*ST舜喆B(200168)雷伊Ｂ2005年年度报告（英文版）

GUANGDONG RIEYS GROUP COMPANY LTD. ANNUAL REPORT 2005 April, 2006 Section I. Important Notice & Contents Important Notice The Board of Directors, the Supervisory Committee, directors, supervisors and senior executives of Guangdong Rieys Group Company Ltd. (hereinafter referred to as the Company) and its directors individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions or errors that would render any statement misleading. Shenzhen Pengcheng Certified Public Accountants Ltd. issued an unqualified Auditors’ Report with emphasis events for the Company, the Board of Directors and the Supervisory Committee also made the corresponding explanation in details for the relevant matters, the investors are suggested to notice the content. Chairman of the Board Mr. Chen Hongcheng and Chief Financial Officer Mr. Li Guoqiang hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. -2- Contents Section Ⅰ. Important Notice and Contents------------------------------------------------------------------- Section Ⅱ. Company Profile----------------------------------------------------------------------------------- Section Ⅲ. Summary of Financial Highlight and Business Highlight------------------------------------ Section Ⅳ. Changes in Capital Shares and Particulars about Shareholders------------------------------ SectionⅤ. Particulars about Directors, Supervisors, Senior Executives and Employees-------------- Section Ⅵ. Corporate Governance----------------------------------------------------------------------------- Section Ⅶ. Brief Introduction to the Shareholders’ General Meeting ------------------------------------ Section Ⅷ. Report of the Board of Directors ---------------------------------------------------------------- Section Ⅸ. Report of the Supervisory Committee----------------------------------------------------------- Section Ⅹ. Significant Events---------------------------------------------------------------------------------- Section Ⅺ. Financial Report------------------------------------------------------------------------------------ Section Ⅻ. Documents for Reference------------------------------------------------------------------------ -3- Section II. Company Profile 1. Legal Name of the Company In Chinese: 广东雷伊（集团）股份有限公司 Abbr. in Chinese: 雷伊 In English: GUANGDONG RIEYS GROUP COMPANY LTD. Abbr. in English: Rieys 2. Legal Representative: Mr. Chen Hongcheng 3. Secretary of the Board: Mr.Xu Wei E-mail: xw@200168.com Contact Tel: 86-755-82250045 Fax: 86-755-82251182 Contact Address: 12th Floor of Orient Plaza, Dongmen Middle Road, Luohu District, Shenzhen 4. Registered Address: Meixin Industrial Park of Jun Bu Town, Puning, Guangdong Office Address: 12th Floor of Orient Plaza, Dongmen Middle Road, Luohu District, Shenzhen Post Code: 518000 Company’s Internet Website: http://www.rieys.com E-mail of the Company: rieys@200168.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times and Hong Kong Ta Kung Pao Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: 12th Floor of Orient Plaza, Dongmen Middle Road, Luohu District, Shenzhen 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: RIEYS-B Stock Code: 200168 7. Initial registered date: Nov. 17, 1997 Initial registered place: Industrial and Commercial Administration Bureau of Guangdong Province Registration code of corporated business license: 4400001000088 Registration code of tax: 445281231131833 Domestic accounting agency engaged by the Company: Name: Shenzhen Pengcheng Certified Public Accountant Ltd. Address: 5th Floor, Baofeng Building, No. 2006 of Dongmen South Road, Shenzhen International accounting agency engaged by the Company: Name: Baker Tilly Hong Kong Limited Certified Public Accountant Address: 12th Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong Section III. Summary of Financial Highlight and Business Highlight I. Major financial data as of the year 2005 (Unit: RMB) Items Year 2005 Total profit 33,218,865 Net profit 12,618,710 Net profit after deducting non-recurring gains and losses 7,378,651 -4- Profit from main operations 183,393,239 Other operating profit 5,285,679 Operating profit 39,185,238 Investment income -6,118,381 Subsidy income 3,433,283 Net non-operating income/expenses 3,281,274 Net cash flow arising from operating activities 2,661,258 Net increase/decrease in cash and cash equivalents -19,791,317 Note: Items of deducted non-recurring gains and losses and the amounts involved: Items of non-recurring gains and losses Amount Local preferential income tax 1,953,230 Various government subsidies 3,433,283 Capital occupied received from non-financing enterprises reckoned into gains and losses of current period 4,638,037 Short-term investment income 5,940 Other non-operating income/expenses after deducting daily reserve for impairment losses of -3,280,884 assets allotted by the Company based on regulations of Accounting System for Business Enterprise Subtotal 6,749,606 Less: impact on income tax 93,139 Impact on minority interests 1,416,408 Total non-recurring gains and losses 5,240,059 II. The explanation on the difference between the auditing results under CAS and IAS: Profit after tax of the Company as of the year 2005 as audited by Shenzhen Pengcheng Certified Public Accountant Ltd. under CAS and by Baker Tilly Hong Kong Limited Certified Public Accountant under IAS was RMB 12,618,710 and RMB 8,192,430 respectively. The adjustment for the differences is as follows: (Unit: RMB) Consolidation Statement for Year 2005 Net profit Year 2005 Year 2004 Amount confirmed under PRC Accounting Standards 12,618,710 53,052,158 Adjustment in accordance with IFRS: -Writing off confirmation of trademark right 6,158,388 - -writing off depreciation of appraised increment for fixed assets 66,000 27,000 -Depreciation of fixed assets (8,602,910) - -Amortization of organization expense (4,447,580) (105,077) -Deferred tax 2,399,822 235,920 Amount confirmed under IFRS 8,192,430 53,210,001 III. Financial indexes in the recent three years: (Unit: RMB) Indexes 2005 2004 2003 Income from main operations 459,048,559 651,717,620 488,288,750 Net profit 12,618,710 53,052,158 47,579,585 Total assets 1,244,935,379 1,279,012,027 1,117,318,635 Shareholder’s equity (excluding 511,278,582 515,279,642 458,700,621 minority interests) Earnings per share (RMB/share) 0.04 0.17 0.18 Net assets per share (RMB/share) 1.60 1.62 1.72 -5- Net assets per share after adjustment 1.57 1.61 1.72 (RMB/share) Net cash flow per share arising from 0.01 0.03 0.23 operating activities Return on equity (%) 2.47 10.30 10.37 IV. Supplemental statement of income statement: Return on equity (%) Earnings per share (RMB/share) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 36.07 35.93 0.58 0.58 Operating profit 7.66 7.63 0.12 0.12 Net profit 2.47 2.46 0.04 0.04 Net profit after deducting non-recurring 1.44 1.44 0.02 0.02 gains and losses V. Particulars about changes in shareholders’ equity during the report period (Unit: RMB) Total Statutory Items Share capital Capital reserve Surplus reserve Retained profit shareholder’s welfare fund equity Amount at the 318,600,000 52,129,497 83,128,136 15,376,046 61,422,009 515,279,642 beginning of period Increase in this 1,694,221 564,740 12,618,709 period Decrease in this 18,313,990 period Amount of the 318,600,000 52,129,497 84,822,357 15,940,786 55,726,728 511,278,582 end of period 1. Reason on change of surplus reserve and statutory welfare fund: appropriating 10% net profit as statutory surplus reserve and appropriating 5% of net profit as statutory welfare fund; 2. Reason on change of retained profit: increase amount in the report period was due to net profit realized in the report year transferred into retained profit, while decrease amount was due to profit distribution. 3. Reason on change of shareholders’ equity is due to decrease of profit distribution. -6- Section IV. Changes in Share Capital and Particulars about Shareholders (I) Particulars about the changes in share capital 1. In the report period, the Company’s share capital remained unchanged. 2. Issuance and listing of shares (1) The Company had not issued any shares or the derived securities in recent three years. (2) In this reporting period, there is neither bonus shares nor transfer from reserves to share capital been decided that resulted in any change in the total number of shares and the structure of share capital. (3) There existed no inner employees’ shares in the Company. (II) Particulars about shareholders 1. Particulars about shares held by the main shareholders of the Company Unit: share Total number of shareholders 16701 户 Increase or Nature of Total number of Number of Full name of Shareholders proportion decrease in Share pledged nontradable shareholders share held or frozen the year shares held Legal person Shenzhen Shenghengchang 36.99% 0 117,855,000 117,855,000 Pledged Industrial Co., Ltd. shares Legal person Shenzhen Risheng Investment Co., 10.68% 0 34,020,000 34,020,000 Pledged Ltd. shares CHEN MEI XIANG B-share 8.08% 0 25,753,588 0 Unknown Legal person Shantou Lianhua Industrial Co., 3.81% 0 12,150,000 12,150,000 Pledged Ltd. shares WANG YING B-share 0.26% +67,000 834,398 0 Unknown HUANG HONG ZHUO B-share 0.16% +327,570 495,770 0 Unknown YAO JIN GEN B-share 0.16% 0 495,720 0 Unknown GUOTAI JUNAN SECURIERS B-share 0.14% +460,239 460,239 0 Unknown HONGKONG LIMITED PAN XIU LING B-share 0.13% 0 411,240 0 Unknown ZHENG LIN B-share 0.12% 391,160 0 Unknown particulars about shares held by the top ten shareholders of tradable share Full name of Shareholders Holding the circulation share Type of share CHEN MEI XIANG 25,753,588 B-share WANG YING 834398 B-share HUANG HONG ZHUO 495,770 B-share YAO JIN GEN 495,720 B-share GUOTAI JUNAN SECURIERS HONGKONG LIMITED 460,239 B-share PAN XIU LING 411,240 B-share ZHENG LIN 391,160 B-share YANG SHENG MING 376,260 B-share CHENG AI XUE 371,700 B-share ABN AMRO BANK NV 350,000 B-share -7- There existed associated relationship among Shenzhen Shenghengchang Industrial Co., Ltd., Ms. Chen Meixiang, Shenzhen Risheng Investment Explanation on associated relationship among the Co., Ltd. and Shantou Lianhua Industrial Co., Ltd., and they belonged to the consistent actors regulated by the Management Measure of above shareholders or acting-in-concert Information Disclosure on Change of Shareholding for Listed Company. The Company was not aware of the associated relationship among the other shareholders. 2. About the controlling shareholder of the Company (1) The controlling shareholder of the Company is Shenzhen Shenghengchang Industrial Co., Ltd. (hereafter referred to as Shenghengchang Industrial), who holds 117.855 million shares of the Company, taking up 36.99% of the total share capital. The registered capital of this company is RMB 98 million, hereinto Mr. Chen Hongcheng holds 70% equity of Shenghengchang Industrial, while Mr. Chen Honghai holds 30% equity of Shenghengchang Industrial. Its registered place: 5th Floor, Hubei Baofeng Building, Bao’an South Road, Shenzhen; legal representative: Ding Lihong. The business scope of Shenghengchang Industrial: sales of hardware, AC parts, building materials, electronic products and car fittings. (2) Mr. Cheng Hongcheng is the actual controller of Shenghengchang Industrial. Mr. Chen Hongcheng was engaged in operation and management of the enterprise for over 20 years. He was once Chairman of the Board and concurrently President of Puning Hongxing Weaving and Clothing Co., Ltd., and executive director of Puning Haicheng Industrial Co., Ltd.. Mr. Chen Hongcheng is the standing commissar of Political Consultative Conference of Puning, the deputy of the National People’s Congress of Jieyang City and Guangdong Province. In 1998, Mr. Chen was awarded as the excellent village and township entrepreneur of Guangdong province, the advanced member of Guangdong Industry and Commerce Union, and the advanced member of Guangdong Chamber of Commerce. In 1999, Jieyang municipality People’s Government awarded him as the advanced individual of splendor undertaking; Vice Chairman of Costume Association of Guangdong Province; Vice Chairman of Costume Association of Shenzhen City. CHEN HONG CHEGN CHEN HONG HAI holding 70% equity holding 30% equity SHENZHEN SHENGHENGCHANG INDUSTRIAL CO., LTD. holding 36.9% equity THE COMPANY 3. Particulars about other shareholders of legal person’s share holding over 10% of shares (including 10%): Shenzhen Risheng Investment Co., Ltd. was founded on Sep. 8, 2000, whose registered capital is RMB 25 million, among