SPT Energy Group Inc. - Proxy Solicitation & Information Statement 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt as to any aspect of this circular or as to the action you should take, 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 Wing Shan International Limited , you should at once hand this circular and the accompanying form of proxy to the purchaser or 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 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 purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for the shares or other securities in Wing Shan International Limited.

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND INCREASE IN AUTHORISED SHARE CAPITAL

Financial adviser to Wing Shan International Limited

Independent financial adviser to the Independent Board Committee and the Independent Shareholders

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A letter of recommendation from the Independent Board Committee to the Independent Shareholders and a letter of advice from AMS Corporate Finance Limited to the Independent Board Committee and the Independent Shareholders regarding the terms of the Agreement and the transactions contemplated thereunder are set out respectively on page 21 and pages 22 to 40 of this circular.

A notice convening an extraordinary general meeting of the Company to be held at the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong on Tuesday, 3 October 2006 at 10:00 a.m. is set out on pages 200 and 201 of this circular. Whether or not you will be able to attend the extraordinary general meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the extraordinary general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the extraordinary general meeting or any adjourned meeting if you so wish.

15 September 2006

	Pages
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
The Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
The Convertible Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Shareholding structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Information on the HHC Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Reasons for the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Financial impact of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Financial and trading prospects of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . .	18
Listing Rules implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Capital Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Letter from AMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix I – Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . .	41
Appendix II – Accountants’ report on the HHC Group . . . . . . . . . . . . . . . . . . . . . .	117
Appendix III – Unaudited pro forma financial information . . . . . . . . . . . . . . . . . . .	159
Appendix IV – Property valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	170
Appendix V – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	192
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	200

– i –

DEFINITIONS

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

“Acquisition” the proposed acquisition by the Company from the Vendor of the Sale Share and the benefits of and interests in the Sale Loan
“Affiliate” in respect of a company, means any subsidiary or holding company of such company or any subsidiary of any of the holding companies of such company
“Agreement” the conditional agreement dated 22 August 2006 entered into amongst the Company as purchaser, FDH as vendor and FDC as guarantor in relation to the Acquisition
“AMS” AMS Corporate Finance Limited, a corporation licensed under the SFO to conduct Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the SFO and the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders regarding the terms of the Agreement and the transactions contemplated thereunder
“Announcement” the announcement of the Company dated 22 August 2006 in relation to the Acquisition
“associate(s)” has the meaning ascribed thereto under the Listing Rules
“Board” the board of Directors
“Business Day(s)” any day (other than a Saturday) on which licensed banks are open for business in Hong Kong
“BVI” the British Virgin Islands
“Capital Increase” the proposed increase in authorised share capital of the Company as detailed herein
“Company” Wing Shan International Limited, a company incorporated in Hong Kong with limited liability, the Shares of which are listed on the Stock Exchange
“Completion” completion of the Agreement
“connected person” has the meaning ascribed thereto under the Listing Rules
“Consideration” the aggregate consideration of HK$282,400,000 for the Acquisition

– 1 –

DEFINITIONS

“Conversion Share(s)” the Share(s) to be issued by the Company upon exercise of the conversion rights attaching to the Convertible Note
“Convertible Note” the convertible note in the principal amount of HK$282,400,000 to be issued by the Company at an initial conversion price of HK$0.2975 per Conversion Share (subject to adjustments) for settlement of the Consideration at Completion
“Director(s)” director(s) of the Company
“DZH” 佛山德眾藥業有限公司 (Foshan Dezhong Pharmaceutical Co., Ltd.), a sino-foreign joint venture company established in the PRC
“EGM” the extraordinary general meeting of the Company to be held on Tuesday, 3 October 2006 at 10:00 a.m. to consider and, if thought fit, approve the Agreement and the transactions contemplated thereunder, the allotment and issue of the Conversion Shares and the Capital Increase
“Enlarged Group” the Group as enlarged by the Acquisition
“FDC” Foshan Development Company Limited, a company incorporated in Hong Kong with limited liability
“FDH” or “Vendor” Foshan Development (Holdings) Limited, a company incorporated in BVI with limited liability
“FLX” 佛山馮了性藥業有限公司 (Foshan Feng Liao Xing Pharmaceutical Co., Ltd.), a sino-foreign joint venture company established in the PRC
“Group” the Company and its subsidiaries
“Hensil Investments” Hensil Investments Group Limited, a company incorporated in BVI with limited liability which is wholly-owned by FDC
“HHC” Hensil Holdings Company Limited, a company incorporated in BVI with limited liability which is wholly-owned by the Vendor
“HHC Group” HHC and its subsidiaries
“HII” Hensil Industrial Inc., a company incorporated in BVI with limited liability
“HK$” Hong Kong dollars, the lawful currency of Hong Kong

– 2 –

DEFINITIONS

“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“HTI” Hensil Trading & Investments Limited, a company incorporated in BVI with limited liability
“Independent Board the independent board committee of the Company, comprising Committee” of all of the independent non-executive Directors, namely Messrs. CHAN Ting Chuen, David, NG Pui Cheung, Joseph and CHEUNG Kin Piu, Valiant, established to advise the Independent Shareholders regarding the terms of the Agreement and the transactions contemplated thereunder
“Independent Shareholders” Shareholders other than Hensil Investments, the Vendor, Mr. He and their respective associates
“Independent Third Party” a third party independent of the Company and its connected persons
“Latest Practicable Date” 12 September 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Mr. He” Mr. HE Haochang, the Chairman and the Managing Director of the Company
“PRC” the People’s Republic of China and for the purpose of this circular, excludes Hong Kong, the Macau Special Administrative Region and Taiwan
“RMB” Renminbi, the lawful currency of the PRC
“Sale Loan” the shareholder’s loan due from HHC to the Vendor and all obligations, liabilities and debts owing or incurred by HHC to the Vendor on the date of Completion, whether actual, contingent or deferred and irrespective of whether or not the same is due and payable on the date of Completion, which amounted to RMB60,848,410 (equivalent to approximately HK$59,655,000) as at the date of the Agreement
“Sale Share” one (1) ordinary share of US$1.00 each in HHC registered in the name of and held beneficially by the Vendor in the capital of HHC
“SFO” Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong

– 3 –

DEFINITIONS

“Shakou JV”	佛山市沙口發電廠有限公司(Foshan Shakou Power Plant
	Company Limited), a sino-foreign joint venture established
	in the PRC and an 80% owned subsidiary of the Company
“Shareholders”	holders of the Shares
“Shares”	ordinary shares of HK$0.10 each in the issued share capital
	of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“TCM”	traditional Chinese medicine
“US$”	United States dollars, the lawful currency of the United
	States of America
“%”	per cent.

Unless specified otherwise, an exchange rate of HK$1.00 to RMB1.02 has been adopted in this circular for illustration purposes.

– 4 –

LETTER FROM THE BOARD

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

Executive Directors: Mr. HE Haochang, Chairman and Managing Director Mr. LAM Siu Hung, Deputy Managing Director Mr. SITU Min Mr. LI Feng

Registered office: Rooms 2801-2805 China Insurance Group Building 141 Des Voeux Road Central Hong Kong

Independent non-executive Directors: Mr. CHAN Ting Chuen, David Mr. NG Pui Cheung, Joseph Mr. CHEUNG Kin Piu, Valiant

15 September 2006

To the Shareholders

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND INCREASE IN AUTHORISED SHARE CAPITAL

INTRODUCTION

On 22 August 2006, the Directors announced that on the same day, the Company as purchaser entered into the Agreement with FDH as vendor and FDC as guarantor pursuant to which (i) the Company has conditionally agreed to acquire and the Vendor has conditionally agreed to sell the Sale Share, representing the entire issued share capital of HHC; and (ii) the Company has conditionally agreed to acquire and the Vendor has conditionally agreed to sell and assign the benefits of and interests in the Sale Loan, for an aggregate consideration of HK$282,400,000 (subject to adjustment).

The Acquisition constitutes a very substantial acquisition for the Company under Chapter 14 of the Listing Rules. As detailed below, the Acquisition also constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. The Agreement and the transactions contemplated thereunder are subject to the approval of the Independent Shareholders at the EGM under the Listing Rules.

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LETTER FROM THE BOARD

In order to facilitate the issue of the Conversion Shares and any further new Shares, the Directors propose the Capital Increase as detailed below.

This circular provides you with, among other things, (i) further information on the Acquisition; (ii) the accountants’ report on the HHC Group; (iii) pro forma financial information on the Enlarged Group; (iv) the recommendation of the Independent Board Committee and advice of AMS regarding the terms of the Agreement and the transactions contemplated thereunder; (v) property valuation report for the Enlarged Group; (vi) information on the Capital Increase; and (vii) a notice of EGM.

THE AGREEMENT

Date

22 August 2006

Parties

Vendor:	FDH
Purchaser:	The Company
Guarantor:	FDC

Assets to be acquired

(i) The Sale Share, representing the entire issued share capital of HHC; and
(ii) the benefits of and interests in the Sale Loan.

HHC, as set out in more detail below, is an investment holding company and its principal assets are its indirect interests in (i) 51% of the registered capital of FLX; and (ii) 51% of the registered capital of DZH. Each of FLX and DZH is principally engaged in the production and sale of Chinese medicine and pharmaceutical products in the PRC.

Consideration

HK$282,400,000 in aggregate payable in full by way of issuance of the Convertible Note by the Company to FDC or its nominee(s) (as directed by the Vendor in consideration of FDC agreeing to guarantee the due and punctual observance and performance by the Vendor of all the Vendor’s obligations undertaken in the Agreement) at Completion.

Pursuant to the Agreement, in the event that the audited combined profit after taxation attributable to the shareholder of HHC for the year ended 31 December 2005 was less than

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LETTER FROM THE BOARD

RMB33,887,000 (equivalent to approximately HK$33,223,000), the Consideration shall be adjusted downward by the shortfall multiplied by a price earnings multiple of 8.5 times. Based on the accountants’ report on the HHC Group set out in Appendix II to this circular, the audited combined profit after taxation attributable to the shareholder of HHC for the year ended 31 December 2005 was RMB33,887,000 (equivalent to approximately HK$33,223,000). Accordingly, the Consideration is not required to be adjusted and remains unchanged to be HK$282,400,000.

Given both FDC and the Vendor are wholly-owned by the Foshan Municipal People’s Government of the PRC and in consideration of FDC acting as the guarantor of the performance of the Vendor in respect of the Agreement, the Vendor has agreed that the Convertible Note will be issued to FDC or its nominee(s) at Completion. Save as disclosed in this sub-section and as far as the Directors are aware, there is no arrangement between FDC and the Vendor as at the Latest Practicable Date in relation to the issuance of the Convertible Note and the settlement of the Consideration.

The Consideration has been agreed between the Company and the Vendor on an arm’s length basis with reference to (i) the unaudited combined profits after taxation of the HHC Group for the year ended 31 December 2005 and the five months ended 31 May 2006; (ii) the price earnings multiples of comparable listed companies which are engaged in a similar business of the HHC Group; (iii) the unaudited combined net asset value of the HHC Group as at 31 May 2006; and (iv) the business prospects of the HHC Group. In addition, the aggregate cost of purchase to the Vendor for the 51% interest in each of FLX and DZH amounted to approximately RMB60.0 million (equivalent to approximately HK$58.8 million) in relation to the conversion of each of FLX and DZH from a state-owned enterprise to a sino-foreign joint venture company in 2000 and 1998 respectively;

Conditions precedent

Completion shall be conditional upon the following conditions being fulfilled or waived (as the case may be):

(i) the receipt by the Company to its absolute satisfaction of a written legal opinion in relation to FLX and DZH issued by a firm of PRC lawyers appointed by the Company;
(ii) the passing at the EGM by the Independent Shareholders of an ordinary resolution to approve:
(a) the Agreement and the transactions contemplated thereunder (including the issue of the Convertible Note to FDC or its nominee(s) (at the direction of the Vendor));
(b) the allotment and issue of the Conversion Shares upon the exercise of the conversion rights attaching to the Convertible Note; and
(c) the increase in the authorised share capital of the Company from HK$110 million to HK$300 million by the creation of an additional 1,900,000,000 Shares.
(iii) the Listing Committee of the Stock Exchange granting an approval for the listing of, and permission to deal in, the Conversion Shares to be issued upon the exercise of the conversion rights attaching to the Convertible Note;

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LETTER FROM THE BOARD

(iv) there being no breach of any terms of the Agreement on the part of the Vendor in any material respect; and
(v) if necessary, the obtaining of all relevant third party consents or approvals for the purpose of transferring any of the Sale Share and/or the Sale Loan in accordance with the terms of the Agreement.

Each of the Company, the Vendor and FDC shall use their respective reasonable endeavours to procure the satisfaction of all the above conditions on or before 31 December 2006. In the event that any of the above conditions have not been fulfilled (or otherwise waived by the Company in writing provided that the conditions set out in paragraphs (ii) and (iii) above cannot be waived by the Company) on or before 31 December 2006 (or such later date as is otherwise agreed by the Company, the Vendor and FDC in writing), the Agreement shall cease and determine and be of no further effect, and no party to the Agreement shall be entitled to any rights or benefits or be under any obligation under or in respect of the Agreement or have any liability to any other parties.

As at the Latest Practicable Date, none of the above conditions has been fulfilled or waived (as the case may be).

Completion

Completion will take place within three (3) Business Days after the Agreement has become unconditional (or such later date as the Company, the Vendor and FDC may agree in writing).

THE CONVERTIBLE NOTE

Principal terms of the Convertible Note

Aggregate principal amount of the Convertible Note: HK$282,400,000. Conversion price: HK$0.2975 per Conversion Share, subject to adjustments in certain events including share consolidation, share subdivision, capitalisation issue, capital distribution, rights issue and issue of convertible securities by the Company. Interest rate: 3% per annum, payable in arrears once every six (6) months, the first payment date shall be six (6) months after the date of issue of the Convertible Note. Maturity date: The day immediately preceding the 42nd month, being three and a half (3.5) years, of the date of issue of the Convertible Note.

Redemption: The Company may, subject to the approval of its independent Shareholders, at any time on or after the date of issue of the Convertible Note and prior to the maturity date redeem the whole or any part of the principal amount outstanding under the Convertible Note at the early redemption amount

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LETTER FROM THE BOARD

together with a redemption premium of 1.5% calculated on the early redemption amount subject to the payment of the coupon interest of 3% accrued thereon but unpaid on the early redemption amount. Unless previously converted and cancelled, the Company shall at the maturity date redeem the Convertible Note at its principal amount outstanding together with interest accrued thereon but unpaid up to and including the maturity date.

Transferability:

The Convertible Note may not be transferred to any company or any other person which is a connected person of the Company without the prior written consent of the Company other than to an Affiliate of the holder of the Convertible Note.

Conversion period:

The holders of the Convertible Note may at any time on or after the date of issue of the Convertible Note and on or prior to the maturity date, require the Company to convert, the whole or any part(s) of the principal amount outstanding under the Convertible Note into Conversion Shares at the conversion price provided that the principal amount of the Convertible Note converted at any one time shall be not less than HK$1,000,000) unless the principal amount outstanding is less than HK$1,000,000 in which case, the principal amount converted shall be the whole principal amount outstanding. The Company shall be entitled to defer the allotment and issue of the Conversion Shares to such time as shall be required for it to ensure that immediately upon the allotment and issue of such Conversion Shares, the public float of the Shares will not fall below the limits prescribed under the Listing Rules.

Voting:

The holder of the Convertible Note will not be entitled to receive notices of, attend or vote at any meetings of the Company by reason only of it being a holder of the Convertible Note.
Listing:

No application will be made for the listing of the Convertible Note on the Stock Exchange or any other stock exchange. An application has been made by the Company for the listing of, and permission to deal in, the Conversion Shares to be issued as a result of the exercise of the conversion rights attaching to the Convertible Note.

Ranking: (i) The Convertible Note will rank pari passu with all other present and future unsecured and unsubordinated obligations of the Company.

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LETTER FROM THE BOARD

(ii) The Conversion Shares to be issued as a result of the exercise of the conversion rights attaching to the Convertible Note will rank pari passu in all respects with all other existing Shares outstanding at the date of conversion of the Convertible Note.

Conversion Shares

Upon full conversion of the Convertible Note, a total of 949,243,697 Conversion Shares will be issued, representing approximately 114.35% of the existing issued share capital of the Company and approximately 53.35% of the issued share capital of the Company as enlarged by the issue of such Conversion Shares.

Conversion price

The conversion price of HK$0.2975 per Conversion Share represents:

(i) a discount of 0.83% to the closing price of HK$0.3000 per Share as quoted on the Stock Exchange as at the Latest Practicable Date;
(ii) a premium of 6.25% over the closing price of HK$0.2800 per Share as quoted on the Stock Exchange on 22 August 2006, being the date of the Announcement;
(iii) a premium of approximately 1.02% over the average closing price of HK$0.2945 per Share for the last 10 trading days up to and including 22 August 2006; and
(iv) a premium of approximately 0.17% over the average closing price of HK$0.2970 per Share for the last 30 trading days up to and including 22 August 2006.

SHAREHOLDING STRUCTURE

Set out below are the shareholding structures of the Company immediately before and after the Acquisition and immediately upon full conversion of the Convertible Note:

Shareholders Hensil Investments_(Note 1) FDC(Notes 1 & 4) Madam YIP Siu Chun Mr. He(Note 2) Mr. CHAN Ting Chuen, David(Note 3)_ Public Shareholders Total	Immediately before and after the Acquisition Shares % 315,000,000 37.95 – 0.00 315,000,000 37.95 290,196,037 34.96 6,117,079 0.74 828,000 0.10 218,005,128 26.25 830,146,244 100.00	Immediately upon full conversion of the Convertible Note Shares % 315,000,000 17.70 949,243,697 53.35 1,264,243,697 71.05 290,196,037 16.31 6,117,079 0.34 828,000 0.05 218,005,128 12.25 1,779,389,941 100.00	Immediately upon full conversion of the Convertible Note Shares % 315,000,000 17.70 949,243,697 53.35 1,264,243,697 71.05 290,196,037 16.31 6,117,079 0.34 828,000 0.05 218,005,128 12.25 1,779,389,941 100.00
			71.05 16.31 0.34 0.05 12.25
			100.00

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LETTER FROM THE BOARD

Notes:

Hensil Investments is wholly-owned by FDC. Therefore, there will be no change in control of the Company as a result of the Acquisition and upon full conversion of the Convertible Note.
Mr. He is the Chairman and the Managing Director of the Company and holds his equity interest in the Company through a 50% owned company, namely Main Fortune International Limited. According to the respective registers of members of FDC and the Vendor, Mr. He is a registered holder of a 75% shareholding interest in FDC and the entire shareholding interest in the Vendor.
Mr. CHAN Ting Chuen, David is an independent non-executive Director.
The Company shall be entitled to, and has confirmed that it will, defer the allotment and issue of the Conversion Shares to such time as shall be required for it to ensure that immediately upon the allotment and issue of such Conversion Shares, the public float of the Shares will not fall below the minimum limit as prescribed under the Listing Rules.

INFORMATION ON THE HHC GROUP

The HHC Group is an investment holding company and its principal assets are its indirect interests in (i) 51% of the registered capital of FLX; and (ii) 51% of the registered capital of DZH. Each of FLX and DZH is principally engaged in the production and sale of Chinese medicine and pharmaceutical products in the PRC. Set out below are the simplified structures of the HHC Group immediately before and after Completion:

Immediately before Completion

==> picture [327 x 182] intentionally omitted <==

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

Vendor
100%
HHC (Note 2)
100%
Co A (Note 1) HTI (Note 2) HII (Note 2) Co B (Note 1)
49% 51% 51% 49%
FLX DZH
----- End of picture text -----

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LETTER FROM THE BOARD

Immediately after Completion

==> picture [327 x 183] intentionally omitted <==

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

Company
100%
HHC (Note 2)
100%
Co A (Note 1) HTI (Note 2) HII (Note 2) Co B (Note 1)
49% 51% 51% 49%
FLX DZH
----- End of picture text -----

Notes:

To the best of the knowledge, information and belief of the Directors and having made all reasonable enquiries, each of Co A, Co B and their respective ultimate beneficial owners is an Independent Third Party as at the Latest Practicable Date.
Each of HHC, HTI and HII is principally engaged in investment holding. The principal assets of these companies are their respective interests in FLX and DZH.

FLX and DZH

FLX and DZH are principally engaged in the production and sale of Chinese medicine and pharmaceutical products in the PRC. The customers of FLX and DZH mainly include clinics and chemists located in the PRC. Each of FLX and DZH has a long established history, which dates back to around 1957, in Chinese medicine and pharmaceutical business and their existing operations include research and development, manufacturing and sale of Chinese medicine and pharmaceutical products. At present, the main forms of products of FLX and DZH include granules, pills, tablets and soft capsules. Both FLX and DZH have an extensive sales and marketing network in the PRC. Currently, DZH has offices located in 25 provinces in the PRC while FLX has a sales and marketing team focusing on the market in the southern part of the PRC.

Set out below are the major products of each of FLX and DZH:

FLX	DZH
馮了性風濕跌打藥酒	鼻炎康片(Bi Yian Kang Tablet)
(Feng Liao Xing Dieda Rheumatism Medicinal Wine)
保濟丸(Bao Ji Pills)	鼻炎滴劑（噴霧型）(Bi Yian Di Jie (Spray))
竭紅跌打酊(Jie Hong Dieda Tincture)	維C銀翹片(Vitamin C Ying Qiao Tablet)
大活絡丸(Dahuoluo Pills)	牛黃解毒片(Niuhuang Jiedu Tablet)
蛇膽川貝散(She Dan Chuan Bei Powder)	少林跌打止痛膏(Shao Lin Dieda Herbal Plasters)
	腰腎膏(Yao Shen Herbal Plasters)

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LETTER FROM THE BOARD

Management discussion and analysis

Set out below is a summary of the financial information on the HHC Group, which is extracted from the accountants’ report on the HHC Group contained in Appendix II to this circular for each of the three years ended 31 December 2005 and the five months ended 31 May 2006:

				Five months ended	Five months ended
	Year ended 31 December			31 May
	2003	2004	2005	2005	2006
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	_(audited) _	(unaudited)	(audited)
Turnover	305,556	326,975	338,182	147,727	146,074
Gross profit	134,291	142,432	149,385	68,980	64,009
Profit before taxation	72,705	77,196	76,171	40,408	30,606
Profit for the year/period	63,806	67,484	66,797	35,528	26,902
	As at 31 December			As at 31 May
	2003	2004	2005		2006
	RMB’000	RMB’000	RMB’000		RMB’000
	(audited)	(audited)	(audited)		(audited)
Non-current assets	172,302	158,695	154,878		149,946
Current assets	150,417	210,799	228,301		206,709
Current liabilities	(132,066)	(129,070)	(140,104)		(196,252)
Non-current liabilities	(1,132)	(950)	(243)		(238)
Net assets	189,521	239,474	242,832		160,165

Set out below are the key financial performance ratios derived from the accountants’ report on the HHC Group contained in Appendix II to this circular:

				Five months
	Year	ended 31 December		ended 31 May
	2003	2004	2005	2006
Gross profit margin	43.9%	43.6%	44.2%	43.8%
Net profit margin	20.9%	20.6%	19.8%	18.4%
Return on net assets	33.7%	28.2%	27.5%	16.8%
Gearing ratio_(Note)_	3.2%	4.2%	8.2%	3.7%
Current ratio	1.14	1.63	1.63	1.05
Year/period on year/period
turnover growth/(decline)	N/A	7.0%	3.4%	(1.1)%
Year/period on year/period
net profit growth/(decline)	N/A	5.8%	(1.0)%	(24.3)%

Note: Bank loans (excluding advance by the shareholders and other operating-related liabilities) divided by total equity.

– 13 –

LETTER FROM THE BOARD

Business review

For the year ended 31 December 2003

During the year, the HHC Group recorded a turnover of approximately RMB306 million and a profit for the year of approximately RMB64 million. Gross profit margin and net profit margin were approximately 43.9 % and 20.9 % respectively.

DZH had a well-established nationwide sales network, and had offices in over 20 provinces for liaison with its sole agents, distributors and retailers. FLX focused its marketing efforts on the southern part of the PRC including Guangdong, Hunan and Guangxi Provinces and maintained a network of distributors and agents.

For the year, the HHC Group’s cost of sales amounted to approximately RMB171 million. Direct materials, direct labour and production overheads accounted for approximately 60.3%, 16.2% and 23.5% of the total cost of sales respectively.

For the year ended 31 December 2004

The HHC Group’s turnover for the year grew by 7.0% to reach approximately RMB327 million. With effective control of production and operating costs, profit for the year reached approximately RMB67 million, representing an increase of 5.8% on the previous year. The gross profit margin and net profit margin were approximately 43.6% and 20.6% respectively, which were consistent with those in 2003.

鼻炎康片 (Bi Yian Kang Tablet) with a brand name of “德眾 (Dezhong)”, which accounted for approximately 33.0% of the HHC Group’s turnover for 2004, is a leading Chinese medicine for rhinitis.

The two major products of FLX, namely 馮了性風濕跌打藥酒 (Feng Liao Xing Dieda Rheumatism Medicinal Wine) and 大活絡丸 (Dahuoluo Pills) accounted for approximately 9.4% and 3.4% of the HHC Group’s turnover for 2004 respectively.

For the year ended 31 December 2005

The momentum of the HHC Group’s business remained stable in 2005. Turnover increased by 3.4% to approximately RMB338 million. Profit for the year amounted to approximately RMB67 million, being relatively stable compared to the previous year. Although the net profit margin mildly dropped by approximately 1% to 19.8%, the gross profit margin remained stable at approximately 44.2%. The decline in net profit margin for the year was mainly due to higher selling expenses, which increased by approximately 16.8% compared to that for the previous year.

During the year, the HHC Group consolidated its marketing efforts for the existing sales regions. In order to further enhance the awareness of its brand name of “德眾 (Dezhong)” in the Pearl River region and in Guangdong Province, DZH advertised through television, radio, subway and internet its three major products, namely 維 C銀翹片 (Vitamin C Ying Qiao Tablet), 鼻炎滴劑 (噴霧型 ) (Bi Yian Di Jie (Spray)) and 腰腎膏 (Yao Shen Herbal Plasters).

– 14 –

LETTER FROM THE BOARD

In 2005, FLX allocated resources for the marketing of a new product 蛇膽川貝含片 (She Dan Chuan Bei Bulb Tablet). The sales of the best-seller of FLX, namely 馮了性風濕跌打藥酒 (Feng Liao Xing Dieda Rheumatism Medicinal Wine) achieved a growth of 16.0% to approximately RMB35 million for 2005.

For the five months ended 31 May 2006

The HHC Group’s turnover reached approximately RMB146 million, which was almost the same as that for the corresponding period of the previous year. Profit for the period amounted to approximately RMB27 million, representing a decrease of approximately 24.3% compared to that for the corresponding period of the previous year. Such decrease was mainly owing to increased selling expenses incurred by DZH for fostering its three major products, namely 維 C銀翹片 (Vitamin C Ying Qiao Tablet), 鼻炎滴劑（噴霧型）(Bi Yian Di Jie (Spray)) and 腰腎膏 (Yao Shen Herbal Plasters). Such increase was due to more aggressive marketing campaigns on those products, they could be developed into another national branded products of DZH such as 鼻炎康片 (Bi Yian Kang Tablet).

Cash flows

For each of the three years ended 31 December 2005 and the five months ended 31 May 2006, the HHC Group recorded net cash generated from operating activities of approximately RMB62 million, RMB59 million, RMB63 million and RMB12 million respectively.

Financial position

Current fund and financial resources

As at 31 December 2003, 2004, 2005 and 31 May 2006, the cash and cash equivalents of the HHC Group were approximately RMB89 million, RMB134 million, RMB132 million and RMB105 million respectively. The current ratios, calculated on the basis of current assets over current liabilities, were 1.14, 1.63, 1.63, and 1.05 respectively.

Bank loans and gearing ratios

As at 31 December 2003, 2004, 2005 and 31 May 2006, the unsecured bank loans of the HHC Group were RMB6 million, RMB10 million, RMB20 million and RMB6 million respectively. The gearing ratios, calculated on the basis of the HHC Group’s bank loans divided by total equity, were maintained at healthy levels of 3.2%, 4.2%, 8.2%, and 3.7% respectively.

Foreign currency risk

The HHC Group has not been affected by the risk of foreign exchange because its business and production are principally conducted in the PRC.

Capital commitments

As at 31 December 2003, 2004, 2005 and 31 May 2006, the capital commitments of the HHC Group were approximately RMB15 million, RMB9 million RMB13 million and RMB13 million respectively.

– 15 –

LETTER FROM THE BOARD

Employees and remuneration policies

As at 31 May 2006, the HHC Group had around 900 employees. Remuneration is determined by reference to market terms, performance, number of years of service, qualifications and experience of individual employees. Other benefits include contributions to retirement scheme, medical scheme, unemployment insurance and housing fund required by social security authorities of Foshan City.

Material acquisitions and disposals of subsidiaries and associated companies

During the three years ended 31 December 2005 and the five months ended 31 May 2006, there were no material acquisitions and disposals of subsidiaries and associated companies carried out by the HHC Group.

REASONS FOR THE ACQUISITION

The Group is currently engaged in the generation and sale of electricity in Foshan City, Guangdong Province, PRC. Due to the persistent surge of fuel oil prices and the inflexible ongrid tariff adjustment under the strict control of the relevant authorities of the Guangdong Provincial Government, the Group recorded significant losses for the year ended 31 December 2005 and for the six months ended 30 June 2006.

The Board considers that despite the potential dilution of shareholding in the Company as a result of the conversion of the Convertible Note and that such conversion is subject to public float requirements under the Listing Rules, the Acquisition represents a good opportunity for the Group to diversify its business into the pharmaceutical sector which FLX and DZH have a long and successful history of operations and reputable products in the market. Further, in view of the solid financial performance and the business prospects of both FLX and DZH, the Board considers that the Acquisition provides a good opportunity to improve the Group’s operating results in the future.

The Directors consider that the Acquisition are on normal commercial terms after arm’s length negotiations and that the terms thereof are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

FINANCIAL IMPACT OF THE ACQUISITION

Set out in Appendix III to this circular is the unaudited pro forma financial information on the Enlarged Group which illustrates the financial impacts of the Acquisition on the assets, liabilities, results and cash flows of the Enlarged Group. Shareholders should note that, as more particularly explained in the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular, the unaudited pro forma combined income statement and cash flow statement of the Enlarged Group for the year ended 31 December 2005 is prepared on the basis that the Acquisition had been completed on 1 January 2005 whereas the combined balance sheet of the Enlarged Group as at 30 June 2006 is prepared on the basis that the Acquisition had been completed on 30 June 2006. Given the unaudited pro forma financial information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information, the unaudited pro forma financial information of the Enlarged Group does not purport to describe the actual financial position or trading results of the Enlarged Group as a result of the completion of the Acquisition. Shareholders are reminded to exercise caution in reading such unaudited pro forma financial information.

– 16 –

LETTER FROM THE BOARD

As illustrated in the pro forma combined income statement of the Enlarged Group for the year ended 31 December 2005, the loss attributable to the equity shareholders of the Company, on a pro forma combined basis, would be increased by approximately HK$1 million from approximately HK$762.6 million to approximately HK$763.6 million as a result of the completion of the Acquisition despite a contribution of approximately HK$32.2 million profit attributable to the equity shareholders of the Company resulted from the acquisition of HHC. Such decrease would be mainly driven by the adoption, for purpose of the pro forma combined income statement, of an effective interest rate method in the non-current liability portion of the Convertible Note as stipulated under the Hong Kong Financial Report Standards, which would result in an approximately HK$15.7 million finance charges to the pro forma combined income statement of the Enlarged Group, on top of the annual 3% coupon interest payment of the Convertible Note of approximately HK$8.5 million. However, the aforesaid additional finance charges of HK$15.7 million will have no impact on the cash flow of the Enlarged Group. Details of the aforesaid adjustments are more particularly explained under notes (a) and (b) of the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular.

The total current liabilities of the Group of approximately HK$430.7 million as at 30 June 2006 (the majority of which is comprised of the amount due to related company of approximately HK$265.7 million which are trade-related in nature and mainly arisen because of the purchases of heavy oil from related companies of the Group) would be increased, on a pro forma combined basis, to approximately HK$624.4 million as a result of the completion of the Acquisition. The aforesaid increase would be mainly due to the combination of the current liabilities of the HHC Group as a result of the completion of the Acquisition and the increase in approximately HK$62.7 million derivative financial liability portion of the Convertible Note as a result of the issuance of the Convertible Note, the details of which are more particularly illustrated in the unaudited pro forma combined balance sheet of the Enlarged Group as set out in Appendix III to this circular. Based on note (a) of the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular, such derivative financial liability portion of the Convertible Note of approximately HK$62.7 million will be remeasured at each future balance sheet date and any gain or loss as a result of such remeasurement to fair value will be credited/charged to the profit and loss account of the Enlarged Group as stipulated under the Hong Kong Financial Report Standards. This derivative financial liability portion of the Convertible Note would mainly comprise of the call option element (being the subscription right which is exercisable at the option of the holder of the Convertible Note) and the early redemption right (which is exercisable at the option of the Group (subject to certain conditions)) of the Convertible Note. Given that the time value embedded in such derivative financial liability portion of the Convertible Note will be diminished throughout the life of the Convertible Note, the value of such derivative financial liability, (if other factors remain unchanged) as recorded on each future balance sheet date is expected to decline and such decrease in liability will be credited to the profit and loss account of the Enlarged Group.

The total non-current liabilities of the Group of approximately HK$289.6 million as at 30 June 2006 would also be increased, on a pro forma combined basis, to approximately HK$545.1 million as a result of completion of the Acquisition and such increase would be mainly due to the combination of the non-current liabilities of the HHC Group as a result of the completion of the Acquisition and the increase in approximately HK$219.7 million non-current liability portion of the Convertible Note as a result of the issuance of the Convertible Note, the details of which are more particularly illustrated in the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular.

– 17 –

LETTER FROM THE BOARD

Despite the aforesaid treatment of the Convertible Note in the pro forma combined balance sheet of the Enlarged Group, i.e. splitting of the principal amount of the Convertible Note of HK$282.4 million into approximately HK$219.7 million as non-current liability and approximately HK$62.7 million as current derivative financial liability, the total equity attributable to equity shareholders of the Company of approximately HK$357.4 million as at 30 June 2006, on the pro forma combined basis, remains unchanged.

On the assets side, goodwill of approximately HK$111 million would be generated as a result of the Acquisition, which represents the excess of the Consideration over the Company’s interest in the estimated fair value of the net identifiable assets and liabilities of the HHC Group. Such amount will be maintained as an intangible asset in the consolidated balance sheet of the Enlarged Group and subject to impairment test annually as stipulated under the Hong Kong Financial Reporting Standards. The unaudited pro forma consolidated total assets and total liabilities of the Enlarged Group would be approximately HK$1,777 million and HK$1,169 million respectively, representing an increase of approximately 52.7% and 62.4% respectively from the unaudited consolidated total assets and total liabilities of the Group of approximately HK$1,164 million and HK$720 million respectively as at 30 June 2006.

Upon Completion, HHC will become a wholly-owned subsidiary of the Company, and the results of HHC will be consolidated into the Group’s financial statements. The Directors believe that the Acquisition will positively contribute to the earnings base of the Group but the quantification of such impact will depend on the future performance of the HHC Group.

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

Despite the fact that Foshan City has been experiencing sustained electricity demand growth as a result of the persistent and strong growth of economic activities in Guangdong Province, operating environment remains extremely difficult for the Group as fuel oil price surges as a result of the volatile international oil market. Moreover, on-grid tariff adjustment continues to be inflexible under the strict control of the relevant authorities of the Guangdong Provincial Government which has caused deferral in increasing on-grid tariff.

The Board considers that the Acquisition represents a good opportunity for the Group to diversify its business risk with prospects of improving the Group’s operating results in the future.

There is growing health consciousness within the community as the population is aging in the PRC and the rest of world. This has created a lot of medical needs. In recent years, TCM has been an area which interests both local and foreign medical researchers. The number of universities and institutions providing courses and seminars to practitioners and trainees has been increasing. Guangdong Provincial People’s Government and Foshan Municipal People’s Government have decided to promote TCM and develop themselves as TCM leaders in the PRC. Taking consideration of the years of heritage and goodwill of DZH and FLX in the TCM industry in the PRC, the Board is confident in the HHC Group’s future growth which would contribute positively to the results of the Enlarged Group.

– 18 –

LETTER FROM THE BOARD

Based on the coupon interest rate of 3% per annum for the Convertible Note and the Consideration amount of HK$282.4 million, the annual interest payment for the Convertible Note amounts to approximately HK$8.5 million. The aforesaid annual interest payment during the life of the Convertible Note should be adequately served by the estimated distribution from HHC based on the average net cash inflow from operating activities of the HHC Group of approximately RMB61.6 million (equivalent to approximately HK$60.4 million) for the three financial years ended 31 December 2005.

Given the three and a half year term of the Convertible Note and the early redemption right available to the Group, the Directors will exercise their discretion as to whether to exercise this right prior to the expiry date to redeem the Convertible Note by having due regard to the working capital position of the Group.

LISTING RULES IMPLICATIONS

As at the Latest Practicable Date, FDC indirectly held 315,000,000 Shares, representing approximately 37.95% of the issued share capital of the Company. Both FDC and the Vendor are wholly-owned by the Foshan Municipal People’s Government of the PRC. Accordingly, the Vendor is an associate of FDC and hence a connected person of the Company. The Acquisition therefore constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. In addition, Mr. He (the Chairman and Managing Director of the Company) is a director of the Vendor. On the above basis, the Agreement and the transactions contemplated thereunder are subject to the approval of the Independent Shareholders at the EGM under the Listing Rules. The Acquisition also constitutes a very substantial acquisition for the Company under Chapter 14 of the Listing Rules.

CAPITAL INCREASE

As at the Latest Practicable Date, the authorised share capital of the Company comprised of 1,100,000,000 Shares of which 830,146,244 Shares were in issue. In order to facilitate the issue of the Conversion Shares and any further new Shares, the Directors propose to increase the authorised share capital of the Company from HK$110,000,000 to HK$300,000,000 by the creation of an additional 1,900,000,000 Shares. Such new Shares, when issued, will rank pari passu in all aspects with the existing issued Shares.

EGM

A notice of the EGM is set out on pages 200 to 201 of this circular. At the EGM, an ordinary resolution will be proposed to the Independent Shareholders to consider and, if thought fit, approve the Agreement and the transactions contemplated thereunder, the allotment and issue of the Conversion Shares and the Capital Increase.

At the EGM, votes of the Independent Shareholders for the resolution will be taken on a poll. FDC, Hensil Investments (a wholly-owned subsidiary of FDC) the Vendor, Mr. He and their respective associates will abstain from voting on such resolution at the EGM. As at the Latest Practicable Date, the aggregate shareholding interests held by Hensil Investments and Mr. He amounted to approximately 38.69% of the total issued share capital of the Company and they have control over the voting right in respect of all of their Shares. Save as the aforesaid, as at the Latest Practicable Date, none of FDC, Hensil Investments (a wholly-owned subsidiary of FDC) the Vendor, Mr. He or their associates had any shareholding interest in the Company.

– 19 –

LETTER FROM THE BOARD

The results of voting at the EGM will be announced by the Company following the conclusion thereof.

Whether or not you will be able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting if you so wish.

RECOMMENDATION

The Independent Board Committee comprising all of the three independent non-executive Directors has been established to advise the Independent Shareholders on the terms of the Agreement and the transactions contemplated thereunder. None of the members of the Independent Board Committee has any interest in the Agreement and the transactions contemplated thereunder. Your attention is drawn to its letter of recommendation set out on page 21 of this circular.

AMS has been appointed to advise the Independent Board Committee and the Independent Shareholders in the same regard. Your attention is drawn to its letter of advice set out on pages 22 to 40 of this circular.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular.

Your faithfully, For and on behalf of

WING SHAN INTERNATIONAL LIMITED HE Haochang Chairman and Managing Director

– 20 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter of recommendation from the Independent Board Committee which has been prepared for the purpose of inclusion in this circular:

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 570)

15 September 2006

To the Independent Shareholders

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

We refer to the circular of the Company dated 15 September 2006 (the “Circular”), of which this letter forms part. Unless specified otherwise, capitalised terms used herein shall have the same meanings as those defined in the Circular.

We have been appointed by the Board to advise you on the terms of the Agreement and the transactions contemplated thereunder. AMS has been appointed as the independent financial adviser to advise you and us in this regard. Details of their advice, together with the principal factors and reasons they have taken into consideration in giving such advice, are set out on pages 22 to 40 of the Circular. Your attention is also drawn to the letter from the Board in the Circular and the additional information set out in the appendices thereto.

