Star Plus Legend Holdings Limited - Proxy Solicitation & Information Statement 2009

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about any of the contents of this circular or as to what action to take in relation to this circular, 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 AviChina Industry & Technology Company Limited , you should at once hand this circular and the enclosed proxy form to the purchaser(s) or the transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

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

==> picture [172 x 56] intentionally omitted <==

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

(1) MAJOR AND CONNECTED TRANSACTIONS: DISPOSAL OF EQUITY INTEREST IN DONGAN MOTOR AND ACQUISTION OF EQUITY INTEREST IN JONHON OPTRONIC; (2) PROPOSED AMENDMENT TO THE ARTICLES OF ASSOCIATION AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

A letter from the Independent Board Committee is set out on page 25 of this circular. A letter from Somerley to the Independent Board Committee and the Independent Shareholders is set out on pages 26 to 55 of this circular.

A notice convening the extraordinary general meeting (“EGM”) of AviChina Industry & Technology Company Limited to be held at 9:00 a.m. on Tuesday, 29 December 2009 at Avic Hotel, No. 10 Yi, Central East Third Ring Road, Chaoyang District, Beijing, the People’s Republic of China is set out on pages N-1 to N-4 of this circular.

Shareholders who intend to attend the EGM shall complete and return the reply slip in accordance with the instructions printed thereon before Wednesday, 9 December 2009. Shareholders who intend to appoint a proxy to attend the EGM shall complete and return the enclosed form of proxy in accordance with the instructions printed thereon not less than 24 hours before the time fixed for the holding of EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending the EGM and voting in person if you so wish.

For identification purpose only.

25 November 2009

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Letter from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Appendix I — Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Appendix II — Accountant’s Report of JONHON Optronic . . . . . . . . . . . . . . . . . . . .	II-1
Appendix III — Unaudited Pro forma Consolidated Statement of Assets and
Liabilities of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . .	III-1
Appendix IV — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	IV-1
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	N-1

— i —

DEFINITIONS

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

“Acquisition”

the acquisition of 43.34% equity interest in JONHON Optronic by the Company from AVIC for a consideration of RMB1,774,179,339 pursuant to the Equity Swap Agreement

“Articles of Association”
“AVIC”

the articles of association of the Company

Aviation Industry Corporation of China (中國航空工業集團公司), a controlling shareholder of the Company holding 61.06% equity interest in the Company
“Board”
the board of Directors
“Company”

AviChina Industry & Technology Company Limited* (中國航空科技工業股份有限公司)

“Completion” completion of the transactions contemplated under the Equity Swap Agreement

“Concert Parties” Institution of China KongKong Missile, Sino Avionics Technology Co., Ltd. and AVIC Information Technology Corporation Ltd., being the subsidiaries of AVIC which hold 6,939,645 shares, 3,825,000 shares and 3,825,000 shares in JONHON Optronic, respectively and collectively hold an aggregate of 14,589,645 shares representing 5.45% of the total issued share capital of JONHON Optronic

“CSRC”

China Securities Regulatory Commission
“Directors” the director(s) of the Company
“Disposal” the disposal of 54.51% equity interest in Dongan Motor by the Company to AVIC for a consideration of RMB2,367,794,200 pursuant to the Equity Swap Agreement

“Domestic Shares”

ordinary shares in the share capital of the Company, with a nominal value of RMB1.00 each, which are subscribed for in Renminbi by PRC nationals and/or PRC incorporated entities

“Dongan Mitsubishi”

Harbin Dongan Automotive Engine Manufacturing Co., Ltd. (哈爾濱東安汽車發動機製造有限公司), a sino-foreign joint venture and is owned as to 36% by Dongan Motor and 15% by Harbin Aviation Industry (Group) Co., Ltd (哈爾濱航空工業 (集團)有限公司), a wholly-owned subsidiary of the Company

“Dongan Motor” Harbin Dongan Auto Engine Co., Ltd. (哈爾濱東安汽車動力股份有限公司), a joint stock limited company whose shares are listed on the Shanghai Stock Exchange with 54.51% of its interest being held by the Company

— 1 —

DEFINITIONS

“EGM”	the extraordinary general meeting to be held on Tuesday, 29
	December 2009 to approve, ratify and confirm the entering
	into of the Equity Swap Agreement and the proposed
	amendment to the Articles of Association
“Equity Swap Agreement”	the equity swap agreement entered into between the Company
	and AVIC on 4 November 2009, pursuant to which the
	Company conditionally agreed to sell and AVIC conditionally
	agreed to purchase from the Company 54.51% equity interest
	in Dongan Motor; and AVIC in return conditionally agreed to
	sell and the Company conditionally agreed to purchase from
	AVIC 43.34% equity interest in JONHON Optronic
“Group”	the Company and its subsidiaries
“H Shares”	overseas listed foreign invested shares of nominal value
	RMB1.00 each in the ordinary share capital of the Company,
	which were traded on the Hong Kong Stock Exchange in HK
	dollars
“HK dollars”	Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”	Hong Kong Special Administrative Region of the PRC
“Independent Board Committee”	an independent board committee comprising independent
	non-executive Directors, namely, Mr. Guo Chongqing, Mr. Li
	Xianzong and Mr. Lau Chung Man, Louis
“Independent Shareholders”	shareholders (other than AVIC and its associates) of the
	Company who are not required to abstain from voting on the
	resolutions(s) to be proposed at the EGM
“JONHON Optronic”	China Aviation Optical-Electrical Technology Co., Ltd.,
	(中航光電科技股份有限公司) a joint stock limited liability
	company whose shares are listed on the Shenzhen Stock
	Exchange with 43.34% of its equity interest being directly
	held by AVIC and 5.45% of its equity interest being indirectly
	held by AVIC through the Concert Parties
“Latest Practicable Date”	20 November 2009, 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 (as amended from time to time)
“PRC”	the People’s Republic of China, for the purpose of this
	circular, excluding Hong Kong, Macau and Taiwan

— 2 —

DEFINITIONS

“Previous Acquisitions”

refer to the Acquisition Agreement entered into between Jiangxi Changhe Automobile Co., Ltd. and AVIC (formerly known as the “organizing unit of Aviation Industry Corporation of China”) dated 9 October 2008 in relation to, among other things, the acquisition of 100% equity interest in Shanghai Aviation Electric Co., Ltd. and 100% equity interest in Lanzhou Wanli Aviation Electrical Co., Ltd.. Details of the transactions can be referred to in the announcement and circular of the Company dated 13 October 2008 and 3 November 2008, respectively

“Previous Disposals”
refer to (i) the Acquisition Agreement entered into between Jiangxi Changhe Automobile Co., Ltd. and AVIC (formerly known as the “organizing unit of Aviation Industry Corporation of China”) dated 9 October 2008 in relation to, among other things, the disposal of the automobile assets of Jiangxi Changhe Automobile Co., Ltd.; (ii) the Share Transfer Agreement I entered into between the Company and AVIC Automobile Industry Co., Ltd. dated 16 April 2009 in relation to, among other things, the disposal of 100% equity interest in Harbin Hafei Automobile Industry Group Co.,; and (iii) the Share Transfer Agreement II entered into between the Company and AVIC Automobile Industry Co., Ltd. dated 16 April 2009 in relation to, among other things, the disposal of 10% equity interest in Jiangxi Changhe Suzuki Automobile Co., Ltd.
“RMB” or “Renminbi” Renminbi, the lawful currency of the PRC
“SASAC”
State-owned Assets Supervision and Administration Commission of the State Council of the PRC (中國國務院國有資產監督管理委員會)
“SFO”
the Securities and Futures Ordinance (Chapter 571of the laws of Hong Kong) as amended from time to time
“Somerley”
Somerley Limited, a corporation licensed to carry out type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO, is the independent financial adviser to the Independent Board Committee and the Independent Shareholders
“Stock Exchange”

The Stock Exchange of Hong Kong Limited

— 3 —

LETTER FROM THE BOARD

==> picture [172 x 55] intentionally omitted <==

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

Executive Directors:

Mr. Lin Zuoming Mr. Tan Ruisong Mr. Wu Xiandong

Non-executive Directors:

Mr. Gu Huizhong Mr. Xu Zhanbin Mr. Geng Ruguang Mr. Zhang Xinguo Mr. Gao Jianshe Mr. Li Fangyong Mr. Chen Yuanxin Mr. Wang Yong Mr. Maurice Savart

Registered Office:

8th Floor, Tower 2 No. 5A Rongchang East Street Beijing Economic-Technological Development Area Beijing, PRC

Principal place of business in Hong Kong: Unit B, 15/F, United Centre Queensway 95, Hong Kong

Independent non-executive Directors:

Mr. Guo Chongqing Mr. Li Xianzong Mr. Lau Chung Man, Louis

25 November 2009

To the Shareholders:

Dear Sir or Madam,

(1) MAJOR AND CONNECTED TRANSACTIONS: DISPOSAL OF EQUITY INTEREST IN DONGAN MOTOR AND ACQUISTION OF EQUITY INTEREST IN JONHON OPTRONIC; (2) PROPOSED AMENDMENT TO THE ARTICLES OF ASSOCIATION AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Reference is made to (1) the announcement of the Company dated 4 November 2009 in relation to the major and connected transactions constituted by the disposal of equity interest in Dongan Motor and the acquisition of equity interest in JONHON Optronic; and (2) the announcement of the Company dated 20 November 2009 in relation to the proposed amendment to the Articles of Association.

* For identification purpose only.

— 4 —

LETTER FROM THE BOARD

The purpose of this circular is to provide you with more information relating to, among other things, (1) further details of the transactions contemplated under the Equity Swap Agreement; (2) the letter from the independent board committee and the recommendation from Somerley on the connected transactions contemplated under the Equity Swap Agreement; and (3) the proposed amendment to the Articles of Association.

A. INTRODUCTION

On 4 November 2009, the Board announced that the Company and AVIC entered into the Equity Swap Agreement, pursuant to which the Company conditionally agreed to sell and AVIC conditionally agreed to purchase from the Company 54.51% equity interest in Dongan Motor; and AVIC in return conditionally agreed to sell and the Company conditionally agreed to purchase from AVIC 43.34% equity interest in JONHON Optronic. The Disposal and the Acquisition are inter-conditional.

B. EQUITY SWAP AGREEMENT

Date

4 November 2009

Parties

(1) The Company; and
(2) AVIC

Principal Terms

(1) 54.51% equity interest in DonganMotor to be disposed of by the Company to AVIC

As at the Latest Practicable Date, the Company holds 54.51% equity interest in Dongan Motor. The total number of issued shares of Dongan Motor is 462,080,000 shares, of which the Company holds 251,893,000 shares and the remaining issued shares are held by the public shareholders. The aggregate net asset value of Dongan Motor was RMB1,909,818,816 as at 31 December 2008. The net asset value attributable to 54.51% equity interest in Dongan Motor as at 31 December 2008 was RMB1,041,042,237.

(2) 43.34% equity interest in JONHON Optronic to be acquired by the Company from AVIC

As at the Latest Practicable Date, AVIC holds 43.34% equity interest in JONHON Optronic. The total number of issued shares of JONHON Optronic is 267,750,000 shares, of which AVIC directly holds 116,035,274 shares and indirectly holds 14,589,645 shares through the Concert

— 5 —

LETTER FROM THE BOARD

Parties. The remaining issued shares are held by the public shareholders. The aggregate net asset value of JONHON Optronic was RMB953,738,202 as at 31 December 2008. The net asset value attributable to 43.34% equity interest in JONHON Optronic as at 31 December 2008 was RMB413,350,137.

Upon Completion, the Company will succeed to the lock-up undertaking given by AVIC in respect of the lock-up of its equity interest in JONHON Optronic for a period of 36 months commencing from the listing date of JONHON Optronic i.e. 1 November 2007 and expiring on 31 October 2010.

Consideration

The consideration for the Disposal shall be RMB2,367,794,200, which shall be satisfied by AVIC by transferring its 43.34% equity interest in JONHON Optronic, the consideration of which shall be RMB1,774,179,339. The difference between the consideration for the Disposal and the consideration for the Acquisition, which amounts to RMB593,614,861 will be settled by AVIC in cash within 20 business days upon the Equity Swap Agreement becomes effective.

The consideration for the transactions contemplated under the Equity Swap Agreement is determined pursuant to Article 24 of “The Interim Measures for the Administration of State-owned Shareholders’ Transfer of Their Shares of Listed Companies”《國有股東轉讓所持上市公司股份管理暫行辦法》 issued by SASAC and CSRC. In particular, the consideration for the Disposal is determined with reference to the 90% of the average of the daily volume-weighted average trading price of Dongan Motor for the last 30 trading days on the Shanghai Stock Exchange immediately preceding 28 October 2009. The consideration for the Acquisition is determined with reference to the 90% of the average of the daily volume-weighted average trading price of JONHON Optronic for the last 30 trading days on the Shenzhen Stock Exchange immediately preceding 28 October 2009.

Conditions Precedent

Completion of the Equity Swap Agreement is conditional upon, among other things, fulfillment of the following conditions:

(1) the Equity Swap Agreement having been duly executed by the legal representatives or authorized person(s) of the parties;
(2) AVIC having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association;
(3) the Company having completed and satisfied all the necessary corporate procedures and complied with the relevant requirements under the Listing Rules and the Articles of Association, including but not limited to the transactions contemplated under the Equity Swap Agreement having been approved by the Independent Shareholders;
(4) the transfers of the equity interests in Dongan Motor and JONHON Optronic contemplated under the Equity Swap Agreement having been approved by SASAC;

— 6 —

LETTER FROM THE BOARD

(5) the changes in relation to the state-owned shares and the state-owned share management plan in Dongan Motor and JONHON Optronic having been approved by SASAC;
(6) waiver from CSRC in relation to AVIC’s general offer obligation in respect of acquisition of the shares in Dongan Motor having been obtained; and
(7) waiver from CSRC in relation to the Company’s general offer obligation in respect of acquisition of the shares in JONHON Optronic having been obtained.

Completion

Completion will take place upon the above conditions having been fulfilled or waived and the transfers of the equity interests in Dongan Motor and JONHON Optronic having been duly registered with China Securities Depository and Clearing Corporation Limited and that the equity interests in Dongan Motor and JONHON Optronic having been transferred to and registered under the name of AVIC and the Company, respectively.

C. INFORMATION RELATING TO THE DISPOSAL AND THE ACQUISITION

The aggregate consideration for the Disposal and the Acquisition shall be RMB2,367,794,200 and RMB1,774,179,339, respectively. The difference between the consideration for the Disposal and the consideration for the Acquisition, which amounts to RMB593,614,861, will be settled by AVIC in cash, which will be applied as general working capital of the Company after Completion.

Information on Dongan Motor

Dongan Motor is a joint stock limited company incorporated in the PRC in 1998 whose shares are listed on the Shanghai Stock Exchange. As at the Latest Practicable Date, Dongan Motor is owned as to 54.51% by the Company, and is principally engaged in the research and development, manufacturing and sales of vehicle engines, gear boxes, parts and components and other relevant automobile products.

The major assets of Dongan Motor include plant, equipment and machineries, etc. engaging in the business of automobile engines.

According to the audited financial statements of Dongan Motor prepared by Zhongrui Yuehua China Certified Public Accountants, a qualified PRC auditor, based on the Generally Accepted Accounting Principles in the PRC, as at 31 December 2008, the total assets and net assets of Dongan Motor amounted to RMB3,384,214,532 and RMB1,909,818,816, respectively. For the financial year ended 31 December 2008, the revenue and the net profits (before and after tax) of Dongan Motor amounted to RMB1,754,328,579, RMB160,196,807 and RMB160,196,807, respectively.

— 7 —

LETTER FROM THE BOARD

Motor amounted to RMB 3,296,813,777 and RMB1,769,138,060, respectively. For the financial year ended 31 December 2007, the revenue and the net profit before tax and the net profits after tax of Dongan Motor amounted to RMB1,852,536,168, RMB150,701,420 and RMB150,701,420, respectively.

Information on JONHON Optronic

JONHON Optronic was incorporated in the PRC in 2002 whose shares are listed on the Shenzhen Stock Exchange. As at the Latest Practicable Date, JONHON Optronic is directly owned as to 43.34% by AVIC and indirectly owned as to 5.45% by AVIC through the Concert Parties. JONHON Optronic is principally engaged in the research and development, manufacturing and sales of electrical connectors, optical components and cable assemblies.

The major assets of JONHON Optronic include plants, equipment and machineries, etc. engaging in the business of electrical connectors and optical components.

According to the audited financial statements of JONHON Optronic prepared by Zhongrui Yuehua China Certified Public Accountants, a qualified PRC auditor, based on the Generally Accepted Accounting Principles in the PRC, as at 31 December 2008, the total assets and net assets of JONHON Optronic amounted to RMB1,821,282,436 and RMB953,738,202, respectively. For the financial year ended 31 December 2008, the revenue and the net profits before tax and the net profit after tax of JONHON Optronic amounted to RMB1,076,654,028, RMB145,147,906 and RMB111,915,779, respectively.

According to the audited financial statements of JONHON Optronic prepared by Zhongrui Yuehua China Certified Public Accountants, a qualified PRC auditor, based on the Generally Accepted Accounting Principles in the PRC, as at 31 December 2007, the total assets and net assets of JONHON Optronic amounted to RMB1,577,176,498 and RMB907,462,824, respectively. For the financial year ended 31 December 2007, the revenue, the net profits before tax and the net profit after tax of JONHON Optronic amounted to RMB831,508,041, RMB121,318,385 and RMB99,237,910, respectively.

There is no audit qualification of the financial statements of JONHON Optronic for the three years ended 31 December 2008.

D. EFFECTS AND FINANCIAL IMPLICATIONS OF THE DISPOSAL

Upon Completion, Dongan Motor will no longer be a subsidiary of the Company and the Company will no longer have any equity interest in Dongan Motor. Accordingly, the financial results of Dongan Motor will not be consolidated in the accounts of the Group. It is expected that the assets and liabilities of the Group will be reduced upon Completion.

— 8 —

LETTER FROM THE BOARD

Further, Dongan Mitsubishi, an indirect subsidiary of the Company which is owned as to 36% by Dongan Motor will cease to be a subsidiary of the Company upon completion of the Disposal. The assets, liabilities and financial results of Dongan Mitsubishi will also cease to be consolidated to the accounts of the Company. The Company will continue to hold 15% equity interest in Dongan Mitsubishi through Harbin Aviation Industry (Group) Co., Ltd., a wholly-owned subsidiary of the Company.

Prior to Completion, AVIC directly holds 43.34% equity interest in JONHON Optronic and indirectly holds 5.45% equity interest in JONHON Optronic through the Concert Parties. Notwithstanding AVIC controls only 48.79% equity interests in JONHON Optronic, AVIC has de facto control over JONHON Optronic and consolidated the accounts of JONHON Optronic in its financial statements based on the following reasons:

Other than AVIC’s and Concert Parties’ interests in JONHON Optronic, the shareholding structure of JONHON Optronic is diversified with dispersed shareholding;
Presentation of other shareholders in general meetings, in person or by proxy, is also widely dispersed. AVIC is thus able to control the majority of effective votes in general meetings, and accordingly allows it to nominate and appoint the majority of the Board of JONHON Optronic;
JONHON Optronic considers AVIC as its controlling shareholders;
The operations of JONHON Optronic are heavily dependent upon the management of AVIC; and
The Company and the Concert Parties entered into an agreement on 4 November 2009 whereby subsequent to Completion, the Concert Parties undertake to exercise their rights to propose resolutions at the general meeting of JONHON Optronic and to vote at the general meeting in accordance with the instructions of the Company.

Notwithstanding the Company will control only 48.79% voting rights in JONHON Optronic, the Company will have de facto control over JONHON Optronic based on reasons set out above. Accordingly, upon Completion, JONHON Optronic’s accounts will be consolidated in the group accounts of the Company and become a subsidiary of the Company.

It is expected that there will be a gain derived from the Disposal, which represents the difference between the market value of 43.34% equity interest in JONHON Optronic plus the difference between the consideration for the Disposal and the Acquisition to be settled in cash minus the net book carrying value of 54.51% equity interest in Dongan Motor. The Disposal gain will be recorded as equity of the group accounts of the Company because the transaction is conducted with the holding company, namely, AVIC, instead of a third party. This is consistent with previous treatments on similar transactions carried out by the Group. For illustrative purpose, based on the average share price in October 2009 of 43.34% equity interest in JONHON Optronic plus the difference between the consideration for the Disposal and the Acquisition to be settled in cash minus the net book carrying value of 54.51% equity interest in Dongan Motor as at 30 September 2009, the estimated net Disposal

— 9 —

LETTER FROM THE BOARD

gain is RMB600 million, which is determined without taking into account of the financial impact of the Acquisition on the accounts of the Company. The actual amount of the Disposal gain can only be ascertained upon Completion. On completion of the entire proposed transactions, which involve the Disposal and the Acquisition, it is expected that there will be a net reduction in the Group’s net assets. However, in view of the business strategy of the Company to dispose the automobile business and Dongan Motor, and the better business prospect and profitability of JONHON Optronic, the Company decided to enter into the transactions with AVIC.

The Group may be subject to tax payment if the PRC tax authority determines that a gain from the Disposal should be calculated by reference to the consideration for the Disposal and Dongan Motor’s original cost to the Group. In accordance with the relevant tax regulations in the PRC, the Company will apply to the State Administration of Taxation for an exemption from payment of such tax should it arise. The possibility of such tax payment cannot be ascertained at the Latest Practicable Date.

E. USE OF PROCEEDS

The sales proceeds derived from the Disposal and the Acquisition contemplated under the Equity Swap Agreement of approximately RMB593,614,861, which represents the difference between the consideration for the Disposal and the consideration for the Acquisition, will be applied as general working capital of the Company after Completion.

F. REASONS FOR AND BENEFITS OF THE DISPOSAL

The Company has commenced the disposal of its automobile business which has been suffering a continuous loss since June 2008. The disposal of the automobile assets of Jiangxi Changhe Automobile Co., Ltd. and the equity interest in Harbin Hafei Automobile Industry Group Co., Ltd. have been completed. Dongan Motor is mainly engaged in the manufacturing of automobile engines and the provision of parts and components for the abovementioned automobile businesses. Upon Completion, the Company will focus on its aviation business.

Through the acquisition of JONHON Optronic, the Company will enhance its research and development on aviation electrical products and improve its manufacturing capabilities in aviation products and assemblies to integrate the aviation business system of the Company. Accordingly, the Directors believe that the transactions contemplated under the Equity Swap Agreement will improve the operations of the Company and enhance the profitability and the capability to achieve sustainable development of the Company which will increase the investment value of the Company. The Directors are of the view that the disposal of the equity interest in Dongan Motor and the acquisition of the equity interest in JONHON Optronic will enable the Group to focus on its aviation business and further strengthen its market position in the PRC aviation industry. The Directors (excluding the independent non-executive Directors) are of the opinion that the terms of the Equity Swap Agreement are fair and reasonable and in the interests of the Company and its shareholders as a whole.

— 10 —

LETTER FROM THE BOARD

G. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE GROUP

Business Review

The Group is mainly engaged in aviation and automobile business. During the first half of 2009, the domestic economy remains depressed, and as a result, many state-owned enterprises did not perform well with revenues and profits having declined on a year-on-year basis. Despite the challenging economic environment, the Group went against the tide and managed to turn its continuing operations from loss-making to profit-making during the period under review. Upon the reorganization of the PRC aviation industry in November 2008, and based on the development strategy formulated by the new session of the Board, the Company will focus on becoming a leading manufacturer of civil aviation products in the Chinese aviation industry, creating a complete value chain and acquiring a platform for overseas financing, merger and acquisition. The Group has made remarkable progress in reorganization its business during the first half of the year. The disposal of the loss-making vehicle business of Jiangxi Changhe Automobile Co., Ltd. (“Changhe Auto”) had been completed by the end of April, and the profitability of the aviation business had steadily improved during the first half of 2009, leading to a sharp improvement in the Company’s financial performance.

For the six months ended 30 June 2009, the comprehensive business (Continuing operations and Discontinued operations) of the Group recorded a revenue of RMB8,996 million, representing an increase of 8.78% over that of the corresponding period in 2008. The comprehensive business resulted in a net loss of RMB20 million attributable to equity holders of the Company for the first half of 2009, representing a decrease of RMB435 million, or 95.6% compared with the loss in the corresponding period of last year.

The continuing operations business of the Group recorded a revenue of RMB7,884 million, representing an increase of 11.77% over that of the corresponding period in 2008. The continuing operations business resulted in a net profit of RMB7 million attributable to equity holders of the Company for the first half of 2009 showing a turn from loss to profit during the period under review compared with the loss of RMB301 million in the corresponding period of last year (details are set out in Note 11 to the condensed consolidated interim financial information).

Aviation Business

For the first half of 2009, despite the continuous impact of international financial crisis, the stimulating policy of the government “propel domestic demands and stimulate consumption” gradually improved the domestic macro economic environment. At the same time the national economy and social demands are growing rapidly. All the factors provide great opportunities to the development of the China aviation industry and the expansion of aviation business of the Company. The aviation business of the Group is growing steadily and the continuous promotion of a balance product mix proves to be an effective business strategy.

For the first half of 2009, the Group recorded a revenue of RMB2,030 million in the sales of aviation products, representing an increase by 15.02% as compared to that of the corresponding period in 2008, out of that, the Group’s helicopter business recorded a sales revenue of RMB1,144million, representing an increase by 56.75% as compared to that of the corresponding period in 2008.

— 11 —

LETTER FROM THE BOARD

After the reorganization of automobile business, the Group set up an aviation electrical business, delivered products for different models of aircraft to satisfy the demands of its customers. At the same time it achieved a significant improvement in the bidding of projects on research and manufacture of aircraft.

During the first half of 2009, the Group further explored the market. On 15 June 2009, the 48th session of Paris Aviation Exhibition was inaugurated. Products of the Company such as H425 civil helicopter, Z11 multi-purpose light helicopter and L15 advanced trainer, of which the Group has participated in its investment and development were displayed in the Paris Aviation Exhibition which attracted the attention of international aviation industry.

In May 2009, Hafei Aviation Industry Co., Ltd., and AVIC International Leasing Co., Ltd. entered into a purchasing agreement for one Y12 aircraft.

On 8 June 2009, the 05 prototype of L15 advanced trainer, of which the Group has participated in its investment and development, successfully had its debut flight.

On 23 June 2009, Airbus (Tianjin) Assembly Company, a joint venture which had been invested and set up by the Company inaugurated the A320 display and delivery ceremony. On the next day, the first A320 flew from Chengdu to Beijing successfully and completed its first commercial journey.

On 30 June 2009, Hafei Airbus Composite Material Manufacture center, a joint venture which was invested directly by the Group, made the groundbreaking.

Automobile Business

During the six months ended on 30 June 2009, the total sales volume of the entire vehicle automobile products of the Group’s comprehensive business (Continuing operations and Discontinued operations) amounted to 174,000 units, representing an increase of 4.87% as compared to the corresponding period of last year, out of which, the sales volume of sedans was 51,600 units; and the sales volume of mini-vans and trucks was 122,400 units. The sales revenue of the Group’s automobile products (Continuing operations and Discontinued operations) amounted to RMB6,966 million in the first half of 2009, representing an increase of 7.09% compared to the corresponding period last year; out of which, the sales revenue of the Group’s entire vehicle automobile products amounted to RMB4,364 million, representing an increase of 3.99% as compared to the corresponding period of last year. The sales revenue of engines and automobile parts and components sold to external parties of the Group was RMB2,602 million, representing an increase of 12.68% as compared to the corresponding period of last year. After taking into account the costs attributable to the automobile segment, the automobile segment in fact made a loss attributable to Shareholders.

In the first half of 2009, the Group completed the reorganization of Changhe Auto which made continuous losses.

During the first half of 2009, with the promotion of the preferential policies such as the reduction of the Vehicle Purchase Tax and the China’s Car Subsidy Program for Rural Areas, the domestic sales volume of the entire automobile showed a great increase as compared to the corresponding period of last year. At the same time, the influence of the financial crises on international automobile market still exists, the export of automobiles presented a further drop.

— 12 —

LETTER FROM THE BOARD

For the first half of the year, Changhe “Beidouxing” and Hafei “Minyi” was still on hot sale. The sales of Changhe “Furuida” series model also showed a rapid increase. The research of new engine programme of Harbin Dongan Auto Engine Co., Ltd. was still going on.

Future Outlook

Aviation Business

The PRC government recognizes the importance of the aviation industry in the development of its defence and economy, it formulated a series of strategy to rapidly promote the development of the aviation industry, which includes the release of the prior strict airspace control policy and the open of the low altitude airspace gradually, the government’s investment of RMB4,000 billion to fasten the pace in the construction of civil aviation airport and improve the basic facilities for helicopter general aviation service, the formulation of policies regarding the general aviation industry development and special subsidy, the speeding up of developing a helicopter market in PRC. All these strategies provide the Group with opportunities for continuous development.

The Company entered into the aviation electrical industry through assets swap. As an important subsection of aviation manufacturing industry, aviation electrical manufacturing will benefit from the development of the entire aviation manufacturing industry. The launching of the large scale aircraft project will promote the aviation electrical business of the Group.

In the second half of 2009 the Group will grasp the opportunities to promote the research and development of products, enhance the training of employees and ensure timely completion of the orders from customers; to fully utilize its technology, equipment, talents and capital to explore the market, and to position itself in the market. The Group will continue to strengthen its supervision system, strengthen the management, regulate the operation, improve the efficiency and reward its shareholders. At the same time, the Group will, through international capital operation, enhance its technology and management, and through international cooperation, to extend its capital strength and enlarge its the market value, and to further consolidate the market leading position of the Company in helicopter, trainers, regional jet and general purpose aircraft industry, and to position the Company as a flagship manufacturer with a comprehensive value chain in China aviation industry for the manufacture of civil aviation products.

Automobile Business

In the second half of 2009, the Group will emphasize on cost cutting, its goal is to enhance customers’ satisfaction and to improve the efficiency overall. The Group will reform its marketing strategy and enlarge its market share. According to the strategic arrangement, the reorganization of automobile business will continuously be the key of promotion. The disposal of automobile assets which are making a loss, such as Harbin Hafei Automobile Industry Group Co., Ltd. business have been completed. The Group is currently undergoing reorganization of its automobile engines business.

— 13 —

LETTER FROM THE BOARD

Financial Review

Revenue

Comprehensive business (Continuing operations and Discontinued operations)

For the six months ended 30 June 2009, the comprehensive business (Continuing operations and Discontinued operations) of the Group achieved a revenue of RMB8,996 million, representing an increase of RMB726 million, or 8.78%, as compared to RMB8,270 million for the corresponding period in 2008.

Continuing operations

For the six months ended 30 June 2009, the continuing operations of the Group achieved a revenue of RMB7,884 million, representing an increase of RMB830 million, or 11.77%, as compared to RMB7,054 million for the corresponding period in 2008. This is mainly contributed by the comprehensive impact of the balance product mix of aviation business and the supportive policy of the government on the automobile industry.

Segment Information

Comprehensive business

For the six months ended 30 June 2009, the revenue of the aviation segment of the comprehensive business of the Group, amounted to RMB2,030 million, representing an increase of 15.02% as compared to the corresponding period in 2008 and accounting for 22.57% of the total revenue. The revenue of the automobile segment of the comprehensive business amounted to RMB6,966 million, representing an increase of 7.09% as compared to the corresponding period in 2008 and accounting for 77.43% of the total revenue.

Continuing operations

For the six months ended 30 June 2009, the revenue of the aviation segment of the continuing operations amounted to RMB2,030 million, representing an increase of 15.02% as compared to the corresponding period in 2008 and accounting for 25.75% of the total revenue which is mainly attributable to the effect of balance product mix of aviation products. The revenue of the automobile segment amounted to RMB5,854million, representing an increase of 10.69% as compared to the corresponding period in 2008 and accounting for 74.25% of the total revenue. During the period, due to the benefits derived from the supportive policy of the government on the automobile industry and the further expansion of marketing of the Group, there were increases in both the sales volume of the entire vehicles and the auto engines sold to parties outside the Group.

— 14 —

LETTER FROM THE BOARD

Gross profit

Comprehensive business

For the six months ended 30 June 2009, the comprehensive business of the Group achieved a gross profit of RMB1,382 million, representing an increase of RMB453 million, or 48.79%, as compared to RMB929 million for the corresponding period in 2008, out of which the gross profit of aviation segment of the Group amounted to RMB379 million, representing an increase of 15.68% as compared to that of the corresponding period in 2008. The increase was mainly attributable to the growth in the gross profit of helicopter. The gross profit of automobile segment amounted to RMB1,003 million, representing an increase of 66.86% as compared to that of the corresponding period in 2008. This is mainly attributable to the positive progress of the results and significant rising of the gross profit of the entire automobile business and the continuous increase of the gross profit of automobile engines sold to external parties of the Group.

Continuing operations

For the six months ended 30 June 2009, the continuing operations of the Group achieved a gross profit of RMB1,311 million, representing an increase of RMB326 million, or 33.13%, as compared to RMB985 million for the corresponding period in 2008. Out of which, the gross profit of aviation segment of the Group amounted to RMB379 million, representing an increase of 15.68% as compared to that of the corresponding period in 2008. The gross profit of automobile segment amounted to RMB932 million, representing an increase of 41.84% as compared to that of the corresponding period in 2008.

Selling and distribution expenses (Continuing operations)

For the six months ended 30 June 2009, the selling and distribution expenses of the Group’s continuing operations amounted to RMB401 million, representing an increase of RMB94 million, or 30.62%, as compared to RMB307 million for the corresponding period in 2008. The increase was mainly attributable to the increase of the sales volume of the automobile products.

General and administrative expenses (Continuing operations)

For the six months ended 30 June 2009, the general and administrative expenses of the Group’s continuing operations amounted to RMB525 million, representing an increase of RMB119 million, or 29.31%, as compared to RMB406 million of the corresponding period in 2008. The rise was mainly attributable to the increase in the research and development expense of automobile engines.

Finance costs, net (Continuing operations)

For the six months ended 30 June 2009, the Group’s net finance costs of the continuing operations amounted to RMB79 million, representing a decrease of RMB64 million, or 44.76%, as compared to that of the corresponding period in 2008. The decrease was attributable to the drop of the interest rate of the borrowings.

— 15 —

LETTER FROM THE BOARD

Net loss/profit attributable to equity holders of the Company

Comprehensive business

For the six months ended 30 June 2009, the comprehensive business of the Group suffered a net loss of RMB20 million attributable to the equity holders of the Company, which was RMB435 million or 95.6% less than the loss of RMB455 million for the corresponding period in 2008.

Continuing operations

For the six months ended 30 June 2009, the continuing operations of the Group made a net profit of RMB7 million attributable to the equity holders of the Company, which showed a turn from loss to profit compared with the loss of RMB301 million for the corresponding period in 2008. This is mainly because of the gradual increase of the profitability of the aviation product and the result of aviation business in this period. The reorganization of part of the automobile assets was completed and aviation assets were injected. Further, the loss of the entire vehicles results comparing to that of the corresponding period of last year was greatly reduced due to the support of the government to the automobile industry and the cost-controlling measures adopted by the management of the Group.

Liquidity and Financial Resources

As at 30 June 2009, the Group’s net cash and cash equivalents amounted to RMB2,281 million. Cash and cash equivalents were mainly derived from cash and bank deposits at the beginning of 2009 and funds generated from its operations during this period.

As at 30 June 2009, the Group’s total borrowings amounted to RMB5,774 million, out of which short-term borrowings amounted to RMB4,073 million, current portion of long-term borrowings amounted to RMB303 million and non-current portion of long-term borrowings amounted to RMB1,398 million.

The Group’s long-term borrowings are repayable as follows:

	RMB million
Within one year	303
In the second year	473
In the third to fifth year	597
After the fith year	328
Total	1,701

As at 30 June 2009, the Group’s bank borrowings amounted to RMB5,496 million with an average interest rate of 4.93% per annum, representing a decrease of RMB536 million as compared to that at the beginning of 2009; and other borrowings amounted to RMB278 million with an average interest rate of 2.23% per annum, representing a decrease of RMB319 million as compared to that at the beginning of 2009. Seasonal influence on the Group’s borrowings was relatively insignificant.

— 16 —

LETTER FROM THE BOARD

Capital Structure

As at 30 June 2009, the Group’s borrowings were mainly denominated in Renminbi whilst cash and cash equivalents were mainly denominated in Renminbi, Hong Kong dollars and United States dollars.

Pledge on assets

As at 30 June 2009, the Group’s borrowings secured by assets amounted to RMB200 million, representing a decrease of RMB1 million as compared to RMB201 million at the beginning of 2009. These borrowings were secured by real estate properties with a book value of RMB265 million.

Gearing ratio

As at 30 June 2009, the Group’s gearing ratio was 26.75% (31 December 2008: 28.47%), which was derived from dividing the total borrowings by total assets.

Exchange risks

Due to business operational needs, the Group has taken out some loans denominated in United States dollars. In addition, the Company has kept some deposits in Hong Kong dollars raised from the public offering. The Group was exposed to exchange risks as a result of fluctuation in exchange rates during the period under review.

Contingent Liabilities and Guarantees

As at 30 June 2009, the Group did not provide any guarantees for any third party and had no significant contingent liabilities.

Material Acquisition and Disposal

On 16 April 2009, the Company and AVIC Automobile Industry Co., Ltd. (“AVIC Automobile”) entered into the Share Transfer Agreements, pursuant to which the Company conditionally agreed to sell and AVIC Automobile conditionally agreed to purchase from the Company 100% equity interest in Harbin Hafei Automobile Industry Group Co., Ltd. (“Harbin Automobile Group”) and 10% equity interest in Jiangxi Changhe Suzuki Automobile Co., Ltd. (“Changhe Suzuki”) for an aggregate consideration of RMB110.4 million, which would be satisfied by AVIC Automobile in cash. The transactions have been completed. Upon completion, Harbin Automobile Group will no longer be a subsidiary of the Company and the Company will no longer have any equity interest in Changhe Suzuki. The transactions contemplated under the Share Transfer Agreements constitute a major transaction pursuant to Chapter 14 of the Listing Rules and connected transactions pursuant to Chapter 14A of the Listing Rules. The transactions were approved by the independent shareholders of the Company at the annual general meeting of the Company held on 9 June 2009. Details of the transactions can be referred to in the announcement and circular of the Company dated 16 April 2009 and 6 May 2009 respectively.

— 17 —

LETTER FROM THE BOARD

Use of Proceeds

Pursuant to the plan on use of proceeds, as at 30 June 2009, a total of RMB955 million had been invested, of which RMB700 million had been invested in automobile products for research, development and technical upgrade of new vehicle models and new engine models, while RMB255 million had been invested in aviation products mainly for research and development of new advanced trainer models and helicopters. The rest of the proceeds has been placed in short term deposits in banks in the PRC. The Company will utilize the rest of the proceeds in accordance with the specific plan of use of proceeds.

Employees

As at 30 June 2009, the Group had 23,033 employees. The Group’s staff costs amounted to RMB566 million for the six months ended 30 June 2009 representing an increase of RMB57 million compared with RMB509 million of the corresponding period of last year.

Other Major Events

On 30 January 2009, the Company entered into the Joint Venture Agreement, pursuant to which Harbin Aircraft Industry Group Co., Ltd., Airbus China Limited, the Company, Hafei Aviation Industry Co., Ltd. (“Hafei Aviation”) and Harbin Development Zone Heli Infrastructure Development Co., Ltd. agreed to establish a joint venture company in China to engage in the business of manufacturing of composite material parts and components for the Airbus A350 XWB and Airbus A320 aircraft series. The total capital contribution of the Group (including the capital commitment of the Company and Hafei Aviation) in respect of the joint venture company amounts to USD30,000,000, representing 20% equity interest in the joint venture company. The transactions contemplated under the Joint Venture Agreement constitute a connected transaction pursuant to Chapter 14A of the Listing Rules. The transactions were approved by independent shareholders of the Company at the extraordinary general meeting of the Company held on 9 April 2009. Details of the transaction can be referred to in the announcement and circular of the Company dated 3 February 2009 and 20 February 2009, respectively.
On 9 October 2008, Changhe Auto, a non wholly-owned subsidiary of the Company and AVIC entered into the acquisition agreement in relation to the acquisition of aviation assets by Changhe Auto from AVIC, and the disposal of automobile assets and issuance of consideration shares by Changhe Auto to AVIC. Details of the Transaction can be referred to in the announcement and circular of the Company dated 13 October 2008 and 3 November 2008, respectively.

— 18 —

LETTER FROM THE BOARD

H. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF JONHON OPTRONICS

JONHON Optronic is a joint stock limited company incorporated in the PRC and listed domestically. Prior to Completion, AVIC is the controlling shareholder of JONHON Optronic, holding 43.34% equity interest in JONHON Optronic.

JONHON Optronic is principally engaged in the research and development, manufacturing and sales of medium to top grade electrical connectors, optical components and cable assemblies. It also provides complicated connectors solutions. JONHON Optronic has a comprehensive system on the research and development, manufacturing and testing of connectors. It is the largest military connector manufacturer in the PRC and ranks first domestically in the research, and development as well as manufacturing capabilities of both electrical and optical military connectors. It is a leader in the domestic optical components market.

Financial Performance

JONHON Optronic was listed on the Shenzhen Stock Exchange in November 2007. The audited financial information of JONHON Optronic for the year 2006, 2007 and 2008 and its audited financial information for the nine months ended 30 September 2009 are set out as followed:

Note: RMB’000

	For the nine	For the	For the	For the
	months ended	year ended	year ended	year ended
	30 Sep. 2009	31 Dec. 2008	31 Dec. 2007	31 Dec. 2006
Total Turnover	860,733	1,015,097	777,882	721,541
Operating Profit	112,566	158,164	135,114	115,431
Net Profit	93,180	122,665	102,880	83,831
Net Profit Attributable to
shareholders of the parent
company	89,829	114,341	100,593	75,921

(i) For the year ended 31 December 2006

For the year ended 31 December 2006, JONHON Optronic recorded a revenue of approximately RMB722 million and a net profit attributable to the parent company of approximately RMB76 million.

(ii) For the year ended 31 December 2007

For the year ended 31 December 2007, JONHON Optronic recorded the revenue, operating profit and net profit attributable to the shareholders of parent company of approximately RMB778 million, RMB135 million and RMB101 million respectively, representing an increase of 7.81%, 17.05% and

— 19 —

LETTER FROM THE BOARD

32.50% over that of 2006, respectively. The increases were mainly attributable to (1) the increase in orders for civil products in 2007; (2) increase in selling prices; and (3) decrease in production cost as a result of expansion in production scale of optical components.

(iii) For the year ended 31 December 2008

For the year ended 31 December 2008, JONHON Optronic recorded the revenue, operating profit and net profit attributable to the shareholders of parent company of approximately RMB1,015 million, RMB158million and RMB114 million respectively, representing an increase of 30.49%, 17.05% and 13.67% over that of 2007, respectively. The increases were mainly attributable to (1) a significant rise in orders for military products, which ascended by 40% as compared to that of 2007; and (2) a steady increase in overseas orders for civil products.

(iv) For the nine months ended 30 September 2009

For the nine months ended 30 September 2009, JONHON Optronic recorded a revenue of approximately RMB861 million, representing an increase of 19.25% over that of the same period in 2008, an operating profit of approximately RMB113 million, and a net profit attributable to the shareholders of parent company of approximately RMB90 million, representing an increase of 14.83% over that of the same period in 2008.

Current capital, financial resources and capital structure

Note: RMB’000

	For the nine	For the	For the	For the
	months ended	year ended	year ended	year ended
	30 Sep. 2009	31 Dec. 2008	31 Dec. 2007	31 Dec. 2006
Current Assets	1,558,465	1,328,251	1,272,148	670,683
Total Assets	2,181,305	1,821,282	1,586,366	925,595
Current Liabilities	571,820	622,681	543,575	434,482
Total Liabilities	1,013,833	750,747	632,774	480,785
Current Ratio	2.73	2.13	2.34	1.54
Assets-Liability Ratio	46.48%	41.22%	39.89%	51.94%

As at 30 September 2009, JONHON Optronic had net current assets of RMB987 million, comprising accounts receivable of RMB627 million, advance to suppliers of RMB44 million, other receivables and prepayments of RMB27 million, inventories of RMB300 million, pledged deposits of RMB104 million, term deposits with initial term of over three months of RMB268 million and cash and cash equivalents of RMB187 million. Current liabilities mainly included accounts payable of RMB370 million, advances from customers of RMB16 million, other payables and accruals of RMB92 million and short-term borrowings of RMB90 million.