which Ms. Chen Xuewen holds 80.4% equity and Mr. Ding Lihong holds 19.6% equity. The legal representative is Ms. Chen Xuewen. The business scope of Shenzhen Risheng Investment Co., Ltd.: to invest and initiate industries (the detailed project till further declared); domestic commerce, material supply and marketing industry (excluding monopoly commodities); investment consultation and information consultation (excluding limited projects). -8- Section V. Particulars about Directors, Supervisors, Senior Executives and Employees I. Directors, supervisors and senior executives of the Company 1. Basic information Number of Number of Name Gender Age Title Office term holding shares holding shares at the year-begin at the year-end Chairman of the Board and May 2003 – Chen 48 0 0 Male Hongcheng concurrently President May 2006 May 2003 – Zheng 39 0 0 Male Vice Chairman of the Board Yujian May 2006 May 2003 – Chen 52 0 0 Male Director Honghai May 2006 May 2003 – Ding 35 0 0 Male Director Lihong May 2006 May 2003 – Fang Meidi Female 60 Independent Director 0 0 May 2006 May 2003 – Cai Shaohe Male 45 Independent Director 0 0 May 2006 May 2003 – Yang Xinfa Male 37 Independent Director 0 0 May 2006 May 2003 – Yan 38 Chairman of the 0 0 Male Mingfei Supervisory Committee May 2006 May 2003 – Liu Li Female 37 Supervisor 0 0 May 2006 May 2003 – Xu Wei Male 29 Supervisor 0 0 May 2006 May 2003 – Zhang 47 0 0 Male Vice President Yongli May 2006 May 2003 – Zhou 36 Vice President, Secretary of 0 0 Male Haolin the Board May 2006 May 2003 – Li 36 0 0 Male Chief Financial Officer Guoqiang May 2006 Post-balance-sheet event: Mr. Zhou Haolin resigned from his posts of Vice Presindent and Secretary of the Board due to working adjustment. Mr. Xu Wei resigned from his post of Supervisor due to working adjustment, the staff representative congress elected Ms. Pan Xiaochun as Supervisor of the Company. The Board of Directors engaged Mr. Xu Wei as Secretary of the Board of the Company. 2. Particulars about main work experience of present directors, supervisors and senior executives Chairman of the Board and President, Mr. Chen Hongcheng, was born in 1958; graduate, China nationality. He was once Chairman of the Board and concurrently President of Puning Hongxin Weaving and Clothing Co., Ltd., and executive director of Puning Haicheng Industrial Co., Ltd.. At present he is the standing commissar of political consultative conference of Puning, Guangdong, the deputy of the National People’s Congress of Jieyang City and Guangdong Province, Vice Chairman of Costume Association of Guangdong Province and Vice Chairman of Costume Association of Shenzhen City. Now he acts as Director of Shenzhen Shenhengchang Industrial Co., Ltd. (the controlling shareholder) over the long term. -9- Vice Chairman of the Board, Mr. Zheng Yujian, was born in 1967 and graduated from university, and he has China nationality. He ever took the post of factory director of Puning Jichang Garments Manufacturer and Director and concurrently General Manager of Puning Hongxing Weaving & Clothing Co., Ltd.. Director Mr. Chen Honghai was born in 1954 and graduated from university, and he has China nationality. He ever took the post of workshop director of Puning Songxing Garments Manufacturer and operation section chief, manager of Puning Hongxing Weaving & Clothing Co., Ltd. and supervisor of the Company.。Now he acts as Director of Shenzhen Shenhengchang Industrial Co., Ltd. (the controlling shareholder) over the long term. Director Mr. Ding Lihong was born in 1971 and graduated from junior college, and has China nationality. He was once office director of Puning Hongxing Weaving & Clothing Co., Ltd., director of general manager office of Puning Jianyang Industrial Co., Ltd. and Secretary of the Board of Directors and vice President of Guangdong Rieys Group Company Ltd.. Now he acts as Chairman of the Board of Shenzhen Shenhengchang Industrial Co., Ltd. (the controlling shareholder) over the long term. Independent Director Ms. Fang Meidi was born in 1946; she got a master degree and was awarded Certified Business Executive, and has Chinese nationality. She took the post of general manager of Shanghai Silk Import and Export Company and vice president of Shanghai Oriental International Group Co., Ltd.. Now she acts as president of Hong Kong Qili Co., Ltd. Mr. Cai Shaohe, independent director of the Company, was born in 1961. He got a master degree and was awarded Certified Public Account. He took the post of accounting superintendent and financial group leader of local state-run Chenghai Winery and vice superintendent and superintendent in Chenghai Auditing Firm. He is now in charge of chief accountant of Shantou City Fengye CPA Firm. Independent Director Mr. Yang Xinfa was born in 1969; he is master degree and has Chinese nationality. Now he is the lawyer of Yixing Law Firm Shenzhen Branch. He ever worked in Hunan Dexin Law Firm, Guangdong Guoyang Law Firm, Guangdong Bohe Law Firm and Liu&Wang, Attorneys At Law; and ever took the post of secretary of Board of the Company. Chairman of the Supervisory Committee, Mr. Yan Mingpei was born in 1968, bachelor degree and engineer, and has China nationality. He took the post of assistant engineer of Shantou Teye Power Development Co., Ltd. and engineer of Shantou Special Economic Region Talents Exchange Center. Now he is in charge of general manager of Shantou Lianzhihua Information and Technology Co., Ltd.. Supervisor Ms. Liu li was born in 1969, economist and bachelor degree, and has China nationality. She graduated from Beijing University of Clothing Technology on major of clothing design, then studied at Zhongnan Industry College on major of science and engineering and obtained master degree. She was ever instructor of Hunan Normal University, designer of Hong Kong Lideng Garments Co., Ltd. and principal of planning department of Embry Form Co., Ltd. Supervisor Mr. Xu Wei was born in1977, bachelor degree of economics and law, and has China nationality. He was ever in charge of securities affairs representative of Shenzhen International Enterprise Co., Ltd. Mr. Zhang Yongli, Vice president, bachelor degree and economist, was born in 1959 and graduated from Naval Engineering Institute, and has China nationality. He took the post of - 10 - assistant of the Navy Shanghai Base, the office director of Shenzhen Yanshan Industry Trading Co., Ltd, general manager of Haikou Lanyuan Corporation Company, vice general manager of Guangdong Baoli South Import and Export Company. Mr. Zhou Haolin, Vice president and concurrently Secretary of the Board, economist, was born in 1970 and got bachelor degree. He graduated from Shenzhen University on major of business management and has China nationality. He took the post of secretary of the board of directors and manager of investment department in Shenzhen International Enterprise Co., Ltd.. Mr. Li Guoqiang, Chief Financial Officer, was born in 1970 and was awarded MBA degree, CCAP, Accountant; he is Chinese and engaged in social audit, capital assessment and corporation consultation, etc. for many years. He ever took the post in Shenzhen Zhongtian Audit and CPA Firm and Authur Anderson Huaqiang CPA Firm. 3. Particulars about the annual remuneration In accordance with the proposal on setting down remuneration of senior executives examined and passed at the 1st meeting of the 2nd Board of Director for the year 2002 and proposal on allowance standard of directors and independent director examined and passed at the annual shareholders’ general meeting 2001, directors and independent directors of the Company drew their annual allowance of RMB 30,000 respectively from the Company; supervisors of the Company received the annual allowance of RMB 10,000 respectively. The Company reimbursed the reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. Name Title Total (RMB) Chairman of the Board 186,000 Chen Hongcheng President Vice Chairman of the Director allowance of 30,000 Zeng Yujian Board Chen Honghai Director Director allowance of 30,000 Ding Lihong Director Director allowance of 30,000 Independent director allowance Cai Shaohe Independent Director of 30,000 Independent director allowance Fang Meidi Independent Director of 30,000 Independent director allowance Yang Xinfa Independent Director of 30,000 Chairman of the Supervisor allowance 10,000 Yan Mingfei Supervisory Committee Liu Li Supervisor 55,500 Xu Wei Supervisor 55,500 Zhang Yongli Vice-president 83,200 Vice-president 97,500 Zhaou Haolin Secretary of the Board - 11 - Li Guoqiang Chief Financial Officer 97,500 Total 765,200 Vice Chairman of the Board Mr. Zheng Yujian, Director Mr. Chen Honghai, Director Mr. Ding Lihong and Chairman of the Supervisory Committee Mr. Yan Mingfei received no payment from the Company. Of them, Director Chen Honghai and Director Ding Lihong drew the annual remuneration from Shenzhen Shenghengchang Industrial Co., Ltd.. 3. Directors, supervisors and senior executives leaving the office in the report period In the report period, the Company’s directors, supervisors and senior executives remained unchanged. II. About employees As at Dec. 31, 2005, the Company and its subsidiaries controlled by the Company have 4400 on-job staffs in total. Among them, 2780 production personnel, 966 salespersons, 216 technicians, 150 QC, 98 financial personnel and 190 administrative personnel; 8 with senior professional titles, and 75 with middle professional titles, and 180 with preliminary professional titles. The Company did not bear expenses of retirees at present. - 12 - Section VI. Corporate Governance I. Corporate governance of the Company The Company established and perfected its administrative structure such as Shareholders’ General Meeting, Board of Directors and Supervisory Committee and strictly standardized the Company’s operation since the Company was founded in accordance with Company Law, Securities Law and Administration Rules for Listed Companies and the relevant laws and regulations, and constituted and consummated the Articles of Association of the Company and the relevant other systems in line with the relevant rules and strengthened the management of investor relationship. In order to further perfect the Company’s corporate governance and standardized the operation, the Company periodically called its senior executives to study the relevant laws and regulations, and brought the functions of independent directors, the special committees of the Board and the Supervisory Committee into full play in the Company’s operation and management. The actual situations of the Company’s corporate governance basically accorded with the requirements of Administration Rules for Listed Companies and so on. II. Implementation of duties of independent directors In the report period, three independent directors of the Company actively took part in operation of the Board, seriously and diligently performed their duties and carefully examined all proposals of the Board and made independent opinion in the report period, and played an important role in enhancing the independent of the Board, strengthening the function of strategic management of the Board, balancing of rights of the Board and concentrating on the legal rights and interests of the small and middle investors, and played an active promotion role in scientific decision-making of the Board and normative operation of the Company. During the report period, the Company’s independent directors did not propose the objection on all proposals of the Board and other proposals of the Company. Name of Times that should be Times of Times of Times of independent attend the Board personal commission absence directors meeting presence presence Cai Shaohe 4 3 1 0 Yang Xinfa 4 4 0 0 Fang Meidi 4 3 1 0 III. The Company’s “Five Separation” in business, personal, assets, organization and financing from the controlling shareholder The Company was completely separated with the controlling shareholder, Shenzhen Shenghengchang Industrial Co., Ltd., and associated enterprises in business, personal, assets, organization and financing, which ensured the Company has independent and complete business and self-operation capability. - 13 - Section VII. Brief Introduction to Shareholders’ General Meeting In the report period, the Company has held the Annual Shareholders’ General Meeting 2004. The Annual Shareholders’ General Meeting 2004 was held at the meeting room of the Company in Meixin Industrial Park, Junbu Town, Puning on May 27, 2005. The relevant public notice on resolutions of the meeting was published in Securities Times and Hong Kong Ta Kung Pao dated May 28, 2005. (public notice No.: 2005-006) - 14 - Section VIII. Report of the Board of Directors I. Operation status of the Company in the report period (I) Review of operation status in the report period 1. Overall operation status in the report period In the report period, the Company suffered influence from several factors such as macro-control, Renminbi appreciation and trade friction of textile and garments between America and China, so the achievement of the Company reduced by a certain margin compared with the same period of 2004. In 2005, the Company realized income from main operations amounting to RMB 460 million, down by 29% over the same period of last year, and profit from main operations amounting to RMB 180 million, a decrease of 5% compared with the same of last year, as well as net profit of RMB 12.62 million, a drop of 76% than that in the same period of last year. 2. Scope of main operations and its operating status (1) Composing of profit from main operations and profit from main operations Classified according to Income from main operations Profit from main operations industry (RMB) (RMB) Garments manufacturing 459,048,558 185,282,546 Classified according to area Income from main operations Profit from main operations (RMB) (RMB) Sales of export clothing 205,403,721 43,450,516 Sales of clothing at home 246480784 141,508,874 Clothing processing 7,164,053 323,156 (2) Main suppliers and customers The total amount of purchase of the top five suppliers took up 25% of the total annual amount of purchase. The total amount of sales of the top five customers took up 42% of the total annual amount of sales. 