Having considered the terms of the Agreement and the transactions contemplated thereunder and taking into account of the independent advice of AMS, in particular the principal factors, reasons and recommendation as set out in its letter on pages 22 to 40 of the Circular, we consider that the terms of the Agreement and the transactions contemplated thereunder are fair and reasonable in so far as the Independent Shareholders are concerned and the entering into of the Agreement is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend that you vote in favour of the ordinary resolution to be proposed at the EGM to approve the Agreement and the transactions contemplated thereunder, the allotment and issue of the Conversion Shares and the Capital Increase.

Yours faithfully, Independent Board Committee

CHAN Ting Chuen, David NG Pui Cheung, Joseph CHEUNG Kin Piu, Valiant Independent non-executive Directors

– 21 –

LETTER FROM AMS

The following is the text of the letter of advice from AMS which has been prepared for the purpose of inclusion into this circular:

==> picture [249 x 36] intentionally omitted <==

20th Floor Hong Kong Diamond Exchange Building 8-10 Duddell Street Central Hong Kong

15 September 2006

To the Independent Board Committee and the Independent Shareholders of Wing Shan International Limited

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders of Wing Shan International Limited (the “Company”) in respect of the Acquisition, details of which are set out in the letter from the Board (the “Letter from the Board”) contained in the circular dated 15 September 2006 issued by the Company to the Shareholders (the “Circular”), of which this letter forms part. Unless otherwise stated, terms used in this letter shall have the same meanings as those defined in the Circular.

On 22 August 2006, the Board announced that the Company (as purchaser) entered into the Agreement with FDH (as vendor) and FDC (as guarantor) on the same day pursuant to which the Company has conditionally agreed to acquire from FDH the Sale Share and the Sale Loan for an aggregate consideration of HK$282,400,000, and FDC has conditionally agreed to guarantee the due and punctual observance and performance by FDH of all its obligations under the Agreement.

Pursuant to the Listing Rules, the Acquisition constitutes a very substantial acquisition of the Company. In addition, since FDC indirectly held 315,000,000 Shares (representing approximately 37.95% of the total issued share capital of the Company) and both FDC and FDH were wholly owned by the Foshan Municipal People’s Government of the PRC as at the date of the Agreement, each of FDC and FDH is considered to be a connected person of the Company under the Listing Rules and the entering into of the Agreement therefore constitutes a connected transaction of the Company which is subject to, among other things, the approval of the Independent Shareholders at a general meeting of the Company.

– 22 –

LETTER FROM AMS

The Independent Board Committee, comprising all the independent non-executive Directors, has been established to consider the transactions contemplated under the Agreement and to advise the Independent Shareholders on the fairness and reasonableness of these transactions. As the independent financial adviser to the Independent Board Committee and the Independent Shareholders, our role is to give an independent opinion to the Independent Board Committee and the Independent Shareholders as to (i) whether or not the entering into of the Agreement is in the interests of the Company and the Shareholders as a whole; (ii) whether the terms of the Agreement are fair and reasonable; and (iii) how the Independent Shareholders should vote in respect of the resolution to approve the Agreement and the transactions contemplated thereunder at the EGM.

Apart from the normal advisory fee payable to us in connection with our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders, no arrangement exists whereby we shall receive any other fees or benefits from the Company. We are independent of the Company for the purposes of Rule 13.84 of the Listing Rules.

BASIS OF OUR OPINION

In formulating our opinion, we have relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Company, its advisers and the Directors. We have assumed that all information, representations and opinions contained or referred to in the Circular, which have been provided by the Company and the Directors and for which they are solely and wholly responsible, were true and accurate at the time they were made and continue to be so at the date hereof. We have no reason to believe that any information and representations relied on by us in forming our opinion is untrue, inaccurate or misleading, nor are we aware of any material facts the omission of which would render the information provided and the representations made to us untrue, inaccurate or misleading. The Directors have confirmed, 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 there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We consider that we have reviewed sufficient information which enables us to form a reasonable basis for our opinion. We also consider that we have performed all reasonable steps as required under Rule 13.80 of the Listing Rules to ascertain the reliability of the information provided to us and to form our opinion. We have not, however, conducted any independent verification of the information provided, nor have we carried out any in-depth investigation into the business and affairs of the Group or the HHC Group or the prospects of the market in which they operate respectively.

– 23 –

LETTER FROM AMS

PRINCIPAL FACTORS AND REASONS CONSIDERED

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

I. Background information and reasons for the Agreement

The Group is principally engaged in the generation and sale of electricity in Foshan City, Guangdong Province, the PRC. The following is a summary of the financial results of the Group for each of the three years ended 31 December 2005 and the six months ended 30 June 2006.

Turnover Cost of sales Gross profit/(loss) Profit/(loss) from operations Loss attributable to Shareholders	For the 2003 (Audited) (HK$’000) 716,489 (639,343) 77,146 19,140 (17,571)	year ended 31 2004 (Audited) (HK$’000) 740,724 (747,753) (7,029) (47,032) (55,857)	For the six months ended December 30 June 2005 2006 (Audited) (Unaudited) (HK$’000) (HK$’000) 824,038 378,473 (926,106) (518,042) (102,068) (139,569) (806,803) (415,593) (762,579) (298,456)

For the year ended 31 December 2003, the Group recorded a turnover and a gross profit of approximately HK$716.5 million and HK$77.1 million, respectively. Turnover for the year represented solely the sale of electricity in Foshan City. While the Group recorded an operating profit of approximately HK$19.1 million, it incurred a net loss attributable to Shareholders of approximately HK$17.6 million. As noted in the Company’s annual report for 2003, such net loss was primarily due to the finance costs of approximately HK$26.4 million and the provision for PRC enterprise income taxation of approximately HK$5.4 million.

For the year ended 31 December 2004, the Group’s turnover amounted to approximately HK$740.7 million, representing an increase of approximately 3.4% from the preceding financial year. However, due to the persistent surge of fuel oil prices resulting in the substantial increase in the total cost of sales, the Group recorded a gross loss and loss from operations of approximately HK$7.0 million and HK$47.0 million, respectively. Loss attributable to Shareholders was approximately HK$55.9 million.

– 24 –

LETTER FROM AMS

For the year ended 31 December 2005, while the Group’s turnover reached HK$824.0 million, representing an increase of approximately 11.2% from the turnover of approximately HK$740.7 million for the preceding financial year, the Group recorded a gross loss of approximately HK$102.1 million. As explained in the Company’s annual report for 2005, the Group experienced another year of extreme difficulty as international oil prices continued to spike and fuel oil cost hovered at high levels. In addition, the Group had not yet been able to recognise and receive the amount of additional fuel cost surcharges for the period from 1 May 2005 to 31 December 2005 since on-grid tariff adjustment remained inflexible under the strict control of the relevant authorities of the Guangdong Provincial Government. For the year ended 31 December 2005, loss from operations amounted to approximately HK$806.8 million which was mainly attributable to the impairment losses of approximately HK$698.6 million recognised on the goodwill and fixed assets of a joint venture company in the PRC. In particular, as the continuing increase in fuel oil price had led to a decrease in recoverable amount of the goodwill and fixed assets of the joint venture company, the carrying amounts of the goodwill and fixed assets were written down by approximately HK$578.3 million and HK$120.3 million, respectively. Loss attributable to Shareholders was approximately HK$762.6 million.

For the six months ended 30 June 2006, the Group recorded an unaudited turnover and gross loss of approximately HK$378.5 million and HK$139.6 million, respectively. For the same period, the Group recorded an unaudited operating loss of approximately HK$415.6 million and the net loss attributable to Shareholders amounted to approximately HK$298.5 million. As explained in the Company’s interim report for 2006, the operating environment remained extremely difficult as fuel oil prices continued to surge. In particular, the increase in fuel oil cost had resulted in the substantial increase in the Group’s cost of sales by approximately 28% over the six-month period. Due to the continuing increase in fuel oil price and expected decrease in future subsidies from the Foshan Municipal People’s Government of the PRC, the Group also recorded a further impairment loss of approximately HK$279.3 million in respect of the decrease in the recoverable amount of the fixed assets of the PRC joint venture company. As such, the Group recorded a significant operating loss and net loss for the six months ended 30 June 2006.

As indicated from the recent financial performance of the Group, the Group’s operating results had since 2003 been adversely affected by the increasing fuel oil prices. As disclosed in the Company’s annual reports, all the electricity produced by the Group was primarily sold to one customer, namely 廣東省廣電集團有限公司佛山供電分公司 (Guangdong Guan-dian Power Grid Group Co. Ltd., Foshan Branch), for onward sales and transmission to end-users in Foshan Municipality, Guangdong Province, the PRC. Although the Group has been operating its electricity generation business for nearly two decades and is the dominant local power plant operator in Foshan Municipality, its financial performance is liable to be affected by external factors which are beyond the control of the Group. For instance, the Group is required to comply with the production quota as allocated by the relevant authorities of Foshan Municipality. In addition, while the Group continues its strategy to reduce the full impact of increased fuel oil cost on its operations by negotiating with the relevant authorities of the Guangdong Provincial

– 25 –

LETTER FROM AMS

Government and the customer for additional fuel cost surcharge, such surcharge, as a kind of customer tariff in the Guangdong Province, is subject to strict control of the Guangdong Provincial Government and there is also a timing difference in relation to the approval and receipt of additional fuel cost surcharges. As advised by the Directors, the recent business hardship experienced by the Group reflected an industry-wide phenomenon for most fuel-oil power plants operating in Guangdong Province.

As stated in the Letter from the Board, the Board considers that the Acquisition represents a good opportunity for the Group to diversify its business into the pharmaceutical sector where FLX and DZH have a long and successful history of operations and well-recognised products in the market. In addition, in view of the solid financial performance and the business prospects of both FLX and DZH, the Board also considers that the Acquisition may provide a good opportunity to improve the Group’s operating results in the future. Accordingly, the Board is of the view that the Acquisition is in the interests of the Company and the Shareholders as a whole.

In view of the unfavourable financial performance of the Group in the recent years and the difficult operating environment facing the Group as a fuel-oil power plant operator in Guangdong Province, we consider it commercially sensible for the Group to seek other business opportunities so as to diversify its business risk associated with the operation of fuel-oil power plant. In addition, given that (i) the HHC Group has demonstrated a stable track record of profitability; (ii) its business prospects appear to be optimistic; and (iii) the Acquisition is expected to have a positive impact on the Group’s operating results (particulars of the HHC Group and the financial effects of the Acquisition are set out in the sections headed “Information on the HHC Group” and “Financial effects of the Acquisition” respectively below), we consider that the Acquisition will contribute positively to the Group’s operating results in the future. Accordingly, we are of the view that the Acquisition is in the interests of the Company and the Shareholders as a whole.

II. Information on the HHC Group

HHC is an investment holding company and its principal assets are the indirect interests in 51% of both the registered capital of FLX and DZH. Each of FLX and DZH is principally engaged in the production and sale of Chinese medicine and pharmaceutical products in the PRC. Based on the information provided by the Company, we understand that both FLX and DZH originated from 佛山聯合制藥廠 (Foshan United Pharmaceutical Plant), which was formed in around 1957 in Foshan City by a combination of a number of pharmaceutical companies, and that certain of those pharmaceutical companies had a long-established history of over 300 years and had been well-known for the manufacture and sales of traditional Chinese medicine and pharmaceutical products. As stated in the Letter from the Board, both FLX and DZH have an extensive sales and marketing network in the PRC and currently, DZH has offices located in 25 provinces in the PRC whereas FLX has a sales and marketing team focusing on the market in the southern part of the PRC.

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Set out below is a summary of the HHC Group’s results of operations for each of the three years ended 31 December 2005 and the five months ended 31 May 2006 extracted from the accountants’ report on the HHC Group (the “Accountants’ Report”) contained in Appendix II to the Circular:–

Turnover
Cost of sales
Gross Profit
Profit from operations
Profit for the year/period
Profit attributable to equity
shareholders of HHC

Five months ended
Year ended 31 December
31 May
2003
2004
2005
2005
2006
(Audited)
(Audited)
(Audited)
(Unaudited)
(Audited)
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
305,556
326,975
338,182
147,727
146,074
(171,265)
(184,543)
(188,797)
(78,747)
(82,065)
134,291
142,432
149,385
68,980
64,009
72,924
77,711
76,860
40,631
30,967
63,806
67,484
66,797
35,528
26,902
32,531
34,406
33,887
18,070
13,715

As noted from the above table, the HHC Group was operating profitably for each of the three years ended 31 December 2005 and the five months ended 31 May 2006. Throughout the period under review, the turnover of the HHC Group represented the sales value of goods sold (including mainly pills, tablets and granules) less returns, discounts, and value added taxes. The turnover of the HHC Group increased from approximately RMB305.6 million for 2003 to approximately RMB338.2 million for 2005, representing an average compound growth rate of about 5% per annum. The HHC Group recorded a gross profit of approximately RMB134.3 million, RMB142.4 million, RMB149.4 million and RMB64.0 million, representing a gross profit margin of approximately 43.9%, 43.6%, 44.2% and 43.8%, for each of the three years ended 31 December 2005 and the five months ended 31 May 2006, respectively. During the same periods, the net profit of the HHC Group was approximately RMB63.8 million, RMB67.5 million, RMB66.8 million and RMB26.9 million, respectively.

Based on the audited combined balance sheet of the HHC Group as at 31 May 2006, its principal assets were property, plant and equipment of approximately RMB123.4 million and cash and cash equivalents of approximately RMB105.4 million. The HHC Group also had interests in leasehold land held for own use under operating leases amounted to approximately RMB19.5 million. In addition to the cash and cash equivalents, the current assets of the HHC Group mainly comprised inventories of approximately RMB52.3 million and trade and bills receivables of approximately RMB42.2 million as at 31 May 2006. The current liabilities of the HHC Group as at 31

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May 2006 were mainly dividend payable of approximately RMB86.5 million, amount due to ultimate holding company (i.e. FDH) of approximately RMB60.8 million and trade payables, accrued expenses and other payables of approximately RMB40.5 million. The HHC Group also had bank loans of RMB6.0 million as at 31 May 2006. Given the minority interests of approximately RMB108.2 million, the equity value attributable to equity shareholders of HHC amounted to approximately RMB51.9 million. Further details of the financial position of HHC Group are set out in the Accountants’ Report.

In view of the steady turnover, gross profit margins and net profits recorded by the HHC Group during the period under review, we are of the view that the HHC Group has been able to demonstrate a stable track record of profitability and its business operations were substantially stable.

For the purpose of assessing the prospects of the PRC medicine and pharmaceutical business in general, we have considered the statistics relating to the markets which are specific and relevant to the Group’s business. Based on the Statistical Communique of the PRC on the 2005 National Economic and Social Development (中華人民共和國二零零五年國民經濟和社會發展統計公報 ) (the “Statistical Communique”) issued by the National Bureau of Statistics of China (中華人民共和國國家統計局 ), the annual per capita disposable income of the PRC city residents grew from approximately RMB4,283 (approximately HK$4,199) to RMB10,493 (approximately HK$10,287) from 1995 till 2005, representing approximately 145% increase in ten years and an average annual growth rate of approximately 14%. As China has been experiencing a continuous and steady economic growth over the years and with rising personal income and spending power of the general public and improving living standard in China, people are becoming more health-conscious and are more willing to spend on medical and health related services. For instance, according to the information published by the National Bureau of Statistics of China, medicine and medical services accounted for only 2.01% of the per capita annual living expenditures of urban households in 2000 which grew to approximately 7.35% in 2004.

In addition, according to the Statistical Communique, the total population in China reached 1.307 billion at the end of 2005 with an average annual growth rate of approximately 1% over the years from 1990 to 2005. China has been facing the problem of aging population since the introduction of the one-child policy in the 1970’s. In 1990, the number of people of age over 65 in China accounted for about 5.57% of the total population and increased to 6.96% in 2000. At the end of 2005, the population of such age group exceeded 100 million and accounted for 7.7% of the total population in China. Given the aging of population in China coupled with the growing health-consciousness of the Chinese city residents as indicated by the increase in their spending on medicine and medical services, we are of the view that there is likely a strong growth in the demand for medicine and pharmaceutical products. Accordingly, we are generally optimistic abut the prospects of the medicine and pharmaceutical business in the PRC.

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LETTER FROM AMS

III. Principal terms of the Agreement

Pursuant to the Agreement, the Company has conditionally agreed to acquire from FDH the Sale Share, which represents the entire issued share capital of HHC, and the Sale Loan, which represents the outstanding amount of the shareholder’s loan due by HHC to FDH as at the date of Completion as well as all obligations, liabilities and debts owing or incurred by HHC to FDH on or at any time prior to the date of Completion, for an aggregate consideration of HK$282,400,000. Pursuant to the Agreement, FDC has conditionally agreed to guarantee the due and punctual observance and performance by FDH of all its obligations undertaken therein. As set out in the Letter from the Board, the Consideration has been agreed between the Company and FDH on an arm’s length basis with reference to (i) the unaudited combined profits after taxation of the HHC Group for the year ended 31 December 2005 and the five months ended 31 May 2006; (ii) the price earnings multiples of comparable listed companies which are engaged in business similar to that of the HHC Group; (iii) the unaudited combined net asset value of the HHC Group as at 31 May 2006; (iv) the aggregate cost of approximately RMB60.0 million (equivalent to approximately HK$58.8 million) for the purchase of 51% interest in each of FLX and DZH by FDH in relation to the conversion of each of DZH and FLX from a state-owned enterprise to a sino-foreign joint venture company in 1998 and 2000 respectively; and (v) the business prospects of the HHC Group.

The Consideration will be payable in full by way of issue of the Convertible Note by the Company to FDC or its nominee(s) (as directed by FDH in consideration of FDC acting as the guarantor under the Agreement) upon Completion. Given that both FDH and FDC are wholly owned by the Foshan Municipal People’s Government of the PRC and that FDC has conditionally agreed to guarantee FDH’s performance under the Agreement, we consider it acceptable for the Convertible Note to be issued to FDC or its nominee(s) upon Completion.

Pursuant to the Agreement, the Sale Loan will be assigned by FDH to the Company on a dollar-for-dollar basis upon Completion. As at the date of the Agreement, the outstanding amount of the Sale Loan was RMB60,848,410 (equivalent to approximately HK$59,655,000).

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IV. Valuation of the HHC Group

In order to assess the fairness and reasonableness of the Consideration, we have sought to compare it with the market statistics of companies listed on the Stock Exchange which are principally engaged in the manufacture and sales of Chinese medicine, pharmaceutical or herbal products (中成藥 ) in the PRC and recorded profitable results in their latest financial year (the “Comparable Companies”). Details of our findings on the Comparable Companies are summarised in the table below.

							Premium/
							(discount)
					Closing		represented
		Audited		Audited	price		by the
		net asset		basic	of the	Price/	closing price
			value	earnings	share as at	earnings	over/to the
Company (Stock code)	Year end date	per share		per share 22 August 2006		multiple	net asset value
	(dd/mm/yyyy)		(HK$)	(HK$)	(HK$)	(Times)	(%)
Board Intelligence International	31/12/2005		0.85	0.165	0.495	3.0	(41.8)
Pharmaceutical Holdings Limited
(1149)
China Shineway Pharmaceutical	31/12/2005		1.86	0.38	5.15	13.6	176.9
Group Limited (2877)
Dawnrays Pharmaceutical	31/12/2005		0.58	0.1246	0.73	5.9	25.9
(Holdings) Limited (2348)
Jiwa Bio-Pharm Holdings Limited	31/03/2006		0.41	0.039	0.28	7.2	(32.0)
(2327)
Pak Fah Yeow International Limited (239)	31/12/2005		1.04	0.129	1.48	11.5	42.3
Shangdong Luoxin Pharmacy Stock	31/12/2005		0.25	0.0745	0.60	8.1	140.0
Co., Ltd. (8058)
Tong Ren Tang Technologies Co., Ltd.	31/12/2005		5.15	1.18	14.56	12.3	182.7
(8069)
*Average*			*n/a*	*n/a*	*n/a*	*8.8*	*113.6*
							*for premium*
							*cases*
							*(36.9)*
							*for discount*
							*cases*

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LETTER FROM AMS

As shown in the table above, the price/earnings multiples of the Comparable Companies range from approximately 3.0 times to 13.6 times, with an average of approximately 8.8 times. On this basis, the price/earnings multiple of approximately 8.4 times, as represented by the Consideration of HK$282.4 million over the average annual profit attributable to equity shareholders of HHC of approximately HK$33.6 million for the three financial years ended 31 December 2005, falls within the range of the price/ earnings multiples of the Comparable Companies and is in line with their average multiple of approximately 8.8 times.

As regards the price to book ratios, i.e. the closing price of the share over its net asset value, of the Comparable Companies, we note that the price to book ratios of five Comparable Companies represented a premium ranging from approximately 25.9% to 182.7%, while those of the remaining two Comparable Companies represented a respective discount of approximately 41.7% and 32.0%. Based on (i) the audited combined net asset value of the HHC Group of approximately RMB51.9 million (equivalent to approximately HK$50.9 million) attributable to the equity shareholders of HHC as at 31 May 2006; (ii) the outstanding amount of the Sale Loan of approximately RMB60.8 million (equivalent to approximately HK$59.7 million) as at 31 May 2006; and (iii) the expected decrease of approximately RMB14.3 million (equivalent to approximately HK$14.0 million) in the net asset value of the HHC Group as a result of the dividend declared by HHC subsequent to 31 May 2006, the Consideration of HK$282.4 million represents a premium of approximately 192.3% over the sum of approximately HK$96.6 million of the Sale Loan and the net asset value of the HHC Group as adjusted by the dividend declared by HHC subsequent to 31 May 2006 (i.e. HK$59.7 million (Sale Loan) + HK$50.9 million (net asset value) – HK$14.0 million (dividend) = HK$96.6 million).

Since the market prices of a majority of the Comparable Companies represented a premium over their respective net asset values, we consider the Consideration, which represents a premium over the sum of the adjusted net asset value of the HHC Group and the Sale Loan, to be comparable and in line with the general market valuation of companies in a business similar to that of the HHC Group. The aforesaid premium of approximately 192.3% as represented by the Consideration is higher than all the premiums of the Comparable Companies. However, we have noted from the unaudited pro forma financial information set out in Appendix III to the Circular that the net asset value attributable to the equity shareholders of HHC upon Completion is expected to increase by approximately HK$62.0 million as a result of the fair value adjustments on the fixed assets, intangible assets and inventories of the HHC Group net of the related deferred tax liabilities. Having taken into account the effect of such fair value adjustments, the net asset value of the HHC Group is expected to increase upon Completion, the Consideration would represent a premium of approximately 78.1% over the sum of approximately HK$158.6 million of the Sale Loan and the net asset value of the HHC Group as adjusted by the dividend declared by HHC subsequent to 31 May 2006 and the fair value adjustments (i.e. HK$59.7 million (Sale Loan) + HK$50.9 million (net asset value) – HK$14.0 million (dividend) + HK$62.0 million (fair value adjustments) = HK$158.6 million). On this basis, the premium of 78.1% would fall within the premium range of 25.9% to 182.7% for the Comparable Companies and would be substantially lower than the average premium of approximately 113.6% of the Comparable Companies.

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In general, valuation based on asset values is more appropriate when valuing businesses under liquidation or asset-based businesses such as property investment companies. Given the business nature and the stable track record of profitability of the HHC Group, we consider that the use of price/earnings multiple, being one of the most commonly used references for valuing industrial companies with profitable operating results, to be more relevant in assessing the reasonableness and fairness of the Consideration. In the present case, the price/earnings multiple of about 8.4 times represented by the Consideration is lower than the average multiple of approximately 8.8 times of the Comparable Companies. Accordingly, we are of the view that the Consideration of HK$282.4 under the Agreement, which has been determined by the relevant parties with references to, among other things, the price/earnings multiples of comparable listed companies which are engaged in business similar to that of the HHC Group, is fair and reasonable.

V. Principal terms of the Convertible Note

The principal terms of the Convertible Note are stated in the Letter from the Board. In particular, the Convertible Note will not be listed and will bear interest at 3% per annum payable in arrears once every six months. The maturity date of the Convertible Note is the day immediately before the expiry day of the 42nd month, being three and a half years, from the date of the issue of the Convertible Note. However, the Company may, subject to the approval of its independent shareholders, at any time on or after the date of issue of the Convertible Note and prior to the maturity date redeem the whole or any part of the outstanding principal amount under the Convertible Note. In such event, the Company will be required to pay a redemption premium of 1.5% calculated on the early redemption amount and, if any, the payment of the coupon interest of 3% accrued thereon but unpaid on the early redemption amount. Unless previously converted and cancelled by the Company, the Convertible Note will be redeemed by the Company on the maturity date at its outstanding principal amount together with interest accrued thereon but unpaid up to and including the maturity date.

In addition, the holder of the Convertible Note has the right to require the Company to convert, at any time on or after the date of issue of the Convertible Note and on or prior to the maturity date, the whole or any part of the outstanding principal amount of the Convertible Note into Conversion Shares at the conversion price of HK$0.2975 (the “Conversion Price”) per Conversion Share (subject to adjustments), provided that the principal amount of the Convertible Note converted at any one time shall not be less than HK$1,000,000 unless the outstanding principal amount is less than HK$1,000,000, in which case the principal amount converted shall be the whole outstanding principal amount. However, if any conversion of the Convertible Note may cause the public float of the Shares to fall below the limits prescribed under the Listing Rules, then the Company is entitled to defer the allotment and issue of the Conversion Shares to such time that is required by the Company to ensure such conversion will satisfy the minimum public float requirement for the Shares. Upon the full conversion of the Convertible Note at the Conversion Price of HK$0.2975 per Conversion Share, an aggregate of 949,243,697 Conversion Shares will be issued, representing approximately 114.35% of the existing issued share capital of the Company and approximately 53.35% of the issued share capital of the Company as enlarged by the issue of the Conversion Shares.

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Any conversion of the Convertible Note by the holder thereof will be subject to the compliance requirements under the Listing Rules and/or the Hong Kong Code on Takeovers and Mergers (the “Takeovers Code”).

Based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2006 set out in Appendix I to the Circular, the Group had cash and cash equivalents of approximately HK$189.1 million as at 30 June 2006. On this basis, the Group would not have sufficient internal financial resources to satisfy the Consideration if it was to be settled in cash upon Completion. Since the Consideration will be payable in full by way of issue of the Convertible Note, the Acquisition is not expected to have any immediate impact on the working capital position of the Group upon Completion. On this basis, we are of the view that it is in the interest of the Company to settle the Consideration by the issue of the Convertible Note.

In order to assess the fairness and reasonableness of the principal terms of the Convertible Note, we have sought to review those issues of convertible notes/bonds, which are denominated in Hong Kong dollars and have a maturity over three years, announced by companies listed on the Stock Exchange during the period from 1 January 2006 to the date of the Agreement (the “Comparable Notes”). In this connection, we have to the best of our knowledge identified a total of 31 Comparable Notes during the period under review. As the terms of a convertible note/bond are usually determined by reference to prevailing market conditions, we consider that the selected time frame, being the period from 1 January 2006 to the date of the Agreement, is appropriate for the purposes of our comparison which would also provide a reasonable number of comparables. The following analysis on the principal terms of the Convertible Note has been mainly based on our findings of the particulars of the Comparable Notes.

1. Annual interest rate

The Comparable Notes carry interest ranging from nil to 7.0% per annum with an average of approximately 1.85%. The annual interest rate of 3% in the case of the Convertible Note falls within the range for the Comparable Notes, though it is slightly higher than their average. On this basis, we are of the view that the interest rate of 3% per annum for the Convertible Note is substantially in line with the market practice.

Based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2006 set out in Appendix I to the Circular, we note that the Group had bank loans of HK$151.3 million and other loans of approximately HK$299.6 million as at 30 June 2006. The Group’s bank loans were all due to banks in the PRC and were secured by property, plant and equipment of the Group with carrying amount of approximately HK$674.2 million. The Group’s other loans were unsecured loans due to a PRC joint-venture partner and its associates. As indicated in the Company’s interim report for 2006 and further confirmed by the Directors, the interest rates applicable to the Group’s bank borrowings range from about 4.32 % to 5.18% per annum, whereas the interest rates applicable to the Group’s other loans were 5.76% per annum. Accordingly, compared with the existing borrowing costs of the Group, the issue of the Convertible Note with the principal amount of HK$282.4 million at

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an interest rate of 3% per annum is more favourable to the Group. Accordingly, we consider that the interest rate of 3% per annum under the Convertible Note is fair and reasonable so far as the Company is concerned.

2. Maturity

The maturities of the Comparable Notes were between three to five years and there are a total of 13 Comparable Notes having a maturity of three years, which is substantially the same as the maturity for the Convertible Note. Given the numerous Comparable Notes having the similar maturity of about three years that had taken place since 1 January 2006 up to the date of the Agreement, we consider that the maturity of about three years is in line with the market practice for an issue of convertible notes/bonds by listed companies in the market. Accordingly, we consider the maturity of the Convertible Note to be fair and reasonable.

3. Conversion Price

As stated in the Letter from the Board, the Conversion Price of HK$0.2975 per Conversion Share (which is subject to usual anti-dilution adjustments in certain events including share consolidation, share subdivision, capitalisation issue, capital distribution, rights issue and issue of convertible securities by the Company) was determined after arm’s length negotiations between the relevant parties with reference to the prevailing market prices of the Shares. The Conversion Price of HK$0.2975 per Conversion Share represents:

(i) a premium of 6.25% over the closing price of HK$0.28 per Share as quoted on the Stock Exchange on 22 August 2006, being the date of the Agreement;
(ii) a premium of approximately 1.02% over the average closing price of HK$0.2945 per Share for the ten consecutive trading days up to and including the date of the Agreement; and
(iii) a discount of approximately 0.83% to the closing price of HK$0.30 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

In assessing the fairness and reasonableness of the Conversion Price, we have sought to compare it with those of the Comparable Notes and noted that as regards the respective closing price per share on the last trading day, 25 Comparable Notes had a conversion price which represented a premium ranging from approximately 3.03% to 45.48%, whereas four Comparable Notes had a conversion price which represented a discount ranging from approximately 10.70% to 50.00% and two Comparable Notes had a conversion price which equalled the respective closing price of the share. As regards the 5/10-day average closing price of the share prior to the last trading day, 27 Comparable Notes had a conversion price which represented a premium ranging from approximately 0.81% to 51.50%, three Comparable Notes had a conversion price which represented a discount ranging from approximately 22.10% to 32.10% and one Comparable Note had a conversion price which equaled the average closing price of the share.

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Since the majority of the conversion prices of the Comparable Notes were determined at a premium to the relevant closing price per share on the last trading day as well as the 5/10-day average closing price, we consider it a common practice in the market to issue convertible notes/bonds with a conversion price set at a premium over the prevailing market price of the share. On this basis, the premiums of approximately 6.25% and 1.02% as represented by the Conversion Price to the share price on the date of the Agreement and the 10-day average historical price, respectively, fall within the relevant ranges of the premiums for the Comparable Notes.

Based on the comparison with the Comparable Notes above, we are of the view that the Conversion Price is fair and reasonable.

4. Redemption amount

Based on our findings, the redemption amounts of the Comparable Notes ranged from 100% to 135.70% of their respective face value. Pursuant to the terms of the Convertible Note, its redemption amount (as represented by a percentage of the principal amount) at the date of maturity is 100%. In the event that the whole or any part of the Convertible Note is redeemed prior to its maturity, the redemption amount of the Convertible Note will be 101.5%.

As compared with the Comparable Notes, the redemption amount of the Convertible Note at the maturity date of 100% is among their lowest redemption amount. Accordingly, we are of the view that the redemption amount at 100% of the face value of the Convertible Note is fair and reasonable.

As regards early redemption, the redemption amounts of the Comparable Notes, where applicable, ranged from 100% to 110% of their respective early redemption amount. As such, the early redemption amount of 101.5% for the Convertible Note falls within the range for the Comparable Notes. Since the early redemption is at the option of the Company, the availability of the right to early redemption will allow the Company to plan the repayment schedule with flexibility, which we consider to be in the interest of the Company. While the Company will be required to pay a premium of 1.5% for any early redemption of the Convertible Note, such percentage is still substantially lower than the annual interest rate of 3% of the Convertible Note. In other words, it would still be in the interest of the Company to redeem the Convertible Note before maturity notwithstanding that the Company will be required to pay the redemption premium, since the potential savings in the interest expenses of the Convertible Note would be greater than the payment of the redemption premium. Accordingly, we consider the early redemption amount of the Convertible Note at 101.5% to be acceptable.

In view of the above analysis of the principal terms of the Convertible Note including the annual interest rate, the maturity, the Conversion Price, the redemption amount and the early redemption premium, we consider that the terms of the Convertible Note are substantially in line with the market, and are therefore fair and reasonable as far as the Company is concerned.

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VI. Financial effects of the Acquisition

1. Income effect

Based on the unaudited pro forma combined income statement of the Enlarged Group set out in Appendix III to the Circular, which was prepared on the basis of the respective financial information of the Group and the HHC Group for the year ended 31 December 2005, and on the assumption that the Acquisition had been completed on 1 January 2005 (being the beginning of the financial year of the Group), consolidation of the HHC Group into the Group would reduce the net loss of the Enlarged Group by approximately HK$17.5 million from approximately HK$807.2 million to approximately HK$789.6 million (before taking into account the minority interests of the Enlarged Group). Such change in the financial result is mainly due to (i) the inclusion of the net profit of the HHC Group of approximately HK$63.4 million; (ii) the estimated finance costs in relation to the Convertible Note of approximately HK$24.2 million; (iii) the fair value adjustments in relation to additional cost of sales, depreciation and amortisation charges of approximately HK$31.2 million; and the positive deferred taxation effects in relation to the issue of the Convertible Note and the fair value adjustments of approximately HK$9.5 million.

Having taken into account the minority interests of the Enlarged Group, consolidation of the HHC Group into the Group would slightly increase the loss attributable to equity shareholders of the Company by approximately HK$1.0 million from approximately HK$762.6 million to approximately HK$763.6 million. Such negative effect is mainly due to the fact that the Enlarged Group would recognise the net-of-tax finance costs in relation to the Convertible Note of approximately HK$20.0 million, though the consolidation of the HHC Group into the Group would have a net positive income effect of approximately HK$19.0 million on the results attributable to the equity shareholders of HHC. As indicated in the notes to the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to the Circular, in addition to the estimated finance costs based on the annual interest rate of 3% of the Convertible Note of approximately HK$8.5 million, there would also be estimated finance costs amounting to approximately HK$15.7 million in relation to the remeasurement of the non-current liability portion of the Convertible Note based on the effective interest rate method. However, it should be noted that such estimated finance costs in relation to the remeasurement of the Convertible Note will not involve any actual cash outflow of the Group during the term of the Convertible Note.

In view of the pro forma income effect as discussed above, the Acquisition is expected to have a positive impact on the operating results of the Group. However, the positive contribution from the share of the profitable results of the HHC Group might be substantially offset by the recognition of the finance costs in relation to the Convertible Note. Due to the accounting policies of the Group, the finance costs to

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LETTER FROM AMS

be recognised based on the effective interest rate method would be significantly higher than the actual finance costs to be paid to the holder of the Convertible Note. Having taken into consideration that (i) the HHC Group is expected to bring positive contribution to the operating results of the Enlarged Group; (ii) the actual amount of interest to be paid by the Company to the holder of the Convertible Note will be approximately HK$8.5 million per annum regardless of the amount of the finance costs to be recognised by the Enlarged Group on the Convertible Note; (iii) the issue of the Convertible Note to satisfy the Consideration would relieve the immediate financial pressure on the Group if the Consideration was to be satisfied by cash; and (iv) the finance costs associated with the issue of the Convertible Note do not arise from the business operations of the HHC Group and therefore do not lessen the merits of the Acquisition proposal, we are of the view that the Acquisition is in the interests of the Company and the Shareholders as a whole.

2. Liquidity and financial resources

Based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2006 set out in Appendix I to the Circular, the Group had current assets of approximately HK$318.2 million and current liabilities of approximately HK$430.7 million, representing a net-current-liabilities position of approximately HK$112.5 million and a current ratio at approximately 0.74 (i.e. HK$318.2 million divided by HK$430.7 million). Besides, the Group’s gearing ratio as at 30 June 2006 was approximately 1.02, as represented by the Group’s total borrowings of approximately HK$450.9 million (being the sum of the bank loans of approximately HK$151.3 million and the other loans of approximately HK$299.6 million as at 30 June 2006) as a percentage to its total equity of approximately HK$443.6 million.

As mentioned above, the Consideration of HK$282.4 million under the Agreement will be satisfied in full by the issue of the Convertible Note. Based on the unaudited pro forma combined balance sheet of the Enlarged Group set out in Appendix III to the Circular, which was prepared on the basis of the respective balance sheet position of the Group as at 30 June 2006 and the HHC Group as at 31 May 2006, and on the assumptions that the Acquisition had been completed on 30 June 2006 (being the latest published period end of the Group), consolidation of the HHC Group into the Group would increase its net current assets by approximately HK$16.4 million, resulting in a net-current-liabilities position of approximately HK$96.1 million or a current ratio at approximately 0.85, which we consider to be in the interest of the Company. However, on the same basis, the gearing ratio of the Enlarged Group would increase to approximately 1.22 (being the sum of the bank loans of approximately HK$157.1 million, the Convertible Note of HK$282.4 million and the other loans of approximately HK$299.6 million over the total equity of approximately HK$607.9 million) as a result of the issue of the Convertible Note with the principal amount of HK$282.4 million.

Although the financial gearing of the Enlarged Group is expected to increase as a result of the issue of the Convertible Note, we are of the view that such effect on the Enlarged Group’s liquidity position or capital structure will not lead to any material adverse impact on the Enlarged Group’s operation or financial conditions in

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LETTER FROM AMS

the foreseeable future. This is because, as mentioned above, the Convertible Note has a maturity of 3.5 years and pursuant to the Agreement, any early redemption of the Convertible Note prior to its maturity date will be subject to the approval by the independent shareholders of the Company. It is unlikely that the Enlarged Group would be able to redeem the whole or any part of the Convertible Note prior to the maturity date unless the Company’s stakeholders (including the independent Shareholders) consider such early redemption to be in the interest of the Company and to have no material adverse impact on the financial position of the Enlarged Group. Furthermore, the interest rate of 3% per annum of the Convertible Note is currently lower than the interest rates applicable to the existing borrowings of the Group. Accordingly, we are of the view that the increase in the financial gearing of the Enlarged Group as a result of the issue of the Convertible Note is acceptable.

3. Total equity attributable to the Shareholders

The Acquisition is not expected to have any immediate impact on the total equity attributable to the Shareholders upon Completion and the excess of the Consideration over the net fair value of the identifiable assets and liabilities of the HHC Group will be recognised as goodwill to be included in the intangible assets of the Enlarged Group. Based on the accounting policies of the Group, such goodwill will be initially stated at cost, and tested annually for impairment loss. As indicated in the unaudited pro forma combined balance sheet of the Enlarged Group set out in Appendix III to the Circular (prepared on the assumption that the Acquisition had been completed on 30 June 2006), the total equity attributable to the Shareholders would remain at approximately HK$357.3 million, which is the same as the amount before the Acquisition.

Based on the above, the Acquisition is expected to have a positive impact on the future operating results of the Enlarged Group. The financial gearing of the Enlarged Group would increase as a result of the issue of the Convertible Note. Nevertheless, such increase in the financial gearing of the Enlarged Group is acceptable as it will not have any material adverse impact on the Enlarged Group’s financial position. The Acquisition is not expected to have any immediate impact on the total equity attributable to the Shareholders upon Completion.

VII. Potential dilution to the shareholdings of the Independent Shareholders

As at the Latest Practicable Date, FDC indirectly held approximately 37.95% of the issued share capital of the Company. In the event that the Convertible Note with principal amount of HK$282.4 million is fully converted into Conversion Shares at the Conversion Price of HK$0.2975 per Conversion Share, a total of 949,243,697 new Shares (representing approximately 114.35% of the existing total issued share capital of the Company) will be allotted and issued to FDC or its nominee(s) and the aggregate shareholding of FDC in the Company will increase to approximately 71.05%. On this basis, the aggregate shareholding interests of the Independent Shareholders in the Company will be diluted from approximately 26.25% to 12.25%, representing a decrease magnitude of approximately 53.3%.

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LETTER FROM AMS

Although the shareholding interests of the Independent Shareholders will be diluted as a result of the conversion of the Convertible Note, it should be noted that since FDC is currently interested in more than 30% but less than 50% of the voting rights of the Company, FDC and parties acting in concert with it are required to observe the obligations under Rule 26 of the Takeovers Code to make a general offer if they in aggregate, or any of them, increase further their shareholdings by more than 2% from their lowest percentage holding in the Company in any 12-month period. Accordingly, as long as any conversion of the Convertible Note by FDC or its nominee(s) results in an increase in its shareholdings exceeding the 2% threshold, FDC and parties acting in concert with it will be required to make a general offer for all the issued securities of the Company which are not already owned by it and parties acting in concert with it.

