked “ A ”), pursuant to which the Company has agreed to purchase, and China Hua Da has agreed to sell, a 64.75% equity interest of (CEC Huada Electronic Design Co., Ltd.) (“ Hua Da Electronics ”) at a consideration of HK$984.20 million, which consideration shall be satisfied by the allotment and issue of 393,680,000 new shares (the “ China Hua Da Consideration Shares ” and each a “ China Hua Da Consideration Share ”) of HK$0.01 each in the share capital of the Company, credited as fully paid, at an issue price of HK$2.50 per China Hua Da Consideration Share to China Hua Da and that such China Hua Da Consideration Shares shall, when allotted and issued, rank pari passu in all respects with all other shares of the Company in issue as at the date of such allotment and issue, be and is hereby generally and unconditionally approved and any one director of the Company be and is hereby authorised to do all such further acts and things and execute all such further documents and take all such steps which he considers necessary, desirable or expedient to implement and/or give effect to the terms of the China Hua Da Agreement and the transactions contemplated thereunder.”

* For identification purpose only

– 158 –

NOTICE OF THE SGM

“ THAT the conditional equity transfer agreement dated 20 June 2008 and entered into between the Company as purchaser and (Beijing Shoufa Xinan Data System Technology Company Limited) (“ Beijing Shoufa Xinan ”) as vendor (the “ Beijing Shoufa Xinan Agreement ”, a copy of which has been initialled by the chairman of this meeting and for the purpose of identification marked “ B ”), pursuant to which the Company has agreed to purchase, and Beijing Shoufa Xinan has agreed to sell, a 7.50% equity interest of Hua Da Electronics at a consideration of HK$114 million, which consideration shall be satisfied by the allotment and issue of 45,600,000 new shares (the “ Beijing Shoufa Xinan Consideration Shares ” and each a “ Beijing Shoufa Xinan Consideration Share ”) of HK$0.01 each in the share capital of the Company, credited as fully paid, at an issue price of HK$2.50 per Beijing Shoufa Xinan Consideration Share to Beijing Shoufa Xinan and that such Beijing Shoufa Xinan Consideration Shares shall, when allotted and issued, rank pari passu in all respects with all other shares of the Company in issue as at the date of such allotment and issue, be and is hereby generally and unconditionally approved and any one director of the Company be and is hereby authorised to do all such further acts and things and execute all such further documents and take all such steps which he considers necessary, desirable or expedient to implement and/or give effect to the terms of the Beijing Shoufa Xinan Agreement and the transactions contemplated thereunder.”
“ THAT the conditional equity transfer agreement dated 20 June 2008 and entered into between the Company as purchaser and Wang Qinsheng, Liu Weiping, Dong Haoran, Huang Guoyong, Sun Xiaonian, Cheng Jinge, Xiao Gang and Jiang Shiping (collectively the “ Other Vendors ”) as vendors (the “ Other Vendors Agreement ”, a copy of which has been initialled by the chairman of this meeting and for the purpose of identification marked “ C ”), pursuant to which the Company has agreed to purchase, and the Other Vendors has agreed to sell, an aggregate of 27.75% equity interest of Hua Da Electronics at an aggregate consideration of HK$421.80 million, which consideration shall be satisfied by the allotment and issue of an aggregate of 168,720,000 new shares (the “ Other Vendors Consideration Shares ” and each a “ Other Vendors Consideration Share ”) of HK$0.01 each in the share capital of the Company, credited as fully paid, at an issue price of HK$2.50 per Other Vendors Consideration Share to the Other Vendors in accordance with the terms of the Other Vendors Agreement and that such Other Vendors Consideration Shares shall, when allotted and issued, rank pari passu in all respects with all other shares of the Company in issue as at the date of such allotment and issue, be and is hereby generally and unconditionally approved and any one director of the Company be and is hereby authorised to do all such further acts and things and execute all such further documents and take all such steps which he considers necessary, desirable or expedient to implement and/or give effect to the terms of the Other Vendors Agreement and the transactions contemplated thereunder.”