3. Financial data of assets composing and reason for change in the report period Unit: RMB Items of assets and Dec. 31, 2005 Dec. 31, 2004 Increase/ liabilities Amount Proportion in Amount Proportion in Decrease total assets（%） total assets（%） year-on-year Accounts receivable 318,906,323 25.62 266,298,966 20.82 19.75% Inventories 116,044,567 9.32 95,918,186 7.50 20.98% Long-term equity 46,087,867 3.70 48,444,678 3.79 -4.86% investment Fixed assets 274,056,694 22.01 227,395,425 17.78 20.52% Construction in 240,544,225 19.32 311,535,105 24.35 -22.79% project Short-term loan 486,281,112 39.06% 504,900,000 39.48 -3.69% Items of profit 2005 2004 - 15 - Operating expense 72,733,588 56,009,688 29.86% Administrative 50,758,601 38,555,823 31.65% expense Financial expenses 27,039,016 21,588,336 25.25% Income tax 4,976,775 8,106,287 -38.61% Analysis on reason for change: 1) Increase of accounts receivables was mainly due to increase of current funds. 2) Increase of inventories was mainly due to decrease of sale volume, as well as increase of stock materials. 3) Increase of fixed assets was mainly because that construction in progress transferred into fixed assets. 4) Decrease of construction in progress was mainly it was carried forward into fixed assets. 5) Increase of operating expense was mainly because sale volume of brand garments increased. 6) Increase of financial expense was mainly due to decrease of interest income of bank deposit and exchange losses. 4. Particulars about the Company’s cash flow and main composing and main change in the report period Unit: RMB 2005 2004 Increase/ Decrease year-on-year (%) Net cash flow arising from 2,661,258 8,272,202 -67.83 operating activities Net cash flow arising from 40,281,518 -171,237,364 123.52 investing activities Net cash flow arising from -62,734,093 171,125,414 -136.66 financing activities Impact on cash due to change in - 277,848 exchange rate 5. Operation and achievements of main holding companies and share-holding companies A. Business of Men’s Clothing The following 11 companies were engaged in brand marketing business of man’s clothing, and mainly took the agents of production and sales of American brands such as “Sbpolo”, “Jeep” and “Sideout” in Chinese Mainland. Of which, Guandong Liwei Fashion Manufacture Co., Ltd. was engaged in the production of brand apparel; Shanghai Jiacheng Trading Co., Ltd. was mainly engaged in sales business of the Group; Sichuan Baodewei Trading Co., Ltd. and Guangzhou Ruicheng Trade Co., Ltd. are two specialty shops which are engaged in the clothing brand and are established based on the needs of Industrial and Commercial Registration; and other companies such as Shanghai Tongrui Apparel Co., Ltd. were engaged in sales business of brand apparels. International Internet websites of agency brands are as follows: http://www.sbpolo.com.cn., http://www.jeep-apparel.com.cn and http://www.sideout.com.cn. 1. Guangdong Liwei Dressing Co., Ltd. is mainly engaged in the production of brand apparel with registered capital of RMB 500,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 81,210,000, as well as net profit of RMB -1,110,000. 2. Shanghai Baowei Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel - 16 - such as SBPOLO with registered capital of RMB 1,000,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 17,730,000, as well as net profit of RMB 660,000. 3. Shanghai Tongrui Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of USD 1,200,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 15,810,000, as well as net profit of RMB -8,000,000. 4. Guangdong Gangwei Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of RMB 5,000,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 60,000, as well as net profit of RMB -300,000. 5. Beijing Baowei Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of RMB 500,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 50,000, as well as net profit of RMB -240,000. 6. Beijing Baodewei Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of RMB 500,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 9,760,000, as well as net profit of RMB -190,000. 7. Guangzhou Ruitang Trade Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of RMB 500,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 540,000, as well as net profit of RMB -50,000. 8. Shanghai Baodewei Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of RMB 1,000,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 20,800,000, realized income from main operations amounting to 86,780,000, profit from main operations amounting to 19,090,000, as well as net profit of RMB 6,490,000. 9. Shanghai Jiacheng Trading Co., Ltd. is mainly engaged in the sales business of the Group of brand clothing such as SBPOLO with registered capital of RMB 500,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 7,930,000, realized income from main operations amounting to RMB 5,850,000 and profit from main operations amounting to RMB 2,840,000, as well as net profit of RMB 4,230,000. 10. Sichuan Baodewei Trading Co., Ltd. is a speciality shop with registered capital of RMB 300,000, whose 70% equity was held by the Company. It is mainly engaged in retail business of brand apparel such as SBPOLO. In the report period, this company’s total assets was RMB 610,000, as well as net profit of RMB -280,000. 11. Guangzhou Ruicheng Trade Co., Ltd. is a speciality shop with registered capital of RMB 500,000, whose 70% equity was held by the Company. It is mainly engaged in retail business of brand apparel such as SBPOLO. In the report period, this company’s total assets was RMB 280,000, as well as net profit of RMB -230,000. - 17 - 12. Dezhou Zhonghe Apparel Co., Ltd. is mainly engaged in the sales business of brand apparel such as SBPOLO with registered capital of USD 600,000, whose 70% equity was held by the Company. In the report period, this company’s total assets was RMB 130,280,000, realized income from main operations amounting to 130,280,000, profit from main operations amounting to RMB 57,860,000, as well as net profit of RMB 49,560,000. B. Brand Business of Women’s Clothing 1. Shenzhen Chuanger Fashion Co., Ltd. is mainly engaged in the production and sales of women’s brand “MISSK” of Hong Kong in mainland of China with registered capital of RMB 12,000,000, whose 51% equity was held by the Company. Its international Internet website is http://www.misskfashion.com. In the report period, this company’s total assets was RMB 31,330,000, realized income from main operations amounting to RMB 26,280,000, profit from main operations amounting to RMB 16,080,000, as well as net profit of RMB 3,020,000. 2. Shenzhen Heyiyi Fashion Co., Ltd. is mainly engaged in the production and sales of women’s brand “AXARA” of France in China with registered capital of RMB 10,000,000, whose 51% equity was held by the Company. Its international Internet website is http://axara-hyy.com.cn. In the report period, this company’s total assets was RMB 20,040,000, and net profit realized was RMB 1,530,000. C. Production Business of Garments 1. Puning Tianhe Textile Manufactory Co., Ltd. is mainly engaged in the processing and export business of OEM garments with registered capital of HKD 50,000,000, whose 75% equity was held by the Company. In the report period, this company’s total assets was RMB 326,700,000, realized income from main operations amounting to RMB 196,530,000, profit from main operations amounting to RMB 44,900,000, as well as net profit of RMB 15,550,000. 2. Dongguan Jinjing Textile Manufactory Co., Ltd. is mainly engaged in the production processing and sales of high-grade wool garments with registered capital of USD 12,800,000, whose 75% equity was held by the Company. In the report period, this company’s total assets was RMB 92,090,000, and net profit realized was RMB 1,650,000. D. Other 1. Puning Rieys Paper Co., Ltd. is mainly engaged in the production and sales of corrugated paper series products with high strength with registered capital of USD 29,000,000, whose 51% equity was held by the Company. In the report period, this company’s total assets was RMB 336,010,000. 2. Shenzhen Rieys Industrial Co., Ltd. is mainly engaged in the import and export business with registered capital of RMB 50,000,000, whose 90% equity was held by the Company. In the report period, this company’s total assets was RMB 141,290,000, and net profit realized was RMB -1,630,000. (II) The Company will perform business from the following aspects: 1. Strengthening restoration of processing business for export OEM In 2005, the Company suffered influence from several factors such as Renminbi appreciation and trade friction of textile products between America and China, under the situation without veracious forecasting in cost, quota and taxation, the Company only controlled risk through accepting order in cautious way, resulting in decrease of processing volume obviously, thus, the said business reduced by a big margin. The said is traditional main operation of the Company, - 18 - the company had the quite advantages in order, production and sale, along with settlement of trade dispute of textile products between America and China, the situation became clear gradually, the Company restored the cooperation relationship with original customers, the said will be restored step by step in the new year, and throughput also will pick up clearly to original level in the previous year. 2. Continuing to strengthen and enlarge brand operation and choose an opportunity to establish self-owned brand International known brands acted as an agent by the subsidiaries of the Company obtained outstanding achievements in the recent years, market share rate has risen continually, income and profit from main operations and increase step by step, self-run league network spread all over the major cities in China. (1) Operating agent brand in the recent years caused the Company accumulating the plenty experiences in brand operation and management, which established the foundation for promoting self-owned brand in the proper time; (2) the Company clarified the development orientation with logistics as one of core competition of brand operation, supporting computer technology, promoting network establishment of the lager-scale logistics center, which formed a logistics system sustaining larger-scale sales. (3) Through integration to customers, assets, network and personnel, realizing resource sharing, reducing cost and enhancing efficiency. 