Given the current shareholding level of FDC in the Company and its compliance obligations in relation to the conversion of the Convertible Note, we do not consider that the interests of the Independent Shareholders will be materially prejudiced by the potential dilution effect of the Convertible Note upon conversion by FDC or its nominee(s).

VIII. Management of the HHC Group

As advised by the Board, having taken into account the successful running of the HHC Group by its existing management as evidenced by the continuous favourable financial performance of the HHC Group in recent years, the Board does not intend to introduce any material change to the existing management of the HHC Group following the Completion. In addition, we understand from the Board that Mr. He and Mr. Situ Min, both executive Directors, have been involved in the management of the HHC Group since 2001 and are familiar with its business operations including the production, sales distribution and financial operations. On this basis, we do not expect that the Acquisition may cause any material integration problem for the Group or disruption to the existing management of the HHC Group that will result in an adverse impact on the business operations of either the Group or the HHC Group.

RECOMMENDATION

In formulating our recommendation to the Independent Board Committee and the Independent Shareholders, we have considered the above principal factors and reasons, in particular, the following:

In view of the Group’s accumulated losses attributable to Shareholders of about HK$1,134 million since the financial year ended 31 December 2003 and the total equity attributable to Shareholders having deteriorated from approximately HK$1,460 million as at 31 December 2003 to approximately HK$357.3 million as at 30 June 2006, we consider it commercially sensible for the Group to seek for other business opportunities so as to diversify its existing business. The HHC Group has demonstrated a stable track record of profitability and its business prospects appear to be optimistic.

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LETTER FROM AMS

Based on the average annual profit attributable to equity shareholders of HHC for the three financial years ended 31 December 2005 of approximately HK$33.6 million, the Consideration of HK$282.4 million represents a price/earnings multiple of about 8.4 times. Having compared such price/earnings multiple with those of the listed companies in Hong Kong which are principally engaged in the manufacture and sales of Chinese medicine, pharmaceutical or herbal products in the PRC and recorded profitable results in their latest financial year, we are of the view that the Consideration has been determined on a fair and reasonable basis.
The Consideration of HK$282.4 million under the Agreement will be satisfied in full by the issue of the Convertible Note. Having compared the principal terms of the Convertible Note (including the annual interest rate, the maturity, the Conversion Price, the redemption amount and the early redemption premium) with those issues of convertible notes/bonds by listed companies in Hong Kong announced during the period from 1 January 2006 to the date of the Agreement, we are of the view that the terms of the Convertible Note have been arrived at on a fair and reasonable basis.
Based on the pro forma financial effects of the Acquisition and without taking into account the minority interests of the Enlarged Group, the transactions contemplated under the Agreement are expected to have a positive impact on the operating results of the Enlarged Group following Completion. Having taken into account the minority interests of the Enlarged Group, consolidation of the HHC Group into the Group would however slightly increase the loss attributable to Shareholders by approximately HK$1.0 million, which is due mainly to the recognition of finance costs based on an assumed effective interest rate in relation to the Convertible Note that is substantially higher than the actual finance costs payable by the Company. Despite the increase in such loss due to the Group’s accounting policies, the estimated additional finance costs will not involve any actual cash outflow of the Enlarged Group during the term of the Convertible Note. Furthermore, although the financial gearing of the Enlarged Group will increase as a result of the issue of the Convertible Note, it is not expected to have any material adverse impact on the Enlarged Group’s financial position.

Based on the above consideration, we are of the opinion that the Agreement is in the interests of the Company and the Shareholders as a whole and the terms of the Agreement are fair and reasonable. Therefore, we would advise the Independent Board Committee and the Independent Shareholders that the Independent Shareholders should vote in favour of the resolution to approve the Agreement and the transactions contemplated thereunder at the EGM.

Yours faithfully, For and on behalf of

AMS Corporate Finance Limited Jinny Mok Director

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. SUMMARY OF FINANCIAL INFORMATION

An unqualified opinion in respect of the audit of the financial statements of the Group has been issued for each of the three years ended 31 December 2005. A summary of the results, assets and liabilities of the Group as extracted from the annual and interim reports of the Company is set out below:

RESULTS

Turnover Loss before taxation Income tax Loss for the period/year Minority interests Loss attributable to Shareholders Loss per Share (HK cents)	Six months ended 30 June 2006 2005 (unaudited) (unaudited) HK$’000 HK$’000 378,473 391,081 (423,738) (127,426) 51,332 5,607 (372,406) (121,819) 73,950 4,819 (298,456) (117,000) (36.0) (14.1)	Year 2005 (audited) HK$’000 824,038 (825,358) 18,195 (807,163) 44,584 (762,579) (91.9)	ended 31 December 2004 2003 (audited) (audited) HK$’000 HK$’000 740,724 716,489 (67,924) (7,296) 7,453 (5,381) (60,471) (12,677) 4,614 (4,894) (55,857) (17,571) (6.7) (2.1)

ASSETS AND LIABILITIES

As at 30 June 2006 (unaudited) HK$’000 Total assets 1,163,923 Total liabilities (720,328) Minority interests (86,279) Total equity attributable to Shareholders 357,316	As at 31 December 2005 2004 (audited) (audited) HK$’000 HK$’000 1,371,327 2,141,858 (561,668) (547,773) (158,974) (201,550) 650,685 1,392,535	2003 (audited) HK$’000 2,259,685 (590,819) (208,417) 1,460,449

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. AUDITED FINANCIAL STATEMENTS

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

CONSOLIDATED PROFIT AND LOSS ACCOUNT

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

Note Turnover 3 Cost of sales Gross loss Other revenue 5 Other net income 5 Administrative expenses Goodwill amortization Impairment losses 13 &14 Loss from operations Finance costs 6(a) Loss before taxation 6 Income tax 7(a) Loss for the year Attributable to: 9 & 24 – Equity shareholders of the Company – Minority interests Loss for the year Loss per share 11 – Basic – Diluted	2005 $’000 824,038 (926,106) (102,068) 13,299 5,082 (24,455) – (698,661) (806,803) (18,555) (825,358) 18,195 (807,163) (762,579) (44,584) (807,163) 91.86 cents N/A	2004 (restated) $’000 740,724 (747,753) (7,029) 1,638 12,502 (22,522) (31,621) – (47,032) (20,892) (67,924) 7,453 (60,471) (55,857) (4,614) (60,471) 6.73 cents N/A

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

At 31 December 2005

(Expressed in Hong Kong dollars)

Note Non-current assets Fixed assets 13 – Property, plant and equipment – Interests in leasehold land held for own use under operating leases Prepayment for planned maintenance Goodwill 14 Deferred tax assets 18(b) Current assets Consumables 16 Trade and other receivables 17 Tax recoverable 18(a) Cash and cash equivalents 19 Current liabilities Trade and other payables 20 Provision for staff welfare 21 Bank loans 22 Current portion of other loans 23 Net current assets Total assets less current liabilities Non-current liabilities Bank loans 22 Other loans 23 Net assets Capital and reserves 24 Share capital Reserves Total equity attributable to equity shareholders of the Company Minority interests Total equity	2005 $’000 1,041,826 31,821 1,073,647 6,485 – 31,725 1,111,857 ---------------- 25,359 101,746 25 132,340 259,470 ---------------- 135,581 257 28,846 – 164,684 ---------------- 94,786 ---------------- 1,206,643 ---------------- 100,000 296,984 396,984 ---------------- 809,659 83,015 567,670 650,685 158,974 809,659	2004 (restated) $’000 1,217,978 36,482
		1,254,460 – 578,319 12,856
		1,845,635 ---------------- 18,145 179,795 25 98,258
		296,223 ---------------- 132,099 1,241 46,790 93,679
		273,809 ----------------
		22,414 ----------------
		1,868,049 ---------------- 78,607 195,357
		273,964 ----------------
		1,594,085

		83,015 1,309,520
		1,392,535 201,550
		1,594,085

Approved and authorized for issue by the Board of Directors on 18 April 2006.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

BALANCE SHEET

At 31 December 2005 (Expressed in Hong Kong dollars)

Note Non-current assets Investments in subsidiaries 15 Current assets Amounts due from subsidiaries Other receivables 17 Cash and cash equivalents 19 Current liabilities Trade and other payables 20 Amount due to subsidiary Net current assets Net assets Capital and reserves 24 Share capital Reserves Total equity	2005 $’000 635,809 ---------------- – 278 15,502 15,780 ---------------- 873 31 904 ---------------- 14,876 ---------------- 650,685 83,015 567,670 650,685	2004 $’000 1,338,500 ---------------- 18,035 172 21,027
		39,234 ---------------- 835 12,743
		13,578 ----------------
		25,656 ----------------
		1,364,156

		83,015 1,281,141
		1,364,156

Approved and authorized for issue by the Board of Directors on 18 April 2006.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

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

Note Total equity at 1 January As previously reported: – attributable to equity shareholders of the Company – attributable to minority interests Exchange difference on translation of accounts of a PRC subsidiary 24 Net loss for the year: – attributable to equity shareholders of the Company – attributable to minority interests 24 Dividend paid during the year 24 Shares issued under shares option scheme 24 Total equity at 31 December	2005 $’000 1,392,535 201,550 1,594,085 ---------------- 25,919 ---------------- (762,579) (44,584) (807,163) ---------------- (3,182) ---------------- – ---------------- 809,659	2004 (restated) $’000 1,460,449 208,417 1,668,866 ---------------- – ---------------- (55,857) (4,614) (60,471) ---------------- (14,705) ---------------- 395 ---------------- 1,594,085

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

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

Note Operating activities Loss before taxation Adjustments for: Depreciation and amortization Goodwill amortization Impairment losses Gain on disposal of property, plant and equipment Interest income Finance costs Interest payable waived Foreign exchange loss Operating (loss)/profit before changes in working capital (Increase)/decrease in consumables Decrease/(increase) in trade and other receivables Increase in trade and other payables Decrease in provision for staff welfare Cash generated from/(used in) operations PRC income tax paid Net cash generated from/(used in) operating activities Investing activities Interest received Increase in prepayment for planned maintenance Purchase of property, plant and equipment Proceeds from sales of property, plant and equipment Net cash (used in)/generated from investing activities Financing activities Interest paid Dividends paid Dividends paid to minority shareholder Proceeds from new bank loans Repayment of bank loans Repayment of other loans Proceeds from shares issued under share option scheme Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 19	2005 $’000 (825,358) 93,956 – 698,661 – (1,724) 18,555 – 3,495 (12,415) (7,214) 78,049 10,703 (984) 68,139 – 68,139 ---------------- 1,724 (6,485) (338) – (5,099) ---------------- (25,776) – (3,182) 47,393 (47,393) – – (28,958) ---------------- 34,082 98,258 132,340	2004 $’000 (67,924) 95,181 31,621 – (18) (1,638) 20,892 (9,032) – 69,082 402 (122,990) 18,383 (5,124) (40,247) (6,275) (46,522) ---------------- 1,638 – (726) 18 930 ---------------- (21,099) (12,452) (2,253) 97,323 (50,533) (87,794) 395 (76,413) ---------------- (122,005) 220,263 98,258

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES ON THE ACCOUNTS

1. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

The consolidated accounts for the year ended 31 December 2005 comprise Wing Shan International Limited (“the Company”) and its subsidiaries (together referred to as the “Group”).

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

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

(b) Basis of preparation of the accounts

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

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

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

Key assumptions and estimation made by management in the application of HKFRSs that have significant effect on the accounts and have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year are disclosed in note 30.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(c) Subsidiaries

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

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

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

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

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

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

(d) Goodwill

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

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cashgenerating units and is tested annually for impairment loss (see note 1(f)).

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(e) Property, plant and equipment

Property, plant and equipment are stated in the balance sheet at cost less accumulated depreciation and impairment losses (see note 1(f)).

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

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

Building situated on leasehold land are depreciated over the shorter of unexpired term of lease and their estimated useful lives.

–	Plant, machinery and equipment	27 years
–	Motor vehicles	5 years
–	Others	2-10 years

(f) Impairment of assets

(i) Impairment of trade and other receivables

Trade and other receivables that are stated at cost or amortized cost are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognized as follows:

For current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for these current receivables are reversed if in a subsequent period the amount of the impairment loss decreases.

For financial assets carried at amortized cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets).

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(ii) Impairment of other long-lived assets

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

property, plant and equipment;
pre-paid interests in leasehold land classified as being held under an operating lease;
prepayment for planned maintenance;
investments in subsidiaries; and
goodwill.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

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

Recognition of impairment losses

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

Reversals of impairment losses

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(g) Consumables

Consumables comprise fuel oil, components and replacement parts held for consumption by the Group. Fuel oil is stated at cost computed using the weighted average method. Components and replacement parts are stated at cost computed using the weighted average method less any provisions for damages or obsolescence.

(h) Trade and other receivables

Trade and other receivables are initially recognized at fair value and thereafter stated at amortized cost less impairment losses for bad and doubtful debts (see note 1(f)), unless the effect of discounting would be immaterial. In such cases, they are stated at cost less impairment losses for bad and doubtful debts (see note 1(f)).

(i) Interest-bearing borrowings

Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in profit and loss over the period of the borrowings using the effective interest method.

(j) Trade and other payables

Trade and other payables are initially recognized at fair value and thereafter stated at amortized cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(k) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

(l) Employees benefits

(i) Short term employee benefits and contributions to defined contribution retirement plans

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(ii) Shared based payments

The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using the binomial lattice model, taking into accounts the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognized in prior years is charged/credited to the profit or loss for the year of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The equity amount is recognized in the capital reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it released directly to retained profits).

(m) Income tax

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

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

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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

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

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

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

in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to incomes taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realize the current tax assets and settle the current tax liabilities on a net basis or realize and settle simultaneously.

(n) Provisions and contingent liabilities

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(o) Revenue recognition

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

(i) Sale of electricity

Revenue arising from sale of electricity is recognized based on electricity supplied as recorded by meters read during the year. Additional fuel cost surcharges for electricity supplied, representing an adjustment for tariff of electricity supplied, are recorded as revenue in the period that agreement on the surcharge amount is reached. Subsequent agreement in respect of the current period is accrued in the current period if the agreement occurs prior to finalization of the accounts.

(ii) Rental income from operating leases

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

(iii) Interest income

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

(iv) Government grants

Government grants are recognized in the balance sheet initially as deferred income when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as revenue in profit or loss on a systematic basis in the same period in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognized in profit or loss as revenue on a systematic basis over the useful life of the asset.

(p) Translation of foreign currencies

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

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items, including goodwill arising on consolidation of foreign operations acquired on or after 1 January 2005, are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognized directly in a separate component of equity. Goodwill arising on consolidation of a foreign operation acquired before 1 January 2005 is translated at the foreign exchange rate that applied at the date of acquisition of the foreign operation.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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

(q) Operating lease charges

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

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

(r) Borrowing costs

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

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

(s) Related parties

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. CHANGES IN ACCOUNTING POLICIES

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

The accounting policies of the Group and/or Company after the adoption of these new and revised HKFRSs have been summarized in note 1. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in these accounts.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period (see note 32).

(a) Employee share option scheme (HKFRS 2, “Share-based payment”)

In prior years, no amounts were recognized when employees (which term includes directors) were granted share options over shares in the Company. If the employees chose to exercise the options, the nominal amount of share capital and share premium were credited only to the extent of the option’s exercise price receivable.

With effect from 1 January 2005, in order to comply with HKFRS 2, the Group has adopted a new policy for employee share options. Under the new policy, the Group recognizes the fair value of such share options as an expense with corresponding increase recognized in a capital reserve within equity. Further details of the new policy are set out in note 1(l)(ii).

The Group has taken advantage of the transitional provisions set out in HKFRS 2, under which the new recognition and measurement policies have not been applied to the following grants of options:

(i) all options granted to employees on or before 7 November 2002; and
(ii) all options granted to employees after 7 November 2002 but which had vested before 1 January 2005.

As a result, no adjustment to the opening balance is required as all options are granted either on or before 7 November 2002 or granted after 7 November 2002 but which had vested before 1 January 2005.

Details of the employee share option scheme are set out in note 26.

(b) Leasehold land and buildings held for own use (HKAS 17, “Leases”)

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Further details of the new policy are set out in notes 1(e) and 1(q). Any buildings held for own use which are situated on such land leases continue to be presented as part of property, plant and equipment.

The new accounting policy has been adopted retrospectively but there is no impact on the Group’s net assets as at the year end 31 December 2004 and 2005 and on the Group’s loss for the years presented. Additional line item “Interests in leasehold land held for own use under operating leases” which previously included in “Property, plant and equipment” has been included on the face of consolidated balance sheet. Comparative figures of “Property, plant and equipment” have been restated to conform with the current year’s presentation.

(c) Amortization of goodwill (HKFRS 3, “Business combinations” and HKAS 36, “Impairment of assets”)

In prior periods, goodwill was amortized on a straight-line basis over its estimated useful life and was subject to impairment testing when there were indications of impairment.

With effect from 1 January 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed its accounting policies relating to goodwill. Under the new policy, the Group no longer amortizes goodwill but tests it at least annually for impairment. Further details of the new policy are set out in note 1(d).

The new policy in respect of the amortization of goodwill has been applied prospectively in accordance with the transitional arrangements under HKFRS 3. As a result, comparative amounts have not been restated, the cumulative amount of amortization as at 1 January 2005 has been offset against the cost of the goodwill and no amortization charge for goodwill has been recognized in the consolidated profit and loss account for the year ended 31 December 2005. The Group’s amortization of goodwill and loss for the year ended 31 December 2005 has been decreased by $31,621,000; the basic loss per share for the year ended 31 December 2005 has been decreased by 3.8 cents.

(d) Retranslation of goodwill on consolidation of a foreign operation (HKAS 21, “The effects of changes in foreign exchange rates”)

In prior years, goodwill arising on the acquisition of a foreign operation was translated at exchange rates ruling at the transaction dates.

With effect from 1 January 2005, in order to comply with HKAS 21, the Group has changed its accounting policy relating to retranslation of goodwill. Under the new policy, any goodwill arising on the acquisition of a foreign operation is treated as an asset of the foreign operation and is retranslated at exchange rates ruling at the balance sheet date, together with the retranslation of the net assets of the foreign operation. Further details of the new policy is set out in note 1(p).

In accordance with the transitional provisions in HKAS 21, this new policy has not been adopted retrospectively and will only be applied to acquisitions occurring on or after 1 January 2005. As the Group has not acquired any new foreign operations since that date, the change in policy has had no impact on the accounts for the year ended 31 December 2005.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(e) Change in presentation of minority interests (HKAS 1, “Presentation of financial statements” and HKAS 27, “Consolidated and separate financial statements”)

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

With effect from 1 January 2005, in order to comply with HKAS 1 and HKAS 27, the Group has changed its accounting policy relating to presentation of minority interests. Under the new policy, minority interests are presented in the consolidated balance sheet as part of equity, separately from equity attributable to the equity shareholders of the Company, and minority interests in the results of the Group for the year to be presented on the face of the consolidated profit and loss account as an allocation of the total income or loss for the year between the minority interests and equity shareholders of the Company. Further details of the new policy are set out in note 1(c).

The presentation of minority interests in the consolidated balance sheet, consolidated profit and loss account and consolidated statement of changes in equity for the comparative year has been restated accordingly.

(f) Classification of liabilities (HKAS 1, “Presentation of financial statements” and HKAS 10 “Events after the balance sheet date”)

In prior years, loan that was due to be settled within twelve months after the balance sheet date was still classified as non-current liability if an agreement to reschedule payments on a long-term basis was completed after the balance sheet date and before the accounts were authorized for issue.

With effect from 1 January 2005, in accordance with HKAS 1, loan that is due to be settled within twelve months after the balance sheet date is classified as current liability even if an agreement to reschedule payments on a long-term basis is completed after the balance sheet date and before the accounts are authorized for issue. However, this would qualify for disclosure as a non-adjusting event in accordance with HKAS 10.

As a result, other long term loans amounting to $93.7 million as at 31 December 2004 which were previously classified as non-current liabilities have been reclassified into current portion of other long term loans in order to conform with the current year’s presentation.

(g) Definition of related parties (HKAS 24, “Related party disclosures”)

As a result of the adoption of HKAS 24, the definition of related parties as disclosed in note 1(s) has been expanded to clarify that related parties include entities that are under the significant influence of a related party that is an individual (i.e. key management personnel, significant shareholders and/or their close family members) and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group. With effect from 1 January 2005, in order to comply with HKAS 24, the Group has made further disclosure of key management personnel compensation and contributions to post-employment benefit plans.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(h) Financial instruments (HKAS 32, “Financial instruments: Disclosure and presentation” and HKAS 39, “Financial instruments: Recognition and measurement”)

With effect from 1 January 2005, in order to comply with HKAS 32 and HKAS 39, the Group has changed its accounting policies relating to financial instruments, to those set out in notes 1(f)(i) and (h) to (j). The changes in policies had no material impact on the accounts for the year ended 31 December 2004 and 2005.

3. TURNOVER

The principal activity of the Group is the generation and sale of electricity. Turnover represents the invoiced value, net of value added tax, of electricity supplied in Foshan City, Guangdong Province, the People’s Republic of China (“PRC”) and additional fuel cost surcharges of $82.1 million (2004: $12.3 million) for electricity supplied, representing an adjustment for tariff of electricity supplied.

4. SEGMENT REPORTING

The Group’s results are almost entirely attributable to its generation and sale of electricity in the PRC. Accordingly, no segmental analysis is provided.

5. OTHER REVENUE AND NET INCOME

Other revenue

Government grants Interest income	2005 $’000 11,575 1,724 13,299	2004 $’000 – 1,638
		1,638

Other net income

Insurance compensation Net exchange gain Rental income Gain on disposal of fixed assets Interest payable waived by a lender Others	2005 $’000 119 – 4,576 – – 387 5,082	2004 $’000 850 67 1,879 18 9,032 656
		12,502

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. LOSS BEFORE TAXATION

Loss before taxation is arrived at after charging

(a) Finance costs Interest on bank advances and other borrowings wholly repayable within five years (b) Staff costs Salaries, wages and other benefits Contribution to defined contribution plans (c) Other items Auditors’ remuneration Cost of consumables Depreciation and amortization (other than goodwill) – assets held for use under operating leases – lease prepayment – other assets Impairment losses – goodwill – fixed assets Operating lease charges on buildings	2005 $’000 18,555 21,584 1,089 22,673 940 804,457 4,114 2,025 87,817 578,319 120,342 300	2004 (restated) $’000 20,892

		20,130 1,282
		21,412

		780 626,767 1,692 1,999 91,490 – – 300

7. INCOME TAX IN THE CONSOLIDATED PROFIT AND LOSS ACCOUNT

(a) Taxation in the consolidated profit and loss account represents:

Current tax PRC enterprises income tax for the year Under-provision in respect of prior years Deferred tax Origination and reversal of temporary differences_(note 18(b))_	2005 $’000 – – – (18,195) (18,195)	2004 $’000 – 188
		188 (7,641)
		(7,453)

No provision has been made for the Hong Kong Profits Tax as the Group sustained losses in Hong Kong for taxation purposes during the year. No provision has been made for PRC enterprise income tax as the Company’s subsidiary, 佛山市沙口發電廠有限公司 (Foshan Shakou Power Plant Co., Ltd.) (“Shakou JV”), sustained a loss for taxation purposes during the year.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) Reconciliation between tax credit and accounting loss at applicable tax rates:

Loss before tax Notional tax on loss before tax, calculated at rates applicable to profit/(loss) in the countries concerned Tax effect on non-deductible expenses Tax effect on non-taxable revenue Tax effect on unused tax losses not recognized Under-provision in prior years	2005 $’000 (825,358) (145,644) 102,311 (598) 25,736 – (18,195)	2004 $’000 (67,924
		(12,039 6,492 (2,170 76 188
		(7,453

8. DIRECTORS’ REMUNERATION AND INDIVIDUALS WITH HIGHEST EMOLUMENTS

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

Executive directors He Haochang Lam Siu Hung Chan Che Kan, Edward Situ Min Li Feng Independent non-executive directors Chan Ting Chuen, David Ng Pui Cheung, Joseph Cheung Kin Piu, Valiant	Directors’ fees $’000 100 50 70 100 100 100 100 100 720	Retirement Salaries Discretionary scheme allowances bonuses contributions $’000 $’000 $’000 390 45 18 244 38 11 916 – 83 390 45 18 89 266 17 – – – – – – – – – 2,029 394 147	2005 Total $’000 553 343 1,069 553 472 100 100 100
			3,290

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Directors’ fees $’000 Executive directors He Haochang 100 Lam Siu Hung 33 Chan Che Kan, Edward 100 Situ Min 100 Li Feng 100 Independent non-executive directors Chan Ting Chuen, David 100 Ng Pui Cheung, Joseph 100 Cheung Kin Piu, Valiant 80 713	Retirement Salaries Discretionary scheme allowances bonuses contributions $’000 $’000 $’000 390 – 18 – – – 1,300 – 118 358 – 17 94 204 16 – – – – – – – – – 2,142 204 169	2004 Total $’000 508 33 1,518 475 414 100 100 80
		3,228

Of the five individuals with the highest emoluments, five (2004: four) are directors whose emoluments are disclosed in the above. The details of the remaining one in 2004 were:

Salaries and other emoluments Retirement scheme contributions	2004 $’000 335 15
	350

9. LOSS ATTRIBUTABLE TO EQUITY SHAREHOLDERS OF THE COMPANY

The consolidated loss attributable to equity shareholders of the Company includes a loss of $726,151,000 (2004: $5,383,000) which has been dealt with in the accounts of the Company.

Reconciliation of the above amount to the Company’s loss for the year:

Amount of consolidated loss attributable to equity shareholders dealt with in the Company’s accounts Final dividends from subsidiary attributable to the profits of the previous financial year, approved and paid during the year Company’s (loss)/profit for the year_(note 24)_	2005 $’000 (726,151) 12,680 (713,471)	2004 $’000 (5,383 19,640
		14,257

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. DIVIDENDS

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

The directors do not recommend the payment of a final dividend in respect of the year ended 31 December 2004 and 2005.

(b) Dividends attributable to the previous financial year, approved and paid during the year

Final dividend in respect of the previous financial year, approved and paid during the year of nil cents per share (2004: 1.5 cents per share)	2005 $’000 –	2004 $’000 12,452

11. LOSS PER SHARE

(a) Basic

The calculation of basic loss per share is based on the loss attributable to ordinary equity shareholders of the Company of $762,579,000 (2004: $55,857,000) and on the weighted average of 830,146,244 ordinary shares (2004: 829,883,228 shares) in issue during the year.

(b) Diluted

The diluted loss per share for the years ended 31 December 2004 and 2005 is not shown as all potential ordinary shares are anti-dilutive.

12. MATERIAL RELATED PARTY TRANSACTIONS

(a) Transactions with Foshan Electric Power Construction Group Corporation (“Power Group Corporation”), its subsidiaries and associate

Foshan City District Electric Power Construction Corporation (“Power Construction Corporation”) is a substantial shareholder of Shakou JV. Power Construction Corporation is a part of a larger group of companies under Power Group Corporation, which are owned by the PRC government and Shakou JV has significant transactions and relationships with Power Group Corporation, its subsidiaries and associate. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

The following is a summary of principal related party transactions with Power Group Corporation, its subsidiaries and associate, which were carried out in the ordinary course of business. These transactions also constitute connected transactions under Listing Rules. Further details of these transactions are disclosed under the paragraph “Connected Transactions” in the directors’ report.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Name of related company Nature of transaction Note Foshan City District Purchase of fuel (i) Electricity Fuel (excluding value added tax) Supply Company Foshan City District Interest on loans (ii) Electric Power Interest payable waived (ii) Construction Corporation and its associate Funeng Power Supply Lease of facilities and premises (iii) Co., Ltd.	2005 $’000 700,531 12,073 – 4,550	2004 $’000 542,822 15,861 9,032 1,872

(i) During the year, the Group purchased fuel from 佛山市區電力燃料公司 (Foshan City District Electricity Fuel Supply Company) (“Fuel Company”). As at 31 December 2005, amount due to Fuel Company was $120.8 million (2004: $108.2 million). The Fuel Company, being a fellow subsidiary of Power Construction Corporation, is a related party to the Company because Power Construction Corporation is a substantial shareholder of Shakou JV. The Fuel Company supplies fuel to the Group at prices which are determined by Shakou JV and the Fuel Company from time to time, but in any event will not be higher than: i) the then prevailing market prices for sales of fuel by the Fuel Company to independent third parties; or ii) the then quotation of price of the fuel that Shakou JV could obtain from other independent supplier, whichever is lower.
(ii) During the year, Shakou JV had outstanding loans due to Power Construction Corporation and its associate pursuant to certain loan agreements entered into between Shakou JV and the respective counter parties. As at 31 December 2005, the outstanding loans amounted to approximately $296.98 million (2004: $289.04 million). As at 31 December 2005, the loans amounting to $161.02 million are interest-bearing at a fixed rate of 5.76% per annum and the remaining balances are interest free (2004: loans amounting to $223.16 million are interest bearing at a fixed rate of 5.76% per annum and the remaining balances are interest free).

As at 31 December 2005, there was no significant overdue interest payable to these parties (There was overdue interest payable as at 31 December 2004 amounting to $7.2 million, which was interest free).

(iii) In July 2004, Shakou JV entered into a facilities lease agreement with (Funeng Power Supply Co., Ltd.) (“Funeng JV”). Funeng JV, being a fellow subsidiary of Power Construction Corporation, is a related party to the Company because Power Construction Corporation is a substantial shareholder of Shakou JV. Pursuant to the facilities lease agreement, Shakou JV leased to Funeng JV certain assets (including office premises, factory premises, land use rights and auxiliary power generation facilities) for two years commencing from the date of the agreement and Shakou JV would receive two annual rental payments of approximately $4.55 million (Rmb: 4.80 million) for each of the two years.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) Key management personnel remuneration

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

Short-term employee benefits Post-employments benefits	2005 $’000 3,143 147 3,290	2004 $’000 3,059 169
		3,228

Total remuneration is included in “staff costs” (see note 6(b)).

(c) Transactions with other state-owned entities in the PRC

Power Group Corporation is a state-owned entity and together with Shakou JV both operate in an economic regime currently predominated by entities directly or indirectly owned or controlled by the PRC government and numerous government authorities and agencies (collectively referred to as “state-owned entities”). Apart from transactions mentioned in note 12(a), the Group conducts a majority of its business activities with state-owned entities in the ordinary course of business. These transactions include sales of electricity, purchase of fuel and materials, purchase of property, plant and equipment and obtaining finance and are carried out at terms similar to those that would be entered into with non-state-owned entities. The Group believes that it has provided meaningful disclosure of related party transactions in note 12(a).

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

13. FIXED ASSETS

Cost: At 1 January 2004 Additions Disposal At 31 December 2004 At 1 January 2005 Exchange adjustments Additions Disposal At 31 December 2005 Accumulated depreciation and amortization: At 1 January 2004 Charge for the year Written back on disposal At 31 December 2004 At 1 January 2005 Exchange adjustments Charge for the year Impairment loss_(note 14)_ Written back on disposal At 31 December 2005 Net book value: At 31 December 2005 At 31 December 2004	Buildings $’000 142,599 – – 142,599 ------------ 142,599 3,922 – – 146,521 ------------ 43,961 5,283 – 49,244 ------------ 49,244 1,431 5,352 9,628 – 65,655 ------------ 80,866 93,355	Plant, machinery and equipment $’000 1,802,205 317 (6,412) 1,796,110 ------------ 1,796,110 49,393 – – 1,845,503 ------------ 592,919 86,522 (6,412) 673,029 ------------ 673,029 19,747 85,889 107,104 – 885,769 ------------ 959,734 1,123,081	Motor vehicles $’000 9,386 – (794) 8,592 ------------ 8,592 218 229 – 9,039 ------------ 8,521 203 (794) 7,930 ------------ 7,930 199 205 – – 8,334 ------------ 705 662	Others $’000 12,060 409 (1,859) 10,610 ------------ 10,610 251 109 (893) 10,077 ------------ 10,415 1,174 (1,859) 9,730 ------------ 9,730 234 485 – (893) 9,556 ------------ 521 880	Interests in leasehold land held for own use under operating The Group Sub-total lease Total $’000 $’000 $’000 1,966,250 55,972 2,022,222 726 – 726 (9,065) – (9,065) 1,957,911 55,972 2,013,883 ------------ ------------ ------------ 1,957,911 55,972 2,013,883 53,784 1,539 55,323 338 – 338 (893) – (893) 2,011,140 57,511 2,068,651 ------------ ------------ ------------ 655,816 17,491 673,307 93,182 1,999 95,181 (9,065) – (9,065) 739,933 19,490 759,423 ------------ ------------ ------------ 739,933 19,490 759,423 21,611 565 22,176 91,931 2,025 93,956 116,732 3,610 120,342 (893) – (893) 969,314 25,690 995,004 ------------ ------------ ------------ 1,041,826 31,821 1,073,647 1,217,978 36,482 1,254,460	The Company Others $’000 2,880 – (1,859) 1,021 ------------ 1,021 – – (893) 128 ------------ 2,880 – (1,859) 1,021 ------------ 1,021 – – – (893) 128 ------------ – –

All of the Group’s buildings are located in the PRC. Interests in leasehold land for own use under operating leases related to the right to use the land of Shakou JV, on which the Group’s buildings and plant are situated, for period to 1 May 2043.

As described in note 12(a)(iii), the Group leases out certain assets under an operating lease at a fixed annual rental payment for a period of two years, with the option to renew the lease after that date at which time all terms are renegotiated. The lease does not include contingent rentals.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The Group’s total future minimum lease payments under non-cancellable operating leases are receivables as follows:

Within 1 year After 1 year but within 5 years 14. GOODWILL The Group Cost At 1 January 2004 and 31 December 2004 At 1 January 2005 Opening balance adjustment to eliminate accumulated amortization At 31 December 2005 Accumulated amortization and impairment losses At 1 January 2004 Amortization for the year At 31 December 2004 At 1 January 2005 Eliminated against cost at 1 January 2005 Impairment loss At 31 December 2005 Carrying amount At 31 December 2005 At 31 December 2004	2005 $’000 2,692 – 2,692	2004 $’000 4,492 2,620 7,112 $’000 790,533 ----------------- 790,533 (212,214) 578,319 ----------------- 180,593 31,621 212,214 ----------------- 212,214 (212,214) (578,319) (578,319) ----------------- – 578,319

In 2004, goodwill was amortized on a straight-line basis over 25 years i.e. the remaining joint venture period of Shakou JV as at the date of acquisition.

As explained further in note 2(c), with effect from 1 January 2005 the Group no longer amortizes goodwill. In accordance with the transitional provisions set out in HKFRS 3, the accumulated amortization of goodwill as at 1 January 2005 has been eliminated against the cost of goodwill as at that date.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Goodwill is allocated to the fixed assets of Shakou JV in the PRC. The impairment loss recognized during the year solely relates to Shakou JV as the continuing increase in fuel oil price caused the decrease of recoverable amount of goodwill and the related fixed assets. Based on the assessment, the carrying amount of the goodwill and fixed assets were written down by $578.3 million and $120.3 million respectively. The estimates of recoverable amount was based on the value in use determined using cash flow projections based on financial forecast approved by management covering the remaining useful lives of power generating facilities in Shakou JV discounted at a rate of approximately 7%.

15. INVESTMENTS IN SUBSIDIARIES

The Company

Unlisted shares, at cost Less: impairment loss	2005 $’000 1,338,500 (702,691) 635,809	2004 $’000 1,338,500 –
		1,338,500

The following list contains the particulars of subsidiaries of the Group.

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

	Place of
	incorporation/	Issued and
	establishment	paid up	Percentage of		Principal
Name of company	and operation	share capital	equity interest held		activities
			Directly	Indirectly
Hensil Worldwide Inc.	British Virgin Islands	Ordinary US$2	100%	–	Investment holding
Lipromate Limited	Hong Kong	Ordinary $2	100%	–	Provision of
					financial and
					management
					services to
					the Group
Foshan Shakou	The PRC	US$85,000,000	–	80%	Generation and
Power Plant Co., Ltd.		(Note)			sale of electricity

Note: This represents the registered and paid up capital of Shakou JV, a sino-foreign equity joint venture established in Foshan City, the PRC. Pursuant to an approval document issued by the Guangdong Province Foreign Trade and Economic Commission dated 14 March 1997, the joint venture period was extended to 30 years expiring on 16 April 2023.

– 68 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. CONSUMABLES

The Group

Fuel oil Components and replacement parts	2005 $’000 6,334 19,025 25,359	2004 $’000 343 17,802
		18,145

17. TRADE AND OTHER RECEIVABLES

Trade receivables Other receivables	The 2005 $’000 79,106 22,640 101,746	Group 2004 $’000 172,404 7,391 179,795	The Company 2005 2004 $’000 $’000 – – 278 172 278 172	The Company 2005 2004 $’000 $’000 – – 278 172 278 172
				172

Included in trade and other receivables is a trade debtor with the following ageing analysis:

Current 1 to 3 months overdue	The 2005 $’000 79,106 – 79,106	Group 2004 $’000 103,574 68,830 172,404	The Company 2005 2004 $’000 $’000 – – – – – –	The Company 2005 2004 $’000 $’000 – – – – – –
				–

Debts are due within 30 days from the date of billing. All of the trade and other receivables are expected to be recovered within one year.

– 69 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

18. INCOME TAX IN THE BALANCE SHEET

(a) Current taxation in the balance sheet represents:

Provision for PRC enterprise income tax for the year Amount paid during the year Balance of income tax relating to prior years Tax recoverable	2005 $’000 – – – (25) (25)	2004 $’000 – (25)
		(25) –
		(25)

(b) Deferred tax assets recognized

The components of deferred tax assets recognized in the consolidated balance sheet and the movements during the year are as follows:

Deferred tax arising from:

At 1 January 2004 Credited to consolidated profit and loss account At 31 December 2004 At 1 January 2005 Exchange adjustments (Charged)/credited to consolidated profit and loss account (note 7(a)) At 31 December 2005	Tax losses $’000 – 5,341 5,341 5,341 436 (5,777) –	Depreciation in excess of related depreciation in allowance $’000 5,215 2,300 7,515 7,515 238 2,310 10,063	Impairment loss in respect of fixed assets $’000 – – – – – 21,662 21,662	Total $’000 5,215 7,641
				12,856

				12,856 674 18,195
				31,725

(c) Deferred tax assets have not been recognized in respect of tax losses of $160,605,000 (2004: $17,712,000) as it is not probable that future taxable profits will be available against which the assets can be utilized.

– 70 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

19. CASH AND CASH EQUIVALENTS

Deposits with banks Cash at bank and in hand	The 2005 $’000 15,498 116,842 132,340	Group 2004 $’000 20,167 78,091 98,258	The Company 2005 2004 $’000 $’000 15,498 20,167 4 860 15,502 21,027	The Company 2005 2004 $’000 $’000 15,498 20,167 4 860 15,502 21,027
				21,027

20. TRADE AND OTHER PAYABLES

Creditors and accrued charges Amounts due to related companies	The 2005 $’000 10,756 124,825 135,581	Group 2004 $’000 16,732 115,367 132,099	The Company 2005 2004 $’000 $’000 873 835 – – 873 835	The Company 2005 2004 $’000 $’000 873 835 – – 873 835
				835

Included in trade and other payables are trade creditors with the following ageing analysis as of the balance sheet date:

Due within 1 month or on demand	The 2005 $’000 123,258	Group 2004 $’000 108,207	The Company 2005 2004 $’000 $’000 – –

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

The amounts due to related companies are unsecured and interest free.

21. PROVISION FOR STAFF WELFARE

The Group

At 1 January 2005 Amount utilized At 31 December 2005	$’000 1,241 (984
	257

In accordance with the articles of association of the PRC subsidiary, the PRC subsidiary is required to transfer part of the profit after taxation to the staff welfare fund. The transfer amount is determined by the subsidiary’s board of directors in accordance with the joint venture agreement and the transfer is made before profit distribution to the joint venture partners. No transfer was made for year 2005 as the PRC subsidiary suffered a loss.

– 71 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

22. BANK LOANS – SECURED

At 31 December 2005, the Group’s bank loans were repayable as follows:

Within 1 year After 1 year but within 2 years After 2 years but within 5 years	2005 $’000 28,846 ----------------- 51,923 48,077 100,000 ----------------- 128,846	2004 $’000 46,790 ----------------- 28,074 50,533
		78,607 -----------------
		125,397

The banking facilities of the PRC subsidiary are secured by charges over its power generating facilities with an aggregate carrying value of $1,066,173,000 (31 December 2004: $1,120,703,000) at 31 December 2005. Such banking facilities amounted to $201,923,000 (2004: $196,519,000), out of which $128,846,000 (2004: $125,397,000) were drawn down at 31 December 2005. The bank loans are denominated in Renminbi bearing floating interest rates ranging from 4.941% to 5.184% per annum as at 31 December 2005 (31 December 2004: from 4.779% to 4.941% per annum).