— 20 —

LETTER FROM THE BOARD

Despite an increase in asset-liability ratio of JONHON Optronic in the first nine months of 2009, its asset-liability ratio remains at a reasonable level by industry standard. The current ratio of JONHON Optronic for the first nine months of 2009 had increased to a certain extent.

For the first half of 2009, most borrowings of JONHON Optronic were lent by AVIC and there was a very small amount of borrowings from banks, therefore, changes in the macro-economic policies of the PRC Government to monitor loan activities will have little effect on JONHON Optronic.

Assets pledged

As at 31 December 2006, 2007, 2008 and 30 September 2009, none of JONHON Optronic’s non-current assets have been pledged.

Outlook for new business

Since its establishment, JONHON Optronic has always been engaging in the manufacturing and sales of electrical connectors, optical components and cable assemblies. It has no plan on developing other business.

Significant investments

Upon its listing in 2007, JONHON Optronic has used the proceeds from the listing to several projects as electrical connector and development and industrialization of optical-electrical transportation integration, which expect a total investment of RMB570 million. As at 30 September 2009, JONHON Optronic’s accumulative total investments amounted to RMB278 million.

Significant acquisition and sale

Upon the listing, JONHON Optronic increased investment in Shenyang Xinghua Aviation Electric Equipment Company Limited (瀋陽興華航空電器有限責任公司) (“Shenyang Xinghua”) by using the proceeds from the listing and self-collected fund to strengthen its shareholding proportion in Shenyang Xinghua. The additional investment was settled on 18 January 2008. Shengyang Xinghua completed changes of industrial and commercial registration on 21 March 2008. Its registered capital increased from RMB37.52 million to RMB61.2653 million, to which the contribution from JONHON Optronic increased to 51%. Shenyang Xinghua is principally engaged in the manfacturing and sales of aircraft electric equipment.

Exchange risks

RMB’s relentless appreciation against US Dollar will have some effect on orders of JONHON Optronic from its overseas customers. However, as those overseas orders only accounts for 2.3% in JONHON Optronic’s total orders, it has little impact on JONHON Optronic as a whole.

— 21 —

LETTER FROM THE BOARD

Employees and remuneration policy

As at 31 December 2006, 31 December 2007 and 31 December 2008, JONHON Optronic had 2,388, 2,649 and 4,536 employees, respectively. It had paid remunerations of RMB212 million to its employees in 2008. JONHON Optronic determines remuneration policies in accordance with prevailing market level and performances of certain employees.

Contingent liabilities

For the three years ended 31 December 2008 and as at 30 September 2009, JONHON Optronic had no significant contingent liabilities.

I. LISTING RULES IMPLICATIONS

As the highest of the applicable ratios for the Disposal, when aggregated with the Previous Disposals, is over 25% but is less than 75%, the Disposal constitutes a major transaction of the Company pursuant to Chapter 14 of the Listing Rules. As the highest of the applicable ratios for the Acquisition, when aggregated with the Previous Acquisitions pursuant to Rule 14A.25 of the Listing Rules, is over 5% but is less than 25%, the Acquisition constitutes a discloseable transaction of the Company. Pursuant to Rule 14.24, in the case of a transaction involving both an acquisition and a disposal, the Stock Exchange will apply the percentage ratios to both the acquisition and the disposal and the transaction will be classified by reference to the larger of the acquisition or disposal. Accordingly, the Acquisition will also constitute a major transaction of the Company. In addition, as AVIC is the controlling Shareholder of the Company holding 61.06% equity interest in the Company, AVIC is a connected person of the Company pursuant to Chapter 14A of the Listing Rules. Therefore, the Disposal and the Acquisition constitute connected transactions of the Company, which will be subject to approval by Independent Shareholders. As AVIC has material interest in the Disposal and Acquisition, AVIC and its associates will abstain from voting on the ordinary resolution to be proposed at the EGM.

An Independent Board Committee comprising all the independent non-executive Directors will be formed to advise the Independent Shareholders on the connected transactions contemplated under the Equity Swap Agreement. Somerley has been appointed to advise the Independent Board Committee and the Independent Shareholders in this regard.

J. GENERAL

Information on Parties

Information on the Company

As at the Latest Practicable Date, the Company is held as to 61.06% by AVIC, being the controlling shareholder of the Company. The Company is mainly engaged in the research, development, manufacture and sales of vehicles and aviation products.

— 22 —

LETTER FROM THE BOARD

Information on AVIC

As at the Latest Practicable Date, AVIC is held and controlled by the State Council of the PRC. AVIC is the controlling shareholder of the Company holding 61.06% equity interest in the Company. AVIC is mainly engaged in the development and manufacture of aviation products and non-aviation products such as the automobile engine and parts and components.

Information on Dongan Motor

As at the Latest Practicable Date, the Company is the controlling shareholder of Dongan Motor holding 54.51% equity interest in Dongan Motor. Dongan Motor is principally engaged in the research and development, manufacture and sales of vehicle engines, gear box, parts and components and other relevant automobile products.

Information on JONHON Optronic

As at the Latest Practicable Date, AVIC is the controlling shareholders of JONHON Optronic and directly holds 43.34% equity interest in JONHON Optronic and indirectly holds 5.45% equity interest in JONHON Optronic. JONHON Optronic is a subsidiary of AVIC. JONHON Optronic is principally engaged in the research and development, manufacture and sales of electrical connectors, optical components and cable assemblies.

K. PROPOSED AMENDMENT TO THE ARTICLES OF ASSOCIATION

In order to reflect the person designated to be in charge of the financial affairs of the Company, the Company proposed to add a new clause, which reads as follows, to Article 105 of the Articles of Association as clause (2) of Article 105:

“The Board will designate a deputy general manager holding the position of chief financial officer to be the person in charge of the financial affairs of the Company. Unless otherwise specified in the articles of association of the Company, all references to the person in charge of the financial affairs of the Company (i.e. the chief financial officer) shall mean the deputy general manager so designated by the Board.”

The Company confirms that there is nothing unusual about the proposed amendment to the Articles of Association for a company listed in Hong Kong.

L. EGM

The notice of the EGM to be held at 9:00 a.m. on Tuesday, 29 December 2009 at Avic Hotel, No. 10 Yi, Central East Third Ring Road, Chaoyang District, Beijing, the People’s Republic of China is set out on pages N-1 to N-4 of this circular, at which (1) an ordinary resolution will be proposed to approve, among other matters, the terms and conditions of the Equity Swap Agreement and; (2) a special resolution will be proposed to amend the Articles of Association.

— 23 —

LETTER FROM THE BOARD

A reply slip and a form of proxy for use at the EGM are enclosed herewith. Shareholders who intend to appoint a proxy to attend the EGM shall complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event no later than 24 hours before the time fixed for the holding of EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof (as the case may be) should you wish.

AVIC and its associate(s), if any, are connected persons of the Company as defined under the Listing Rules and they will abstain from voting at the EGM in respect of the ordinary resolution to be proposed at the EGM. As at the Latest Practicable Date, AVIC and its associate(s), if any, directly owned 2,835,305,636 shares, representing approximately 61.06% of the total issued share capital of the Company. AVIC was entitled to control all voting rights in respect of such shares. Pursuant to Rule 13.39(4) of the Listing Rules, all votes at the EGM will be taken by poll. The Company will announce the results of the poll in accordance with the Listing Rules following the EGM.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 25 of this circular. The Directors and the Independent Board Committee, having taken into account the advice of Somerley, consider that the terms of the Equity Swap Agreement are fair and reasonable and the transactions contemplated under the Equity Swap Agreement are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors and the Independent Board Committee recommend the Independent Shareholders to vote in favour of the ordinary resolution relating to the Equity Swap Agreement to be proposed at the EGM.

Further, the Board also considers the proposed amendment to the Articles of Association to be in the interests of the Company and the Shareholders, and recommends the Shareholders to vote in favour of the special resolution to amend the Articles of Association to be proposed at the EGM.

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

Yours faithfully, By Order of the Board Lin Zuoming Chairman

— 24 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [172 x 55] intentionally omitted <==

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

25 November 2009

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular (the “Circular”) dated 25 November 2009 despatched to the Shareholders of which this letter forms a part. Unless the context requires otherwise, terms and expressions defined in the Circular shall have the same meanings in this letter.

We have been appointed to advise the Independent Shareholders on whether the terms of the Equity Swap Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Somerley has been appointed to advise the Independent Board Committee and Independent Shareholders in respect of the terms of the Equity Swap Agreement.

We wish to draw your attention to the letter from the Board set out on pages 4 to 24 of the Circular and the letter from Somerley set out on pages 26 to 55 of the Circular.

Having considered the advice given by Somerley, we are of the opinion that the Equity Swap Agreement are on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned. We also consider the entering into of the Equity Swap Agreement is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM.

Yours faithfully,

For and on behalf of the Independent Board Committee AviChina Industry & Technology Company Limited* Guo Chongqing, Li Xianzong, Lau Chung Man, Louis

Independent Non-executive Directors

* For identification purpose only.

— 25 —

LETTER FROM SOMERLEY

SOMERLEY LIMITED 10th Floor The Hong Kong Club Building 3A Chater Road Central Hong Kong 25 November 2009

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

MAJOR AND CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with the Equity Swap Agreement entered into between the Company and AVIC on 4 November 2009. Details of the Equity Swap Agreement are contained in the circular to the Shareholders dated 25 November 2009 (the “Circular”), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

As at the Latest Practicable Date, the Company was owned as to approximately 61.06% by AVIC. Accordingly, the transactions as contemplated under the Equity Swap Agreement between the Company and AVIC will constitute connected transactions of the Company and be subject to approval by Independent Shareholders by way of poll pursuant to the Listing Rules.

The Independent Board Committee comprising all of the three independent non-executive Directors, namely Mr. Guo Chongqing, Mr. Li Xianzong and Mr. Lau Chung Man, Louis, has been formed to advise the Independent Shareholders in respect of the terms of the Equity Swap Agreement. We, Somerley Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

In formulating our advice, we have relied on the information and facts supplied, and the opinions expressed, by the Directors and the management of the Group and have assumed that they are true, accurate and complete at the date of the Circular and will remain so up to the time of the EGM. We have also sought and received confirmation from the Directors that all material relevant information has been supplied to us and that no material facts has been omitted from the information supplied and opinions expressed to us. We have no reason to doubt the truth or accuracy of the information provided to us, or to believe that any material information has been omitted or withheld. We have relied on such information and consider that the information we have received is sufficient for us to reach our advice

— 26 —

LETTER FROM SOMERLEY

and recommendation as set out in this letter and to justify our reliance on such information. However, we have not conducted any independent investigation into the business and affairs of each of the Group (including Dongan Motor which is the subject matter of the Equity Swap Agreement), JONHON Optronic, AVIC and their respective subsidiaries and associated companies.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In considering whether the terms of the Equity Swap Agreement are fair and reasonable insofar as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons set out below:

1. Background to and reasons for entering into the Equity Swap Agreement

The Group is owned as to 61.06% by AVIC which is the only PRC state-owned enterprise specialising in the manufacturing of aircrafts and aviation products. As a member company of AVIC, the Group is also engaged in the aviation industry. In addition, the Group also manufactures automobile and auto products, using skills generated from its aviation operation.

The aviation segment has always been the principal profit contributor of the Group, while the automobile business made continuous losses up to the year ended 31 December 2008. Given this, the Group has started from the second half of 2008 embarked on a restructure policy (the “Reorganisation”) to divest of its automobile business and re-allocate its resources and manpower to the aviation segment, in which the Group, being the Hong Kong listed flagship of AVIC, has a competitive advantage. The Directors also believe that this strategy would enable the Group to increase its share in the growing PRC aviation market, which, according to the management of the Group, is one of the strongly promoted industries by the PRC Government.

Set out below is the group chart of the Company’s automobile segment prior to the Reorganisation:

==> picture [358 x 168] intentionally omitted <==

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

The Company
(Note 2)
100% 58.77% 59.02%
Changhe Auto
Harbin Auto Group Dongan Motor
(as defined below)
(as defined below) (Note 3)
(Note 3)
74.81% 15% 36% 100% 41% 10%
Hefei Changhe Changhe Suzuki
Hafei Motor Co., Ltd. Dongan Mitsubishi
Automobile Co., Ltd. (as defined below)
----- End of picture text -----

Notes:

(1) For the purpose of this letter, the aviation segment of the Group was not shown in the above group chart.

— 27 —

LETTER FROM SOMERLEY

(2) Shares of the Company are listed on the Stock Exchange.
(3) Shares of Dongan Motor and Changhe Auto are listed on Shanghai Stock Exchange.

On 13 October 2008, the Company announced the first step of the Reorganisation which involves swapping its automobile assets held through Jiangxi Changhe Automobile Co., Ltd. (“Changhe Auto”), a subsidiary of the Company and shares of which are listed on the Shanghai Stock Exchange, for aviation assets held by other companies controlled by AVIC (the “Assets Swap”). This transaction was completed on 30 April 2009.

On 16 April 2009, the Company announced the second step of the Reorganisation which involved disposal of the 100% equity interest in Harbin Hafei Automobile Industry Group Co., Ltd. (“Harbin Auto Group”) and a 10% equity interest in Jiangxi Changhe Suzuki Automobile Co., Ltd. (“Changhe Suzuki”), both being engaged in the manufacture and sale of automobiles, to a wholly-owned subsidiary of AVIC for an aggregate cash consideration of approximately RMB110.4 million. The disposal of Harbin Auto Group was completed on 21 October 2009.

The Group now proposes to divest of its automobile engine manufacturing subsidiary, Dongan Motor, by entering into the Equity Swap Agreement. Pursuant to the said agreement, the Group has agreed to sell to AVIC its 54.51% interest in Dongan Motor, the issued shares of which are listed on the Shanghai Stock Exchange, in exchange for a 43.34% interest in JONHON Optronic, the issued shares of which are listed on the Shenzhen Stock Exchange, with the balance of the consideration to be satisfied in cash.

Upon completion of the above Reorganisation, the Group would cease to have any controlling interest in any automobile business. The Group would, however, still maintain, through a subsidiary engaged in aviation segment, a 15% interest in Dongan Mitsubishi, which is a joint venture company set up with, among others, Mitsubishi Motors Corporation.

The Directors noted that for the first half of 30 June 2009, the Group’s automobile business achieved a positive segment result which was higher than its aviation segment. This phenomenon is unusual. However, this has not changed the Directors’ policy to continue with the Reorganisation as the results achieved by the automobile segment was, according to the Directors, largely resulted from the PRC Government’s recently launched preferential policies which include reduction of the Vehicle Purchase Tax and the Car Subsidy Program for Rural Areas in the PRC. As set out in the relevant PRC policies, the favourable tax treatment and rural car purchase subsidy program became effective in the first quarter of 2009 and would come to an end on 31 December 2009. Therefore, we agree with the Directors that the sustainability of the growth of the Group’s automobile segment beyond 2009 is uncertain. Besides, in the opinion of the Directors, Dongan Motor and Dongan Mitsubishi, being automobile engine manufacturers, would face increasing competition in the market. The Directors are aware that the large automobile manufacturers are establishing or enhancing their own engine manufacturing facilities and this vertical integration process is also promoted by the PRC government. This is further discussed in the section below headed “Business and financial information of Dongan Motor”.

— 28 —

LETTER FROM SOMERLEY

In the circumstances, the Directors would like to put forward to Independent Shareholders the proposal of swapping the Group’s controlling interest in Dongan Motor for a controlling interest in JONHON Optronic which started up as a developer of aviation electrical products. Through the acquisition of JONHON Optronic, the Company would enhance its research and development on aviation electrical products and improve its manufacturing capabilities of aviation products and assemblies, thereby making the aviation business system of the Company more complete.

Having considered the above, we agree with the Directors that the entering into of the Equity Swap Agreement is in line with the Group’s stated strategy. The transaction would also enable the Group to focus on its aviation business and further strengthen its market position in the PRC aviation industry, which is in the interests of the Company.

2. Principal terms of the Equity Swap Agreement

(i) Subject matters and Consideration

Dongan Motor is currently a 54.51% owned subsidiary of the Company, while AVIC has a 43.34% direct interest in JONHON Optronic. Pursuant to the Equity Swap Agreement entered into between the Company and AVIC on 4 November 2009:

(i) the Group has agreed to sell to AVIC its 54.51% equity interest in Dongan Motor at a consideration of approximately RMB2,367.8 million (the “Acquisition Consideration”);
(ii) the Group has agreed to purchase from AVIC its 43.34% equity interest in JONHON Optronic at a consideration of approximately RMB1,774.2 million (the “Disposal Consideration”); and
(iii) the balance of approximately RMB593.6 million (the “Balance”) would be settled by cash payment from AVIC to the Group.

Both the Acquisition Consideration and the Disposal Consideration have been determined in accordance with the relevant PRC rules and regulations, based on the 90% of the average of the daily volume-weighted average trading prices of Dongan Motor and JONHON Optronic respectively for the last 30 trading days on the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively up to and including 27 October 2009 (the “Last Trading Day”), being the last trading day immediately preceding the announcement by the Company of the possibility of entering into the Equity Swap Agreement with AVIC.

The Balance would be settled by AVIC in cash within 20 days upon the Equity Swap Agreement becoming effective.

Upon Completion, the Company will succeed to the lock-up undertaking given by AVIC in respect of the lock-up of its equity interest in JONHON Optronic for a period of 36 months commencing from the listing date of JONHON Optronic, namely 1 November 2007, and expiring on 31 October 2010.

— 29 —

LETTER FROM SOMERLEY

(ii) Conditions precedent

Completion of the Equity Swap Agreement is conditional upon fulfilment of the following conditions:

(1) the Equity Swap Agreement having been duly executed by the legal representatives or authorized person(s) of the parties;
(2) AVIC having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association;
(3) the Company having completed and satisfied all the necessary corporate procedures and complied with the relevant requirements under the Listing Rules and the Articles of Association, including but not limited to the transactions contemplated under the Equity Swap Agreement having been approved by the Independent Shareholders;
(4) the transfers of the equity interests in Dongan Motor and JONHON Optronic contemplated under the Equity Swap Agreement having been approved by SASAC;
(5) the changes in relation to the state-owned shares and the state-owned share management plan in Dongan Motor and JONHON Optronic having been approved by SASAC;
(6) waiver from CSRC in relation to AVIC’s general offer obligation in respect of acquisition of the shares in Dongan Motor having been obtained; and
(7) waiver from CSRC in relation to the Company’s general offer obligation in respect of acquisition of the shares in JONHON Optronic having been obtained.

— 30 —

LETTER FROM SOMERLEY

(iii) Change in shareholding structure

Set out below is the shareholding structure of Dongan Motor and JONHON Optronic before and after Completion:

Before Completion

==> picture [283 x 252] intentionally omitted <==

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

AVIC
61.06% 43.34%
The Company JONHON Optronic
(Note 1) (Note 2)
54.51%
Dongan Motor
(Note 3)
15%
(indirect interest) 36%
Dongan Mitsubishi
----- End of picture text -----

— 31 —

LETTER FROM SOMERLEY

After Completion

==> picture [275 x 252] intentionally omitted <==

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

AVIC
61.06%
54.51%
The Company Dongan Motor
(Note 1) (Note 3)
43.34%
JONHON Optronic
(Note 2)
15%
(indirect interest) 36%
Dongan Mitsubishi
----- End of picture text -----

Notes:

(1) Shares of the Company are listed on the Stock Exchange.
(2) Shares of JONHON Optronic are listed on Shenzhen Stock Exchange.
(3) Shares of Dongan Motor are listed on Shanghai Stock Exchange.

Upon Completion, the Group’s 54.51% equity interest in Dongan Motor will be transferred to AVIC, while AVIC’s 43.34% equity interest in JONHON Optronic will be transferred to the Group.

Apart from AVIC’s 43.34% direct interest in JONHON Optronic, AVIC indirectly holds 5.45 equity interest in JONHON Optronic through the Concert Parties. The Company has on 4 November 2009 entered into an agreement with the Concert Parties, whereby the Concert Parties undertake to, subsequent to Completion, exercise the voting rights held by them in JONHON Optronic in accordance with the instructions of the Company. This means that, upon Completion, the Company will in effect control 48.79% of the voting rights of JONHON Optronic, which will be accounted for as a subsidiary of the Company. The operating results and financial position of JONHON Optronic will be consolidated into the financial statements of the Group. Such accounting treatment has been confirmed with the auditors of the Company.

— 32 —

LETTER FROM SOMERLEY

3. Business and financial information of the Group

The Company is a joint stock limited company incorporated in the PRC whose shares have been listing on the Stock Exchange since 2003. The Company is principally engaged in the development, manufacture and sales of aviation and automobile products and related components, with most of its turnovers coming from the PRC market. AVIC currently has an approximately 61.06% equity interest in the Company.

The businesses of the Group comprise principally the aviation segment and the automobile segment. Set out below is the condensed segment information of the Group for each of the two years ended 31 December 2008 and for the six months ended 30 June 2009 as extracted from the Group’s 2008 annual report and 2009 interim report:

Aviation
Automobiles
RMB’000
RMB’000
For the six months ended 30 June 2009
(unaudited) (Note)
Operating results
Turnover
2,030,075
5,853,808
Segment results
146,550
205,402
Loss attributable to shareholders
Assets and liabilities
Segment assets (including interests in
associates)
9,954,187
10,666,420
Unallocated assets
Total assets
Net assets attributable to Shareholders
Other segment information
Depreciation and amortisation
70,551
366,227
Provision for impairment
5,581
9,051
For the year ended 31 December 2008
(audited)
Operating results
Turnover
4,596,140
11,788,744
Segment results
248,542
(633,359)
Loss attributable to shareholders
Assets and liabilities
Segment assets (including interests in
associates)
9,112,468
12,294,086
Unallocated assets
Total assets
Net assets attributable to Shareholders

Total
RMB’000
7,883,883
351,952
(20,443)
20,620,607
959,814
21,580,421
2,800,258
436,778
14,632
16,384,884
(384,817)
(1,156,611)
21,406,554
1,038,077
22,444,631
2,332,653

— 33 —

LETTER FROM SOMERLEY

Aviation
Automobiles
RMB’000
RMB’000
Other segment information
Depreciation and amortisation
106,312
1,239,724
Provision/(reversal of provision) for
impairment
23,989
(6,370)
For the year ended 31 December 2007
(audited)
Operating results
Turnover
5,327,408
11,213,237
Segment results
306,241
(852,840)
Loss attributable to shareholders
Assets and liabilities
Segment assets (including interests in
associates)
9,096,155
12,870,071
Unallocated assets
Total assets
Net assets attributable to Shareholders
Other segment information
Depreciation and amortisation
91,454
998,942
Provision for impairment
24,549
359,772

Total
RMB’000
1,346,036
17,619
16,540,645
(546,599)
(1,026,226)
21,966,226
812,372
22,778,598
3,488,073
1,090,396
384,321

Note: The Group completed the Assets Swap on 30 April 2009, and the operating result of the previous automobile business of Changhe Auto was presented in the Group’s financial statements for the six months ended 30 June 2009 as discontinued operations. Accordingly, the turnover and segment results presented above for the six months ended 30 June 2009 excluded those contributed by Changhe Auto. The operating results of the Group for 2007 and 2008 as presented above was extracted from the Group’s 2008 annual report, and included the operating result of the previous automobile business of Changhe Auto.

As shown in the condensed segment analysis above, although sales contributed by the automobile segment represent a majority of the total sales of the Group, the automobile segment made losses for each of the two years ended 31 December 2008. As mentioned in the section above headed “Background to and reasons for entering into the Equity Swap Agreement”, although the automobile business achieved a positive segment result for the first half of 2009, the management of the Group considered that it was principally due to the temporary PRC government’s preferential policies, which would expire by the end of 2009. According to the management of the Group, after taking into account the other costs attributable to the automobile segment, the automobile segment in fact made a loss attributable to Shareholders. The aviation segment continued to make a positive contribution to the results of the Group during the same period.

— 34 —

LETTER FROM SOMERLEY

For the first half of 2009, the segment results of the automobile segment were approximately RMB205.4 million, which represented mainly contributions from Harbin Auto Group, Dongan Motor and Dongan Mitsubishi. Operating results of the automobile business of Changhe Auto, disposal of which was completed on 30 April 2009, were included in the Group’s financial statements for the six months ended 30 June 2009 as discontinued operations. On 21 October 2009, the Group completed its disposal of Harbin Auto Group, which was then de-consolidated from the Group’s financial statements.

As shown in the above table, the charges for depreciation and the provisions for impairment related to the automobile segment were significantly higher than that for the aviation segment.

4. Business and financial information of Dongan Motor

Dongan Motor has been listing on the Shanghai Stock Exchange since 1998. As at the Latest Practicable Date, the Company had an approximately 54.51% equity interest in the Dongan Motor. The results and assets and liabilities of Dongan Motor are consolidated into the financial statements of the Group.

Dongan Motor is currently engaged in the research and development, manufacture and sales of mini-sized automobile engines, gear boxes, parts and components and other relevant automobile products. Its major products are automobile engines with engine displacement of 1.3 litres or below, suitable for mini-sized sedans or vans. Most of the sales of Dongan Motor are made to member companies of AVIC.

One of the major investments of Dongan Motor is a 36% equity interests in Dongan Mitsubishi. Dongan Mitsubishi is a joint venture set up among Dongan Motor (36%), Harbin Aviation Industry (Group) Co., Ltd. (15%) (a wholly-owned subsidiary of the Company), Harbin Dongan Automotive Engine Manufacturing Co., Ltd. (19%), Mitsubishi Motors Corporation (15.3%), Mitsubishi Corporation (5.7%) and MCIC Holding Bhn. (9%). Dongan Mitsubishi is currently engaged in the manufacture and sale of automobile engines, mainly using technologies and components supplied by Mitsubishi. Its major products are automobile engines with engine displacement of 1.3 litres or above, suitable for medium-sized sedans. Products of Dongan Mitsubishi are mainly sold to independent car manufacturers in the PRC. Dongan Mitsubishi, being 51% owned by the Company and its subsidiary in aggregate, is currently being accounted for as a subsidiary of the Company.

For the first half of 2009, sales of both Dongan Motor and Dongan Mitsubishi benefited from the PRC recently launched preferential policies. Dongan Motor in particular benefited from the Car Subsidy Program for Rural Areas which applies to purchases of cars with engine displacement of 1.3 litres or below in the rural areas of the PRC. However, those policies would expire by the end of 2009 and in the view of the management of the Group, the automobile engine business in the PRC would face intense competition. To the knowledge of the management of the Company, two major customers of Dongan Mitsubishi are developing or expanding their own engine manufacturing facilities. Besides, the PRC government has issued a policy which requires investors of new automobile projects to establish their own engine manufacturing facilities. In the circumstances, the whole automobile engine market would be squeezed. Besides the above challenges, Dongan Motor also has a narrow external customer base, given that a majority of the products manufactured by Dongan Motor are supplied to

— 35 —

LETTER FROM SOMERLEY

the group companies of AVIC. The historical results of Dongan Motor were not promising. Although Dongan Motor has made profits in the past years, this was principally due to the profit contribution from its 36% owned associate, Dongan Mitsubishi. If the profit contribution from Dongan Mitsubishi was excluded from the operating results of Dongan Motor, Dongan Motor would have had made losses in 2007 and 2008.

The following table summarises the financial information of Dongan Motor, prepared in accordance with the Generally Accepted Accounting Principles in the PRC (“PRC GAAP”), for the nine months ended 30 September 2009 and 2008, and for the two years ended 31 December 2008, as extracted from the 2009 third-quarter report and 2008 annual report of Dongan Motor:

Profit and loss

	Nine months	Nine months
	ended 30	ended 30
	September	September	Year ended 31 December
	2009	2008	2008	2007
	RMB’000	RMB’000	RMB’000	RMB’000
	(unaudited)	(unaudited)	(audited)	(audited)
Turnover	1,626,964	1,333,834	1,754,329	1,852,536
Gross profit	202,739	57,918	64,142	163,443
Gross profit %	12.5%	4.3%	3.7%	8.8%
Investment profit (Note)	79,935	124,700	283,965	268,893
Reversal of provision/
(provision for impairment)	3,684	23,447	16,760	(91,860)
Operating profit	113,764	63,850	158,637	145,633
Profit before tax	113,860	63,941	160,197	150,701
Profit after tax	108,504	63,941	160,197	150,701
Profit attributable to shareholders	108,504	63,941	160,197	150,701

Note: Investment profit represented mainly the contribution of profit from Dongan Motor’s 36% equity investment in Dongan Mitsubishi. During the first half of 2008, Dongan Motor completed the disposal of its 0.83% interest in Changhe Auto, resulting in a gain on disposal of approximately RMB29.8 million, which was included in the investment profit of Dongan Motor.

— 36 —

LETTER FROM SOMERLEY

2008 compared to 2007

For the year ended 31 December 2008, Dongan Motor recorded turnover of approximately RMB1,754.3 million, which represented a slight decrease of approximately 5.3% when compared to 2007. According to the management of the Group, this was mainly due to the intensified competition in the PRC auto industry during 2008, which led to the decrease in sales volume and selling prices of Dongan Motor’s products. At the same time, gross profit margin also dropped from approximately 8.8% in 2007 to approximately 3.7% in 2008, which was mainly due to the decrease in selling price of Dongan Motor’s products and an increase in material costs.

Despite the decrease in gross profit from approximately RMB163.4 million in 2007 to approximately RMB64.1 million in 2008, operating profit of Dongan Motor increased by approximately 8.9% to approximately RMB158.6 million in 2008. This was mainly due to (i) the reversal of provision for impairment of approximately RMB16.8 million in 2008 as compared to the provision for impairment of approximately RMB91.9 million in 2007; and (ii) increase in investment profit from approximately RMB268.9 million in 2007 to approximately RMB284.0 million in 2008, majority of which was derived from the contribution from Dongan Motor’s 36% owned Dongan Mitsubishi. Accordingly, profit attributable to shareholders increased by approximately 6.3%, from approximately RMB150.7 million in 2007 to approximately RMB160.2 million in 2008.

Nine months ended 30 September 2009 compared to nine months ended 30 September 2008

Turnover for the nine months ended 30 September 2009 increased by approximately 22.0% to approximately RMB1,627.0 million. As advised by the management of the Group, this was mainly a result of the preferential policies adopted by the PRC government, such as the reduction of the Vehicle Purchase Tax and the Car Subsidy Program for Rural Areas in the PRC, which boosted the sales of automobiles and related components including engines. As a result of a larger economy of scale from increased sales, gross profit margin increased to approximately 12.5% for the nine months ended 30 September 2009 when compared to the same period in 2008.

Despite the significant increase in gross profit from approximately RMB57.9 million for the nine months ended 30 September 2008 to approximately RMB202.7 million for the nine months ended 30 September 2009, operating profit only increased by approximately 78.2% to RMB113.8 million. This was mainly due to (i) a gain on disposal of approximately RMB29.8 million recognised in respect of the disposal of its 0.83% interest in Changhe Auto during the nine months ended 30 September 2008; (ii) decreased contribution from Dongan Mitsubishi which suffered from higher selling and administrative expenses incurred as a result of increases in sales rebate to customers and research and development expenses; and (iii) increased selling and administrative expenses of Dongan Motor itself, which were largely in line with the increase in sales. Profit attributable to shareholders increased by approximately 69.7% to approximately RMB108.5 million for the nine months ended 30 September 2009.

— 37 —

LETTER FROM SOMERLEY

Financial position

As at 30 September 2009 RMB’000 (unaudited) Non-current assets 1,464,902 Current assets 2,273,882 Total assets 3,738,784 Non-current liabilities (223,000) Current liabilities (1,497,461) Total liabilities (1,720,461) Equity attributable to shareholders 2,018,323 Minority interests — Total equity 2,018,323	As at 31 December 2008 2007 RMB’000 RMB’000 (audited) (audited) 1,473,721 1,306,700 1,910,493 1,990,114 3,384,214 3,296,814 (81,417) (26,725) (1,392,978) (1,500,951) (1,474,395) (1,527,676) 1,909,819 1,769,138 — — 1,909,819 1,769,138

As at 30 September 2009, major assets of Dongan Motor were accounts receivable and bills receivable with an aggregate value of approximately RMB1,402.0 million, long-term investment of approximately RMB809.9 million which represented mainly Dongan Motor’s 36% investment in Dongan Mitsubishi, fixed assets and construction in progress with an aggregate value of approximately RMB655.0 million, and cash and bank deposits of approximately RMB588.4 million.

Major liabilities of Dongan Motor as at 30 September 2009 included accounts payable and bills payable with an aggregate value of approximately RMB827.2 million and borrowings of approximately RMB560 million.

Dongan Motor’s net cash position (defined as cash and bank deposits net of borrowings) as at 30 September 2009 was approximately RMB28.4 million.

— 38 —

LETTER FROM SOMERLEY

Cash flow

	Nine	Nine
	months	months
	ended 30	ended 30	Year	ended
	September	September	31 December
	2009	2008	2008	2007
	RMB’000	RMB’000	RMB’000	RMB’000
	(unaudited)	(unaudited)	(audited)	(audited)
Net cash (used in)/generated
from operating activities	(90,452)	(112,421)	54,857	(549,558)
Net cash (used in)/generated from
investing activities	(1,268)	(26,689)	(26,400)	1,612
Net cash generated from
financing activities	108,090	234,918	272,509	113,131
Net increase/(decrease) in cash
and cash equivalents	16,370	95,808	300,966	(434,815)

As shown above, except for 2008, Dongan Motor generated negative cash flows from operating activities. Most of the cash generated from financing activities came from borrowings. Except for 2007, Dongan Motor had negative cash flow from investing activities, which principally arose from purchase of fixed assets. Management of the Group advised that Dongan Motor was embarking on an investment project relating to new products, with an expected capital requirement of approximately RMB2.5 billion in the coming years. This would have an impact on the future cash flow from investing activities. During the above years/periods under review, Dongan Mitsubishi contributed dividend incomes to Dongan Motor, which were included in net cash generated from/(used in) investing activities of Dongan Motor.

5. Business and financial information of JONHON Optronic

JONHON Optronic is principally engaged in the research and development, manufacture and sales of electrical connectors, optical components and cable assemblies. JONHON Optronic started up as a developer of aviation electrical products. With the expansion of its production capacity, JONHON Optronic started manufacturing and marketing its products to industries other than aviation. Recently, JONHON Optronic has successfully tapped into the emerging 3G telecommunication market and sales to the telecommunication market have out-numbered the sales to the aviation industry. Sales from telecommunication segment now constitute the most significant portion of the sales of JONHON Optronic. Currently, the Group’s purchases of similar aviation electrical products are mostly made from JONHON Optronic. It is expected that this trend would continue after Completion and on this basis, the Directors believe that acquisition of JONHON Optronic would compliment the Group’s aviation business.

As at the Latest Practicable Date, JONHON Optronic was directly owned as to 43.34% by AVIC. AVIC also indirectly held a 5.45 equity interest in JONHON Optronic through the Concert Parties as at the Latest Practicable Date.

— 39 —

LETTER FROM SOMERLEY

In order to ensure management continuity of the existing business of JONHON Optronic, the Directors have informed us that all the senior management and employees of JONHON Optronic will remain in their existing positions following Completion.

The following table summarises the consolidated financial information of JONHON Optronic, prepared in accordance with International Financial Reporting Standards (“IFRS”), for the nine months ended 30 September 2009 and 2008, and for the two years ended 31 December 2008, as extracted from the accountant’s report of JONHON Optronic as contained in Appendix II to the Circular.

Profit and loss

	Nine	Nine
	months	months
	ended 30	ended 30	Year	ended
	September	September	31 December
	2009	2008	2008	2007
	RMB’000	RMB’000	RMB’000	RMB’000
	(audited)	(unaudited)	(audited)	(audited)
Turnover	860,733	721,769	1,015,097	777,882
Gross profit	273,193	250,575	342,058	271,205
Gross profit %	31.7%	34.7%	33.7%	34.9%
Provision for impairment	(7,484)	(9,052)	(11,625)	(3,849)
Operating profit	112,566	114,158	158,164	135,114
Profit before tax	104,344	106,482	150,403	123,236
Profit after tax	93,180	77,411	122,665	102,880
Profit attributable to shareholders	89,829	72,673	115,583	100,593

Note: The above financial information is extracted from the accountant’s report on JONHON Optronic, full report of which is contained in Appendix II to the Circular, prepared in accordance with IFRS for the purpose of meeting the Listing Rule requirements applicable to the Acquisition. As an A-share company, JONHON Optronic published financial statements prepared under PRC GAAP, which can be found in the website of Shenzhen Stock Exchange.

2008 compared to 2007

For the year ended 31 December 2008, turnover of JONHON Optronic increased by approximately 30.5%, from approximately RMB777.9 million in 2007 to approximately RMB1,015.1 million in 2008. This was principally due to the increase in orders during 2008. Gross profit margin slightly decreased to 33.7% in 2008, which was principally due to increased material costs.

— 40 —

LETTER FROM SOMERLEY

The 2008 operating profit of JONHON Optronic increased by approximately 17.1%, from approximately RMB135.1 million in 2007 to RMB158.2 million in 2008, which was principally due to the increase in turnover and accordingly gross profit in 2008. Profit attributable to shareholders increased by approximately 14.9%, from approximately RMB100.6 million in 2007 to approximately RMB115.6 million in 2008.

Nine months ended 30 September 2009 compared to nine months ended 30 September 2008

Turnover of JONHON Optronic for the nine months ended 30 September 2009 further improved by approximately 19.3% to approximately RMB860.7 million. Gross profit margin decreased to 31.7% for the nine months ended 30 September 2009, which was again mainly due to the effect of increased material costs.

Operating profit of JONHON Optronic decreased slightly by approximately 1.4% to approximately RMB112.6 million for the nine months ended 30 September 2009. However, profit attributable to shareholders increased by approximately 23.6% to approximately RMB89.8 million for the nine months ended 30 September 2009. This was largely due to the reduction in applicable tax rate starting from 1 January 2009. JONHON Optronic was regarded as a PRC high-tech enterprise as from 1 January 2009 and therefore subject to a lower tax rate of 15%. JONHON Optronic’s applicable tax rate was 25% in 2008. Tax expenses incurred by JONHON Optronic for the nine months ended 30 September 2009 decreased by approximately 61.6% to approximately RMB11.2 million as compared to the same period in 2008.

Financial position

Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Equity attributable to shareholders Minority interests Total equity	As at 30 September 2009 RMB’000 (audited) 622,840 1,558,465 2,181,305 (442,013) (571,820) (1,013,833) 1,037,450 130,022 1,167,472	As at 31 December 2008 2007 RMB’000 RMB’000 (audited) (audited) 493,031 314,218 1,328,251 1,272,148 1,821,282 1,586,366 (128,066) (89,199) (622,681) (543,575) (750,747) (632,774) 941,096 893,057 129,439 60,535 1,070,535 953,592

— 41 —

LETTER FROM SOMERLEY

As at 30 September 2009, major assets of JONHON Optronic were accounts receivable of approximately RMB626.7 million, cash and bank deposits (including pledged deposits and term deposits) of approximately RMB560.1 million, and property, plant and equipment of approximately RMB535.8 million.

Major liabilities of JONHON Optronic as at 30 September 2009 included borrowings of approximately RMB411.6 million, and accounts payable of approximately RMB369.6 million.

JONHON Optronic’s net cash position (defined as cash and bank deposits net of borrowings) as at 30 September 2009 was approximately RMB148.5 million.

Cash flow

Nine
months
ended 30
September
Nine
months
ended 30
September
2009
2008
RMB’000
RMB’000
(audited)
(unaudited)
Net cash (used in)/generated from
operating activities
(22,305)
(92,589)
Net cash used in investing activities
(266,314)
(92,635)
Net cash generated from/(used in)
financing activities
183,387
(11,090)
Net (decrease)/increase in cash and cash
equivalents
(105,232)
(196,314)

Year ended
31 December
2008
2007
RMB’000
RMB’000
(audited)
(audited)
110,506
13,722
(392,366)
(93,229)
(3,090)
485,080
(284,950)
405,573

JONHON Optronic generated positive cash flows from operating activities for each of the two years ended 31 December 2007 and 2008. However, for the nine months ended 30 September 2008 and 2009, JONHON Optronic generated negative cash flows from operating activities, which were principally due to the increase in accounts receivables for the nine months ended 30 September 2008, and the increase in pledged deposits made to secure trade finance facilities during the nine months ended 30 September 2009. Continued net cash used in investing activities represented principally purchase of fixed assets.

— 42 —

LETTER FROM SOMERLEY

6. Comparison between Dongan Motor and JONHON Optronic

Set out below is a summary table comparing the key financial statistics between Dongan Motor and JONHON Optronic. Since Dongan Motor has not prepared financial statements under IFRS, the below comparison is made based on the financial statements of Dongan Motor and JONHON Optronic prepared under PRC GAAP, the full reports of which can be found in the website of Shanghai Stock Exchange and Shenzhen Stock Exchange respectively.

	Dongan Motor	Dongan Motor			JONHON	Optronic
	As at 30	As at 31	As at 31	As at 30	As at 31	As at 31
	September	December	December	September	December	December
	2009	2008	2007	2009	2008	2007
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
*Scale of operations*
Turnover	1,626,964	1,754,329	1,852,536	897,452	1,076,654	831,508
Profit attributable to
shareholders	108,504	160,197	150,701	85,190	111,916	99,238
Total assets	3,738,784	3,384,214	3,296,814	2,181,116	1,821,282	1,577,176
Equity attributable to
shareholders	2,018,323	1,909,819	1,769,138	1,032,237	953,738	907,463
Financial ratios	%	%	%	%	%	%
Gross profit margin	12.5%	3.7%	8.8%	31.2%	32.7%	34.0%
Profit margin (Note 1)	6.7%	9.1%	8.1%	9.5%	10.4%	11.9%
Return on assets (Note 2)	3.9%	4.7%	4.6%	5.3%	6.4%	6.4%
Return on shareholders’
equity (Note 2)	7.2%	8.4%	8.5%	11.0%	11.7%	10.9%
Growth in total assets
(Note 3)	10.5%	2.7%	N/A	19.8%	15.5%	N/A
Growth in profit
attributable to
shareholders (Note 3)	69.7%	6.3%	N/A	12.4%	12.8%	N/A

Notes:

Profit margin is defined as profit attributable to shareholders divided by turnover.
The numerators of return on assets and return on shareholders’ equity are defined as profit after tax and profit attributable to shareholders respectively, while the denominators are defined as total assets and shareholders’ equity respectively as at year end date.

Return on assets and return on shareholders’ equity are annualised for the nine months ended 30 September 2009.

Growth in total assets in 2009 represents year-to-date growth of total assets as at 30 September 2009 when compared with those as at 31 December 2008. Growth in net profit in 2009 represents the growth of net profits for the nine months ended 30 September 2009 when compared with the corresponding period in 2008.

— 43 —

LETTER FROM SOMERLEY

The scale of operations of Dongan Motor is notably larger than that of JONHON Optronic. However, JONHON Optronic out-performed Dongan Motor in terms of the above financial ratios, except for Dongan Motor’s 69.7% growth in profit attributable to shareholders for the nine months ended 30 September 2009, when compared to JONHON Optronic’s 14.8% growth. However, the management of the Group are of the view that Dongan Motor’s growth in profitability achieved in 2009 may not be sustainable as it was principally due to the temporary PRC government’s preferential policies, as mentioned in the section above headed “Background to and reasons for entering into the Equity Swap Agreement”.