3. Picking up establishment of paper-making plant and input early Puning Rieys Paper Co., Ltd. invested by the Company could not put in production due to many reasons. Up to now, Rieys Paper has completed the installation of its first and second production lines and the installation of the third production line is also about to be completed. Rieys Paper has conducted trial operation for the installed equipments. Approved by Puning Municipal Government, the external sewage disposal channel for the factory area of Rieys Paper has already been constructed and internal sewage discharging channel is under construction. Only when the construction of the above-mentioned sewage discharging infrastructures is completed can the regular production be started. The Company also will adopt several measures in the new year in order to ensure the said project go on smoothly. 4. Integrating and optimizing existing resources, revitalizing assets and improving the Company’s operation situation The Company did not new financing channel since listing of the Company. In the report period, meeting the macro-control of the State, and shrinking loan scale by the bank, which affected the Company’s capital normal allocation. In the new year, the Company will quicken callback of accounts receivable and other receivables in order to reflow capital; the Company will optimize resource collocation, saving cost through integrating source and organization system of all brand so as to improve financial status; the Company will revitalize stock assets and settle capital problem through various ways. II. Investment (I) In the report period, the Company’s long-term equity investment decreased by RMB 2,356,811, which was mainly because in the report period, the Company amortized the equity investment balance of Shanghai Baowei Apparel Co., Ltd., Guangdong Liwei Apparel Co., Ltd., Guangdong Gangwei Apparel Co., Ltd., Beijing Baowei Apparel Co., Ltd., and Shanxi Chuanglian Information Network Technology Co. Ltd.. (II) In the report period, the Company had no application of the proceeds newly raised. (III) Investment of the proceeds not raised by shares offering in the report period (1) The Company founded Chinese-foreign Joint Ventures Dezhou Zhonghe Fashion Co., Ltd. with cash of USD 0.42 million together with SOMANCO PTY. LTD., the Company held 70% equity of this company. As approved by Shandong Dezhou Municipal Industrial and Commercial Administration Bureau, Dezhou Zhonghe Fashion Co., Ltd. has been established on Jan. 6, 2005. (2) Dezhou Zhonghe Fashion Co., Ltd., a shareholding subsidiary of the Company, has signed an - 19 - agreement, which it would establish the production base in Dezhou Industry Development Park with area of 127 mu. At present, the said company paid RMB 4 million for purchasing land (did not take land use right). The said project is in the early stage of construction presently. III. Explanation of emphasis events made by the Board of Directors The CPA engaged by the Company issued an unqualified Auditors’ Report with emphasis events for the year 2005 for the Company, the Board of Directors made the following explanation on the aforesaid events: (I) About Rieys Paper Project: Rieys Paper was founded on May 8, 2003 with registered capital of USD 29 million, a Sino-foreign joint venture enterprise, whose business scope included production of series products such as high strength corrugated paper. The Company invested USD 14.79 million in Rieys Paper, taking up 51% of registered capital, of which, USD 11.29 million was used in paying expenses that the Company introducing facilities and auxiliary facilities, transportation expense and knocked-down expense, USD 3 million was used in investment of land, plant and power facilities, USD 0.5 million was used in current capital of joint venture company. Japan New Century Trading Co., Ltd. invested USD 14.21 million with paper making facilities, taking up 49% of registered capital. The Company has already finished the financial contribution and capital verification for Rieys Paper. Japan New Century made the financial contribution with the mechanical equipments worth RMB 78.5 million Yuan and failed to make the equipment contribution of RMB 39.443 million Yuan as per the stipulated date. Ended Dec. 31, 205, total asset of Rieys Paper was RMB 336.01 million, as well as liabilities amounting to RMB 135.25 million and net assets of RMB 200.76 million. At present, Rieys Paper has completed main construction projects such as plant, storage and etc., Rieys Paper has completed the installation of its first and second production lines and the installation of the third production line is also about to be completed, and stored up American waste paper used in production continuously within two to three months. Approved by Puning Municipal Government, the external sewage disposal channel for the factory area of Rieys Paper has already been constructed. In line with the relevant requirements of Environmental Protection Bureau of the State, the additional internal sewerage disposal facilities for the factory area of Rieys Paper was under checking and accepting. Only when the checking and accepting of the above-mentioned sewage disposal facilities, the aforesaid sewerage disposal facilities will be put in production formally. The Company was also adopting comprehensive feasibility measures, for insistent, adjusting capital using structure and investment structure, receiving back various capital occupied, seeking external financing ways and so on, to ensure capital demand that Rieys Paper Co., Ltd manufactured and operated formally. (II) About Projects of Tianye Chemical Fiber, Garments Design Center and Production line of Jean On May 30, 2005, the 1st extraordinary shareholders’ general meeting formed the resolution on directionally additionally issuing domestically listed foreign shares. The raised proceeds of RMB 450 million were used in investment of Tianye Chemical Fiber, Garments Design Center and Production Line of Jean. The Company invested the prophase project with self-owned capital, planed to quicken project construction after raising proceeds, reducing project construction period. But the said directional additional issuance did not be approved, resulted in no follow-up capital input. At present, the company has suspended the additional investment for the aforesaid three projects. The Company also would appraise the said projects investment referring the existing capital status. At the same time, the Company was negotiating with the relevant companies to require handing back capital over paid. Up to now, Shantou Kefa Company has handed back accounts in - 20 - advance amounting to RMB 3.5 million, and Shantou Dongying Company has handed back withdrew accounts in advance amounting to RMB 2.3 million. IV. Routine work of the Board of Directors (I) In the report period, the Board meetings and resolutions was as follows: In the report period, the Board of Directors of the Company totally held 4 Board meetings. 1. The Company held the 1st meeting of 3rd Board of Directors for 2005 on Apr. 11, 2005. The relevant public notice on resolutions was published in Securities Times and Hong Kong Ta Kung Pao dated Apr. 12, 2005 (public notice No. 2005-001). 2. The Company held the 2nd meeting of 3rd Board of Directors for 2005 on Apr. 28, 2005. The relevant public notice on resolutions was published in Securities Times and Hong Kong Ta Kung Pao dated Apr. 29, 2005 (public notice No. 2005-004). 3. The Company held the 3rd meeting of 3rd Board of Directors for 2005 on Aug. 19, 2005. The relevant public notice on resolutions was published in Securities Times and Hong Kong Ta Kung Pao dated Aug. 20, 2005 (public notice No. 2005-010). 4. The Company held the 4th meeting of 3rd Board of Directors for 2005 on Oct. 27, 2005, in which the third quarterly report 2005 was examined and approved. The third quarterly report 2005 was published in Securities Times and Hong Kong Ta Kung Pao dated Oct. 28, 2005. (II) The Board of Directors’ implementation to Shareholders’ General Meeting in the report period: The Company held the Shareholders’ General Meeting 2004 on May 27, 2005, in which profit distribution plan was considered and passed: as at Dec. 31, 2004, based on consolidated profit after tax amounting to RMB 53,052,158 in 2004 as audited by Shenzhen Pengcheng Certified Public Accountants, after being appropriated 10% of the profit after tax of parent company as statutory surplus public reserve amounting to RMB 5,449,521 and being appropriated 5% of the profit after tax of parent company as welfare fund amounting to RMB 2,724,761 and adding retained earnings carried down from the end of 2003 amounting to RMB 43,094,133, and deducting dividends of ordinary shares transferred into share capital amounting to RMB 26,550,000, the total profit available for distribution to shareholders was RMB 61,422,009 . The profit distribution plan 2004 was: Based on total share capital amounting to 318,600,000 shares as at Dec. 31, 2004, a cash dividend of HKD 0.5 would be granted for every 10 shares by using retained earnings to all shareholders with total cash dividends amounting to HKD 15,930,000. The Board of Directors of the Company published implementation notice on dividends distribution 2004 in Securities Times and Hong Kong Ta Kung Pao dated Aug 16, 2005 and confirmed that the final trading date, ex-right date and registration date of B-share are Aug 19, Aug. 22, and Aug. 24, 2005 respectively. The Company entrusted China Securities Registration and Clearing Co., Ltd. Shenzhen Branch to distribute dividends to registered shareholders on final trading date through capital liquidation system. The profit distribution plan for 2004 is now completed in implementation. V. Profit distribution preplan Ended Dec. 31st, 2005, the profit after tax for the year 2005 audited and confirmed by Shenzhen Pengcheng Certified Public Accountants and Baker Tilly Hong Kong Limited Certified Public Accountants according to Chinese Accounting Standards and International Accounting Standards respectively was RMB 12,618,710 and RMB 8,192,430. Based on the consolidated profit after tax amounting to RMB12,618,710 for the year 2005 audited by Shenzhen Pengcheng Certified Public Accountants, deducting appropriating 10% of the profit after tax of parent company as statutory surplus public reserve amounting to RMB 1,129,481 and 5% of the profit after tax of parent company as welfare fund amounting to RMB 564,740 and adding retained earnings carried down from the end of 2004 amounting to RMB - 21 - 61,422,008, the total profit available for distribution to shareholders was RMB 72,346,497, subtracting dividend of ordinary shares payable amounting to RMB 16,619,769, thus undistributed profit was RMB 55,726,728. As a result that the Company’s all business developed quickly, current capital demand in operating activities continually increased, meanwhile, for cutting down bank loan scale step by step, and ensuring capital demand and steady development of the Company consequently, thus, the Board of Directors plan to decide that the profit distribution preplan for the year 2005 was: neither to distribute profit nor to convert public reserve into share capital. The undistributed profit would be used to supplement current capital of the Company. As a result that the Company’s all business developed quickly, current capital demand in operating activities continually increased, meanwhile, for cutting down bank loan scale step by step, and ensuring capital demand and steady development of the Company consequently, thus, the Board of Directors plan to decide that the profit distribution preplan for the year 2005 was: neither to distribute profit nor to convert public reserve into share capital. The undistributed profit would be used to supplement current capital of the Company. Section IX. Report of the Supervisory Committee I. Work of the Supervisory Committee in the report period Besides the supervisors attending the Board meeting of the Company as non-voting delegates, the Supervisory Committee totally held two meetings: 1. The 1st meeting of the 3rd Supervisory Committee for 2005 was held at the meeting room of the Company on 26/F, Tower A, Jiangsu Bulg., Yitian Road, Futian District, Shenzhen on the morning of Apr. 11, 2005. The following resolutions were examined and approved in this meeting: 1) Work Report 2004 of the Supervisory Committee; 2) Annual Report 2004 and its Summary; 3) Revised the Rules of Procedure for the Supervisory Committee; 4) Opinions of the Supervisory Committee on the operation of the Company in 2004. 