23. OTHER LOANS – UNSECURED

The Group

At 31 December 2005, the Group’s other loans were repayable as follows:

Within 1 year After 1 year but within 2 years After 2 years but within 5 years	2005 $’000 – ----------------- 136,503 160,481 296,984 ----------------- 296,984	2004 $’000 93,679 ----------------- 127,597 67,760
		195,357 -----------------
		289,036

The loans are denominated in Renminbi. The loans amounting to $161.02 million are interestbearing at a fixed rate of 5.76% per annum and the remaining balances are interest free (2004: loans amounting $223.16 millions are interest-bearing at a fixed rate of 5.76% per annum and the remaining balances are interest free). These loans are due to Power Construction Corporation and its associate.

– 72 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

24. CAPITAL AND RESERVES

(a) The Group

Share capital (Note c) $’000 At 1 January 2004 82,902 Loss for the year – Dividends approved for equity shareholders of the Company – Dividends paid to minority equity shareholder of subsidiaries – Shares issued under share option scheme 113 At 31 December 2004 83,015 At 1 January 2005 83,015 Loss for the year – Dividends paid to minority equity shareholder of subsidiaries – Exchange differences on translation of accounts of a PRC subsidiary – At 31 December 2005 83,015	Capital Share redemption premium reserve (Note d) (Note d) $’000 $’000 1,041,444 297 – – – – – – 282 – 1,041,726 297 1,041,726 297 – – – – – – 1,041,726 297	Exchange reserve (Note e) $’000 – – – – – – – – – 20,729 20,729	Total equity attributable Retained to equity Enterprise profits/ shareholders Reserve development (accumulated of the fund fund losses) Company (Note f) (Note f) $’000 $’000 $’000 $’000 23,481 23,481 288,844 1,460,449 – – (55,857) (55,857) – – (12,452) (12,452) – – – – – – – 395 23,481 23,481 220,535 1,392,535 23,481 23,481 220,535 1,392,535 – – (762,579) (762,579) – – – – – – – 20,729 23,481 23,481 (542,044) 650,685	Minority interests Total equity $’000 $’000 208,417 1,668,866 (4,614) (60,471) – (12,452) (2,253) (2,253 ) – 395 201,550 1,594,085 201,550 1,594,085 (44,584) (807,163) (3,182) (3,182 ) 5,190 25,919 158,974 809,659

– 73 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) The Company

At 1 January 2004 Profit for the year Dividends approved (Note 10) Shares issued under share option scheme At 31 December 2004 At 1 January 2005 Loss for the year At 31 December 2005	Share capital $’000 82,902 – – 113 83,015 83,015 – 83,015	Share premium $’000 1,041,444 – – 282 1,041,726 1,041,726 – 1,041,726	Retained Capital profits/ redemption (accumulated reserve losses) $’000 $’000 297 237,313 – 14,257 – (12,452) – – 297 239,118 297 239,118 – (713,471) 297 (474,353)	Total $’000 1,361,956 14,257 (12,452) 395
				1,364,156

				1,364,156 (713,471)
				650,685

(c) Share capital

Authorized Share of $0.10 each Issued and fully paid: At 1 January Share issued under share option scheme At 31 December	2005 Number of Nominal shares value ’000 $’000 1,100,000 110,000 830,146 83,015 – – 830,146 83,015	2004 Number of Nominal shares value ’000 $’000 1,100,000 110,000 829,018 82,902 1,128 113 830,146 83,015	2004 Number of Nominal shares value ’000 $’000 1,100,000 110,000 829,018 82,902 1,128 113 830,146 83,015

			82,902 113
			83,015

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meeting of the Company. All ordinary shares rank equally with regard to the Company’s residual assets.

– 74 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(d) Share premium and capital redemption reserve

The application of the share premium account and capital redemption reserve is governed by Sections 48B and 49H respectively of the Hong Kong Companies Ordinance.

(e) Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the accounts of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 1(p).

(f) Reserve fund and enterprise development fund

In accordance with the accounting principles and financial regulations applicable in the PRC, the PRC subsidiary is required to transfer part of its profit after taxation to the reserve fund and the enterprise development fund. The transfer amounts are determined by the subsidiary’s board of directors in accordance with the articles of association and the transfer are made before profit distribution to the joint-venture partners. Reserve fund can only be used to make good losses, if any, and for increasing capital. Enterprise development fund can only be used for increasing capital.

(g) Distributability of reserves

At 31 December 2005, the aggregate amount of reserves available for distribution to equity shareholders of the Company was nil (2004: $239,118,000).

25. EMPLOYEES RETIREMENT BENEFITS

The Group operates a Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF scheme is a defined contribution retirement plan administered by independent trustees. Under the MPF scheme, the employer and its employees are each required to make contributions to the plan at 5% of the employee’s relevant income, subject to a cap of monthly relevant income of $20,000. Apart from the mandatory contributions, the employer would make monthly voluntary contributions, which is the excess of 5%, or 10% for employees working over ten years, of the basic salary over the mandatory contribution. Mandatory contribution to the plan vest immediately. Where there are employees who leave the Group prior to vesting fully in the voluntary contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions.

The employees in the Group’s PRC subsidiary are members of the stated-managed retirement scheme. The PRC subsidiary is required to contribute a specified percentage of the payroll to the scheme. The only obligation of the Group with respect to the retirement scheme is to make the specified contributions.

– 75 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

26. EQUITY SETTLED SHARE-BASED TRANSACTIONS

The Company has a share option scheme which was adopted on 22 May 2002 whereby the directors of the Company are authorized, at their discretion, to invite employees of the Group, including directors of any company in the Group, to take up options to subscribe for shares of the Company. The exercise price of options is the highest of the nominal value of the shares, the closing price of the shares on the Stock Exchange of Hong Kong Limited at the date of grant and the average closing price of the shares on the Stock Exchange of Hong Kong Limited for the five business days immediately proceeding the date of grant. The options vest after six months from the date of grant and are then exercisable within a period of five years. Each option gives the holder the right to subscribe for one ordinary share in the Company.

(a) The terms and conditions of the grants that existed during the year are as follows, whereby all options are settled by physical delivery of shares:

Date granted Exercise period Exercise Price 25 July 2002 25 January 2003 to 24 January 2008 $0.35 30 July 2002 30 January 2003 to 29 January 2008 $0.35 19 May 2003 22 November 2003 to 21 November 2008 $0.415	2005 ’000 828 11,900 1,500
	14,228

All the above share options are granted to the directors.

(b) The number and weighted average exercise prices of share options are as follows:

		2005		2004
	Weighted		Weighted
	average	Number of	average	Number of
	exercise price	shares	exercise price	shares
		’000		’000
At 1 January	$0.36	14,228	$0.36	15,356
Exercised	–	–	$0.35	(1,128)
Lapsed and cancelled	$0.35	(3,900)	–	–
At 31 December	$0.36	10,328	$0.36	14,228
Options vested at 31 December	$0.36	10,328	$0.36	14,228

– 76 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Details of share option exercised during last year:

Market value per share Exercised date Exercise price at exercise date 2 January 2004 $0.35 $0.50 6 January 2004 $0.35 $0.50 22 April 2004 $0.35 $0.445	Proceeds received $’000 21 84 290 395	Number ’000 60 240 828
		1,128

27. COMMITMENTS

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

Contracted for	The 2005 $’000 51,187	Group 2004 $’000 –	The Company 2005 2004 $’000 $’000 – –

On 23 August 2005, Shakou JV placed purchase orders with an independent third party supplier to provide certain spare parts for the routine large-scale inspection and overhaul of its power plant.

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

Within 1 year	The 2005 $’000 25	Group 2004 $’000 275	The Company 2005 2004 $’000 $’000 – –

28. CONTINGENT LIABILITIES

Shakou JV had a syndicated loan denominated in US Dollar which was fully repaid on 23 March 1998. Under the loan agreement, Shakou JV is required to bear any PRC tax payable in respect of interest paid to the lenders. By a letter dated 17 March 1998, Shakou JV’s former ultimate holding company, Foshan Development Company Limited, agreed to bear any tax liabilities, including penalties, if any, which may arise from the interest paid on the syndicated loan. The estimated tax which may be payable is approximately $43 million, excluding penalties.

– 77 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

29. FINANCIAL INSTRUMENTS

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

(a) Credit risk

Guangdong Power Grid Company, the provincial grid company is the sole purchaser of electricity supplied by the Group.

The details of sale and receivables from sale of electricity are as follows:

Sale of electricity Receivables from sale of electricity	2005 $’000 824,038 79,106	2004 $’000 740,724 172,404

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

(b) Liquidity risk

Individual operating entities within the Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the parent company’s board when the borrowings exceed certain predetermined levels of authority. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the shorter and longer term.

(c) Interest rate risk

The interest rates and terms of repayment of the outstanding loans of the Group are disclosed in notes 22 and 23.

(d) Foreign currency risk

Individual companies within the Group has limited foreign currency risk as most of the transactions are denominated in the same currency as the functional currency of the operations in which they relate. However, as the principal subsidiary, Shakou JV, mainly carried out transactions in Renminbi, therefore any appreciation or depreciation of Hong Kong dollars against Renminbi will affect the Group’s financial position.

– 78 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(e) Fair values

The Group has not developed an internal valuation model necessary to make the estimate of the fair value of other loans from related parties as it is not considered practicable to estimate their fair value because of the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the terms of the borrowings.

All other financial instruments are carried at amounts not materially different from their fair values as at 31 December 2005 and 2004.

30. ACCOUNTING ESTIMATES AND JUDGEMENTS

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

The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the accounts. The significant accounting policies are set forth in note 2. The Group believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the accounts.

(a) Impairment for long-lived assets

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

– 79 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) Depreciation

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

(c) Impairment for bad and doubtful debts

The Group estimates impairment losses for bad and doubtful debts resulting from the inability of the debtors to make the required payments. The Group bases the estimates on the ageing of the trade and other receivables balance, credit-worthiness of the debtors, and historical write-off experience. If the financial condition of the debtors were to deteriorate, actual write-offs would be higher than estimated.

31. COMPARATIVE FIGURES

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

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

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

Of these developments, the following relate to matters that may be relevant to the Group’s operations and accounts:

	Effective for accounting
	periods beginning
	on or after
HK(IFRIC) 4, Determining whether an arrangement contains a lease	1 January 2006
Amendments to HKAS19, Employee benefits – Actuarial Gains
and Losses, Group Plans and Disclosure	1 January 2006
Amendments to HKAS 39, Financial instruments:
Recognition and measurement:
– The fair value option	1 January 2006
– Financial guarantee contracts	1 January 2006
HKFRS 7, Financial instruments: disclosure	1 January 2007
Amendments to HKAS 1, Presentation of financial statements:
capital disclosures	1 January 2007

– 80 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that while the adoption of them may result in new or amended disclosures, it is unlikely to have a significant impact on the Group’s results of operations and financial position.

– 81 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. INTERIM FINANCIAL STATEMENTS

Set out below are the unaudited financial statements of the Group together with accompanying notes as extracted from the interim report of the Company for the six months ended 30 June 2006:

CONSOLIDATED PROFIT AND LOSS ACCOUNT

For the six months ended 30 June 2006 – Unaudited

(Expressed in Hong Kong dollars)

Note Turnover 2 Cost of sales Gross loss Other revenue 4 Other net income 4 Administrative expenses Impairment losses 5 Loss from operations Finance costs 6 Loss before taxation 6 Income tax 7 Loss for the period Attributable to: – Equity shareholders of the Company – Minority interests Loss for the period Loss per share 9 – Basic – Diluted	Six months ended 30 June 2006 2005 $’000 $’000 378,473 391,081 (518,042) (403,375) (139,569) (12,294) 13,940 754 3,265 2,275 (13,968) (13,904) (279,261) (94,783) (415,593) (117,952) (8,145) (9,474) (423,738) (127,426) 51,332 5,607 (372,406) (121,819) (298,456) (117,000) (73,950) (4,819) (372,406) (121,819) 36.0 cents 14.1 cents N/A N/A

– 82 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

At 30 June 2006 – Unaudited

(Expressed in Hong Kong dollars)

Note Non-current assets Fixed assets – Property, plant and equipment – Interests in leasehold land held for own use under operating leases Prepayment for planned maintenance Deferred tax assets Current assets Consumables Trade and other receivables 11 Tax recoverable Cash and cash equivalents Current liabilities Trade and other payables 12 Provision for staff welfare Bank loans 13 Current portion of other loans Net current (liabilities)/assets Total assets less current liabilities Non-current liabilities Bank loans 13 Other loans Net assets Capital and reserves Share capital Reserves Total equity attributable to equity shareholders of the Company Minority interests Total equity	At At 30 June 31 December 2006 2005 $’000 $’000 733,117 1,041,826 22,678 31,821 755,795 1,073,647 6,543 6,485 83,345 31,725 845,683 1,111,857 ---------------- ---------------- 28,075 25,359 101,085 101,746 – 25 189,080 132,340 318,240 259,470 ---------------- ---------------- 269,345 135,581 10 257 81,490 28,846 79,857 – 430,702 164,684 ---------------- ---------------- (112,462) 94,786 ---------------- ---------------- 733,221 1,206,643 ---------------- ---------------- 69,848 100,000 219,778 296,984 289,626 396,984 ---------------- ---------------- 443,595 809,659 83,015 83,015 274,301 567,670 357,316 650,685 86,279 158,974 443,595 809,659	At At 30 June 31 December 2006 2005 $’000 $’000 733,117 1,041,826 22,678 31,821 755,795 1,073,647 6,543 6,485 83,345 31,725 845,683 1,111,857 ---------------- ---------------- 28,075 25,359 101,085 101,746 – 25 189,080 132,340 318,240 259,470 ---------------- ---------------- 269,345 135,581 10 257 81,490 28,846 79,857 – 430,702 164,684 ---------------- ---------------- (112,462) 94,786 ---------------- ---------------- 733,221 1,206,643 ---------------- ---------------- 69,848 100,000 219,778 296,984 289,626 396,984 ---------------- ---------------- 443,595 809,659 83,015 83,015 274,301 567,670 357,316 650,685 86,279 158,974 443,595 809,659
		1,073,647 6,485 31,725
		1,111,857 ---------------- 25,359 101,746 25 132,340
		259,470 ---------------- 135,581 257 28,846 –
		164,684 ----------------
		94,786 ----------------
		1,206,643 ---------------- 100,000 296,984
		396,984 ----------------
		809,659

		83,015 567,670
		650,685 158,974
		809,659

– 83 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2006 – Unaudited (Expressed in Hong Kong dollars)

At 1 January 2005 Loss for the period At 30 June 2005 At 1 January 2006 Loss for the period Exchange differences on translation of accounts of a PRC subsidiary At 30 June 2006	Share capital $’000 83,015 – 83,015 83,015 – – 83,015	Share premium $’000 1,041,726 – 1,041,726 1,041,726 – – 1,041,726	Capital redemption reserve $’000 297 – 297 297 – – 297	Exchange reserve $’000 – – – 20,729 – 5,087 25,816	Total equity attributable Retained to equity Enterprise profits/ shareholders Reserve development (accumulated of the fund fund losses) Company $’000 $’000 $’000 $’000 23,481 23,481 220,535 1,392,535 – – (117,000) (117,000) 23,481 23,481 103,535 1,275,535 23,481 23,481 (542,044) 650,685 – – (298,456) (298,456) – – – 5,087 23,481 23,481 (840,500) 357,316	Minority interests $’000 201,550 (4,819) 196,731 158,974 (73,950) 1,255 86,279	Total equity $’000 1,594,085 (121,819 ) 1,472,266 809,659 (372,406 ) 6,342 443,595

– 84 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2006 – Unaudited (Expressed in Hong Kong dollars)

Net cash generated from operations Net cash generated from investing activities Net cash generated from/(used in) financing activities Increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Analysis of balances of cash and cash equivalents Deposits with banks Cash at bank and in hand	Six months ended 30 June 2006 2005 $’000 $’000 38,498 73,794 766 673 17,476 (16,484) 56,740 57,983 132,340 98,258 189,080 156,241 12,572 17,374 176,508 138,867 189,080 156,241

– 85 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE UNAUDITED INTERIM FINANCIAL REPORT

(Expressed in Hong Kong dollars)

1. BASIS OF PREPARATION

The interim financial report is unaudited, but has been reviewed by the audit committee of Wing Shan International Limited (“the Company”) and by its auditors, KPMG, in accordance with Statement of Auditing Standards 700, “Engagements to review interim financial reports”, issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

The interim financial report has been prepared in accordance with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, including compliance with Hong Kong Accounting Standard (“HKAS”) 34 “Interim financial reporting” issued by the HKICPA. It was authorised for issuance on 15 August 2006.

The preparation of an interim financial report in conformity with HKAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates.

In preparing this interim financial report, the significant judgements made by management in applying the group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated accounts as at and for the year ended 31 December 2005.

This interim financial report contains condensed consolidated accounts and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the 2005 annual accounts. The condensed consolidated interim accounts and notes thereon do not include all of the information required for full set of accounts prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”, which term collectively includes HKASs and Interpretations).

HKICPA has issued a number of new and revised HKFRSs that are effective or available for early adoption for accounting periods beginning on or after 1 January 2006. The Board of Directors has determined the accounting policies to be adopted in the preparation of the Group’s annual accounts for the year ending 31 December 2006, on the basis of HKFRSs currently in use.

The HKFRSs that will be effective or are available for voluntary early adoption in the annual accounts for the year ending 31 December 2006 may be affected by the issue of additional interpretation(s) or other changes announced by HKICPA subsequent to the date of issuance of this interim financial report. Therefore the policies that will be applied in the Group’s accounts for that period cannot be determined with certainty at the date of issuance of this interim financial report.

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The interim financial report has been prepared in accordance with the same accounting policies adopted in the 2005 annual accounts. The adoption of the new and revised HKFRSs did not have any significant impact on the Group’s results of operations and financial position.

The financial information relating to the financial year ended 31 December 2005 that is included in the interim financial report as being previously reported information does not constitute the Company’s statutory accounts for that financial year but is derived from those accounts. Statutory accounts for the year ended 31 December 2005 are available from the Company’s registered office. The auditors have expressed an unqualified opinion on those accounts in their report dated 18 April 2006.

2. TURNOVER

The principal activity of the Group is the generation and sale of electricity. Turnover represents the invoiced value, net of value added tax, of electricity supplied in Foshan City, Guangdong Province, the People’s Republic of China (“PRC”). The amounts in the six months ended 30 June 2005 also included additional fuel cost surcharges of $62.2 million for electricity supplied, representing an adjustment for tariff of electricity supplied.

3. SEGMENT REPORTING

The Group’s results are almost entirely attributable to its generation and sale of electricity in the PRC. Accordingly, no segmental analysis is provided.

4. OTHER REVENUE AND NET INCOME

Other revenue Government grants Interest income Other net income Insurance compensation Rental income Others	Six months ended 30 June 2006 2005 $’000 $’000 13,008 – 932 754 13,940 754 912 – 2,316 2,246 37 29 3,265 2,275	Six months ended 30 June 2006 2005 $’000 $’000 13,008 – 932 754 13,940 754 912 – 2,316 2,246 37 29 3,265 2,275
		754

		– 2,246 29
		2,275

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5. IMPAIRMENT LOSSES

During the six months ended 30 June 2006, the continuing increase in fuel oil price and expected decrease in future subsidies caused the Group to assess the recoverable amount of fixed assets of the Company’s subsidiary, 佛山市沙口發電廠有限公司 (Foshan Shakou Power Plant Co., Ltd.) (“Shakou JV”). Based on this assessment, the carrying amount of the fixed assets was written down by $279 million. The estimates of recoverable amount were based on the value in use, determined using a discount rate of 7%. The amounts in the six months ended 30 June 2005 represented impairment of goodwill of $95 million.

6. LOSS BEFORE TAXATION

Loss before taxation is arrived at after charging:

			Six months	ended 30 June
			2006	2005
			$’000	$’000
	(a)	Finance costs
		Interest on bank advances and other borrowings
		wholly repayable within five years	8,145	9,474

	(b)	Other items
		Amortisation of lease prepayments	1,031	1,000
		Depreciation
		– assets held for use under operating leases	2,094	2,031
		– other assets	44,958	44,153

7.	INCOME TAX IN CONSOLIDATED PROFIT AND LOSS ACCOUNT

Deferred Tax Origination and reversal of temporary differences	Six months ended 30 June 2006 2005 $’000 $’000 (51,332) (5,607)

No provision has been made for Hong Kong Profits Tax as the Group sustained losses in Hong Kong for taxation purposes during the period. No provision for PRC enterprise income tax has been made during the period as the Company’s subsidiary, Shakou JV, sustained a loss for taxation purposes.

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8. DIVIDENDS

Dividends attributable to the interim period:

The directors do not recommend the payment of any interim dividend for the six months ended 30 June 2006 (six months ended 30 June 2005: $Nil).

9. LOSS PER SHARE

(a) Basic

The calculation of basic loss per share is based on the loss attributable to ordinary equity shareholders of the Company for the six months ended 30 June 2006 of $298,456,000 (six months ended 30 June 2005: $117,000,000) and on the weighted average number of shares in issue during the six months ended 30 June 2006 of 830,146,244 (six months ended 30 June 2005: 830,146,244).

(b) Diluted

The diluted loss per share for the six months ended 30 June 2005 and 2006 is not shown as all potential ordinary shares are anti-dilutive.

10. MATERIAL RELATED PARTY TRANSACTIONS

(a) Transactions with Foshan Electric Power Construction Group Corporation (“Power Group Corporation”), its subsidiaries and associate

The following is a summary of principal related party transactions with Power Group Corporation, its subsidiaries and associate, which were carried out in the ordinary course of business.

		Six months ended 30 June	Six months ended 30 June
		2006	2005
Name of related company	Nature of transaction	$’000	$’000
Foshan City District Electricity	Purchase of fuel	447,834	330,805
Fuel Supply Company	(excluding value
	added tax)
Foshan City District Electric	Interest on loans	4,299	6,374
Power Construction Corporation
and its associate
Foshan Funeng Power	Lease of facilities and	2,316	2,246
Supply Co., Ltd.	premises

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(i) During the period, the Group purchased fuel from 佛山市區電力燃料公司 (Foshan City District Electricity Fuel Supply Company) (“Fuel Company”). As at 30 June 2006, amount due to Fuel Company was $259.6 million (31 December 2005: $120.8 million). The Fuel Company, being a fellow subsidiary of Power Construction Corporation, is a related party to the Company because Power Construction Corporation is a substantial shareholder of Shakou JV. The Fuel Company supplies fuel to the Group at prices which are determined by Shakou JV and the Fuel Company from time to time, but in any event will not be higher than: i) the then prevailing market prices for sales of fuel by the Fuel Company to independent third parties; or ii) the then quotation of price of the fuel that Shakou JV could obtain from other independent supplier, whichever is lower.
(ii) During the period, Shakou JV had outstanding loans due to Power Construction Corporation and its associate pursuant to certain loan agreements entered into between Shakou JV and the respective counter parties. As at 30 June 2006, the outstanding loans amounted to approximately $299.64 million (31 December 2005: $296.98 million). As at 30 June 2006, the loans amounting to $116.35 million are interest-bearing at a fixed rate of 5.76% per annum and the remaining balances are interest-free. (31 December 2005: loans amounting to $161.02 million are interest-bearing at a fixed rate of 5.76% per annum and the remaining balances are interest-free).

As at 30 June 2006, there was overdue interest payable to these parties amounting to $4.7 million, which is interest free. There was no overdue interest payable as at 31 December 2005. According to the loan agreements, overdue interest payable is subject to an interest penalty at a rate of 0.03% per day. No provision for these interest penalties has been made for the six months ended 30 June 2006 as the lenders have subsequently waived the interest penalties on all interest payable as in previous years.

(iii) In July 2004, Shakou JV entered into a facilities lease agreement with 佛山市褔能發電廠有限公司 (Foshan Funeng Power Supply Co., Ltd.) (“Funeng JV”). Funeng JV, being a fellow subsidiary of Power Construction Corporation, is a related party to the Company because Power Construction Corporation is a substantial shareholder of Shakou JV. Pursuant to the facilities lease agreement, Shakou JV leased to Funeng JV certain assets (including office premises, factory premises, land use rights and auxiliary power generation facilities) for two years commencing from the date of the agreement and Shakou JV would receive two annual rental payments of approximately $4.63 million (Rmb 4.80 million) for each of the two years.

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(b) Key management personnel remuneration

Short-term employee benefits Post-employment benefits	Six months ended 30 June 2006 2005 $’000 $’000 1,030 1,577 36 83 1,066 1,660	Six months ended 30 June 2006 2005 $’000 $’000 1,030 1,577 36 83 1,066 1,660
		1,660

(c) Transactions with other state-owned entities in the PRC

Apart from transactions mentioned in note 10(a), transactions with state-owned entities include but not limited to the sales of electricity.

These transactions are conducted in the ordinary course of the Group’s business on terms comparable to those with other entities that are not state-owned. The Group has established its buying, pricing strategy and approval process for purchases and sales of products and services. Such buying, pricing strategy and approval processes do not depend on whether the counterparties are state-owned entities or not.

Having considered the potential for transactions to be impacted by related party relationships, the entity’s pricing strategy, buying and approval processes, and what information would be necessary for an understanding of the potential effect of the relationship on the accounts, the directors are of the opinion that the following transactions require disclosure as related party transactions:

Sale of electricity to grid company Trade receivables from sale of electricity	Six months ended 30 June 2006 2005 $’000 $’000 378,473 391,081 At At 30 June 31 December 2006 2005 $’000 $’000 69,732 79,106

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11. TRADE AND OTHER RECEIVABLES

Trade receivables Other receivables	At At 30 June 31 December 2006 2005 $’000 $’000 69,732 79,106 31,353 22,640 101,085 101,746	At At 30 June 31 December 2006 2005 $’000 $’000 69,732 79,106 31,353 22,640 101,085 101,746
		101,746

Included in trade and other receivables is a trade debtor with the following ageing analysis:

Current 1 to 3 months overdue	At At 30 June 31 December 2006 2005 $’000 $’000 68,342 79,106 1,390 – 69,732 79,106	At At 30 June 31 December 2006 2005 $’000 $’000 68,342 79,106 1,390 – 69,732 79,106
		79,106

Debts are due within 30 days from the date of billing. All of the trade and other receivables are expected to recover within one year.

12. TRADE AND OTHER PAYABLES

Creditors and accrued charges Amounts due to related companies	At At 30 June 31 December 2006 2005 $’000 $’000 3,669 10,756 265,676 124,825 269,345 135,581	At At 30 June 31 December 2006 2005 $’000 $’000 3,669 10,756 265,676 124,825 269,345 135,581
		135,581

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

Due within 1 month or on demand	At At 30 June 31 December 2006 2005 $’000 $’000 259,584 123,258

All of the trade and other payables are expected to settle within one year. The amounts due to related companies are unsecured and interest free.

13. BANK LOANS – SECURED

At 30 June 2006, the Group’s bank loans were repayable as follows:

Within one year or on demand After 1 year but within 2 years After 2 years but within 5 years	At At 30 June 31 December 2006 2005 $’000 $’000 81,490 28,846 ---------------- ---------------- 48,506 51,923 21,342 48,077 69,848 100,000 ---------------- ---------------- 151,338 128,846	At At 30 June 31 December 2006 2005 $’000 $’000 81,490 28,846 ---------------- ---------------- 48,506 51,923 21,342 48,077 69,848 100,000 ---------------- ---------------- 151,338 128,846
		100,000 ----------------
		128,846

The banking facilities of the PRC subsidiary are secured by charges over its power generating facilities with an aggregate carrying value of $674,153,000 (31 December 2005: $1,066,173,000). Such banking facilities amount to $151,338,000 (31 December 2005: $201,923,000), out of which $151,338,000 (31 December 2005: $128,846,000) were drawn down at 30 June 2006. The bank loans are denominated in Renminbi bearing floating interest rates ranging from 4.320% to 5.184% per annum as at 30 June 2006 (31 December 2005: from 4.941% to 5.184% per annum).

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14. EQUITY SETTLED SHARE-BASED TRANSACTIONS

The Company has a share option scheme which was adopted on 22 May 2002 whereby the directors of the Company are authorized, at their discretion, to invite employees of the Group, including directors of any company in the Group, to take up options to subscribe for shares of the Company. The exercise price of options is the highest of the nominal value of the shares, the closing price of the shares on The Stock Exchange of Hong Kong Limited at the date of grant and the average closing price of the shares on The Stock Exchange of Hong Kong Limited for the five business days immediately preceding the date of grant. The options vest after six months from the date of grant and are then exercisable within a period of five years. Each option gives the holder the right to subscribe for one ordinary share in the Company.

(a) The terms and conditions of the grants that existed during the six months ended 30 June 2006 are as follows, whereby all options are settled by physical delivery of shares:

Exercise Date granted Exercise period price 25 July 2002 25 January 2003 to 24 January 2008 $0.35 30 July 2002 30 January 2003 to 29 January 2008 $0.35 19 May 2003 22 November 2003 to 21 November 2008 $0.415	At 30 June 2006 ’000 828 8,000 1,500
	10,328

(b) The number and weighted average exercise prices of share options are as follows:

At 1 January Lapsed and cancelled At 30 June 2006/ 31 December 2005 Options vested at 30 June 2006/ 31 December 2005	2006 Weighted average Number of exercise price shares ’000 $0.36 10,328 – – $0.36 10,328 $0.36 10,328	2005 Weighted average Number of exercise price shares ’000 $0.36 14,228 $0.35 (3,900 $0.36 10,328 $0.36 10,328	2005 Weighted average Number of exercise price shares ’000 $0.36 14,228 $0.35 (3,900 $0.36 10,328 $0.36 10,328
			10,328
			10,328

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APPENDIX I

15. CONTINGENT LIABILITIES

Shakou JV had a syndicated loan denominated in US dollar which was fully repaid on 23 March 1998. Under the loan agreement, Shakou JV is required to bear any PRC tax payable in respect of interest paid to the lenders. By a letter dated 17 March 1998, the Shakou JV’s former ultimate holding company, Foshan Development Company Limited, agreed to bear any tax liabilities, including penalties, if any, which may arise from the interest paid on the syndicated loan. The estimated tax which may be payable is approximately $43 million, excluding penalties.

16. CAPITAL COMMITMENT

Capital commitment outstanding at 30 June 2006 not provided for in the accounts was as follows:

Contracted for	At At 30 June 31 December 2006 2005 $’000 $’000 54,126 51,187

On 23 August 2005, Shakou JV placed purchase orders with an independent third party supplier to provide certain spare parts for routine large-scale inspection and overhaul of its power plant.

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4. MANAGEMENT DISCUSSION AND ANALYSIS

Set out below is the management discussion and analysis extracted from each of the annual and interim reports of the Company for the three years ended 31 December 2005 and the six months ended 30 June 2006:

(i) For the six months ended 30 June 2006

Performance Review

The Group’s total turnover decreased by 3.22% to HK$378.47 million which solely representing the on-grid tariff and there were no additional fuel cost surcharges for the six months ended 30 June 2006 (six months ended 30 June 2005: HK$391.08 million which included additional fuel cost surcharges received of HK$62.17 million). The decrease mainly resulted from no additional fuel cost surcharges approved and received during the period. However, from 1 April 2006 to 30 June 2006, the on-grid tariff during the peak load demand periods has been increased to HK$0.7913 per kilowatt-hour (“kwh”) including value added tax. Furthermore, government grants from the Foshan Municipality amounting to HK$13.01 million (six months ended 30 June 2005: Nil) was recognised as other revenue. On the other hand, the total cost of sales grew more markedly by 28.43% to HK$518.04 million (six months ended 30 June 2005: HK$403.38 million), primarily reflecting the increase in fuel oil cost during the period. The Group suffered gross loss of HK$139.57 million (six months ended 30 June 2005: HK$12.29 million) resulting from the continuing increase in fuel oil cost, such cost recorded a relatively high growth, and the deferral in relation to the increase in on-grid tariff. Administrative expenses were contained at HK$13.97 million (six months ended 30 June 2005: HK$13.90 million) which were only increased by 0.46%. Loss from operations amounted to HK$415.59 million (six months ended 30 June 2005: HK$117.95 million). Loss from operations included HK$279.26 million in respect of impairment loss on fixed assets during the period (six months ended 30 June 2005: impairment loss on goodwill amounting to HK$94.78 million). Finance costs continued to decline from the previous HK$9.47 million to HK$8.15 million by 14.03%. Loss before taxation widened to HK$423.74 million (six months ended 30 June 2005: HK$127.43 million) and loss per share further deepened from the previous 14.10 Hong Kong cents to 36.00 Hong Kong cents.

Operational Review

Market Review

During the period, Foshan Municipality experienced sustained electricity demand growth as a result of the persistent and strong growth of economic activities in Guangdong Province, the People’s Republic of China (the “PRC”). Despite the increased power supplies from the provincial grid, electricity supply shortage persisted. The Company’s subsidiary, Foshan Shakou Power Plant Co., Ltd. (“Shakou

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APPENDIX I

JV”) which owns and operates Shakou JV power plant, and other local power plants in Foshan Municipality had to operate at maximum capacity during peak load demand periods in order to improve the tight supply situation. However, operating environment remained extremely difficult as fuel oil prices surged to newer and higher levels and hovered at such levels during the period as a result of the movements in international oil prices. Moreover, on-grid tariff adjustment continues to be inflexible under the strict control of the relevant authorities of the Guangdong Provincial Government which caused the deferral in increasing on-grid tariff.

Electricity Sales

The Group decreased its electricity sales volume by 5.35% to approximately 658.59 million kwh (six months ended 30 June 2005: 695.81 million kwh). All the electricity produced was primarily sold to the Group’s sole customer, 廣東電網公司佛山供電局 (Guangdong Power Grid Company, Foshan Power Supply Bureau) for onward sales and transmissions to end-users in Foshan Municipality, Guangdong Province, the PRC. From 1 April 2006 to 30 June 2006, the on-grid tariff during the peak load demand periods has been increased to HK$0.7913 per kwh including value added tax. The average plant utilization rate for the period dropped to 52.35% (six months ended 30 June 2005: 55.31%). During the period, no major incident of mechanical breakdown or operational failure was recorded.

Fuel Oil Prices

During the period, international oil prices continued to hike and fuel oil prices hovered at high levels. With the support of its fuel oil suppliers, the Group continued its strategic bulk-purchasing policy and was able to sustain a less marked increase as compared with market magnitude in fuel oil cost. The weighted average cost of heavy oil consumed by Shakou JV for the period, therefore, increased by 38.90% from the previous Renminbi 2,303 to Renminbi 3,196 per tonne. Shakou JV has decided to reduce the generation of electricity in low demand periods to balance the effect from increase in fuel oil prices.

Additional Fuel Cost Surcharges

The Group continued its strategy to reduce the full impact of increased fuel oil cost on its performance by negotiation with the relevant PRC parties of the Guangdong Provincial Government and the customer for additional fuel cost surcharges. However, no additional fuel cost surcharges have been approved or received as the result of increasing in on-grid tariff during the peak load demand periods to HK$0.7913 per kwh including value added tax. The management would endeavor its best effort to liaise and to struggle for additional fuel cost surcharges to offset the adverse impact of the increased fuel cost on the Group’s operating results.

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Subsidies from Local Government

After the strong request of the oil-fired power plants in the Foshan Municipality, the People’s Government of Foshan Municipality has committed to give subsidies to the oil-fired power plants since the last quarter of 2005. The amount approved during the period was HK$13.01 million (six months ended 30 June 2005: Nil) which had been recognised as government grants. The management would continue to request for more subsidies from the local government in order to set off part of the impact of increased fuel oil cost on the Group’s performance.

Major Overhaul of Shakou JV Power Plant

On 18 July 2005, Shakou JV entered into long term spare parts supply agreement, long term reconditioning services agreement and long term technical agreement with an independent supplier for major overhaul of Shakou JV power plant. According to the agreements, two purchase orders both dated 23 August 2005 were placed by Shakou JV requesting the supplier to supply certain spare parts and perform inspection respectively to the Shakou JV power plant for the purpose of undertaking a routine large-scale inspection plus an overhaul and upgrading program for the Shakou JV power plant. Upon the completion of the purchase orders, it is expected that the power generating facilities will benefit in the following ways:

ability to maintain maximum capacity availabilities of the power generation facilities at all times, especially during peak load demand periods;
ability to maintain uninterrupted electricity supply to Foshan Municipality; and
avoidance of or reduction in the occurrence of unexpected failures and breakdowns.

Details of the purchase orders had been disclosed in the Company’s circular dated 13 September 2005.

Facility Lease Agreement

On 30 July 2004, Shakou JV and 佛山市褔能發電廠有限公司 (Foshan Funeng Power Supply Co., Ltd.) (“Funeng JV”), a Sino-foreign equity joint-venture established in the PRC, entered into the Facility Lease Agreement, pursuant to which Funeng JV agreed to lease from Shakou JV certain assets (including office premises, factory premises, land use rights and auxiliary power generation facilities) for two years commencing from 30 July 2004, the date of the Facilities Lease Agreement. The consideration is to be satisfied in cash by two annual payments of approximately HK$4.63 million each. Under the request of Funeng JV, Shakou JV has allowed to extent the lease for two months.

As Foshan City District Electric Power Construction Corporation (“Power Construction Corporation”), a wholly-owned subsidiary of Foshan Electric Power Construction Group Corporation (“Power Group Corporation”), is a substantial

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APPENDIX I

shareholder (as defined in the Listing Rules) of Shakou JV, it is a connected person of the Company within the meaning of the Listing Rules. Funeng JV, being a subsidiary of Power Group Corporation, is an associate (as defined in the Listing Rules) of Power Construction Corporation by virtue of its being a fellow subsidiary of Power Construction Corporation and thus the entering into of the Facilities Lease Agreement between Shakou JV and Funeng JV constitutes a connected transaction of the Company and the transactions arising therefrom constitute continuing connected transactions under Chapter 14A of the Listing Rules.

Since, in respect of the aggregate consideration on an annual basis under the Facilities Lease Agreement payable by Funeng JV to Shakou JV, each of the applicable percentage ratios for connected transaction purpose is less than 2.5%, the entering into the Facilities Lease Agreement is only subject to the reporting and announcement requirements under Rules 14A.45 to 14A.47 of the Listing Rules and no shareholders’ approval is required. Details of the transactions had been disclosed in the Company’s announcement dated 2 August 2004.

Financial Review

Liquidity and Financial Resources

The Group funded its operation largely by internal cash inflow generated from its operating activities even though suffered a significant loss for the period which included non-cash flow impairment losses on fixed assets amounting to HK$279.26 million (six months ended 30 June 2005: HK$94.78 million representing impairment of goodwill). Net cash generated from operating activities amounting to HK$38.50 million (six months ended 30 June 2005: HK$73.79 million) was mainly due to the increased trade and other payables. Net cash generated from investing activities amounted to HK$0.76 million (six months ended 30 June 2005: HK$0.67 million). During the period, the Group did not repay any other loans and bank loans but the Group drawn down HK$21.34 million bank loan (six months ended 30 June 2005: repayment of HK$47.39 million and re-financed by a new bank loan of HK$47.39 million). There was no movement in other loans, the change in book value of other loans was due to the change in exchange rate. As a result, net cash generated from financing activities amounted to HK$17.48 million (six months ended 30 June 2005: used in financing activities HK$16.48 million). Total cash and cash equivalents as at 30 June 2006 increased from HK$132.34 million to HK$189.08 million during the period.

As at 30 June 2006, the Group’s total current assets amounting to HK$318.24 million (31 December 2005: HK$259.47 million), mainly comprised of cash and cash equivalents of HK$189.08 million (31 December 2005: HK$132.34 million), and trade and other receivables of HK$101.09 million (31 December 2005: HK$101.75 million). Total current liabilities amounting to HK$430.70 million (31 December 2005: HK$164.68 million), mainly comprised of trade and other payables of HK$269.35 million (31 December 2005: HK$135.58 million), other loans due within one year of HK$79.86 million (31 December 2005: Nil), and bank loans due within one year of HK$81.49 million (31 December 2005: HK$28.85 million). Net current liabilities amounted to HK$112.46 million (31 December 2005: Net current assets of

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APPENDIX I

HK$94.79 million). Under these circumstances, the Group has arranged for more favorable credit terms from its main fuel oil supplier such as the delay of payment and waiver of the interest for late payment; the repayment of current portion of other loans are under negotiation to be postponed; and then new bank loans will be drawn down to repay the bank loans while fall due. The management believes that these arrangements can make well to the liquidity and solvency of the Group.

Committed Banking Facilities

As at 30 June 2006, the Group had available committed banking facilities in Renminbi from three PRC banks for an aggregate amount of HK$151.34 million (31 December 2005: HK$201.92 million). Up to 30 June 2006, HK$151.34 million (31 December 2005: HK$128.85 million) was drawn down and the bank loans bear interest at an annual rate from 4.320% to 5.184% (31 December 2005: from 4.941% to 5.184%). Save as disclosed herein, the Group had no other bank borrowings or committed banking facilities.