7. Share price performance

(i) Share price performance of Dongan Motor

Set out below is the daily closing market prices of the Dongan Motor’s shares (“Dongan Share(s)”) during a period starting from 1 November 2008 (approximately one year preceding the date of the Equity Swap Agreement) up to and including the Latest Practicable Date:

==> picture [452 x 301] intentionally omitted <==

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

18
Period over which the
consideration for the
Disposal is determined
16
1) Announcement of
the Equity Swap
14 Announcement of Agreement
2009 first quarter 2) Announcement of
results 2009 third quarter
12 results
10
8
Announcement of
2009 interim
6 results
Announcement of
2008 annual Announcement of the
4 results transfer of AVIC's
automobile business
to Chang'an
2
0
Source: Bloomberg
2008/11/32008/11/242008/12/15 2009/1/52009/1/262009/2/16 2009/3/92009/3/302009/4/202009/5/11 2009/6/12009/6/222009/7/13 2009/8/32009/8/242009/9/142009/10/52009/10/262009/11/16
Price of Dongan Shares (RMB)
----- End of picture text -----

— 44 —

LETTER FROM SOMERLEY

As shown in the above price chart, closing prices of the Dongan Shares were steadily increasing during the period from November 2008 to mid-February 2009. Prices of the Dongan Shares then increased significantly from RMB5.72 on 18 February 2009 to a high of RMB7.87 on 24 February 2009, representing an increase of approximately 37.6%. On 25 February 2009, Dongan Motor issued a clarification announcement confirming that there was no price sensitive information as regards Dongan Motor. Despite a brief decrease in the next two trading days, prices of Dongan Shares continued to increase to RMB8.88 on 5 March 2009, then fluctuated within a range of RMB7.54 to RMB9.21 from 6 March 2009 to 29 April 2009. During this period, Dongan Motor announced its 2008 results on 10 April 2009, reporting a profit for the year of approximately 160.2 million, based on audited financial statements prepared under PRC GAAP. Such profit figure represented a slight increase of approximately 6.3% when compared to 2007. Dongan Motor also announced its 2009 first quarter results on 24 April 2009, with a significant decrease in profit for the period prepared under PRC GAAP by approximately 47.1% to approximately RMB22.9 million, principally as a result of lower contribution of profits from Dongan Mitsubishi, Dongan Motor’s 36% owned associate.

Prices of Dongan Shares started to increase in May 2009, and reached a high of RMB12.30 on 5 June 2009, then fluctuated within a range of RMB10.36 to RMB12.18 from 8 June 2009 to 6 August 2009. Prices of Dongan Shares started to drop afterwards, to a low of RMB8.70 on 19 August 2009. Dongan Motor then announced its 2009 interim results on 25 August 2009, reporting a profit for the period prepared under PRC GAAP of approximately RMB94.5 million, which represented an increase of approximately 28.7% when compared to the same period in 2007, as a result of increased sales and gross profit. Prices of Dongan Shares then fluctuated within a range of RMB8.72 to RMB11.11 from 26 August 2009 to 30 September 2009.

After the National Holidays in the PRC, prices of Dongan Motors increased significantly from RMB8.78 on 30 September 2009 to a high of RMB12.27 on 21 October 2009. On 22 October 2009, Dongan Motor issued an announcement to clarify that AVIC, Dongan Motor’s ultimate shareholder, had not reached any agreement with third parties in respect of a possible reorganisation of the automobile business of AVIC. On 28 October 2009, the day immediately after the Last Trading Day, Dongan Motor announced the entering into of the Equity Swap Agreement between the Company and AVIC. On the same day, Dongan Motor also announced its 2009 third quarter results, with an increase in profit for the period prepared under PRC GAAP by approximately 69.7% to approximately RMB108.5 million. Such increase arose from increase in sales and gross profit. Prices of Dongan Shares continued to rise to a high of RMB14.27 on 2 November 2009, before the suspension of its trading on 3 November 2009, pending the announcement of a further change in shareholding of Dongan Motor.

On 11 November 2009, Dongan Motor issued an announcement stating the intention of AVIC to transfer its automobile business to Chang’an Automobile Group (“Chang’an”). It was also widely reported in the newspapers on the same day that AVIC intends to inject Dongan Motor and other automobile business previously acquired from the Group into Chang’an, in return for an approximately 23% interest in the enlarged Chang’an. The above merger is reported in the press to be part of a government-backed consolidation of PRC’s fragmented automobile industry. We also understand that the assets to be injected into Chang’an would include assets not owned by the Group. In the circumstances, we are of the view that no useful inference can be drawn from the above merger for the purpose of an analysis of the terms of the Equity Swap Agreement.

— 45 —

LETTER FROM SOMERLEY

Following the announcement and resumption of trading on 11 November 2009, prices of Dongan Shares increased by approximately 8.0% to RMB15.41 on the same day, then gradually increased to a high of RMB16.68 on the Latest Practicable Date.

(ii) Share price performance of JONHON Optronic

Set out below is the daily closing market prices of the JONHON Optronic’s shares (“JONHON Share(s)”) during a period starting from 1 November 2008 (approximately one year preceding the date of the Equity Swap Agreement) up to and including the Latest Practicable Date:

==> picture [450 x 273] intentionally omitted <==

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

25
Period over which the
consideration for the
Acquisition is determined
Announcement of
20 2009 third quarter
results
15
Announcement of
Announcement of
10 2009 first quarter 2009 interim
results
results
Announcement of Announcement
unaudited 2008 of the Equity
annual results Swap
5
0
2008/11/32008/11/242008/12/15 2009/1/52009/1/262009/2/16 2009/3/92009/3/302009/4/202009/5/11 2009/6/12009/6/222009/7/13 2009/8/32009/8/242009/9/142009/10/52009/10/262009/11/16
Price of JONHON Shares (RMB)
----- End of picture text -----

Source: Bloomberg

Similar to the Dongan Shares, closing prices of the JONHON Shares were steadily increasing during the period from November 2008 to mid-February 2009. On 6 January 2009, JONHON Optronic issued an announcement confirming that it was regarded as a PRC high-tech enterprise and therefore subject to a lower tax rate of 15%, compared to 25% in 2008. On 23 February 2009, JONHON Optronic announced its unaudited 2008 profit attributable to shareholders prepared under PRC GAAP of approximately RMB112.9 million (which is close to the audited profit attributable to shareholders prepared under PRC GAAP of approximately RMB111.9 million as announced by Dongan Motor on 30 March 2009), representing an increase of approximately 13.8% when compared to 2007. Despite the increase in 2008 profit, prices of JONHON Shares dropped from RMB13.40 on 23 February 2009 to a low of RMB11.05 on 2 March 2009, but then started to rise again for the rest of March 2009 until it reached a high of RMB18.96 on 16 April 2009. Prices of JONHON Shares started to drop again, from RMB18.96 on 16 April 2009 to RMB17.04 on 24 April 2009. On 25 April 2009, JONHON

— 46 —

LETTER FROM SOMERLEY

Optronic announced its 2009 first quarter results, reporting an increase in profit attributable to shareholders prepared under PRC GAAP of approximately RMB23.7 million, representing an increase in approximately 40.7% as compared to the same period in 2008.

Following the announcement of JONHON Optronic’s 2009 first quarter results, prices of JONHON Shares rose to a high of RMB19.08 on 6 May 2009, then fluctuated within a range of RMB16.44 to RMB20.35 from 7 May 2009 to 3 August 2009. On 28 July 2009, JONHON Optronic announced its 2009 interim results, with its profit attributable to shareholders prepared under PRC GAAP for the first half of 2009 increased by approximately 35.8% to approximately RMB59.3 million. Prices of JONHON Shares then started to drop from RMB20.35 on 3 August 2009 to a low of RMB15.16 on 19 August 2009, then fluctuated within a range of RMB15.41 to RMB19.04 from 20 August 2009 to 27 October 2009. During that period, JONHON Optronic announced its 2009 third quarter results, reporting a profit attributable to shareholders prepared under PRC GAAP of RMB85.2 million, representing an increase of approximately 12.4% when compared to same period in 2008.

On 28 October 2008, the day immediately after the Last Trading Day, JONHON Optronic announced the entering into of the Equity Swap Agreement between the Company and AVIC. Following the above announcement, prices of JONHON Shares gradually rose to a high of RMB19.69 on the Latest Practicable Date.

(iii) Comparison of the prices of Dongan Share and the JONHON Share as implied by the Consideration

The price per Dongan Share as implied by the Consideration of RMB9.40 represents:

(a) 90% of the average of the daily volume-weighted average trading price of the Dongan Shares for the last 30 trading days on the Shanghai Stock Exchange up to and including the Last Trading Day. This was the agreed basis for setting the consideration of the Disposal;
(b) a discount of approximately 11.6% to the average of the daily volume-weighted average trading price of approximately RMB10.63 per Dongan Share on the Shanghai Stock Exchange over the 15 trading days up to and including the Last Trading Day;
(c) a discount of approximately 7.5% to the average of the daily volume-weighted average trading price of approximately RMB10.16 per Dongan Share on the Shanghai Stock Exchange over the 45 trading days up to and including the Last Trading Day;
(d) a discount of approximately 28.2% to the closing price of RMB13.10 per Dongan Share on the Shanghai Stock Exchange on the Last Trading Day;
(e) a discount of approximately 43.6% to the closing price of RMB16.68 per Dongan Share on the Shanghai Stock Exchange as at the Latest Practicable Date;
(f) a premium of approximately 227.6% over the audited net asset value per Dongan Share of approximately RMB4.13 as at 31 December 2008;

— 47 —

LETTER FROM SOMERLEY

(g) a premium of approximately 215.1% over the unaudited net asset value per Dongan Share of approximately RMB4.37 as at 30 September 2009.

The price per JONHON Share as implied by the Consideration of RMB15.29 represents:

(a) 90% of the average of the daily volume-weighted average trading price of the JONHON Shares for the last 30 trading days on the Shenzhen Stock Exchange up to and including the Last Trading Day. This was the agreed basis for setting the consideration of the Acquisition;
(b) a discount of approximately 7.3% to the average of the daily volume-weighted average trading price of approximately RMB16.49 per JONHON Share on the Shenzhen Stock Exchange over the 15 trading days up to and including the Last Trading Day;
(c) a discount of approximately 9.7% to the average of the daily volume-weighted average trading price of approximately RMB16.93 per JONHON Share on the Shenzhen Stock Exchange over the 45 trading days up to and including the Last Trading Day;
(d) a discount of approximately 6.3% to the closing price of RMB16.31 per JONHON Share on the Shenzhen Stock Exchange on the Last Trading Day;
(e) a discount of approximately 22.3% to the closing price of RMB19.69 per JONHON Share on the Shenzhen Stock Exchange as at the Latest Practicable Date;
(f) a premium of approximately 429.5% over the audited net asset value per JONHON Share of approximately RMB3.56 as at 31 December 2008;
(g) a premium of approximately 396.1% over the unaudited net asset value per JONHON Share of approximately RMB3.86 as at 30 September 2009.

Both the considerations for the Disposal and the Acquisition are set with reference to 90% of the average of the daily volume-weight average trading prices of the respective shares on the PRC stock exchanges for the last 30 trading days up to and including the Last Trading Day, which according to the Directors and the Company’s legal advisers is the only permissible pricing mechanism in the case of the transactions contemplated by the Equity Swap Agreement. This pricing mechanism is set out in Article 24 of “The Interim Measures for the Administration of State-owned Shareholders’ Transfer of Their Shares of Listed Companies” 《國有股東轉讓所持上市公司股份管理暫行辦法》 issued by SASAC and CSRC.

— 48 —

LETTER FROM SOMERLEY

8. Evaluation of the Consideration

		Basic earnings
		per share	2008 price/
	Share price	for 2008	earnings
	RMB	RMB	(“P/E”) ratio
	(A)	(B)	(A)/(B)
Dongan Motor
- as at the Latest Practicable Date	16.68	0.35	47.7
- average of the daily volume-weighted
average trading prices of Dongan Shares on
the Shanghai Stock Exchange for the last 30
trading days up to and including the Last
Trading Day (the “Average Dongan Share
Price”)	10.44	0.35	29.8
- as implied by the Consideration
(i.e. 90% of the Average Dongan Share
Price)	9.40	0.35	26.9
JONHON Optronic
- as at the Latest Practicable Date	19.69	0.42	46.9
- average of the daily volume-weighted
average trading prices of JONHON Shares
on the Shenzhen Stock Exchange for the last
30 trading days up to and including the Last
Trading Day (the “Average JONHON Share
Price”)	16.99	0.42	40.5
- as implied by the Consideration
(i.e. 90% of the Average JONHON Share
Price”)	15.29	0.42	36.4

Note: The basic earnings per share for 2008 for Dongan Motor and JONHON Optronic are calculated based on the respective companies’ financial statements prepared under PRC GAAP.

Source: Bloomberg

— 49 —

LETTER FROM SOMERLEY

Since the consideration for the Disposal is determined, pursuant to the relevant PRC rules and regulations, on the basis of the Average Dongan Share Price, we have assessed it against the average of daily volume-weighted average trading prices on the PRC stock exchanges for the last 30 trading days up to and including the Last Trading Day of the following companies (the “Automobile Comparable Companies”), which were PRC A-share listed companies engaging principally in the automobile engine business that we were able to identify from the websites of Shenzhen Stock Exchange and Shanghai Stock Exchange as at the Latest Practicable Date:

	Average of the daily
	volume-weighted
	average trading price of
	the shares for the last
	30 trading days on the	Basic
	PRC stock exchange up	earnings per
	to and including the	share for
Name of Automobile Comparable	Last Trading Day	2008	2008
Companies	(RMB)	(RMB)	P/E ratio
	(A)	(B)	(A)/(B)
Weichai Power Co., Ltd. (stock code:
000338.CH) (“Weichai”) (Note 2)	52.01	2.32	22.4
Kunming Yunnei Power Co., Ltd.
(stock code: 000903.CH)	10.35	0.36	28.8
Jinan Diesel Engine Co., Ltd.
(stock code: 000617.CH)	13.06	0.37	35.3
		*Average:*	*28.8*
		*Median:*	*28.8*
*Average Dongan Share Price*	*10.44*	*0.35*	*29.8*

Source: Bloomberg

Notes:

The above companies are all listed on the Shenzhen Stock Exchange, and the above basic earnings per share are calculated based on audited financial statements prepared under PRC GAAP.
The H-shares of Weichai are listed in the Stock Exchange (stock code: 2338.HK).

As illustrated above, the Automobile Comparable Companies have average and median trading P/E ratios both of approximately 28.8 times, which are close to the trading P/E ratio of Dongan Motor of approximately 29.8 times, calculated based on the Average Dongan Share Price.

— 50 —

LETTER FROM SOMERLEY

Since the consideration for the Acquisition is also determined, pursuant to the relevant PRC rules and regulations, on the basis of the Average JONHON Share Price, we have assessed it against the average of the daily volume-weighted average trading prices on the PRC stock exchanges for the last 30 trading days up to and including the Last Trading Day of the following companies (the “Aviation Comparable Companies”). Listed out below were all PRC A-share listed companies engaging principally in the aviation business that we were able to identify from the websites of Shenzhen Stock Exchange and Shanghai Stock Exchange as at the Latest Practicable Date:

	Average of the daily
	volume-weighted
	average trading price of
	the shares for the last
	30 trading days on the	Basic
	PRC stock exchange up	earnings per
	to and including the	share for
Name of Aviation Comparable	Last Trading Day	2008	2008
Companies	(RMB)	(RMB)	P/E ratio
	(A)	(B)	(A)/(B)
China Dongfanghong Spacesat Co., Ltd.
(stock code: 600118.CH)	20.42	0.50	40.8
Hafei Aviation Industry Co., Ltd.
(stock code: 600038.CH)	15.92	0.29	54.5
Jiangxi Hongdu Aviation Industry Co.,
Ltd. (stock code: 600316.CH)	28.29	0.29	97.0
Aerospace Times Electronic Technology
Co., Ltd. (stock code: 600879.CH)	10.89	0.31	35.1
Sichuan Chengfa Aero-science &
Technology Co., Ltd.
(stock code: 600391.CH)	22.95	0.51	45.0
Sichuan Haite High-tech Co., Ltd.
(stock code: 002023.CH)	13.99	0.19	73.6
Xi’an Aircraft International Corporation
(stock code: 000768.CH)	14.21	0.16	88.8
Guizhou Space Appliance Co., Ltd.
(stock code: 002025.CH)	11.19	0.37	30.2
		*Average:*	*58.1*
		*Median:*	*49.7*
*Average JONHON Share Price*	*16.99*	*0.42*	*40.5*

Note: The above companies are all listed in the stock exchanges in the PRC, and the above basic earnings per share are calculated based on audited financial statements prepared under PRC GAAP. For the purpose of the above analysis, since the other A-share companies would not normally publish accounts prepared under IFRS, we have assessed the trading P/E ratio of JONHON Optronic, calculated based on audited financial statements prepared under PRC GAAP, against that of the Aviation Comparable Companies.

Source: Bloomberg

— 51 —

LETTER FROM SOMERLEY

As illustrated above, the Aviation Comparable Companies have average and median trading P/E ratios of approximately 58.1 times and 49.7 times respectively, which are higher than the trading P/E ratio of JONHON Optronic of approximately 40.5 times, calculated based on the Average JONHON Share Price.

JONHON Optronic became the subject of the Group’s target acquisition, because of its capability on developing aviation electrical products. However, since the current major sales of JONHON Optronic are made to the telecommunication sector, we have also assessed the trading P/E ratio of JONHON Optronic against the average of the daily volume-weighted average trading prices on the PRC stock exchanges for the last 30 trading days up to and including the Last Trading Day of the following companies, which were all PRC A-share listed companies engaging principally in manufacturing similar telecommunication products as JONHON Optronic (“Telecommunication Comparable Companies”) that we were able to identify from the websites of Shenzhen Stock Exchange and Shanghai Stock Exchange as at the Latest Practicable Date:

	Average of the daily	Average of the daily
		volume-weighted
	average trading price of
	the shares for the last		Basic
	30 trading days on the		earnings
	PRC stock exchange up		per share
	to	and including the	for
Name of Telecommunication Comparable		Last Trading Day	2008	2008 P/E
Companies		(RMB)	(RMB)	ratio
		(A)	(B)	(A)/(B)
Wuhan Fingu Electronic Technology Co.,
Ltd. (stock code: 002194.CH)		17.36	0.59	29.4
Accelink Technologies Co., Ltd. (stock
code: 002281.CH)		29.26	0.63	46.4
Allwin Telecommunication Company, Ltd.
(stock code: 002231.CH)		15.26	0.21	72.7
Fiberhome Telecommunication Technologies
Co., Ltd. (stock code: 600498.CH)		21.40	0.43	49.8
Jiangsu Zhongtian Technologies Co., Ltd.
(stock code: 600522.CH)		22.35	0.54	41.4
Jiangsu Hengtong Photoelectric Stock Co.,
Ltd. (stock code: 600487.CH)		24.08	0.64	37.6
Shenzhen SDG Information Co., Ltd. (stock
code: 000070.CH)		7.35	0.14	52.5
Sichuan Huiyuan Optical Communications
Co., Ltd. (stock code: 000586.CH)		6.78	(0.62)	N/A
Zhejiang East Crystal Electronic Co., Ltd.
(stock code: 002199.CH)		16.41	0.27	60.8
			*Average:*	*48.8*
			*Median:*	*48.1*
*Average JONHON Share Price*		*16.99*	*0.42*	*40.5*

— 52 —

LETTER FROM SOMERLEY

Source: Bloomberg

The Telecommunication Comparable Companies have average and median trading P/E ratios of approximately 48.8 times and 48.1 times respectively, which are higher than the trading P/E ratio of JONHON Optronic of approximately 40.5 times, calculated based on the Average JONHON Share Price.

The Automobile Comparable Companies have average and median trading P/E ratios close to the trading P/E ratio of Dongan Motor, calculated based on the Average Dongan Share Price, while the Aviation Comparable Companies and the Telecommunication Comparable Companies have average and median trading P/E ratios higher than the trading P/E ratio of JONHON Optronic, calculated based on the Average JONHON Share Price. Based on the above, we consider that the considerations for the disposal of Dongan Motor and the acquisition of JONHON Optronic are fair and reasonable to the Company and the Independent Shareholders.

9. Financial effects on the Group

(i) Earnings and asset value

Following Completion, Dongan Motor and Dongan Mitsubishi would no longer be subsidiaries of the Company. The Company would no longer have any equity interest in Dongan Motor, and would only hold an approximately 15% equity interest in Dongan Mitsubishi. Accordingly, the operating results and financial positions of Dongan Motor and Dongan Mitsubishi would no longer be consolidated into the financial statements of the Group and it is expected that there would be a substantial decrease in turnover of the Group following Completion. On the other hand, the operating results and financial positions of JONHON Optronic would be consolidated into the financial statements of the Group upon Completion.

It is expected that there will be a gain derived from the Disposal, which represents the difference between the aggregate of the market value of 43.34% equity interest in JONHON Optronic and the Balance of approximately RMB593.6 million, and the carrying value of 54.51% equity interest in Dongan Motor. The exact amount of the gain would be calculated on the basis of the relevant figures as at the date of Completion prepared under IFRS. Such gain on Disposal would not be included in the consolidated income statement of the Group, but would be credited to reserve.

— 53 —

LETTER FROM SOMERLEY

The Group may be subject to tax payment, estimated to amount to approximately RMB335 million (please refer to note 4(a)(ii) to the unaudited pro forma consolidated statement of assets and liabilities of the Group as contained in Appendix III to the Circular) if the PRC tax authority determines that a gain from the Disposal should be calculated by reference to the consideration for the Disposal and Dongan Motor’s original cost to the Group. Based on the communication with the PRC tax authority and the fact that both Dongan Motor and JONHON Optronic are under the common control of AVIC, the Company is of the view that there is a ground to apply for a waiver from making such tax payment. However, the possibility of such tax payment cannot be ascertained as at the Latest Practicable Date.

Since Dongan Motor and JONHON Optronic are both under the control of AVIC, merger accounting would therefore be applied, and the Disposal and the Acquisition would be accounted for at their respective book values. Upon Completion and after taking into account the above-mentioned gain from Disposal and potential tax payment, it is expected that there will be a net reduction in the net assets attributable to Shareholders, as the aggregate amount of (i) the 43.34% net book value of JONHON Optronic acquired and (ii) the cash consideration to be received by the Group from AVIC for the Disposal, is expected to be less than the net book value attributable to a 54.51% interest in Dongan Motor which is subject to the Disposal. The difference will be accounted for as a debit to equity and therefore, there would be no impact on the income statement of the Group. The exact amount of the net reduction in net assets attributable to Shareholders would be calculated on the basis of the relevant figures as at the date of Completion prepared under IFRS. In view of the Group’s stated strategy to dispose of its automobile business, and the better business prospect and profitability of JONHON Optronic, such reduction in the Group’s net assets attributable to Shareholders is considered acceptable.

According to the unaudited pro forma consolidated statement of assets and liabilities of the Group as contained in Appendix III to the Circular, upon completion of the Equity Swap Agreement, there would be a significant reduction by approximately RMB3.0 billion in net assets of the Group, which include net assets attributable to minority shareholders and shareholders of the Company. As confirmed by the Company, such reduction is principally attributable to the reduction in net assets attributable to minority interests, which arose largely as a result of the de-consolidation of Dongan Motor and Dongan Mitsubishi.

(ii) Gearing

The net cash position (defined as cash and bank deposits net of borrowings) of Dongan Motor was approximately RMB28.4 million as at 30 September 2009, which was lower than JONHON Optronic’s net cash position of approximately RMB148.5 million. Accordingly, the gearing ratio of the Group is expected to be lower following Completion.

(iii) Working capital

Following Completion, the Balance of approximately RMB593.6 million would be paid by AVIC to the Group, which would be applied by the Group as general working capital.

— 54 —

LETTER FROM SOMERLEY

As at 30 September 2009, the cash and bank deposits of Dongan Motor and JONHON Optronic were approximately RMB588.4 million and RMB560.1 million respectively. The cash and bank balance of the Group would therefore be slightly decreased following the de-consolidation of Dongan Motor and consolidation of JONHON Optronic upon Completion.

RECOMMENDATION

Having taken into account the above principal factors and reasons, we consider that the Equity Swap Agreement is on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned. We also consider the entering into of the Equity Swap Agreement is in the interests of the Company and its Shareholders as a whole. We therefore advise the Independent Board Committee to recommend, and ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve, among others, the entering into of the Equity Swap Agreement.

Yours faithfully, for and on behalf of SOMERLEY LIMITED Sylvia Leung Director

— 55 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

The PRC aviation manufacturing industry is encountering historical opportunity, the market demand is extremely broad. According to the overseas forecast for the PRC aerial transportation in the next 20 years, the total volume of the PRC aerial transportation will achieve an increase of above 7% per year, which will be the world’s biggest aviation market apart from the United States. The Board is of the view that, through the transactions contemplated under the Equity Swap Agreement, the Group will be able to dispose of vehicle engine business. In the future, the Group will focus on the aviation business, and will, with the support by the controlling shareholder through its strong capability in the aviation industry, endeavor to become a flagship company in the PRC civil aviation products manufacturing industry.

— I-1 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. SUMMARY FINANCIAL INFORMATION

The following is a summary of the consolidated financial information of the Group for the three years ended 31 December 2006, 2007 and 2008, as extracted from the relevant annual reports of the Company which are not subject to any qualified opinion.

CONSOLIDATED INCOME STATMENTS

For the years ended 31 December

Revenue Cost of sales Gross profit Other income Other gains, net Selling and distribution expenses General and administrative expenses Other operating expenses Operating loss Finance income Finance costs Finance costs, net Share of results of associates Loss before income tax Income tax expense Loss for the year Attributable to: Equity holders of the Company Minority interests Loss per share for loss attributable to equity holders of the Company during the year — Basic and diluted	2008 RMB’000 16,384,884 (14,818,736) 1,566,148 105,915 22,498 (872,292) (1,216,235) — (393,966) 79,280 (447,281) (368,001) 40,068 (721,899) (188,596) (910,495) (1,156,611) 246,116 (910,495) RMB (0.249)	2007 RMB’000 16,540,645 (14,780,935) 1,759,710 113,796 99,082 (980,648) (1,049,823) (466,112) (523,995) 57,966 (387,391) (329,425) 56,711 (796,709) (51,635) (848,344) (1,026,226) 177,882 (848,334) RMB (0.221)	2006 RMB’000 17,110,508 (15,204,907) 1,905,601 98,411 37,767 (1,156,994) (1,103,119) (105,954) (324,288) 78,256 (272,282) (194,026) 45,051 (473,263) (13,399) (486,662) (331,079) (155,583) (486,662) RMB (0.071)

— I-2 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEETS

As at 31 December

ASSETS Non-current assets Property, plant and equipment Land use rights Intangible assets Interests in subsidiaries Interests in associates Available-for-sale financial assets Deferred income tax assets Current assets Accounts receivable Advances to suppliers Other receivables and prepayments Inventories Financial assets at fair value through profit or loss Pledged deposits Term deposits with initial term of over three months Cash and cash equivalents Total assets	2008 RMB’000 6,897,248 151,307 240,120 — 329,969 230,379 97,603 7,946,626 ------------ 3,759,684 314,736 1,170,638 5,120,762 11,488 536,605 1,259,962 2,324,130 14,498,005 ------------ ----------------------------------------------- 22,444,631	2007 RMB’000 7,325,989 81,375 331,614 — 297,921 587,417 126,241 8,750,557 ------------ 3,237,673 519,014 1,203,537 5,277,527 7,414 638,350 691,820 2,452,706 14,028,041 ------------ ----------------------------------------------- 22,778,598	2006 RMB’000 9,049,538 96,331 450,654 — 247,967 131,247 75,305
			10,051,042 ------------ 3,716,924 628,383 708,218 4,804,913 — 694,391 1,051,128 3,155,527
			14,759,484 ------------ ----------------------------------------------- 24,810,526

— I-3 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

EQUITY Capital and reserves attributable to equity holders of the Company Share capital Reserves Minority interests Total equity LIABILITIES Non-current liabilities Long-term borrowings Deferred income from government grants Deferred income tax liabilities Current liabilities Accounts payable Advances from customers Other payables and accruals Amounts payable to ultimate holding company Provisions Current portion of long-term borrowings Short-term borrowings Current income tax liabilities Total liabilities Total equity and liabilities	2008 RMB’000 4,643,609 (2,310,956) 2,332,653 3,240,885 5,573,538 ------------ 934,191 135,491 36,816 1,106,498 ------------ 7,218,591 688,750 1,364,177 520,524 205,128 728,000 4,910,404 129,021 15,764,595 ------------ ----------------------------------------------- 16,871,093 ------------ ----------------------------------------------- 22,444,631	2007 RMB’000 4,643,609 (1,155,536) 3,488,073 3,170,322 6,658,395 ------------ 1,111,540 149,886 156,332 1,417,758 ------------ 6,761,213 884,568 1,324,343 520,524 174,431 650,457 4,312,163 74,746 14,702,445 ------------ ----------------------------------------------- 16,120,203 ------------ ----------------------------------------------- 22,778,598	2006 RMB’000 4,643,609 (314,710) 4,328,899 3,793,213 8,122,112 ------------ 836,704 157,002 35,872 1,029,578 ------------ ------------ 7,037,244 460,470 1,667,884 520,524 103,284 433,695 5,401,598 34,137 15,658,836 ------------ ----------------------------------------------- 16,688,414 ------------ ----------------------------------------------- 24,810,526

— I-4 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2008

The following are the audited consolidated financial statements of the Group prepared under HKFRS for the year ended 31 December 2008 which are extracted from the annual report of the Company for the year ended 31 December 2008.

Consolidated Income Statement

For the year ended 31st December 2008

Note Revenue 5 Cost of sales Gross profit Other income 6 Other gains, net 7 Selling and distribution expenses General and administrative expenses Other operating expenses Operating loss Finance income 9 Finance costs 9 Finance costs, net Share of results of associates 19 Loss before income tax Income tax expense 10 Loss for the year Attributable to: Equity holders of the Company 11 Minority interests Loss per share for loss attributable to equity holders of the Company during the year — Basic and diluted 12	2008 RMB’000 16,384,884 (14,818,736) 1,566,148 105,915 22,498 (872,292) (1,216,235) — (393,966) 79,280 (447,281) (368,001) 40,068 (721,899) (188,596) (910,495) (1,156,611) 246,116 (910,495) RMB (0.249)	2007 RMB’000 16,540,645 (14,780,935) 1,759,710 113,796 99,082 (980,648) (1,049,823) (466,112) (523,995) 57,966 (387,391) (329,425) 56,711 (796,709) (51,635) (848,344) (1,026,226) 177,882 (848,344) RMB (0.221)

— I-5 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Balance Sheets

As at 31st December 2008

Note ASSETS Non-current assets Property, plant and equipment 15 Land use rights 16 Intangible assets 17 Interests in subsidiaries 18 Interests in associates 19 Available-for-sale financial assets 20 Deferred income tax assets 21 Current assets Accounts receivable 22 Advances to suppliers 23 Other receivables and prepayments 24 Inventories 25 Financial assets at fair value through profit or loss Pledged deposits 27 Term deposits with initial term of over three months 28 Cash and cash equivalents 37(d) Total assets	Group 2008 2007 RMB’000 RMB’000 6,897,248 7,325,989 151,307 81,375 240,120 331,614 — — 329,969 297,921 230,379 587,417 97,603 126,241 7,946,626 8,750,557 ------------ ------------ 3,759,684 3,237,673 314,736 519,014 1,170,638 1,203,537 5,120,762 5,277,527 11,488 7,414 536,605 638,350 1,259,962 691,820 2,324,130 2,452,706 14,498,005 14,028,041 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 22,444,631 22,778,598	Group 2008 2007 RMB’000 RMB’000 6,897,248 7,325,989 151,307 81,375 240,120 331,614 — — 329,969 297,921 230,379 587,417 97,603 126,241 7,946,626 8,750,557 ------------ ------------ 3,759,684 3,237,673 314,736 519,014 1,170,638 1,203,537 5,120,762 5,277,527 11,488 7,414 536,605 638,350 1,259,962 691,820 2,324,130 2,452,706 14,498,005 14,028,041 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 22,444,631 22,778,598	Company 2008 2007 RMB’000 RMB’000 6,788 7,413 — — — — 3,506,886 3,544,134 30,000 30,000 — — — — 3,543,674 3,581,547 ------------ ------------ — — — — 193,017 151,358 — — — — — — 687,638 661,820 232,026 143,266 1,112,681 956,444 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 4,656,355 4,537,991	Company 2008 2007 RMB’000 RMB’000 6,788 7,413 — — — — 3,506,886 3,544,134 30,000 30,000 — — — — 3,543,674 3,581,547 ------------ ------------ — — — — 193,017 151,358 — — — — — — 687,638 661,820 232,026 143,266 1,112,681 956,444 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 4,656,355 4,537,991
	7,946,626 ------------ 3,759,684 314,736 1,170,638 5,120,762 11,488 536,605 1,259,962 2,324,130	8,750,557 ------------ 3,237,673 519,014 1,203,537 5,277,527 7,414 638,350 691,820 2,452,706	3,543,674 ------------ — — 193,017 — — — 687,638 232,026	3,581,547 ------------ — — 151,358 — — — 661,820 143,266
	14,498,005 ------------ ----------------------------------------------- 22,444,631	14,028,041 ------------ ----------------------------------------------- 22,778,598	1,112,681 ------------ ----------------------------------------------- 4,656,355	956,444 ------------ ----------------------------------------------- 4,537,991

— I-6 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Note EQUITY Capital and reserves attributable to equity holders of the Company Share capital 35 Reserves 36 Minority interests Total equity LIABILITIES Non-current liabilities Long-term borrowings 34 Deferred income from government grants Deferred income tax liabilities 21 Current liabilities Accounts payable 29 Advances from customers 30 Other payables and accruals 31 Amounts payable to ultimate holding company 32 Provisions 33 Current portion of long-term borrowings 34 Short-term borrowings 34 Current income tax liabilities Total liabilities Total equity and liabilities Net current (liabilities)/ assets Total assets less current liabilities	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 4,643,609 4,643,609 4,643,609 4,643,609 (2,310,956)(1,155,536) (482,323) (601,370) 2,332,653 3,488,073 4,161,286 4,042,239 3,240,885 3,170,322 — — 5,573,538 6,658,395 4,161,286 4,042,239 ------------ ------------ ------------ ------------ 934,191 1,111,540 — — 135,491 149,886 — — 36,816 156,332 — — 1,106,498 1,417,758 — — ------------ ------------ ------------ ------------ 7,218,591 6,761,213 — — 688,750 884,568 — — 1,364,177 1,324,343 30,771 31,454 520,524 520,524 464,298 464,298 205,128 174,431 — — 728,000 650,457 — — 4,910,404 4,312,163 — — 129,021 74,746 — — 15,764,595 14,702,445 495,069 495,752 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 16,871,093 16,120,203 495,069 495,752 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 22,444,631 22,778,598 4,656,355 4,537,991 (1,266,590) (674,404) 617,612 460,692 6,680,036 8,076,153 4,161,286 4,042,239	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 4,643,609 4,643,609 4,643,609 4,643,609 (2,310,956)(1,155,536) (482,323) (601,370) 2,332,653 3,488,073 4,161,286 4,042,239 3,240,885 3,170,322 — — 5,573,538 6,658,395 4,161,286 4,042,239 ------------ ------------ ------------ ------------ 934,191 1,111,540 — — 135,491 149,886 — — 36,816 156,332 — — 1,106,498 1,417,758 — — ------------ ------------ ------------ ------------ 7,218,591 6,761,213 — — 688,750 884,568 — — 1,364,177 1,324,343 30,771 31,454 520,524 520,524 464,298 464,298 205,128 174,431 — — 728,000 650,457 — — 4,910,404 4,312,163 — — 129,021 74,746 — — 15,764,595 14,702,445 495,069 495,752 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 16,871,093 16,120,203 495,069 495,752 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 22,444,631 22,778,598 4,656,355 4,537,991 (1,266,590) (674,404) 617,612 460,692 6,680,036 8,076,153 4,161,286 4,042,239	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 4,643,609 4,643,609 4,643,609 4,643,609 (2,310,956)(1,155,536) (482,323) (601,370) 2,332,653 3,488,073 4,161,286 4,042,239 3,240,885 3,170,322 — — 5,573,538 6,658,395 4,161,286 4,042,239 ------------ ------------ ------------ ------------ 934,191 1,111,540 — — 135,491 149,886 — — 36,816 156,332 — — 1,106,498 1,417,758 — — ------------ ------------ ------------ ------------ 7,218,591 6,761,213 — — 688,750 884,568 — — 1,364,177 1,324,343 30,771 31,454 520,524 520,524 464,298 464,298 205,128 174,431 — — 728,000 650,457 — — 4,910,404 4,312,163 — — 129,021 74,746 — — 15,764,595 14,702,445 495,069 495,752 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 16,871,093 16,120,203 495,069 495,752 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 22,444,631 22,778,598 4,656,355 4,537,991 (1,266,590) (674,404) 617,612 460,692 6,680,036 8,076,153 4,161,286 4,042,239
	6,680,036	8,076,153	4,161,286

— I-7 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 31st December 2008

For the year ended 31st December 2008 Balance at 1st January 2008 Gain on disposal of certain interests in a subsidiary(note 36(e)) Change in fair value of available-for-sale financial assets - gross - deferred taxation Realisation of gain on available-for-sale financial assets in income statement upon disposal - gross - deferred taxation Others Net income/(expense) recognised directly in equity (Loss)/profit for the year Total recognised income/ (expense) for the year Purchase of additional interests in a subsidiary Disposal of certain interests in subsidiaries Dividend to minority shareholders of subsidiaries Balance at 31st December 2008	Attributable Share capital Capital reserve RMB’000 RMB’000 (Note 35) (Note 36(b)) 4,643,609 77,475 - - - - - - - - - - - - - - - - — 140,332 — — — — — — — — — (427) — 139,905 — — — 139,905 - - - - - - - - - - - - - - - - — — — — — — 4,643,609 217,380	to equity holders of the Company Available- for-sale financial assets reserve Statutory surplus reserve Accumulated losses RMB’000 RMB’000 RMB’000 (Note 36(c)) (Note 36(d)) 185,510 31,178 (1,449,699) - - - - - - - - - - - - - - - - - - - - - - - - — — — (177,358) — — 49,845 — — (19,433) — — 8,232 — — — — — (138,714) — — — — (1,156,611) (138,714) — (1,156,611) - - - - - - - - - - - - - - - - - - - - - - - - — — — — — — — — — 46,796 31,178 (2,606,310)	Subtotal RMB’000 3,488,073 - - - - - - - - 140,332 (177,358) 49,845 (19,433) 8,232 (427) 1,191 (1,156,611) (1,155,420) - - - - - - - - — — — 2,332,653	Minority interests RMB’000 3,170,322 - - - - - - - - 12,616 (143,419) 40,307 (15,715) 6,295 (346) (100,262) 246,116 145,854 - - - - - - - - (11) 13,930 (89,210) 3,240,885	Total RMB’000 6,658,395 - - - - - - - - 152,948 (320,777) 90,152 (35,148) 14,527 (773)
					(99,071) (910,495)
					(1,009,566) - - - - - - - - (11) 13,930 (89,210)
					5,573,538

— I-8 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

For the year ended 31st December 2007 Balance at 1st January 2007 Transfer to statutory reserve Change in fair value of available-for-sale financial assets - gross - deferred taxation Others Net (expense)/income recognised directly in equity (Loss)/profit for the year Total recognised (expense) /income for the year Contributions from minority shareholders of subsidiaries Purchase of additional interests in a subsidiary Disposal of certain interests in subsidiaries Disposal of a subsidiary Dividend to minority shareholders of subsidiaries Effect on proportionate consolidation of a jointly controlled entity (Note 3(a)(iii)) Balance at 31st December 2007	Attributa Share capital Capital reserve RMB’000 RMB’000 (Note 35) (Note 36(b)) 4,643,609 77,585 - - - - - - - - - - - - - - - - — — — — — — — (110) — (110) — — — (110) - - - - - - - - - - - - - - - - — — — — — — — — — — — — 4,643,609 77,475	ble to equity holders of the Company Available- for-sale financial assets reserve Statutory surplus reserve Accumulated losses RMB’000 RMB’000 RMB’000 (Note 36(c)) (Note 36(d)) — 26,712 (419,007) - - - - - - - - - - - - - - - - - - - - - - - - — 4,466 (4,466) 251,845 — — (66,335) — — — — — 185,510 4,466 (4,466) — — (1,026,226) 185,510 4,466 (1,030,692) - - - - - - - - - - - - - - - - - - - - - - - - — — — — — — — — — — — — — — — — — — 185,510 31,178 (1,449,699)	Subtotal RMB’000 4,328,899 - - - - - - - - — 251,845 (66,335) (110) 185,400 (1,026,226) (840,826) - - - - - - - - — — — — — — 3,488,073	Minority interests RMB’000 3,793,213 - - - - - - - - — 203,653 (53,280) (2,281) 148,092 177,882 325,974 - - - - - - - - 2,000 (2,909) 14,973 (2,203) (37,230) (923,496) 3,170,322	Total RMB’000 8,122,112 - - - - - - - - — 455,498 (119,615) (2,391)
					333,492 (848,344)
					(514,852) - - - - - - - - 2,000 (2,909) 14,973 (2,203) (37,230) (923,496)
					6,658,395

— I-9 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated Cash Flow Statement

For the year ended 31st December 2008

Note Cash flows from operating activities Net cash generated from operations 37(a) Interest received Interest paid Enterprise income tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of land use rights Payments for intangible assets Addition of available-for-sale financial assets Disposal of available-for-sale financial assets Decrease in pledged deposits (Increase)/decrease in term deposits with initial term of over three months Proceeds from sale of property, plant and equipment 37(b) Net cash outflow from disposal of a subsidiary 37(c) Effect on proportionate consolidation of a jointly controlled entity (Note 3(a)(iii)) Proceeds from disposal of certain interests in subsidiaries Additional investments in associates Disposal of interests in associates Dividends received from associates Dividends received from available-for-sale financial assets Purchase of additional interests in a subsidiary Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Contributions from minority shareholders of subsidiaries Dividend paid to minority shareholders of subsidiaries Dividend paid to holding company Net cash generated from/(used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1st January Cash and cash equivalents at 31st December 37(d)	2008 RMB’000 1,032,394 79,280 (427,238) (120,520) 563,916 ------------ (769,579) (79,644) (1,201) (14,000) 55,381 101,745 (568,142) 1,852 — — 166,878 (42,631) 7,750 39,539 2,428 (11) (1,099,635) ------------ 5,399,750 (4,911,193) — (81,414) — 407,143 ------------ ----------------------------------------------- (128,576) 2,452,706 2,324,130	2007 RMB’000 503,390 57,966 (398,171) (65,911) 97,274 ------------ (894,643) — (6,392) — 380 56,041 359,308 14,819 (1,559) (136,257) 47,413 (30,000) 99 33,256 4,870 (2,909) (555,574) ------------ 7,896,298 (8,077,298) 2,000 (37,451) (28,070) (244,521) ------------ ----------------------------------------------- (702,821) 3,155,527 2,452,706

— I-10 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to the Financial Statements

1 ORGANISATION AND PRINCIPAL ACTIVITIES

AviChina Industry & Technology Company Limited (the “Company”) was established in the People’s Republic of China (the “PRC”) on 30th April 2003 as a joint stock company with limited liability under the PRC laws as a result of a group reorganisation (the “Reorganisation”) of China Aviation Industry Corporation II (“AVIC II”). The Company’s H shares were listed on the Main Board of The Stock Exchange of Hong Kong Limited on 30th October 2003.

The Company and its subsidiaries are collectively referred to as the “Group”. The Group is principally engaged in the research, development, manufacture and sale of aviation and automobile products.

The Company’s directors regard AVIC II, a company established in the PRC, as being the ultimate holding company of the Company, up to 6th November 2008 when AVIC II merged with China Aviation Industry Corporation I to form China Aviation Industry Group Corporation (“AVIC Group”) which then became the Company’s ultimate holding company. AVIC Group, AVIC I and AVIC II are all state-owned enterprises under control of the State Council of the PRC government.

These consolidated financial statements are presented in Renminbi (“RMB”), unless otherwise stated, and have been approved for issue by the Board of Directors on 9th April 2009.

2 BASIS OF PREPARATION

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets at fair value through profit or loss, as appropriate.

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

In preparing these financial statements, the directors have taken into account all information that could reasonably be expected to be available including the proposed transactions as disclosed in note 42 and have ascertained that the Group has obtained adequate financial resources to support the Group to continue in operational existence for the foreseeable future. Under these circumstances, the directors consider that it is proper to prepare the financial statements on a going concern basis notwithstanding that at 31st December 2008, the Group’s current liabilities exceeded its current assets by RMB 1,266,590,000.