2. The 2nd meeting of the 3rd Supervisory Committee for 2005 was held at the meeting room of the Company on 28/F, Centre Business Bulg., 1st Fuhua Road, Futian District, Shenzhen on Aug. 19, 2005. The following resolutions were examined and approved in this meeting: Semi-annual Report 2005 and its Summary II. Authorized by the Shareholders’ General Meeting, the Supervisory Committee and all supervisors performed the supervision duties according to the present laws and regulations of the State, the Article of Association and Rules of Procedure for the Supervisory Committee: (I) The Company’s operation according to laws In the report period, the Supervisory Committee conducted supervision and investigation about every item of work of the Company, the members of the Supervisory Committee attended the Board meeting as non-voting delegate. The Company could strictly operate according to relevant policies, regulations of the State and the Articles of Association. Based on the principle of prudently operating and effectively preventing and minimizing risks, the Company had established a relatively perfect internal control system. While performing their duties in the Company, directors, general managers or other senior executives had no cases that were against laws, regulations, or Articles of Association, or did harm to the interests of the Company. (II) Financial situation of the Company In the report period, the Supervisory Committee seriously performed their duties to inspect the Company’s financial status, the Supervisory Committee believed that the unqualified Auditor’s Report for the year 2005, which issued by Shenzhen Pengcheng Certified Public Accountant Ltd. and Baker Tilly Hong Kong Limited Certified Public Accountants, objectively and truly reflected the financial status and operating achievements of the Company. (III) In the report period, the related transactions did not harm interests of shareholders and investors. - 22 - (IV) Agreeing the special explanation of emphasis events on Auditors’ Report 2005 made by the Board of Directors. Section X. Important Events I. The Company had no significant lawsuits or arbitrations in the report period. II. Significant purchases within the report year III. In the report period, the Company had no significant related transactions. IV. Significant guarantees made by the Company in the report period: 1. In the report period, the Company has relieved the external guarantee: A guarantee not exceeding RMB 14 million provided by the Company for Palm Spring Property Development (Shenzhen) Co., Ltd. from Industrial Bank, Shenzhen Technology Sub-Branch, as negotiated by three parties, the said guarantee was relieved. The Company had no external guarantee. 2. The guarantees provided by the Company to its subsidiaries within the report period 1) The Company provided a joint responsibility guarantees for a liquid fund applied by Shenzhen Rieys Industrial Co., Ltd. (a subsidiary of the Company) amounting to RMB 64.38 million in total from Shanghai Pudong Development Bank Shenzhen Branch, from Hua Xia Bank Bao’an Sub-Branch, from Industrial Bank Shenzhen Technology Subbranch, and from Agricultural Bank of China Nanshan Sub-Branch. 2) The Company provided a joint responsibility guarantee for a liquid fund applied by the Company’s subsidiary Puning Tianhe Textile Manufactory Co., Ltd. amounting to RMB 40.05 million from China Everbright Bank Guangzhou Branch. 3) The Company provided a guarantee for a liquid fund applied by Shenzhen Chuang’er Fashion Co., Ltd. (a subsidiary of the Company) amounting to RMB 675,000 from Shenzhen Commercial Bank Huanggang Sub-branch. The said guarantee was overdue. At present, the Company exists no external guarantee. The guarantee accumulatively provided by the Company to its shareholding subsidiaries amounted to RMB 105.105 million in total, taking up 20.55% of net assets. V. Commitments made by the Company or shareholders holding more than 5% shares in the report period or lasting to the report period 1. No commitments made by the Company or shareholders holding more than 5% shares of the Company in the report period. 2. Commitments events made by the Company lasting to the report period referred to Note IX of Accounting Report. VI. The Company agreed to engage continuously Shenzhen Pengcheng Certified Public Accountant Ltd. and Baker Tilly Hong Kong Limited Certified Public Accountants as domestic and international auditor respectively in the report period. The Company respectively paid remunerations of RMB 0.33 million to the said two certified public accountants for the year 2005. Remuneration paid to accounting agencies: Remuneration paid to Certified Public Accountants: Shenzhen Pengcheng Baker Tilly Hong Kong Certified Public Accountant Limited Certified Public Agent Accountants Total remuneration for RMB 0.33 million RMB 0.33 million 2005 Term of auditing service 3 years 3 years - 23 - VII. In the report period, the Board of Directors, the Supervisory Committee, directors, supervisors of the Company had not been inspected, administratively punished or criticized with circulars by CSRC, nor had been condemned publicly by Shenzhen Stock Exchange. VIII. Post-balance-sheet events Tianrui (Hong Kong) Trade Co., Ltd. a sole proprietorship of Shenzhen Rieys Industrial Co., Ltd. (the controlling subsidiary of the Company) acquired 49% equity of Puning Rieys Papermaking Co., Ltd. held by New Century Trading Co., Ltd of Japan with of RMB 78.50 million. (for details, please refer to the public notice on assets purchase with public notice No. 2006-003) Section XI. Financial Report I. Auditors’ Opinion (attachment) II. Accounting Statement and Notes (attachment) Section XII. Documents for Reference 1. Accounting statements with the signatures and seals of legal representative, financial principal and person in charge of accounting 2. Original of Auditor’s Report with seals of accounting agencies and certified public accountants and seals and signatures of certified public accountants 3. Originals of all the documents of the Company ever disclosed publicly on the information-disclosure media designated by CSRC, as well as original manuscripts of all notifications of the Company The Report is prepared both in Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Board of Directors of Guangdong Rieys Group Company Ltd. Apr. 26, 2006 GUANGDONG RIEYS (GROUP) COMPANY LIMITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 TOGETHER WITH AUDITORS’ REPORT - 24 - - 25 - AUDITORS’ REPORT TO THE SHAREHOLDERS OF GUANGDONG RIEYS (GROUP) COMPANY LIMITED: (Incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Guangdong Rieys (Group) Company Limited (the “Company”) and its subsidiaries (hereafter referred to as the “Group”) as at December 31, 2005, the related consolidated income statement, consolidated cash flow statement and consolidated statement of changes in equity for the year then ended. The financial statements set out on pages 2 to 30 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. BAKER TILLY HONG KONG LIMITED Certified Public Accountants Hong Kong April 26, 2006 Chan Cheuk Chi Practising Certificate number P01137 -1- GUANGDONG RIEYS (GROUP) COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in Renminbi (“RMB”) thousands, except for earnings per share) Notes 2005 2004 Sales 459,049 651,718 Cost of sales (274,618) (458,638) Gross profit 184,431 193,080 Other operating income, net 5 5,459 11,177 Distribution costs (72,734) (56,010) General and administrative expenses (63,743) (43,405) Profit from operations 53,413 104,842 Finance costs, net 6 (27,039) (21,588) Share of gain of an associate 19 116 Profit before income tax 7 26,393 83,370 Income tax expenses 8 (2,577) (7,870) Profit for the year 23,816 75,500 Attributable to: Equity holders of the Company 8,193 53,210 Minority interests 15,623 22,290 23,816 75,500 Dividends 9 16,620 26,550 Earnings per share for profit attributable to the equity holders of the Company during the year - Basic and diluted 10 RMB0.0257 RMB0.17 The accompanying notes are an integral part of these financial statements. -2- GUANGDONG RIEYS (GROUP) COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005 (Expressed in Renminbi thousands) Notes 2005 2004 ASSETS Non-current assets Property, plant and equipment, net 11 502,564 535,431 Land use rights, net 12 27,966 12,683 Goodwill 13 39,267 35,484 Computer software and other deferred assets 14 1,046 1,435 Prepayments for property, plant and equipment 15 98,008 95,976 Investments in an associate 17 12,980 12,961 Deferred tax assets 18(b) 6,198 3,798 688,029 697,768 Current assets Marketable securities 19 300 300 Inventories, net 20 116,045 95,918 Trade and other receivables, net 21 323,546 267,406 Prepayments 2,052 1,208 Advances to suppliers 22 88,327 131,779 Taxes recoverable 18(a) 12,579 21,946 Cash and cash equivalents 23 10,203 59,995 553,052 578,552 Total assets 1,241,081 1,276,320 LIABILITIES Current liabilities Trade payables 55,606 79,533 Accruals and other payables 65,411 51,370 Short-term bank loans 24 486,281 504,900 Taxes payable 18(c) 8,153 7,965 615,451 643,768 EQUITY Capital and reserves attributable to equity holders of the Company Share capital 25 318,600 318,600 Reserves 26 133,426 131,732 Retained earnings 52,652 62,772 504,678 513,104 Minority interests 120,952 119,448 Total equity 625,630 632,552 Total liabilities and equity 1,241,081 1,276,320 The accompanying notes are an integral part of these financial statements. -3- GUANGDONG RIEYS (GROUP) COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in Renminbi thousands) Minority Total Attributable to equity holders of the Company interests equity Statutory Share revenue Discretionary Retained Notes Share capital premium reserves reserve earnings Balances at January 136,468 1, 2004 265,500 75,154 37,954 37,000 44,286 596,362 Net profit for the 22,290 year - - - - 53,210 75,500 New investment in 5,740 subsidiaries - - - - - 5,740 Disposal of certain equity interest in a subsidiary to a company within the Group - - - - - (39,650) (39,650) Dividends 9 26,550 - - - (26,550) (5,400) (5,400) Issue of shares 26,550 (26,550) - - - - - Appropriation from retained earnings - Statutory - revenue reserves 26 - - 8,174 - (8,174) - Balances at 119,448 December 31, 2004 318,600 48,604 46,128 37,000 62,772 632,552 Net profit for the 15,623 year - - - - 8,193 23,816 Dividends 9 - - - - (16,619) (15,599) (32,218) Additional capital injection to a 1,480 subsidiaries - - - - - 1,480 Appropriation from retained earnings - Statutory revenue - reserves 26 - - 1,694 - (1,694) - Balances at 120,952 December 31, 2005 318,600 48,604 47,822 37,000 52,652 625,630 -4- The accompanying notes are an integral part of these financial statements. -5- GUANGDONG RIEYS (GROUP) COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 (Expressed in Renminbi thousands) Note 2005 2004 OPERATING ACTIVITIES Profit from operations 26,393 83,370 Adjustments for: Provision for doubtful debts 14,177 4,660 Provision (Write back of provision) for obsolete stocks 384 (2,436) Depreciation of property, plant and equipment 33,304 21,904 Loss on disposal of property, plant and equipment 25 31 Amortization of land use rights 595 277 Amortization of goodwill - 4,771 Amortization of computer software and other deferred assets 579 577 Share of gain of an associate (19) (116) Interest expenses 28,787 29,767 Interest income (4,773) (8,976) Operating profit before working capital changes 99,452 133,829 Increase in inventories (20,510) (18,834) Increase in trade and other receivables (55,857) (59,944) Decrease / (Increase) in prepayments 42,608 (45,911) Decrease in trade payables (23,927) (51,772) Increase in accruals and other payables 12,954 25,545 Cash (used in) generated from operations 54,720 (17,087) Interest paid (28,787) (29,767) Taxes refunded 4,577 33,105 Net cash (used in) generated from operating activities 30,510 (13,749) INVESTING ACTIVITIES Purchases of property, plant and equipment (22,591) (102,601) Net proceeds from disposals of marketable securities - 348 Increase in prepayments for property, plant and equipment (11,553) (82,396) Decrease in prepayments for long-term investments - 4,891 Interest received 135 9,944 Net proceeds from disposals of property, plant and equipment 3,250 90 Decrease in other deferred assets (190) (28) Net cash flows used in investing activities (30,949) (169,752) FINANCING ACTIVITIES (Repayments of) New short-term bank loans (18,619) 121,600 Contribution from minority shareholders 1,480 5,740 Dividends paid (32,220) (5,400) Net cash flows generated from financing activities (49,359) 121,940 Net decrease in cash and cash equivalents (49,792) (61,561) Cash and cash equivalents, beginning of year 59,995 121,556 Cash and cash equivalents, end of year 23 10,203 59,995 The accompanying notes are an integral part of these financial statements. -6- GUANGDONG RIEYS (GROUP) COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 (Expressed in Renminbi thousands unless otherwise stated) 1. ORGANIZATION AND OPERATIONS Guangdong Rieys (Group) Company Limited (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on November 17, 1997. Pursuant to the approval document No. [2000] 133 issued by the China Securities Regulatory Commission on September 29, 2000, the Company issued 69,000,000 domestically listed foreign shares (“B shares”) with a par value of RMB1 each and these shares were listed on the Shenzhen Stock Exchange on October 17, 2000. The Company and its subsidiaries (hereinafter referred to as the “Group”) are principally engaged in the production and sale of clothes. The registered office of the Company is located at Meixin Industrial Park of Junbu Town, Puning, Guangdong Province. 2. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in preparing these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of presentation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and under the historical cost convention. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial information are disclosed in Note 4. In 2005, the Group adopted the new/revised standards and interpretations of IFRS below, which are relevant to its operations. IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Cash Flow Statement IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 32 Financial Instruments: Disclosures and Presentation IAS 33 Earnings per Share IAS 36 Impairment of Assets IAS 39 Financial Instruments: Recognition and Measurement IFRS 3 Business Combinations -7- 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (a) Basis of presentation (Continued) The adoption of IAS 1 has affected the presentation of minority interest, share of net results of associates and other disclosures. IAS 2, 7, 8, 10, 16, 17, 21, 24, 27, 28, 32, 33 and 39 had no material effect on the Group’s policies. The adoption of IFRS 3 and IAS 36 resulted in a change in the accounting policy in goodwill and the assessment on assets impairment by management. Prior to 31 December 2004: - Goodwill was amortized on a straight line basis over its estimated useful life up to a maximum period of 10 years; and - Goodwill was assessed for an indication of impairment at each balance sheet date. In accordance with the provisions of IFRS 3: - The Group ceases amortization of goodwill from 1 January 2005; - Accumulated amortization as at 31 December 2004 has been eliminated with a corresponding decrease in the cost of goodwill; and - From the year ended 31 December 2004 onwards, goodwill is tested annually for impairment, as well as when there are indications of impairment. In accordance with the provisions of IAS 36: - Assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not recoverable; and - An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amounts. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The adoption of IFRS 3 results in: 1 January 2005 RMB’000 Decrease in the cost of goodwill 12,229 Decrease in accumulated amortization of goodwill 12,229 Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2006 or later periods but which the Group has not early adopted, are as follows: -8- 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (a) Basis of presentation (Continued) IAS 1 Amendment Capital Disclosures IAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures IAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions IAS 39 Amendment The Fair Value Option IAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial Liabilities IAS 39 and IFRS 4 Amendment Financial Guarantee Contracts IFRS 1 First-time Adoption of IFRS, and IFRS 6 Amendment IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRIC amendment to SIC 12 Scope of SIC 12 Consolidation – Special Purpose Entities IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments IFRIC 3 Emission Rights (withdrawn in June 2005) IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market: Waste Electrical and Electronic Equipment The Group is still assessing the impact of these standards, amendments and interpretations on its results of operations and financial position. (b) Going concern The consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. This may not be appropriate in view of the significant net current liabilities and significant short-term bank loans at December 31, 2005. At the balance sheet date, consolidated current liabilities exceeded consolidated current assets by RMB62 million (2004:RMB65 million) and the due dates on the short-term loans of RMB83 million have been expired. In addition, although the construction work on the production facilities of one of the subsidiary company has been substantially completed, there will be a delay in the commencement of commercial production as there is insufficient working capital within the Group. The continuation of the business as a going concern is dependent upon the Group attaining future profitable operations and the continuing financial support of the Group’s major creditors and bankers. Should the Group be unable to continue to operate as a going concern, adjustments would have to be made to reduce the value of assets to their receivable amount, to provide for any further liabilities which may arise, and to re-classify non-current assets as current assets. -9- 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Going concern (Continued) The directors consider that the Group has sufficient working capital to meet its liabilities as and when they fall due and to carry on its existing business without a significant curtailment of its operations for the foreseeable future. The Group has also obtained verbal agreements with its bankers that the expired loans of RMB83 million can be renewed for the next twelve months. With respect of the delay in the commercial production of one of the subsidiary of which the production facilities are all newly acquired and there are no impairments in value as at the balance sheet date, the directors consider that there will not be additional material cash flow requirements if the commercial production is to be delayed in the next twelve months. As such, the directors believe that the Group will continue as a going concern and consequently have prepared the consolidated financial statement on a going concern basis. Principles of consolidation The consolidated financial statements include the Company and its subsidiaries made up to December 31. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors. Details of the subsidiaries are set out on Note 16 below. The results of subsidiaries acquired or disposed of during the year are included in the consolidated financial statements from the effective date of acquisition or up to the date of disposal, as appropriate. The equity and net income attributable to minority shareholders’ interests are shown separately in the consolidated balance sheet and consolidated income statement respectively. All significant inter-company balances and transactions, including inter-company profit and unrealized profit and losses, within the Group are eliminated on consolidation. (d) Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short-term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand. For the purpose of the consolidated balance sheet, cash and bank balances comprise cash on hand and at banks, less any overdrafts in use. (e) Marketable securities Marketable securities are measured at fair value on the basis of their quoted market prices at the balance sheet date, on an individual investment basis. Where securities are held for trading purposes, gains and losses arising from changes in fair value are recognized in the income statement for the period. (f) Accounts receivable and other receivables Provision is made against accounts receivable and other receivables to the extent they are considered to be doubtful. Accounts receivable and other receivables in the balance sheet are stated net of such provision. - 10 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (g) Inventories Inventories are stated at the lower of cost and net realizable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present locations and conditions. Net realizable value is determined based on the anticipated sales proceeds less estimated costs to be incurred to completion and selling expenses, after making due allowance for obsolete or slow-moving items. (h) Associates An associated company is a company, not being a subsidiary, in which an equity interest is held for the long term purposes and significant influence is exercised in its management. The consolidated income statement includes the Group’s share of the results of associated companies for the year, and the consolidated balance sheet includes the Group’s share of the net assets of the associated companies. (i) Property, plant and equipment and depreciation Property, plant and equipment, other than construction-in-progress (“CIP”), are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the property, plant and equipment have been ready for its intended use, such as repairs and maintenance and overhaul costs, are charged to the income statement in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalized as an additional cost of that asset. Depreciation is calculated using the straight-line method to write off the cost, after taking into account the estimated residual value (5% of the initial cost), of each asset over its expected useful life. The expected useful lives are as follows: Buildings 35 years Machinery and equipment 10 –20 years Motor vehicles and office equipment 5-8 years Leasehold improvements 2-5 years The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are sold or retired, their cost and accumulated depreciation and accumulated impairment loss are eliminated from the accounts and any gains or losses resulting from their disposals are included in the consolidated income statement. CIP represents plant and properties under construction or installation and is stated at cost less any impairment losses. CIP is not depreciated and its cost includes direct cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent that they are regarded as adjustment to interest costs. CIP is reclassified to the appropriate category of property, plant and equipment when completed and ready for use. - 11 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (j) Land use rights Land use rights are stated at cost less accumulated amortization and accumulated impairment loss. Amortization is calculated using the straight-line method to write off the cost over the terms of the leases. (k) Goodwill The excess of the cost of an acquisition over the Company’s interest in the fair value of the net identifiable assets and liabilities acquired as at the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. With respect to investments in associates, goodwill is included in the carrying amount of the investment. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity sold. (l) Operating leases Leases of assets under which substantially all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Leases payments under operating leases are recognized as an expense on a straight-line basis over the lease term. Aggregate benefit of incentives provided by the lessor is recognized as a reduction of rental expense over the lease term on a straight-line basis. (m) Provisions A provision is recognized when, and only when an enterprise has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. (n) Minority interests Minority interests include their proportion of the fair values of identifiable assets and liabilities recognized upon acquisition of a subsidiary. (o) Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized on the following bases: (1) Sale of goods Revenue is recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer. (2) Rental income Rental income is recognized on an accruals basis. - 12 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (o) Revenue recognition (Continued) (3) Subcontracting income, consultancy income and warehouse service income Revenue from sale of subcontracting services, consultancy and warehouse service is recognized when the services are rendered. (4) Franchise income Franchise income is recognized when entitlement to the income is ascertained. (5) Interest income Interest income from bank deposits is recognized on a time proportion basis that takes into account the effective yield on the assets. (p) Taxation The income tax charge is based on profit for the year and considers deferred taxation. Deferred taxes are calculated using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the balance sheet date. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are recognized regardless of when the timing difference is likely to reverse. Deferred tax assets and liabilities are not discounted and are classified as non-current assets (liabilities) in the balance sheet. Deferred tax assets are recognized when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilized. At each balance sheet date, the Group re-assesses unrecognized deferred tax assets and the carrying amount of deferred tax assets. The Group recognizes a previously unrecognized deferred tax assets to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. The Group conversely reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity. A deferred tax liability is recognized for all taxable temporary differences, unless the deferred tax liability arises from goodwill for which amortization is not deductible for tax purposes. Other taxation is provided on the basis of the relevant PRC tax regulations. (q) Subsidy income Subsidy income from the government is recognized only when there is reasonable assurance that the Company has complied with the conditions attaching to them and the subsidy income has been received. - 13 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (r) Foreign currency translation Each entity within the Group maintains its books and records in RMB, which is not freely convertible. The measurement currency of each entity within the Group is considered to be RMB. Transactions in other currencies are translated into RMB at exchange rates prevailing at the time of transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences arising on the settlement of monetary items at rates different from those at which they were initially recorded during the periods are recognized in the statement of income in the period in which they arise. On consolidation the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange difference arising, if any, are classified as equity and translated to the Group’s exchange reserve. Such translation differences are recognized as income or as expenses in the period in which the operation is disposed of. (s) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sales, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in the income statement in the period in which they incurred. (t) Pension scheme Pursuant to the relevant regulations of the PRC government, the Company and its subsidiaries operating in the PRC have participated in central pension schemes (the "Schemes") operated by local municipal governments, whereby the Company and its subsidiaries in the PRC are required to contribute a certain percentage of the basic salaries of their employees to the Scheme to fund their retirement benefits. The local municipal governments undertake to assume the retirement benefits obligations of all existing and future retired employees of the subsidiaries in the PRC. The only obligation of the Group with respect to the Schemes is to pay the ongoing required contributions under the Schemes mentioned above. Contributions under the Schemes are charged to the income statement as incurred. (u) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables, long-term investments, investment in an associate, payables, balances with related party and borrowings. These are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. When the rights and obligations regarding the manner of settlement of financial instruments depend on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder, the financial instruments is classified as a liability unless the possibility of the issuer being required to settle in cash or another financial asset is remote at the time of issuance, in which case the instrument is classified as equity. - 14 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (v) Impairment of assets An assessment is made at each balance sheet date of whether there is any indication of impairment of any assets, or whether there is any indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset's recoverable amount is estimated. An asset's recoverable amount is calculated as the higher of the asset's value in use or its net selling price. An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, when the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/ amortization), had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, when the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset. (w) Segment reporting The Group is organized on a national basis into one major operating business. The divisions are the basis upon which the Group reports its primary segment information. Financial information on business and geographical segments is presented in Note 29. (x) Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. (z) Subsequent events Post-year-end events that provide additional information about a company’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 3. FINANCIAL RISK MANAGEMENT (a) Financial risk factors The Group’s activities expose it to a variety of financial risks, including credit risk, interest rate risk, liquidity risk and foreign exchange risk. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors - 15 - 3. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Financial risk factors (Continued) (i) Credit risk The carrying amounts of cash and cash equivalents, trade and other receivables represent the Group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks. The majority of the Group’s trade receivables related to sales of goods from third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. For the year ended December 31, 2005, approximately 42% of the Group’s turnover was made to top five customers (2004: approximately 44%). As of December 31, 2005, no single customer accounted for greater than 27% (2004: approximately 19%) of total trade receivables. No other financial assets carry a significant exposure to credit risk. (ii) Interest rate risk The directors believe that the Group’s exposure to interest rate risk of financial assets and liabilities as of December 31, 2005 was minimal since their deviation from their respective fair values was not significant. (iii) Liquidity risk The Group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. (iv) Foreign exchange risk The foreign exchange risks of the Group occur due to the fact that the Group has business activities denominated in foreign currencies. The Group did not enter into any foreign exchange forward contracts to hedge against foreign currency fluctuations. However, the directors believe that the Group’s exposure to foreign exchange risk was minimal since most of the Group’s foreign currency transactions are denominated in HKD and USD and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD and HKD. (b) Fair value estimation In assessing the fair value of other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date as follows: (i) Cash and cash equivalents and short-term bank loans The carrying amount of cash and cash equivalents and short-term bank loans approximates their fair value due to the short-term maturity of these financial instruments. - 16 - 3. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Fair value estimation (Continued) (ii) Receivables and payables The carrying amount of receivables and payables, which are all subject to normal trade credit terms, approximates their fair values. (iii) Balances with related parties No disclosure of fair values is made for balances with related parties as it is not practicable to determine their fair values with sufficient reliability since these balances are non-interest bearing and have no fixed repayment terms. (iv) Long-term investment and investment in an associate The fair value of long-term investment and investment in an associate cannot be reliably estimated and disclosed because these investments do not have quoted market price in an active market and other methods for estimating fair value for these investments are clearly inappropriate or unworkable. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. 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. (a) Depreciation and amortization and the respective useful lives The Group’s management determines the estimated useful lives and related deprecation/ amortization charges for the property, plant and equipment and other deferred assets. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will revise the depreciation and amortization 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. (b) Impairment of property, plant and equipment The impairment loss for property, plant and equipment is recognized for the amount by which the carrying amount exceeds its recoverable amount in accordance with the accounting policy stated in accounting policy stated in Note 2(v). The recoverable amount is higher of an asset’s value in use and fair value less costs to sell, which is based on the best information available to reflect the amount that is obtainable at each of the balance sheet date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs to disposal, or cash to be generated from continuously using the assets. - 17 - 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (CONTINUED) (c) Impairment of trade and other receivables Provision for impairment of trade and other receivables is determined based on the evaluation of collectibility of trade and other receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current creditworthiness, the past collection history of each customer and the current market condition. Management reassesses the provision on each of the balance sheet date. (d) Inventories Management estimates the net realizable value for inventory based primarily on the latest invoice prices less costs to sell or value in use. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and make provision for impairment on obsolete and slow-moving items or write-off or write-down inventories to net realizable value. 5. OTHER OPERATING INCOME, NET 2005 2004 Rental income less outgoings 5,195 7,916 Financial subsidy income 3,433 2,007 Franchise fees 1,520 1,049 Subcontracting fees - 326 Consultancy fees - 593 Warehouse services fees - 148 Others (2,539) 757 Less: Donation and others (2,150) (1,679) 5,459 11,117 Financial subsidy income was granted by and received from the Shenzhen Finance Bureau and the Shanghai Jinshan Fengjing Economic Development Administrative Committee in 2005 for the purpose of supporting the local enterprises and the refunds on value added tax, business tax and enterprise income tax respectively. 