Charges on Group Assets

As at 30 June 2006, Shakou JV power generating facilities of an aggregate carrying value of HK$674.15 million (31 December 2005: HK$1,066.17 million) were charged to three banks in the PRC to secure the respective banking facilities for Shakou JV’s working capital requirements. Apart from such, no other part of the Group’s assets has been charged to banks, financial institutions or other enterprises.

Capital Structure and Gearing Ratio

The Group continues to finance its non-current assets principally by a mix of long-term loans and shareholders’ equity. The Group’s non-current portion of longterm loans amounted to HK$289.63 million (31 December 2005: HK$396.98 million). Total long-term loans mainly consisted: (1) the aggregate outstanding balance of the unsecured long-term Renminbi loans due to Shakou JV’s PRC jointventure partner and its associate; and (2) Renminbi term loans due to three PRC banks. The long-term Renminbi loans due to Shakou JV’s PRC joint-venture partner and its associate were primarily employed to re-finance Shakou JV’s investment in its fixed assets, principally power generating facilities, and were repayable within 10 years commencing from 1997 and 1998. The applicable interest rates for the period were 5.76% (31 December 2005: 5.76%) per annum. Gearing ratio, being the aggregate amount of the non-current portion of long-term bank loans and other loans as a percentage of equity attributable to equity shareholders of the Company, increased from the previous 61.01% to 81.06%. The increase in gearing ratio was mainly owing to the decrease in shareholders’ equity of the Company.

Net Assets

The Group’s net assets value excluding minority interests amounted to HK$357.32 million (31 December 2005: HK$650.69 million). Therefore, net assets excluding minority interests per share dropped from the previous HK$0.78 to HK$0.43 primarily resulted from the loss for the period attributable to equity shareholders of the Company amounting to HK$298.46 million.

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Contingent Liabilities

Exchange Rate Risk

In the course of the period, the Group’s revenue, operating costs, finance costs, debt servicing and capital expenditure were substantially denominated in Renminbi. Currently the exchange rate of Renminbi against Hong Kong dollars has been relatively stable so no financial instrument has been used for the purpose of hedging exchange rate risk during the period.

Employees and Remuneration Policies

On 30 June 2006, the Group employed 175 staff (31 December 2005: 173) including directors of the Company. The remuneration policy for the Group’s employees are reviewed and approved by the Board together with the remuneration committee on a periodical basis. The Group remunerates its employees based on industry practice. The remuneration packages principally comprise of salary, discretionary performance bonuses based on individual merits and share option scheme.

(ii) For the year ended 31 December 2005

Performance Review

The Group’s total turnover grew by 11.25% to HK$824.04 million (2004: HK$740.72 million) which included additional fuel cost surcharges received of HK$82.07 million (2004: HK$12.28 million). With effect from 1 May 2005, the ongrid tariff has increased by HK$0.04 per kilowatt-hour excluding value added tax. The growth mainly resulted from the increase in additional fuel cost surcharges approved and received during the year and the increase in on-grid tariff. However, the total cost of sales grew more markedly by 23.85% to HK$926.11 million (2004: HK$747.75 million), primarily reflecting the increase in fuel oil cost during the year. As the Guangdong Provincial Government and the customer have not yet agreed the additional fuel cost surcharges for the year and hence the Group has not yet recognized and received the amount of additional fuel cost surcharges for the period from 1 May 2005 to 31 December 2005. The Group suffered gross loss of HK$102.07 million (2004: HK$7.03 million) resulting from the continuing increase

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in fuel oil cost, such cost recorded a relatively high growth, and the timing difference in relation to the approval and receiving of additional fuel cost surcharges. Administrative expenses was increased by 8.61% to HK$24.46 million (2004: HK$22.52 million), loss from operations amounted to HK$806.80 million (2004: HK$47.03 million). Loss from operations included HK$698.66 million in respect of impairment loss on goodwill and fixed assets during the year. There was no goodwill amortization for the year (2004: HK$31.62 million) as the adoption of the new Hong Kong Accounting Standards issued by Hong Kong Institute of Certified Public Accountants. Finance cost continued to decline from the previous HK$20.89 million to HK$18.56 million. Loss before taxation widened to HK$825.36 million (2004: HK$67.92 million) and loss per share further deepened from the previous 6.73 Hong Kong cents to 91.86 Hong Kong cents.

Operational Review

Market Review

During the year, Foshan Municipality experienced sustained electricity demand growth as a result of the sustained strong growth of economic activities of Guangdong Province, the People’s Republic of China (the “PRC”). Despite the increased power supplies from the provincial grid, electricity supply shortage persisted. The Company’s subsidiary, Foshan Shakou Power Plant Co., Ltd. (“Shakou JV”) which owns and operates Shakou JV power plant, and other local power plants in Foshan Municipality had to operate at maximum capacity during peak load demand periods in order to improve the tight supply situation. However, operating environment remained extremely difficult as fuel oil prices surged to new high levels and hovering at such levels during the year as a result of the movements in international oil prices. Furthermore, on-grid tariff adjustment remained inflexible under the strict control of the relevant authorities of the Guangdong Provincial Government.

Electricity Sales

The Group decreased its electricity sales volume by 5.19% to approximately 1.46 billion (2004: 1.54 billion) kilowatt-hours. All the electricity produced was primarily sold to the Group’s sole customer, 廣東電網公司佛山供電局 (Guangdong Power Grid Company, Foshan Power Supply Bureau) formerly named 廣東省廣電集團有限公司佛山供電分公司 (Guangdong Guang-Dian Power Grid Group Co. Ltd., Foshan Branch), for onward sales and transmissions to end-users in Foshan Municipality, Guangdong Province, the PRC. The Group’s on-grid tariff has increased by HK$0.04 per kilowatt-hour excluding value added tax with effect from 1 May 2005. The average plant utilization rate for the year dropped to 57.43% (2004: 59.00%). During the year, no major incident of mechanical breakdown or operational failure was recorded.

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Fuel Oil Prices

During the year, international oil prices continued to hike and fuel oil prices hovered at new high levels. With the support of its fuel oil suppliers, the Group continued its strategic bulk-purchasing policy and was able to sustain a less marked increase as compared with market magnitude in fuel oil cost. The weighted average cost of heavy oil consumed by Shakou JV for the year therefore increased by 32.68% from the previous Renminbi 1,946 to Renminbi 2,582 per tonne. Shakou JV has decided to reduce the generation of electricity in low demand periods to balance the effect from increase in fuel oil prices.

Additional Fuel Cost Surcharges

The Group continued its strategy to reduce the full impact of increased fuel oil cost on its performance by negotiating with the relevant PRC parties of the Guangdong Provincial Government and the customer for additional fuel cost surcharges. During the year, the Group received the approved additional fuel cost surcharges of an aggregate amount of HK$82.07 million (2004: HK$12.28 million). However, as up to the date of this report, the relevant PRC parties of the Guangdong Provincial Government and the customer have not yet agreed the additional fuel cost surcharges for the period from 1 May 2005 to 31 December 2005. The management would endeavor its best effect to liaise and to struggle for additional fuel cost surcharges to offset the adverse impact of the increased fuel cost on the Group’s operating results.

Subsidies from Local Government

After the strong request of the oil-fired power plants in the Foshan Municipality, the People’s Government of Foshan Municipality has committed to give subsidies to the oil-fired power plants from the last quarter of 2005. The amount approved for the last quarter of 2005 was HK$11.58 million which had been incorporated in the accounts as government grants. The management would continue to request for more subsidies from the local government in order to set off part of the impact of increased fuel oil cost on its performance.

Major Overhaul of Shakou JV Power Plant

On 18 July 2005, Shakou JV entered into long term spare parts supply agreement, long term reconditioning services agreement and long term technical agreement with an independent supplier for major overhaul of Shakou JV power plant. According to the agreements, two purchase orders both dated 23 August 2005 were placed by Shakou JV requesting the supplier to supply certain spare parts and inspection respectively to the Shakou JV power plant for the purposes of undertaking a routine large-scale inspection and overhaul and upgrading program for the Shakou JV power plant. Upon the completion of the purchase orders, it is expected that the power generating facilities will be benefit in the following ways:

ability to maintain maximum capacity availabilities of the power generation facilities at all times, especially during peak load demand periods;

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ability to maintain uninterrupted electricity supply to Foshan Municipality; and
avoidance of or reduction in the occurrence of unexpected failures and breakdowns.

Details of the purchase orders had been disclosed in the Company’s circular dated 13 September 2005.

Financial Review

Liquidity and Financial Resources

The Group funded its operation largely by internal cash inflow generated from its operating activities even though suffered a significant loss for the year which included a non-cash flow impairment loss on goodwill and fixed assets amounted HK$698.66 million (2004: HK$31.62 million in respect of goodwill amortization). Net cash generated from operating activities amounted to HK$68.14 million (2004: net cash used in operating activities of HK$46.52 million) mainly due to the decreased trade receivables. Net cash used in investing activities amounted to HK$5.10 million (2004: net cash generated from investing activities of HK$0.93 million) mainly due to the advance payment for major overhaul of the Shakou JV power plant. During the year, the Group did not repay other loans (2004: repaid of HK$87.79 million) and repaid bank loans of HK$47.39 million (2004: HK$50.53 million) which re-financed by proceeds from new bank borrowings of HK$47.39 million (2004: HK$97.32 million). As a result, net cash used in financing activities amounted to HK$28.96 million (2004: HK$76.41 million) mainly due to the payment of interests. Total cash and cash equivalents as at balance sheet date therefore increased from beginning of the year HK$98.26 million to HK$132.34 million.

As at balance sheet date, the Group’s total current assets amounted to HK$259.47 million (2004: HK$296.22 million), which mainly comprised of cash and cash equivalents of HK$132.34 million (2004: HK$98.26 million); and trade and other receivables of HK$101.75 million (2004: HK$179.80 million). Total current liabilities amounted to HK$164.68 million (2004: HK$273.81 million), which mainly comprised of trade and other payables of HK$135.58 million (2004: HK$132.10 million); other loans due within one year of HK$ nil (2004: HK$93.68 million); and bank loans due within one year of HK$28.85 million (2004: HK$46.79 million). Net working capital surplus amounted to HK$94.79 million (2004: HK$22.41 million). Current ratio moderately increased from the previous 1.08 to 1.58. Net loans (total short-term and long-term loans less cash) dropped 7.18% to HK$293.49 million (2004: HK$316.18 million).

Committed Banking Facilities

As at 31 December 2005, the Group had available committed banking facilities in Renminbi from three PRC banks for an aggregate amount of HK$201.92 million (2004: HK$196.52 million). Up to 31 December 2005, HK$128.85 million (2004: HK$125.40 million) was drawn down and the bank loans bear interest at an annual

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rate from 4.941% to 5.184% (2004: from 4.779% to 4.941%). Save as disclosed herein, the Group had no other bank borrowings or committed banking facilities.

Charge on Group Assets

As at 31 December 2005, Shakou JV power generating facilities of an aggregate carrying value of HK$1,066.17 million (2004: HK$1,120.70 million) were charged to three banks in the PRC to secure the respective banking facilities for Shakou JV’s working capital requirements. Apart from such, no other part of the Group’s assets has been charged to banks, financial institutions of other enterprises.

Capital Structure and Gearing Ratio

The Group continued to finance its non-current assets principally by a mix of long-term loans and shareholders’ equity. The Group’s non-current portion of longterm loans amounted of HK$396.98 million (2004: HK$273.96 million). Total longterm loans mainly comprised: (1) the aggregate outstanding balance of the unsecured long-term Renminbi loans due to Shakou JV’s PRC joint-venture partner and its associate; and (2) Renminbi term loans due to three PRC banks. The long-term Renminbi loans due to Shakou JV’s PRC joint-venture partner and its associate were primarily employed to re-finance Shakou JV’s investment in its fixed assets, principally power generating facilities, and were repayable within 10 years commencing in 1997 and 1998. The applicable interest rates for the year were 5.76% (2004: 5.76%) per annum. During the year, Shakou JV negotiated with its PRC joint-venture partner and its associate to reschedule the loan repayments amounted of HK$153.69 million due in 2006 (2004: HK$93.70 million due in 2005) extending the expiry for about 24 months (2004: 18 months). During the year, Shakou JV had repaid the bank loans of HK$47.39 million (2004: HK$50.53 million) and then made proceeds from new bank loans of HK$47.39 million (2004: HK$97.32 million). Gearing ratio, being the aggregate amount of the non-current portion of long-term bank loans and other loans as a percentage of equity attributable to equity shareholders of the Company, sharply increased from the previous 19.67% to 61.01%.

Net Assets

The Group’s net assets value excluding minority interests amounted to HK$650.69 million (2004: HK$1,392.54 million). At beginning of the year, the carrying value of goodwill arising from acquisition of subsidiaries was HK$578.32 million which was written off as impairment loss on goodwill. Furthermore, impairment loss on fixed assets of HK$120.34 million (2004: nil) was recognized at the end of the year. Therefore, net assets excluding minority interests per share decreased from the previous HK$1.68 to HK$0.78 while net tangible assets (net assets value excluding minority interests and goodwill) per share only decreased from the previous level of approximately HK$0.98 to HK$0.78.

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Contingent Liabilities

As at 31 December 2005, the Group had contingent liabilities of approximately HK$43 million (2004: HK$43 million). The details of which has been disclosed in the section headed “Contingent Liabilities” under “Notes on the Accounts” in this report.

Exchange Rate Risk

During the year, the Group’s revenue, operating costs, finance costs, debt servicing and capital expenditure were substantially denominated in Renminbi. Currently the exchange rate of Renminbi against Hong Kong dollars has been relatively stable. No financial instrument has been used for the purpose of hedging exchange rate risk during the year.

Employees and Remuneration Policies

As at balance sheet date, the Group employed a total of approximately 173 (2004: 204) staff including directors of the Company. Remuneration packages principally comprised salary, discretionary performance bonuses based on individual merits and share option scheme. The Group’s total employee remuneration for the year was approximately HK$22.67 million (2004: HK$21.41 million).

Business Risk Assessment

The major operating expense of the Group is fuel oil cost. Due to the continuing rise in fuel oil prices, such cost recorded a relatively significant increase and hovering at such high levels which caused the Group to suffer from gross loss result. Strong global growth may lead to continuous high oil prices. The said ongoing rise in oil prices will be a critical factor to the Group. The on-grid tariff adjustment remained inflexible because it is determined by mutual agreement with the sole customer and also subject to the approval by the relevant authorities of the Guangdong Provincial Government, such as Guangdong Provincial Price Bureau.

The management continues its strategy to reduce the full impact of increased fuel oil cost on its performance by negotiating with the relevant PRC parties of the Guangdong Provincial Government and the sole customer for additional fuel cost surcharges and increase in on-grid tariff. The management will also request for more subsidies from the Foshan Municipality.

In fact, the increases in on-grid tariff and additional fuel cost surcharges are not in line with the increase in fuel oil prices. It is probably due to the fact that the pace of increase in fuel oil prices is far faster than the increase in on-grid tariff and additional fuel cost surcharges. Moreover, most of the additional fuel cost surcharges for the current year will be received in next year or even later as the amount is not approved and as such the amount involved may become larger and larger. In case such situation is going on, it will constitute an adversely significant impact on the liquidity and especially the gross loss on top of the results of the Group.

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(iii) For the year ended 31 December 2004

Performance Review

The Group’s total turnover grew by 3.4% to HK$740.7 million (2003: HK$716.5 million) which included additional fuel cost surcharge of HK$12.3 million (2003: HK$42.6 million). However, the total cost of sales grew more markedly by 17.0% to HK$747.8 million (2003: HK$639.3 million). As the relevant PRC parties of the Guangdong Provincial Government and the customer have not yet agreed and hence the Group has not yet recognized and received the amount of additional fuel cost surcharge for the year ended 31 December 2004, the Group suffered gross loss of HK$7.0 million (2003: profit of HK$77 million). Although administrative expense was contained at HK$22.5 million (2003: HK$22.5 million), loss from operations amounted to HK$47.0 million (2003: profit of HK$19.1 million). Finance cost continued to decline from the previous HK$26.4 million to HK$20.9 million. Loss from operating activities before taxation widened to HK$67.9 million (2003: HK$7.3 million) and loss per share further widened from the previous 2.1 Hong Kong cents to 6.7 Hong Kong cents.

Operational Review

Market Development

During the year, Foshan Municipality experienced sustained electricity demand growth as a result of the sustained strong growth of economic activities of Guangdong Province, PRC. Despite the increased power supplies from the provincial grid, electricity supply shortage persisted. Shakou Power Plant and other local power plants in Foshan Municipality had to operate at maximum capacity during peak load demand periods. However, operating environment remained extremely difficult as fuel oil price surged to new high levels during the year as a result of the movements in international oil price. On-grid tariff adjustment remained inflexible under the strict control of the relevant authorities of the Guangdong Provincial Government. During the year, a number of newly built power plants in the Province commenced operation. In particular, a new thermal power plant named Funeng Power Plant, operated by Funeng Power Supply Co., Ltd. (“Funeng JV”), was built in Foshan Municipality in close proximity to the Group’s existing power generating facilities. Funeng JV, a Sino-foreign equity joint-venture established in the PRC, is controlled by the Group’s PRC joint-venture partner. Funeng Power Plant has a total installed capacity of approximately 360 megawatts; the first phase of 180 megawatts had already commenced production in late 2004 while the second phase of 180 megawatts is expected to commence production in mid-2005. Due to the expected strong growth of electricity demand of Foshan Municipality in the coming years, the Group considered that Funeng Power Plant would not be in immediate and direct competition with the Groups’ existing business. The Group believed that by adopting a cooperative business strategy towards Funeng Power Plant, the Group could foster further opportunities for future cooperation.

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Electricity Sales

The Group increased its electricity sales volume by 7.7% to approximately 1.54 billion (2003: 1.43 billion) kilowatt-hours. All the electricity produced was primarily sold to the Group’s sole customer, 廣東省廣電集團有限公司佛山供電分公司 (Guangdong Guan-dian Power Grid Group Co. Ltd., Foshan Branch), for onward sales and transmissions to end-users in Foshan Municipality, Guangdong Province, the PRC. The Group’s on-grid tariff remained unchanged throughout the year. The average plant utilization rate for the year improved to 59% (2003: 54%). No major incident of mechanical breakdown or operational failure was recorded.

Fuel Oil Price

During the year, international oil price continued to hike and fuel oil prices hovered at new high levels. With the support of its fuel oil suppliers, the Group continued its strategic bulk-purchasing policy and was able to sustain a less marked increase as compared with market magnitude in fuel oil cost. The weighted average cost of heavy oil consumed by Shakou JV for the year therefore increased by 8.2% from the previous Renminbi 1,798 to Renminbi 1,946 per tonne.

Additional Fuel Cost Surcharge

The Group continued its strategy to reduce the full impact of increased fuel oil cost on its performance by negotiating with the relevant PRC parties of the Province and the customer for additional fuel cost surcharge. During the year, the Group received additional fuel cost surcharge for the fourth quarter of 2003 of an aggregate amount of HK$12.3 million. As such additional fuel cost surcharge was confirmed and received after the approval date of the Group’s accounts for 2003, the amount had been accounted for in the Group’s accounts for this year. The total amount of additional fuel cost surcharge for the year 2003 was therefore HK$54.9 million. However, as up to the date of this report, the relevant PRC parties of the Guangdong Provincial Government and the customer have not yet agreed and hence the Group has not yet recognized and received the amount of additional fuel cost surcharge for the year ended 31 December 2004. Barring unforeseen circumstances, the Group believed that such additional fuel cost surcharge would be finalized and received in 2005.

Facility Lease Agreement

On 30 July 2004, Shakou JV and Funeng JV entered into the Facilities Lease Agreement, pursuant to which Funeng JV agreed to lease from Shakou JV certain assets (including office premises, factory premises, land-use rights and auxiliary power generation facilities) for two years commencing from 30 July 2004, the date of the Facilities Lease Agreement. The consideration is to be satisfied in cash by two annual payments of RMB4.8 million (equivalent to approximately HK$4.5 million) each. Details of the transaction have already been disclosed in the Company announcement dated 2 August 2004.

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Financial Review

Liquidity and Financial Resources

The Group funded its operation largely by internal cash inflow generated from its operating activities. However, net cash outflow from operating activities amounted to HK$46.5 million (2003: inflow of HK$177.2 million) mainly due to the increased net loss and the increased trade receivables. Net cash generated from investing activities amounted to HK$0.9 million (2003: HK$1.0 million). During the year, the Group repaid other loans of an aggregate amount of HK$87.8 million (2003: HK$71.4 million) and bank loans of HK$50.5 million (2003: HK$168.4 million), partly re-financed by proceed from new bank borrowings of HK$97.3 million (2003: HK$162.8 million). As a result, net cash used in financing activities amounted to HK$76.4 million (2003: HK$125.9 million). Total cash and cash equivalents as at balance sheet date therefore decreased significantly from HK$220.3 million to HK$98.3 million.

As at balance sheet date, the Group’s total current assets amounted to HK$296.2 million (2003: HK$295.6 million), which mainly comprised of cash and cash equivalents of HK$98.3 million (2003: HK$220.3 million); and trade and other receivables of HK$179.8 million (2003: 56.8 million). Total current liabilities amounted to HK$180.1 million (2003: HK$251.2 million), which mainly comprised of trade and other payables of HK$132.1 million (2003: HK$123.0 million); current portion of long-term loans of HK$ nil (2003: HK$65.3 million); and a short-term bank loan of HK$46.8 million (2003: HK$50.5 million). Net working capital surplus amounted to HK$116.1 million (2003: HK$44.4 million). Current ratio moderately increased from the previous 1.18 to 1.64. Net debts (total interest-bearing short-term debts and long-term debts less cash) grew 34.4% to HK$316.2 million (2003: HK$235.2 million).

Committed Banking Facilities

As at 31 December 2004, the Group had available committed banking facilities from three PRC banks for an aggregate amount of HK$196.5 million (2003: HK$196.5 million). At 31 December 2004, the outstanding balance of a short-term Renminbi bank loan was HK$46.8 million (2003: HK$50.5 million) and the bank loan bears interest at an annual rate of 4.779% (2003: 4.536%). The Group also had three three-year term bank loans the aggregate outstanding balance of which amounted to HK$78.6 million (2003: HK$28.1 million) and the loans all bear interest at annual rate of 4.941% (2003: 4.941%). Save as disclosed herein, the Group had no other bank borrowings or committed banking facilities.

Charge on Group Assets

As at 31 December 2004, the Group’s power generating facilities of an aggregate amount of HK$1.1 billion (2003: HK$1.2 billion) were charged to three banks in the PRC to secure the respective banking facilities for Shakou JV’s working capital requirements. Apart from such, no other part of the Group’s assets has been charged to banks, financial institutions or other enterprises.

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Contingent Liabilities

As at 31 December 2004, the Group had contingent liabilities of approximately HK$43 million (2003: HK$43 million), details of which has been disclosed in the section headed “CONTINGENT LIABILITIES” under “Notes on the accounts” in this report.

Capital Structure and Gearing Ratio

The Group continued to finance its non-current assets principally by a mix of long-term debts and shareholders’ equity. The Group’s long-term debts (including their current portions) decreased by 9.2% to HK$367.6 million (2003: HK$404.9 million). Total long-term debts mainly comprised: (1) the aggregate outstanding balance of the unsecured long-term Renminbi loans due to Shakou JV’s PRC jointventure partner and its associate of HK$289.0 million (2003: HK$376.8 million); and (2) three three-year Renminbi term loans due to three PRC banks of aggregate amount of HK$78.6 million (2003: HK$28.1 million). The long-term Renminbi loans due to Shakou JV’s PRC joint-venture partner and its associate were primarily employed to re-finance Shakou JV’s investment in its fixed assets, principally power generating facilities, and were repayable within 10 years commencing in 1997 and 1998. The applicable loan rates for the year were 5.76% (2003: 5.76%) per annum. During the year, the Group made partial payment of HK$87.8 million (2003: HK$71.4 million).

Furthermore, Shakou JV negotiated with its PRC joint-venture partner and its associate to reschedule current portions of the long-term loans due for repayments in 2005 of an aggregate amount of HK$93.7 million (2003: HK$66 million), extending the expiry for about 18 months. Gearing ratio, being the aggregate amount of bank loans and other loans (including current portion) as a percentage of shareholders’ fund, decreased modestly from the previous 31.2% to 29.8%.

Net Assets

The Group’s net assets amounted to HK$1.39 billion (2003: HK$1.46 billion). The net book value of goodwill arising from acquisition of subsidiaries was HK$578.3 million (2003: HK$609.9 million). Net assets per share decreased from the previous HK$1.76 to HK$1.68 while net tangible assets per share decreased slightly from the previous level of approximately HK$1.03 to HK$0.98.

Exchange Risk

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Employees and Remuneration Policies

As at year end, the Group employed a total of approximately 198 (2003: 198) staff excluding executive directors. Remuneration packages principally comprised salary and performance bonuses based on individual merits. The Group’s total employee remuneration for the year was approximately HK$21.4 million (2003: HK$21.4 million).

(iv) For the year ended 31 December 2003

Operating Review

Operating Results

The Group’s total turnover decreased by 2.2% to HK$716.5 million (2002: HK$732.4 million). Despite the increase of tariff revenue as a result of increased electricity sales volume, the aggregate amount of additional fuel cost surcharges received for the year decreased more markedly as compared with previous year. The Group’s total cost of sales increased by 17.9% to HK$639.3 million (2002: HK$542.3 million), mainly attributable to the increase in electricity sales and the drastic increase of fuel oil cost for the year. Gross profit was reduced significantly by 59.5% to HK$77.1 million (2002: HK$190.2 million) and gross profit margin deteriorated from 26.0% to 10.8%. Despite the reduction of administrative expenses by 22.2% to HK$22.5 million (2002: HK$28.9 million), profit from operations decreased by markedly 85.7% to HK$19.1 million (2002: HK$133.5 million) while operating profit margin also fell from 18.2% to 2.7%. Although finance cost continued to fall, by 23.7% to HK$26.4 million (2002: HK$34.6 million), the Group incurred loss attributable to shareholders of HK$17.6 million (2002: profit of HK$49.6 million). Loss per share was 2.12 Hong Kong cents (2002: earnings per share of 5.98 Hong Kong cents).

Electric Power Market

Driven by robust economic activities, electricity demand of Guangdong Province, in particular fast-growing cities in the Pearl River Delta Area like Foshan Municipality, experienced unprecedented strong growth of the recent years. The unexpected severe hot weather during the summer season also stimulated the province’s overall electricity consumption. For several times during the year, the maximum electricity demand load of both Guangdong Province and Foshan Municipality recorded new highs. However, electricity supply growth has been relatively slow which is mainly due to the inefficient addition of new capacity in the past. At the same time, due to the relatively dry weather in the recent past period, electricity supplies from hydro power stations in the province were markedly reduced. Supplies from some thermal power plants were also reduced as a result of the increased energy cost, such as coal and fuel oil. Even though new power plants were being developed in the province, electricity productions have yet to provide sufficient supplies which will only increase gradually in the coming years. As electricity consumption of major inland provinces also increased on the back of rapid

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economic growth, electricity supplies of the 西電東送 (West-to-East Transmission) Project recorded slower growth. As a result, aggregate electricity supply from the provincial grid became extremely tight and electricity shortage on provincial-wide scale prevailed. Electricity rationings were not uncommon during peak load demand periods. Retail tariffs to some categories of electricity consumers were raised during peak load demand periods while there was also potential for upward adjustment in respect of producers’ on-grid tariffs for some thermal power plants including oilfired power plants.

Electricity Sales

During the year, the Group continued to strengthen its low-cost operating structure to concentrate on improving the operating efficiency and enhancing the cost effectiveness of 佛山市沙口發電廠有限公司 (Foshan Shakou Power Plant Co. Ltd.) (“Shakou JV”). Despite the slight interruption to normal production caused by the major overhaul of its power generating facilities in the first quarter of the year, Shakou JV achieved marked growth in electricity sales volume in the remaining period of the year. After the completion of the major overhaul and upgrade, Shakou Power Plant’s production efficiency achieved improvement. Power generating facilities were able to operate in optimal conditions throughout the year without any significant breakdown and major mechanical failure. The unfortunate SARS (Severe Acute Respiratory Syndrome) incident during the year had no significant impact on the Group’s business and operations. Throughout the SARS period, the Group adopted contingency measures in its headquarters and power plant premises to ensure minimal impact on the Group’s operations. Electricity sales volume of Shakou JV increased by 7.5% to 1.43 billion kilowatt-hours (“kwh”) (2002: 1.33 billion kwh). The average plant utilization rate for the year of Shakou Power Plant in Shakou JV improved from the previous 50.6 % to 54.3%. During the year, Shakou JV sustained its market position as a dominant local power plant operator in Foshan Municipality, providing a significant portion of the local electricity supply. All electricity produced during the year was sold to 廣東省廣電集團有限公司佛山供電分公司 (Guangdong Guan-Dian Electric Power Grid Group Co. Ltd., Foshan Branch) (“Guang-Dian Power Group Foshan”) at the per-unit tariff of Renminbi 0.5051 (exclusive of value added tax). In addition, Shakou JV negotiated with Guang-Dian Power Group Foshan and received an aggregate amount of additional fuel cost surcharges of Renminbi 45.6 million (equivalent to HK$42.6 million) (2002: Renminbi 100 million (equivalent to HK$94.0 million)) to partially compensate for the increased fuel cost during the year.

Fuel Oil Prices

Heavy oil cost accounted for approximately 78.9% (2002: 77.5%) of the Group’s total cost of sales. During the year, fuel oil prices surged to almost record high levels of the recent years and hovered at high levels, which was mainly due to the warfare in Iraq. As a result, the weighted average cost of heavy oil consumed by Shakou JV increased markedly by 15.3% to Rmb 1,798 per tonne (exclusive of valueadded tax) (2002: Rmb 1,560 per tonne). The unit fuel cost of electricity supplied by Shakou JV increased by 11.4% to Rmb 0.39 (2002: Rmb 0.35) per kwh.

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Disposal of Fixed Assets

During the year, the Group disposed two transformer units of Shakou JV to an independent third party in the PRC for approximately HK$1.6 million on an arm’s length basis. These assets were purchased about 10 years ago and have become obsolete. Pursuant to the transaction, a loss on disposal of fixed assets of HK$6.5 million (2002: Nil) was recorded.

Employees and Remuneration Policies

As at year end, the Group employed a total of approximately 200 staff (2002: 220 staff). Remuneration packages principally comprised salary and performance bonuses based on individual merits. The Group’s total remuneration for the year was approximately HK$21.3 million (2002: HK$25.2 million).

Financial Review

Liquidity and Financial Resources

The Group continued to fund its operation principally by internal cash inflow generated from operating activities. Compared with the previous year, net cash from operating activities decreased by 27.7% to HK$177.2 million (2002: HK$245.2 million). Notwithstanding the loss from ordinary activities before taxation of HK$7.3 million (2002: profit of HK$98.8 million), decrease of trade and other receivables grew from HK$35.6 million to HK$71.4 million. Accounts receivable turnover (turnover as a percentage of accounts receivable) improved from the previous 6.0 to 13.1 and the average collection period shortened from the previous 61 days to 28 days. At the same time, net cash used in investing activities was significantly reduced from HK$121.6 million to net cash inflow of HK$1.0 million as significant amount was used in the purchase of components for the major overhaul in previous year. Cash expenditure on other tangible fixed assets for the year was HK$2.2 million (2002: HK$5.2 million). Net cash used in financing activities grew from HK$96.5 million to HK$125.9 million. Total amount of cash and cash equivalents as at balance sheet date therefore increased from HK$167.9 million to HK$220.3 million. As at 31 December 2003, the Group’s total current assets decreased by 4.0% to HK$295.6 million (2002: HK$307.8 million) which primarily comprised cash & cash equivalents of HK$220.3 million (2002: HK$167.9 million) and trade and other receivables of HK$56.8 million (2002: HK$128.2 million). Total current liabilities decreased by 29.6% to HK$251.2 million (2002: HK$356.7 million) which comprised mainly the current portions of long-term loans of an aggregate amount of HK$65.3 million (2002: HK$113.6 million), trade & other payables of HK$123.0 million (2002: HK$117.2 million) and short-term bank loans of HK$50.5 million (2002: HK$84.2 million). As at 31 December 2003, the Group’s short-term liquidity position significantly improved with net working capital surplus of HK$44.4 million (2002: deficit of HK$49.0 million). Current ratio improved from the previous 0.86 to 1.18.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Committed Banking Facilities

As at 31 December 2003, the Group had committed short-term Renminbi banking facilities from two banks in the PRC for an aggregate amount of Renminbi 180.0 million (equivalent to HK$168.4 million) (2002: Renminbi 116.0 million (equivalent to HK$108.6 million)). As at the balance sheet date, the aggregate outstanding balance of bank borrowings under the short-term Renminbi banking facilities was Renminbi 54.0 million (equivalent to HK$50.5 million) (2002: Renminbi 90.0 million) (equivalent to HK$84.2 million)). These bank loans bear interest at annual rate of 4.536%. The Group also had committed a three year Renminbi term loan facility from a PRC bank for Renminbi 30.0 million (equivalent to HK$28.1 million) (2002: Nil). As at the balance sheet date the outstanding balance of such term loan facilities was Renminbi 30.0 million (equivalent to HK$28.1 million) (2002: Nil) and the loan bears interest at annual rate of 4.941%. Save as disclosed herein, the Group had no other bank borrowings or committed banking facilities.

Charge on Group Assets

As at 31 December 2003, the Group’s power generating facilities of an aggregate amount of HK$1.2 billion (2002: HK$1.1 billion) were charged to three banks in the PRC to secure the respective banking facilities for Shakou JV’s working capital requirements. Apart from such, no other part of the Group’s assets has been charged to banks, financial institutions or other enterprises.

Contingent Liabilities

As at 31 December 2003, the Group had contingent liabilities of approximately HK$43 million (2002: HK$43 million), details of which has been disclosed in the section headed “Contingent Liabilities” under “Notes on the Accounts” in this report.

Capital Structure and Gearing Ratio

The Group financed its non-current assets principally by a mix of long-term debts and shareholders’ equity. The Group’s long-term debts (including their current portions) decreased by 9.7% to HK$404.9 million (2002: HK$448.2 million). Total long-term debts mainly comprised: (1) the aggregate outstanding balance of the unsecured long-term Renminbi loans due to Shakou JV’s PRC joint-venture partner and its associate of HK$376.8 million (2002: HK$448.2 million); and (2) a three years Renminbi term loan due to a PRC bank of HK$28.1 million (2002: Nil). The long-term Renminbi loans due to Shakou JV’s PRC joint-venture partner and its associate were primarily employed to re-finance Shakou JV’s investment in its fixed assets, principally power generating facilities, and were repayable within 10 years commencing in 1997 and 1998. The applicable loan rates for the year were 5.76% (2002: 5.76%) per annum. During the year, the Group made partial payment by internal cash flow generated from its operating activities. Furthermore, Shakou JV negotiated with its PRC joint-venture partner and its associate to reschedule certain overdue principal repayments and current portions of the long-term loans due for

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

repayments within 2004 of an aggregate amount of HK$66 million, extending the expiry for about 18 months. Gearing ratio, being the aggregate amount of bank loans and other loans (including current portion) as a percentage of shareholders’ fund, decreased modestly from the previous 35.7% to 31.2%.

Net Assets

The Group’s net assets amounted to HK$1.46 billion (2002: HK$1.49 billion). The net book value of goodwill arising from acquisition of subsidiaries was HK$609.9 million (2002: HK$641.6 million). Net assets per share decreased negligibly from the previous HK$1.80 to HK$1.76 while net tangible assets per share remained at the previous level of approximately HK$1.03.

Exchange Risk

The Group’s revenue, operating costs, finance costs, debt servicing and capital expenditure were substantially denominated in Renminbi. Currently the exchange rate of Renminbi against Hong Kong dollars has been relatively stable. No financial instrument has been used for the purpose of hedging exchange rate risk during the year.

Outlook

It is expected that Guangdong Province’s electricity demand growth will accelerate in the coming years primarily driven by the province’s robust economic activities. As one of the fastest growing cities in Guangdong Province, Foshan Municipality is expected to sustain strong electricity demand growth. The directors of the Company (the “Directors”) believed that the maximum electricity demands for both Guangdong Province and Foshan Municipality will experience record highs and electricity shortage will persist in the coming years. In fact, electricity rationings and temporary electricity supply suspensions have become more frequent since the beginning of 2004. In addition, high demand seasons of the year also have commenced in earlier months than previous year. Foshan Municipality has already adopted contingency measures to ration electricity during high demand periods while certain production and commercial activities was requested to shift to low demand periods. Local power plants in Foshan Municipality, including Shakou Power Plant, have been requested by the relevant authority of the Foshan Municipal Government to operate at their maximum available capacity during the peak demand periods. The Directors believe that Shakou Power Plant will improve its total electricity sales volume and achieve a higher utilization rates in the coming year. However, the Group’s profitability may still fluctuate largely as a result of the uncertain fuel oil price movements in short term. As fuel oil prices may continue to hover at the recent high level and remain uncertain in the short-term, the Group will continue to closely monitor the fuel oil price movement and explore more effective fuel-purchasing strategy to minimize the Group’s overall operating costs. The Group will endeavor its best effort to negotiate with the relevant PRC authorities and to solicit additional fuel cost surcharges from its customer. In the long run, the Group will commence preliminary feasibility study in respect of making technological innovation to its

– 115 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

existing power generating facilities to consume liquefied natural gas as an alternative energy source in the future to reduce the Group’s susceptibility on fuel oil prices. In order to meet surging electricity demand, the relevant authorities of Foshan Municipal Government have recently approved new power plant projects to be built in Foshan Municipality. These new power plant facilities are being developed by certain PRC parties. The Directors would obtain further information in respect of the technical and financial feasibility of these projects and explore the possibility to invest in these projects.

5. MATERIAL ADVERSE CHANGE

As disclosed in the 2006 interim report of the Company, the Group recorded a net loss after taxation of approximately HK$372,406,000 for the six months ended 30 June 2006. Save as aforesaid, 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 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

The following is the text of a report, prepared for the purpose of inclusion in this circular, received from the reporting accountants, KPMG, Certified Public Accountants, Hong Kong:

8th Floor Prince’s Building 10 Chater Road Central Hong Kong

15 September 2006

The Directors Wing Shan International Limited

Dear Sirs,

INTRODUCTION

We set out below our report on the financial information relating to Hensil Holdings Company Limited (“HHC”) and its subsidiaries (collectively, the “HHC Group”) including the combined income statements, combined statements of changes in equity and combined cash flow statements of the HHC Group for each of the years ended 31 December 2003, 2004, 2005 and the five months ended 31 May 2006 (the “relevant period”) and the combined balance sheets of the HHC Group as at 31 December 2003, 2004, 2005 and 31 May 2006 and the notes thereto (the “Financial Information”) for inclusion in the circular of Wing Shan International Limited (the “Company”) dated 15 September 2006 (the “Circular”) in connection with the proposed acquisition of HHC by the Company (the “Acquisition”) as described more fully in the section headed “Letter from the Board” contained in the Circular.

HHC was incorporated in the British Virgin Islands on 7 July 2006 as a company with limited liability under the BVI Business Companies Act, 2004 of the British Virgin Islands. Pursuant to a group reorganisation (the “Reorganisation”) which was completed on 12 July 2006, HHC became the holding company of the subsidiaries now comprising the HHC Group, details of which are set out in Section A below. HHC has not carried on any business since the date of its incorporation save for the Reorganisation.

BASIS OF PREPARATION

The Financial Information has been prepared by the directors of HHC (the “Directors”) based on the audited financial statements or, where appropriate, unaudited management accounts of the companies now comprising the HHC Group, on the basis set out in Section A below, after making such adjustments as are appropriate (the “Underlying Financial Information”). Adjustments have been made, for the purpose of this report, to restate the Underlying Financial Information to conform with accounting policies as referred to in Section C below, which are in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), the accounting policies adopted by HHC and the Company to the extent that the accounting policies are applicable, and the disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

No audited financial statements have been prepared for the companies comprising the HHC Group, except for Hensil Trading & Investments Limited (“HTI”), Hensil Industrial Inc. (“HII”), Foshan Dezhong Pharmaceutical Co., Ltd. (“DZH”) and Foshan Feng Liao Xing Pharmaceutical Co., Ltd. (“FLX”), as they were either incorporated shortly or dormant before 31 May 2006 or are investment holding companies and have not carried on any business since their respective dates of incorporation or are not subject to statutory audit requirements under the relevant rules and regulations in their jurisdictions of incorporation. We have, however, reviewed all significant transactions of these companies from their respective dates of incorporation to 31 May 2006 for the purpose of this report.