— I-11 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(a) Amendments and interpretations effective in 2008

IAS 39 and IFRS 7 Reclassification of Financial Assets (Amendments) IFRIC Int 11 IFRS 2 - Group and Treasury Share Transactions IFRIC Int 12 Service Concession Arrangements IFRIC Int 14 IFRS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirement and Their Interaction

The adoption of these amendments and interpretations to the standards does not have any significant impact to the results and financial position of the Group.

(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

IFRS 1 (Revised) First-time Adoption of International Financial Reporting Standards (effective for annual periods beginning on or after 1st January 2009)

IFRS 1 and IAS 27 Cost of an Investment in a Subsidiary, Jointly Controlled (Amendments) Entity or Associate (effective for annual periods beginning on or after 1st January 2009) IFRS 2 (Amendment) Share-based Payment - Vesting Conditions and Cancellations (effective for annual periods beginning on or after 1st January 2009) IFRS 3 (Revised) Business Combinations (effective for annual periods beginning on or after 1st July 2009) IFRS 7 (Amendments) Improving Disclosures about Financial Instruments (effective for annual periods beginning on or after 1st January 2009) IFRS 8 Operating Segments (effective for annual periods beginning on or after 1st January 2009)

IAS 1 (Revised) Presentation of Financial Statements (effective for annual periods beginning on or after 1st January 2009) IAS 23 (Revised) Borrowing Costs (effective for annual periods beginning on or after 1st January 2009)

IAS 27 (Revised) Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1st July 2009) IAS 32 and IAS 1 Puttable Financial Instruments and Obligations arising on (Amendments) Liquidation (effective for annual periods beginning on or after 1st January 2009) IAS 39 (Amendment) Eligible Hedged Items (effective for annual periods beginning on or after 1st July 2009)

— I-12 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

IFRIC Int 9 and IAS 39 Embedded Derivatives (effective for annual periods ending on (Amendments) or after 30th June 2009) IFRIC Int 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1st July 2008) IFRIC Int 15 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1st January 2009) IFRIC Int 16 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1st October 2008) IFRIC Int 17 Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1st July 2009) IFRIC Int 18 Transfers of Assets from Customers (effective for transfers of assets from customers received on or after 1st July 2009)

The effect that the adoption of IFRS 3 (Revised), IAS 27 (Revised) and IFRIC Int 17 will have on the results and financial position of the Group will depend on the incidence and timing of transactions within the scope of these standards and interpretation occurring on or after 1st January 2010. The effect of adoption of IFRS 8 will result in certain presentational changes in the Group’s financial statements. The directors anticipate that the adoption of other new standards, amendments and interpretations to standards will not result in a significant impact on the results and financial position of the Group.

In addition, the International Accounting Standards Board also published a number of amendments for the existing standards under its annual improvement project. These amendments are not expected to have a significant financial impact on the results and financial position of the Group.

3 PRINCIPAL ACCOUNTING POLICIES

(a) Consolidation

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

(i) Subsidiaries

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent

— I-13 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interests. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, including any contingent liabilities assumed, the difference is recognised directly in the consolidated income statement.

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

In the Company’s balance sheet, interests in subsidiaries are stated at cost less provision for impairment losses. The results of the subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(ii) Transactions and minority interests

The Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. Gains or losses on disposals to minority interests are also recorded in equity. For disposals to minority interests, differences between any proceeds received and the relevant share of minority interests are also recorded in equity.

(iii) Jointly ventures

A jointly controlled entity is a joint venture in respect of which a contractual arrangement is established between the participating ventures and whereby the Group together with the other venturers undertake an economic activity which is subject to joint control and none of the venturers has unilateral control over the economic activity.

The Group’s interest in a jointly controlled entity is accounted for by proportionate consolidation. The Group combines its share of the jointly controlled entity’s individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group’s consolidated financial statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the jointly controlled entity that it is attributable to the other venturers. The Group does not recognise its share of profits or losses from the jointly controlled entity that result from the Group’s purchase of assets from the jointly controlled entity until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss. As a result of a change in management roles and responsibilities in Jiangxi Changhe Suzuki Automobile Co., Ltd. (“JCSA”), a former subsidiary indirectly held

— I-14 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

by the Group, the directors of the Company consider that the Group no longer controls JCSA as a subsidiary and therefore have reclassified JCSA as a jointly controlled entity of the Group during the year ended 31st December 2007 and accounted for JCSA using proportionate consolidation from the date when the Group’s control over JCSA ceased.

Certain of the Group’s activities are conducted through joint ventures where the venturers have a direct ownership interest in and jointly control the assets of the venture. The income, expenses, assets and liabilities of these jointly controlled assets are included in the consolidated financial statements in proportion to the Group’s interest.

(iv) Associates

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

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

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

In the Company’s balance sheet the investments in associates are carried at cost less provision for impairment losses. The results of associates are accounted for by the Company on the basis of dividends received and receivable.

(b) Property, plant and equipment

Property, plant and equipment other than construction-in-progress are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

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

— I-15 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Property, plant and equipment

Depreciation is calculated on a straight-line basis to write off the cost less accumulated impairment losses of each asset to their residual values over their estimated useful lives as follows:

Buildings	20 - 45 years
Plant and equipment	3 - 16 years
Furniture and fixtures, other equipment and motor vehicles	5-12years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. During the year, the directors reassessed the estimate useful lives of certain plant and equipment in the Group mainly in relation to its automobile segment, after taking into account the current business environment, market conditions and the expected pattern of economic benefits from the respective assets, and revised their accounting estimates accordingly. The revised accounting estimates on depreciation are within the range of the Group as shown above. The aggregate effect of the changes is that the depreciation charge and the Group’s loss for the year has been increased by RMB 212,620,000.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 3 (f)).

Gains and losses on disposals are determined by comparing net sales proceeds and the carrying amount of the relevant assets, and are included in the income statement.

(c) Construction-in-progress

Construction-in-progress represents buildings, plant and machinery under construction and pending installation and is stated at cost less accumulated impairment losses, if any. Cost includes the costs of construction of buildings, the costs of plant and machinery, and interest charges arising from borrowings used to finance these assets during the period of construction or installation and testing. All other borrowing costs are expensed. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for intended use. When the assets concerned are brought to use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated in Note 3(b) to the financial statements.

(d) Land use rights

Land use rights are stated at cost less accumulated amortisation and accumulated impairment losses. Cost represents consideration paid for the rights to use the land on which various plants and buildings are situated for periods varying from 30 to 50 years.

Amortisation of land use rights is calculated on a straight-line basis over the period of the land use rights.

— I-16 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Intangible assets

Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technical feasibility and its costs can be measured reliably. Other development expenditures that do not meet their criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its expected useful life, not exceeding five years; and tested for impairment according to Note 3(f) below.

Where the research phase and the development phase of an internal project cannot be clearly distinguished, all expenditure incurred on the project is charged to the income statement.

Technology know-how is initially recognised at cost. Technology know-how that has a definite useful life is carried at cost less accumulated amortisation and accumulated impairment losses, if any. Amortisation is calculated using the straight-line method to allocate the cost of technology know-how over their estimated useful lives of 6 years.

(f) Impairment of investments in subsidiaries, associates and non-financial assets

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

Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the income statement.

— I-17 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(g) Financial assets

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

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

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

(ii) Loans and receivables

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

(iii) Held-to-maturity investments

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

(iv) Available-for-sale financial assets

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

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

— I-18 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are presented in the income statement in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement when the Group’s right to receive payments is established.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss; translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in equity.

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

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

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted investments), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. However, if the range of reasonable fair value estimate is significant and the probabilities of the various estimate cannot be reasonably assessed, such financial assets are carried at cost less accumulated impairment losses.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of receivables is described in Note 3(j).

(h) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined by the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). 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.

— I-19 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(i) Contracts in progress

Contracts in progress in connection with the manufacturing of aircraft are accounted for under construction contracts.

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred and that it is probable to be recoverable; and contract costs are recognised when incurred.

When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

The Group uses the percentage of completion method to determine the appropriate amount to recognise in a given period. The stage of completion is measured by reference to the contract costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature.

The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within “accounts receivable”.

The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses).

(j) Receivables

Receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original term of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement within “general and administrative expenses”. When a receivable is uncollectible, it is written off against the allowance account for receivables. Subsequent recoveries of amounts previously written off are credited against general and administrative expenses in the income statement.

(k) Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks and term deposit with initial terms of less than three months.

— I-20 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(l) Financial liabilities and equity

Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Financial liabilities (including accounts payables) are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. An equity instrument is any contract that does not meet the definition of financial liability and evidences a residual interest in the assets of the Group after deducting all of its liabilities.

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

(m) Borrowings

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

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

(n) Borrowing costs

Borrowing costs incurred for the construction of qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed as incurred.

(o) Current and deferred income tax

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

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

— I-21 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

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

(p) Employee benefits

(i) Pension obligations

The Group contributes on a monthly basis to various defined contribution retirement benefit plans organised by relevant municipal and provincial governments in the PRC. The municipal and provincial governments undertake to assume the retirement benefit obligations payable to all existing and future retired employees under these plans and the Group has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred.

(ii) Early retirement benefits

Early retirement benefits are recognised as expense in the period the Group reaches agreements with the relevant employees for the early retirement.

(iii) Housing benefits

The Group sold staff quarters to its employees, subject to a number of eligibility requirements, at preferential prices. When staff quarters are identified as being subject to sale under these arrangements, the carrying value of the staff quarters is written down to the net recoverable amount. Upon sale, any difference between sales proceeds and the carrying amount of the staff quarters is charged to the income statement.

The above discounted quarters allocation plans were phased out in accordance with the policies of the PRC government. In 1998, the State Council of the PRC issued a circular which stipulated that the sale of quarters to employees at preferential prices should be withdrawn. In 2000, the State Council further issued a circular stating that cash subsidies should be made to the employees following the withdrawal of allocation of staff quarters. However, the specific timetable and procedures of implementation of these policies are to be determined by individual provincial or municipal government based on the particular situation of the province or municipality.

Based on the relevant detailed local government regulations promulgated, certain entities within the Group have adopted cash housing subsidy plans. In accordance with these plans, for those eligible employees who have not been allocated with quarters at all or who have not been allocated with quarters up to the prescribed standards before the discounted quarters sale plans were terminated, the Group is required to pay them one-off cash housing subsidies based on their years of service, positions and other criteria. These cash housing subsidies are charged to the

— I-22 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

income statement in the year in which it was determined that the payment of such subsidies is probable and the amounts can be reasonably estimated. Based on the available information and its best estimate, the Group estimated the required provision for these cash housing subsidies which was charged to the income statement in the year ended 31st December 2000 when the State Council circular in respect of cash subsidies was issued.

Pursuant to the Reorganisation, AVIC II would bear any further one-off cash housing subsidies in excess of the amount provided for in the consolidated balance sheet of the Group. Employees joining the Group after the incorporation of the Company would not be entitled to any one-off cash housing subsidies.

In addition, all full-time employees of the Group are entitled to participate in various government-sponsored housing funds. The Group contributes on a monthly basis to these funds based on certain percentages of the salaries of the employees. The Group’s liability in respect of these funds is limited to the contributions payable in each period.

(q) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

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

Warranty obligations are accrued at the time the sales are recognised, based on the estimated amounts of fulfilling the total obligations, including handling and transportation costs. The assumptions used to estimate warranty expenses are evaluated periodically and based on historical experience.

(r) Operating leases

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

Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term.

— I-23 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(s) Financial guarantee contract liabilities

Financial guarantee contract liabilities are measured initially at their fair values and are subsequently measured at the higher of (i) the amount initially recognised less, where appropriate, cumulative amortisation recognised in the income statement over the period of the relevant liabilities and (ii) the amount of which the Group is obliged to reimburse the recipient under the financial guarantee contracts.

(t) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “Functional Currency”). The financial statements are presented in Renminbi (“RMB”), which is the Company’s functional and presentation currency.

(ii) Transactions and balances

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

Translation differences on non-monetary financial assets and liabilities such as equity instruments held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale are included in the fair value reserve in equity.

(iii) Group companies

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

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

— I-24 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(u) Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sales of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts after eliminated sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Group. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue and income are recognised as follows:

Turnover represents revenues recognised on sales of automobiles and aviation products. Sales of goods are recognised when a group entity has delivered products to the customer, the customer has accepted the products and collectibility of the related receivables is reasonably assured.

The Group combines its proportionate share of the jointly controlled entity’s turnover as described in Note 3(a)(iii) with similar recognition policies mentioned above.

Recognition policy of revenue relating to long-term construction contracts is disclosed in Note 3(i) above.

Dividend income and income from investments are recognised when the right to receive payment is established.

Revenue from the provision of services is recognised when the services are rendered.

Rental income under operating leases is recognised on a straight-line basis over the lease periods.

Interest income from bank deposits is recognised on a time proportion basis using the effective interest method.

(v) Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income from government grants and are credited to the income statement on a straight-line basis over the expected lives of the related assets.

— I-25 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(w) Dividend distribution

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

(x) Derivative financial instruments

Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. During the year, the Group did not enter into any derivative financial instruments.

(y) Segment reporting

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

4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements used in preparing the financial statements 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 resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(i) Depreciation and amortisation

The Group’s management determines the estimated useful lives and related deprecation/amortisation charges for the property, plant and equipment and intangible assets with reference to the estimated periods that the Group intends to derive future economic benefits from the use of these assets. Management will revise the depreciation and amortisation charge where useful lives are different to previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

(ii) Development costs

The Group’s management determines the capitalisation of development costs when it is probable that the project will be a success considering its commercial and technology feasibility. It could change significantly as a result of technological innovations and the changes of estimated projections. Management will write-off or write-down development costs when there are adverse changes in technological innovations or estimated projections.

— I-26 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(iii) Impairment of non-financial assets

Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its recoverable amount in accordance with the accounting policy stated in Note 3(f). The recoverable amount of an asset or a cash-generating unit is determined based on the higher of its fair value less costs to sell and value-in-use. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value, which has been prepared on the basis of management’s assumptions and estimates.

(iv) Impairment of account and other receivables

Provision for impairment of account and other receivables is determined based on the evaluation of collectibility of account and other receivables. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness, the past collection history of each customer and the current market condition.

(v) Inventories

Management estimates the net realisable value for finished goods and work-in progress based primarily on the latest invoice prices and current market conditions. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and will make provision for impairment on obsolete and slow-moving items or will write-off or write-down inventories to net realisable value.

(vi) Revenue recognition

The Group uses the percentage of completion method in accounting for its contract revenues. Use of the percentage of completion method requires the Group to estimate the contract costs incurred up to the balance sheet date as a proportion of the total estimated cost for each contract. Based on the Group’s experience and nature of the construction contracts undertaken by the Group, the Group makes estimates of the point at which it considers the work is sufficiently advanced such that costs to complete and revenue can be reliably estimated. Management is confident that the actual outcome will not materially differ from the estimates made at the balance sheet date.

(vii) Income taxes

The Group is subject to income taxes in the PRC. There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred income tax assets relating to certain temporary differences and tax losses are recognised when management considers it is probable that future taxable profits will be available against which the temporary differences or tax losses can be utilised. When the expectation is different from the original estimate, such differences will impact the recognition of deferred income tax assets and taxation charges in the period in which such estimate is changed.

— I-27 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(viii) Provisions

The Group gives warranties on certain automobile and aviation products and undertakes to repair or replace items that fail to perform satisfactorily based on certain pre-determined conditions. Management estimates the related warranty claims based on historical warranty claim information including level of repairs and returns as well as recent trends that might suggest that past cost information may differ from future claims.

Factors that could impact the estimated claim information include the success of the Group’s product quality initiatives, as well as parts and labor costs. Any increase or decrease in the provision would affect profit or loss in future years.

5 SEGMENT INFORMATION

The Group is principally engaged in the manufacturing, assembly, sales and servicing of civilian aircrafts and automobiles . In accordance with the Group’s internal financial reporting system, the Group has determined business segments be presented as the primary reporting format.

(a) Primary reporting format - business segments

The Group is organised into two main business segments:

Aviation - manufacturing, assembly, sales and servicing of helicopters, trainers and other aircrafts.
Automobiles - manufacturing, assembly, sales and servicing of automobiles.

All segment revenues were made to external parties.

Operating expenses are allocated to the relevant segment which is the predominant user of the services provided by the unit. Operating expenses of other shared services which cannot be allocated to a specific segment are included as unallocated costs. Unallocated costs mainly represent corporate expenses.

Segment assets consist primarily of property, plant and equipment, land use rights, intangible assets, investments in associates, inventories, operating receivables, prepayments, deposits and cash and cash equivalents, and mainly exclude corporate assets. Segment liabilities comprise operating liabilities and exclude corporate liabilities. Capital expenditures mainly comprise additions to property, plant and equipment, land use rights and intangible assets.

— I-28 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Primary reporting format - business segments

Operating results
Segment revenue
Segment results
Unallocated income
Unallocated costs
Operating loss
Finance costs, net
Share of results of associates
Loss before income tax
Income tax expense
Loss for the year
Assets
Segment assets
Interests in associates
Unallocated assets
Total assets
Liabilities
Segment liabilities
Borrowings
Unallocated liabilities
Total liabilities
Other segment information
Capital expenditures
Depreciation
Amortisation
Provision/(reversal of provision) for impairments
Write-off of intangible assets

As at and for the year ended
31st December 2008
Aviation
Automobiles
Total
RMB’000
RMB’000
RMB’000
4,596,140
11,788,744
16,384,884
248,542
(633,359)
(384,817)
17,304
(26,453)
(393,966)
(88,377)
(279,624)
(368,001)
38,420
1,648
40,068
(721,899)
(188,596)
(910,495)
8,809,718
12,266,867
21,076,585
302,750
27,219
329,969
1,038,077
22,444,631
3,751,898
6,014,716
9,766,614
2,487,991
4,084,604
6,572,595
531,884
16,871,093
177,278
868,458
1,045,736
104,042
1,173,456
1,277,498
2,270
66,268
68,538
23,989
(6,370)
17,619
—
33,869
33,869

— I-29 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

As at and for the year ended
31st December 2007
Aviation
Automobiles
Total
RMB’000
RMB’000
RMB’000
5,327,408
11,213,237
16,540,645
306,241
(852,840)
(546,599)
48,745
(26,141)
(523,995)
(73,707)
(255,718)
(329,425)
53,389
3,322
56,711
(796,709)
(51,635)
(848,344)
8,855,603
12,812,702
21,668,305
240,552
57,369
297,921
812,372
22,778,598
3,888,127
5,505,832
9,393,959
2,080,340
3,993,820
6,074,160
652,084
16,120,203
217,461
702,851
920,312
89,145
936,147
1,025,292
2,309
62,795
65,104
24,549
359,772
384,321
—
83,117
83,117

— I-30 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Secondary reporting format - geographical segments

All assets and operations of the Group for the year were located in the PRC, which is considered as one geographical location in an economic environment with similar risk and returns.

No geographical segments analysis is presented as less than 10% of the Group’s revenue and assets are attributable to markets not located in the PRC.

6 OTHER INCOME

	2008	2007
	RMB’000	RMB’000
Profit from sale of scrap materials	24,592	22,312
Income from government grants	69,050	70,000
Refund of value-added tax and real estate tax	1,829	3,683
Rental income from plant and equipment	6,578	1,074
Income from rendering of other services	1,438	11,857
Dividend income from available-for-sale financial assets	2,428	4,870
	105,915	113,796
OTHER GAINS, NET
	2008	2007
	RMB’000	RMB’000
Amortisation of deferred income relating to government grants	17,755	33,161
Fair value (loss)/gain on financial assets at fair value through
profit or loss	(1,991)	338
(Loss)/gain on disposal of
— Property, plant and equipment	(9,082)	16,838
— Certain interests in subsidiaries	—	32,440
— Associates	794	—
— Available-for-sale financial assets	36,112	—
— Financial assets at fair value through profit or loss	(21,090)	16,305
	22,498	99,082

7 OTHER GAINS, NET

— I-31 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

8 EXPENSES BY NATURE

Advertising costs Amortisation of — Intangible assets (Note 17) — Land use rights (Note 16) Auditors’ remuneration Changes in inventories of finished goods and work-in-progress Contract costs incurred Depreciation on property, plant and equipment (Note 15) Fuel Insurance Operating lease rentals — Land and buildings — Property, plant and equipment Provision/(reversal of provision) for impairment — Available-for-sale financial assets — Intangible assets (Note 17) — Inventories — Property, plant and equipment (Note 15) — Receivables Raw materials and consumables used Repairs and maintenance expense Research expenditures and development costs Staff costs, including directors’ emoluments (Note 13) Sub-contracting charges Sundries Transportation expenses Travelling Warranty expenses (Note 33) Write-off of intangible assets (Note 17) Total cost of sales, selling and distribution expenses, general and administrative expenses, and other operating expenses	2008 RMB’000 192,474 58,826 9,712 7,650 394,442 2,282,697 1,277,498 324,273 16,725 45,985 — — — 7,914 — 9,705 9,573,180 174,663 235,794 1,090,027 216,271 413,815 351,827 48,077 141,839 33,869 16,907,263	2007 RMB’000 171,949 58,875 6,229 7,190 (424,184) 2,726,946 1,025,292 395,295 19,334 45,548 216 (1,326) 5,958 121,875 243,421 13,067 10,047,509 229,257 244,539 945,478 218,664 392,157 400,887 53,322 246,903 83,117 17,277,518

— I-32 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9 FINANCE COSTS, NET

Finance income: Interest income on bank balances and deposits Finance costs: Interest expense on bank borrowings — Wholly repayable within 5 years — Not wholly repayable within 5 years Interest expense on other borrowings — Not wholly repayable within 5 years Less: Amount capitalised in property, plant and equipment (note) Government interest subsidies Exchange (gains)/losses Other finance costs	2008 RMB’000 79,280 ------------ 414,736 22,193 186 437,115 (24,646) — 412,469 (15,913) 50,725 447,281 ------------ ----------------------------------------------- 368,001	2007 RMB’000 57,966 ------------ 381,010 17,054 107
		398,171 (26,111) (33,245)
		338,815 35,183 13,393
		387,391 ------------ ----------------------------------------------- 329,425

Note: Interest expenses capitalised are borrowing costs related to funds borrowed specifically for the purpose of obtaining qualifying assets. Interest rates on such capitalised borrowings are as follows:

										2008		2007
Interest	rates	per	annum	at	which	finance	costs	were	capitalised	6.89%-7.47%	5.49%	-6.57%

— I-33 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10 INCOME TAX EXPENSE

PRC enterprise income tax Deferred income taxes	2008 RMB’000 174,795 13,801 188,596	2007 RMB’000 106,520 (54,885) 51,635

Notes:

(a) Except for certain subsidiaries which are taxed at a transitional preferential rate of 18% (2007: preferential rates from 7.5% to 15%), in accordance with the relevant PRC enterprise income tax rules and regulations, provision for PRC enterprise income tax is calculated based on the statutory income tax rate of 25% on the assessable income of the Group (2007: 33%).
(b) The reconciliation between the Group’s actual tax charge and the amount which is calculated based on the statutory tax rate of 25% (2007: 33%) in the PRC is as follows:

Loss before income tax Tax calculated at the statutory tax rate of 25% (2007: 33%) Preferential tax rates on the income of certain subsidiaries Non-taxable income Expenses not deductible for tax purposes Tax losses for which no deferred income tax asset was recognised Utilisation of previously unrecognised tax losses Effect of changes in future tax rates Write-off of previously recognised deferred tax assets Others Tax charge	2008 RMB’000 (721,899) (180,475) (87,148) (90,721) 142,347 330,763 — (10,628) 84,144 314 188,596	2007 RMB’000 (796,709) (262,914) (214,523) (61,811) 124,669 483,181 (6,769) (18,297) 15,347 (7,248) 51,635

(c) Share of taxation attributable to associates for the year ended 31st December 2008 is RMB 11,148,000 (2007: RMB 4,686,000).

— I-34 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11 LOSS ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The loss attributable to equity holders of the Company is dealt with in the financial statements of the Company to the extent of a profit of RMB 119,047,000 (2007: a loss of RMB 462,588,000).

12 LOSS PER SHARE

The calculation of basic loss per share is based on the Group’s loss attributable to equity holders of the Company of RMB 1,156,611,000 (2007: RMB 1,026,226,000) and based on the weighted average number of 4,643,608,500 (2007: 4,643,608,500) shares in issue during the year.

There was no dilution effect on the basic loss per share for the years ended 31st December 2008 and 2007 as there were no potential dilutive shares outstanding during the years ended 31st December 2008 and 2007.

13 STAFF COSTS, INCLUDING DIRECTORS’ EMOLUMENTS

Wages, salaries and bonuses Housing benefits Contributions to pension plans Welfare and other expenses	2008 RMB’000 689,186 64,268 174,729 161,844 1,090,027	2007 RMB’000 605,951 62,626 160,080 116,821
		945,478

— I-35 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14 DIRECTORS’, SUPERVISORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

The emoluments of each of the directors of the Company for the years ended 31st December 2008 and 2007 are set out below.

		Year ended	31st December 2008	31st December 2008
		Basic salaries,
		housing
		allowance,
		other		Employer’s
		allowances		contributions
		and benefits		to retirement
Name of director	Fees	in kind	Bonuses	schemes		Total
	RMB’000	RMB’000	RMB’000	RMB’000		RMB’000
Executive directors
Lin Zuoming (note (ii))	—	30	—		—	30
Zhang Hongbiao (note (i))	—	150	—		—	150
Tan Ruisong	—	160	—		—	160
Wu Xiandong	—	160	—		—	160
Non-executive directors
Gu Huizhong (note (ii))	20	—	—		—	20
Xu Zhanbin (note (ii))	20	—	—		—	20
Geng Ruguang (note (ii))	20	—	—		—	20
Zhang Xinguo (note (ii))	20	—	—		—	20
Li Fangyong (note (ii))	20	—	—		—	20
Wang Yong	35	—	—		—	35
Maurice Savart	—	—	—		—	—
Liang Zhenhe (note (i))	100	—	—		—	100
Song Jingang (note (i))	100	—	—		—	100
Tian Min (note (i))	100	—	—		—	100
Chen Huaiqiu (note (i))	100	—	—		—	100
Wang Bin (note (i))	100	—	—		—	100
Independent
non-executive directors
Lau Chungman	119	—	—		—	119
Guo Chongqing	60	—	—		—	60
Li Xianzong	60	—	—		—	60
	874	500	—		—	1,374

Notes:

(i) Resigned on 16th October 2008.

(ii) Appointed on 16th October 2008.

— I-36 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Name of director Executive directors Zhang Hongbiao Wu Xiandong Tan Ruisong Non-executive directors Liang Zhenhe Song Jingang Tian Min Chen Huaiqiu Wang Bin Wang Yong Maurice Savart Independent non-executive directors Lau Chungman Guo Chongqing Li Xianzong	Year ended 31st December 2007	Year ended 31st December 2007
	Fees Basic salaries, housing allowance, other allowances and benefits in kind Bonuses Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 — 180 — — 180 — 160 — — 160 — 160 — — 160 120 — — — 120 120 — — — 120 120 — — — 120 120 — — — 120 120 — — — 120 35 — — — 35 — — — — — 119 — — — 119 60 — — — 60 60 — — — 60 874 500 — — 1,374
		1,374

— I-37 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Supervisors’ emoluments

The emoluments of each of the supervisors of the Company for the years ended 31st December 2008 and 2007 are set out below.

Name of supervisor Supervisors Hu Wenming (note (ii)) Tang Jianguo Li Yuhai (note (iv)) Gao Jianshe (note (iv)) Bai Ping Yu Yan Wang Yuming (note (ii)) Wang Shouxin (note (i)) Li Shentian (note (iii)) Han Xiaoyang (note (iii)) Li Deqing (note (i)) Independent supervisors Zheng Li Xie Zhihua	Year ended 31st December 2008	Year ended 31st December 2008
	Fees Basic salaries, housing allowance, other allowances and benefits in kind Bonuses Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 27 — — — 27 133 — — — 133 20 — — — 20 20 — — — 20 120 — — — 120 — — — — — 4 — — — 4 100 — — — 100 100 — — — 100 100 — — — 100 21 — — — 21 35 — — — 35 35 — — — 35 715 — — — 715
		715

Notes:

(i) Resigned on 16th October 2008.
(ii) Appointed on 16th October 2008.
(iii) Resigned on 25th August 2008.
(iv) Appointed on 25th August 2008.

— I-38 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Name of supervisor Supervisors Tang Jianguo Wang Shouxin Li Shentian Bai Ping Han Xiaoyang Li Deqing Yu Yan Independent supervisors Zheng Li Xie Zhihua	Year ended 31st December 2007	Year ended 31st December 2007
	Fees Basic salaries, housing allowance, other allowances and benefits in kind Bonuses Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 160 — — — 160 120 — — — 120 120 — — — 120 120 — — — 120 120 — — — 120 25 — — — 25 — — — — — 35 — — — 35 35 — — — 35 735 — — — 735
		735

(c) Five highest paid individuals

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

In the capacity as: Director Supervisor Senior management	Number of individuals 2008 2007 3 3 — 1 2 1 5 5	Number of individuals 2008 2007 3 3 — 1 2 1 5 5
		5

— I-39 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The five individuals whose emoluments were highest in the Group for the year included three (2007: four) directors/supervisors whose emoluments are reflected in the analyses presented above. The emoluments payable to the remaining two (2007: one) individuals during the years ended 31st December 2008 and 2007 are as follows:

	2008	2007
	RMB’000	RMB’000
Basic salaries, housing allowance, other allowances and
benefits in kind	280	140
Contributions to retirement schemes	—	—
	280	140
The emoluments fell within the following band:
	Number of individuals
	2008	2007
Nil - RMB 881,900 (equivalent to HKD 1,000,000)	2	1

(d) No directors or supervisors of the Company waived any emoluments during the years ended 31st December 2007 and 2008. During the year, no emoluments have been paid by the Group to the directors or supervisors of the Company or any of the five highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of office (2007: Nil).

— I-40 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15 PROPERTY, PLANT AND EQUIPMENT

			Group
				Furniture
				and fixtures,
				other
				equipment
	Construction		Plant and	and motor
	in progress	Buildings	equipment	vehicles	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Cost
As at 1st January 2008	526,674	2,082,120	9,195,253	781,504	12,585,551
Additions	695,396	218,147	32,186	19,162	964,891
Transfer upon completion	(545,218)	144,868	358,169	42,181	—
Disposals/write-off	(6,144)	(49,380)	(332,651)	(20,792)	(408,967)
As at 31st December 2008	670,708	2,395,755	9,252,957	822,055	13,141,475
	------------	------------	------------	------------	------------
Accumulated depreciation
and impairment
As at 1st January 2008	—	627,080	4,267,078	365,404	5,259,562
Depreciation	—	93,482	1,113,867	70,149	1,277,498
Disposals/write-off	—	(5,458)	(271,559)	(15,816)	(292,833)
As at 31st December 2008	—	715,104	5,109,386	419,737	6,244,227
	------------ -----------------------------------------------	------------ -----------------------------------------------	------------ -----------------------------------------------	------------ -----------------------------------------------	------------ -----------------------------------------------
Net book value
As at 31st December 2008	670,708	1,680,651	4,143,571	402,318	6,897,248

— I-41 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

			Group
				Furniture
				and fixtures,
				other
				equipment
	Construction		Plant and	and motor
	in progress	Buildings	equipment	vehicles	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Cost
As at 1st January 2007	737,969	2,194,278	9,822,664	735,264	13,490,175
Additions	507,430	136,975	27,849	199,773	872,027
Transfer upon completion	(602,388)	84,227	496,943	21,218	—
Disposals/write-off	—	(138,705)	(358,999)	(35,393)	(533,097)
Effect on proportionate
consolidation of a
jointly controlled entity
(Note 3(a)(iii))	(116,337)	(194,655)	(793,204)	(139,358)	(1,243,554)
As at 31st December 2007	526,674	2,082,120	9,195,253	781,504	12,585,551
	------------	------------	------------	------------	------------
Accumulated depreciation and
impairment
As at 1st January 2007	—	638,964	3,464,096	337,577	4,440,637
Depreciation	—	48,374	888,726	88,192	1,025,292
Impairment charge (note (c))	—	—	243,421	—	243,421
Disposals/write-off	—	(45,263)	(205,675)	(20,460)	(271,398)
Effect on proportionate
consolidation of a jointly
controlled entity (Note
3(a)(iii))
	—	(14,995)	(123,490)	(39,905)	(178,390)
As at 31st December 2007	—	627,080	4,267,078	365,404	5,259,562
	------------ -----------------------------------------------	------------ -----------------------------------------------	------------ -----------------------------------------------	------------ -----------------------------------------------	------------ -----------------------------------------------
Net book value
As at 31st December 2007	526,674	1,455,040	4,928,175	416,100	7,325,989

— I-42 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Cost As at 1st January 2008 Additions As at 31st December 2008 Accumulated depreciation and impairment As at 1st January 2008 Depreciation As at 31st December 2008 Net book value As at 31st December 2008 Cost As at 1st January 2007 Additions Disposals As at 31st December 2007 Accumulated depreciation and impairment As at 1st January 2007 Depreciation Disposals As at 31st December 2007 Net book value As at 31st December 2007		Company	Total RMB’000 15,221 330 15,551 ------------ 7,808 955 8,763 ------------ ----------------------------------------------- 6,788 15,291 180 (250) 15,221 ------------ 7,086 897 (175) 7,808 ------------ ----------------------------------------------- 7,413
		Plant and equipment Furniture and fixtures, other equipment and motor vehicles RMB’000 RMB’000 6,637 8,584 — 330 6,637 8,914 ------------ ------------ 3,630 4,178 328 627 3,958 4,805 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 2,679 4,109 6,637 8,654 — 180 — (250) 6,637 8,584 ------------ ------------ 3,340 3,746 290 607 — (175) 3,630 4,178 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 3,007 4,406

— I-43 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) Carrying value of the Group’s property, plant and equipment pledged as securities for bank borrowings were set out as follows:


							2008	2007
							RMB’000	RMB’000
Property,	plant	and	equipment	pledged	(Note	34(h))	507,134	542,303

(b) As at 31st December 2008, certain of the Group’s property, plant and equipment with carrying value of approximately RMB 617,960,000 (2007: RMB 700,993,000) were situated on leasehold land in the PRC which are granted by AVIC Group (2007: AVIC II) for the Group’s use at no cost or have been leased from certain fellow subsidiaries under long-term leases. The remaining period of the Group’s rights on the leasehold land at 31st December 2008 ranged from 14 to 41 years (2007: 15 to 42 years).
(c) During 2007, the Group reviewed the recoverable amount of its property, plant and equipment, taking into account the product lines of the Group and the market conditions, which consequently led to the recognition of an impairment loss of RMB 243,421,000 mainly in relation to its automobile segment. The recoverable amount of the relevant assets has been determined on the basis of their value in use. The pre-tax discount rate used in measuring value in use was 9.7% per annum.

— I-44 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16 LAND USE RIGHTS

Cost As at 1st January Additions Disposal Effect on proportionate consolidation of a jointly controlled entity (Note 3(a)(iii)) As at 31st December Accumulated amortisation As at 1st January Amortisation Disposal Effect on proportionate consolidation of a jointly controlled entity (Note 3(a)(iii)) As at 31st December Net book amount As at 31st December	Group 2008 2007 RMB’000 RMB’000 115,871 125,286 79,644 — — (2,093) — (7,322) 195,515 115,871 ------------ ------------ 34,496 28,955 9,712 6,229 — (311) — (377) 44,208 34,496 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 151,307 81,375

— I-45 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17 INTANGIBLE ASSETS

Group
Development
costs
Technology
know-how
RMB’000
(note (i))
RMB’000
(note (ii))
Cost
As at 1st January 2008
781,629
32,983
Additions
1,201
—
Write-off (note (iii))
(171,248)
—
As at 31st December 2008
611,582
32,983
------------
------------
Accumulated amortisation and impairment
As at 1st January 2008
477,643
5,355
Amortisation
54,361
4,465
Write-off (note (iii))
(137,379)
—
As at 31st December 2008
394,625
9,820
------------
-----------------------------------------------
------------
-----------------------------------------------
Net book amount
As at 31st December 2008
216,957
23,163
Cost
As at 1st January 2007
848,951
41,710
Additions
36,574
11,711
Write-off (note (iii))
(103,896)
—
Effect on proportionate consolidation of a
jointly controlled entity (note 3(a)(iii))
—
(20,438)
As at 31st December 2007
781,629
32,983
------------
------------
Accumulated amortisation and impairment
As at 1st January 2007
437,838
2,169
Impairment charge (note (iii))
5,958
—
Amortisation
54,626
4,249
Write-off (note (iii))
(20,779)
—
Effect on proportionate consolidation of a
jointly controlled entity (note 3(a)(iii))
—
(1,063)
As at 31st December 2007
477,643
5,355
------------
-----------------------------------------------
------------
-----------------------------------------------
Net book amount
As at 31st December 2007
303,986
27,628

Total
RMB’000
814,612
1,201
(171,248)
644,565
------------
482,998
58,826
(137,379)
404,445
------------
-----------------------------------------------
240,120
890,661
48,285
(103,896)
(20,438)
814,612
------------
440,007
5,958
58,875
(20,779)
(1,063)
482,998
------------
-----------------------------------------------
331,614

— I-46 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(i) In 2005, the Group entered into a jointly controlled asset arrangement with a fellow subsidiary to develop a new model of aircraft in which the Group has 60.56% participating interests. As at 31st December 2008, the aggregate amounts of development costs incurred by the Group amounted to RMB 201,486,000 (2007: RMB 201,486,000).
(ii) Technology know-how represents upfront license fees paid for acquiring technical details in connection with certain new automobile and engine models.
(iii) Management determined to write-off certain development costs for automobile segment as a result of a change in production plan based on the latest market conditions.

During 2007, impairment losses on intangible assets were mainly in relation to certain development costs of automobile segment for which management estimated that the carrying amounts of these assets have exceeded their recoverable amounts as determined based on value-in-use calculations. The key assumptions and discount rate used in determining the recoverable amounts are consistent to those applied for reviewing other assets impairment.

18 INTERESTS IN SUBSIDIARIES

Investments, at cost - Shares listed in the PRC - Unlisted investments Less: Provision for impairment losses Loans to subsidiaries (note) Market value of listed shares	Company 2008 2007 RMB’000 RMB’000 2,168,509 2,205,757 1,295,171 1,295,171 3,463,680 3,500,928 (491,794) (491,794) 2,971,886 3,009,134 535,000 535,000 3,506,886 3,544,134 4,819,142 10,538,842

Particulars of the principal subsidiaries of the Group as at 31st December 2008 are set out in Note 43.

Note:

Loans to subsidiaries are unsecured and non-interest bearing. These loans have no fixed terms of repayment and are regarded as equity contributions to the subsidiaries.

— I-47 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19 SHARE OF RESULTS OF / INTERESTS IN ASSOCIATES

Share of net assets, as at 1st January
Share of results of associates
- Profit before income tax
- Income tax expense
Dividends received from associates
New investments
Disposals
Share of net assets, as at 31st December
Unlisted investment, at cost

Group
2008
2007
RMB’000
RMB’000
297,921
247,967
------------
------------
51,216
61,397
(11,148)
(4,686)
------------
------------
40,068
56,711
------------
-----------------------------------------------
------------
-----------------------------------------------
337,989
304,678
(39,539)
(33,256)
42,631
30,000
(11,112)
(3,501)
329,969
297,921
Company
2008
2007
RMB’000
RMB’000
30,000
30,000

Particulars of the principal associates of the Group as at 31st December 2008 are set out in Note 43.

— I-48 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20 AVAILABLE-FOR-SALE FINANCIAL ASSETS

Listed equity securities, at fair value Other investments, unlisted (note) Less: Provision for impairment	Group 2008 2007 RMB’000 RMB’000 166,430 528,719 ------------ ------------ 74,978 69,727 (11,029) (11,029) 63,949 58,698 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 230,379 587,417

Note:

These assets principally represent interests in certain unlisted companies which do not have a quoted market price in an active market and for which the range of other methods of reasonably estimating fair value is significant and the probabilities of the various estimates cannot be reasonably assessed. Accordingly, these investments are carried at cost less accumulated impairment losses.

21 DEFERRED INCOME TAXES

Deferred income taxes are calculated in respect of temporary differences under the liability method using the tax rates enacted or substantively enacted by the balance sheet date.

The movement on the deferred income tax accounts is as follows:

Deferred income tax assets:

	Group	Group
	2008	2007
	RMB’000	RMB’000
As at 1st January	126,241	75,305
(Charged)/credited to consolidated income statement	(28,638)	55,730
Effect on proportionate consolidation of a jointly controlled
entity (Note 3(a)(iii))	—	(4,794)
As at 31st December	97,603	126,241

— I-49 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred income tax liabilities:

As at 1st January Credited/(charged) to consolidated income statement Credited/(charged) to available-for-sale financial assets reserve As at 31st December	Group 2008 2007 RMB’000 RMB’000 (156,332) (35,872) 14,837 (845) 104,679 (119,615) (36,816) (156,332)

The deferred income taxes are provided for, prior to offsetting of balances within the same tax jurisdiction, in respect of:

Deferred income tax assets:
Provision for impairment of receivables
Provision for impairment of inventories
Provision for impairment of investments
Provision for impairment of property, plant and equipment
Provision for warranty expense
Other temporary differences
Deferred income tax liabilities:
Development costs
Fair value changes on available-for-sale financial assets
Other temporary differences
Total deferred income tax assets less total deferred income tax
liabilities

Group
2008
2007
RMB’000
RMB’000
9,765
64,765
9,899
18,437
—
2,545
726
4,667
31,582
43,443
60,242
20,710
112,214
154,567
------------
------------
32,011
59,341
14,936
119,615
4,480
5,702
51,427
184,658
------------
-----------------------------------------------
------------
-----------------------------------------------
60,787
(30,091)

— I-50 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes related to the same fiscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet:

Representing: Deferred income tax assets Deferred income tax liabilities Total deferred income tax assets less total deferred income tax liabilities	Group 2008 2007 RMB’000 RMB’000 97,603 126,241 (36,816) (156,332) 60,787 (30,091)

Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group did not recognise deferred income tax assets of approximately RMB 654 million (2007: RMB 323 million) in respect of tax losses amounting to approximately RMB 2,616 million (2007: RMB1,465 million) that can be carried forward against future taxable income. These unrecognised tax losses are expiring within 5 years.

— I-51 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

22 ACCOUNTS RECEIVABLE

Trade receivables, gross (note (a)) - Related parties (note (b)) - Third parties Less: Provision for impairment of receivables Notes receivable (note (c)) - Related parties (Note 40(b)) - Third parties	Group 2008 2007 RMB’000 RMB’000 1,740,897 1,165,491 1,039,864 1,266,414 2,780,761 2,431,905 (214,090) (234,264) 2,566,671 2,197,641 ------------ ------------ 520,600 209,000 672,413 831,032 1,193,013 1,040,032 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 3,759,684 3,237,673	Group 2008 2007 RMB’000 RMB’000 1,740,897 1,165,491 1,039,864 1,266,414 2,780,761 2,431,905 (214,090) (234,264) 2,566,671 2,197,641 ------------ ------------ 520,600 209,000 672,413 831,032 1,193,013 1,040,032 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 3,759,684 3,237,673
		2,431,905 (234,264)
		2,197,641 ------------ 209,000 831,032
		1,040,032 ------------ ----------------------------------------------- 3,237,673

Notes:

(a) Certain of the Group’s sales were on advance payment or documents against payment. Sales to small, new or short-term customers are normally expected to be settled shortly after delivery. A credit period of up to six months may be granted in respect of sales to customers with good credit history and long-established relationship with the Group. Terms offered to related parties are similar to those offered to third parties. Ageing analysis of trade receivables is as follows:

Current to 1 year 1 year to 2 years 2 years to 3 years Over 3 years	Group 2008 2007 RMB’000 RMB’000 2,531,081 2,109,716 43,260 87,174 10,450 58,255 195,970 176,760 2,780,761 2,431,905	Group 2008 2007 RMB’000 RMB’000 2,531,081 2,109,716 43,260 87,174 10,450 58,255 195,970 176,760 2,780,761 2,431,905
		2,431,905

The credit quality of accounts receivable that are neither past due nor impaired can be assessed by reference to the historical information about counter parties default rates. The existing counter parties do not have significant default in the past.