– 159 –

NOTICE OF THE SGM

“ THAT the continuing connected transactions contemplated under the business services agreement dated 20 June 2008 and entered into between Hua Da Electronics and (China Electronics Corporation), a copy of which has been

initialled by the chairman of this meeting and for the purpose of identification marked “ D ”, and the proposed annual caps be and are hereby generally and unconditionally approved and any one director of the Company be and is hereby authorised to do all such further acts and things and execute all such further documents and take all such steps which he considers necessary, desirable or expedient to implement and/or give effect to the terms of the continuing connected transactions contemplated thereunder.”

By Order of the Board China Electronics Corporation Holdings Company Limited Yam Pui Hung, Robert Company Secretary

Hong Kong, 30 June 2008

Registered office: Principal place of business in Hong Kong: Clarendon House Room 3503, 35th Floor 2 Church Street China Resources Building Hamilton HM 11 26 Harbour Road Bermuda Wanchai Hong Kong

Notes:

Any shareholder of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint another person as his proxy to attend and vote instead of him. A shareholder who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at the meeting. A proxy need not be a shareholder of the Company but must be present in person at the meeting to represent the shareholder. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
A form of proxy for use at the meeting is enclosed. In order to be valid, the form of proxy must be duly completed and signed in accordance with the instructions printed thereon and returned together with the power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority, to the Company’s branch share registrar in Hong Kong, Tricor Abacus Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of a form of proxy will not preclude a shareholder from attending in person and voting at the meeting or any adjournment thereof, should he so wish.
In the case of joint holders of any shares, any one of such holders may vote at the meeting, either personally or by proxy, in respect of such shares as if he were solely entitled thereto, but if more than one of such joint holders are present at the meeting personally or by proxy, that one of the said persons so present whose name stands first in the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.
In accordance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, voting on the above ordinary resolutions will be taken by poll.

– 160 –

AI assistant

Smart Fish Wealthlink Holdings Limited — Proxy Solicitation & Information Statement 2008

48979_rns_2008-06-29_6f1db8f1-0df4-4bd6-a4e0-bad38f95df15.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

MAJOR TRANSACTION, CONNECTED TRANSACTION

AND

CONTINUING CONNECTED TRANSACTIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED

MAJOR TRANSACTION, CONNECTED TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

THE ACQUISITION

(1) China Hua Da Agreement

(2) Beijing Shoufa Xinan Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Consideration Shares to be issued pursuant to the Acquisition

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions precedent

Information on Hua Da Electronics

LETTER FROM THE BOARD

Excluded assets

LETTER FROM THE BOARD

Reasons for and benefits of the Acquisition

LETTER FROM THE BOARD

Shareholding structure of the Company

LETTER FROM THE BOARD

Corporate structure immediately prior to completion of the Acquisition

Corporate structure immediately following completion of the Acquisition

LETTER FROM THE BOARD

Financial effects of the Acquisition on the Group

Earnings

Net asset value

LETTER FROM THE BOARD

Financial and trading prospects of the Group

Listing Rules implications

LETTER FROM THE BOARD

CONTINUING CONNECTED TRANSACTIONS

(1) Hua Da Business Services Agreement

LETTER FROM THE BOARD

(iii) Provision of canteen services by CEC Group

LETTER FROM THE BOARD

Historical figures of continuing connected transactions

Proposed annual caps

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(2) Hua Da Deposit Services Agreement

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(3) Hua Da Tenancy Agreement

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Listing Rules implications

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SGM

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RECOMMENDATION

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FURTHER INFORMATION

Yours faithfully

China Electronics Corporation Holdings Company Limited Xiong Qunli

CHINA ELECTRONICS CORPORATION HOLDINGS COMPANY LIMITED

*

MAJOR TRANSACTION, CONNECTED TRANSACTION AND

CONTINUING CONNECTED TRANSACTIONS

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MAJOR AND CONNECTED TRANSACTION ACQUISITION OF 100% EQUITY INTERESTS IN HUA DA ELECTRONICS

NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

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BASIS OF OUR ADVICE

PRINCIPAL FACTORS TAKEN INTO CONSIDERATION

I. THE ACQUISITION

1. Background of the transaction

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