The statutory financial statements of HTI and HII, which were prepared in accordance with HKFRSs, and DZH and FLX, which were prepared in accordance with the relevant accounting rules and regulations applicable to enterprises with foreign investment in the People’s Republic of China (“PRC”), were audited during the relevant period by the respective statutory auditors as indicated below:

Name of company	Financial period	Auditors
HTI	Years ended 31 December 2003	Tony Kwok Tung Ng & Co.
	and 2004
HII	Years ended 31 December 2003	Tony Kwok Tung Ng & Co.
	and 2004
DZH	Years ended 31 December 2003,	Foshan Chan Shan Certified
	2004 and 2005	Public Accountants Co., Ltd.
		registered in the PRC
FLX	Years ended 31 December 2003,	Foshan Da Cheng Certified
	2004 and 2005	Public Accountants Co., Ltd.
		registered in the PRC

The statutory financial statements of HTI and HII during the relevant period were qualified in respect of certain matters concerning the non-preparation of the consolidated financial statements of the group consisting of HTI, HII and their respective subsidiaries. We have satisfied ourselves by carrying out additional audit procedures that any material adjustments arising from the above audit qualification have been incorporated into the HHC Group’s Financial Information for the relevant period presented in this report in accordance with the basis of presentation set out in Section A below.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND REPORTING ACCOUNTANTS

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

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

BASIS OF OPINION

As a basis for forming an opinion on the Financial Information, for the purpose of this report, we have carried out appropriate audit procedures in respect of the audited financial statements or, where appropriate, the unaudited management accounts of the companies comprising the HHC Group (as reflected in Section A of this report) for the relevant period in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and we have carried out such additional procedures as we considered necessary in accordance with Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the HKICPA.

We have not audited any financial statements of the companies comprising the HHC Group in respect of any period subsequent to 31 May 2006.

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

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the Financial Information is free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of Financial Information. We believe that our audit provides a reasonable basis for our opinion.

OPINION

In our opinion, for the purposes of this report and on the basis of presentation set out in Section A below, all adjustments considered necessary have been made and the Financial Information gives a true and fair view of the combined results, changes in equity and cash flows of the HHC Group for each of the years ended 31 December 2003, 2004, 2005 and the five months ended 31 May 2006 and of the combined state of the affairs of the HHC Group as at 31 December 2003, 2004, 2005 and 31 May 2006.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

COMPARATIVE FINANCIAL INFORMATION

For the purpose of this report, we have also reviewed the unaudited financial information of the HHC Group including the combined income statement, combined statement of changes in equity and combined cash flow statement for the five months ended 31 May 2005, together with the notes thereon (the “31 May 2005 Corresponding Information”), for which the Directors are responsible, in accordance with Statement of Auditing Standard 700 “Engagements to review interim financial reports” issued by the HKICPA. A review consists principally of making enquiries of group management and applying analytical procedures to the 31 May 2005 Corresponding Information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as test of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the 31 May 2005 Corresponding Information.

Review conclusion

On the basis of our review of the 31 May 2005 Corresponding Information which does not constitute an audit, for the purpose of this report and on the basis of presentation set out in Section A below, we are not aware of any material modifications that should be made to the unaudited financial information presented for the five months ended 31 May 2005.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

A BASIS OF PRESENTATION

HHC became the holding company of the following companies now comprising the HHC Group pursuant to the Reorganisation which was completed on 12 July 2006. The combined income statements, combined statements of changes in equity and combined cash flow statements of the HHC Group as set out in Sections B1, B3 and B4 respectively include the results of operations of the following companies comprising the HHC Group for the relevant period as if the current group structure had been in existence throughout the entire relevant period. The combined balance sheets of the HHC Group as at 31 December 2003, 2004, 2005 and 31 May 2006 as set out in Section B2 have been prepared to present the state of affairs of the following companies comprising the HHC Group as at the respective dates as if the current group structure had been in existence as at the respective dates.

All material intra-group transactions and balances have been eliminated on combination.

At the date of this report, HHC had direct or indirect interests in the following subsidiaries, all of which are private companies, particulars of which are set out below:

		Issued and
	Place and date	fully paid up/
	of incorporation/	registered	Attributable
Name of company	establishment	capital	equity	interest	Principal activities
			Direct	Indirect
HTI	British Virgin Islands	US$2	100%	–	Investment holding
	26 May 1998
HII	British Virgin Islands	US$51	100%	–	Investment holding
	26 May 1998
DZH_(note)_	The PRC	US$5,760,000	–	51%	Manufacturing and sale of
	1 November 1998				Chinese pharmaceutical
					products
FLX_(note)_	The PRC	US$6,926,100	–	51%	Manufacturing and sale of
	16 March 2000				Chinese pharmaceutical
					products
Dezhong Pharmaceutical	Hong Kong	HK$2	–	51%	Dormant
(Hong Kong)	13 December 1999
Company Limited

Note: DZH and FLX are sino-foreign equity joint ventures established pursuant to the law of the PRC on sinoforeign equity joint ventures.

– 121 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

B FINANCIAL INFORMATION

(Expressed in Renminbi)

1 Combined income statements

Section C Note Turnover 2 Cost of sales Gross profit Other revenue 3 Other net income 3 Selling expenses Administrative expenses Profit from operations Finance costs 4(a) Profit before taxation 4 Income tax 5(a) Profit for the year/ period Attributable to: Equity shareholders of HHC Minority interests Profit for the year/ period Dividends attributable to the year/period: 6(a) Interim dividend proposed after the balance sheet date Final dividends proposed after the balance sheet date Earnings per share – basic 9	Years 2003 RMB’000 305,556 (171,265) 134,291 1,762 135 (35,247) (28,017) 72,924 (219) 72,705 (8,899) 63,806 32,531 31,275 63,806 – – – 32,531	ended 31 December 2004 2005 RMB’000 RMB’000 326,975 338,182 (184,543) (188,797) 142,432 149,385 1,743 2,503 17 93 (34,738) (40,592) (31,743) (34,529) 77,711 76,860 (515) (689) 77,196 76,171 (9,712) (9,374) 67,484 66,797 34,406 33,887 33,078 32,910 67,484 66,797 – – 41,649 56,348 41,649 56,348 34,406 33,887	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 147,727 146,074 (78,747) (82,065) 68,980 64,009 615 1,238 68 28 (17,695) (22,639) (11,337) (11,669) 40,631 30,967 (223) (361) 40,408 30,606 (4,880) (3,704) 35,528 26,902 18,070 13,715 17,458 13,187 35,528 26,902 – 14,280 – – – 14,280 18,070 13,715

The accompanying notes form part of the Financial Information.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

2 Combined balance sheets

Section C Note Non-current assets Fixed assets 10 – Investment property – Property, plant and equipment – Interests in leasehold land held for own use under operating leases Construction in progress 11 Other financial assets 12 Current assets Inventories 13 Trade and bills receivables 14 Deposits, prepayments and other receivables 15 Cash and cash equivalents 16 Current liabilities Bank loans 17 Dividend payable Trade payables 18 Accrued expenses and other payables Amount due to ultimate holding company 19 Current taxation 20(a)	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 1,456 5,539 5,315 142,252 131,896 128,867 23,643 20,172 19,719 253 107 – 4,698 981 977 172,302 158,695 154,878 ----------- ----------- ----------- 34,118 44,097 57,988 21,356 24,085 30,801 5,995 8,323 7,380 88,948 134,294 132,132 150,417 210,799 228,301 ----------- ----------- ----------- (6,000) (10,000) (20,000) – – – (11,968) (19,349) (18,225) (48,836) (34,187) (37,025) (62,727) (62,371) (61,234) (2,535) (3,163) (3,620) (132,066) (129,070) (140,104) ----------- ----------- -----------	As at 31 May 2006 RMB’000 5,231 123,417 19,530 189 1,579 149,946 ----------- 52,307 42,208 6,796 105,398 206,709 ----------- (6,000) (86,488) (12,732) (27,803) (60,848) (2,381) (196,252) -----------

– 123 –

APPENDIX II

ACCOUNTANTS’ REPORT ON THE HHC GROUP

Section C Note Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities 20(b) NET ASSETS Capital and reserves Share capital 22 Reserves Total equity attributable to equity shareholders of HHC Minority interests TOTAL EQUITY	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 18,351 81,729 88,197 ----------- ----------- ----------- 190,653 240,424 243,075 ----------- ----------- ----------- (1,132) (950) (243) ----------- ----------- ----------- 189,521 239,474 242,832 – – – 65,995 100,397 93,900 65,995 100,397 93,900 123,526 139,077 148,932 189,521 239,474 242,832	As at 31 May 2006 RMB’000 10,457 ----------- 160,403 ----------- (238) ----------- 160,165 – 51,923 51,923 108,242 160,165

The accompanying notes form part of the Financial Information.

Approved and authorised for issue by the board of directors on 15 September 2006.

Chairman

Director

– 124 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

3 Combined statements of changes in equity

Attributable to equity	Attributable to equity	shareholders	of HHC	Total equity RMB’000 157,949 (1,055) 127 63,806 – (15,806) (15,224) (276)
Statutory surplus reserve RMB’000 (note (i)) 29,101 – – – 14,476 – – – 43,577 43,577 – – – 12,087 – – 55,664	Fair value reserve RMB’000 (note (ii)) 1,185 (538) 65 – – – – – 712 712 (366) 45 – – – – 391	Retained profits RMB’000 19,798 – – 32,531 (14,476) (15,806) – – 22,047 22,047 – – 34,406 (12,087) – – 44,366	Exchange reserve RMB’000 (65) – – – – – – (276) (341) (341) – – – – – 317 (24)
				189,521

				189,521 (717) 87 67,484 – (17,218) 317
				239,474

– 125 –

APPENDIX II

ACCOUNTANTS’ REPORT ON THE HHC GROUP

Attributable to equity shareholders of HHC

Note At 1 January 2005 Changes in fair value of available-for-sale securities Net profit for the year Transfer to reserve Final dividend approved in respect of the previous year 6(b) Dividend paid to minority interests Exchange difference on translation of financial statements of operations outside the PRC At 31 December 2005 At 1 January 2006 Available-for-sale securities – changes in fair value – to deferred tax Net profit for the period Transfer from reserve Final dividend approved in respect of the previous year 6(b) Dividend paid to minority interests Exchange difference on translation of financial statements of operations outside the PRC At 31 May 2006	Share capital RMB’000 – – – – – – – – – – – – – – – – –	Statutory surplus reserve RMB’000 (note (i)) 55,664 – – 898 – – – 56,562 56,562 – – – (24,078) – – – 32,484	Fair value reserve RMB’000 (note (ii)) 391 (2) – – – – – 389 389 307 (37) – – – – – 659	Retained profits RMB’000 44,366 – 33,887 (898) (41,649) – – 35,706 35,706 – – 13,715 24,078 (56,348) – – 17,151	Exchange reserve RMB’000 (24) – – – – – 1,267 1,243 1,243 – – – – – – 386 1,629	Total RMB’000 100,397 (2) 33,887 – (41,649) – 1,267 93,900 93,900 307 (37) 13,715 – (56,348) – 386 51,923	Minority interests RMB’000 139,077 (2) 32,910 – – (23,053) – 148,932 148,932 295 (35) 13,187 – – (54,137) – 108,242	Total equity RMB’000 239,474 (4) 66,797 – (41,649) (23,053) 1,267
								242,832

								242,832 602 (72) 26,902 – (56,348) (54,137) 386
								160,165

– 126 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

Notes:

(i) Statutory surplus reserve

According to the relevant rules and regulations in the PRC, the subsidiaries in the PRC are required to appropriate 10% of after-tax profit to the statutory surplus reserve, based on the PRC statutory financial statements prepared in accordance with Accounting Standard for Business Enterprises in the PRC, until the balance of the reserve reaches 50% of their respective registered capital. The transfer to this reserve must be made before distribution of a dividend to equity owners.

Statutory surplus reserve can be used to make good previous years’ losses, if any, and may be converted into capital in proportion to existing equity owners’ equity percentage, provided that the balance after such issuance is not less than 25% of their registered capital.

(ii) Fair value reserve

The fair value reserve comprises the cumulative net change in the fair value of available-for-sale securities held at the balance sheet date, and is dealt with in accordance with the accounting policies in section C note 1(d).

The accompanying notes form part of the Financial Information.

– 127 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

4 Combined cash flow statements

Note
Operating activities
Profit before taxation
Adjustments for:
– Depreciation of
fixed assets
– Amortisation of land
lease premium held
for own use
– Interest income
– Dividend income from
listed securities
– Interest expense
– Loss/(gain) on disposal
of fixed assets
– Foreign exchange
(gain)/loss
Operating profit before
changes in working
capital
(Increase)/decrease in
inventories
Increase in trade
and bills receivables
Decrease/(increase) in
deposits, prepayments
and other receivables
Increase/(decrease) in
trade payables
Increase/(decrease) in
accrued expenses and
other payables
Cash generated from
operations carried
forward

Five months ended
Years ended 31 December
31 May
2003
2004
2005
2005
2006
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(unaudited)
72,705
77,196
76,171
40,408
30,606
10,309
13,837
14,711
6,088
6,350
518
454
453
189
189
(958)
(1,170)
(1,745)
(370)
(642)
–
(31)
(22)
–
–
219
515
689
223
361
23
(11)
(58)
(35)
12
(11)
(39)
457
(477)
–
82,805
90,751
90,656
46,026
36,876
(9,170)
(9,979)
(13,891)
(2,045)
5,681
(3,720)
(2,729)
(6,716)
(23,994)
(11,407)
1,436
(2,328)
943
(3,963)
584
5,273
7,381
(1,124)
(7,083)
(5,493)
1,717
(14,649)
2,838
(8,708)
(9,222)
78,341
68,447
72,706
233
17,019

– 128 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

Note
Cash generated from
operations brought
forward
PRC Enterprise Income
Tax paid
Net cash generated from/
(used in) operating
activities
Investing activities
Payment for purchase of
fixed assets
Payment for construction
in progress
Proceeds from sale of
fixed assets
Proceeds from sale of
held-to-maturity securities
Interest received
Dividend received from
listed securities
Net cash used in
investing activities
Financing activities
Interest paid
Proceeds from bank loans
Repayment of bank loans
Dividends paid to equity
shareholders
Dividends paid to
minority interests
Net cash used in
financing activities

Five months ended
Years ended 31 December
31 May
2003
2004
2005
2005
2006
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(unaudited)
78,341
68,447
72,706
233
17,019
(16,021)
(9,179)
(9,624)
(4,605)
(5,020)
62,320
59,268
63,082
(4,372)
11,999
----------- ----------- ----------- ----------- -----------
(20,702)
(4,299)
(11,475)
(3,668)
(828)
(17,257)
(107)
(15)
(15)
(189)
17
16
197
35
–
1,000
3,000
–
–
–
958
1,170
1,745
370
642
–
31
22
–
–
(35,984)
(189)
(9,526)
(3,278)
(375)
----------- ----------- ----------- ----------- -----------
(219)
(515)
(689)
(223)
(361)
6,000
16,000
24,000
–
–
–
(12,000)
(14,000)
–
(14,000)
(15,806)
–
(41,649)
(17,410)
–
(15,224)
(17,218)
(23,053)
(16,193)
(23,997)
(25,249)
(13,733)
(55,391)
(33,826)
(38,358)
----------- ----------- ----------- ----------- -----------

– 129 –

APPENDIX II

ACCOUNTANTS’ REPORT ON THE HHC GROUP

Note Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December/31 May 16	Years 2003 RMB’000 1,087 87,861 –	ended 31 December 2004 2005 RMB’000 RMB’000 45,346 (1,835) 88,948 134,294 – (327) 134,294 132,132	ended 31 December 2004 2005 RMB’000 RMB’000 45,346 (1,835) 88,948 134,294 – (327) 134,294 132,132	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) (41,476) (26,734) 134,294 132,132 73 – 92,891 105,398
	88,948	134,294	132,132	92,891

The accompanying notes form part of the Financial Information.

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APPENDIX II

C NOTES ON THE FINANCIAL INFORMATION

(Expressed in Renminbi)

1 Significant accounting policies

(a) Statement of compliance

The Financial Information has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and accounting principles generally accepted in Hong Kong. A summary of the significant accounting policies adopted by the HHC Group is set out below.

(b) Basis of preparation of the Financial Information

The measurement basis used in the preparation of the Financial Information is the historical cost basis except that certain financial instruments classified as available-for-sale securities (see note 1(d)) are stated at their fair value.

The Financial Information presents the results, cash flows and financial position of the HHC Group for each of the years ended 31 December 2003, 2004, 2005 and the five months ended 31 May 2006 on the basis that HHC, for the purpose of this report, is regarded as a continuing entity and that the Reorganisation had been completed as at the beginning of the relevant period and that the business of the HHC Group had been conducted by HHC throughout the relevant period as they are related to entities under common control.

HKFRS 1, “First-time adoption of Hong Kong Financial Reporting Standards”, has been applied in preparing the Financial Information. The Financial Information is the first set of HHC’s Financial Information prepared in accordance with HKFRSs. Reconciliations and descriptions of the effect of the transition from the PRC GAAP to HKFRSs on the HHC Group’s total equity as at 1 January 2003 and 31 December 2003 are given in note 30. There is no net effect to the combined profit for the year ended 31 December 2003.

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

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

Judgements made by management in the application of HKFRSs that have significant effect on the Financial Information and estimates with a significant risk of material adjustment in the future period are discussed in note 28.

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(c) Subsidiaries and controlled entities

Subsidiaries are entities controlled by the HHC Group. Control exists when the HHC Group has the power, directly or indirectly, to govern the financial and operating policies of the entities, so as to obtain benefits from their activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. Merger accounting is adopted for common control combinations in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.

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

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

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

(d) Other investments in debt and equity securities

The HHC Group’s policies for investments in debt and equity securities, other than investments in subsidiaries are as follows:

Dated debt securities that the HHC Group has the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are initially recognised in the combined balance sheets at fair value plus transaction costs. Subsequently, they are stated in the combined balance sheets at amortised cost less impairment losses (see note 1(h)).

Investments classified as available-for-sale securities are initially recognised at fair value plus transaction costs. At each balance sheet date the fair value is remeasured, with any resultant gain or loss being recognised directly in equity, except for impairment losses (see note 1(h)) and foreign exchange gains and losses arising from monetary items such as debt securities, both of which are recognised directly in profit or loss. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss.

Investments are recognised/derecognised on the date the HHC Group commits to purchase/ sell the investments or they expire.

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(e) Fixed assets
(i) Property, plant and equipment

Other property, plant and equipment are stated in the combined balance sheets at cost or deemed cost less accumulated depreciation and impairment losses (see note 1(h)).

Certain items of property, plant and equipment that have been revalued to fair value on or prior to 1 January 2003, the date of transition to HKFRSs, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation.

Subsequent expenditure relating to an item of property, plant and equipment that has already been recognised is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the HHC Group. All other subsequent expenditure is recognised as an expense in the period in which it is incurred.

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

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

Buildings held for own use which are situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives, being no more than 40 years after the date of completion.
Plant and machinery 10-18 years
– Equipment and vehicles 5-12 years

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

(ii) Investment property

Investment properties are land and/or buildings which are owned or held under a leasehold interest to earn rental income and/or for capital appreciation. These include land held for a currently undetermined future use.

Investment properties are stated in the combined balance sheets at cost less accumulated depreciation and impairment losses (see note 1(h)). Rental income from investment properties is accounted for as described in note 1(q)(ii). Depreciation is provided over the properties’ estimated useful lives on a straight-line basis. Estimated useful lives of investment properties are 35 to 50 years.

Major costs incurred in restoring investment properties to their nominal working condition are charged to profit or loss. Improvements are capitalised and depreciated over their expected useful lives.

Gains or losses arising from the retirement or disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.

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(f) Construction in progress

Construction in progress represents property, plant and equipment under construction and equipment pending installation, and is stated at cost less impairment losses (note 1(h)). Cost comprises direct costs of construction. Capitalisation of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all of the activities necessary to prepare the assets for their intended use are complete.

No depreciation is provided in respect of construction in progress until it is substantially completed and ready for its intended use.

(g) Operating lease charges

Where the HHC Group has the use of assets under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. The cost of acquiring land held under operating lease is amortised on a straight-line basis over the period of the lease term.

(h) Impairment of assets

(i) Impairment of investments in debt and equity securities, trade and other receivables

Investments in debt and equity securities and current receivables that are stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognised as follows:

For current receivables that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for current receivables are reversed if in a subsequent period the amount of the impairment loss decreases.
For financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets).

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

For available-for-sale securities, the cumulative loss that had been recognised directly in equity is removed from equity and is recognised in profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss.

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Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognised directly in equity.

(ii) Impairment of other assets

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

investment properties;
other property, plant and equipment;
construction in progress; and
pre-paid interests in leasehold land classified as being held under an operating lease.
If any such indication exists, the asset’s recoverable amount is estimated.
Calculation of recoverable amount

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

Recognition of impairment losses

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

Reversals of impairment losses

An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. A reversal of impairment losses is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

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APPENDIX II

(i) Inventories

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

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

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

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

(j) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts (see note 1(h)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts (see note 1(h)).

(k) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the borrowings using the effective interest method.

(l) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(m) Cash and cash equivalents

(n) Employee benefits

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

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APPENDIX II

(ii) Contributions to appropriate local retirement schemes pursuant to the relevant labour rules and regulations in the PRC are recognised as an expense in profit or loss as incurred, except to the extent that they are included in the cost of inventories not yet recognised as an expense.
(o) Income tax
(i) Income tax for the period comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.
(ii) Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.
(iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

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

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

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

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

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

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APPENDIX II

in the case of current tax assets and liabilities, the HHC Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

(p) Provisions and contingent liabilities

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

(q) Revenue recognition

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

(i) Sale of goods

Revenue is recognised when goods are delivered at the customers’ premises which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

(ii) Rental income from operating leases

Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term.

(iii) Interest income

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

(iv) Dividends

Dividends income from listed investments is recognised when the share price of the investment goes ex-dividend.

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APPENDIX II

(r) Translation of foreign currencies

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

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Nonmonetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined.

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

On disposal of operations outside the PRC, the cumulative amount of the exchange differences which relate to those operations is included in the calculation of the profit or loss on disposal.

(s) Borrowing costs

Borrowing costs are expensed in profit or loss in the period in which they are incurred.

(t) Dividends

Dividends are recognised as a liability in the period in which they are declared.

(u) Related parties

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

(v) Segment reporting

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

The HHC Group operates in a single business segment, manufacturing and sales of pharmaceutical products in the PRC. Accordingly, no segmental analysis is presented.

– 139 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

2 Turnover

The principal activities of the HHC Group are manufacture and sales of pharmaceutical products in the PRC. Turnover represents the sales value of goods sold less returns, discounts, and value added taxes, which may be analysed as follows:

Pills and tablets Granules Others	Years 2003 RMB’000 214,445 32,320 58,791 305,556	ended 31 December 2004 2005 RMB’000 RMB’000 228,082 229,808 29,625 31,836 69,268 76,538 326,975 338,182	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 102,578 100,952 14,994 13,910 30,155 31,212 147,727 146,074	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 102,578 100,952 14,994 13,910 30,155 31,212 147,727 146,074
				146,074

3 Other revenue and net income

Other revenue Interest income Rental income Dividend income from listed securities Others Other net income (Loss)/gain on disposal of fixed assets Others	Years 2003 RMB’000 958 414 – 390 1,762 (23) 158 135	ended 31 December 2004 2005 RMB’000 RMB’000 1,170 1,745 484 736 31 22 58 – 1,743 2,503 11 58 6 35 17 93	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 370 642 245 211 – – – 385 615 1,238 35 (12 33 40 68 28	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 370 642 245 211 – – – 385 615 1,238 35 (12 33 40 68 28
				1,238

				(12 40
				28

– 140 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

4 Profit before taxation

Profit before taxation is arrived at after charging:

(a) Finance costs: Interest on bank borrowings wholly repayable within five years (b) Staff costs: Contributions to defined contribution retirement plans Salaries, wages and other benefits (c) Other items: Auditors’ remuneration Depreciation Amortisation of land lease premium held for own use Impairment loss on trade receivables Net foreign exchange (gain)/loss Operating lease charges in respect of premises	Years 2003 RMB’000 219 6,685 44,147 50,832 46 10,309 518 621 (6) 243	ended 31 December 2004 2005 RMB’000 RMB’000 515 689 6,366 6,251 46,839 44,264 53,205 50,515 44 40 13,837 14,711 454 453 63 5,461 3 268 265 334	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 223 361 2,479 2,766 19,860 19,848 22,339 22,614 32 31 6,088 6,350 189 189 – – – – 128 118	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 223 361 2,479 2,766 19,860 19,848 22,339 22,614 32 31 6,088 6,350 189 189 – – – – 128 118

				2,766 19,848
				22,614

				31 6,350 189 – – 118

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

5 Income tax in the combined income statements

(a) Taxation in the combined income statements represents:

Current tax – PRC Enterprise Income Tax Provision for the year Deferred tax Origination and reversal of temporary differences	Five months ended Years ended 31 December 31 May 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 8,912 9,807 10,081 4,948 3,781 (13) (95) (707) (68) (77) 8,899 9,712 9,374 4,880 3,704	Five months ended Years ended 31 December 31 May 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 8,912 9,807 10,081 4,948 3,781 (13) (95) (707) (68) (77) 8,899 9,712 9,374 4,880 3,704	Five months ended Years ended 31 December 31 May 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 8,912 9,807 10,081 4,948 3,781 (13) (95) (707) (68) (77) 8,899 9,712 9,374 4,880 3,704	Five months ended Years ended 31 December 31 May 2003 2004 2005 2005 2006 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited) 8,912 9,807 10,081 4,948 3,781 (13) (95) (707) (68) (77) 8,899 9,712 9,374 4,880 3,704
	8,899	9,712	9,374	4,880

No provision has been made for Hong Kong Profits Tax as the HHC Group does not earn income subject to Hong Kong Profits Tax during the relevant period.

Pursuant to the income tax rules and regulations of the British Virgin Islands, the HHC Group is not subject to any income tax in the British Virgin Islands.

Pursuant to the income tax rules and regulations of the PRC, DZH is granted certain tax relief, under which it is exempted from PRC Enterprise Income Tax for the first two profit making years, i.e. the period from 1 January 1999 to 31 December 2000. DZH is entitled to a 50% income tax reduction for the next three years and hence subject to PRC income tax at 12% for the period from 1 January 2001 to 31 December 2003.

DZH is recognised as a new high technology enterprise and received an approval from the Foshan Tax Bureau for a three-year extension of the 50% income tax reduction to 31 December 2006.

Pursuant to the income tax rules and regulations of the PRC, FLX is granted certain tax relief, under which it is exempted from PRC Enterprise Income Tax for the first two profit making years, i.e. the period from 16 March 2000 to 31 December 2001. FLX is entitled to a 50% income tax reduction for the next three years and hence subject to PRC income tax at 12% for the period from 1 January 2002 to 31 December 2004.

FLX is recognised as a new high technology enterprise and received an approval from the Foshan Tax Bureau for a three-year extension of the 50% income tax reduction to 31 December 2007.

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

Years 2003 RMB’000 Profit before tax 72,705 Notional tax on profit before tax, calculated at the PRC Enterprise Income Tax rate of 24% 17,449 Tax effect of non-deductible expenses 372 Tax effect of non-taxable income (28) Income tax concessions (8,912) Others 18 Actual tax expense 8,899	ended 31 December 2004 2005 RMB’000 RMB’000 77,196 76,171 18,527 18,281 1,092 460 (324) (74) (9,807) (10,081) 224 788 9,712 9,374	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 40,408 30,606 9,698 7,345 120 118 (82) (62 (4,948) (3,781 92 84 4,880 3,704	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 40,408 30,606 9,698 7,345 120 118 (82) (62 (4,948) (3,781 92 84 4,880 3,704

			7,345 118 (62 (3,781 84
			3,704

6 Dividends

(a) Dividends payable to equity shareholders of HHC attributable to the year/period:

Years 2003 RMB’000 Interim dividend proposed after the balance sheet date – Final dividends proposed after the balance sheet date – –	ended 31 December 2004 2005 RMB’000 RMB’000 – – 41,649 56,348 41,649 56,348	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) – 14,280 – – – 14,280	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) – 14,280 – – – 14,280
			14,280

The dividends proposed after the balance sheet date has not been recognised as liability at the respective balance sheet date.

(b) Dividends payable to equity shareholders of HHC attributable to the previous financial year, approved and paid during the year/period:

				Five months ended	Five months ended
	Years ended 31 December			31 May
	2003	2004	2005	2005	2006
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(unaudited)
Final dividends in respect of
the previous financial year,
approved and paid during
the year/period	15,806	–	41,649	17,410	56,348

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APPENDIX II

7 Directors’ remuneration

Details of directors’ remuneration are as follows:

For the year ended 31 December 2003: Mr. He Haochang Mr. Situ Min Total For the year ended 31 December 2004: Mr. He Haochang Mr. Situ Min Total For the year ended 31 December 2005: Mr. He Haochang Mr. Situ Min Total For the five months ended 31 May 2006: Mr. He Haochang Mr. Situ Min Total	Fees RMB’000 265 265 530 177 177 354 227 227 454 62 62 124	Basic Contributions salaries, to allowances retirement and other benefit benefits scheme RMB’000 RMB’000 – – – – – – – – – – – – – – – – – – – – – – – –	Bonuses RMB’000 – – – – – – – – – – – –	Total RMB’000 265 265
				530

				177 177
				354

				227 227
				454

				62 62
				124

The remuneration of the Directors is within the following bands.

RMB Nil to RMB 1,000,000	Five months ended Years ended 31 December 31 May 2003 2004 2005 2006 Number Number Number Number of of of of directors directors directors directors 2 2 2 2

Save as disclosed above, no emoluments were paid by HHC to the Directors or any of the five highest paid individuals (note 8) during the relevant period as an inducement to join or upon joining HHC or as compensation for loss of office. No Directors have waived or agreed to waive any emoluments during the relevant period.

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APPENDIX II

8 Senior management remunerations

The five highest paid individuals of the HHC Group include two directors of HHC during the relevant period whose remuneration is reflected in the analysis presented in note 7 above. Details of remuneration paid to the remaining highest individuals of the HHC Group are as follows:

Years 2003 RMB’000 Basic salaries, allowances and other benefits 232 Contributions to retirement benefit schemes 32 Discretionary bonuses 1,682 1,946 Number of senior management 3	Five months ended ended 31 December 31 May 2004 2005 2006 RMB’000 RMB’000 RMB’000 232 232 109 35 43 20 2,106 1,872 204 2,373 2,147 333 3 3 3	Five months ended ended 31 December 31 May 2004 2005 2006 RMB’000 RMB’000 RMB’000 232 232 109 35 43 20 2,106 1,872 204 2,373 2,147 333 3 3 3
		333

		3

The emoluments of the three individuals with the highest emoluments are within the following bands:

RMB Nil to RMB 1,000,000 RMB 1,000,000 to RMB 1,500,000	Years 2003 Number of individuals 3 –	Five months ended ended 31 December 31 May 2004 2005 2006 Number Number Number of of of individuals individuals individuals 2 2 3 1 1 –

Save as disclosed above, no emoluments were paid by the HHC Group to the five highest paid individuals during the relevant period as an inducement to join or upon joining the HHC Group or as compensation for loss of office.

9 Earnings per share

The calculation of basic earnings per share for the relevant period is based on the net profit attributable to ordinary shareholders for each of the years ended 31 December 2003, 2004, 2005 and the five months ended 31 May 2005 and 2006 and on the number of share in issue of 1 ordinary share in HHC.

There were no dilutive potential ordinary shares during the relevant period and, therefore, diluted earnings per share are not presented.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

10 Fixed assets

Cost: At 1 January 2003 Additions Transfer from construction in progress_(note 11) Disposals At 31 December 2003 Accumulated depreciation: At 1 January 2003 Charge for the year Written back on disposals At 31 December 2003 Net book value: At 31 December 2003 Cost: At 1 January 2004 Additions Transfer from construction in progress(note 11)_ Transfer to investment property Disposals At 31 December 2004 Accumulated depreciation: At 1 January 2004 Charge for the year Transfer to investment property Written back on disposals At 31 December 2004 Net book value: At 31 December 2004	Buildings RMB’000 42,754 12 20,674 (205) 63,235 - - - - - - - - 17,360 1,877 (205) 19,032 - - - - - - - - 44,203 63,235 – – (3,224) – 60,011 - - - - - - - - 19,032 1,831 (1,955) – 18,908 - - - - - - - - 41,103	Plant and machinery RMB’000 58,134 8,673 32,411 (1,433) 97,785 - - - - - - - - 17,425 5,751 (1,393) 21,783 - - - - - - - - 76,002 97,785 2,979 253 – (46) 100,971 - - - - - - - - 21,783 7,681 – (41) 29,423 - - - - - - - - 71,548	Office equipment and vehicles RMB’000 19,036 12,017 2,227 (208) 33,072 - - - - - - - - 8,593 2,640 (208) 11,025 - - - - - - - - 22,047 33,072 1,320 – – (220) 34,172 - - - - - - - - 11,025 4,122 – (220) 14,927 - - - - - - - - 19,245	Interests in leasehold land held for own use under Investment operating Sub-total property leases RMB’000 RMB’000 RMB’000 119,924 1,638 25,910 20,702 – – 55,312 – – (1,846) – – 194,092 1,638 25,910 - - - - - - - - - - - - - - - - - - - - - - - - 43,378 141 1,749 10,268 41 518 (1,806) – – 51,840 182 2,267 - - - - - - - - - - - - - - - - - - - - - - - - 142,252 1,456 23,643 194,092 1,638 25,910 4,299 – – 253 – – (3,224) 6,492 (3,268) (266) – – 195,154 8,130 22,642 - - - - - - - - - - - - - - - - - - - - - - - - 51,840 182 2,267 13,634 203 454 (1,955) 2,206 (251) (261) – – 63,258 2,591 2,470 - - - - - - - - - - - - - - - - - - - - - - - - 131,896 5,539 20,172	Total RMB’000 147,472 20,702 55,312 (1,846)
					221,640 - - - - - - - - 45,268 10,827 (1,806)
					54,289 - - - - - - - -
					167,351

					221,640 4,299 253 – (266)
					225,926 - - - - - - - - 54,289 14,291 – (261)
					68,319 - - - - - - - -
					157,607

– 146 –

APPENDIX II

ACCOUNTANTS’ REPORT ON THE HHC GROUP

Cost: At 1 January 2005 Additions Transfer from construction in progress_(note 11)_ Disposals At 31 December 2005 Accumulated depreciation: At 1 January 2005 Charge for the year Written back on disposals At 31 December 2005 Net book value: At 31 December 2005 Cost: At 1 January 2006 Additions Disposals At 31 May 2006 Accumulated depreciation: At 1 January 2006 Charge for the period Written back on disposals At 31 May 2006 Net book value: At 31 May 2006	Buildings RMB’000 60,011 – – (257) 59,754 - - - - - - - - 18,908 2,046 (216) 20,738 - - - - - - - - 39,016 59,754 – – 59,754 - - - - - - - - 20,738 850 – 21,588 - - - - - - - - 38,166	Plant and machinery RMB’000 100,971 9,374 122 (1,603) 108,864 - - - - - - - - 29,423 7,726 (1,541) 35,608 - - - - - - - - 73,256 108,864 317 – 109,181 - - - - - - - - 35,608 3,686 – 39,294 - - - - - - - - 69,887	Office equipment and vehicles RMB’000 34,172 2,101 – (574) 35,699 - - - - - - - - 14,927 4,736 (559) 19,104 - - - - - - - - 16,595 35,699 511 (125) 36,085 - - - - - - - - 19,104 1,730 (113) 20,721 - - - - - - - - 15,364	Interests in leasehold land held for own use under Investment operating Sub-total property leases RMB’000 RMB’000 RMB’000 195,154 8,130 22,642 11,475 – – 122 – – (2,434) (24) – 204,317 8,106 22,642 - - - - - - - - - - - - - - - - - - - - - - - - 63,258 2,591 2,470 14,508 203 453 (2,316) (3) – 75,450 2,791 2,923 - - - - - - - - - - - - - - - - - - - - - - - - 128,867 5,315 19,719 204,317 8,106 22,642 828 – – (125) – – 205,020 8,106 22,642 - - - - - - - - - - - - - - - - - - - - - - - - 75,450 2,791 2,923 6,266 84 189 (113) – – 81,603 2,875 3,112 - - - - - - - - - - - - - - - - - - - - - - - - 123,417 5,231 19,530	Total RMB’000 225,926 11,475 122 (2,458)
					235,065 - - - - - - - - 68,319 15,164 (2,319)
					81,164 - - - - - - - -
					153,901

					235,065 828 (125)
					235,768 - - - - - - - - 81,164 6,539 (113)
					87,590 - - - - - - - -
					148,178

– 147 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

(a) The interests in leasehold land and buildings held for own use and investment properties under operating leases are held on a medium-term lease of 50 years in the PRC.
(b) The HHC Group leases out investment properties under operating leases. The leases typically run for an initial period of thirty years with three months’ notice for termination. Lease payments are usually increased every three to ten years to reflect market rentals. None of the leases includes contingent rentals.

All properties held under operating leases that would otherwise meet the definition of investment property are classified as investment property.

The HHC Group’s total future minimum lease payments under non-cancellable operating leases are receivable as follows:

Within 1 year	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 – 125 125	As at 31 May 2006 RMB’000 125

All investment properties of the HHC Group were stated in the balance sheet at cost less accumulated depreciation and impairment losses. The fair value of the investment properties as at 31 December 2003, 2004, 2005 and 31 May 2006, as determined by the Directors of HHC by reference to market transactions in comparable properties, is RMB5,776,000, RMB7,309,000, RMB7,810,000 and RMB8,240,000.

11 Construction in progress

At 1 January Additions Transfer to fixed assets_(note 10)_ At 31 December/31 May	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 38,308 253 107 17,257 107 15 (55,312) (253) (122) 253 107 –	As at 31 May 2006 RMB’000 – 189 –
		189

Construction in progress comprises costs incurred on buildings and plant and equipment not yet completed at the respective balance sheet dates.

– 148 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

12 Other financial assets

Held-to-maturity debt securities – Unlisted Available-for-sale equity securities – Listed in the PRC Market value of listed securities	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 3,000 – – 1,698 981 977 4,698 981 977 1,698 981 977	As at 31 May 2006 RMB’000 – 1,579
		1,579

		1,579

13 Inventories

(a) Inventories in the combined balance sheets comprise:

Raw materials Work in progress Finished goods Spare parts and consumables	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 12,553 26,080 29,408 5,124 5,351 13,878 14,944 10,322 11,295 1,497 2,344 3,407 34,118 44,097 57,988	As at 31 May 2006 RMB’000 25,368 11,306 12,238 3,395
		52,307

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

Cost of inventories sold	Years 2003 RMB’000 171,265	ended 31 December 2004 2005 RMB’000 RMB’000 184,543 188,797	Five months ended 31 May 2005 2006 RMB’000 RMB’000 (unaudited) 78,747 82,065

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

14 Trade and bills receivables

All of the trade and bills receivables are expected to be recovered within one year. An ageing analysis of trade and bills receivables (net of impairment losses for bad and doubtful debts) is as follows:

Within 3 months Over 3 months but less than 6 months Over 6 months but less than 1 year Over 1 year	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 17,325 19,152 26,099 692 1,443 1,371 618 2,548 2,602 2,721 942 729 21,356 24,085 30,801	As at 31 May 2006 RMB’000 36,716 2,714 883 1,895
		42,208

Subject to negotiation, credit is generally only available for major customers with well-established trading records. The HHC Group allows an average credit period of 30 to 90 days to its trade customers.

15 Deposits, prepayments and other receivables

All of the deposits, prepayments and other receivables are expected to be recovered within one year.

16 Cash and cash equivalents

Deposits with banks Cash at bank and in hand Cash and cash equivalents in the combined balance sheets	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 25,364 54,515 57,299 63,584 79,779 74,833 88,948 134,294 132,132	As at 31 May 2006 RMB’000 57,299 48,099
		105,398

All cash and bank balances, which are denominated in Renminbi, are placed with banks in the PRC. Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.

17 Bank loans

The bank loans as at 31 December 2003, 2004, 2005 and 31 May 2006 are unsecured, bear interest at 5.31%, 5.31%, 5.58% and 5.58% respectively and are repayable on demand.

18 Trade payables

The HHC Group is generally granted credit terms of 1 month to 3 months. Ageing of trade payables of the HHC Group is all within one year or on demand.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

19 Amount due to ultimate holding company

Amount due to ultimate holding company is payable to Foshan Development (Holdings) Limited, which is unsecured, interest-free and repayable on demand.