— I-52 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

As of 31st December 2008, trade receivables of RMB 149,197,000 (2007: RMB 176,228,000) were past due but not impaired. These relate mainly to a number of customers in the aviation segment for whom there is no recent history of default. The ageing analysis of these past due but not impaired receivables is as follows:

Up to 1 year 1 year to 2 years 2 years to 3 years Over 3 years	Group 2008 2007 RMB’000 RMB’000 107,464 64,666 41,733 61,920 — 47,336 — 2,306 149,197 176,228	Group 2008 2007 RMB’000 RMB’000 107,464 64,666 41,733 61,920 — 47,336 — 2,306 149,197 176,228
		176,228

As of 31st December 2008, trade receivables of RMB 214,090,000 (2007: RMB 234,264,000) were impaired. The individually impaired receivables mainly relate to smaller customers which are in financial difficulties. The ageing of these impaired receivables is as follows:

Current to 1 year 1 year to 2 years 2 years to 3 years Over 3 years	Group 2008 2007 RMB’000 RMB’000 6,143 23,637 1,527 25,254 10,450 10,919 195,970 174,454 214,090 234,264	Group 2008 2007 RMB’000 RMB’000 6,143 23,637 1,527 25,254 10,450 10,919 195,970 174,454 214,090 234,264
		234,264

Movements on the provision for impairment of accounts receivable are as follows:

At 1st January Provision for impairment of accounts receivable Unused amounts reversed Write-off At 31st December	Group 2008 2007 RMB’000 RMB’000 234,264 222,108 14,750 16,734 (15,793) (4,578) (19,131) — 214,090 234,264	Group 2008 2007 RMB’000 RMB’000 234,264 222,108 14,750 16,734 (15,793) (4,578) (19,131) — 214,090 234,264
		234,264

(b) Trade receivables from related parties are unsecured, non-interest bearing and are repayable in accordance with the relevant trading terms. Details of the balances with these related parties are disclosed in Note 40(b).

(c) Substantially all of the notes receivable are bank acceptance notes with average maturity period of within six months.

— I-53 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(d) Substantially all of the accounts receivable are denominated in RMB and the carrying amounts of accounts receivable approximate their fair values.
(e) Certain notes receivable were pledged as security for bank loans (Note 34(h)) as at 31st December 2007.

23 ADVANCES TO SUPPLIERS

Advances to suppliers - Related parties (Note 40(b)) - Third parties	Group 2008 2007 RMB’000 RMB’000 87,243 176,551 227,493 342,463 314,736 519,014	Group 2008 2007 RMB’000 RMB’000 87,243 176,551 227,493 342,463 314,736 519,014
		519,014

In the ordinary course of business, the Group is required to make advance payments to certain suppliers according to the terms of respective agreements. The advance payments made to these parties are unsecured, non-interest bearing and will be settled or utilised in accordance with the terms of relevant agreements.

24 OTHER RECEIVABLES AND PREPAYMENTS

Advances for purchases of property, plant and equipment Amounts due from customers for contract work (Note 26) Dividends receivable from subsidiaries Other advances from related parties (note) Other receivables Prepayments and deposits Other current assets	Group 2008 2007 RMB’000 RMB’000 — 4,788 367,843 422,596 — — 333,003 250,885 285,704 379,485 67,246 56,000 116,842 89,783 1,170,638 1,203,537	Company 2008 2007 RMB’000 RMB’000 — — — — 178,994 151,128 — — — — 14,023 — — 230 193,017 151,358	Company 2008 2007 RMB’000 RMB’000 — — — — 178,994 151,128 — — — — 14,023 — — 230 193,017 151,358
			151,358

Note:

Other advances mainly represent current account balances with the respective related parties which are unsecured, non-interest bearing and are repayable on demand. Details of the balances with these related parties are disclosed in Note 40(b).

— I-54 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25 INVENTORIES

Raw materials Work in progress Finished goods Consumables Less: Provision for impairment losses	Group 2008 2007 RMB’000 RMB’000 2,490,870 2,272,486 1,163,873 924,117 1,529,735 2,163,933 88,598 105,212 5,273,076 5,465,748 (152,314) (188,221) 5,120,762 5,277,527	Group 2008 2007 RMB’000 RMB’000 2,490,870 2,272,486 1,163,873 924,117 1,529,735 2,163,933 88,598 105,212 5,273,076 5,465,748 (152,314) (188,221) 5,120,762 5,277,527
		5,465,748 (188,221)
		5,277,527

The cost of inventories recognised as expense amounted to RMB 14,521,841,000 (2007: RMB 14,662,735,000).

26 CONTRACTS IN PROGRESS

Contracts in progress at balance sheet date: Amounts due from customers for contract work (Note 24) Contract costs incurred and recognised profits to date	Group 2008 2007 RMB’000 RMB’000 367,843 422,596 2,541,277 3,031,092	Group 2008 2007 RMB’000 RMB’000 367,843 422,596 2,541,277 3,031,092
		3,031,092

At 31st December 2008, no retentions were held by customers for contract work and no advances were received on construction contracts (2007: Nil).

27 PLEDGED DEPOSITS

				Group
			2008	2007
			RMB’000	RMB’000
Renminbi	denominated	deposits	536,605	638,350

As at 31st December 2008, trade finance facilities utilised by the Group for issuing notes payable to its suppliers amounting to RMB 1,460,105,000 (2007: RMB 1,487,488,000) were secured by these pledged deposits (Note 29(c)).

— I-55 —

APPENDIX I FINANCIAL INFORMATION OF THE GROUP

Pledged deposits earn interest at rates ranging from 0.36% to 3.78% (2007: 0.72% to 3.78%). The conversion of Renminbi denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC Government.

28 TERM DEPOSITS WITH INITIAL TERM OF OVER THREE MONTHS

Term deposits with initial term of over three months are denominated in the following currencies:

Currency Renminbi * Hong Kong Dollar	Group 2008 2007 RMB’000 RMB’000 1,242,324 645,000 17,638 46,820 1,259,962 691,820	Company 2008 2007 RMB’000 RMB’000 670,000 615,000 17,638 46,820 687,638 661,820	Company 2008 2007 RMB’000 RMB’000 670,000 615,000 17,638 46,820 687,638 661,820
			661,820

The weighted average effective interest rates of the Group and the Company on term deposits with initial term of over three months were 2.55% (2007: 2.36%) and 3.27% (2007: 2.41%) per annum respectively.

The conversion of Renminbi denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC Government.

29 ACCOUNTS PAYABLE

Trade payables (note (a)) - Related parties (note (b)) - Third parties Notes payable (note (c)) - Related parties (Note 40(b)) - Third parties	Group 2008 2007 RMB’000 RMB’000 1,310,843 807,856 4,100,522 4,122,331 5,411,365 4,930,187 ------------ ------------ 735,074 846,294 1,072,152 984,732 1,807,226 1,831,026 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 7,218,591 6,761,213	Group 2008 2007 RMB’000 RMB’000 1,310,843 807,856 4,100,522 4,122,331 5,411,365 4,930,187 ------------ ------------ 735,074 846,294 1,072,152 984,732 1,807,226 1,831,026 ------------ ----------------------------------------------- ------------ ----------------------------------------------- 7,218,591 6,761,213
		4,930,187 ------------ 846,294 984,732
		1,831,026 ------------ ----------------------------------------------- 6,761,213

— I-56 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) The normal credit period for trade payables generally ranges from 0 to 6 months. Ageing analysis of trade payables is as follows:

Current to 1 year 1 year to 2 years 2 years to 3 years Over 3 years	Group 2008 RMB’000 4,909,432 449,696 4,188 48,049 5,411,365	2007 RMB’000 4,287,572 489,816 116,883 35,916
		4,930,187

(b) Trade payables to related parties are unsecured, non-interest bearing and will be settled in accordance with the relevant trading terms. Details of the balances with these related parties are disclosed in Note 40(b).
(c) Substantially all of the notes payable are bank acceptance notes with average maturity period of within six months. As at 31st December 2008, notes payable of RMB 1,460,105,000 (2007: RMB 1,487,488,000) were secured by pledged deposits to the extent of RMB 536,605,000 (2007: RMB 638,350,000).
(d) The carrying amounts of accounts payable approximate their fair values.

30 ADVANCES FROM CUSTOMERS

Advances from customers - Related parties - Third parties	Group 2008 2007 RMB’000 RMB’000 380,764 466,457 307,986 418,111 688,750 884,568	Group 2008 2007 RMB’000 RMB’000 380,764 466,457 307,986 418,111 688,750 884,568
		884,568

In the ordinary course of the Group’s business, certain of the Group’s customers are required to pay advance deposits according to terms of the respective agreements. The advances from related parties are unsecured, non-interest bearing and will be settled or utilised in accordance with the terms of relevant agreements. Details of the balances with these related parties are disclosed in Note 40(b).

— I-57 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31 OTHER PAYABLES AND ACCRUALS

Payable for property, plant and equipment - Fellow subsidiaries (note (i)) - Others Wages, salaries and bonuses payables Accrued expenses Deferred income from government grants Consumption tax, business tax and other taxes payable Other advances (note (ii)) - Ultimate holding company - Fellow subsidiaries - Other related parties Payable relating to share reform Other current liabilities	Group 2008 2007 RMB’000 RMB’000 6,992 6,767 114,268 130,583 283,131 308,234 321,336 356,613 73,445 17,755 25,394 31,253 2,940 13,680 302,904 161,971 — 1,795 — 96,029 233,767 199,663 1,364,177 1,324,343	Company 2008 2007 RMB’000 RMB’000 — — — — 623 137 4,824 4,705 — — 13 50 9,420 12,240 15,891 14,322 — — — — — — 30,771 31,454	Company 2008 2007 RMB’000 RMB’000 — — — — 623 137 4,824 4,705 — — 13 50 9,420 12,240 15,891 14,322 — — — — — — 30,771 31,454
			31,454

Notes:

(i) Payable for property, plant and equipment is unsecured, non-interest bearing and will be settled in accordance with the relevant trading terms.
(ii) Other advances mainly represent current account balances with the respective related parties which are unsecured, non-interest bearing and are repayable on demand.

Details of the balances with these related parties are disclosed in Note 40(b).

— I-58 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32 AMOUNTS PAYABLE TO ULTIMATE HOLDING COMPANY

Supplementary pension subsidies (note (a)) One-off housing benefit (note (b))	Group 2008 2007 RMB’000 RMB’000 464,298 464,298 56,226 56,226 520,524 520,524	Company 2008 2007 RMB’000 RMB’000 464,298 464,298 — — 464,298 464,298	Company 2008 2007 RMB’000 RMB’000 464,298 464,298 — — 464,298 464,298
			464,298

Notes:

(a) Prior to the Reorganisation, the Group paid supplementary pension subsidies to its retired employees who retired prior to the Reorganisation. In addition, the Group was committed to make periodic benefits payments to certain former employees who retired early in accordance with various rationalisation programmes adopted by the Group prior to the Reorganisation. Pursuant to the Reorganisation, the Group and AVIC II agreed that, upon establishment of the Company, the Group’s obligations to make these supplementary pension benefits and early retirement payments as at 30th June 2002 were assumed by AVIC II and the actual payments of these obligations will be made by AVIC II. The Group is not obliged to any further liabilities in respect of these supplementary pension benefits and early retirement payments to these former employees after 30th June 2002. The above obligations were actuarially determined by a PRC insurance company using the projected unit credit method and are repayable to AVIC II with no fixed repayment terms under the Reorganisation. The balance is unsecured and non-interest bearing.
(b) This represents provision made by a subsidiary in connection with one-off housing subsidies for its eligible employees as at 31st December 2000 as detailed in Note 3(p)(iii). AVIC II has undertaken to bear any final actual cash settlement to those eligible employees in excess of RMB 56,226,000. During 2006, it was agreed that such one-off housing subsidies and future settlements shall be handled by AVIC II and accordingly the balance payable was transferred to AVIC II.

During the year AVIC Group undertook all the assets and liabilities of AVIC I and AVIC II upon their merger on 6th November 2008 as detailed in Note 1. Accordingly the above amounts became payable to AVIC Group as of 31st December 2008.

— I-59 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

33 PROVISIONS

	Group Warranty
	RMB’000
As at 1st January 2008	174,431
Additional provisions	141,839
Utilised during the year	(111,142)
As at 31st December 2008	205,128
As at 1st January 2007	103,284
Additional provisions	246,903
Utilised during the year	(171,364)
Effect on proportionate consolidation of a jointly controlled entity
(Note 3(a)(iii))	(4,392)
As at 31st December 2007	174,431

Note:

The Group provides warranties to its customers on certain automobile and aviation products and undertakes to repair or replace items that fail to perform up to certain specified standard. Provision for expected warranty claims has been determined based on historical warranty information after taking into account of the Group’s recent claim experience.

— I-60 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

34 BORROWINGS

Short-term borrowings
Bank borrowings
- Secured (note (h))
- Unsecured
Other short-term borrowings
- Secured (notes (c)(i) and (h))
- Unsecured (note (c)(ii))
Current portion of long-term borrowings
Long-term borrowings
Bank borrowings
- Secured (note (h))
- Unsecured
Other borrowings
- Secured (note (h))
- Unsecured (note (d))
Less: Current portion of long-term borrowings
Total borrowings

Group
2008
2007
RMB’000
RMB’000
3,423,774
2,664,794
1,066,630
1,637,369
4,490,404
4,302,163
100,000
—
320,000
10,000
4,910,404
4,312,163
728,000
650,457
5,638,404
4,962,620
------------
------------
1,442,890
1,611,890
60,000
—
1,502,890
1,611,890
------------
------------
9,301
10,650
150,000
139,457
159,301
150,107
------------
------------
1,662,191
1,761,997
(728,000)
(650,457)
934,191
1,111,540
------------
-----------------------------------------------
------------
-----------------------------------------------
6,572,595
6,074,160

— I-61 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes:

(a) The long-term borrowings are analysed as follows:

Wholly repayable within five years - Bank borrowings - Other borrowings Not wholly repayable within five years - Bank borrowings - Other borrowings	Group 2008 2007 RMB’000 RMB’000 1,217,000 1,340,000 150,000 139,457 1,367,000 1,479,457 - - - - - - - - - - - - - - - - - - - - - - - - 285,890 271,890 9,301 10,650 295,191 282,540 - - - - - - - - - - - - ----------------------------------------------- - - - - - - - - - - - - ----------------------------------------------- 1,662,191 1,761,997	Group 2008 2007 RMB’000 RMB’000 1,217,000 1,340,000 150,000 139,457 1,367,000 1,479,457 - - - - - - - - - - - - - - - - - - - - - - - - 285,890 271,890 9,301 10,650 295,191 282,540 - - - - - - - - - - - - ----------------------------------------------- - - - - - - - - - - - - ----------------------------------------------- 1,662,191 1,761,997
		1,479,457 - - - - - - - - - - - - 271,890 10,650
		282,540 - - - - - - - - - - - - ----------------------------------------------- 1,761,997

(b) The long-term borrowings are repayable as follows:

Bank borrowings: - Within one year - In the second year - In the third to fifth year - After the fifth year Other borrowings: - Within one year - After the fifth year	Group 2008 2007 RMB’000 RMB’000 578,000 511,000 370,000 319,000 269,000 510,000 285,890 271,890 1,502,890 1,611,890 - - - - - - - - - - - - - - - - - - - - - - - - 150,000 139,457 9,301 10,650 159,301 150,107 - - - - - - - - - - - - ----------------------------------------------- - - - - - - - - - - - - ----------------------------------------------- 1,662,191 1,761,997	Group 2008 2007 RMB’000 RMB’000 578,000 511,000 370,000 319,000 269,000 510,000 285,890 271,890 1,502,890 1,611,890 - - - - - - - - - - - - - - - - - - - - - - - - 150,000 139,457 9,301 10,650 159,301 150,107 - - - - - - - - - - - - ----------------------------------------------- - - - - - - - - - - - - ----------------------------------------------- 1,662,191 1,761,997
		1,611,890 - - - - - - - - - - - - 139,457 10,650
		150,107 - - - - - - - - - - - - ----------------------------------------------- 1,761,997

(c) (i) As at 31st December 2008, other short-term secured borrowings represented a loan granted by a fellow subsidiary of the Group which bears interest at 5.045% per annum and is repayable in full in 2009;

— I-62 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) As at 31st December 2008, other short-term unsecured borrowings represented:
- loans of RMB 310,000,000 granted by certain unrelated parties of the Group which bear interest at 4.374% per annum and are repayable in full in 2009; and
a loan of RMB 10,000,000 (2007: RMB 10,000,000) granted by Shenzhen Finance Bureau to a subsidiary of the Group which is non-interest bearing and is repayable on demand.
(d) Other long-term borrowings

Other long-term unsecured borrowings represent a loan granted by Shenzhen Finance Bureau to a subsidiary of the Group which is non-interest bearing and is repayable on demand as at 31st December 2008.

(e) The exposure of the total borrowings of the Group to interest rate changes is as follows:

Bank borrowings - Fixed rates - Floating rates Other borrowings - Fixed rates	Group 2008 2007 RMB’000 RMB’000 3,121,795 2,830,963 2,871,499 3,083,090 5,993,294 5,914,053 - - - - - - - - - - - - - - - - - - - - - - - - 579,301 160,107 - - - - - - - - - - - - ----------------------------------------------- - - - - - - - - - - - - ----------------------------------------------- 6,572,595 6,074,160	Group 2008 2007 RMB’000 RMB’000 3,121,795 2,830,963 2,871,499 3,083,090 5,993,294 5,914,053 - - - - - - - - - - - - - - - - - - - - - - - - 579,301 160,107 - - - - - - - - - - - - ----------------------------------------------- - - - - - - - - - - - - ----------------------------------------------- 6,572,595 6,074,160
		5,914,053 - - - - - - - - - - - - 160,107 - - - - - - - - - - - - ----------------------------------------------- 6,074,160

The annual effective interest rates of long-term and short-term borrowings at balance sheet date were as follows:


	2008	2007
	RMB’000	RMB’000
Weighted average effective interest rates
- Bank borrowings	6.13%	6.39%
- Other borrowings	3.24%	0.07%

— I-63 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(f) The carrying amounts of long-term and short-term borrowings are denominated in the following currencies:

Currency Renminbi United States Dollar Euro Others	Group 2008 RMB’000 6,285,599 139,751 48,295 98,950 6,572,595	2007 RMB’000 5,536,316 10,650 455,500 71,694
		6,074,160

(g) The carrying amount and fair value of non-current portion of long-term borrowings are as follows:

				Group
		Carrying	amount	Fair	value
		2008	2007	2008	2007
		RMB’000	RMB’000	RMB’000	RMB’000
Bank	borrowings	924,890	1,100,890	916,837	1,027,450
Other	borrowings	9,301	10,650	5,582	4,359
		934,191	1,111,540	922,419	1,031,809

The fair values are based on discounted cash flows using applicable discount rates based upon the prevailing market rates of interest available to the Group for financial instruments with substantially the same terms and characteristic as at the balance sheet dates. Such discount rates ranged from 5.40% to 5.94% as at 31st December 2008 (2007: 7.56% to 7.83%), depending on the type of the debt.

(h) The Group’s long-term and short-term borrowings are secured as follows:

Securities over the Group’s assets, at carrying value - Property, plant and equipment, at net book value (Note 15(a)) - Notes receivable (Note 22(e)) Guarantees provided by - Related parties (Note 40(c)) - Subsidiaries within the Group (cross guarantees) - Third parties	Group 2008 RMB’000 507,134 — 2,001,345 2,773,620 —	2007 RMB’000 542,303 59,866
		480,540 3,702,094 50,000

— I-64 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(i) As at 31st December 2008, the Group had the following undrawn committed borrowing facilities.

At floating rates - Expiring within one year - Expiring beyond one year	Group 2008 RMB’000 1,579,509 200,000 1,779,509	2007 RMB’000 — 1,476,567
		1,476,567

35 SHARE CAPITAL

Registered: Issued and fully paid: 2,963,808,000 Domestic Shares of RMB 1 each 1,679,800,500 H Shares of RMB 1 each	Company 2008 2007 RMB’000 RMB’000 4,643,609 4,643,609 2,963,808 2,963,808 1,679,801 1,679,801 4,643,609 4,643,609	Company 2008 2007 RMB’000 RMB’000 4,643,609 4,643,609 2,963,808 2,963,808 1,679,801 1,679,801 4,643,609 4,643,609
		2,963,808 1,679,801
		4,643,609

The H Shares rank pari passu in all respects with the Domestic Shares and rank equally for all dividends or distributions declared, paid or made except that all dividends in respect of H Shares are to be paid by the Company in Hong Kong dollars and H Shares may only be subscribed for by, and traded in Hong Kong dollars between legal or natural persons of Hong Kong, Macau, Taiwan or any other country other than the PRC. The transfer of the Domestic Shares is subject to such restrictions as the PRC laws may impose from time to time.

— I-65 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

36 RESERVES

Company
Capital
reserve
Statutory
surplus
reserve
Accumulated
losses
RMB’000
(Note (b))
RMB’000
(Note (c))
RMB’000
(Note (d))
Balance at 1st January 2008
(2,073)
31,178
(630,475)
Profit for the year
—
—
119,047
As at 31st December 2008
(2,073)
31,178
(511,428)
Balance at 1st January 2007
(2,073)
26,712
(163,421)
Loss for the year
—
—
(462,588)
Transfer to statutory reserve
—
4,466
(4,466)
As at 31st December 2007
(2,073)
31,178
(630,475)

Total
RMB’000
(601,370)
119,047
(482,323)
(138,782)
(462,588)
—
(601,370)

Notes:

(a) Movements in the reserves of the Group are set out in the consolidated statement of changes in equity.

(b) Capital reserve

Capital reserve of the Company represents the difference between the amount of share capital issued by the Company and the historical net value of the assets, liabilities and interests transferred to the Company upon its establishment, set off by net premium on issue of shares upon listing of the Company.

Capital reserves of the Group also included reserves arising from the issuance of additional shares by a subsidiary, capital contributions in associates and gains/losses on disposals to minority interests (Note 36(e)).

(c) Statutory surplus reserve

In accordance with the relevant PRC laws and financial regulations, every year the Company is required to transfer 10% of the profit after taxation determined in accordance with the PRC accounting standards to the statutory surplus reserve until the balance reaches 50% of the paid-up share capital. Such reserve can be used to reduce any losses incurred and to increase share capital. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital.

(d) Retained earnings available for distribution

In accordance with the relevant PRC regulations and Articles of Association of the Company, retained earnings available for distribution by the Company will be deemed to be the lower of the amounts determined in accordance with the PRC GAAP and the amount determined in accordance with IFRS. As at 31st December 2007 and 2008, there were no retained earnings available for distribution under both PRC GAAP and IFRS.

— I-66 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(e) Disposal of certain interests in a subsidiary

During the year the Group disposed of an aggregate of 16,140,000 A shares of Jiangxi Changhe Automobile Co., Ltd. (“Changhe Automobile”) representing 3.94% of its total share capital, at market price.

In accordance with the Group’s accounting policy, transactions with minority shareholders are dealt with in reserves. Accordingly, the aggregate effect on the gain on disposal of equity interests in Changhe Automobile of RMB 152,948,000 was accounted for as an addition to the Group’s equity in the consolidated financial statements for the year ended 31st December 2008.

In the Company’s financial statements, the effect of disposal of the Company’s directly owned equity interests in Changhe Automobile totalling RMB 93,799,000 was credited directly to the Company’s income statement for the year ended 31st December 2008.

— I-67 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

37 CONSOLIDATED CASH FLOW STATEMENT

(a) Cash generated from operations

Loss before income tax
Adjustments for:
Share of results of associates
Loss/(gain) on disposal of
- Property, plant and equipment
- Certain interests in subsidiaries
- Associates
- Available-for-sale financial assets
Amortisation of
- Intangible assets
- Land use rights
Amortisation of deferred income relating to government grants
Depreciation on property, plant and equipment
Write-off of intangible assets
Provision/(reversal of provision) for impairment
- Property, plant and equipment
- Intangible assets
- Available-for-sale financial assets
- Receivables
- Inventories
Dividend income from available-for-sale financial assets
Interest income
Interest expense
Changes in working capital (excluding the effects of disposals
of subsidiaries):
- (Increase)/decrease in accounts receivable
- Decrease/(increase) in advances to suppliers, other
receivables and prepayments
- Decrease/(increase) in inventories
- Increase in financial assets at fair value through profit or
loss
- Increase in accounts payable
- (Decrease)/increase in advance from customers, other
payables and accruals
- Increase in provisions
Net cash generated from operations

Group
2008
2007
RMB’000
RMB’000
(721,899)
(796,709)
(40,068)
(56,711)
9,082
(16,838)
—
(32,440)
(794)
—
(36,112)
—
58,826
58,875
9,712
6,229
(17,755)
(33,161)
1,277,498
1,025,292
33,869
83,117
—
243,421
—
5,958
—
(1,326)
9,705
13,067
7,914
121,875
(2,428)
(4,870)
(79,280)
(57,966)
412,469
338,815
920,739
896,628
(520,968)
289,938
341,771
(284,615)
148,851
(851,867)
(4,074)
(7,414)
457,378
57,108
(342,000)
328,073
30,697
75,539
1,032,394
503,390

— I-68 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) In the cash flow statement, proceeds from sale of property, plant and equipment comprise:

Net book amount (Note 15)
(Loss)/gain on sale of property, plant and equipment (Note 7)
Receivables from sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
(c)
Disposal of a subsidiary
Property, plant and equipment
Current assets
Total assets
Total liabilities
Minority interests
Net assets sold
Total consideration
Result on disposal of a subsidiary
Net cash outflow from disposal is determined as follows:
Proceeds received from disposal of a subsidiary
Less: Cash and cash equivalents in a subsidiary disposed
Net cash outflow from disposal of a subsidiary

Group
2008
2007
RMB’000
RMB’000
116,134
261,699
(9,082)
16,838
(105,200)
(263,718)
1,852
14,819
Group
2008
2007
RMB’000
RMB’000
—
516
—
43,588
—
44,104
—
(51)
—
(2,203)
—
41,850
—
41,850
—
—
—
41,850
—
(43,409)
—
(1,559)

— I-69 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(d) Analysis of cash and cash equivalents

Bank balances and cash Term deposits with initial term of less than three months	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 2,124,130 2,375,706 232,026 98,266 200,000 77,000 — 45,000 2,324,130 2,452,706 232,026 143,266	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 2,124,130 2,375,706 232,026 98,266 200,000 77,000 — 45,000 2,324,130 2,452,706 232,026 143,266
		143,266

The cash and cash equivalents are denominated in the following currencies:

Renminbi* Other currencies	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 2,285,801 2,384,976 230,370 140,916 38,329 67,730 1,656 2,350 2,324,130 2,452,706 232,026 143,266	Group Company 2008 2007 2008 2007 RMB’000 RMB’000 RMB’000 RMB’000 2,285,801 2,384,976 230,370 140,916 38,329 67,730 1,656 2,350 2,324,130 2,452,706 232,026 143,266
		143,266

The weighted average effective interest rate of the Group and the Company on term deposits with initial term of less than three months was 1.71% (2007: 1.71%) per annum. Bank balances earn interest at floating rates based on daily bank deposit rates.

The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC Government.

— I-70 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

38 COMMITMENTS

(a) Capital commitments

The Group has the following capital commitments not provided for as at 31st December 2008:

Acquisition of property, plant and equipment - Authorised but not contracted for - Contracted but not provided for Construction commitments - Authorised but not contracted for - Contracted but not provided for Investment in a jointly controlled asset - Contracted but not provided for Investments in an associate - Contracted but not provided for	Group 2008 RMB’000 998,476 313,690 1,312,166 ------------ 30,000 13,012 43,012 ------------ — ------------ 34,000 ------------ ----------------------------------------------- 1,389,178	2007 RMB’000 48,557 228,001
		276,558 ------------ 14,070 57,846
		71,916 ------------ 40,764 ------------ 88,175 ------------ ----------------------------------------------- 477,413

— I-71 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Operating lease commitments

The Group has commitments to make the following future minimum lease payments under non-cancellable operating leases as at 31st December 2008:

	Group
	2008	2007
	RMB’000	RMB’000
Land and buildings
- Not later than one year	27,110	17,406
- Later than one year and not later than five years	39,690	47,170
- Later than five years	10,798	21,426
	77,598	86,002

Generally, the Group’s operating leases are for terms of 1 to 20 years.

— I-72 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

39 INTEREST IN A JOINTLY CONTROLLED ENTITY

Particulars of the jointly controlled entity of the Group as at 31st December 2008 are set out in Note 43.

The following amounts represent the Group’s share of the jointly controlled entity’s assets and liabilities as at 31st December 2008, and the Group’s share of its income and results for the year then ended, which are included in the Group’s consolidated balance sheet and consolidated income statement:

Assets: Non-current assets Current assets Liabilities: Non-current liabilities Current liabilities Net assets Income Expenses Net loss Proportionate interest in the jointly controlled entity’s capital commitments	2008 RMB’000 1,002,813 641,615 1,644,428 ------------ 10,080 1,190,041 1,200,121 ------------ ----------------------------------------------- 444,307 1,297,537 (1,527,210) (229,673) 111,731	2007 RMB’000 1,097,546 609,947 1,707,493 ------------ — 1,033,513 1,033,513 ------------ ----------------------------------------------- 673,980 1,263,021 (1,685,139) (422,118) 92,729

The jointly controlled entity did not have any material operating lease commitments as at 31st December 2008 (2007: Nil).

There are no contingent liabilities relating to the Group’s interest in the jointly controlled entity and the jointly controlled entity did not have any material contingent liabilities as at 31st December 2008 (2007: Nil).

— I-73 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

40 SIGNIFICANT RELATED PARTY TRANSACTIONS

The Group is controlled by AVIC Group (2007: AVIC II), which owns 61.06% of the Company’s shares as at 31st December 2008. The remaining 38.94% of the shares are widely held.

Related parties refer to entities in which AVIC Group (2007: AVIC II) has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions; or directors or officers of the Company and of its ultimate holding company, associates or jointly controlled entity. Given that the PRC government still owns a significant portion of the productive assets in the PRC despite the continuous reform of the government structure, a majority of the Group’s business activities had been conducted with enterprises directly or indirectly owned or controlled by the PRC government (“state-owned enterprises”), including AVIC Group (2007: AVIC II), its subsidiaries, associates and jointly controlled entities in the ordinary course of business.

In accordance with IAS 24, “Related Party Disclosures”, state-owned enterprises and their subsidiaries, other than entities under AVIC Group (2007: AVIC II) (also a state-owned enterprise), directly or indirectly controlled by the PRC government are also defined as related parties of the Group. Neither AVIC Group (2007: AVIC II) nor the PRC government publishes financial statements for public use. In the normal course of the Group’s business, it may either enter into various transactions with one or more of such state-owned enterprises and their subsidiaries.

The following is a summary of significant related party transactions entered into in the ordinary course of business between the Group and its related parties and the balances arising from related party transactions in addition to the related party information shown elsewhere in the financial statements. Management of the Group are of the opinion that meaningful information relating to related party disclosures has been adequately disclosed.

— I-74 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(a) Significant transactions with related parties:

Income Revenue from sale of goods and materials - Fellow subsidiaries - A jointly controlled entity - Other related parties - Other state-owned enterprises Income from rendering of services - Fellow subsidiaries Expenses Purchases of goods and raw materials - Fellow subsidiaries - A jointly controlled entity - Other related parties - Other state-owned enterprises Service fees payable - Fellow subsidiaries - Other related parties - Other state-owned enterprises Rental expenses - Fellow subsidiaries Interest expense - Other state-owned enterprises Key management compensations - Salaries, bonuses and other welfares	Group 2008 RMB’000 4,467,323 141,498 — 882,020 1,438 1,849,753 48,732 147,632 62,372 204,606 91,247 243 31,770 359,590 2,715	2007 RMB’000 4,685,494 163,066 14,948 1,115,196 11,857
		2,553,654 34,445 248,272 1,206,301 166,988 14,067 63,654 41,892 355,140 2,648

Notes:

In the opinion of the directors of the Company, the above transactions were carried out in the ordinary course of the Group’s business and were determined based on mutually agreed terms.

— I-75 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Significant balances with related parties:

Assets
Trade receivables
- Fellow subsidiaries
- A jointly controlled entity
- Other related parties
- Other state-owned enterprises
Notes receivable
- Fellow subsidiaries
Advances to suppliers
- Fellow subsidiaries
- A jointly controlled entity
- Other related parties
- Other state-owned enterprises
Other receivables and prepayments
- Ultimate holding company
- Fellow subsidiaries
- A jointly controlled entity
- Other related parties
- Other state-owned enterprises
Pledged deposits
- Other state-owned enterprises
Term deposits with initial term of over three months
- Other state-owned enterprises
Cash and cash equivalents deposited with
- Other state-owned enterprises

Group
2008
2007
RMB’000
RMB’000
1,415,068
992,205
266,370
109,007
862
949
58,597
63,330
520,600
209,000
71,923
76,718
904
—
14,283
6,242
133
93,591
4,522
6,011
189,808
181,181
50,028
43,051
18,084
20,258
70,561
384
536,605
638,350
1,109,962
691,820
2,257,898
2,126,852

— I-76 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

		Group
	2008	2007
	RMB’000	RMB’000
Liabilities
Trade payables
- Fellow subsidiaries	928,432	529,067
- A jointly controlled entity	17,565	2,774
- Other related parties	15,523	8,372
- Other state-owned enterprises	349,323	267,643
Notes payable
- Fellow subsidiaries	468,566	366,881
- Other state-owned enterprises	266,508	479,413
Advances from customers
- Fellow subsidiaries	359,486	405,917
- Other state-owned enterprises	21,278	60,540
Other payables and accruals
- Ultimate holding company	2,940	13,680
- Fellow subsidiaries	309,896	168,738
- A jointly controlled entity	—	192
- Other state-owned enterprises	—	1,603
Amounts payable to ultimate holding company	520,524	520,524
Bank borrowings
- Other state-owned enterprises	5,003,141	5,161,985

		Group
	2008	2007
	RMB’000	RMB’000
Guarantees on bank loans granted to the Group from
- Ultimate holding company	1,167,590	389,890
- Fellow subsidiaries	594,301	90,650
- Other related parties	239,454	—

In addition, AVIC Group (2007: AVIC II) granted certain leasehold land for the Group’s use at no cost, details of which are disclosed in Note 15(b).

— I-77 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(d) Whilst other state-owned enterprises are related parties of the Group as defined under IAS 24, the directors are of the opinion that each party is operating independently; and the above balances are arising in the ordinary course of the Group’s businesses. Details of these balances are included under Notes 27, 28, 34 and 37(d) to the financial statements.

41 FINANCIAL RISK MANAGEMENT

(a) Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risks (including: foreign exchange risk, interest-rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The use of financial derivatives to hedge certain risk exposures is governed by the Group’s policies approved by the board of directors. The Group does not use derivative financial instruments for speculative purposes.

(i) Foreign exchange risk

The Group mainly operates in the PRC with most of the transactions settled in RMB. Foreign exchange rate risk arises when future commercial translation or recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The Group is exposed to foreign exchange risk primarily with respect to the United States Dollar, Euro and Hong Kong Dollar.

The Group’s assets and liabilities, and transactions arising from its operations primarily do not expose to material foreign exchange risk. Other than certain term deposits, bank balances and borrowings, the Group’s assets and liabilities are primarily denominated in RMB. The Group generates RMB from sales in the PRC to meet its liabilities denominated in RMB. The Group has not used any forward contracts to hedge its exposure as the cost-benefit is considered not effective.

As at 31st December 2007 and 2008, certain of the Group’s borrowings (Note 34), term deposits and bank balances (Notes 28 and 37(d)) were denominated in foreign currencies. RMB experienced certain appreciation in recent years which is the major reason for the exchange differences recognised by the Group for the years ended 31 December 2007 and 2008. Further appreciation or depreciation of RMB against these currencies will affect the Group’s financial position and results of operations.

However, as foreign currency denominated assets and liabilities are relatively insignificant to the Group, management considers that the Group’s volatility against changes in exchange rates of foreign currencies would not be significant. Accordingly, no sensitivity analysis is presented for foreign exchange risk.

— I-78 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) Cash flow and fair value interest-rate risk

The Group’s income and operating cash flows are substantially independent of changes in market interest rates and the Group has no significant interest-bearing assets except for the bank deposits and cash and cash equivalents, details of which have been disclosed in Notes 27, 28 and 37(d). The Group’s exposure to changes in interest rates is mainly attributable to its borrowings, details of which have been disclosed in Note 34. Borrowings carried at floating rates expose the Group to cash flow interest-rate risk whereas those carried at fixed rates expose the Group to fair value interest-rate risk. As of 31st December 2008, 56% (2007: 49%) of the Group’s borrowings were at fixed rates. The Group has not used any interest rate swaps to hedge its exposure to interest rate risk.

At 31st December 2008, if the interest rates on bank borrowings, deposits and bank balances had been 50 basis points higher/lower than the prevailing rate announced by People’s Bank of China, with all other variables held constant, loss for the year would have been RMB 4,684,000 (2007: RMB 2,250,000) lower/higher.

(iii) Price risk

The Group is exposed to equity securities price risk in respect of investments held by the Group which are classified as available-for-sale financial assets and financial assets at fair value through profit or loss. Some of these financial assets are publicly traded in recognised stock exchanges. At 31st December 2008, if the quoted market price of these equity investments held by the Group had increased/decreased by 10%, with all other variables held constant, loss for the year would have been RMB 861,600 (2007: RMB 556,000) lower/higher and equity would have been RMB 14,147,000 (2007: RMB 39,654,000) higher/lower as a result of the changes in fair value of financial assets at fair value through profit or loss and available-for-sale financial assets.

(iv) Credit risk

The carrying amounts of bank deposits and balances, receivables, available-for-sale financial assets and financial assets at fair value through profit or loss included in the consolidated balance sheet represent the Group’s maximum exposure to credit risk in relation to its financial assets.

95% (2007: 91%) of the Group’s pledged deposits, term deposits and cash and cash equivalents are held in state-owned financial institutions, which management believes are of high credit quality. Most of the Group’s available-for-sale financial assets and financial assets at fair value through profit or loss are also publicly traded in recognised stock exchanges. Management does not expect any losses from non-performance by these counterparties.

— I-79 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Group has no significant concentrations of credit risk. The carrying amount of receivables included in the consolidated balance sheet represents the Group’s maximum exposure to credit risk in relation to these financial assets. Ageing analysis of the Group’s accounts receivable is disclosed in Note 22. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history and the Group performs periodic credit evaluations of its customers. Normally, the Group does not require collaterals from trade debtors. Management makes periodic collective assessment as well as individual assessment on the recoverability of account and other receivables based on historical payment records, the length of the overdue period, the financial strength of the debtors and whether there are any disputes with the relevant debtors. The Group’s historical experience in collection of trade and other receivables falls within the recorded allowances and the directors are of the opinion that adequate provision for uncollectible receivables has been made in the financial statements.

(v) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities.

The Group’s primary cash requirements have been for additions of and upgrades on property, plant and equipment, payment on related debts and payment for purchases and operating expenses. The Group finances its working capital requirements through a combination of internal resources and long-term and short-term bank borrowings.

As at 31st December 2008, the net current liabilities of the Group amounted to RMB 1,266,590,000 (2007: RMB 674,404,000). Management monitors regularly the Group’s current and expected liquidity requirements to ensure it maintains sufficient cash and cash equivalents and has available funding through adequate amount of committed banking facilities to meet its working capital requirements. The amount of undrawn credit facilities at the balance sheet date are disclosed in Note 34 to the financial statements. The directors believe that the Group’s current operating cash flows and credit facilities from PRC banks are sufficient for financing its capital commitments in the near future and for working capital purposes.

— I-80 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The table below analyses the Group’s and the Company’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

		Between	Between
	Less than	1 and	2 and	Over
	1 year	2 years	5 years	5 years
	RMB’000	RMB’000	RMB’000	RMB’000
Group
At 31st December 2008
Bank and other borrowings	6,027,434	421,816	348,107	314,603
Accounts and other payables	8,582,768	—	—	—
Amounts payable to ultimate holding
company	520,524	—	—	—
At 31st December 2007
Bank and other borrowings	5,295,282	337,024	534,143	299,700
Accounts and other payables	8,085,556	—	—	—
Amounts payable to ultimate holding
company	520,524	—	—	—
Company
At 31st December 2008
Other payables	30,771	—	—	—
Amounts payable to ultimate holding
company	464,298	—	—	—
At 31st December 2007
Other payables	31,454	—	—	—
Amounts payable to ultimate holding
company	464,298	—	—	—

(b) Capital risk management

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

In order to maintain or adjust the capital structure, the Group may consider the macro economic conditions, prevailing borrowing rates in the market and adequacy of cash flows generating from operations and may raise funding through capital market or bank borrowings as necessary.

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

— I-81 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

During 2008, the Group’s strategy, which was unchanged from 2007, was to maintain a stable gearing ratio. The gearing ratios at 31st December 2008 and at 31st December 2007 were as follows:

Total borrowings Less: Cash and cash equivalents (Note 37(d)) Net debt Total equity Total capital Gearing ratio	Group 2008 2007 RMB’000 RMB’000 6,572,595 6,074,160 (2,324,130) (2,452,706) 4,248,465 3,621,454 5,573,538 6,658,395 9,822,003 10,279,849 43% 35%

The increase in the gearing ratio during 2008 resulted primarily from the decrease in total equity as a result of the loss for the year.

(c) Fair value estimation

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. As detailed in Note 20 to the financial statements, there are no quoted market price in an active market for certain of the Group’s available-for-sale financial assets in the PRC and for which the range of other methods of reasonably estimating fair value is significant and the probabilities of the various estimates cannot be reasonably assessed without incurring excessive costs. Accordingly, these investments are carried at cost less accumulated impairment losses.

The carrying amounts of the Group’s current financial assets, including cash and cash equivalents, deposits, trade receivables, notes receivable and other receivables, and the Group’s current financial liabilities, including trade and other payables and current borrowings, approximate their fair values. The fair value of non-current portion of borrowings are disclosed in Note 34 to the financial statements.

— I-82 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The carrying amounts of financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

42 SUBSEQUENT EVENTS

(a) Proposed transaction between Jiangxi Changhe Automobile Co., Ltd. (“Changhe Automobile”) and AVIC Group
(i) Nature of the transaction

On 9th October 2008, Changhe Automobile, a subsidiary of the Company, and AVIC Group entered into a sale and purchase agreement, pursuant to which Changhe Automobile will conditionally:

acquire from AVIC Group the entire equity interests in Shanghai Aviation Electric Co., Ltd. (“Shanghai Aviation”) and Lanzhou Wanli Aviation Electrical Co., Ltd. (“Lanzhou Aviation”);
dispose of its entire assets and liabilities to AVIC Group; and
issue consideration shares to AVIC Group.

The proposed transaction was approved by the independent shareholders of the Company on 15th December 2008. Up to the date of this report, completion of the transaction is conditional upon, among other things, the fulfillment of several conditions including the approval by the China Securities Regulatory Commission.

Upon completion of the transaction, Changhe Automobile will:

dispose of its entire existing businesses, which recorded a loss of approximately RMB 400 million for the year ended 31st December 2008;
acquire Shanghai Aviation and Lanzhou Aviation, which had an aggregate net current assets and net assets of approximately RMB 292 million and RMB 581 million respectively as at 31st December 2008; and
allot and issue 74,625,174 consideration shares to AVIC Group.

(ii) Estimated financial effect to the Group

The Group will commence to account for the business combinations with Shanghai Aviation and Lanzhou Aviation from the effective date when Changhe Automobile gains control over the relevant companies and businesses.

— I-83 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Given that Changhe Automobile, Shanghai Aviation and Lanzhou Aviation are all under common control of the PRC government before and after the business combinations, the Company will apply the principles of merger accounting in preparing the consolidated financial statements of the Group after those business combinations become effective, which is expected to be completed during the year ending 31st December 2009.

By applying the principles of merger accounting, the consolidated financial statements of the Group will include the results of the existing businesses of Changhe Automobile up to the date when Changhe Automobile disposes of its entire then existing assets and liabilities to AVIC Group. The consolidated financial statements of the Group will also include the financial positions, results and cash flows of those companies comprising the Group, when the business combination becomes effective, as if the resulting group structure had been in existence throughout the year. Comparative figures as at 31st December 2008 and for the year then ended will be re-presented on the same basis. However, since the aggregate results and financial positions of Shanghai Aviation and Lanzhou Aviation are relatively immaterial to the Group, the restatement of the comparative figures is not expected to significantly affect the Group’s overall financial position and results as of and for the year ended 31st December 2008.

In addition, based on the directors’ best estimates, as the value of net assets to be received by Changhe Automobile is likely to exceed the value of its aggregate considerations to be given, a gain is expected to arise from the proposed transaction which will be credited to the equity of the Group.

(b) Proposed disposal of Hafei Automobile to AVIC Group

Pursuant to a board resolution passed on 9th April 2009, the Group will dispose of its entire interest in a subsidiary, Harbin Hafei Automobile Industry Group Co., Ltd. (“Hafei Automobile”), and the remaining 10% equity interests of JCSA to AVIC Group for a cash consideration, subject to the approval of the independent shareholders of the Company and the relevant governing bodies. Based on the directors’ best estimates, a gain on disposal is expected to arise from this proposed transaction which will be credited to the equity of the Group.

— I-84 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

43 PARTICULARS OF PRINCIPAL SUBSIDIARIES, ASSOCIATES AND A JOINTLY CONTROLLED ENTITY

	Registered and	Attributable	Type of
Name	paid up capital	equity interest	legal entity	Principal activities
Subsidiaries
Directly held
Harbin Aviation Industry	RMB616,102	100%	Limited liability	Manufacture and sale of
Group Ltd			company	general- purpose aeroplane
(哈爾濱航空工業（集團）				and automobile
有限責任公司)
Jiangxi Changhe Aviation	RMB421,037,974	100%	Limited liability	Manufacture and sale of
Industry Company Limited			company	general-purpose aeroplane,
(江西昌河航空工業有限公				automobile and
司)				automobile parts and
				components
Jiangxi Hongdu Aviation	RMB228,768,039	55.29%	Joint stock company	Design, development,
Industry Co., Ltd.			(listed on the	manufacture and sale of
(江西洪都航空工業股份有限			Shanghai Stock	basic trainers, general-
公司)			Exchange)	purpose aeroplane and
				other aero products,
				including parts and
				components
Harbin Dongan Auto Engine	RMB462,080,000	58.77%	Joint stock company	Manufacture and sale of
Co., Ltd.			(listed on the	automobile engine
(哈爾濱東安汽車動力股份有			Shanghai Stock
限公司)			Exchange)
Jiangxi Changhe Automobile	RMB410,000,000	59.02%	Joint stock company	Design, development,
Co., Ltd.			(listed on the	manufacture and sale of
(江西昌河汽車股份有限公			Shanghai Stock	mini-sized vehicles
司)			Exchange)
Harbin Hafei Automobile	RMB 758,035,000	100%	Joint stock company	Manufacture and sale of
Industry Group Co., Ltd.				automobile products
(哈爾濱哈飛汽車工業集團有
限公司)
Indirectly held
Hafei Aviation Industry	RMB300,393,899	50.05%	Joint stock company	Research, development,
Co., Ltd.			(listed on the	design, manufacture and
(哈飛航空工業股份有限公			Shanghai Stock	sale of aero products,
司)			Exchange)	including parts and
				components
Jiujiang Changhe Automobile	RMB161,250,000	72.89%	Limited liability	Development, manufacture
Co., Ltd.			company	and sale of parts and
(九江昌河汽車有限責任公				components for mini-sized
司)				vehicles

— I-85 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

	Registered and	Attributable	Type of
Name	paid up capital	equity interest	legal entity	Principal activities
Harbin Dongan Automotive	RMB450,888,750	36.16%	Equity joint venture	Manufacture and sale of
Engine Manufacturing				automobile engines
Co., Ltd.
(哈爾濱東安汽車發動機製造
有限公司)
Hafei Motor Co., Ltd.	RMB 804,322,000	74.81%	Joint stock company	Manufacture and sale of
(哈飛汽車股份有限公司)				automobile products
Associates
Directly held
Baoding Huide Wind Power	RMB150,000,000	20.00%	Equity joint venture	Development, manufacture
Engineering Co., Ltd.				and sale of large-scale
(保定惠德風電工程有限公				wind power generation
司)				equipments
Indirectly held
Harbin Wanxiang Hafei Motor	RMB60,000,000	35.00%	Limited liability	Manufacture and sales of
Chassis System Co., Ltd.			company	motor chassis system
(哈爾濱萬向汽車底盤系統有
限責任公司)
Harbin Embraer Aircraft	USD25,000,000	36.76%	Limited liability	Production of regional jets
Industry Co., Ltd.			company	and provision of relevant
(哈爾濱安博威飛機工業有限				sales and after-sale
公司)				services
Jointly controlled entity
Indirectly held
Jiangxi Changhe Suzuki	USD311,800,000	34.20%	Equity joint venture	Manufacture and sale of
Automobile Co., Ltd.				mini-sized vehicles
(江西昌河鈴木汽車有限責任
公司)

Notes:

(i) All the above subsidiaries, associates and the jointly controlled entity are established and operating in the PRC.
(ii) The English names of certain subsidiaries, associates and the jointly controlled entity referred to herein represent management’s best effort at translating the Chinese names of these companies as no English names have been registered.

— I-86 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

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

25 November 2009

The Directors

AviChina Industry & Technology Company Limited

Dear Sirs

We set out below our report on the financial information (the “Financial Information”) of China Aviation Optical-Electrical Technology Co., Ltd. (the “Target Company”) and its subsidiaries (together, the “Target Group”) set out in Sections I to III below, for inclusion in the circular of AviChina Industry & Technology Company Limited (the “Company”) dated 25 November 2009 (the “Circular”) in connection with the proposed acquisition of the Target Company by the Company (the “Proposed Acquisition”). The Financial Information comprises the consolidated balance sheets of the Target Group as at 31 December 2006, 2007 and 2008 and 30 September 2009, the balance sheets of the Target Company as at 31 December 2006, 2007 and 2008 and 30 September 2009, and the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated cash flow statements of the Target Group for each of the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 2009 (the “Relevant Periods”), and a summary of significant accounting policies and other explanatory notes.

The Target Company was established in the People’s Republic of China (the “PRC”) as a limited liability company on 31 December 2002. As at the date of this report, the Target Company has direct and indirect interests in subsidiaries as set out in Note 36 of Section II below. All of these companies are private companies. The consolidated financial statements of the Target Group prepared in accordance with the Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises in the PRC for the year ended 31 December 2006 and the consolidated financial statements of the Target Group prepared in accordance with the Accounting Standards for Business Enterprises (2006) of the PRC for each of the years ended 31 December 2007 and 2008 were audited by RSM China Certified Public Accountants.

For the purpose of this report, the directors of the Company have prepared the consolidated financial statements of the Target Group for the Relevant Periods (the “Underlying Financial Statements”) in accordance with International Financial Reporting Standards (“IFRS”) issued by the

— II-1 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

International Accounting Standards Board. We have audited the Underlying Financial Statements for each of the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2009 in accordance with International Standards on Auditing. The Financial Information has been prepared based on the Underlying Financial Statements with no adjustment made thereon.

Directors’ responsibility

The directors of the Target Company during the Relevant Periods are responsible for the preparation and the true and fair presentation of the consolidated financial statements of the Target Group in accordance with the Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises in the PRC or the Accounting Standards for Business Enterprises (2006) of the PRC as appropriate. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the consolidated financial statements of the Target Group that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

For the Financial Information for each of the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2009, the directors of the Company are responsible for the preparation and the true and fair presentation of the Financial Information in accordance with IFRS. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the Financial Information that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

For the Financial Information for the nine months ended 30 September 2008, the directors of the Company are responsible for the preparation and the presentation of the Financial Information in accordance with the accounting policies set out in Note 3 of Section II below which are in conformity with IFRS.

Reporting accountant’s responsibility

For the Financial Information for each of the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2009, our responsibility is to express an opinion on the Financial Information based on our examination and to report our opinion to you. We examined the Underlying Financial Statements used in preparing the Financial Information, and carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

For the Financial Information for the nine months ended 30 September 2008, our responsibility is to express a conclusion on the Financial Information based on our review and to report our conclusion to you. We conducted our review in accordance with International Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”. A review of the Financial Information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review

— II-2 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Opinion and review conclusion

In our opinion, the Financial Information for each of the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2009, for the purpose of this report, gives a true and fair view of the state of affairs of the Target Company and of the Target Group as at 31 December 2006, 2007 and 2008 and 30 September 2009 and of the Target Group’s results and cash flows for the respective years and period then ended.

Based on our review, which does not constitute an audit, nothing has come to our attention that causes us to believe that the Financial Information for the nine months ended 30 September 2008, for the purpose of this report, is not prepared, in all material respects, in accordance with the accounting policies set out in Note 3 of Section II below which are in conformity with IFRS.

— II-3 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

I. FINANCIAL INFORMATION OF THE TARGET GROUP

The following is the Financial Information of the Target Company and the Target Group as at 31 December 2006, 2007 and 2008 and 30 September 2009 and for each of the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 2009.

(a) CONSOLIDATED BALANCE SHEETS

Note ASSETS Non-current assets Land use rights 7 Property, plant and equipment 8 Intangible assets 9 Deferred income tax assets 11 Current assets Accounts receivable 12 Advance to suppliers Other receivables and prepayments 13 Inventories 14 Pledged deposits 15 Term deposits with initial term of over three months 16 Cash and cash equivalents 17 Total assets	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 22,321 21,841 71,249 224,000 276,904 407,340 2,435 8,765 8,287 6,156 6,708 6,155 254,912 314,218 493,031 ------------ ------------ ------------ 274,298 356,121 496,067 12,617 55,261 36,579 16,239 37,158 35,780 165,532 213,925 265,030 29,907 32,020 32,082 — — 170,000 172,090 577,663 292,713 670,683 1,272,148 1,328,251 ------------ ------------ ------------ 925,595 1,586,366 1,821,282	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 22,321 21,841 71,249 224,000 276,904 407,340 2,435 8,765 8,287 6,156 6,708 6,155 254,912 314,218 493,031 ------------ ------------ ------------ 274,298 356,121 496,067 12,617 55,261 36,579 16,239 37,158 35,780 165,532 213,925 265,030 29,907 32,020 32,082 — — 170,000 172,090 577,663 292,713 670,683 1,272,148 1,328,251 ------------ ------------ ------------ 925,595 1,586,366 1,821,282	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 22,321 21,841 71,249 224,000 276,904 407,340 2,435 8,765 8,287 6,156 6,708 6,155 254,912 314,218 493,031 ------------ ------------ ------------ 274,298 356,121 496,067 12,617 55,261 36,579 16,239 37,158 35,780 165,532 213,925 265,030 29,907 32,020 32,082 — — 170,000 172,090 577,663 292,713 670,683 1,272,148 1,328,251 ------------ ------------ ------------ 925,595 1,586,366 1,821,282	As at 30 September 2009 RMB’000 70,126 535,805 9,577 7,332
	254,912 ------------ 274,298 12,617 16,239 165,532 29,907 — 172,090	314,218 ------------ 356,121 55,261 37,158 213,925 32,020 — 577,663	493,031 ------------ 496,067 36,579 35,780 265,030 32,082 170,000 292,713	622,840 ------------ 626,746 44,061 27,498 300,021 104,295 268,363 187,481
	670,683 ------------ 925,595	1,272,148 ------------ 1,586,366	1,328,251 ------------ 1,821,282	1,558,465 ------------ 2,181,305

— II-4 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 89,000 119,000 178,500 294,740 774,057 762,596 383,740 893,057 941,096 61,070 60,535 129,439 444,810 953,592 1,070,535 ------------ ------------ ------------ 12,190 6,190 — 12,270 82,001 126,209 1,843 1,008 1,857 26,303 89,199 128,066 ------------ ------------ ------------ 158,308 198,224 277,709 7,408 13,152 13,976 113,373 109,107 82,761 7,543 6,092 16,235 145,000 211,000 230,000 22,850 6,000 2,000 454,482 543,575 622,681 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 480,785 632,774 750,747 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 925,595 1,586,366 1,821,282 216,201 728,573 705,570 471,113 1,042,791 1,198,601	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 89,000 119,000 178,500 294,740 774,057 762,596 383,740 893,057 941,096 61,070 60,535 129,439 444,810 953,592 1,070,535 ------------ ------------ ------------ 12,190 6,190 — 12,270 82,001 126,209 1,843 1,008 1,857 26,303 89,199 128,066 ------------ ------------ ------------ 158,308 198,224 277,709 7,408 13,152 13,976 113,373 109,107 82,761 7,543 6,092 16,235 145,000 211,000 230,000 22,850 6,000 2,000 454,482 543,575 622,681 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 480,785 632,774 750,747 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 925,595 1,586,366 1,821,282 216,201 728,573 705,570 471,113 1,042,791 1,198,601	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 89,000 119,000 178,500 294,740 774,057 762,596 383,740 893,057 941,096 61,070 60,535 129,439 444,810 953,592 1,070,535 ------------ ------------ ------------ 12,190 6,190 — 12,270 82,001 126,209 1,843 1,008 1,857 26,303 89,199 128,066 ------------ ------------ ------------ 158,308 198,224 277,709 7,408 13,152 13,976 113,373 109,107 82,761 7,543 6,092 16,235 145,000 211,000 230,000 22,850 6,000 2,000 454,482 543,575 622,681 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 480,785 632,774 750,747 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 925,595 1,586,366 1,821,282 216,201 728,573 705,570 471,113 1,042,791 1,198,601	As at 30 September 2009 RMB’000 267,750 769,700
383,740 61,070	893,057 60,535	941,096 129,439	1,037,450 130,022
444,810 ------------ 12,190 12,270 1,843	953,592 ------------ 6,190 82,001 1,008	1,070,535 ------------ — 126,209 1,857	1,167,472 ------------ 319,630 120,348 2,035
26,303 ------------ 158,308 7,408 113,373 7,543 145,000 22,850	89,199 ------------ 198,224 13,152 109,107 6,092 211,000 6,000	128,066 ------------ 277,709 13,976 82,761 16,235 230,000 2,000	442,013 ------------ 369,573 16,270 91,673 2,304 90,000 2,000
454,482 ------------ ----------------------------------------------- 480,785 ------------ ----------------------------------------------- 925,595	543,575 ------------ ----------------------------------------------- 632,774 ------------ ----------------------------------------------- 1,586,366	622,681 ------------ ----------------------------------------------- 750,747 ------------ ----------------------------------------------- 1,821,282	571,820 ------------ ----------------------------------------------- 1,013,833 ------------ ----------------------------------------------- 2,181,305
216,201	728,573	705,570	986,645
471,113	1,042,791	1,198,601	1,609,485

— II-5 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(b) BALANCE SHEETS OF THE TARGET COMPANY

					As at 30
		As at 31 December			September
	Note	2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
ASSETS
Non-current assets
Land use rights	7	12,933	12,641	12,349	12,130
Property, plant and equipment	8	135,896	197,040	270,420	320,445
Intangible assets	9	1,782	1,448	2,715	5,226
Interests in subsidiaries	10	—	36,028	149,536	149,536
Deferred income tax assets	11	3,083	3,483	2,510	3,687
		153,694	250,640	437,530	491,024
		------------ ------------		------------	------------
Current assets
Accounts receivable	12	183,662	255,323	350,063	433,850
Advance to suppliers		8,376	11,363	32,710	13,185
Other receivables and prepayments	13	12,076	5,808	9,234	24,341
Inventories	14	108,787	120,782	176,475	200,846
Pledged deposits	15	29,907	32,020	32,082	104,295
Term deposits with initial term of
over three months	16	—	—	170,000	268,363
Cash and cash equivalents	17	121,601	543,130	166,090	106,113
		464,409	968,426	936,654	1,150,993
		------------ ------------		------------	------------
Total assets		618,103	1,219,066	1,374,184	1,642,017

— II-6 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 89,000 119,000 178,500 231,773 747,571 783,203 320,773 866,571 961,703 ------------ ------------ ------------ 8,190 4,190 — 6,120 7,824 12,382 1,843 1,008 1,857 16,153 13,022 14,239 ------------ ------------ ------------ 146,055 180,055 245,920 1,654 4,686 2,725 66,431 63,958 37,128 5,037 5,774 12,469 42,000 81,000 100,000 20,000 4,000 — 281,177 339,473 398,242 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 297,330 352,495 412,481 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 618,103 1,219,066 1,374,184 183,232 628,953 538,412 336,926 879,593 975,942	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 89,000 119,000 178,500 231,773 747,571 783,203 320,773 866,571 961,703 ------------ ------------ ------------ 8,190 4,190 — 6,120 7,824 12,382 1,843 1,008 1,857 16,153 13,022 14,239 ------------ ------------ ------------ 146,055 180,055 245,920 1,654 4,686 2,725 66,431 63,958 37,128 5,037 5,774 12,469 42,000 81,000 100,000 20,000 4,000 — 281,177 339,473 398,242 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 297,330 352,495 412,481 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 618,103 1,219,066 1,374,184 183,232 628,953 538,412 336,926 879,593 975,942	As at 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 89,000 119,000 178,500 231,773 747,571 783,203 320,773 866,571 961,703 ------------ ------------ ------------ 8,190 4,190 — 6,120 7,824 12,382 1,843 1,008 1,857 16,153 13,022 14,239 ------------ ------------ ------------ 146,055 180,055 245,920 1,654 4,686 2,725 66,431 63,958 37,128 5,037 5,774 12,469 42,000 81,000 100,000 20,000 4,000 — 281,177 339,473 398,242 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 297,330 352,495 412,481 ------------ ----------------------------------------------- ------------ ----------------------------------------------- ------------ ----------------------------------------------- 618,103 1,219,066 1,374,184 183,232 628,953 538,412 336,926 879,593 975,942	As at 30 September 2009 RMB’000 267,750 789,395
320,773 ------------ 8,190 6,120 1,843	866,571 ------------ 4,190 7,824 1,008	961,703 ------------ — 12,382 1,857	1,057,145 ------------ 205,936 13,245 2,035
16,153 ------------ 146,055 1,654 66,431 5,037 42,000 20,000	13,022 ------------ 180,055 4,686 63,958 5,774 81,000 4,000	14,239 ------------ 245,920 2,725 37,128 12,469 100,000 —	221,216 ------------ 311,493 6,727 43,769 1,667 — —
281,177 ------------ ----------------------------------------------- 297,330 ------------ ----------------------------------------------- 618,103	339,473 ------------ ----------------------------------------------- 352,495 ------------ ----------------------------------------------- 1,219,066	398,242 ------------ ----------------------------------------------- 412,481 ------------ ----------------------------------------------- 1,374,184	363,656 ------------ ----------------------------------------------- 584,872 ------------ ----------------------------------------------- 1,642,017
183,232	628,953	538,412	787,337
336,926	879,593	975,942	1,278,361

— II-7 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(c) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Note
Revenue
Cost of sales
25
Gross profit
Other income
23
Selling and distribution expenses
25
General and administrative
expenses
25
Other gains/(losses), net
24
Operating profit
Finance income
28
Finance costs
28
Profit before income tax
Income tax expense
29
Profit for the year/period
Total comprehensive income for
the year/period
Attributable to:
Equity holders of the Target
Company
Minority interests
Earnings per share for profit
attributable to equity holders
of the Target Company during
the year/period
Basic and diluted(RMB)
31

For the year ended
31 December
Nine months ended
30 September
2006
2007
2008
2008
2009
RMB’000
RMB’000
RMB’000
RMB’000
RMB’000
(Unaudited)
721,541
777,882 1,015,097
721,769
860,733
(460,042) (506,677) (673,039) (471,194) (587,540)
261,499
271,205
342,058
250,575
273,193
7,996
18,632
17,704
7,004
10,904
(42,363)
(57,012)
(72,335)
(49,838)
(63,577)
(116,139) (101,489) (135,684)
(98,599)
(113,634)
4,438
3,778
6,421
5,016
5,680
115,431
135,114
158,164
114,158
112,566
1,021
1,668
6,122
2,257
2,774
(10,617)
(13,546)
(13,883)
(9,933)
(10,996)
(9,596)
(11,878)
(7,761)
(7,676)
(8,222)
105,835
123,236
150,403
106,482
104,344
(22,004)
(20,356)
(27,738)
(29,071)
(11,164)
83,831
102,880
122,665
77,411
93,180
83,831
102,880
122,665
77,411
93,180
75,921
100,593
115,583
72,673
89,829
7,910
2,287
7,082
4,738
3,351
83,831
102,880
122,665
77,411
93,180
0.38
0.48
0.43
0.27
0.34

— II-8 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(d) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

		Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company	Attributable to equity holders of the Target Company
				Statutory
				and
		Share	Capital	discretionary	Retained		Minority
	Note	capital	reserve	reserve	earnings	Sub-total	interests	Total
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
For the year ended
31 December 2006
Balance at 1 January 2006		70,000	72,949	73,987	26,450	243,386	53,160	296,546
		- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -
Profit for the year		—	—	—	75,921	75,921	7,910	83,831
Total comprehensive income		—	—	—	75,921	75,921	7,910	83,831
Capital injection		19,000	55,600	—	—	74,600	—	74,600
Transfer to reserves	19(c)	—	—	53,190	(53,190)	—	—	—
Dividends		—	—	—	(10,167)	(10,167)	—	(10,167)
		- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -
		-------------------------------	-------------------------------	-------------------------------	-------------------------------	-------------------------------	-------------------------------	-------------------------------
Balance at 31 December 2006		89,000	128,549	127,177	39,014	383,740	61,070	444,810
For the year ended
31 December 2007
Balance at 1 January 2007		89,000	128,549	127,177	39,014	383,740	61,070	444,810
		- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -
Profit for the year		—	—	—	100,593	100,593	2,287	102,880
		- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -
Total comprehensive income		—	—	—	100,593	100,593	2,287	102,880
Transfer to reserves	19(c)	—	—	34,158	(34,158)	—	—	—
Issue of new shares	18(a)	30,000	432,313	—	—	462,313	—	462,313
Deemed distribution to
shareholder	19(d)(i)	—	(36,028)	—	—	(36,028)	—	(36,028)
Dividends		—	—	—	(17,561)	(17,561)	—	(17,561)
Dividends to minority
shareholders of subsidiaries		—	—	—	—	—	(2,822)	(2,822)
		- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -	- - - - - - - -
		-------------------------------	-------------------------------	-------------------------------	-------------------------------	-------------------------------	-------------------------------	-------------------------------
Balance at 31 December 2007		119,000	524,834	161,335	87,888	893,057	60,535	953,592

— II-9 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

Attributable to equity holders of the Target Company

Note For the year ended 31 December 2008 Balance at 1 January 2008 Profit for the year Total comprehensive income Bonus issue 18(b) Contribution by minority interests Transfer to reserves 19(c) Additional investment in a subsidiary 19(d)(ii) Dividends Balance at 31 December 2008 For the period ended 30 September 2009 Balance at 1 January 2009 Profit for the period Total comprehensive income Bonus issue 18(c) Deemed contribution 22(g) Dividends Dividends to minority shareholders of subsidiaries Balance at 30 September 2009	Share capital RMB’000 119,000 - - - - - - - - — — 59,500 — — — — - - - - - - - - ------------------------------- 178,500 178,500 - - - - - - - - — — 89,250 — — — - - - - - - - - ------------------------------- 267,750	Capital reserve Statutory and discretionary reserve RMB’000 RMB’000 524,834 161,335 - - - - - - - - - - - - - - - - — — — — (35,700) — — — — 10,626 (55,644) — — — - - - - - - - - ------------------------------- - - - - - - - - ------------------------------- 433,490 171,961 433,490 171,961 - - - - - - - - - - - - - - - - — — — — (53,550) — 15,450 — — — — — - - - - - - - - ------------------------------- - - - - - - - - ------------------------------- 395,390 171,961	Retained earnings RMB’000 87,888 - - - - - - - - 115,583 115,583 (23,800) — (10,626) — (11,900) - - - - - - - - ------------------------------- 157,145 157,145 - - - - - - - - 89,829 89,829 (35,700) — (8,925) — - - - - - - - - ------------------------------- 202,349	Sub-total RMB’000 893,057 - - - - - - - - 115,583 115,583 — — — (55,644) (11,900) - - - - - - - - ------------------------------- 941,096 941,096 - - - - - - - - 89,829 89,829 — 15,450 (8,925) — - - - - - - - - ------------------------------- 1,037,450	Minority interests RMB’000 60,535 - - - - - - - - 7,082 7,082 — 6,178 — 55,644 — - - - - - - - - ------------------------------- 129,439 129,439 - - - - - - - - 3,351 3,351 — — — (2,768) - - - - - - - - ------------------------------- 130,022	Total RMB’000 953,592 - - - - - - - - 122,665
						122,665 — 6,178 — — (11,900) - - - - - - - - ------------------------------- 1,070,535
						1,070,535 - - - - - - - - 93,180
						93,180 — 15,450 (8,925) (2,768) - - - - - - - - ------------------------------- 1,167,472

— II-10 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(e) CONSOLIDATED CASH FLOW STATEMENT

Note Cash flows from/(used in) operating activities Cash generated from/(used in) operations 33 Interest received Interest paid Enterprise income tax paid Net cash generated from/(used in) operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of land use rights Purchase of intangible assets Cash proceeds from disposals of property, plant and equipment Increase in term deposits with initial term of over three months Net cash used in investing activities Cash flows from financing activities Issue of shares 18(a) Contribution by capital injection Proceeds from borrowings Repayments of borrowings Dividends paid Net cash generated from/ (used in) financing activities Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year/period Cash and cash equivalents at the ending of the year/period	For the year ended 31 December Nine months ended 30 September 2006 2007 2008 2008 2009 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 86,631 49,810 139,224 (60,279) 20,482 1,021 1,668 6,122 2,257 2,774 (11,737) (14,562) (18,647) (14,885) (19,467) (31,624) (23,194) (16,193) (19,682) (26,094) 44,291 13,722 110,506 (92,589) (22,305) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (55,166) (87,481) (178,688) (94,185) (169,062) (9,389) — (50,907) — — (1,601) (7,311) (1,871) (1,454) (3,077) 5,114 1,563 9,100 3,004 4,188 — — (170,000) — (98,363) (61,042) (93,229) (392,366) (92,635) (266,314) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 462,313 — — — 74,600 — — — — 179,190 216,000 288,000 278,000 485,080 (135,650) (172,850) (279,190) (277,190) (290,000) (10,167) (20,383) (11,900) (11,900) (11,693) 107,973 485,080 (3,090) (11,090) 183,387 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 91,222 405,573 (284,950) (196,314) (105,232) 80,868 172,090 577,663 577,663 292,713 172,090 577,663 292,713 381,349 187,481	For the year ended 31 December Nine months ended 30 September 2006 2007 2008 2008 2009 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited) 86,631 49,810 139,224 (60,279) 20,482 1,021 1,668 6,122 2,257 2,774 (11,737) (14,562) (18,647) (14,885) (19,467) (31,624) (23,194) (16,193) (19,682) (26,094) 44,291 13,722 110,506 (92,589) (22,305) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (55,166) (87,481) (178,688) (94,185) (169,062) (9,389) — (50,907) — — (1,601) (7,311) (1,871) (1,454) (3,077) 5,114 1,563 9,100 3,004 4,188 — — (170,000) — (98,363) (61,042) (93,229) (392,366) (92,635) (266,314) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - — 462,313 — — — 74,600 — — — — 179,190 216,000 288,000 278,000 485,080 (135,650) (172,850) (279,190) (277,190) (290,000) (10,167) (20,383) (11,900) (11,900) (11,693) 107,973 485,080 (3,090) (11,090) 183,387 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 91,222 405,573 (284,950) (196,314) (105,232) 80,868 172,090 577,663 577,663 292,713 172,090 577,663 292,713 381,349 187,481
		(22,305) - - - - - - - - - (169,062) — (3,077) 4,188 (98,363)
		(266,314) - - - - - - - - - — — 485,080 (290,000) (11,693)
		183,387 - - - - - - - - - (105,232) 292,713
		187,481

— II-11 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

II NOTES TO THE FINANCIAL STATEMENTS

1 General Information

China Aviation Optical-Electrical Technology Co., Ltd. (the “Target Company”), a joint stock company limited by shares, was established in the the People’s Republic of China (the “PRC”) on 31 December 2002. The Target Company listed its A shares on The Shenzhen Stock Exchange on 1 November 2007. The registered address of the Target Company is 洛陽高新技術開發區周山路10 號, the PRC.

The Target Company and its subsidiaries (collectively the “Target Group”) is principally engaged in the manufacturing and sale of optoelectronics products in the PRC.

The Target Company’s directors regard Aviation Industry Corporation of China (“AVIC”) as the ultimate holding company.

On 26 March 2007 and 21 March 2008, the Target Company acquired 20% and 31%, respectively, equity interests in 瀋陽興華航空電器有限責任公司 from its ultimate holding company, resulting in business combination under common control which is deemed to have existed throughout the Relevant Periods.

Other than the acquisition mentioned above, there is no significant change in the organisational structure of the Target Group during the Relevant Periods.

These consolidated financial statements are presented in Renminbi (“RMB”), unless otherwise stated.

2. Basis of presentation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgements in the process of applying the Target Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 5.

— II-12 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

3. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.

(a) Standards, amendments and interpretations to existing standards that are relevant to the Target Group but not yet effective and have not been early adopted by the Target Group except as stated otherwise.
IFRS 3 (Revised) Business Combinations (effective for annual periods beginning on or after 1 July 2009)
IFRS 5 (Amendment) Non-current Assets held for sale and discontinued operations (effective for annual periods beginning on or after 1 January 2010)
IFRS 8 (Amendment) Operating Segments (effective for annual periods beginning on or after 1 January 2010)
IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013)
IAS 7 (Amendment) Statement of Cash Flows (effective for annual periods beginning on or after 1 January 2010)
IAS 17 (Amendment) Leases (effective for annual periods beginning on or after 1 January 2010)
IAS 24 (Revised) Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011)
IAS 27 (Revised) Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009)
IAS 36 (Amendment) Impairment of Assets (effective for annual periods beginning on or after 1 January 2010)
IAS 38 (Amendment) Intangible assets (effective for periods beginning on or after 1 July 2009)
IFRIC 17 Distribution of non-cash assets to owners (effective for periods beginning on or after 1 July 2009)
IFRS 3 (revised), ‘Business combinations’ and consequential amendments to IAS 27, ‘Consolidated and separate financial statements’. The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the minority interest in the acquiree either at fair value or at the minority interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed.
Amendment to IFRS 5 ‘Non-current Assets held for sale and discontinued operations’. Disclosures in standards other than IFRS 5 do not apply to non-current assets (or disposal groups) classified as held for sale or discontinued operations unless those IFRSs specifically require disclosures for them.

— II-13 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Amendment to IFRS 8 ‘Operating segments’. Disclosure of information about total assets and liabilities for each reportable segment is required only if such amounts are regularly provided to the chief operating decision maker.
IFRS 9 ‘Financial Instruments’. This improves and simplifies the approach for classification and measurement of financial assets compared with the requirements of IAS 39. It applies a consistent approach to classifying financial assets and replace the numerous categories of financial assets in IAS 39, each of which had its own classification criteria.
Amendment to IAS 7 ‘Statement of cash flows’. Only expenditures that result in a recognised asset are eligible for classification as investing activities.
Amendment to IAS 17 ‘Leases’. The amendment removes the specific guidance on the classification of long-term leases of land as operating leases. When classifying land leases, the general principles applicable to the classification of leases should be applied. The classification of land leases has to be reassessed on adoption of the amendment on the basis of information existing at inception of the leases.
IAS 24 (revised) ‘Related Party Disclosures’. This removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities; and clarifies and simplifies the definition of a related party.
Amendment to IAS 36 ‘Impairment of assets’. This clarifies that the largest unit permitted for the goodwill impairment test is the lowest level of operating segment before any aggregation as defined in IFRS 8.
Amendment to IAS 38 ‘Intangible assets’. This clarifies the description of the valuation techniques commonly used to measure intangible assets acquired in a business combination when they are not traded in an active market. In addition, an intangible asset acquired in a business combination might be separable but only together with a related contract, identifiable asset or liability. In such cases, the intangible asset is recognised separately from goodwill but together with the related item.
IFRIC 17, ‘Distributions of non-cash assets to owners’. This interpretation applies to non-reciprocal distributions of non-cash assets (or with a cash alternative) except for common control transactions and clarifies certain accounting treatments on dividends.

The effect that the adoption of IFRS 3 (Revised), IAS 27 (Revised) and IFRIC 17 will have on the results and financial position of the Target Group will depend on the incidence and timing of transactions within the scope of these standards and interpretation occurring on or after 1 January 2010. Management anticipate that the adoption of other new standards, amendments and interpretations to standards will not result in a significant impact on the results and financial position of the Target Group.

— II-14 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(b) Merger accounting and consolidation

The Financial Information incorporate the financial position, results and cash flows of the companies comprising the Target Group in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party.

The net assets of the combining entities or businesses are combined using the existing book values from the controlling parties’ perspective. No amount is recognised in consideration for goodwill or excess of acquirers’ interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest.

The consolidated statement of comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control (whichever period is shorter).

A uniform set of accounting policies is adopted by those entities. All intra-group transactions, balances and unrealised gains on transactions between combining entities or businesses are eliminated on consolidation.

Subsidiaries are all entities over which the Target Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Target Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Target Group. They are de-consolidated from the date that control ceases.

The Target Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Target Group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. Gains or losses on disposals to minority interests are also recorded in equity. For disposals to minority interests, differences between any proceeds received and the relevant share of minority interests are also recorded in equity.

Except for combination of businesses under common control by using merger accounting as described in Note 1, the purchase method of accounting is used to account for the acquisition of subsidiaries by the Target Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interests. The excess of the cost of acquisition over the fair value of the Target Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, including any contingent liabilities assumed, the difference is recognised directly in the consolidated income statement.

— II-15 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

In the Target Company’s balance sheet, interests in subsidiaries are stated at cost less provision for impairment losses. The results of the subsidiaries are accounted for by the Target Company on the basis of dividends received and receivable.

(c) Segment reporting

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, and whose operating results are regularly reviewed by the Board of Directors to make decisions about resources to be allocated to the segment and assess its performance.

(d) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Target Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “Functional Currency”). The financial statements are presented in RMB, which is the Target Company’s functional and presentation currency.

(ii) Transactions and balances

(iii) Group companies

(a) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

— II-16 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

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

(e) Property, plant and equipment

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

Depreciation is calculated on a straight-line basis to write off the cost less accumulated impairment losses of each asset to their residual values over their estimated useful lives as follows:

Buildings	20 years
Plant and machinery	5 - 10 years
Other equipment and motor vehicles	5 - 10 years

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 3 (i)).

Gains and losses on disposals are determined by comparing net sales proceeds and the carrying amount of the relevant assets, and are included in the income statement.

(f) Land use right

— II-17 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Amortisation of land use rights is calculated on a straight-line basis over the period of the land use rights.

(g) Intangible assets

(i) Patent and proprietary technologies

Patent and proprietary technologies is initially recognised at cost. Technology know-how that has a definite useful life is carried at cost less accumulated amortisation and accumulated impairment losses, if any. Amortisation is calculated using the straight-line method to allocate the cost of technology know-how over their estimated useful lives of 5 years.

(ii) Computer software

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of 5 years.

(h) Research and development expenditure

Where the research phase and the development phase of an internal project cannot be clearly distinguished, all expenditure incurred on the project is charged to the income statement.

(i) Impairment of investments in subsidiaries and non-financial assets

— II-18 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(j) Receivables

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

(k) Inventories

(l) Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks and term deposit with initial terms of less than three months.

(m) Financial liabilities and equity

Financial liabilities and equity instruments issued by the Target Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Financial liabilities (including accounts payables) are initially measured at fair value plus transaction costs that are directly attributable to the issue

— II-19 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

of the financial liability, and are subsequently measured at amortised cost, using the effective interest method. An equity instrument is any contract that does not meet the definition of financial liability and evidences a residual interest in the assets of the Target Group after deducting all of its liabilities.

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

(n) Borrowings

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

(o) Borrowings costs

(p) Current and deferred income tax

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

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

— II-20 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

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

(q) Employee benefits

(i) Pension obligations

The Target Group contributes on a monthly basis to various defined contribution retirement benefit plans organised by relevant municipal and provincial governments in the PRC. The municipal and provincial governments undertake to assume the retirement benefit obligations payable to all existing and future retired employees under these plans and the Target Group has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred.

(ii) Housing benefits

Employees of the Target Group are entitled to participate in various governmentsponsored housing funds. The Target Group contributes on a monthly basis to these funds based on certain percentages of the salaries of the employees. The Target Group’s liability in respect of these funds is limited to the contributions payable in each period.

(r) Provisions

Provisions are recognised when the Target Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

(s) Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sales of goods in the ordinary course of the Target Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts after eliminating sales within the Target Group.

The Target Group recognises revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Target Group. The amount of

— II-21 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Target Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue and income are recognised as follows:

(i) Sales of goods are recognised when a group entity has delivered products to the customer; the customer has accepted the products and collectability of the related receivables is reasonably assured.
(ii) Interest income is recognised on a time-proportion basis using the effective interest method.

(t) Operating leases

(u) Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Target Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate.

(v) Dividend distribution

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

— II-22 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

4 Financial risk management

(a) Financial risk factors

The Target Group’s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Target Group’s overall risk management policy focuses on the unpredictability of financial markets and seeks to minimise potential adverse effect on the Target Group’s financial performance. The Target Group regularly monitors its exposure and currently considers not necessary to hedge any of these financial risks.

(i) Interest rate risk

The Target Group’s exposure to changes in interest rates is mainly attributable to its borrowings, pledged deposits and bank deposits.

Borrowings at variable rates expose the Target Group to cash flow interest-rate risk. As at 31 December 2006, 2007 and 2008 and 30 September 2009, approximately RMB 24,850,000, RMB 64,000,000, RMB 82,000,000, and RMB 52,000,000 of the Target Group’s borrowings were at variable rates, respectively.

All pledged deposits and bank deposits of the Target Group were at variable rates and so expose it to cash flow interest-rate risk.

The interest rates and maturities of the Target Group’s borrowings, pledged deposits, term deposits with initial term of over three months, and bank balances are disclosed in Notes 22, 15, 16 and 17.

If the interest rates on bank borrowings, deposits and bank balances had been 50 basis points higher/lower with all other variables held constant, which were considered reasonably possible at each of the dates by management, equity as at 31 December 2006, 2007 and 2008 and 30 September 2009, and profits for the years/period then ended would have been approximately RMB 59,000, RMB 191,000, RMB 177,000, and RMB 85,000 lower/higher, respectively.

(ii) Credit risk

The carrying amounts of bank deposits and receivables included in the consolidated balance sheet represent the Target Group’s maximum exposure to credit risk in relation to its financial assets. As at 31 December 2006, 2007 and 2008 and 30 September 2009, 91%, 99%, 94% and 99% of the Target Group’s pledged deposits, term deposits and cash and cash equivalents are held in state-owned financial institutions, which management believes are of high credit quality. Management does not expect any losses from non-performance by these counterparties.

— II-23 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

The Target Group has no significant concentrations of credit risk. The carrying amount of receivables included in the consolidated balance sheet represents the Target Group’s maximum exposure to credit risk in relation to these financial assets. Ageing analysis of the Target Group’s accounts receivable is disclosed in Note 12. The Target Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history and the Target Group performs periodic credit evaluations of its customers. Normally, the Target Group does not require collaterals from trade debtors. Management makes periodic collective assessment as well as individual assessment on the recoverability of account and other receivables based on historical payment records, the length of the overdue period, the financial strength of the debtors and whether there are any disputes with the relevant debtors. The Target Group’s historical experience in collection of trade and other receivables falls within the recorded allowances and the directors are of the opinion that adequate provision for uncollectible receivables has been made in the financial statements.

(iii) Liquidity risk

To manage the liquidity risk, the Target Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Target Group’s operations and mitigate the effects of fluctuations in cash flows. The Target Group expects to fund its future cash flow needs through internally generated cash flows from operations, borrowings from related parties and financial institutions, as well as equity financing through shareholders or initial public offering. Most borrowings from related parties are non-current to enable the Target Group to maintain a liquid financial position in future. The Target Group does not expect significant difficulties in subsequent renewals of these borrowings.

The maturity analysis of borrowings that shows the remaining contractual maturities is disclosed in Note 22. Generally there is no specific credit period granted by the suppliers but the related trade payables are normally expected to be settled within three months after receipt of goods or services.

The table below analyses the Target Group’s financial liabilities that will be settled into relevant maturity groupings based on the remaining periods at 31 December 2006, 2007 and 2008 and 30 September 2009 to the contractual maturity dates. The amounts disclosed in the table are the contractual undiscounted cash flows.

— II-24 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

At 31 December 2006 Borrowings Accounts and other payables At 31 December 2007 Borrowings Accounts and other payables At 31 December 2008 Borrowings Accounts and other payables At 30 September 2009 Borrowings Accounts and other payables	Less than 1 year Between 1 and 2 years Between 2 and 5 years RMB’000 RMB’000 RMB’000 173,147 6,107 6,297 269,337 — — 229,786 6,647 — 303,031 — — 245,406 — — 353,164 — — 101,106 — 336,681 451,099 — —	Less than 1 year Between 1 and 2 years Between 2 and 5 years RMB’000 RMB’000 RMB’000 173,147 6,107 6,297 269,337 — — 229,786 6,647 — 303,031 — — 245,406 — — 353,164 — — 101,106 — 336,681 451,099 — —
		— —
		— —
		336,681 —

(b) Fair value estimation

The carrying amounts of the Target Group’s financial assets, including cash and bank balances, pledged deposits, term deposits with initial term of over three months, receivables; and financial liabilities including payables, short-term borrowings, approximate their fair values due to their short maturities. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values.

The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Target Group for similar financial instruments. The fair values of non-current borrowings are disclosed in Note 22 (g).

(c) Capital risk management

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

— II-25 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

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

The Target Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings as shown in the consolidated balance sheet, less cash and cash equivalents. Total capital is calculated as total equity as shown in the consolidated balance sheet plus net debt. The Target Group aims to maintain the gearing ratio at a level of not more than 20%.

Total borrowings (Note 22) Less: cash and cash equivalents (Note 17) Net debt Total equity Total capital Gearing ratio	As 2006 RMB’000 180,040 (172,090) 7,950 444,810 452,760 2%	at 31 December 2007 2008 RMB’000 RMB’000 223,190 232,000 (577,663) (292,713) (354,473) (60,713) 953,592 1,070,535 N/A N/A N/A N/A	As at 30 September 2009 RMB’000 411,630 (187,481) 224,149 1,167,472 1,391,621 16%

5 Critical accounting estimates and judgements

(i) Taxation

The Target Group is subject to income taxes in the PRC. There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

— II-26 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(ii) Depreciation and amortisation

The Target Group’s management determines the estimated useful lives and related deprecation/amortisation charges for the property, plant and equipment and intangible assets with reference to the estimated periods that the Target Group intends to derive future economic benefits from the use of these assets. Management will revise the depreciation and amortisation charge where useful lives are different to previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

(iii) Impairment of receivables

Provision for impairment of receivables is determined based on the evaluation of collectibility of receivables. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness, the past collection history of each customer and the current market condition.

6 Segment information

The Target Group is principally engaged in the optoelectronics products business in Luoyang and Shenyang in the PRC. Separate individual financial information of the two locations are presented to the chief operating decision maker (the Board of Directors) who reviews the internal reporting in order to assess performance and allocate resources. Due to the similarities in economic characterics, nature of products and production, customers, etc, they are aggregated into a single reportable segment.

The Target Group‘s turnover and profit for the Relevant Periods were derived from selling of optoelectronics products in the PRC with the main products disclosed below.

— II-27 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

The Target Group is domiciled in the PRC from where substantially all of its revenues from external customers are derived and in where all of its assets are located.