Included in the amount due to ultimate holding company is the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

Hong Kong dollars	As at 31 December 2003 2004 2005 ’000 ’000 ’000 58,828 58,828 58,828	As at 31 May 2006 ’000 58,828

20 Income tax in the combined balance sheets

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

Provision for PRC Enterprise Income Tax	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 2,535 3,163 3,620	As at 31 May 2006 RMB’000 2,381

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

(b) Deferred tax assets and liabilities recognised:

The components of deferred tax (assets)/liabilities recognised in the combined balance sheets and the movements during the year/period are as follows:

Deferred tax arising from: At 1 January 2003 (Credited)/charged to profit or loss Credited to reserves At 31 December 2003 At 1 January 2004 Credited to profit or loss Credited to reserves At 31 December 2004 At 1 January 2005 Credited to profit or loss At 31 December 2005 At 1 January 2006 Charged/(credited) to profit or loss Charged to reserves At 31 May 2006 Represented by: Deferred tax asset Deferred tax liability	Impairment loss for bad and Available- doubtful for-sale debts securities Others RMB’000 RMB’000 RMB’000 (144) 318 554 (75) – 606 – (127) – (219) 191 1,160 (219) 191 1,160 (7) – (88) – (87) – (226) 104 1,072 (226) 104 1,072 (511) – (196) (737) 104 876 (737) 104 876 9 – (86) – 72 – (728) 176 790 As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 (219) (226) (737) 1,351 1,176 980 1,132 950 243	Total RMB’000 728 531 (127) 1,132 1,132 (95) (87) 950 950 (707) 243 243 (77) 72 238 As at 31 May 2006 RMB’000 (728) 966 238

– 152 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

21 Employee retirement benefits

(a) Defined contribution retirement plans

Pursuant to the relevant labour rules and regulations in the PRC, the PRC subsidiaries of the HHC Group participate in defined contribution retirement schemes (the “Schemes”) organised by the PRC municipal government authorities whereby the subsidiaries are required to contribute to the Schemes to fund the retirement benefits of the eligible employees. Contributions made to the Schemes are calculated based on 23% and 19% of the payroll of the eligible employees for the period from 1 January 2003 to 30 June 2004 and from 1 July 2004 to 31 May 2006 respectively. The local government authorities are responsible for the entire pension obligations payable to the retired employees. The HHC Group is not liable to any retirement benefits payment in the PRC beyond the contributions to the Schemes.

22 Share capital

HHC was incorporated after 31 May 2006 and became the holding company of HTI and HII on 12 July 2006.

For the purpose of this report, share capital in the combined balance sheets as at 31 December 2003, 2004, 2005 and 31 May 2006 represents the aggregate amount of the nominal value of the issued share capital of HTI and HII.

23 Distributable reserve

HHC was incorporated on 7 July 2006. Accordingly, there was no reserve available for distribution to shareholders as at 31 May 2006.

On the basis set out in Section A above, the aggregate amounts of distributable reserve at 31 December 2003, 2004, 2005 and 31 May 2006 of the companies comprising the HHC Group were RMB22,047,000, RMB44,366,000, RMB35,706,000 and RMB17,151,000 respectively.

24 Material related party transactions

Except for the related party information disclosed in notes 7 ,8 and 19 in the Financial Information, there are no other significant related party transactions.

25 Financial instruments

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

(a) Credit risk

The HHC Group’s credit risk is primarily attributable to trade and bills receivables. Credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 30 to 90 days from the date of billing. Debtors with balances that are more than three months overdue are requested to settle all outstanding balances before any further credit is granted. Normally, the HHC Group does not obtain collateral from customers.

– 153 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

Investments are normally made in liquid securities and with counterparties that have a credit rating equal to or better than the HHC Group. Given their high credit ratings, management does not expect any investment counterparty to fail to meet its obligations.

At the balance sheet date, the HHC Group has a certain concentration of credit risk as 14%, 15%, 17%, 9% and 31%, 43%, 41% and 24% of the total trade and bills receivables were due from the HHC Group’s largest customer and the five largest customers as at 31 December 2003, 2004, 2005 and 31 May 2006 respectively.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the combined balance sheets. The HHC Group does not provide any other guarantees which would expose the HHC Group to credit risk.

(b) Liquidity risk

Individual operating entities within the HHC Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by HHC’s board when the borrowings exceed certain predetermined levels of authority. The HHC Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

(c) Interest rate risk

The interest rates and maturity information of the HHC Group’s bank loans are disclosed in note 17.

(d) Foreign currency risk

As most of the HHC Group’s monetary assets and liabilities are denominated in Renminbi and the HHC Group conducts its business transactions principally in Renminbi, the exchange rate risk of the HHC Group is not significant and the HHC Group does not employ any financial instruments for hedging purposes.

(e) Fair values

All financial assets and liabilities are carried at amounts not materially different from their fair values as at 31 December 2003, 2004, 2005 and 31 May 2006.

(f) Business risk

The HHC Group is dependent on specific herb materials for its production of certain pharmaceutical products. At the balance sheet date, the HHC Group has a certain concentration of business risk as 12%, 13%, 16% and 10% of the total purchase from the HHC Group’s five largest suppliers during 31 December 2003, 2004, 2005 and 31 May 2006 respectively. If the HHC Group could not purchase adequate quantity of specific herb materials from these suppliers and failed to identify alternative sources, its results and financial position could be adversely affected.

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ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

26 Capital commitments

Capital commitments outstanding at 31 December 2003, 2004, 2005 and 31 May 2006 not provided for in the Financial Information were as follows:

Contracted for Authorised but not contracted for	As at 31 December 2003 2004 2005 RMB’000 RMB’000 RMB’000 – – – 15,096 8,792 12,955 15,096 8,792 12,955	As at 31 May 2006 RMB’000 – 12,738
		12,738

27 Ultimate holding company

The Directors consider the ultimate holding company of HHC as at 31 May 2006 to be Foshan Development (Holdings) Limited, which is incorporated in the British Virgin Islands.

28 Significant accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

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

(a) Impairments

If circumstances indicate that the carrying value of fixed assets and receivables may not be recoverable, the assets may be considered “impaired”, and an impairment loss may be recognised in accordance with HKAS 36 “Impairment of assets”. The carrying amounts of fixed assets and receivables are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount.

The recoverable amount of fixed assets is the greater of the net selling price and the value in use.

The recoverable amount of receivables is the estimated future cash flows discounted at the current market rate of return of similar assets.

– 155 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

It is difficult to precisely estimate selling price because quoted market prices for the HHC Group’s assets are not readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price and amount of operating costs. The HHC Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price and amount of operating costs.

(b) Write down of inventories

The HHC Group determines the write-down for obsolescence of inventories. These estimates are based on the current market condition and the historical experience and selling goods of similar nature. It could change significantly as a result of change in market condition.

29 HHC’s balance sheet

On the basis set out in Section A above, the net assets of HHC at 31 May 2006 amounted to RMB51,923,000 and were represented by the investments in subsidiaries.

30 Financial Information under the PRC GAAP

Reconciliation of total equity of combined balance sheets at 1 January 2003 (date of transition to HKFRSs) and 31 December 2003:

Total equity under the PRC GAAP Adoption of HKAS 39 “Financial instruments: Recognition and measurement” (“HKAS 39”), net of deferred tax_(note)_ Total equity under HKFRSs	1 January 31 December 2003 2003 RMB’000 RMB’000 155,625 188,125 2,324 1,396 157,949 189,521	1 January 31 December 2003 2003 RMB’000 RMB’000 155,625 188,125 2,324 1,396 157,949 189,521
		189,521

Note: This represented the recognition of fair value of available-for-sale equity securities to fair value reserve after adoption of HKAS 39, net of a deferred tax liability.

– 156 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

31 Possible impact of amendments, new standards and interpretations issued but not yet effective for the relevant period

Up to the date of issue of this Accountants’ Report, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the relevant period and which have not been adopted in this Accountants’ Report.

Of these developments, the following relate to matters that may be relevant to the HHC Group’s operations and financial statements:

Effective for accounting periods beginning on or after

HKFRS 7, Financial instruments: disclosures 1 January 2007

Amendment to HKAS 1, Presentation of financial statements: capital disclosures 1 January 2007

The HHC Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of them may result in new or amended disclosures, it is unlikely to have a significant impact on the HHC Group’s results of operations and financial position.

D DIRECTORS’ REMUNERATION AND SENIOR MANAGEMENT’S REMUNERATIONS

Save as disclosed in Section C note 7 and note 8 above, no remuneration has been paid or is payable in respect of the relevant period by HHC or any of the companies now comprising the HHC Group to the Directors. Under the arrangement presently in force, the estimated aggregate amount of the Directors’ emoluments payable for the year ending 31 December 2006 is approximately RMB300,000 excluding management bonuses which are payable at HHC’s discretion.

E SUBSEQUENT EVENTS

The following significant events took place subsequent to 31 May 2006:

1 Group reorganisation

On 12 July 2006, HHC paid US$53 to Foshan Development (Holdings) Limited, which is legally wholly owned by Mr. He Haochang, to acquire the entire issued share capital of HTI and HII. The HHC Group then completed the Reorganisation which rationalised the HHC Group’s structure in preparation for the acquisition. As a result of the Reorganisation, HHC became the holding company of the HHC Group.

– 157 –

ACCOUNTANTS’ REPORT ON THE HHC GROUP

APPENDIX II

2 Valuation of properties

For the purpose of the Acquisition, the properties, leasehold land and machineries of the HHC Group were revalued as at 30 June 2006 by Sallmanns (Far East) Limited, an independent firm of professional surveyors.

The valuation gave rise to a revaluation surplus of approximately RMB34,262,000 from the carrying amount of the properties, leasehold land and machineries at that date. The revaluation surplus will be incorporated in the consolidated financial statements of the Company for the year ending 31 December 2006 and an additional depreciation of approximately RMB1,973,000 per annum will be incurred. Details of the valuation are set in the Valuation Report presented in Appendix IV to the Circular.

3 Dividend distribution

Subsequent to 31 May 2006 and up to the date of this report, distribution totalling RMB28,000,000 was declared by the subsidiaries of HHC.

4 Employee benefits

Pursuant to Administrative Provisions of the PRC for the Labour Management of Sino-Foreign Joint Ventures, DZH and FLX are required to compensate their employees in connection with certain employee benefits upon the completion of Acquisition. Pursuant to the Agreement for the Acquisition entered into by the Company and Foshan Development (Holdings) Limited, Foshan Development (Holdings) Limited has undertaken to indemnify the HHC Group in respect of such employee compensation.

F SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by HHC or any of the companies now comprising the HHC Group in respect of any period subsequent to 31 May 2006.

Yours faithfully, KPMG

Certified Public Accountants

Hong Kong

– 158 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

For illustrative purpose only, set out below is the unaudited pro forma financial information of the Group after completion of the Acquisition of HHC. The unaudited pro forma financial information is prepared in accordance with Paragraph 4.29(1) and Paragraph 14.69(4)(a)(ii) of the Listing Rules to illustrate the effect of the Acquisition on the Group’s financial information.

(A) UNAUDITED PRO FORMA FINANCIAL INFORMATION

Introduction to the unaudited pro forma financial information

The accompanying unaudited pro forma financial information of the Enlarged Group, including the unaudited pro forma combined income statement and unaudited pro forma combined cash flow statement for the year ended 31 December 2005, which gives effect to the Acquisition as if the Acquisition had been completed on 1 January 2005, and the unaudited pro forma balance sheet prepared based on the consolidated balance sheet of the Group as at 30 June 2006 and the combined balance sheet of the HHC Group as at 31 May 2006, which gives effect to the Acquisition as if the Acquisition had been completed on 30 June 2006 (the “Unaudited Pro Forma Financial Information”).

The unaudited pro forma combined income statement and unaudited pro forma combined cash flow statement of the Enlarged Group is prepared based upon the audited consolidated income statement and audited consolidated cash flow statement of the Group for the year ended 31 December 2005 as set out in Appendix I to this circular and the audited combined income statement and audited combined cash flow statement of the HHC Group for the year ended 31 December 2005 as set out in Appendix II to this circular after incorporating the unaudited pro forma adjustments described in the accompanying notes. The unaudited pro forma combined balance sheet of the Enlarged Group is prepared based upon the unaudited consolidated balance sheet of the Group as at 30 June 2006 as set out in Appendix I to this circular and the audited combined balance sheet of the HHC Group as at 31 May 2006 as set out in Appendix II after incorporating the unaudited pro forma adjustments described in the accompanying notes. A narrative description of the unaudited pro forma adjustments of the Acquisition that are (i) directly attributable to the transactions concerned and not relating to future events or decisions; (ii) expected to have a continuing impact on the Enlarged Group; and (iii) factually supportable, are summarised in the accompanying notes.

The Unaudited Pro Forma Financial Information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. As a result of these assumptions, estimates and uncertainties, the accompanying Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to describe the actual financial position of the Enlarged Group that would have been attained had the Acquisition been completed on 30 June 2006, or the results and cash flows of the Enlarged Group that would have been attained had the Acquisition been completed on 1 January 2005. Further, the accompanying Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position, results or cash flows.

– 159 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

The Unaudited Pro Forma Financial Information of the Enlarged Group should be read in conjunction with the financial information of the Group as set out in Appendix I to this circular, the financial information of the HHC Group as set out in Appendix II to this circular and other financial information included elsewhere in this circular.

1 Unaudited pro forma combined income statement for the year ended 31 December 2005

Turnover Cost of sales Gross (loss)/profit Other revenue Other net income Selling expenses Administrative expenses Impairment losses (Loss)/profit from operations Finance costs (Loss)/profit before taxation Income tax (Loss)/profit for the year Attributable to: Equity shareholders of the Company Minority interests (Loss)/profit for the year	The Group HK$’000 824,038 (926,106) (102,068) 13,299 5,082 – (24,455) (698,661) (806,803) (18,555) (825,358) 18,195 (807,163) (762,579) (44,584) (807,163)	The HHC Group HK$’000 320,978 (179,192) 141,786 2,376 88 (38,527) (27,589) (5,183) 72,951 (654) 72,297 (8,897) 63,400 32,164 31,236 63,400	Pro forma Pro forma the Enlarged combined Pro forma adjustments Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 4(b)) (Note 4(d)) (Note 4(e)) 1,145,016 1,145,016 (1,105,298) (11,944) (1,117,242) 39,718 27,774 15,675 15,675 5,170 5,170 (38,527) (38,527) (52,044) (19,295) (71,339) (703,844) (703,844) (733,852) (765,091) (19,209) (24,206) (43,415) (753,061) (808,506) 9,298 9,583 18,881 (743,763) (789,625) (730,415) (24,206) (15,932) 6,963 (763,590) (13,348) (15,307) 2,620 (26,035) (743,763) (789,625)

See accompanying notes to the Unaudited Pro Forma Financial Information of the Enlarged Group.

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APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

2 Unaudited pro forma combined balance sheet

Non-current assets Fixed assets Construction in progress Prepayment for planned maintenance Goodwill Intangible assets Deferred tax assets Other financial assets Current assets Inventories Trade and other receivables Amount due from the HHC Group Cash and cash equivalents Current liabilities Bank loans Dividend payable Trade and other payables Provision for staff welfare Amount due to related company Amount due to the Group Current portion of other loans Current taxation	The Group as at 30 June 2006 HK$’000 755,795 – 6,543 – – 83,345 – 845,683 ----------- 28,075 101,085 – 189,080 318,240 ----------- (81,490) – (3,669) (10) (265,676) – (79,857) – (430,702) -----------	The HHC Group as at 31 May 2006 HK$’000 143,264 183 – – – – 1,527 144,974 ----------- 50,572 47,379 – 101,903 199,854 ----------- (5,801) (83,620) (39,191) – – (58,830) – (2,302) (189,744) -----------	Pro forma combined Pro forma adjustments HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 4(a)) (Note 4(c)) (Note 4(e)) (Note 4(f)) 899,059 33,280 183 6,543 – 111,329 – 113,776 83,345 1,527 990,657 ----------- 78,647 10,173 148,464 – 58,830 (58,830) 290,983 518,094 ----------- (87,291) (83,620) (42,860) (62,742) (10) (265,676) (58,830) 58,830 (79,857) (2,302) (620,446) -----------	Pro forma the Enlarged Group HK$’000 932,339 183 6,543 111,329 113,776 83,345 1,527 1,249,042 ----------- 88,820 148,464 – 290,983 528,267 ----------- (87,291) (83,620) (105,602) (10) (265,676) – (79,857) (2,302) (624,358) -----------

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APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Net current (liabilities)/ assets Total assets less current liabilities Non-current liabilities Bank loans Other loans Convertible notes Deferred tax liabilities NET ASSETS Capital and reserves Share capital Reserves Total equity attributable to equity shareholders of the Company Minority interests TOTAL EQUITY	The Group as at 30 June 2006 HK$’000 (112,462) ----------- 733,221 ----------- (69,848) (219,778) – – (289,626) ----------- 443,595 83,015 274,301 357,316 86,279 443,595	The HHC Group at 31 May 2006 HK$’000 10,110 ----------- 155,084 ----------- – – – (230) (230) ----------- 154,854 – 50,202 50,202 104,652 154,854	Pro forma combined Pro forma adjustments HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 4(a)) (Note 4(c)) (Note 4(e)) (Note 4(f)) (102,352) ----------- 888,305 ----------- (69,848) (219,778) – (219,658) (230) (35,584) (289,856) ----------- 598,449 83,015 324,503 (50,202) 407,518 190,931 77,042 (17,436) 598,449	Pro forma the Enlarged Group HK$’000 (96,091) ----------- 1,152,951 ----------- (69,848) (219,778) (219,658) (35,814) (545,098) ----------- 607,853 83,015 274,301 357,316 250,537 607,853

See accompanying notes to the Unaudited Pro Forma Financial Information of the Enlarged Group.

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APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

3 Unaudited pro forma condensed combined cash flow statement for the year ended 31 December 2005

Net cash generated from operating activities Net cash used in investing activities Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January 2005 Effect of foreign exchange rate changes Cash and cash equivalents at 31 December 2005	The Group HK$’000 68,139 (5,099) (28,958) 34,082 98,258 – 132,340	The Pro forma HHC Pro forma Pro forma the Enlarged Group combined adjustment Group HK$’000 HK$’000 HK$’000 HK$’000 (Note 4(b)) 59,873 128,012 128,012 (9,041) (14,140) (14,140) (52,574) (81,532) (8,472) (90,004) (1,742) 32,340 23,868 127,462 225,720 225,720 1,220 1,220 1,220 126,940 259,280 250,808

See accompanying notes to the Unaudited Pro Forma Financial Information of the Enlarged Group.

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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

4 Notes to the Unaudited Pro Forma Financial Information

(a) Funding of the Acquisition

Pursuant to the agreement dated 22 August 2006 entered into between the Company, Foshan Development (Holdings) Limited and Foshan Development Company Limited (“FDC”), the aggregate consideration payable by the Company for the proposed acquisition of the entire equity interest in HHC and amount due from HHC to Foshan Development (Holdings) Limited is HK$282,400,000, to be satisfied by way of issuance of the convertible notes of HK$282,400,000 with interest rate of 3% per annum by the Company to FDC. The unaudited pro forma adjustment reflects the recognition of the non-current liability portion of HK$219,658,000 and current derivative financial liability portion of HK$62,742,000 as if the convertible notes were issued on 30 June 2006. The derivative financial liability will be remeasured at each future balance sheet date and any gain or loss on remeasurement to fair value will be charged immediately to profit or loss.

(b) Finance costs

The unaudited pro forma adjustment reflects the estimated finance costs of HK$24,206,000 in the unaudited pro forma combined income statement, representing:

(i) the estimated finance costs of HK$8,472,000 incurred for the year ended 31 December 2005, as if the convertible notes of HK$282,400,000 as mentioned in note 4(a) had been issued by the Company on 1 January 2005 with interest rate of 3% per annum. This unaudited pro forma adjustment will have continuing income statement and cash flow effect on the Enlarged Group and the final amount of this adjustment will be determined according to the terms of the convertible notes; and
(ii) the remeasurement of the liability portion of the convertible notes based on the effective interest rate method subsequent to inception of HK$15,734,000 incurred for the year ended 31 December 2005, as if the convertible notes as mentioned in note 4(a) were issued on 1 January 2005, and based on the assumption that no conversion had taken place during the year. Based on a valuation report issued by Sallmanns (Far East) Limited, a professional corporate valuation and consultancy firm, on 8 September 2006 in connection with the valuation of the convertible notes mentioned in note 4(a), the discount rate adopted in the remeasurement of the non-current liability portion of the convertible notes is 8% and it is determined, on the same basis throughout the duration of the convertible notes, with reference to the average yield of Exchange Fund Notes issued by Hong Kong Monetary Authority and specific yield spread of the convertible notes. This unaudited pro forma adjustment will have continuing income statement effect on the Enlarged Group, and the actual amount of finance costs to be incurred in the future periods will vary according to the amount and timing of convertible notes being converted into shares of the Company, the repayment terms of the convertible notes and the applicable interest rate.

The above unaudited pro forma adjustment reflects the decrease in the net profit for the year of HK$24,206,000.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

(c) Excess of consideration of the Acquisition over the net fair value of the acquired net assets

Upon completion of the Acquisition, identifiable assets and liabilities of the HHC Group will be accounted for in the consolidated financial statements of the Enlarged Group at their fair value under the purchase method of accounting. The identifiable assets and liabilities of the HHC Group are recorded in the unaudited pro forma combined balance sheet of the Enlarged Group at their fair value as if the Acquisition was completed on 30 June 2006. The fixed assets, intangible assets and inventories increase by approximately HK$33,280,000, HK$113,776,000 and HK$10,173,000 respectively as a result of the fair value adjustments on the carrying amount of the relevant assets. The amount due from the HHC Group increases by HK$58,830,000 upon the Acquisition.

The amount of excess of consideration of the Acquisition over the net fair value of the acquired net assets of HK$111,329,000 is recognised as goodwill in the unaudited pro forma combined balance sheet as if the Acquisition was completed on 30 June 2006.

The above fair value adjustments on fixed assets and intangible assets are determined by the directors of the Company and the fair value adjustment on inventories is based on the preliminary assessments made by the directors of the Company during the negotiation of the Acquisition.

These unaudited pro forma financial information adjustments will not have continuing income statement and cash flow effect on the Enlarged Group, however the final amounts of this adjustment will be determined on the completion date of the Acquisition which may be different from the amounts presented in this Appendix.

The above unaudited pro forma adjustment reflects the increase in the net assets of HK$327,388,000, of which HK$77,042,000 is attributable to the minority interests.

(d) Cost of inventories, depreciation and amortisation

As a result of the fair value adjustments mentioned in note 4(c) above, additional cost of inventories, additional annual depreciation on fixed assets and additional annual amortisation on intangible assets calculated in accordance with the Group’s accounting policies and over each individual item’s remaining estimated useful lives, will be approximately HK$10,173,000, HK$1,919,000 and HK$19,147,000 respectively. The unaudited pro forma adjustment reflects the additional cost of sales, depreciation and amortisation as if the Acquisition had taken place on 1 January 2005. This unaudited pro forma adjustment will have continuing income statement but no cash flow effect on the Enlarged Group, and the final amount of this adjustment will be determined on the completion date of the Acquisition and the fair value adjustments as determined by the management of the Company which may be different from the amounts presented in this Appendix.

The above unaudited pro forma adjustment reflects the decrease in the net profit for the year of HK$31,239,000, of which HK$15,307,000 is attributable to the minority interests.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

(e) Deferred taxation

As mentioned in note 4(a) to 4(d) above, upon completion of the Acquisition, convertible notes issued by the Company and the identifiable assets and liabilities of the HHC Group will be accounted for in the consolidated financial statements of the Enlarged Group at their fair values. According to the relevant of Hong Kong and PRC tax rules and regulations, the original carrying amounts of the convertible notes of the Company and fixed assets, intangible assets and inventories of the HHC Group will continue to serve as the tax base for future years. Accordingly, the unaudited pro forma adjustment reflects the increase in deferred tax liabilities of HK$35,584,000 as a result of the fair value adjustments on the convertible notes and related derivative financial liability of the Company and the fixed assets, intangible assets and inventories of the HHC Group as if the Acquisition had taken place on 30 June 2006, of which HK$17,436,000 is attributable to the minority interests. The tax rates applicable for the calculation of the deferred tax liabilities range from 12% to 24%.

The related deferred taxation effect of HK$4,236,000 and HK$5,347,000 on the finance costs as mentioned in note 4(b)(ii) and on the additional cost of inventories, depreciation and amortisation as mentioned in note 4(d) respectively are reflected as an adjustment in the unaudited pro forma income statement as if the Acquisition had taken place on 1 January 2005. This unaudited pro forma adjustment will have continuing income statement but no cash flow effect on the Enlarged Group, and the final amount of this adjustment will be determined on the completion date of the Acquisition which may different from the amount presented in this Appendix.

The above unaudited pro forma adjustment reflects the decrease in the net assets of HK$35,584,000, of which HK$17,436,000 is attributable to the minority interests; and the reduction in loss for the year of HK$9,583,000, of which HK$2,620,000 is attributable to the minority interests.

(f) Elimination of inter-company balances

The unaudited pro forma adjustment reflects the elimination of inter-company balances of the Enlarged Group as at 30 June 2006.

(g) Translation of RMB into HK$ is made in the Unaudited Pro Forma Financial Information of the Enlarged Group at the average rate of HK$1 = RMB1.05 for the preparation of unaudited pro forma combined income statement and combined cash flow statement and the closing rate of HK$1 = RMB1.03 for the preparation of unaudited pro forma combined balance sheet.

– 166 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the text of a comfort letter, prepared from the sole purpose of inclusion in this circular, received from the independent reporting accountants, KPMG, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix V, a copy of the following comfort letter is available for inspection.

(B) COMFORT LETTER ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION

8th Floor Prince’s Building 10 Chater Road Central Hong Kong

15 September 2006

The Directors

Wing Shan International Limited

Dear Sirs,

We report on the unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of the Enlarged Group set out in Section A of Appendix III to the circular of Wing Shan International Limited (the “Company”, together with its subsidiaries are referred to as the “Group”) dated 15 September 2006 which has been prepared by the directors of the Company solely for illustrative purposes to provide information about how the proposed acquisition of the entire equity interest in Hensil Holdings Company Limited (“HHC”, together with its subsidiaries, the “HHC Group”), might have affected the audited consolidated income statement and audited consolidated cash flow statement of the Group for the year ended 31 December 2005 and the unaudited consolidated balance sheet of the Group as at 30 June 2006. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in the section headed “Introduction to the unaudited pro forma financial information” and notes to the Unaudited Pro Forma Financial Information of Section A of this Appendix.

Responsibilities

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

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

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

Basis of opinion

We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Report on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

Our work did not constitute an audit or review made in accordance with Hong Kong Standards on Auditing or Hong Kong Standards on Review Engagements issued by the HKICPA, and accordingly, we do not express any such audit or review assurance on the Unaudited Pro Forma Financial Information.

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

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and because of its hypothetical nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

the results and cash flows of the Enlarged Group for the year ended 31 December 2005 or any future periods; or
the financial position of the Enlarged Group as at 30 June 2006 or any future date.

Opinion

In our opinion:

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

Yours faithfully, KPMG Certified Public Accountants Hong Kong

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX III

(C) INDEBTEDNESS

Borrowings

At the close of business on 31 July 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding bank and other loans of approximately HK$468,785,000. As at 31 July 2006, bank loans amounting to approximately HK$150,827,000 were secured by charges over certain plant and machineries with an aggregate carrying value of approximately HK$666,837,000.

Contingent liability

Shakou JV, a subsidiary of the Group, had a syndicated loan denominated in US$ which was fully repaid on 23 March 1998. Under the loan agreement, Shakou JV is required to bear any PRC tax payable in respect of interest paid to the lenders. The estimated tax which may be payable is approximately HK$43,000,000, excluding penalties. By a letter dated 17 March 1998, Shakou JV’s former ultimate holding company, FDC, agreed to bear any tax liabilities, including penalties, if any, which may arise from the interest paid on the syndicated loan.

Disclaimers

Save as aforesaid, the Enlarged Group did not have, at the close of business on 31 July 2006, outstanding liabilities or any mortgages, charges, debentures, loan capital, bank overdrafts, liabilities under acceptance or other similar indebtedness, hire purchase of finance lease obligations or any guarantees or other material contingent liabilities.

The Directors have confirmed that there have been no material changes in the indebtedness and contingent liability of the Enlarged Group since 31 July 2006, up to and including the Latest Practicable Date.

(D) WORKING CAPITAL

The Directors are satisfied after due and careful enquiry that after taking into account the existing banking facilities available and the existing cash and bank balances, the Enlarged Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of publication of this circular, in the absence of unforeseeable circumstances.

– 169 –

PROPERTY VALUATION

APPENDIX IV

The following is the text of a letter, summary of values and valuation certificates, prepared for the purpose of incorporation in this circular, received from Sallmanns (Far East) Limited, an independent valuer, in connection with its valuation as at 30 June 2006 of the property interests of the Enlarged Group.

Sallmanns

Corporate valuation and consultancy

www.sallmanns.com

22nd Floor Siu On Centre 188 Lockhart Road Wanchai, Hong Kong Tel : (852) 2169 6000 Fax : (852) 2528 5079

15 September 2006

The Board of Directors Wing Shan International Limited Rooms 2801-2805 China Insurance Group Building 141 Des Voeux Road Central Hong Kong

Dear Sirs,

Wing Shan International Limited (the “Company”, together with its subsidiaries, hereinafter referred to as the “Group”) intends to acquire from Foshan Development (Holdings) Limited its wholly-owned subsidiary, Hensil Holdings Company Limited (“HHC”). HHC holds 51% interests in each of its subsidiaries, Foshan Dezhong Pharmaceutical Co., Ltd. (“DZH”) and Foshan Feng Liao Xing Pharmaceutical Co., Ltd. (“FLX”) in the People’s Republic of China (the “PRC”). In accordance with your instructions to value the properties of HHC and its subsidiaries (hereinafter together referred to as the “HHC Group”) and the Group, we confirm that we have carried out physical inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the capital values of the property interests to be acquired and the property interest currently held by the Group as at 30 June 2006 (the “date of valuation”).

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

We have valued the property interests in property nos. 3 to 5 in Group I by the direct comparison approach assuming sale of the properties in their existing state with the benefit of immediate vacant possession and by making reference to comparable sale transactions as available in the relevant market.

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PROPERTY VALUATION

APPENDIX IV

Where, due to the nature of the buildings and structures of the property in the PRC, there are no market sales comparables readily available, the property interests in property nos. 1, 2 and 6 in Group I and property no. 11 in Group III have been valued on the basis of their depreciated replacement cost.

Depreciated replacement cost is defined as “the current cost of replacement (reproduction) of a property less deductions for physical deterioration and all relevant forms of obsolescence and optimization.” It is based on an estimate of the Market Value for the existing use of the land, plus the current cost of replacement (reproduction) of the improvements less deductions for physical deterioration and all relevant forms of obsolescence and optimization. The depreciated replacement costs of the property interests are subject to adequate potential profitability of the concerned business.

In valuing the property interests in Group II, we have adopted the investment method by capitalising the net rental income of the property derived from the existing tenancy with due allowance for the reversionary value of the property.

Our valuations have been made on the assumption that the seller sells the property interests in the market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement, which could serve to affect the values of the property interests.

No allowance has been made in our report for any charges, mortgages or amounts owing on any of the property interests valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions and outgoings of an onerous nature, which could affect their values.

In valuing the property interests, we have complied with all the requirements contained in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities of The Stock Exchange of Hong Kong Limited; the RICS Appraisal and Valuation Standards (5th Edition May 2003) published by the Royal Institution of Chartered Surveyors; and the HKIS Valuation Standards on Properties (1st Edition January 2005) published by the Hong Kong Institute of Surveyors.

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

We have been shown copies of various title documents including State-owned Land Use Rights Certificates, Real Estate Title Certificates and official plans relating to the property interests located in the PRC and have made relevant enquiries. Where possible, we have examined the original documents to verify the existing titles to the property interests in the PRC and any material encumbrances that might be attached to the property interests or any lease amendments. We have relied considerably on the advice given by the Company’s PRC legal advisers – Grandall Legal Group (Shenzhen) and Guangdong Jinxin Fangzheng Law Office, concerning the validity of the HHC Group’s and the Group’s titles to the property interests.

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PROPERTY VALUATION

APPENDIX IV

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the properties but have assumed that the site areas shown on the documents and official site plans handed to us are correct. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations. No on-site measurement has been taken.

We have inspected the exterior and, where possible, the interior of the properties. However, no structural survey has been made, but in the course of our physical inspection in July and August 2006, we did not note any serious defects. We are not, however, able to report whether the properties are free of rot, infestation or any other structural defects. No tests were carried out on any of the services.

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

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

Our valuations are summarised below and the valuation certificates are attached.

Yours faithfully, for and on behalf of Sallmanns (Far East) Limited Paul L. Brown B.Sc. FRICS FHKIS Director

Note: Paul L. Brown is a Chartered Surveyor who has 23 years’ experience in the valuation of properties in the PRC and 26 years of property valuation experience in Hong Kong, the United Kingdom and the Asia-Pacific region.

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PROPERTY VALUATION

APPENDIX IV

SUMMARY OF VALUES

GROUP I – PROPERTY INTERESTS HELD AND OCCUPIED BY THE HHC GROUP IN THE PRC

	IN THE PRC
				Capital value
		Capital value	Interest	attributable to
		in existing	attributable	the HHC
		state as at	to the	Group as at
No.	Property	30 June 2006	HHC Group	30 June 2006
		RMB		RMB
1.	Two parcels of land,	50,740,000	51%	25,877,000
	various buildings and structures
	No. 35 Fo Luo Highway
	Foshan City
	Guangdong Province
	The PRC
2.	A parcel of land and	1,500,000	51%	765,000
	a commercial/residential building
	No. 49 Rui Qing Zone
	Mazhang District
	Zhanjiang City
	Guangdong Province
	The PRC
3.	Room Nos. 305 and 205	340,000	51%	173,000
	and two car parking rooms
	No. 9 Hua Yuan Dong Road
	Foshan City
	Guangdong Province
	The PRC
4.	Room No. 701	150,000	51%	77,000
	No. 23 Dong Sheng Nei Street
	Foshan City
	Guangdong Province
	The PRC
5.	Room No. 807	130,000	51%	66,000
	No. 2 Jian Hua Street
	Foshan City
	Guangdong Province
	The PRC
6.	Two parcels of land,	53,710,000	51%	27,392,000
	various buildings and structures
	No. 89 Fo Ping Road
	Urban District
	Foshan City
	Guangdong Province
	The PRC
			Sub-total:	54,350,000

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PROPERTY VALUATION

APPENDIX IV

GROUP II – PROPERTY INTERESTS HELD FOR INVESTMENT BY THE HHC GROUP IN THE PRC

				Capital value
		Capital value	Interest	attributable to
		in existing	attributable	the HHC
		state as at	to the	Group as at
No.	Property	30 June 2006	HHC Group	30 June 2006
		RMB		RMB
7.	Shop No. 3 on Level 1	1,260,000	51%	643,000
	No. 33 Wei Guo Road
	Foshan City
	Guangdong Province
	The PRC
8.	A parcel of land,	5,960,000	51%	3,040,000
	various buildings and structures
	No. 43 Qing Ning Road
	Foshan City
	Guangdong Province
	The PRC
9.	A parcel of land
	and a composite building	590,000	51%	301,000
	located at
	Tang Bian Street
	Shang Shi Jiao
	Zhaodong Village
	Huanshi Town
	Shiwan District
	Foshan City
	Guangdong Province
	The PRC
10.	A parcel of land and	430,000	51%	219,000
	a composite building
	No. 81 Sheng Ping Road
	Urban District
	Foshan City
	Guangdong Province
	The PRC
			Sub-total:	4,203,000

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PROPERTY VALUATION

APPENDIX IV

GROUP III – PROPERTY INTEREST HELD AND OCCUPIED BY THE GROUP IN THE PRC

Capital value in existing Interest state as at attributable No. Property 30 June 2006 to the Group RMB 11. A parcel of land, 95,000,000 80% various buildings and structures located at Sha Kou Power Plant Cheng Xi Industrial Zone Urban District Foshan City Guangdong Province The PRC Sub-total: Grand-total:	Capital value attributable to the Group as at 30 June 2006 RMB 76,000,000
	76,000,000
	134,553,000

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PROPERTY VALUATION

APPENDIX IV

VALUATION CERTIFICATE

GROUP I – PROPERTY INTERESTS HELD AND OCCUPIED BY THE HHC GROUP IN THE PRC

Property

Description and tenure

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB

Two parcels of land, various buildings and structures No. 35 Fo Luo Highway Foshan City Guangdong Province The PRC
The property comprises two parcels of land with a total site area of approximately 34,377.11 sq.m. on which are erected 13 buildings and various structures completed in various stages between 1986 and 2003.

The property is 50,740,000 currently 51% interest occupied by FLX attributable to for production, the HHC Group: storage and RMB25,877,000 ancillary office purposes.

The buildings have a total gross floor area of approximately 45,964.3 sq.m.

The buildings mainly include industrial buildings, warehouses and an office building.

The major structures include wells and gates, etc.

The land use rights of the property were granted for various terms with the latest expiry date on 6 April 2050 for industrial use.

Notes:

Pursuant to 2 State-owned Land Use Rights Certificates – Nan Fu Guo Yong (2001) Zi Di No. Te 090139 and Fo Fu Guo Yong (2001) Zi Di No. 06000614403, the land use rights of 2 parcels of land with a total site area of approximately 34,377.11 sq.m. were granted to FLX, for various terms with the latest expiry date on 6 April 2050 for industrial use.
Pursuant to 12 Real Estate Title Certificates – Yue Fang Di Zheng Zi Di Nos. C0653502 to C0653505, C0653507 to C0653510, C4584058 to C4584060 and C4387040, the building ownership rights of 12 buildings with a total gross floor area of approximately 45,850.63 sq.m. and the land use rights of two parcels of land with a total site area of approximately 34,377.11 sq.m. were held by FLX, for various terms of 50 years with the latest expiry date on 6 April 2050 for industrial use.
For the remaining building with a gross floor area of approximately 113.67 sq.m., we have not been provided with any title certificates.

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APPENDIX IV

We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) FLX has legally obtained both the state-owned land use rights of the property and building ownership rights of the 12 buildings stated in note 2, and has the right to use and occupy them in accordance with the valid term and usages stipulated by the Real Estate Title Certificates;
(ii) FLX has the rights to transfer, lease, mortgage or otherwise dispose of the 2 parcels of land and the 12 buildings stated in notes 1 and 2; and
(iii) The property is not subject to mortgage and any other encumbrances.
In the valuation of this property, we have attributed no commercial value to the building stated in note 3. However, for reference purposes, we are of the opinion that the capital value of the building (excluding the land) as at the date of valuation would be RMB50,000 assuming all relevant title documents had been obtained and the building could be freely transferred.

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APPENDIX IV

Description and tenure

Property

A parcel of land and The property comprises a parcel a commercial/ of land with a site area of residential building approximately 338 sq.m. on No. 49 Rui Qing Zone which is erected a 5-storey Mazhang District commercial/residential building Zhanjiang City completed in 1997. Guangdong Province The PRC The property has a gross floor area of approximately 1,866.2 sq.m.
Capital value
Particulars of in existing state occupancy as at 30 June 2006 RMB
The property is 1,500,000 currently 51% interest occupied by FLX attributable to for warehouse, the HHC Group: office and staff RMB765,000 quarters purposes.

The land use rights of the property were granted for a term expiring on 22 March 2063 for commercial/residential uses.

Notes:

Pursuant to a State-owned Land Use Rights Certificate – Zhan Guo Yong (2005) Di No. 00380, the land use rights of a parcel of land with a site area of approximately 338 sq.m. were granted to FLX, for a term expiring on 22 March 2063 for commercial/residential uses.
Pursuant to a Real Estate Title Certificate – Yue Fang Di Zheng Zi Di No. C3660682, the building ownership rights of the property with a gross floor area of approximately 1,866.2 sq.m. and the land use rights of the property with a site area of approximately 338 sq.m. are held by FLX, for a term expiring on 22 March 2063 for commercial/residential uses.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) FLX has legally obtained both the state-owned land use rights and building ownership rights of the property, and has the right to use and occupy the property in accordance with the valid term and usages stipulated by the Real Estate Title Certificates;
(ii) FLX has the rights to transfer, lease, mortgage or otherwise dispose of the property; and
(iii) The property is not subject to mortgage and any other encumbrances.

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APPENDIX IV

Description and tenure

Property

Room Nos. 305 and The property comprises two 205 and two car residential units on Level 2 and parking rooms Level 3 and two car parking No. 9 Hua Yuan rooms of a 9-storey residential Dong Road building completed in early Foshan City 1990s. Guangdong Province The PRC The residential units have a total gross floor area of approximately 140.5 sq.m. whilst the car parking rooms have a total gross floor area of approximately 13.55 sq.m.
Capital value
Particulars of in existing state occupancy as at 30 June 2006 RMB
The property is 340,000 currently 51% interest occupied by attributable to DZH for staff the HHC Group: quarters and car RMB173,000 parking purposes.