Year ended 31 December 2006 Revenue Gross profit Year ended 31 December 2007 Revenue Gross profit Year ended 31 December 2008 Revenue Gross profit Period ended 30 September 2008 （unaudited） Revenue Gross profit Period ended 30 September 2009 Revenue Gross profit	Line Spring RMB’000 637,279 250,460 618,868 221,058 786,316 277,358 591,909 217,541 619,735 218,413	Optical Fiber RMB’000 73,176 7,347 112,244 34,736 137,238 33,260 113,026 28,638 223,856 47,883	Others RMB’000 11,086 3,692 46,770 15,411 91,543 31,440 16,834 4,396 17,142 6,897	Total RMB’000 721,541
				261,499
				777,882
				271,205
				1,015,097
				342,058
				721,769
				250,575
				860,733
				273,193

— II-28 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

7 Land use rights

Target Group

Opening net book amount Additions Amortisation Closing net book amount	For the year ended 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 13,256 22,321 21,841 9,389 — 50,907 (324) (480) (1,499) 22,321 21,841 71,249	Nine months ended 30 September 2009 RMB’000 71,249 — (1,123) 70,126

Target Company

Opening net book amount Amortisation Closing net book amount	For the year ended 31 December 2006 2007 2008 RMB’000 RMB’000 RMB’000 13,225 12,933 12,641 (292) (292) (292) 12,933 12,641 12,349	Nine months ended 30 September 2009 RMB’000 12,349 (219) 12,130

— II-29 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

8 Property, plant and equipment

Target Group

At 1 January 2006 Cost Accumulated depreciation Net book amount Year ended 31 December 2006 Opening net book amount Additions Reclassification upon completion Disposals Depreciation Closing net book amount At 31 December 2006 Cost Accumulated depreciation Net book amount Year ended 31 December 2007 Opening net book amount Additions Reclassification upon completion Disposals Depreciation Closing net book amount	Buildings Plant and machinery RMB’000 RMB’000 59,536 220,666 (22,450) (91,058) 37,086 129,608 37,086 129,608 504 4,628 3,463 38,420 (329) (3,901) (2,659) (26,447) 38,065 142,308 62,988 254,635 (24,923) (112,327) 38,065 142,308 38,065 142,308 — 18,795 142 6,665 (25) (753) (2,507) (27,848) 35,675 139,167	Motor vehicles Other equipment Construction in-progress RMB’000 RMB’000 RMB’000 10,166 9,952 10,728 (4,138) (3,857) — 6,028 6,095 10,728 6,028 6,095 10,728 130 1,234 66,047 2,208 1,177 (45,268) (128) (78) — (1,901) (2,645) — 6,337 5,783 31,507 12,223 12,056 31,507 (5,886) (6,273) — 6,337 5,783 31,507 6,337 5,783 31,507 1,459 1,723 67,621 — 1,967 (8,774) (190) (179) (538) (1,976) (2,678) — 5,630 6,616 89,816	Total RMB’000 311,048 (121,503)
			189,545
			189,545 72,543 — (4,436) (33,652)
			224,000
			373,409 (149,409)
			224,000
			224,000 89,598 — (1,685) (35,009)
			276,904

— II-30 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

At 31 December 2007 Cost Accumulated depreciation Net book amount Year ended 31 December 2008 Opening net book amount Additions Reclassification upon completion Disposals Depreciation Closing net book amount At 31 December 2008 Cost Accumulated depreciation Net book amount Period ended 30 September 2009 Opening net book amount Additions Reclassification upon completion Disposals Depreciation Closing net book amount At 30 September 2009 Cost Accumulated depreciation Net book amount	Buildings Plant and machinery RMB’000 RMB’000 63,114 276,779 (27,439) (137,612) 35,675 139,167 35,675 139,167 — 47,533 70,708 59,175 (509) (7,007) (4,703) (30,959) 101,171 207,909 132,896 370,500 (31,725) (162,591) 101,171 207,909 101,171 207,909 12,355 45,732 — 13,881 — (4,364) (4,741) (29,594) 108,785 233,564 145,251 420,750 (36,466) (187,186) 108,785 233,564	Motor vehicles Other equipment Construction in-progress RMB’000 RMB’000 RMB’000 12,946 15,360 89,816 (7,316) (8,744) — 5,630 6,616 89,816 5,630 6,616 89,816 1,066 7,166 123,190 — — (129,883) (352) (1,096) — (1,645) (2,248) — 4,699 10,438 83,123 13,470 20,800 83,123 (8,771) (10,362) — 4,699 10,438 83,123 4,699 10,438 83,123 819 3,608 108,522 — — (13,881) — (45) — (1,338) (2,489) — 4,180 11,512 177,764 14,289 24,200 177,764 (10,109) (12,688) — 4,180 11,512 177,764	Total RMB’000 458,015 (181,111)
			276,904
			276,904 178,955 — (8,964) (39,555)
			407,340
			620,789 (213,449)
			407,340
			407,340 171,036 — (4,409) (38,162)
			535,805
			782,254 (246,449)
			535,805

— II-31 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Target Company

At 1 January 2006 Cost Accumulated depreciation Net book amount Year ended 31 December 2006 Opening net book amount Additions Reclassification upon completion Disposals Depreciation Closing net book amount At 31 December 2006 Cost Accumulated depreciation Net book amount Year ended 31 December 2007 Opening net book amount Additions Reclassification upon completion Disposals Depreciation Closing net book amount At 31 December 2007 Cost Accumulated depreciation Net book amount	Buildings Plant and machinery RMB’000 RMB’000 36,418 115,577 (9,762) (44,306) 26,656 71,271 26,656 71,271 504 3,992 — 12,242 (329) (21) (1,962) (10,139) 24,869 77,345 36,408 131,330 (11,539) (53,985) 24,869 77,345 24,869 77,345 — 17,895 — 4,529 (13) (624) (1,814) (12,044) 23,042 87,101 36,391 150,709 (13,349) (63,608) 23,042 87,101	Motor vehicles Other equipment Construction in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 3,565 4,851 2,459 162,870 (1,390) (1,675) — (57,133) 2,175 3,176 2,459 105,737 2,175 3,176 2,459 105,737 130 1,234 38,362 44,222 — — (12,242) — — (16) — (366) (580) (1,016) — (13,697) 1,725 3,378 28,579 135,896 3,695 5,939 28,579 205,951 (1,970) (2,561) — (70,055) 1,725 3,378 28,579 135,896 1,725 3,378 28,579 135,896 885 1,626 57,090 77,496 — — (4,529) — — (13) — (650) (671) (1,173) — (15,702) 1,939 3,818 81,140 197,040 4,525 7,422 81,140 280,187 (2,586) (3,604) — (83,147) 1,939 3,818 81,140 197,040	Motor vehicles Other equipment Construction in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 3,565 4,851 2,459 162,870 (1,390) (1,675) — (57,133) 2,175 3,176 2,459 105,737 2,175 3,176 2,459 105,737 130 1,234 38,362 44,222 — — (12,242) — — (16) — (366) (580) (1,016) — (13,697) 1,725 3,378 28,579 135,896 3,695 5,939 28,579 205,951 (1,970) (2,561) — (70,055) 1,725 3,378 28,579 135,896 1,725 3,378 28,579 135,896 885 1,626 57,090 77,496 — — (4,529) — — (13) — (650) (671) (1,173) — (15,702) 1,939 3,818 81,140 197,040 4,525 7,422 81,140 280,187 (2,586) (3,604) — (83,147) 1,939 3,818 81,140 197,040
			105,737
			105,737 44,222 — (366) (13,697)
			135,896
			205,951 (70,055)
			135,896
			135,896 77,496 — (650) (15,702)
			197,040
			280,187 (83,147)
			197,040

— II-32 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

		Plant and	Motor	Other	Construction
	Buildings	machinery	vehicles	equipment	in-progress	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Year ended 31 December 2008
Opening net book amount	23,042	87,101	1,939	3,818	81,140	197,040
Additions	—	46,645	304	6,681	43,951	97,581
Reclassification upon completion	70,708	46,945	—	—	(117,653)	—
Disposals	(509)	(447)	(279)	(37)	—	(1,272)
Depreciation	(4,082)	(16,608)	(708)	(1,531)	—	(22,929)
Closing net book amount	89,159	163,636	1,256	8,931	7,438	270,420
At 31 December 2008
Cost	106,172	239,409	4,377	13,832	7,438	371,228
Accumulated depreciation	(17,013)	(75,773)	(3,121)	(4,901)	—	(100,808)
Net book amount	89,159	163,636	1,256	8,931	7,438	270,420
Period ended 30 September 2009
Opening net book amount	89,159	163,636	1,256	8,931	7,438	270,420
Additions	12,355	43,737	540	3,330	15,295	75,257
Reclassification upon completion	—	6,313	—	—	(6,313)	—
Disposals	—	(239)	—	(45)	—	(284)
Depreciation	(4,141)	(18,320)	(416)	(2,071)	—	(24,948)
Closing net book amount	97,373	195,127	1,380	10,145	16,420	320,445
At 30 September 2009
Cost	118,527	288,649	4,917	16,952	16,420	445,465
Accumulated depreciation	(21,154)	(93,522)	(3,537)	(6,807)	—	(125,020)
Net book amount	97,373	195,127	1,380	10,145	16,420	320,445

— II-33 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

9 Intangible assets

Target Group

Patent and proprietary technologies RMB’000 At 1 January 2006 Cost — Accumulated amortisation — Net book amount — Year ended 31 December 2006 Opening net book amount — Additions — Amortisation — Closing net book amount — At 31 December 2006 Cost — Accumulated amortisation — Net book amount — Year ended 31 December 2007 Opening net book amount — Additions 6,005 Amortisation (100) Closing net book amount 5,905 At 31 December 2007 Cost 6,005 Accumulated amortisation (100) Net book amount 5,905	Computer software RMB’000 2,185 (659) 1,526 1,526 1,601 (692) 2,435 3,786 (1,351) 2,435 2,435 1,306 (881) 2,860 5,092 (2,232) 2,860	Total RMB’000 2,185 (659) 1,526 1,526 1,601 (692) 2,435 3,786 (1,351) 2,435 2,435 7,311 (981) 8,765 11,097 (2,332) 8,765

— II-34 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Patent and proprietary technologies RMB’000 Year ended 31 December 2008 Opening net book amount 5,905 Additions 922 Amortisation (1,265) Closing net book amount 5,562 At 31 December 2008 Cost 6,927 Accumulated amortisation (1,365) Net book amount 5,562 Period ended 30 September 2009 Opening net book amount 5,562 Additions — Amortisation (973) Closing net book amount 4,589 At 30 September 2009 Cost 6,927 Accumulated amortisation (2,338) Net book amount 4,589	Computer software RMB’000 2,860 949 (1,084) 2,725 6,041 (3,316) 2,725 2,725 3,077 (814) 4,988 9,118 (4,130) 4,988	Total RMB’000 8,765 1,871 (2,349) 8,287 12,968 (4,681) 8,287 8,287 3,077 (1,787) 9,577 16,045 (6,468) 9,577

— II-35 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Target Company

Patent and proprietary technologies RMB’000 At 1 January 2006 Cost — Accumulated amortisation — Net book amount — Year ended 31 December 2006 Opening net book amount — Additions — Amortisation — Closing net book amount — At 31 December 2006 Cost — Accumulated amortisation — Net book amount Year ended 31 December 2007 Opening net book amount — Additions — Amortisation — Closing net book amount — At 31 December 2007 Cost — Accumulated amortisation — Net book amount —	Computer software RMB’000 841 (119) 722 722 1,257 (197) 1,782 2,098 (316) 1,782 1,782 38 (372) 1,448 2,136 (688) 1,448	Total RMB’000 841 (119) 722 722 1,257 (197) 1,782 2,098 (316) 1,782 1,782 38 (372) 1,448 2,136 (688) 1,448

— II-36 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Patent and
proprietary
technologies
Computer
software
RMB’000
RMB’000
Year ended 31 December 2008
Opening net book amount
—
1,448
Additions
800
948
Amortisation
(64)
(417)
Closing net book amount
736
1,979
At 31 December 2008
Cost
800
3,084
Accumulated amortisation
(64)
(1,105)
Net book amount
736
1,979
Period ended 30 September 2009
Opening net book amount
736
1,979
Additions
—
2,987
Amortisation
(72)
(404)
Closing net book amount
664
4,562
At 30 September 2009
Cost
800
6,071
Accumulated amortisation
(136)
(1,509)
Net book amount
664
4,562
10
Interests in subsidiaries
As at 31 December
2006
2007
2008
RMB’000
RMB’000
RMB’000
Cost of investments, at cost
—
36,028
149,536

Total
RMB’000
1,448
1,748
(481)
2,715
3,884
(1,169)
2,715
2,715
2,987
(476)
5,226
6,871
(1,645)
5,226
As at 30
September
2009
RMB’000
149,536

Particulars of the principal subsidiaries of the Target Group as at 30 September 2009 are set out in Note 36.

— II-37 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

11 Deferred income tax assets

Deferred income taxes are calculated in respect of temporary differences under the liability method using the tax rates enacted or substantively enacted by the balance sheet date.

Target Group

The movement on the deferred income tax accounts is as follows:

Deferred income tax assets:

As the beginning of the year/period (Charged)/credited to consolidated income statement As the end of the year/period	As 2006 RMB’000 13,159 (7,003) 6,156	at 31 December 2007 2008 RMB’000 RMB’000 6,156 6,708 552 (553) 6,708 6,155	As at 30 September 2009 RMB’000 6,155 1,177
			7,332

Deferred income tax liabilities:

As the beginning of the year/period (Charged)/credited to consolidated income statement As the end of the year/period	As 2006 RMB’000 — (1,843) (1,843)	at 31 December 2007 2008 RMB’000 RMB’000 (1,843) (1,008) 835 (849) (1,008) (1,857)	As at 30 September 2009 RMB’000 (1,857) (178)
			(2,035)

— II-38 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

The deferred income taxes are provided for in respect of:

Deferred income tax assets: Impairment of assets Other temporary differences Deferred income tax liabilities: Accelerated tax depreciation	As 2006 RMB’000 3,608 2,548 6,156 (1,843)	at 31 December 2007 2008 RMB’000 RMB’000 4,386 6,084 2,322 71 6,708 6,155 (1,008) (1,857)	As at 30 September 2009 RMB’000 6,621 711
			7,332
			(2,035)

Target Company

The movement on the deferred income tax accounts is as follows:

Deferred income tax assets:

As the beginning of the year/period Credited/(charged) to income statement As the end of the year/period	As 2006 RMB’000 1,497 1,586 3,083	at 31 December 2007 2008 RMB’000 RMB’000 3,083 3,483 400 (973) 3,483 2,510	As at 30 September 2009 RMB’000 2,510 1,177
			3,687

— II-39 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Deferred income tax liabilities:

As the beginning of the year/period (Charged)/credited to income statement As the end of the year/period	As 2006 RMB’000 — (1,843) (1,843)	at 31 December 2007 2008 RMB’000 RMB’000 (1,843) (1,008) 835 (849) (1,008) (1,857)	As at 30 September 2009 RMB’000 (1,857) (178) (2,035)

The deferred income tax assets are provided for in respect of:

Deferred income tax assets: Impairment of assets Other temporary differences Deferred income tax liabilities: Accelerated tax depreciation	As 2006 RMB’000 1,241 1,842 3,083 (1,843)	at 31 December 2007 2008 RMB’000 RMB’000 1,527 2,440 1,956 70 3,483 2,510 (1,008) (1,857)	As at 30 September 2009 RMB’000 2,977 710 3,687 (2,035)

— II-40 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

12 Accounts receivable

Target Group

Trade and notes receivables, gross - Related parties (Note 35) - Third parties Less: provision for impairment	As 2006 RMB’000 105,852 182,573 288,425 (14,127) 274,298	at 31 December 2007 2008 RMB’000 RMB’000 121,773 174,434 251,833 347,106 373,606 521,540 (17,485) (25,473) 356,121 496,067	As at 30 September 2009 RMB’000 234,788 425,173 659,961 (33,215) 626,746

Target Company

Trade and notes receivables, gross - Related parties (Note 35) - Third parties Less: provision for impairment	As 2006 RMB’000 47,136 144,887 192,023 (8,361) 183,662	at 31 December 2007 2008 RMB’000 RMB’000 52,243 88,191 213,266 277,074 265,509 365,265 (10,186) (15,202) 255,323 350,063	As at 30 September 2009 RMB’000 114,328 338,562 452,890 (19,040) 433,850

(a) Substantially all the Target Group’s and the Target Company’s accounts receivable are denominated in RMB.
(b) The carrying amounts of the accounts receivable approximated their fair values.

— II-41 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(c) There is no concentration of credit risk with respect to the Target Group’s accounts receivable, as the Target Group has a large number of customers which are nationally dispersed. Ageing analysis of accounts receivable is as follows:

Target Group

Current to 1 year 1 to 2 years 2 to 3 years More than 3 years	As 2006 RMB’000 275,834 9,661 1,486 1,444 288,425	at 31 December 2007 2008 RMB’000 RMB’000 345,239 493,432 22,626 21,267 3,683 4,219 2,058 2,622 373,606 521,540	As at 30 September 2009 RMB’000 608,032 42,519 5,397 4,013
			659,961

Target Company

Current to 1 year 1 to 2 years 2 to 3 years More than 3 years	As 2006 RMB’000 189,026 2,344 394 259 192,023	at 31 December 2007 2008 RMB’000 RMB’000 257,097 351,566 7,339 11,045 883 2,298 190 356 265,509 365,265	As at 30 September 2009 RMB’000 438,458 10,257 3,515 660
			452,890

— II-42 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(d) As of 31 December 2006, 2007 and 2008 and 30 September 2009, certain accounts receivable were past due but not impaired. These relate mainly to a number of customers with the Target Group, for whom there is no recent history of default. The ageing analysis of these past due but not impaired accounts receivable is as follows:

Target Group

Current to 1 year 1 to 2 years	As 2006 RMB’000 18,357 5,958 24,315	at 31 December 2007 2008 RMB’000 RMB’000 17,113 38,256 18,306 15,438 35,419 53,694	As at 30 September 2009 RMB’000 51,656 35,056
			86,712

Target Company

Current to 1 year 1 to 2 years	As 2006 RMB’000 13,597 1,110 14,707	at 31 December 2007 2008 RMB’000 RMB’000 15,339 19,537 4,605 6,441 19,944 25,978	As at 30 September 2009 RMB’000 36,093 7,231
			43,324

— II-43 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(e) As of 31 December 2006, 2007 and 2008 and 30 September 2009, certain accounts receivable were impaired. The individually impaired receivable mainly relate to small customers which are in financial difficulties. The accounts of these impaired accounts receivable is as follows:

Target Group

Current to 1 year 1 to 2 years 2 to 3 years More than 3 years	As 2006 RMB’000 7,494 3,703 1,486 1,444 14,127	at 31 December 2007 2008 RMB’000 RMB’000 7,424 12,803 4,320 5,829 3,683 4,219 2,058 2,622 17,485 25,473	As at 30 September 2009 RMB’000 16,342 7,463 5,397 4,013
			33,215

Target Company

Current to 1 year 1 to 2 years 2 to 3 years More than 3 years	As 2006 RMB’000 6,474 1,234 394 259 8,361	at 31 December 2007 2008 RMB’000 RMB’000 6,379 7,944 2,734 4,604 883 2,298 190 356 10,186 15,202	As at 30 September 2009 RMB’000 11,839 3,026 3,515 660
			19,040

— II-44 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(f) Movements on the provision for impairment of accounts receivable are as follows:

Target Group

At 1 January Provision for impairment of accounts receivable Write-off At 31 December	As 2006 RMB’000 11,368 4,476 (1,717) 14,127	at 31 December 2007 2008 RMB’000 RMB’000 14,127 17,485 3,734 8,508 (376) (520) 17,485 25,473	As at 30 September 2009 RMB’000 25,473 7,744 (2)
			33,215

Target Company

At 1 January Provision for impairment of accounts receivable Write-off At 31 December	As 2006 RMB’000 5,932 3,303 (874) 8,361	at 31 December 2007 2008 RMB’000 RMB’000 8,361 10,186 2,062 5,016 (237) — 10,186 15,202	As at 30 September 2009 RMB’000 15,202 3,838 —
			19,040

— II-45 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

13 Other receivables and prepayments

Target Group

Other advances from related parties (Note 35) - Ultimate holding company - Fellow subsidiaries Other receivables *Target Company* Dividends receivable from subsidiaries Other advances from related parties (Note 35) - Ultimate holding company - Fellow subsidiaries Other receivables	As 2006 RMB’000 6,092 105 10,042 16,239 As 2006 RMB’000 — 5,882 104 6,090 12,076	at 31 December 2007 2008 RMB’000 RMB’000 18,511 21,294 — — 18,647 14,486 37,158 35,780 at 31 December 2007 2008 RMB’000 RMB’000 — — 300 — — — 5,508 9,234 5,808 9,234	As at 30 September 2009 RMB’000 3,561 8 23,929
			27,498
			As at 30 September 2009 RMB’000 2,882 2,200 8 19,251
			24,341

Note: Other advances mainly represent current account balances with the respective related parties which are unsecured, non-interest bearing and repayable on demand. Details of the balances with these related parties are disclosed in Note 35(b).

— II-46 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

14 Inventories

Target Group

					As at 30
	As	at 31 December			September
	2006	2007		2008	2009
	RMB’000	RMB’000	RMB’000		RMB’000
Raw materials	44,038	43,288		40,525	48,246
Work in progress	41,806	46,878		58,623	56,188
Finished goods	70,573	123,067	166,520		195,934
Consumables	9,737	1,429		427	458
	166,154	214,662	266,095		300,826
Less: provision for impairment	(622)	(737)		(1,065)	(805)
	165,532	213,925	265,030		300,021

The cost of inventories recognised as expense and included in cost of sales for years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 30 September 2009 amounted to RMB 425,986,000, RMB 467,790,000, RMB 633,489,000 , RMB 442,386,000 and RMB 552,855,000, respectively.

Target Company

				As at 30
	As	at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Raw materials	46,459	36,264	33,852	38,356
Work in progress	14,557	12,350	19,756	15,442
Finished goods	48,393	72,905	123,932	147,853
	109,409	121,519	177,540	201,651
Less: provision for impairment	(622)	(737)	(1,065)	(805)
	108,787	120,782	176,475	200,846

— II-47 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

15 Pledged deposits

Target Group and Target Company

As at 31 December 2006, 2007 and 2008 and 30 September 2009, trade finance facilities utilised by the Target Group for issuing notes payable to its suppliers amounting to RMB 49,606,000, RMB 79,760,000, RMB107,782,000 and RMB 146,062,000 were secured by these pledged deposits.

Pledged deposits earn interest at rates ranging from 0.72% to 0.81%, 0.72% to 0.81%, 0.36% to 2.25%, 0.36% to 2.25%, and 0.36% to 2.25% for the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 30 September 2009, respectively.

All of the pledged deposits are denominated in RMB. The conversion of RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC Government.

16 Term deposits with initial term of over three months

Target Group and the Target Company

The weighted average effective interest rate on term deposits with maturity ranging from three months to one year is 2.25% per annum for the year ended 31 December 2008 and the nine months ended 30 September 2009.

The balances were denominated in RMB. The conversion of Renminbi denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC Government.

— II-48 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

17 Cash and cash equivalents

Target Group

					As at 30
		As	at 31 December		September
		2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
Cash	in hand	141	591	288	153
Bank	deposits	171,949	577,072	292,425	187,328
		172,090	577,663	292,713	187,481
Cash	and bank balances denominated in:
RMB		166,652	565,233	282,274	166,438
USD		5,438	12,430	6,834	17,238
EUR		—	—	1,106	1,306
HKD		—	—	2,499	2,499
		172,090	577,663	292,713	187,481

Target Company

					As at 30
		As	at 31 December		September
		2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
Cash	in hand	118	510	242	9
Bank	deposits	121,483	542,620	165,848	106,104
		121,601	543,130	166,090	106,113
Cash	and bank balances denominated in:
RMB		116,163	530,769	158,149	87,771
USD		5,438	12,361	6,834	17,238
EUR		—	—	1,107	1,104
		121,601	543,130	166,090	106,113

Note: Bank balances earn interest at floating rates based on daily bank deposit rates. The conversion of RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by PRC government.

— II-49 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

18 Share capital

Target Company

									As at 30
						As	at 31 December		September
						2006	2007	2008	2009
						RMB’000	RMB’000	RMB’000	RMB’000
							(Note(a))	(Note(b))	(Note(c))
Registered,	issued	and	fully	paid	of
RMB1.00	each					89,000	119,000	178,500	267,750

Notes:

(a) On 18 October 2007, the Target Company issued 30,000,000 A shares in an initial public offering in the Shenzhen Stock Exchange raising net proceeds to the Target Company of approximately RMB 462,313,000.
(b) On 9 May 2008, a bonus issue of five bonus shares, credited as fully paid, for every ten shares were made by way of capitalisation of RMB 35,700,000 and RMB 23,800,000 as a debit to the capital reserve and as a distribution to shareholders, respectively, of the Target Company. These bonus shares rank pari passu in all respects with the existing ordinary shares.
(c) On 8 May 2009, a bonus issue of five bonus shares, credited as fully paid, for every ten shares were made by way of capitalisation of RMB 53,550,000 and RMB 35,700,000 as a debit to the capital reserve and as a distribution to shareholders, respectively, of the Target Company. These bonus shares rank pari passu in all respects with the existing ordinary shares.

— II-50 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

19 Reserves

Target Company

	Statutory and	Statutory and
	Capital	discretionary	Retained
	reserve	reserves	earnings	Total
	RMB’000	RMB’000	RMB’000	RMB’000
At 1 January 2006	13,591	73,987	32,107	119,685
Contribution from shareholder	55,600	—	—	55,600
Total comprehensive income	—	—	66,655	66,655
Transfer to reserves (note(b))	—	53,190	(53,190)	—
Dividends	—	—	(10,167)	(10,167)
At 31 December 2006	69,191	127,177	35,405	231,773
At 1 January 2007	69,191	127,177	35,405	231,773
Total comprehensive income	—	—	101,046	101,046
Issue of new shares	432,313	—	—	432,313
Transfer to reserves (note(b))	—	34,158	(34,158)	—
Dividends	—	—	(17,561)	(17,561)
At 31 December 2007	501,504	161,335	84,732	747,571
At 1 January 2008	501,504	161,335	84,732	747,571
Total comprehensive income	—	—	107,032	107,032
Transfer to reserves (note(b))	—	10,626	(10,626)	—
Bonus issue (Note 18(b))	(35,700)	—	(23,800)	(59,500)
Dividends	—	—	(11,900)	(11,900)
At 31 December 2008	465,804	171,961	145,438	783,203
At 1 January 2009	465,804	171,961	145,438	783,203
Deemed contribution (Note 22(g))	14,064	—	—	14,064
Total comprehensive income	—	—	90,303	90,303
Bonus issue (Note 18(c))	(53,550)	—	(35,700)	(89,250)
Dividends	—	—	(8,925)	(8,925)
At 30 September 2009	426,318	171,961	191,116	789,395

— II-51 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Notes:

(a) Movements in the reserves of the Target Group are set out in the consolidated statement of changes in equity.
(b) Capital reserve

Capital reserve of the Target Company represents the difference between the amount of share capital issued by the Target Company and the historical net value of the assets, liabilities and interests transferred to the Target Company upon its establishment; and the premium on issue of shares upon listing of the Target Company.

Pursuant to the PRC regulations and the Companies’ Articles of Association, each of the Target Group companies is required to transfer 10% of its profit for the year, as determined under the PRC Accounting Regulations, to a statutory common reserve fund until the fund balance exceeds 50% of the Target Group company’s registered capital. The statutory common reserve fund can be used to make good previous years’ losses, if any, and to issue new shares to shareholders in proportion to their existing shareholdings or to increase the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.

Each of the Target Group companies is also permitted to transfer a certain percentage of its profit for the year as determined under the PRC Accounting Regulations, to a discretionary common reserve fund. The transfer to this reserve is subject to approval at shareholders’ meetings.

(d) Deemed distribution to shareholder
(i) As mentioned in Note 1, the acquisition of equity interests in 瀋陽興華航空電器有限責任公司 by the Target Company is a business combination under common control. Accordingly, the financial statements of 瀋陽興華航空電器有限責任公司 have been included in the financial information throughout the Relevant Period by applying merger accounting. As such the consideration paid by the Target Company in 2007 is accounted for as a deemed distribution to shareholder.
(ii) In 2008, the Target Company further injected cash amounting to Rmb 113,508,000 as capital into the subsidiary, 瀋陽興華航空電器有限責任公司, thereby raising its shareholding in this company from 20% to 51% and diluting the remaining interests in this company held by AVIC from 80% to 49%. Therefore, this is a deemed acquisition of business from AVIC and is accounted for as a business combination under common control. The premium representing the excess of the cash consideration paid over the 31% of the net assets value of the subsidiary at the time of acquisition is being reflected as a deemed distribution to shareholder.

— II-52 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

20 Accounts payable

Target Group

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Trade and notes payables
- Related parties (Note 35(b))	1,651	722	2,880	5,757
- Third parties	156,657	197,502	274,829	363,816
	158,308	198,224	277,709	369,573

Target Company

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Trade and notes payables
- Related parties (Note 35(b))	947	141	1,421	3,624
- Third parties	145,108	179,914	244,499	307,869
	146,055	180,055	245,920	311,493

— II-53 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Note:

(a) The normal credit period for trade payables generally ranges from 1 to 6 months. Ageing analysis of trade payables is as follows:

Target Group

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Current to 1 years	153,221	191,541	267,024	351,196
1 to 2 years	1,452	2,665	6,120	13,084
2 to 3 years	248	666	1,346	1,211
Over 3 years	3,387	3,352	3,219	4,082
	158,308	198,224	277,709	369,573

Target Company

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Current to 1 years	144,781	177,182	240,300	302,372
1 to 2 years	838	1,990	4,267	7,210
2 to 3 years	96	557	995	573
More than 3 years	340	326	358	1,338
	146,055	180,055	245,920	311,493

(b) Substantially all of the notes payable are bank acceptance notes with average maturity period of within six months.
(c) Trade payables to related parties are unsecured, non-interest bearing and will be settled in accordance with the relevant trading terms.
(d) The carrying amounts of accounts payable approximate their fair values.

— II-54 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

21 Other payables and accruals

Target Group

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Wages, salaries and bonus payables	44,082	22,328	19,167	21,736
Deferred income from government grants	1,089	1,915	4,014	5,839
Consumption tax, business tax and other
taxes payable	1,255	2,385	3,292	6,111
Other advances (note (i))
- Ultimate holding company	16,082	32,310	12,523	14,613
- Fellow subsidiaries	31,128	30,190	33,220	31,304
Other current liabilities	19,737	19,979	10,545	12,070
	113,373	109,107	82,761	91,673

Target Company

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Wages, salaries and bonus payables	43,011	21,017	16,470	20,579
Deferred income from government grants	771	771	771	771
Consumption tax, business tax and other
taxes payable	976	2,254	1,394	3,787
Other advances (note (i))
- Ultimate holding company	15,279	30,930	12,143	13,969
Other current liabilities	6,394	8,986	6,350	4,663
	66,431	63,958	37,128	43,769

Notes:

(i) Other advances mainly represent current account balances with the respective related parties which are unsecured, non-interest bearing and are repayable on demand. Details of the balances with these related parties are disclosed in Note 35(b).

— II-55 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

22 Borrowings

Target Group

					As at 30
	Note	As	at 31 December		September
		2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
Non-current
Secured bank borrowings	(a)	12,190	6,190	—	15,080
Unsecured bank borrowings		—	—	—	50,000
Unsecured other borrowings	(c)	—	—	—	254,550
Total non-current borrowings		12,190	6,190	—	319,630
Current
Current portion of long-term secured
bank borrowings	(a)	5,850	6,000	2,000	2,000
Current portion of long-term unsecured
bank borrowings		17,000	—	—	—
Short-term secured bank borrowings	(a)	61,000	10,000	—	—
Short-term unsecured bank borrowings		84,000	201,000	130,000	90,000
Unsecured other borrowings	(b)	—	—	100,000	—
Total current borrowings		167,850	217,000	232,000	92,000
Total borrowings		180,040	223,190	232,000	411,630

— II-56 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Target Company

					As at 30
	Note	As	at 31 December		September
		2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
Non-current
Secured bank borrowings	(a)	8,190	4,190	—	—
Unsecured bank borrowings		—	—	—	—
Unsecured other borrowings	(c)	—	—	—	205,936
Total non-current borrowings		8,190	4,190	—	205,936
Current
Current portion of long-term secured
bank borrowings	(a)	3,000	4,000	—	—
Current portion of long-term unsecured
bank borrowings		17,000	—	—	—
Short-term secured bank borrowings	(a)	21,000	—	—	—
Short-term unsecured bank borrowings		21,000	81,000	—	—
Unsecured other borrowings	(b)	—	—	100,000	—
Total current borrowings		62,000	85,000	100,000	—
Total borrowings		70,190	89,190	100,000	205,936

Notes:

(a) Target Group’s long-term and short-term borrowings are secured as follows:

								As at 30
					As	at 31 December		September
				2006		2007	2008	2009
				RMB’000		RMB’000	RMB’000	RMB’000
Securities	over	accounts	receivable	32,190		8,190	—	—

— II-57 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Guarantees provided by
- Ultimate holding company	6,850	4,000	2,000	17,080
- Fellow subsidiaries	40,000	10,000	—	—
	46,850	14,000	2,000	17,080

Target Company’s long-term and short-term borrowings are secured as follows:

								As at 30
					As	at 31 December		September
				2006		2007	2008	2009
				RMB’000		RMB’000	RMB’000	RMB’000
Securities	over	accounts	receivable	32,190		8,190	—	—

(b) As at 31 December 2008, unsecured other short-term borrowings of the Target Group and the Target Company represented a loan granted by a fellow subsidiary of the Target Group which bears interest at 5.3% per annum and repayable in 2009.
(c) As at 30 September 2009, unsecured other long-term borrowings of the Target Group amounting to RMB254,550,000 and the Target Company amounting to RMB205,936,000 represented loans granted by a fellow subsidiary of the Group which bear interest ranged from 3.5% to 4.0% per annum and repayable within 5 years.
(d) The maturities of the Target Group’s total borrowings are set out as follows:

Target Group

					As at 30
			As at 31 December		September
		2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
-	Within 1 year	167,850	217,000	232,000	92,000
-	Between 1 and 2 years	6,000	6,190	—	—
-	Between 2 and 5 years	6,190	—	—	319,630
		180,040	223,190	232,000	411,630

— II-58 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

Target Company

					As at 30
			As at 31 December		September
		2006	2007	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000
-	Within 1 year	62,000	85,000	100,000	—
-	Between 1 and 2 years	4,000	4,190	—	—
-	Between 2 and 5 years	4,190	—	—	205,936
		70,190	89,190	100,000	205,936

(e) All the Target Group’s and the Target Company’s borrowings are denominated in RMB.
(f) The weighted average effective interest rates (per annum) at the balance sheet date are set out as follows:

Target Group

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
Bank borrowings	6.52%	7.23%	6.64%	7.34%
Other borrowings	—	—	5.30%	5.50%
*Target Company*
				As at 30
		As at 31 December		September
	2006	2007	2008	2009
Bank borrowings	6.13%	6.07%	5.81%	—
Other borrowings	—	—	5.30%	5.50%

(g) Current

The carrying amounts of short-term and current portion of long-term bank borrowings of the Target Group and the Target Company approximated their fair values.

Non-current

The fair values of non-current bank borrowings of the Target Group were RMB 12,000,000, RMB 6,123,000 and RMB 64,350,000 as at 31 December 2006, 2007 and 30 September 2009 respectively.

Non-current other borrowings of the Target Group represented loans from a fellow subsidiary granted near to 30 September 2009. The total face value is RMB 270,000,000 and the difference of RMB 15,450,000 (as a result of the interest differential between the market rate of 5.50% and contractual rate of 3.90%) was regarded as a deemed contribution.

— II-59 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

The fair values of non-current bank borrowings of the Target Company were RMB 8,000,000 and RMB 4,123,000 as at 31 December 2006 and 31 December 2007 respectively.

Non-current other borrowings of the Target Company represented loans from a fellow subsidiary granted near to 30 September 2009. The total face value is RMB 220,000,000 and the difference of RMB 14,064,000 (as a result of the interest differential between the market rate of 5.50% and contractual rate of 3.51%) was regarded as a deemded contribution.

The fair values of non-current borrowings are estimated based on discounted cash flow approach using the prevailing market rates of interest available to the Target Group and the Target Company for financial instruments with substantially the same terms and characteristics at the respective balance sheet dates.

23 Government grants

Deferred government grants are mainly related to purchase of property, plant and equipment and land use rights which are credited to the income statement as other income on a straight-line basis over the expected lives of the related assets.

	For	the year ended	the year ended	the year ended	the year ended		Nine months ended	Nine months ended
	31 December						30 September
	2006			2007		2008	2008	2009
	RMB’000		RMB’000		RMB’000		RMB’000	RMB’000
						(Unaudited)
Other income
- relating to government grants	7,996			18,632	17,704		7,004	10,904
Other gains/(losses), net
							Nine	months
	For		the year ended				ended
		31		December			30 September
	2006			2007		2008	2008	2009
	RMB’000		RMB’000		RMB’000		RMB’000	RMB’000
						(Unaudited)
Gain/(loss) on disposal of
property, plant and equipment	678			(122)		136	303	(221)
Net foreign exchange (loss)/gain	(97)			(480)		(801)	(709)	7
Profit from sale of scrap materials	3,857			4,380		7,086	5,422	5,894
	4,438			3,778		6,421	5,016	5,680

24 Other gains/(losses), net

— II-60 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

25 Expenses by nature

	For	the year ended	the year ended	Nine months ended	Nine months ended
	31 December			30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
			(Unaudited)
Advertising	4,524	4,337	5,203	2,193	1,054
Amortisation of intangible assets
(note 9)	692	981	2,349	995	1,787
Amortisation of land use rights
(note 7)	324	480	1,499	1,124	1,123
Changes in inventories of finished
goods and work-in-progress	(28,350)	(57,566)	(55,198)	(55,451)	(26,979)
Depreciation of property,plant and
equipment (note 8)	33,652	35,009	39,555	29,414	38,162
Employee benefit expenses
(note 26)	159,848	173,260	210,054	132,233	196,062
Fuel	52,892	53,396	72,802	52,346	54,369
Office expenses	18,510	30,284	36,774	26,031	24,753
Operating leases expenses	643	2,005	1,554	1,059	2,939
Provision for impairment of
receivables (note 12)	4,476	3,734	8,508	9,789	7,744
Provision/(reversal of provision)
for impairment of inventories	2,702	115	3,117	(737)	(260)
Raw materials and consumables
used	303,710	349,226	463,303	343,824	396,049
Repairs and maintenance	6,974	7,270	9,433	6,650	4,043
Research and development costs	11,844	17,775	20,800	27,030	20,823
Sundries	18,438	17,618	29,573	20,749	18,981
Transportation costs	3,510	5,258	7,897	5,307	7,989
Travelling	24,155	21,996	23,835	17,075	16,112
Total cost of sales, selling and
distribution expenses and
general and administrative
expenses	618,544	665,178	881,058	619,631	764,751

— II-61 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

26 Employee benefit expenses (including directors’ emoluments)

	For	the year ended	the year ended	Nine months ended	Nine months ended
	31 December			30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Salaries, wages and bonuses	105,295	129,000	153,722	100,023	142,539
Contributions to retirement
contribution plan	32,208	34,526	40,822	23,006	35,974
Welfare and other expenses	22,345	9,734	15,510	9,204	17,549
	159,848	173,260	210,054	132,233	196,062

— II-62 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

27 Directors’, supervisors’ and senior management’s emoluments

(a) Directors’ emoluments

The emoluments of each of the directors and supervisors of the Target Company for the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 30 September 2009 are set out below.

	Year ended 31 December	Year ended 31 December	2006
	Basic salaries,
	housing
	allowance, other	Employer’s
	allowances	contributions
	and benefits	to retirement
Name	in kind	schemes	Total
	RMB’000	RMB’000	RMB’000
Executive directors
Li Juwen	280	12	292
Wang Yujie	15	—	15
Gan Fengqi	15	—	15
Kang Rui	15	—	15
Chang Huaizhong	—	—	—
Chen Guanjun	—	—	—
Zhou Guoqiang	—	—	—
Yuan Shunxing	—	—	—
Hu Yusheng	—	—	—
Supervisors
Cao Hewei	226	13	239
Xi Mingqiang	62	12	74
Wang Yanyang	60	13	73
Li Zexing	—	—	—
Zhang Hu	—	—	—
Xie Tieshan	—	—	—
Xu Xuanzhi	—	—	—
Rong Yichao	—	—	—
	673	50	723

— II-63 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Name Executive directors Li Juwen Wang Yujie Gan Fengqi Kang Rui Li Bing Chen Lijuan Yuan Shunxing Hu Yusheng Zhou Guoqiang Supervisors Cao Hewei Xi Mingqiang Wang Yanyang Li Zexing Zhang Hu Xie Tieshan Xu Xuanzhi Rong Yichao	Year ended 31 December 2007	Year ended 31 December 2007
	Basic salaries, housing allowance, other allowances and benefits in kind Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 298 14 312 50 — 50 50 — 50 50 — 50 — — — — — — — — — — — — — — — 248 14 262 108 13 121 109 13 122 15 — 15 — — — — — — — — — — — — 928 54 982
		982

— II-64 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Name Executive directors Li Juwen Wang Yujie Gan Fengqi Kang Rui Li Bing Chen Lijuan Yuan Shunxing Hu Yusheng Zhou Guoqiang Supervisors Cao Hewei Xi Mingqiang Wang Yanyang Li Zexing Zhang Hu Xie Tieshan Xu Xuanzhi Rong Yichao	Year ended 31 December 2008	Year ended 31 December 2008
	Basic salaries, housing allowance, other allowances and benefits in kind Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 281 22 303 50 — 50 50 — 50 50 — 50 — — — — — — — — — — — — — — — 242 22 264 117 18 135 126 18 144 15 — 15 — — — — — — — — — — — — 931 80 1,011
		1,011

— II-65 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Name Executive directors Li Juwen Wang Yujie Gan Fengqi Kang Rui Li Bing Chen Lijuan Yuan Shunxing Hu Yusheng Zhou Guoqiang Supervisors Li Zexing Cao Hewei Xi Mingqiang Wang Yanyang Zhang Hu Xie Tieshan Xu Xuanzhi Rong Yichao	Nine months ended 30 September 2008 (Unaudited)	Nine months ended 30 September 2008 (Unaudited)
	Basic salaries, housing allowance, other allowances and benefits in kind Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 171 39 210 38 — 38 38 — 38 38 — 38 — — — — — — — — — — — — — — — 11 — 11 148 34 182 71 17 88 75 19 94 — — — — — — — — — — — — 590 109 699
		699

— II-66 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Name Executive directors Li Juwen Wang Yujie Gan Fengqi Kang Rui Li Bing Chen Lijuan Yuan Shunxing Hu Yusheng Zhou Guoqiang Supervisors Li Zexing Cao Hewei Xi Mingqiang Wang Yanyang Zhang Hu Xie Tieshan Xu Xuanzhi Rong Yichao	Nine months ended 30 September 2009	Nine months ended 30 September 2009
	Basic salaries, housing allowance, other allowances and benefits in kind Employer’s contributions to retirement schemes Total RMB’000 RMB’000 RMB’000 225 56 281 50 — 50 50 — 50 50 — 50 — — — — — — — — — — — — — — — 15 — 15 193 49 242 93 24 117 100 26 126 — — — — — — — — — — — — 776 155 931
		931

— II-67 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Target Group for the year/period are as follows:

Number of individuals

In the capacity as: Director Senior management	For the year ended 31 December Nine months ended 30 September 2006 2007 2008 2008 2009 (Unaudited) 1 1 1 1 1 4 4 4 4 4 5 5 5 5 5	For the year ended 31 December Nine months ended 30 September 2006 2007 2008 2008 2009 (Unaudited) 1 1 1 1 1 4 4 4 4 4 5 5 5 5 5
		5

The five individuals included one director whose emolument is reflected in the analyses presented above. The emoluments payable to the remaining four individuals during the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 30 September 2009 are as follows:

	For the year ended	For the year ended	For the year ended	Nine months ended	Nine months ended
		31 December		30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Basic salaries, housing
allowance, other allowances
and benefits in kind	632	718	740	625	701
Contributions to retirement
schemes	398	382	300	155	339
	1,030	1,100	1,040	780	1,040

— II-68 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

The emoluments fell within the following band:

Nil - HKD 1,000,000	Number of individuals
	For the year ended 31 December Nine months ended 30 September 2006 2007 2008 2008 2009 (Unaudited) 4 4 4 4 4

(c) No directors or supervisors of the Target Company waived any emoluments during the Relevant Period and no emoluments have been paid by the Target Group to the directors or supervisors of the Target Company or any of the five highest paid individuals as an inducement to join or upon joining the Target Group or as compensation for loss of office.