The land use rights of the property were granted for a term expiring on 25 May 2070 for residential use.

Notes:

Pursuant to 2 Real Estate Title Certificates – Yue Fang Di Zheng Zi Di Nos. C0657393 and C0657394, the building ownership rights of two residential units with a total gross floor area of approximately 140.5 sq.m. and the land use rights of the property are held by DZH.
Pursuant to 2 Real Estate Title Certificates – Yue Fang Di Zheng Zi Di Nos. C0657383 and C0657395, the building ownership rights of two car parking rooms with a total gross floor area of approximately 13.55 sq.m. and the land use rights of the property are held by DZH.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) DZH has legally obtained both the state-owned land use rights and building ownership rights of the property, and has the right to use and occupy the property in accordance with the valid term and usages stipulated by the Real Estate Title Certificates;
(ii) DZH has the rights to transfer, lease, mortgage or otherwise dispose of the property; and
(iii) The property is not subject to mortgage and any other encumbrances.

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PROPERTY VALUATION

APPENDIX IV

Description and tenure

Property

Room No. 701 The property comprises a No. 23 Dong Sheng residential unit on Level 7 of an Nei Street 8-storey residential building Foshan City completed in early 1990s. Guangdong Province The PRC The property has a gross floor area of approximately 73.98 sq.m. The land use rights of the property were granted for a term expiring on 22 June 2069 for residential use.

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB The property is 150,000 currently 51% interest occupied by attributable to DZH for staff the HHC Group: quarters. RMB77,000

Notes:

Pursuant to a Real Estate Title Certificate – Yue Fang Di Zheng Zi Di No. C0556130, the building ownership rights of the property with a gross floor area of approximately 73.98 sq.m. and the land use rights of the property are held by DZH.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) DZH has legally obtained both the state-owned land use rights and building ownership rights of the property, and has the right to use and occupy the property in accordance with the valid term and usages stipulated by the Real Estate Title Certificate;
(ii) DZH has the rights to transfer, lease, mortgage or otherwise dispose of the property; and
(iii) The property is not subject to mortgage and any other encumbrances.

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PROPERTY VALUATION

APPENDIX IV

Description and tenure

Property

Room No. 807 The property comprises a No. 2 Jian Hua Street residential unit on Level 8 of an Foshan City 8-storey composite building Guangdong Province completed in early 1990s. The PRC

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB The property is 130,000 currently 51% interest occupied by attributable to DZH for staff the HHC Group: quarters. RMB66,000

The property has a gross floor area of approximately 65.27 sq.m.

The land use rights of the property were granted for a term expiring on 31 December 2063 for residential use.

Notes:

Pursuant to a Real Estate Title Certificate – Yue Fang Di Zheng Zi Di No. C0556131, the building ownership rights of the property with a gross floor area of approximately 65.27 sq.m. and the land use rights of the property are held by DZH.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) DZH has legally obtained both the state-owned land use rights and building ownership rights of the property, and has the right to use and occupy the property in accordance with the valid term and usages stipulated by the Real Estate Title Certificate;
(ii) DZH has the rights to transfer, lease, mortgage or otherwise dispose of the property; and
(iii) The property is not subject to mortgage and any other encumbrances.

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PROPERTY VALUATION

APPENDIX IV

Property

Two parcels of land, various buildings and structures No. 89 Fo Ping Road Urban District Foshan City Guangdong Province The PRC

Description and tenure

The property comprises two parcels of land with a total site area of approximately 21,955 sq.m. on which are erected 16 buildings and various structures completed in various stages between 1968 and 2004.

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB The property is 53,710,000 currently 51% interest occupied by attributable to DZH for the HHC Group: production, RMB27,392,000 storage and ancillary office purposes.

The buildings have a total gross floor area of approximately 34,046.1 sq.m.

The buildings mainly include industrial buildings, warehouses, an office building and a dining hall.

The major structures include wells and gates, etc.

The land use rights of the property were granted for various terms with the latest expiry date on 15 November 2048 for industrial use.

Notes:

Pursuant to 2 State-owned Land Use Rights Certificates – Fo Fu Guo Yong (2002) Zi Di Nos. 06000616769 and 06000616681, the land use rights of 2 parcels of land with a total site area of approximately 21,955 sq.m. were granted to DZH, for various terms with the latest expiry date on 15 November 2048 for industrial use.
Pursuant to 13 Real Estate Title Certificates – Yue Fang Di Zheng Zi Di Nos. 2070312, 2070327, 2087199, 2087200, 2088483 to 2088489, C4726916 and C4726925, the building ownership rights of 13 buildings of the property with a total gross floor area of approximately 33,134.1 sq.m. were held by DZH.
For the remaining 3 buildings with a total gross floor area of approximately 912 sq.m., we have not been provided with any title certificates.

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PROPERTY VALUATION

APPENDIX IV

We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) DZH has legally obtained both the state-owned land use rights of the property and building ownership rights of the 13 buildings stated in note 2, and has the right to use and occupy them in accordance with the valid term and usages stipulated by the State-owned Land Use Rights Certificates;
(ii) DZH has the rights to transfer, lease, mortgage or otherwise dispose of the 2 parcels of land and the 13 buildings stated in notes 1 and 2; and
(iii) The property is not subject to mortgage and any other encumbrances.
In the valuation of this property, we have attributed no commercial value to the 3 buildings stated in note 3. However, for reference purposes, we are of the opinion that the capital value of the 3 buildings (excluding the land) as at the date of valuation would be RMB300,000 assuming all relevant title documents had been obtained and the buildings could be freely transferred.

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PROPERTY VALUATION

APPENDIX IV

GROUP II – PROPERTY INTERESTS HELD FOR INVESTMENT BY THE HHC GROUP IN THE PRC

Property

Description and tenure

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB

Shop No. 3 on Level 1 The property comprises a No.33 Wei Guo Road commercial unit on Level 1 of a Foshan City 9-storey composite building Guangdong Province completed in 1990. The PRC The property has a gross floor area of approximately 104.8 sq.m.
The property is 1,260,000 subject to a 51% interest Tenancy attributable to Agreement. (See the HHC Group: note 2) RMB643,000

The land use rights of the property were granted for a term expiring on 30 April 2041 for commercial use.

Notes:

Pursuant to a Real Estate Title Certificate – Yue Fang Di Zheng Zi Di No. C0653506, the building ownership rights of the property with a gross floor area of approximately 104.8 sq.m. and the land use rights of the property are held by FLX.
Pursuant to a Tenancy Agreement dated 3 July 2003 entered into between FLX and Foshan City Chancheng District Heng Jian Medicine Store（佛山市禪城區囱健藥品總匯）, an independent third party, the property was rented to Foshan City Chancheng District Heng Jian Medicine Store for a term of 3 years expiring on 30 June 2006 at a monthly rental of RMB3,000 exclusive of all outgoings. On 18 August 2006, FLX and Foshan City Chancheng District Heng Jian Medicine Store agreed to extend the tenancy till 31 December 2006.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) FLX has legally obtained both the state-owned land use rights and building ownership rights of the property, and has the right to use and occupy the property in accordance with the valid term and usages stipulated by the Real Estate Title Certificates;
(ii) FLX has the rights to transfer, lease, mortgage or otherwise dispose of the property;
(iii) The Tenancy Agreement is valid, binding and enforceable under the PRC laws; and
(iv) The property is not subject to mortgage and any other encumbrances.

– 184 –

PROPERTY VALUATION

APPENDIX IV

Property

Description and tenure

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB

A parcel of land, The property comprises a parcel various buildings of land with a site area of and structures approximately 5,543.6 sq.m. on No. 43 Qing Ning Road which are erected 8 buildings and Foshan City various structures completed in Guangdong Province various stages between 1960 and The PRC 1982.
The property is 5,960,000 currently subject 51% interest to a Tenancy attributable to Agreement. (See the HHC Group: note 6) RMB3,040,000

The buildings have a total gross floor area of approximately 8,521.26 sq.m.

The buildings mainly include hospital buildings, office buildings and storeroom.

The major structures include walls and gates, etc.

The land use rights of the property were granted for a term expiring on 1 January 2050 for industrial use.

Notes:

Pursuant to a State-owned Land Use Rights Certificate – Fo Fu Guo Yong (2001) Zi Di No. 06000409576, the land use rights of a parcel of land with a site area of approximately 5,649 sq.m. were granted to FLX, for a term expiring on 1 January 2050 for industrial use.
Pursuant to a Land Transfer Agreement entered into between FLX and Foshan City Dong Jian Group Limited （佛山市東建集團有限公司）, a portion of land with a site area of approximately 42.5 sq.m. was transferred to Foshan City Dong Jian Group Limited effective from 31 January 2004 and therefore is excluded from our valuation.
Pursuant to a Building Demolition and Removal Agreement dated 1 March 2003 entered into between FLX and Foshan City No.12 Primary School（佛山市第十二小學）, an independent third party, a building with corresponding base site area of approximately 62.9 sq.m. was acquired by Foshan City No.12 Primary School and therefore is excluded from our valuation.
Pursuant to 7 Real Estate Title Certificates – Yue Fang Di Zheng Zi Di Nos. C0653511, C0653512 and C0653515 to C0653519, the building ownership rights of 7 buildings of the property with a total gross floor area of approximately 8,210.26 sq.m. and the land use rights of a parcel of land with a site area of approximately 5,649 sq.m. were held by FLX, for a term expiring on 1 January 2050 for industrial use.
For the remaining building with a gross floor area of approximately 311 sq.m., we have not been provided with any title certificates.

– 185 –

PROPERTY VALUATION

APPENDIX IV

Pursuant to a Tenancy Agreement dated January 2004 entered into between FLX and Foshan City Yong An Hospital（佛山市永安醫院）, an independent third party, 11 buildings with a total gross floor area of approximately 9,460.2 sq.m. are rented to Foshan City Yong An Hospital for a term of 30 years expiring on 1 March 2034, at an annual rental of RMB500,000 from 1 March 2004 to 28 February 2007, RMB700,000 from 1 March 2007 to 28 February 2010, RMB800,000 from 1 March 2010 to 28 February 2014, RMB1,200,000 from 1 March 2014 to 28 February 2024 and RMB1,500,000 from 1 March 2024 to 1 March 2034, exclusive of all outgoings.

As advised by FLX, 3 buildings with a total gross floor area of approximately 938.94 sq.m. were demolished.

We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) FLX has legally obtained both the state-owned land use rights of the property and building ownership rights of the 7 buildings stated in note 4, and has the right to use and occupy them in accordance with the valid term and usages stipulated by the Real Estate Title Certificate;
(ii) FLX has the rights to transfer, lease, mortgage or otherwise dispose of the parcel of land and the 7 buildings stated in note 4;
(iii) The property is not subject to mortgage and any other encumbrances;
(iv) As advised by FLX, the change of use of land and buildings relevant to the tenancy agreement has not obtained permission from relevant government departments and the buildings and temporary buildings that are without Building Ownership Certificate have not obtained the construction and planning permit from the government department. It is expected to has no legal impediment for FLX to apply to the relevant government departments for the change of use procedure of the land and buildings.
(v) Pursuant to the PRC Contract Law, tenancy term can not exceed 20 years, thus the valid term of the subject tenancy should not exceed 20 years;
(vi) The registration for change of state-owned land use rights area has not been processed, FLX should register for the change of site area. Upon the completion of the area change registration procedure, FLX obtained the land use rights of the site area as stated in the new land use rights certificate.
Our valuation of the property is carried out on the basis of its permitted use. In the valuation of this property, we have attributed no commercial value to the building stated in note 5. However, for reference purposes, we are of the opinion that the capital value of the building (excluding the land) as at the date of valuation would be RMB120,000 assuming all relevant title documents had been obtained and the building could be freely transferred.

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PROPERTY VALUATION

APPENDIX IV

Description and tenure

Property

A parcel of land and The property comprises a parcel a composite building of land with a site area of located at approximately 1,250 sq.m. on Tang Bian Street which is erected a 2-storey Shang Shi Jiao temporary composite building Zhaodong Village completed in 2002. Huanshi Town Shiwan District The property has a gross floor Foshan City area of approximately 586.25 Guangdong Province sq.m. The PRC
Capital value
Particulars of in existing state occupancy as at 30 June 2006 RMB
The property is 590,000 currently subject 51% interest to 5 Tenancy attributable to Agreements. the HHC Group: (See notes 6 to 8) RMB301,000

The land use rights of the property were granted for a term expiring on 1 January 2050 for warehouse use.

Notes:

Pursuant to a State-owned Land Use Rights Certificate – Fo Fu Guo Yong (2001) Zi Di No. 06000614414, the land use rights of a parcel of land with a site area of approximately 2,420 sq.m. were granted to FLX, for a term expiring on 1 January 2050 for warehouse use.
Pursuant to a Compensation Agreement dated 12 November 2001, a portion of land with a site area of approximately 1,170 sq.m. was resumed by Foshan Public Affairs Management Bureau for public road construction effective from 25 November 2001 and therefore is excluded from our valuation.
Pursuant to a Temporary Construction Work Planning Permit – Fo Gui Gong Lin (2002) No. J076 and Construction Commencement Permit – No. 440601200205290201, the composite building with a gross floor area of approximately 586.25 sq.m. has been approved for construction.
Pursuant to a Planning Certificate issued by Foshan Planning Bureau dated 9 December 2002, the composite building has complied with the planning requirements.
For the composite building with a gross floor area of approximately 586.25 sq.m., we have not been provided with any title certificates.
Pursuant to a Tenancy Agreement dated 4 January 2005 entered into between FLX and Su Qian Ming（蘇倩明）, an independent third party, shop no. 2 of the composite building with a gross floor area of approximately 97.1 sq.m. is rented to Su Qian Ming for a term commencing from 28 February 2005 and expiring on 1 March 2007 for retail use, at a monthly rental of RMB2,718.8 exclusive of all outgoings.

– 187 –

PROPERTY VALUATION

APPENDIX IV

Pursuant to a Tenancy Agreement dated 13 June 2006 entered into between FLX and Pan Jin Hua（潘錦華）, an independent third party, shop no. 5 of the composite building with a gross floor area of approximately 97.1 sq.m. is rented to Pan Jin Hua for a term commencing from 1 July 2006 and expiring on 30 June 2008 for retail use, at a monthly rental of RMB2,718.8 exclusive of all outgoings.
As advised by FLX, the remaining portion of the property is rented to three independent third parties for various terms expiring on 31 December 2006 at a total monthly rental of RMB10,777.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) FLX has legally obtained the state-owned land use rights of the property, and has the right to use and occupy the parcel of land of the property in accordance with the valid term and usages stipulated by the State-owned Land Use Rights Certificate;
(ii) FLX has the rights to transfer, lease, mortgage or otherwise dispose of the parcel of land of the property;
(iii) The valid planning term of the composite building stated in note 5 has been expired and no use extension permission has been obtained from relevant Government Bureaus, thus this composite building should be demolished;
(iv) The registration for change of state-owned land use rights area has not been processed, FLX should register for the change of site area. Upon the completion of area change registration procedure, FLX obtained the land use rights of the site area as stated in the new land use rights certificates; and
(v) The property is not subject to mortgage and any other encumbrances.
In the valuation of this property, we have attributed no commercial value to the composite building stated in note 5. However, for reference purposes, we are of the opinion that the capital value of this composite building (excluding the land) as at the date of valuation would be RMB470,000 assuming all relevant title documents had been obtained and the building could be freely transferred.

– 188 –

PROPERTY VALUATION

APPENDIX IV

Description and tenure

Property

A parcel of land and The property comprises a parcel a composite building of land with a site area of No. 81 Sheng approximately 39 sq.m. on which Ping Road is erected a 2-storey composite Urban District building completed in 1972. Foshan City Guangdong Province The property has a gross floor The PRC area of approximately 72.37 sq.m.
Capital value
Particulars of in existing state occupancy as at 30 June 2006 RMB
The property is 430,000 currently subject 51% interest to a Tenancy attributable to Agreement. (See the HHC Group: note 2) RMB219,000

The land use rights of the property were granted for a term expiring on 15 November 2038 for commercial use.

Notes:

Pursuant to a Real Estate Title Certificate – Yue Fang Di Zheng Zi Di No. 2063661, the building ownership rights of the property with a gross floor area of approximately 72.37 sq.m. and the land use rights of a parcel of land with a site area of approximately 39 sq.m. were held by DZH, for a term expiring on 15 November 2038 for commercial use.
Pursuant to a Tenancy Agreement dated 20 May 2006 entered into between DZH and Yingde City Quan Xiang Teahouse Limited（英德市權祥涼茶有限公司）, an independent third party, the property with a gross floor area of approximately 72 sq.m. is rented to Yingde City Quan Xiang Teahouse Limited for a term of 1 year expiring on 30 May 2007 at a monthly rental of RMB3,250 exclusive of management fees, water and electricity charges and other outgoings.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Grandall Legal Group (Shenzhen), which contains, inter alia, the following:
(i) DZH has legally obtained both the state-owned land use rights and building ownership rights of the property, and has the right to use and occupy the property in accordance with the valid term and usages stipulated by the Real Estate Title Certificate;
(ii) DZH has the rights to transfer, lease, mortgage or otherwise dispose of the property;
(iii) The Tenancy Agreement is valid, binding and enforceable under the PRC laws; and
(iv) The property is not subject to mortgage and any other encumbrances.

– 189 –

PROPERTY VALUATION

APPENDIX IV

GROUP III – PROPERTY INTEREST HELD AND OCCUPIED BY THE GROUP IN THE PRC

Property

Description and tenure

Capital value Particulars of in existing state occupancy as at 30 June 2006 RMB

A parcel of land, The property comprises a parcel various buildings of land with a site area of and structures approximately 99,116 sq.m. on located at which are erected 25 buildings Sha Kou Power Plant and various structures completed Cheng Xi in various stages between 1993 Industrial Zone and 2005. Urban District Foshan City The buildings have a total gross Guangdong Province floor area of approximately The PRC 36,096.85 sq.m.
The property comprises a parcel of land with a site area of approximately 99,116 sq.m. on which are erected 25 buildings and various structures completed in various stages between 1993 and 2005.
The buildings mainly include industrial buildings, offices, warehouses, a dormitory and a canteen.

Portions of the 95,000,000 property are 80% interest subject to 3 attributable to Tenancy the Group: Agreements. RMB76,000,000 (See notes 4 to 6). The remaining portion of the property is currently occupied by the Group for power plant purposes.

The major structures include roads, walls, sheds, lawns and gates.

The land use rights of the property were granted for a term expiring on 1 May 2043 for industrial use.

Notes:

Pursuant to a State-owned Land Use Rights Certificate – Fo Fu Guo Yong (2001) Zi Di No. 06000715099, the land use rights of a parcel of land with a site area of approximately 99,116 sq.m. were granted to Foshan Shakou Power Plant Company Limited （佛山市沙口發電廠有限公司）, an 80% owned subsidiary of the Company, for a term expiring on 1 May 2043 for industrial use.
Pursuant to 16 Real Estate Title Certificates – Yue Fang Di Zheng Zi Di Nos. 0621995 to 0622000, 1124001 to 1124007 and 1124009 to 1124011, the building ownership rights of 16 buildings with a total gross floor area of approximately 34,449.69 sq.m. were held by Foshan Shakou Power Plant Company Limited.
For the remaining 9 buildings with a total gross floor area of approximately 1,647.16 sq.m., we have not been provided with any title certificates.

– 190 –

PROPERTY VALUATION

APPENDIX IV

Pursuant to a Tenancy Agreement dated 30 July 2004 entered into between Foshan Shakou Power Plant Company Limited and Funeng Power Supply Co., Ltd.（佛山市福能發電廠有限公司）, an independent third party, portions of the property with a total gross floor area of approximately 3,855.78 sq.m. together with common areas, equipments and facilities within the subject power plant are rented to Funeng Power Supply Co., Ltd. for a term of 2 years commencing from 30 July 2004 and expiring on 29 July 2006, at an annual rental of RMB4,800,000 exclusive of water charges, electricity charges and other outgoings, with an option to renew for a further term.
Pursuant to a letter dated 12 July 2006 from Foshan Shakou Power Plant Company Limited to Funeng Power Supply Co., Ltd. in reply to a letter dated 6 July 2006 from Funeng Power Supply Co., Ltd. to Foshan Shakou Power Plant Company Limited, Foshan Shakou Power Plant Company Limited agreed to grant a two-month extension of the Tenancy Agreement dated 30 July 2004 (as stated in note 4) whereby the said Tenancy Agreement is extended for another two calendar months commencing from 30 July 2006 at an aggregate rental of RMB400,000 per month, upon the expiry of such extension of which Funeng Power Supply Co., Ltd. shall vacate the said premises.
Pursuant to a Land Tenancy Agreement dated 26 September 2005 entered into between Foshan Shakou Power Plant Company Limited and Foshan City Guo Long Technology Services Limited（佛山市國龍技術服務有限公司）, an independent third party, a portion of land with a site area of approximately 1,000 sq.m. together with common areas within the subject power plant are rented to Foshan City Guo Long Technology Services Limited for a term of 3 years commencing from 26 September 2005 and expiring on 25 September 2008, at an annual rental of RMB20,760 exclusive of telephone charges and taxes.
We have been provided with a legal opinion regarding the property interest by the Company’s PRC legal adviser – Guangdong Jinxin Fangzheng Law Office, which contains, inter alia, the following:
(i) The Group has legally obtained both the state-owned land use rights of the property and building ownership rights of the 16 buildings stated in note 2, and has the right to use and occupy them in accordance with the valid term and usages stipulated by the State-owned Land Use Rights Certificate;
(ii) The Group has the rights to transfer, lease, mortgage or otherwise dispose of the parcel of land of the property and the 16 buildings stated in notes 1 and 2;
(iii) The agreements and letters stated in notes 4 to 6 are legally binding and enforceable under the PRC laws; and
(iv) The property is not subject to mortgage and any other encumbrances.
In the valuation of this property, we have attributed no commercial value to the 9 buildings stated in note 3. However, for reference purposes, we are of the opinion that the capital value of the 9 buildings (excluding the land) as at the date of valuation would be RMB1,300,000 assuming all relevant title documents had been obtained and the buildings could be freely transferred.

– 191 –

GENERAL INFORMATION

APPENDIX V

RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable inquiries, that to the best of their knowledge and belief, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

SHARE CAPITAL

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

Authorised 1,100,000,000 Shares Issued and fully paid 830,146,244 Shares	HK$ 110,000,000

	83,014,624

The authorised and issued and fully paid up share capital of the Company after the Capital Increase and immediately upon full conversion of the Convertible Note will be as follows:

Authorised 1,100,000,000 Shares 1,900,000,000 Shares created under the Capital Increase 3,000,000,000 Shares Issued and fully paid 830,146,244 Shares 949,243,697 Conversion Shares (subject to adjustments) 1,779,389,941 Shares	HK$ 110,000,000 190,000,000
	300,000,000

	83,014,624 94,924,370
	177,938,994

– 192 –

GENERAL INFORMATION

APPENDIX V

DISCLOSURE OF INTERESTS

Interests of Directors

(i) As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executive of the Company or any of their respective associates in any shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which are required: (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which he is taken or deemed to have under such provision of the SFO); (b) pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers were as follows:

Long positions in Shares and underlying Shares

Name of Directors
Mr. He
SITU Min
LI Feng
CHAN Ting Chuen, David
NG Pui Cheung, Joseph

Number of Shares
Approximate
Personal
Corporate
percentage of
interests
interests
Underlying
the Company’s
(held as
(interests of
Shares
total issued
beneficial
controlled
pursuant to
share capital
owner)
corporation)
share options
Total interests
(%)
(Note 2)
–
6,117,079
4,200,000
10,317,079
1.24
(Note 1)
–
–
3,800,000
3,800,000
0.46
–
–
1,500,000
1,500,000
0.18
828,000
–
–
828,000
0.10
–
–
828,000
828,000
0.10

Notes:

These Shares were held by Main Fortune International Limited which is 50% owned by Mr. He.
These represent interests in share options granted to the Directors under the share option scheme of the Company adopted on 22 May 2002.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and the chief executive of the Company had any interest or short position in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which are required: (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV and the SFO (including interests or short positions which he is taken or deemed to have under such provisions of the SFO); (b) pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers.

– 193 –

GENERAL INFORMATION

APPENDIX V

(ii) As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which were, since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up), acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to, any member of the Enlarged Group.
(iii) None of the Directors was materially interested in any contract or arrangement subsisting at the Latest Practicable Date which is significant in relation to the business of the Enlarged Group.

Interests of substantial Shareholders

As at the Latest Practicable Date, according to the register of interests maintained by the Company pursuant to section 336 of the SFO and so far as is known to the Directors and the chief executive of the Company, the persons, other than Directors or the chief executive of the Company, who had an interest or a short position in the Shares and 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, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group, together with any options in respect of such capital, were as follows:

The Company

Hensil Investments
FDC
YIP Siu Chun
Oakwood Enterprise Limited
KWAN Tik Hoi

Number of Shares
Approximate
percentage of
the Company’s
total issued
Personal
Corporate
Family
Other
share capital
interest
interest
interest
interest
(%)
–
315,000,000
–
–
37.95%
(Note 1)
–
315,000,000
–
–
37.95%
(Note 1)
290,196,037
–
–
–
34.96%
(Note 2)
–
–
–
290,196,037
34.96%
(Note 2)
–
–
290,196,037
–
34.96%
(Note 2)

– 194 –

GENERAL INFORMATION

APPENDIX V

Notes:

The 315,000,000 Shares were held by Hensil Investments, which is wholly-owned by FDC. By virtue of its interest in Hensil Investments, FDC was deemed to be interested in such 315,000,000 Shares held by Hensil Investments.
The 290,196,037 Shares were held by Madam YIP Siu Chun as beneficial owner. Oakwood Enterprise Limited had given notification in respect of its interest in 290,196,037 Shares held by Madam YIP Siu Chun. By virtue of his relationship as the spouse of Madam YIP Siu Chun, Mr. KWAN Tik Hoi was deemed to be interested in the 290,196,037 Shares held by Madam YIP Siu Chun.

The subsidiary of the Company

Name of subsidiary	Name of shareholder	% of interest held
Shakou JV	Power Construction	20%
	Corporation_(Note)_

Note: Power Construction Corporation is wholly-owned by Power Group Corporation.

Save as disclosed above, as at the Latest Practicable Date, the Directors or the chief executive of the Company were not aware of any other persons or corporations (other than a Director or the chief executive of the Company and the respective companies controlled by them whose interests have been disclosed above) who had an interest or 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, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group, or in any options in respect of such capital.

PROCEDURES BY WHICH A POLL MAY BE DEMANDED

Pursuant to article 73 of the articles of association of the Company, at any general meeting of the Company, a resolution put to the vote of the meeting shall be decided on a show of hand unless a poll is taken as may from time to time be required under the Listing Rules or any other applicable laws, rules or regulations or unless a poll is (before or on the declaration of the result of the show of hands) demanded by:

(i) the chairman of the meeting; or
(ii) at least three Shareholders present in person or by proxy being entitled to vote at the meeting; or
(iii) any Shareholder or Shareholders present in person or by proxy and representing not less than one-tenth of the total voting rights of all the Shareholders having the right to vote at the meeting; or
(iv) any Shareholder or Shareholders present in person or by proxy and holding Shares 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 the right.

– 195 –

GENERAL INFORMATION

APPENDIX V

A demand by a person as proxy for a Shareholder or in the case of a Shareholder being a corporation by its duly authorised representative shall be deemed to be the same as a demand by the Shareholder.

Pursuant to Rule 13.39(4) of the Listing Rules, any vote of shareholders taken at a general meeting to approve connected transactions pursuant to Chapter 14A of the Listing Rules and transactions that are subject to Independent Shareholders’ approval pursuant to the Listing Rules must be taken on a poll. Accordingly, the Chairman of the EGM will demand that the ordinary resolution to approve, amongst others, the transactions contemplated under the Agreement, and the allotment and issue of the Conversion Shares be decided by poll.

EXPERTS AND CONSENTS

The following are the experts, and their qualifications, who have given advice or opinion contained in this circular:

Name Qualification AMS Corporate Finance Limited a corporation licensed under the SFO to conduct Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the SFO 國浩律師集團（深圳）事務所 PRC legal advisers (Grandall Legal Group (Shenzhen)) (“Grandall”) 廣東金信方正律師事務所 PRC legal advisers (Guangdong Jinxin Fangzheng Law Office) (“Jinxin”) KPMG certified public accountants Sallmanns (Far East) Limited independent professional valuer (“Sallmanns ”)

Each of AMS, Grandall, Jinxin, KPMG and Sallmanns has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter or report as set out in this circular and references to its name in the form and context in which they respectively appear.

As at the Latest Practicable Date, none of AMS, Grandall, Jinxin, KPMG and Sallmanns was beneficially interested in the share capital of any member of the Group, nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group, nor did it have any direct or indirect interest in any assets which were, since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up), acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to, any member of the Enlarged Group.

– 196 –

GENERAL INFORMATION

APPENDIX V

COMPETING INTEREST

As at the Latest Practicable Date, so far as the Directors are aware, none of the Directors or their respective associates had any direct or indirect interest in a business which competed or was likely to compete with the business of the Group.

LITIGATION

So far as the Directors are aware, as at the Latest Practicable Date, save for a pending litigation relating to a payment of goods of approximately RMB1.3 million plus interest by 廣東廣弘藥材有限公司 (Guangdong Guanghong Medicines Company Limited) to DZH, no member of the Enlarged Group was engaged in any litigation or arbitration of material importance and there was no litigation or claim of material importance known to the Directors to be pending or threatened by or against any member of the Enlarged Group.

SERVICE CONTRACTS

Each of Mr. He, Mr. LAM Siu Hung and Mr. SITE Min has entered into a service contract with the Company for an initial term of two years commencing from 19 July 2001, 4 July 2005 and 1 March 2003 respectively, which term would continue thereafter until terminated by either party thereto giving to the other not less than six months’ prior notice in writing, which notice period shall not expire at any time during the first two years.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors had entered, or proposed to enter, into a service contract with any member of the Enlarged Group which does not expire or is not determinable by the relevant member of the Enlarged Group within one year without payment of compensation, other than statutory compensation.

MATERIAL CONTRACTS

The following contracts, not being contracts in the ordinary course of business, were entered into by the Group within two years immediately preceding the Latest Practicable Date, and are or may be material:

(i) a letter dated 12 July 2006 from Shakou JV to 佛山市福能發電廠有限公司 (Funeng Power Supply Co., Ltd.) (“Funeng JV”) in reply to a letter dated 6 July 2006 from Funeng JV to Shakou JV whereby Shakou JV agreed to grant a two-month extension of the facilities lease agreement dated 30 July 2004 entered into between Shakou JV as lessor and Funeng JV as lessee (which facilities lease agreement was expired on 29 July 2006) pursuant to which Funeng JV shall continue to lease certain office premises, factory premises, land-use rights and auxiliary power generation facilities from Shakou JV for another two calendar months commencing from 30 July 2006 at an aggregate rental of RMB400,000 per month, upon the expiry of such extension of which Funeng JV shall vacate the said premises; and
(ii) the Agreement.

– 197 –

GENERAL INFORMATION

APPENDIX V

The following contracts, not being contracts in the ordinary course of business, were entered into by the HHC Group within two years immediately preceding the Latest Practicable Date, and are or may be material:

(i) a tenancy agreement dated 4 January 2005 entered into between FLX and Su Qian Ming, an independent third party, relating to the lease to Su Qian Ming of a shop in the composite building located at Tang Bian Street, Shang Shi Jiao, Zhaodong Village, Huanshi Town, Shiwan District, Foshan City, Guangdong Province, the PRC with a gross floor area of approximately 97.1 sq.m. for a term commencing from 28 February 2005 and expiring on 1 March 2007 for retail use, at a monthly rental of RMB2,718.80 exclusive of all outgoings;
(ii) a tenancy agreement dated 20 May 2006 entered into between DZH and Yingde City Quan Xiang Teahouse Limited, an independent third party, relating to the lease of the property located at No. 81 Sheng Ping Road, Urban District, Foshan City, Guangdong Province, the PRC with a gross floor area of approximately 72 sq.m. to Yingde City Quan Xiang Teahouse Limited for a term of one year expiring on 30 May 2007 at a monthly rental of RMB3,250 exclusive of management fees, water and electricity charges and other outgoings;
(iii) a tenancy agreement dated 13 June 2006 entered into between FLX and Pan Jin Hua, an independent third party, relating to the lease to Pan Jin Hua of a shop in the composite building located at Tang Bian Street, Shang Shi Jiao, Zhaodong Village, Huanshi Town, Shiwan District, Foshan City, Guangdong Province, the PRC with a gross floor area of approximately 97.1 sq.m. for a term commencing from 1 July 2006 and expiring on 30 June 2008 for retail use, at a monthly rental of RMB2,718.80 exclusive of all outgoings;
(iv) bought and sold notes dated on 12 July 2006, executed between HHC as purchaser and FDH as seller, whereby HHC acquired the entire issued share capital of HTI and HII pursuant to a group reorganisation and HHC became the holding company of the subsidiaries now comprising the HHC Group; and
(v) a letter dated 18 August 2006 between FLX and Foshan City Chancheng District Heng Jian Medicine Store, an independent third party, whereby FLX agreed to extend the lease of a shop located at Shop No. 3, Level 1, No.33 Wei Guo Road, Foshan City, Guangdong Province, the PRC to Foshan City Chancheng District Heng Jian Medicine Store from 30 June 2006 to 31 December 2006 at a monthly rental of RMB3,000 excluding all outgoings.

GENERAL

(i) The share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

– 198 –

GENERAL INFORMATION

APPENDIX V

(ii) The company secretary of the Company is Mr. HUEN Po Wah who is a director of Fair Wind Secretarial Services Limited and has over 25 years’ experience in the company management and secretarial fields. He is an associate of The Hong Kong Institute of Chartered Secretaries and also an associate of The Institute of Chartered Secretaries and Administrators.
(iii) The qualified accountant of the Company is Mr. SITU Min who is a member of the Association of Chartered Certified Accountants and also a member of the Chinese Institute of Certified Public Accountants.
(iv) The English text of this circular and the accompanying form of proxy shall prevail over the Chinese text thereof.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong during normal business hours on any weekdays other than public holidays up to and including 3 October 2006:

(i) the memorandum and articles of association of the Company;
(ii) the annual reports of the Company for each of the two years ended 31 December 2005 and the interim report of the Company for the six months ended 30 June 2006;
(iii) the letter of advice from AMS, the text of which is set out on pages 22 to 40 of this circular;
(iv) the accountants’ report on the HHC Group, the text of which is set out in Appendix II to this circular;
(v) the unaudited pro forma financial information and the comfort letter thereon from KPMG, the text of each of which is set out in Appendix III to this circular;
(vi) the property valuation report for the Enlarged Group, the text of which is set out in Appendix IV to this circular;
(vii) the written consents as referred to in the section headed “Experts and consents” in this appendix;
(viii)the service contracts as referred to in the section headed “Service contracts” in this appendix;
(ix) the material contracts as referred to in the section headed “Material contracts” in this appendix; and
(x) a copy of each circular of the Company issued pursuant to the requirements set out in Chapters 14 and/or 14A of the Listing Rules since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

– 199 –

NOTICE OF EGM

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司

(Incorporated in Hong Kong with limited liability) (Stock Code: 570)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Wing Shan International Limited (the “Company”) will be held at the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong on Tuesday, 3 October 2006 at 10:00 a.m. for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT:

(A) the conditional agreement dated 22 August 2006 and entered into amongst the Company as purchaser, Foshan Development (Holdings) Limited (“FDH”) as vendor, and Foshan Development Company Limited (“FDC”) as guarantor (the “Agreement”, a copy of which marked “A” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification) pursuant to which the Company agreed to acquire from FDH the entire issued share capital of FDH’s wholly owned subsidiary Hensil Holdings Company Limited (“HHC”) and the benefits of and interests in the shareholder’s loan due from HHC to the FDH, at an aggregate consideration of HK$282,400,000 (subject to adjustment) to be satisfied by the Company by way of issue of a convertible note in the principal amount of HK$282,400,000 (the “Convertible Note”) to FDC or its nominee(s) (as directed by FDH), and the transactions contemplated under the Agreement (including but not limited to the issue of the Convertible Note upon completion of the Agreement), be and are hereby approved, ratified and/or confirmed;
(B) subject to the Listing Committee of The Stock Exchange of Hong Kong Limited granting or agreeing to grant the listing of, and permission to deal in, the shares of HK$0.10 each in the capital of the Company (“Share(s)”) to be issued upon the exercise of the conversion rights attaching to the Convertible Note, Shares be allotted and issued to FDC or its nominee(s) upon the exercise of the conversion rights attaching to the Convertible Note (the “Conversion Shares”), such Conversion Shares to rank pari passu in all respects with the existing issued Shares;

– 200 –

NOTICE OF EGM

(C) the authorised share capital of the Company be increased from HK$110,000,000 to HK$300,000,000 by the creation of an additional 1,900,000,000 Shares to rank pari passu in all respects with the existing issued Shares; and
(D) the directors of the Company be and are hereby authorised on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary, desirable or expedient to implement and/or give effect to the Agreement, including but not limited to the issue of the Conversion Note upon completion of the Agreement and the allotment and issue of the Conversion Shares upon exercise of the conversion rights attaching to the Convertible Note.”

By order of the Board WING SHAN INTERNATIONAL LIMITED HE Haochang Chairman and Managing Director

Hong Kong, 15 September 2006

Registered office: Rooms 2801-2805 China Insurance Group Building 141 Des Voeux Road Central Hong Kong

Notes:

The ordinary resolution to be considered at the meeting will be decided by poll. On voting by poll, each shareholder of the Company shall have one vote for each share held in the Company.
Any member of the Company entitled to attend and vote at the meeting is entitled to appoint one or more persons as his proxy(ies) to attend and vote instead of him. On a poll votes may be given either personally or by proxy. A proxy need not be a member of the Company.
In order to be valid, the form of proxy, together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority, must be deposited at the registered office of the Company at Rooms 2801-2805, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong not less than 48 hours before the time appointed for holding the meeting or adjourned meeting.
Completion and return of the form of proxy will not preclude members from attending and voting in person at the meeting and in such an event, the form of proxy shall be deemed to be revoked.
As at the date of this notice, the board of directors of the Company comprises of seven directors, of whom Mr. HE Haochang, Mr. LAM Siu Hung, Mr. SITU Min and Mr. LI Feng are the executive directors; and Mr. CHAN Ting Chuen, David, Mr. NG Pui Cheung, Joseph and Mr. CHEUNG Kin Piu, Valiant are the independent non-executive directors.

– 201 –

AI assistant

SPT Energy Group Inc. — Proxy Solicitation & Information Statement 2006

49801_rns_2006-09-15_3468f591-0e05-49a6-828a-61bd9a5c729b.pdf

WING SHAN INTERNATIONAL LIMITED 榮 山 國 際 有 限 公 司

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND INCREASE IN AUTHORISED SHARE CAPITAL

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

WING SHAN INTERNATIONAL LIMITED 榮 山 國 際 有 限 公 司

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND INCREASE IN AUTHORISED SHARE CAPITAL

INTRODUCTION

THE AGREEMENT

Date

Parties

Assets to be acquired

Consideration

LETTER FROM THE BOARD

Conditions precedent

Completion

THE CONVERTIBLE NOTE

Principal terms of the Convertible Note

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conversion Shares

Conversion price

SHAREHOLDING STRUCTURE

INFORMATION ON THE HHC GROUP

Immediately before Completion

Immediately after Completion

FLX and DZH

Management discussion and analysis

Business review

For the five months ended 31 May 2006

Cash flows

Financial position

Foreign currency risk

Capital commitments

Material acquisitions and disposals of subsidiaries and associated companies

REASONS FOR THE ACQUISITION

FINANCIAL IMPACT OF THE ACQUISITION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

CAPITAL INCREASE

EGM

RECOMMENDATION

ADDITIONAL INFORMATION

WING SHAN INTERNATIONAL LIMITED HE Haochang Chairman and Managing Director

WING SHAN INTERNATIONAL LIMITED 榮 山 國 際 有 限 公 司

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

LETTER FROM AMS

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

I. Background information and reasons for the Agreement

LETTER FROM AMS

LETTER FROM AMS

II. Information on the HHC Group

LETTER FROM AMS

LETTER FROM AMS

III. Principal terms of the Agreement

LETTER FROM AMS

IV. Valuation of the HHC Group

LETTER FROM AMS

LETTER FROM AMS

V. Principal terms of the Convertible Note

1. Annual interest rate

2. Maturity

3. Conversion Price

4. Redemption amount

VI. Financial effects of the Acquisition

2. Liquidity and financial resources

LETTER FROM AMS

3. Total equity attributable to the Shareholders

VII. Potential dilution to the shareholdings of the Independent Shareholders

SPT Energy Group Inc. Proxy Solicitation & Information Statement 2006

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司

WING SHAN INTERNATIONAL LIMITED 榮山國際有限公司