— II-69 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

28 Finance income and finance costs

Target Group

		Nine months
For the year ended		ended
31 December		30 September
2006 2007	2008	2008 2009
_RMB’000 RMB’000 RMB’000 _		RMB’000 RMB’000
	(Unaudited)

Finance income:

Interest income on bank balances and deposits Finance costs: Interest expense on bank borrowings - Wholly repayable within 5 years Interest expense on other borrowings - Not wholly repayable within 5 years Less: Amount capitalised in property, plant and equipment (Note) Other finance costs	1,021 11,737 — 11,737 (1,280) 10,457 160 10,617	1,668 14,562 — 14,562 (1,343) 13,219 327 13,546	6,122 18,647 — 18,647 (5,241) 13,406 477 13,883	2,257 14,885 — 14,885 (5,087) 9,798 135 9,933	2,774
					14,917 4,550
					19,467 (9,093)
					10,374 622
					10,996

— II-70 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

Note:

				Nine months ended	Nine months ended
	For the	year ended 31 December		30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Interest rates per annum at which
finance costs were capitalised	5.43%-7.78%	5.43%-7.78%	5.98%-7.78%	5.98%-7.78%	4.20%-7.34%

29 Income tax expense

Target Group

Companies of the Target Group are subject to PRC enterprise income tax, which has been provided based on the enterprise income tax rate of 33%, 33%, 25%, 25% and 25% of the assessable income of each of these companies during the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 30 September 2009, respectively as determined in accordance with the relevant PRC income tax rules and regulations except for the Target Company which was taxed at preferential rate during the Relevant Period .

Pursuant to the approval of State Administration of Taxation and according to the related regulations in respect of preferential tax benefit for enterprises engaged in high-tech business, the Target Company is eligible to enjoy a preferential tax rate of 15% during the Relevant Period.

	For the year ended	For the year ended	For the year ended	Nine months ended	Nine months ended
		31 December		30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Current income tax	13,158	21,743	26,336	28,177	12,163
Deferred income tax charge/
(credit) (Note 11)	8,846	(1,387)	1,402	894	(999)
	22,004	20,356	27,738	29,071	11,164

— II-71 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

The tax on the Target Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:

	For	the year ended	the year ended	Nine months ended	Nine months ended
	31 December			30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
			(Unaudited)
Profit before income tax	105,835	123,236	150,403	106,482	104,344
Tax calculated at PRC statutory
tax rate	34,926	40,659	37,601	26,621	26,086
Income not subject to taxation	(2,639)	(6,149)	(4,426)	(1,751)	(2,726)
Expenses not deductible for tax
purposes	7,278	5,521	8,265	4,201	2,485
Effect of preferential tax rates	(17,561)	(19,675)	(13,702)	—	(14,681)
Income tax expense	22,004	20,356	27,738	29,071	11,164

30 Profit attributable to equity holders of the Target Company

The profit attributable to equity holders of the Target Company is dealt with in the financial statements of the Target Company to the extent of a profit of RMB 66,655,000, RMB 101,064,000, RMB107,032,000, RMB 87,327,000, and RMB 90,303,000 for the years ended 31 December 2006, 2007 and 2008 and the nine months ended 30 September 2008 and 30 September 2009 respectively.

— II-72 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

31 Earnings per share

Earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of ordinary shares in issue during the Relevant Period.

	For the year ended	For the year ended	For the year ended	Nine months ended	Nine months ended
		31 December		30 September
	2006	2007	2008	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
				(Unaudited)
Profit attributable to equity holders	75,921	100,593	115,583	72,673	89,829
*Weighted average number of
ordinary shares in issue (’000)	200,250	211,500	267,750	267,750	267,750

Adjusted for bonus issues

As there are no potentially dilutive securities, there is no difference between the basic and diluted earnings per share.

32 Dividends

		For the year ended	For the year ended	For the year ended	Nine months ended	Nine months ended
			31 December		30 September
		2006	2007	2008	2008	2009
		RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
					(Unaudited)
Dividends	attributable to equity
holders	of the Target Company	10,167	17,561	11,900	11,900	8,925
Dividends	per share (cents)	1.45	2.10	1.00	1.00	5.00

— II-73 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

33 Notes to the consolidated cash flow statements

Reconciliation of profit before income tax to net cash generated from operations is provided as follows:

	For the year ended Nine months ended	For the year ended Nine months ended	For the year ended Nine months ended	For the year ended Nine months ended	For the year ended Nine months ended
	31 December			30 September
	2006	2007	2008	2008	2009
	_RMB’000 RMB’000 _		_RMB’000 _	_RMB’000 _	RMB’000
			(Unaudited)
Profit for the year/period	83,831	102,880	122,665	77,411	93,180
Adjustments for:
Income tax expense	22,004	20,356	27,738	29,071	11,164
(Gain)/loss on disposal of property,
plant and equipment	(678)	122	(136)	(303)	221
Amortisation of
- land use rights	324	480	1,499	1,124	1,123
- intangible assets	692	981	2,349	995	1,787
Depreciation of property, plant and
equipment	33,652	35,009	39,555	29,414	38,162
Provision/(reversal of provision) for
impairments of
- receivables	4,476	3,734	8,508	9,789	7,744
- inventories	2,702	115	3,117	(737)	(260)
Interest income	(1,021)	(1,668)	(6,122)	(2,257)	(2,774)
Interest expense	11,737	14,562	18,647	14,885	19,467
	157,719	176,571	217,820	159,392	169,814
Changes in working capital
- Increase in accounts receivable	(61,561)	(85,181)	(147,934)	(159,514)	(138,421)
- (Increase)/decrease in other
receivables, prepayments and other
current assets	(12,509)	(102,084)	22,662	(13,972)	(1,176)
- Increase in inventories	(53,855)	(48,508)	(51,433)	(63,217)	(34,731)
- Decrease/(increase) in pledged
deposits	6,009	(2,113)	(62)	(3,896)	(72,213)
- (Decrease)/increase in accounts
payables	(18,581)	39,916	79,485	41,541	91,864
- Increase/(decrease) in advances from
customers, other payables and
accruals	57,139	1,478	(25,522)	(28,518)	11,206
- Increase/(decrease) in deferred
income from government grants	12,270	69,731	44,208	7,905	(5,861)
Cash generated from/(used in) operations	86,631	49,810	139,224	(60,279)	20,482

— II-74 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

34 Commitments

(a) Capital commitments

The Target Group and the Target Company has the following capital commitments not provided for:

Target Group

				As at 30
	As at 31 December			September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Acquisition of property, plant and
equipment
- Contracted but not provided for	7,569	15,762	104,072	63,396
*Target Company*
				As at 30
	As at 31 December			September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Acquisition of property, plant and
equipment
- Contracted but not provided for	7,569	15,762	35,123	5,230

— II-75 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(b) Operating lease commitments

The Target Group and the Target Company has commitments to make the following future minimum lease payments under non-cancellable operating leases as follows:

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Land and buildings
- Not later than one year	643	2,005	1,554	2,939
- Later than one year and not
later than five years	—	97	891	849
	643	2,102	2,445	3,788

35 Significant related party transactions

The Target Group is controlled by AVIC during the Relevant Period. Related parties refer to entities in which AVIC has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions; or directors or officers of the Target Company and of its ultimate holding company. Given that the PRC government still owns a significant portion of the productive assets in the PRC despite the continuous reform of the government structure, a majority of the Target Group’s business activities had been conducted with enterprises directly or indirectly owned or controlled by the PRC government (“state-owned enterprises”), including AVIC, its subsidiaries and associates in the ordinary course of business.

In accordance with IAS 24, “Related Party Disclosures”, state-owned enterprises and their subsidiaries, other than entities under AVIC (also a state-owned enterprise), directly or indirectly controlled by the PRC government are also defined as related parties of the Target Group. Neither AVIC nor the PRC government publishes financial statements for public use. In the normal course of the Target Group’s business, it may either enter into various transactions with one or more of such state-owned enterprises and their subsidiaries.

The following is a summary of significant related party transactions entered into in the ordinary course of business between the Target Group and its related parties and the balances arising from related party transactions in addition to the related party information shown elsewhere in the financial statements. Management of the Target Group are of the opinion that meaningful information relating to related party disclosures has been adequately disclosed.

— II-76 —

APPENDIX II

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

(a) Significant transactions with related parties:

	For the year ended	For the year ended	For the year ended	Nine months ended	Nine months ended
	31	December		30 September
	2006	2007	2008	2008	2009
	_RMB’000 _	_RMB’000 RMB’000 _		_RMB’000 _	RMB’000
			(Unaudited)
Income
Revenue from sale of goods and
materials
- Fellow subsidiaries	177,328	156,454	235,314	142,824	144,686
- Other state-owned enterprises	100,746	88,398	137,451	103,089	198,275
Expenses
Purchases of goods and raw
materials
- Fellow subsidiaries	6,100	168	13,857	10,342	14,799
- Other state-owned enterprises	818	2,021	358	2,519	3,136
Service fees payable
- Ultimate holding company	750	1,000	—	500	—
Interest expense
- Other state-owned enterprises	9,270	10,488	11,164	7,668	7,425
Key management compensations
- Salaries, bonuses and other
welfares	6,850	1,168	13,857	10,893	14,799

Notes: In the opinion of the directors of the Target Company, the above transactions were carried out in the ordinary course of the Target Group’s business and were determined based on mutually agreed terms.

— II-77 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

(b) Significant balances with related parties:

Target Group

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Assets
Accounts receivable
- Fellow subsidiaries	56,277	62,011	104,610	131,190
- Other state-owned enterprises	46,725	53,972	47,448	83,579
Notes receivable
- Fellow subsidiaries	2,850	5,790	22,376	20,019
Advances to suppliers
- Fellow subsidiaries	1,755	857	10,900	10,828
- Other state-owned enterprises	386	420	102	329
Other receivables and prepayments
- Ultimate holding company	6,092	18,511	21,294	3,561
- Fellow subsidiaries	105	—	—	8
Pledged deposits
- Other state-owned enterprises	29,907	32,020	32,082	96,751
Term deposits with initial term of
over three months
- Other state-owned enterprises	—	—	170,000	268,363
Cash and cash equivalents deposited
with
- Other state-owned enterprises	156,602	571,886	275,150	185,606

— II-78 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Liabilities
Accounts payable
- Fellow subsidiaries	514	350	2,018	3,146
- Other state-owned enterprises	1,137	372	862	2,611
Advances from customers
- Fellow subsidiaries	901	1,989	1,310	3,256
- Other state-owned enterprises	2,513	3,662	3,770	6,270
Other payables and accruals
- Ultimate holding company	16,082	32,310	12,523	14,613
- Fellow subsidiaries	31,128	30,190	33,220	31,304
Borrowings
- Other state-owned enterprises	180,040	223,190	132,000	157,000
- Fellow subsidiaries	—	—	100,000	254,550

— II-79 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

Target Company

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Assets
Accounts receivable
- Fellow subsidiaries	27,368	29,116	48,780	59,428
- Other state-owned enterprises	16,918	17,337	17,035	34,881
Notes receivable
- Fellow subsidairies	2,850	5,790	22,376	20,019
Advances to suppliers
- Fellow subsidiaries	590	857	10,900	27
- Other state-owned enterprises	386	420	102	329
Other receivables and prepayments
- Ultimate holding company	5,882	300	—	2,200
- Fellow subsidiaries	104	—	—	8
Pledged deposits
- Other state-owned enterprises	29,907	32,020	32,082	96,751
Term deposits with initial term of
over three months
- Other state-owned enterprises	—	—	170,000	268,363
Cash and cash equivalents deposited
with
- Other state-owned enterprises	110,657	537,699	156,125	105,052

— II-80 —

ACCOUNTANT’S REPORT OF JONHON OPTRONIC

APPENDIX II

				As at 30
		As at 31 December		September
	2006	2007	2008	2009
	RMB’000	RMB’000	RMB’000	RMB’000
Liabilities
Accounts payable
- Fellow subsidiaries	141	98	1,332	2,212
- Other state-owned enterprises	806	43	89	1,412
Advances from customers
- Fellow subsidiaries	103	7	451	2,166
- Other state-owned enterprises	124	397	195	2,684
Other payables and accruals
- Ultimate holding company	15,279	30,930	12,143	13,969
Borrowings
- Other state-owned enterprises	70,190	89,190	—	—
- Fellow subsidiaries	—	—	100,000	205,936

36 Particulars of principal subsidiary

Issued Attributable and paid up equity Type of Company name capital interest legal entity Principal activities Auditor Years of audit (RMB’000) 瀋陽興華航空電器 61,265 51% Limited Manufacture and RSM China 2006, 有限責任公司 liability sale of aircraft Certified Public 2007,2008 company electric equipment Accountants

III SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Company or any of the companies now comprising the Target Group in respect of any period subsequent to 30 September 2009. No dividend or distribution has been declared or made by the Target Company in respect of any period subsequent to 30 September 2009.

Yours faithfully, PricewaterhouseCoopers Certified Public Accountants Hong Kong

— II-81 —

APPENDIX III UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

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

Introduction

The following unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group (“Unaudited Pro Forma Financial Information”) have been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the Proposed Disposal and Proposed Acquisition (collectively “the Proposed Transactions”) as if they had taken place on 30 June 2009. The Unaudited Pro Forma Financial Information has been prepared for illustrative purpose only and because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group had the Proposed Transactions been completed as at 30 June 2009 or at any future dates.

This Unaudited Pro Forma Financial Information has been prepared using the accounting policies consistent with that of the Group as set out in the published annual report of the Group for the year ended 31 December 2008, after making certain pro forma adjustments as set out in the notes below.

The Unaudited Pro Forma Financial Information is based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2009 as extracted from the interim report of the Company for the six months ended 30 June 2009, the unaudited consolidated balance sheet of Dongan Motor and its subsidiaries (collectively, the “Disposed Group”) as at 30 June 2009 as extracted from the management accounts of the Company, and the audited consolidated balance sheet of JOHNON Optronic (the “Target Company”) as at 30 September 2009 as extracted from the accountants’ report of JOHNON Optronic and its subsidiaries (collectively, the “Target Group”) as set out in Appendix II to this circular.

Prior to the Proposed Transactions, AVIC directly holds 43.34% equity interest in JONHON Optronic and indirectly holds 5.45% equity interest in JONHON Optronic through the Concert Parties. Notwithstanding AVIC controls only 48.79% equity interests in JONHON Optronic, AVIC has de facto control over JONHON Optronic. The Company expects to continue to have de facto control over JONHON Optronic immediately after the acquisition of JONHON Optronic from AVIC. Accordingly, the Proposed Acquisition has been accounted for using merger accounting given that the Company and

— III-1 —

APPENDIX III UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

the Target Company are under common control of AVIC before and after the Proposal Acquisition. Please refer to the details of the Company’s analysis of de facto control over JONHON Optronic as set out in Section D “Effects and Financial Implications of the Disposal” of Letter from the Board to this circular.

Pro forma adjustments

		Unaudited	Audited
	Unaudited	consolidated	consolidated
	consolidated	statement of	statement of
	statement of	assets and	assets and			Pro forma
	assets and	liabilities of	liabilities of			consolidated
	liabilities of	the Disposed	the Target			balances of
	the Group as	Group as at	Group as at	Other pro		the Enlarged
	at 30 June	30 June	30 September	forma		Group as at
	2009	2009	2009	adjustments		30 June 2009
	RMB’000	RMB’000	RMB’000	RMB’000		RMB’000
	(Note 1)	(Note 2)	(Note 3)
ASSETS
Non-current assets
Property, plant and equipment	5,645,815	1,473,343	535,805			4,708,277
Investment properties	48,720	—	—			48,720
Land use rights	260,440	65,624	70,126			264,942
Intangible assets	222,516	—	9,577			232,093
Interests in associates	332,779	22,389	—			310,390
Available-for-sale financial assets	433,628	—	—			433,628
Deferred income tax assets	86,332	58,085	7,332			35,579
	7,030,230	1,619,441	622,840	—		6,033,629
	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -		- - - - - - - - - - -
Current assets
Accounts receivable	3,268,455	2,265,530	626,746			1,629,671
Advance to suppliers	552,392	20,355	44,061			576,098
Other receivables & prepayments	1,500,251	25,134	27,498	70,000	(Note 4(b)(i))	1,572,615
Inventories	4,633,119	642,458	300,021			4,290,682
Financial assets held for trading	3,183	—	—			3,183
Pledged deposits	407,408	188,865	240,580			459,123
Term deposits with initial term of
over three months	1,903,891	579,547	132,078			1,456,422
				593,615	(Note 4(a)(i))
Cash and cash equivalents	2,281,492	1,170,489	187,481	(334,855)	(Note 4(a)(ii))	1,557,244
	14,550,191	4,892,378	1,558,465	328,760		11,545,038
	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -		- - - - - - - - - - -
TOTAL ASSETS	21,580,421	6,511,819	2,181,305	328,760		17,578,667

— III-2 —

APPENDIX III

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

		Pro forma adjustments	Pro forma adjustments	Pro forma adjustments
		Unaudited	Audited
	Unaudited	consolidated	consolidated
	consolidated	statement of	statement of
	statement of	assets and	assets and			Pro forma
	assets and	liabilities of	liabilities of			consolidated
	liabilities of	the Disposed	the Target			balances of
	the Group as	Group as at	Group as at	Other pro		the Enlarged
	at 30 June	30 June	30 September	forma		Group as at
	2009	2009	2009	adjustments		30 June 2009
	RMB’000	RMB’000	RMB’000	RMB’000		RMB’000
	(Note 1)	(Note 2)	(Note 3)
LIABILITIES
Non-current liabilities
Long-term borrowings	1,397,855	—	319,630			1,717,485
Deferred income from government
grants	176,734	—	120,348			297,082
Deferred income tax liabilities	44,339	—	2,035			46,374
	1,618,928	—	442,013	—		2,060,941
	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -		- - - - - - - - - - -
Current liabilities
Accounts payable	5,989,427	1,535,590	369,573	1,057,111	(Note 4(b)(ii))	5,880,521
Advances from customers	904,673	40,473	16,270			880,470
Other payables and accruals	1,511,692	792,891	91,673			810,474
Amounts payable to ultimate
holding company	370,524	—	—			370,524
Provisions	178,279	84,405	—			93,874
Current portion of non-current
borrowings	303,000	—	2,304			305,304
Short-term borrowings	4,072,810	537,140	90,000			3,625,670
Current income tax liabilities	82,407	54,629	2,000			29,778
	13,412,812	3,045,128	571,820	1,057,111		11,996,615
	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -	- - - - - - - - - - -		- - - - - - - - - - -
Total liabilities	15,031,740	3,045,128	1,013,833	1,057,111		14,057,556

Notes:

1 The balances are extracted from the unaudited consolidated balance sheet of the Company as at 30 June 2009 as set out in the Company’s interim report for the six months ended 30 June 2009.
2 The balances are extracted from the unaudited consolidated balance sheet of the Disposed Group as at 30 June 2009 and these are deducted from the Group’s assets and liabilities.

— III-3 —

APPENDIX III UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

3 The adjustment represents the inclusion of the statement of assets and liabilities of the Target Group as at 30 September 2009 as extracted from the accountants’ report of the Target Group as set out in Appendix II to this circular, and is added to the Group’s assets and liabilities.
4 (a) These adjustments represent cash:
- (i) to be settled by AVIC upon Completion of the Proposed Transactions, which is calculated by the difference between the consideration for the Proposed Disposal (Rmb 2,367,794,000) and the consideration for the Proposed Acquisition (Rmb 1,774,179,000);
- (ii) payments for capital gain tax arising from the Proposed Disposal, which is calculated based on 25% of the disposal gain amounting to RMB1,339,418,000 in accordance with the relevant PRC tax rules and regulations. The disposal gain is calculated based on the difference between the consideration for the Proposed Disposal amounting to RMB2,367,794,000 and the investment cost of the Disposed Group of RMB1,028,376,000.
(b) These adjustments represent:
- (i) advance from the Company to the Disposed Group;
- (ii) accounts payables to the Disposal Group recorded in a subsidiary of the Company.

Prior to the Proposed Disposal, the Company had 54.51% equity interest in the Disposed Group and the intercompany balances with the Disposed Group were eliminated. These balances would not be eliminated in the consolidated statements of assets and liabilities as the Disposal Group would no longer be part of the Enlarged Group upon Completion of the Proposed Disposal.

5 On 31 August 2009, the Company disposed its entire 100% equity interests in a subsidiary, Harbin Hafei Automobile Industry Group Co., Ltd. (“Hafei Automobile”) to a fellow subsidiary for a cash consideration of Rmb 1 million. Hafei Automobile had total assets and total liabilities of approximately Rmb 4.8 billion and Rmb 6.4 billion respectively as at 30 June 2009. This is a non-adjusting event of the Group after 30 June 2009.
No other adjustment has been made to the Unaudited Pro Forma Financial Information to reflect any trading results or other transactions entered into by the Group subsequent to 30 June 2009 and the Target Group subsequent to 30 September 2009 respectively.

— III-4 —

APPENDIX III UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF AVICHINA INDUSTRY & TECHNOLOGY COMPANY LIMITED

We report on the unaudited pro forma financial information set out on pages III-1 to III-4 under the heading of “Unaudited Pro Forma Consolidated Statement of Assets and Liabilities of the Enlarged Group” (the “Unaudited Pro Forma Financial Information”) in Appendix III of the circular dated 25 November 2009 (the “Circular”) of AviChina Industry & Technology Company Limited (the “Company”), in connection with the proposed disposal of Harbin Dongan Auto Engine Co., Ltd. and the proposed acquisition of China Aviation Optical-Electrical Technology Company Limited (collectively the “Proposed Transactions”) by the Company. The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Proposed Transactions might have affected the relevant financial information of the Company and its subsidiaries (hereinafter collectively referred to as the “Group”). The basis of preparation of the Unaudited Pro Forma Financial Information is set out on pages III-1 to III-4 of the Circular.

Respective Responsibilities of Directors of the Company and the Reporting Accountant

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

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

— III-5 —

APPENDIX III

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

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unaudited consolidated statement of assets and liabilities of the Group as at 30 June 2009 with the unaudited condensed consolidated financial statements of the Group as at 30 June 2009, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

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

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 30 June 2009 or any future date.

Opinion

In our opinion:

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

PricewaterhouseCoopers

Certified Public Accountants Hong Kong, 25 November 2009

— III-6 —

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the 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 enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement contained herein misleading.

2. (a) THE INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE IN THE SECURITIES OF THE COMPANY

As at the Latest Practicable Date, none of the Directors, supervisors and chief executive of the Company has any interests and short positions in the Shares, underlying Shares and debentures of the Company (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register kept by the Company, or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies of the Listing Rules to be notified to the Company and the Stock Exchange.

(b) THE INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE IN THE SECURITIES OF THE COMPANY’S ASSOCIATED CORPORATIONS

As at the Latest Practicable Date, none of the Directors, supervisors and chief executive of the Company has any interests and short positions in the Shares, underlying Shares and debentures of any associated corporations of the Company (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register kept by the Company, or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies of the Listing Rules to be notified to the Company and the Stock Exchange.

3. THE INTERESTS OF SUBSTANTIAL SHAREHOLDERS IN THE SECURITIES OF THE COMPANY

As at the Latest Practicable Date, so far as is known to any Directors, chief executive or supervisors of the Company, the following persons (not being a Director, chief executive or a supervisor of the Company) had interests or short positions in the Shares and underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of the Divisions 2 and

— IV-1 —

APPENDIX IV

GENERAL INFORMATION

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.

				Approximate	Approximate
				percentage of	percentage of
				shareholding	shareholding
				to the same	to share
	Class		Number	class of	capital in	Nature of
Name of Shareholders	of shares	Capacity	of shares	shares	issue	shares held
AVIC	Domestic	Beneficial owner	2,835,305,636	95.66%	61.06%	Long position
	Shares
European Aeronautic	H Shares	Interests of a party to	232,180,425	13.82%	5%	Long position
Defence and Space		an agreement to
Company — EADS		acquire interests in a
N.V.		listed corporation
		under s.317(1)(a) and
		s.318
The Hamon Investment	H Shares	Investment manager	164,278,000	9.78%	3.54%	Long position
Group Pte Limited			(Note)
The Dreyfus Corporation	H Shares	Investment Manager	105,226,000	6.26%	2.27%	Long position

Note: These shares are held directly by various controlled corporations of The Hamon Investment Group Pte Limited, of which 35,572,000 shares were held by Hamon Asset Management Limited, 101,690,000 shares were held by Hamon U.S. Investment Advisors Limited and 27,016,000 shares were held by Hamon Investment Management Limited.

Save as disclosed above, as at the Latest Practicable Date, the Company had not been notified of any interests and short positions in 5% or more than 5% of shares and underlying shares of the Company which had been recorded in the register kept by the Company under section 336 of the SFO.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group which will not expire or is not determinable by the Group within one year without payment of compensation (other than statutory compensation).

5. DIRECTORS’ INTERESTS IN ASSETS AND/OR CONTRACTS AND OTHER INTERESTS

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2008, being the date to which the latest published audited accounts of the Company 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 Group.

— IV-2 —

GENERAL INFORMATION

APPENDIX IV

As at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group which was subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Group.

6. CONSENT AND QUALIFICATION OF EXPERTS

The following are the qualifications of the professional adviser who has given the Company an opinion or provided advice referred to or contained in this circular:

Name Qualifications

Somerley A corporation licensed to carry out type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO.

Pricewaterhouse Coopers Certified Public Accountants (“PwC”)

As at the Latest Practicable Date, each of Somerley and PwC did not have shareholding interest in any member of the Group or any right to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, each of Somerley and PwC did not have any direct or indirect interest in any assets which has been, since 31 December 2008, being the date to which the latest published audited accounts of the Company 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 Group.

Each of Somerley and PwC has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter, report and references to its name included in this circular in the form and context in which it is included.

7. INDEBTEDNESS OF THE GROUP AND THE JONHON OPTRONIC GROUP (“TARGET GROUP”)

Borrowings

As at 31 October 2009, being the latest practicable date for the purpose of this statement of indebtedness prior to the printing of this circular, the Group and the Target Group had outstanding borrowings of approximately RMB4,059 million, comprising secured borrowings of approximately RMB1,768 million and unsecured borrowings of approximately RMB2,291 million. Among the secured borrowings, borrowings of approximately RMB868 million was guaranteed by related parties, and RMB880 million was cross-guaranteed amongst the subsidiaries of the Group.

Contingent liabilities

As at 31 October 2009, the Group and the Target Group had no significant contingent liabilities.

— IV-3 —

GENERAL INFORMATION

APPENDIX IV

Pledge of assets

As at 31 October 2009, the Group and the Target Group had borrowings of approximately RMB20 million which was secured by accounts receivables amounting to RMB20 million.

Save as aforesaid and apart from intra-group liabilities and normal accounts payable in the ordinary course of business of the Group and the Target Group, the Group and the Target Group did not have any outstanding indebtedness in respect of any mortgages, charges or debentures, loan capital, bank loans and overdrafts, loans, debt securities or other similar indebtedness, or hire purchase commitments, finance lease commitments, guarantees or other material contingent liabilities as at the close of business on 31 October 2009.

The Directors have confirmed that there has not been any material change in the indebtedness or the contingent liabilities of the Group and the Target Group since 31 October 2009.

8. SUFFICIENCY OF WORKING CAPITAL OF THE GROUP AND THE TARGET GROUP

Taking into account the financial resources available to the Group and the Target Group, including internally generated funds, the Directors are of the opinion that the Group and the Target Group will have sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this circular, in the absence of any unforeseen circumstances.

9. MATERIAL CONTRACTS

The particulars of material contracts (not being contracts entered into in the ordinary course of business) entered into by the member of the Group within the two years immediately preceding the issue of this circular are set out as follows:

(a) The subscription agreement entered into between the Company and Hongdu Aviation on 29 December 2007, as amended by the supplemental agreement on 22 February 2008, whereby the Company undertakes to subscribe, subject to conditions and adjustment, for approximately 9,842,520 new Hongdu Aviation shares for a total consideration of approximately RMB250 million. Details of the subscription agreement and the supplemental agreement are set out in the announcements of the Company dated 9 January 2008 and 22 February 2008, respectively.
(b) The subscription agreement entered into between Hongdu Group and Hongdu Aviation on 29 December 2007, as amended by the supplemental agreement on 22 February 2008, whereby Hongdu Group undertakes to subscribe, subject to conditions and adjustment, for approximately 13,779,527 new Hongdu Aviation shares for a total consideration of approximately RMB350 million. Details of the subscription agreement and the supplemental agreement are set out in the announcements of the Company dated 9 January 2008 and 22 February 2008, respectively.

— IV-4 —

APPENDIX IV

GENERAL INFORMATION

(c) The capital injection agreement entered into between Hongdu Aviation, China Aviation Industry Corporation II and its associates, China Huarong Asset Management Corporation, AviChina Undercarriage Limited Liability Company and an independent third party on 26 March 2008. Pursuant to the capital injection agreement, Hongdu Aviation agrees to make a capital injection of RMB100 million in AviChina Undercarriage Limited Liability Company. Details of the agreement are set out in the announcement of the Company dated 27 March 2008.
(d) The capital injection agreement entered into between Hongdu Aviation, Hongdu Group and Jiangxi Changjiang General Aviation Company Limited on 26 March 2008. Pursuant to the capital injection agreement, Hongdu Aviation agrees to make a capital injection of RMB49,960,000 in Jiangxi Changjiang General Aviation Company Limited. Details of the agreement are set out in the announcement of the Company dated 27 March 2008.
(e) The acquisition agreement entered into between Jiangxi Changhe Automobile Co., Ltd. and AVIC (formerly known as the “organizing unit of Aviation Industry Corporation of China”) dated 9 October 2008 in relation to, among other things, the acquisition of 100% equity interest in Shanghai Aviation Electric Co., Ltd. and 100% equity interest in Lanzhou Wanli Aviation Electrical Co., Ltd.. Details of the transactions can be referred to in the announcement and circular of the Company dated 13 October 2008 and 3 November 2008, respectively.
(f) The joint venture agreement entered into between the Company, Harbin Aircraft Industry Group Co., Ltd., Airbus China Limited, Hafei Aviation Industry Co., Ltd. and Harbin Development Zone Heli Infrastructure Development Co., Ltd. on 30 January 2009 to set up a joint venture company to engage in the business of manufacturing of composite material parts and components for the Airbus A350 XWB and Airbus A320 aircraft series. Pursuant to the joint venture agreement, the Group agrees to contribute USD 30 million cash to the registered capital of the joint venture for a 20% equity interest in the joint venture, amongst which 10% equity interest is directly held by the Company and the remaining 10% is indirectly held by the Company through its non wholly-owned subsidiary Hafei Aviation Industry Co., Ltd.. Details of the agreement are set out in the announcement of the Company dated 3 February 2009.
(g) The share transfer agreement I entered into between the Company and AVIC Automobile Industry Co., Ltd. dated 16 April 2009 in relation to, among other things, the disposal of 100% equity interest in Harbin Hafei Automobile Industry Group Co.. Details of the agreement are set out in the announcement of the Company dated 16 April 2009.
(h) The share transfer agreement II entered into between the Company and AVIC Automobile Industry Co., Ltd. dated 16 April 2009 in relation to, among other things, the disposal of 10% equity interest in Jiangxi Changhe Suzuki Automobile Co., Ltd.. Details of the agreement are set out in the announcement of the Company dated 16 April 2009.
(i) The subscription agreement entered into between the Hongdu Group and Hongdu Aviation on 29 July 2009, as amended by a supplemental agreement dated 18 August 2009, in relation to the subscription in 23,128,680 new Hongdu Aviation shares. Details of the agreement are set out in the announcement of the Company dated 7 August 2009.

— IV-5 —

GENERAL INFORMATION

APPENDIX IV

(j) The assets acquisition agreement dated 29 July 2009 entered into between Hongdu Aviation and Hongdu Group in relation to the acquisition of aircraft business assets relating to the production of Export Type L15 advanced trainer and related assets by Hongdu Aviation from Hongdu Group. Details of the agreement are set out in the announcement of the Company dated 7 August 2009.
(k) The capital contribution agreement entered into among Hongdu Aviation, Hongdu Group and Changjiang General Aviation Co., Ltd. on 18 August 2009 in relation to a capital contribution of RMB49,960,000 by Hongdu Aviation to Changjiang General Aviation. Details of the agreement are set out in the announcement of the Company dated 7 August 2009.
(l) The Equity Swap Agreement.

10. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and their respective associates have any interests in a business which competes or may compete with the business of the Group.

11. NO MATERIAL ADVERSE CHANGE

The Directors are of the opinion that since 31 December 2008, being the date to which the latest published audited accounts of the Group have been made up, there have been no material adverse changes in the financial or trading position of the Group.

12. MATERIAL LITIGATION

As at the Latest Practicable Date, so far as known to the Directors, there is no litigation or claim of material importance pending or threatened against any member of the Group.

13. MISCELLANEOUS

(a) Mr. Yan Lingxi, the company secretary of the Company, is a senior engineer and holds a bachelor degree in engineering (majoring in management information system) and a master degree in management. He commenced his career in the aviation industry in 1991 and has extensive experience in the aviation industry. He has been appointed as the Company Secretary since 2003 and is familiar with the security market and related supervision regulations.
(b) The registered address of the Company is situated at 8th Floor, Tower 2, No. 5A Rongchang East Street, Beijing Economic-Technological Development Area, Beijing, PRC. The registrar of the Company is Computershare Hong Kong Investor Services Limited, whose address is at Room 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

— IV-6 —

GENERAL INFORMATION

APPENDIX IV

(c) The principal place of business of the Company in Hong Kong is at Unit B, 15/F, United Center, Queensway 95, Hong Kong.
(d) The Chinese text of this circular and the revised proxy form shall prevail over their respective English text in the case of inconsistency.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company from the date of this circular up to and including 29 December 2009:

(a) the letter dated 25 November 2009 from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 25 of this circular;
(b) the letter of advice dated 25 November 2009 from Somerley to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 26 to 55 of this circular;
(c) the written consent of each of Somerley and PwC referred to in paragraph 6 of this Appendix;
(d) the material contracts of the Company referred to in paragraph 9 of this Appendix;
(e) the Articles of Association;
(f) the Company’s annual reports for the two financial years ended 31 December 2008;
(g) a copy of each circular issued pursuant to the requirements set out in Chapters 14 and/or 14A which has been issued since the date of the latest published accounts;
(h) the accountant’s report on JONHON Optronic from PwC as set out in Appendix II to this circular; and
(i) the report from PwC regarding the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular.

— IV-7 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [172 x 55] intentionally omitted <==

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting (“EGM”) of AviChina Industry & Technology Company Limited (the “Company”) will be held at 9:00 a.m. on Tuesday, 29 December 2009, at Avic Hotel, No. 10 Yi, Central East Third Ring Road , Chaoyang District, Beijing, the People’s Republic of China to consider and approve the following resolutions. Unless othwerise indicated, capitalized terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 25 November 2009 (the “Circular”):

ORDINARY RESOLUTION

1. “THAT :

(a) the terms and conditions of the Equity Swap Agreement dated 4 November 2009 entered into between the Company and AVIC (a copy of which has been produced to this meeting marked “A” and initialed by the Chairman of the meeting) in relation to, among other matters, the disposal of 54.51% equity interest in Dongan Motor by the Company to AVIC for an aggregate consideration of RMB2,367,794,200 (the “ Disposal ”), which shall be satisfied by AVIC by transferring its 43.34% equity interest in JONHON Optronic to the Company for a consideration of RMB1,774,179,339 (the “ Acquisition ”) and the difference between the consideration for the Disposal and the consideration for the Acquisition, which amounts to RMB593,614,861, shall be settled by AVIC in cash

be and are hereby approved, ratified and confirmed; and

(b) the Executive Directors (or any one of them) be and are hereby authorized to implement and take all steps and to do all acts and things as may be necessary or desirable to give effect and/or to complete or in connection with the transactions contemplated under the Equity Swap Agreement, including, without limitation, to obtain all necessary approvals from the relevant PRC government authorities, and to sign and execute such further documents, or to do any other matters incidental thereto and/or as contemplated thereunder and to make changes or amendments to the Equity Swap Agreement as the Executive Directors (or any one of them) may in their absolute discretion deem fit.”

— N-1 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

SPECIAL RESOLUTION

2. “THAT:

(a) a new clause, which reads as follows, is added as clause (2) of Article 105 of the Articles of Association: “The Board will designate a deputy general manager holding the position of chief financial officer to be the person in charge of the financial affairs of the Company. Unless otherwise specified in the articles of association of the Company, all references to the person in charge of the financial affairs of the Company (i.e. the chief financial officer) shall mean the deputy general manager so designated by the Board”; and
(b) any one of the Executive Directors be and is hereby authorised to make such other modifications to the proposed amendment to the Articles of Association as may be required by the relevant regulatory authorities of the PRC.”

By Order of the Board **AviChina Industry & Technology Company Limited* Yan Lingxi**

Company Secretary

Hong Kong, 25 November 2009

For identification purpose only.

Notes:

(1) Closure of register of members and eligibility to attend the EGM

Pursuant to Article 38 of the Articles of Association of the Company, the H Share register of the Company will be closed from Wednesday, 9 December 2009 to Tuesday, 29 December 2009 (both days inclusive), during which period no transfer of H shares will be effected. Holders of the Company’s H Shares and Domestic Shares whose names appear on the Company’s Register of Members on Tuesday, 29 December 2009 are entitled to attend the EGM and to vote in the EGM.

In order to qualify to attend and vote in the EGM, holders of the Company’s H shares shall lodge all transfers together with the relevant share certificates to Computershare Hong Kong Investor Services Limited, the Company’s H Shares Registrar, not later than 4:30 p.m. on Tuesday, 8 December 2009 at Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queens’ Road East, Wanchai, Hong Kong.

(2) Registration procedures for attending the EGM

(a) The shareholder or its proxies shall produce his identification proof. If a corporation shareholder’s legal representative or any other person authorized by the board of directors or other governing body of such corporate shareholder attends the EGM, such legal

— N-2 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

representative or other person shall produce his proof of identity, and proof of designation as legal representative and the valid authorization document of the board of directors or other governing body of such corporate shareholder (as the case may be) to prove the identity and authorisation of that legal representative or other person.

(b) Holders of H Shares or Domestic Shares who wish to attend the EGM must complete the reply slip to confirm the attendance, and return the same to the correspondence address designated by the Company not later than 20 days before the date of the EGM, i.e. before Wednesday, 9 December 2009.
(c) Shareholders may deliver the reply slip by post or facsimile to the correspondence address designated by the Company.
(3) Proxies
(a) Any shareholder who is entitled to attend and vote at the EGM is entitled to appoint one or more proxies to attend and vote on his behalf at the EGM. A proxy need not be a shareholder of the Company. Any shareholder who wishes to appoint a proxy should first review the form of proxy for use in the EGM.
(b) Any shareholder shall appoint its proxy in writing. The instrument appointing a proxy must be in writing signed under the hand of the appointer or his attorney duly authorized in writing. If the appointer is a body corporate, the instrument shall be affixed with the seal of the body corporate or shall be signed by the directors of the board of the body corporate or by attorneys duly authorized. If the instrument is signed by an attorney of the appointer, the power of attorney authorizing the attorney to sign or other documents of authorization must be notarially certified. In order to be valid, the form of proxy, and a notarially certified copy of the power of attorney or other documents of authorization, where appropriate, must be delivered in the case of holders of Domestic Shares, to the correspondence address designated by the Company, and in the case of holders of H Shares, to Computershare Hong Kong Investor Services Limited at the address stated in note (1) above not less than 24 hours before the time for holding the EGM and return of a form of proxy will not preclude a shareholder from attending in person and voting at the EGM if he or she so wishes.
(4) The EGM is expected to last for half a day. Shareholders attending the meeting are responsible for their own transportation and accommodation expenses.

Designated address of the Company: P.O. Box 1655, Beijing, the PRC (Postal code: 100009) Telephone No.: 86-10-64094835/06 Facsimile No.: 86-10-64094826 Attention: Mr. Xu Bin/Mr. Wang Yongzhi

— N-3 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

(5) Ordinary resolution 1 will be voted by poll by the Independent Shareholders. No Shareholder is required to abstain from voting for special resolution 2.

As at the date of this notice, the Board comprises executive directors Mr. Lin Zuoming, Mr. Tan Ruisong and Mr. Wu Xiandong and non-executive directors Mr. Gu Huizhong, Mr. Xu Zhanbin, Mr. Geng Ruguang, Mr. Zhang Xinguo, Mr. Gao Jianshe, Mr. Li Fangyong, Mr. Chen Yuanxian, Mr. Wang Yong, Mr. Maurice Savart as well as independent non-executive directors Mr. Guo Chongqing, Mr. Li Xianzong and Mr. Lau Chung Man, Louis.

— N-4 —

AI assistant

Star Plus Legend Holdings Limited — Proxy Solicitation & Information Statement 2009

51032_rns_2009-11-24_a91c4158-b348-4d00-a00d-9ac59d9b50c2.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]

(1) MAJOR AND CONNECTED TRANSACTIONS: DISPOSAL OF EQUITY INTEREST IN DONGAN MOTOR AND ACQUISTION OF EQUITY INTEREST IN JONHON OPTRONIC; (2) PROPOSED AMENDMENT TO THE ARTICLES OF ASSOCIATION AND NOTICE OF EXTRAORDINARY GENERAL MEETING

SOMERLEY LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]

(Stock Code: 2357)

Executive Directors:

Non-executive Directors:

Registered Office:

Independent non-executive Directors:

(1) MAJOR AND CONNECTED TRANSACTIONS: DISPOSAL OF EQUITY INTEREST IN DONGAN MOTOR AND ACQUISTION OF EQUITY INTEREST IN JONHON OPTRONIC; (2) PROPOSED AMENDMENT TO THE ARTICLES OF ASSOCIATION AND NOTICE OF EXTRAORDINARY GENERAL MEETING

LETTER FROM THE BOARD

A. INTRODUCTION

B. EQUITY SWAP AGREEMENT

LETTER FROM THE BOARD

Consideration

Conditions Precedent

LETTER FROM THE BOARD

Completion

C. INFORMATION RELATING TO THE DISPOSAL AND THE ACQUISITION

Information on Dongan Motor

LETTER FROM THE BOARD

Information on JONHON Optronic

D. EFFECTS AND FINANCIAL IMPLICATIONS OF THE DISPOSAL

LETTER FROM THE BOARD

LETTER FROM THE BOARD

E. USE OF PROCEEDS

F. REASONS FOR AND BENEFITS OF THE DISPOSAL

LETTER FROM THE BOARD

G. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE GROUP

Business Review

Aviation Business

LETTER FROM THE BOARD

Automobile Business

LETTER FROM THE BOARD

Future Outlook

Aviation Business

Automobile Business

Financial Review

Revenue

Comprehensive business (Continuing operations and Discontinued operations)

Continuing operations

Segment Information

Comprehensive business

Continuing operations

LETTER FROM THE BOARD

Gross profit

Comprehensive business

Continuing operations

Selling and distribution expenses (Continuing operations)

General and administrative expenses (Continuing operations)

Finance costs, net (Continuing operations)

LETTER FROM THE BOARD

Net loss/profit attributable to equity holders of the Company

Comprehensive business

Continuing operations

Liquidity and Financial Resources

LETTER FROM THE BOARD

Capital Structure

Pledge on assets

Gearing ratio

Exchange risks

Contingent Liabilities and Guarantees

Material Acquisition and Disposal

LETTER FROM THE BOARD

Use of Proceeds

Employees

Other Major Events

H. MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF JONHON OPTRONICS

Financial Performance

Note: RMB’000

(i) For the year ended 31 December 2006

(ii) For the year ended 31 December 2007

Star Plus Legend Holdings Limited Proxy Solicitation & Information Statement 2009

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**

**中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]**