6. FINANCE COSTS, NET 2005 2004 Interest income from bank deposits (135) (3,170) Interest income from outstandings due from third parties (4,638) (5,806) Interest expenses on bank loans 28,787 29,767 Exchange losses, net 2,350 278 Others 675 519 27,039 21,588 Interest on the outstandings due from third parties is charged at a rate of 6 % (2004: 6%) per annum. - 18 - 7. PROFIT BEFORE INCOME TAX Profit before tax was determined after charging (crediting) the following: 2005 2004 Staff costs - Wages and salaries 23,498 23,608 - Provision for staff and workers’ bonus and welfare fund 3,683 3,851 - Contribution to defined contribution pension schemes 2,308 3,006 Depreciation of property, plant and equipment 33,304 21,904 Amortization of land use rights 595 277 Amortization of goodwill - 4,771 Amortization of computer software and other deferred assets 579 577 Loss on disposals of property, plant and equipment 25 31 Share of gain of an associate (19) (116) Cost of sales 274,618 458,638 Rentals of office buildings under operating leases 8,440 6,057 Provision (Write back of provision) for obsolete stocks 384 (2,436) Provision for doubtful debts 14,177 4,660 Exchange losses, net 2,350 278 8. INCOME TAX EXPENSES Two subsidiaries, Puning Tianhe Garment Manufacturing Factory Co., Ltd. (“Puning Tianhe”) and Dongguan Jinjing Textile Co., Ltd. (“Dongguan Jinjing”) are Sino-foreign companies. In accordance with rule 8 of the “Policy on Profits Tax on Foreign Investment and Enterprises in the PRC”, any profit tax liabilities arising from the taxable profit of these companies for the first and second profit making years will be waived. Any profits tax liabilities arising from the third to fifth years thereafter will be subject to a discount of 50%. For the year ended December 31, 2005, Puning Tianhe is subject to income tax at the rate of 12% and Dongguan Jinjing does not have any assessable profits. In accordance with Shenzhen Municipal Government [1988] rule 232 and the tax exemption notice issued by the Shenzhen State Tax Bureau (Document no. [2004] 125), two subsidiaries, Shenzhen Tianqi Garment Manufacturing Co., Ltd. (“Shenzhen Tianqi”) and Dezhou Sino-Union Garment Co., Ltd (“Dezhou Sino-Union”), have been granted tax exemption from the Shenzhen State Tax Bureau, any profit tax liabilities arising from the taxable profit of this company for the first and second profit making years will be waived. Any profits tax liabilities arising from the third to fifth years thereafter will be subject to a discount of 50%. For the year ended December 31, 2005, these companies do not have any provision for taxation. In accordance with the “Provisional Regulation on Profits Tax in the PRC “ and the agreed taxable rate stipulated by the Tax Bureau in Jinshan, Shanghai, the profits tax of Shanghai Boldway Fashion Co., Ltd. (“Shanghai Boldway”), Shanghai Jiancheng Commerce and Trade Co., Ltd (“Shanghai Jiancheng”) and Shanghai Bolderway Fashion Co., Ltd. (“Shanghai Bolderway”) are assessed based on 0.5% of the monthly sales revenue. Shenzhen Heyiyi Fashion Co., Ltd. (“Shenzhen Heyiyi”) and Shenzhen Chuanger Garment Co., Ltd. (“Shenzhen Chuanger”) are subject to income tax at the rate of 15%. For the year ended December 31, 2005, Shenzhen Rieys Industrial Co., Ltd (“Shenzhen Rieys”) does not have any assessable profits. Other than the above companies, all companies within the Group are subject to income tax at the rate of 33%. - 19 - 8. INCOME TAX EXPENSES (CONTINUED) Details of income tax expense charged (refunded) during the year are as follows: 2005 2004 Current income tax expense 4,977 8,106 Deferred tax arising from temporary differences (2,400) (236) 2,577 7,870 Reconciliation of income tax: 2005 2004 Profit before taxation of the Group 26,393 83,370 Tax calculated at rate of 33% (2004: 33%) 8,710 27,512 Effect of different tax rates of subsidiaries (6,127) (19,604) Effect of share of results of an associate (6) (38) 2,577 7,870 9. DIVIDENDS 2005 2004 Dividends declared during the year 16,620 26,550 Dividends declared after year-end - 15,930 In accordance with the relevant regulations in the PRC and the Articles of Association of the Company, the Company declared dividends based on the lower of retained earnings as reported in the statutory accounts and the financial statements prepared in accordance with IFRS. As the statutory accounts are prepared in accordance with the generally accepted accounting principles in the PRC (the “PRC GAAP”), the retained earnings as reported in the statutory accounts will be different from the amounts as reported in the consolidated financial statements prepared in accordance with IFRS. As of December 31, 2005, the retained earnings before final dividends reported in the statutory accounts were approximately RMB55,727,000 (2004: approximately RMB61,422,000). 10. EARNINGS PER SHARE The calculation of basic earnings per share was based on the consolidated net profit attributable to shareholders for the year ended December 31, 2005 of approximately RMB8,193,000 (2004: approximately RMB53,210,000), divided by the weighted average number of shares in issue during the year of 318,600,000 shares (2004: 318,600,000 shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year-end. - 20 - 11. PROPERTY, PLANT AND EQUIPMENT, NET Motor vehicles and Machinery office Leasehold Buildings and equipment equipment improvements CIP Total Cost As at 1 January 2005 88,002 179,584 26,132 10,531 311,534 615,783 Additions - 280 4,757 1,030 23,323 29,390 Transfer from CIP 68,636 181,114 - - (249,750) - Transfer to advances to suppliers - - - - (9,800) (9,800) Transfer to land use rights - - - - (15,878) (15,878) Disposals - (2,699) (741) (1,535) - (4,975) As at 31 December 2005 156,638 358,279 30,148 10,026 59,429 614,520 Accumulated depreciation As at 1 January 2005 9,723 54,628 10,777 5,224 - 80,352 Charge for the year 4,553 23,606 3,819 1,326 - 33,304 Disposals - (18) (364) (1,318) - (1,700) As at 31 December 2005 14,276 78,216 14,232 5,232 - 111,956 Net book value As at 31 December 2005 142,362 280,063 15,916 4,794 59,429 502,564 As at 31 December 2004 78,279 124,956 15,355 5,307 311,534 535,431 As of December 31, 2005 and 2004, there are no borrowing costs capitalized in the property, plant and equipment. As of December 31, 2005, buildings and machinery with net book values of approximately RMB46,190,000 (2004: RMB30,740,000) and RMB115,150,000 (2004: RMB20,630,000) respectively have been pledged as collaterals for the Group’s short-term bank loans (see Note 24). As of the balance sheet date, management is in the process of applying to obtain the land use right certificates from the local authorities for two pieces of land in Puning. The directors are of the opinion that the underlying values of property, plant and equipment as of December 31, 2005 are not less than their carrying values. - 21 - 12. LAND USE RIGHTS, NET 2005 2004 Cost Beginning of year 15,122 15,122 Transfer from CIP 15,878 - End of year 31,000 15,122 Accumulated amortization Beginning of year 2,439 2,162 Charge for the year 595 277 End of year 3,034 2,439 Net book value End of year 27,966 12,683 Beginning of year 12,683 12,960 Land use rights comprise land use fees paid to the land administration authorities for the rights to use the lands where the Group companies’ factory buildings in Puning are located. 13. GOODWILL 2005 2004 Shanghai Boldway 21,760 25,940 Shanxi Chuanglian Information Network Technology Co., Ltd. (“Shanxi Chuanglian”) 9,174 11,838 Guangdong Leader Way Co., Ltd. (“Guangdong Leader Way”) 3,712 4,426 Guangdong Gang Wei Fashion Co., Ltd. (“Guangdong Gang Wei”) 2,510 2,995 Beijing Boldway Fashion Co., Ltd. (“Beijing Boldway”) 2,111 2,514 39,267 47,713 Less: Accumulated amortization - (12,229) 39,267 35,484 14. COMPUTER SOFTWARE AND OTHER DEFERRED ASSETS 2005 2004 Cost 4,740 11,344 Less: Accumulated amortization (3,694) (9,909) 1,046 1,435 - 22 - 15. PREPAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT 2005 2004 Construction Beginning of year - 13,580 Additions 17,350 49,365 Transfer to CIP - (62,945) End of year 17,350 - Machinery Beginning of year 95,976 21,657 Additions - 95,976 Refunds as a result of the cancellation of the purchase order - (21,657) Refunds from the suppliers (5,800) - Transfer to other receivables (6,218) - Transfer to CIP (3,300) - End of year 80,658 95,976 Total 98,008 95,976 Prepayments for property, plant and equipment represent the amounts prepaid to build new factories and deposits for purchases of machinery for garment manufacturing. 16. INVESTMENTS IN SUBSIDIARIES As of December 31, 2005, the Company directly owned equity interests in the following subsidiaries. Except for Tian Rui (HK) Trading Company Limited (“Tian Rui”) which was incorporated in Hong Kong, all subsidiaries were incorporated in the PRC: Attributable Date of equity Name incorporation Registered capital interests Principal activities RMB’000 HKD’000USD’000 Shenzhen Rieys December 7, 50,000 90% Investment and liaison of 2000 export business Puning Tianhe December 28, 50,000 97.5% Manufacturing of garment 2001 Shenzhen Chuanger February 8, 12,000 51% Trading of garment 2001 Guangdong Leader Way March 25, 500 70% Manufacturing and trading 1999 of garment Guangdong Gang Wei March 25, 5,000 70% Trading of garment 1999 Beijing Boldway November 11, 500 70% Trading of garment 1998 Shanghai Boldway April 5, 1999 1,000 70% Trading of garment Puning Rieys Paper Mill May 8, 2003 29,000 51% Manufacturing and sales Co., Ltd. pf paper Shanghai Tongrui Fashion August 6, 1,200 70% Trading of garment Co., Ltd. (Shanghai 2003 Tongrui) Beijing Bao Dewei November 28, 500 70% Trading of garment Fashion Co., Ltd. 2003 Dongguan Jinjing October 23, 12,800 75% Manufacturing of garment 2003 Shenzhen Heyiyi December 30, 10,000 51% Trading of garment 2002 Shenzhen Tianqi April 5, 2004 1,000 55% Manufacturing of garment 16. INVESTMENTS IN SUBSIDIARIES (CONTINUED) - 23 - Attributable Date of equity Name incorporation Registered capital interests Principal activities RMB’000 HKD’000USD’000 Guangzhou Ruicheng Trade May 24, 2004 500 70% Business has not yet Co., Ltd. been commenced Guangzhou Ruitang Trade Co., May 24, 2004 500 70% Business has not yet Ltd. been commenced Shanghai Jiancheng May 31, 2004 500 70% Trading of garment Commerce and Trade Co., Ltd. Sichuan Baodewei Commerce March 19, 300 70% Trading of garment and Trade Co., Ltd. 2004 Tian Rui November 17, - 90% Business has not yet 2004 been commenced Shanghai Bolderway November 28, 1,000 70% Trading of garment 2001 Dezhou Sino-Union Garment January 6, 600 70% Trading of garment Co., Ltd (Note) 2005 Note: These are newly established during the year. 17. INVESTMENTS IN AN ASSOCIATE As of December 31, 2005, the Company directly owned equity interests in the following associate which was incorporated in the PRC: Date of Registered Attributable Name incorporation capital equity interest Principal activities Shanxi Chuanglian May 7, 1999 45,000 27.7% Development, manufacturing and sales of communication product and provision of technical services As of December 31, 2005, investment in the associate comprised: 2005 2004 Share of net assets As at 1 January 12,961 12,845 Share of profit less loss 25 154 Share of taxation (6) (38) As at 31 December 12,980 12,961 The directors of the Company are of the opinion that the underlying value of the associate was not less than its carrying value as of December 31, 2005. 18. DEFERRED TAX, TAXES RECOVERABLE AND TAXES PAYABLE The Group is subject to Value Added Tax (VAT). The applicable tax rate for domestic sales is 17% while that for export sales is 0%. Input VAT from purchases of raw materials and other production imports can be netted off against output VAT from sales. Input VAT on purchases of raw materials used to produce goods for export sales is refundable. VAT payable or receivable is the net difference between periodic output and input VAT. - 24 - 18. DEFERRED TAX, TAXES RECOVERABLE AND TAXES PAYABLE (CONTINUED) (a) Taxes recoverable 2005 2004 Prepaid enterprise income tax 2,029 2,079 VAT recoverable, net 10,550 19,867 12,579 21,946 (b) Deferred tax assets 2005 2004 Deferred tax relating to provision for doubtful debts 6,123 3,821 Deferred tax relating to provision for obsolete stocks 86 (20) Others (11) (3) 6,198 3,798 (c) Taxes payable 2005 2004 Enterprise income tax 6,817 6,072 City construction tax 189 384 Others 1,147 1,509 8,153 7,965 19. MARKETABLE SECURITIES These are all invested in the listed funds and stated at their market values. 20. INVENTORIES, NET 2005 2004 Raw materials 24,868 13,770 Work-in-progress 2,041 512 Finished goods 88,210 80,728 Sub-contracting materials 132 1,090 Consumables 1,360 - 116,611 96,100 Less: Provision for obsolete stocks - Raw materials (216) (115) - Finished goods (350) (67) (566) (182) 116,045 95,918 21. TRADE AND OTHER RECEIVABLES, NET 2005 2004 Trade receivables 155,883 198,641 Other receivables 185,400 81,601 Amounts due from related parties 9,276 - 350,559 280,242 Less : Provision for doubtful debts (27,013) (12,836) 323,546 267,406 - 25 - 21. TRADE AND OTHER RECEIVABLES, NET (CONTINUED) At December 31, 2005, other receivables of RMB86,748,565 (2004: RMB8,776,000) are interest bearing. Interest is charged on the outstanding balances at a rate of 6% (2004: 6%) per annum. The Directors consider that the carrying amounts of trade and other receivables approximates their fair values. 22. ADVANCES TO SUPPLIERS At December 31, 2004, advances to suppliers amounting to RMB74,473,000 were interest bearing. Interest was charged on the outstanding balances at a rate of 6 % per annum. As at December 31, 2005, all advances to suppliers are not interest bearing. The Directors consider that the carrying amounts of advances to suppliers approximate their fair values. 23. CASH AND CASH EQUIVALENT 2005 2004 Cash on hand 3,145 3,548 Bank current deposits 7,058 26,447 Bank time deposits (pledged to secure the general banking facilities) - 30,000 10,203 59,995 24. SHORT-TERM BANK LOANS During the year, interest as charged at rates ranging from 4.536% to 9.558% (2004: from 4.536% to 9.558%) per annum. 2005 2004 Amounts guaranteed by shareholders and/or directors 135,176 414,000 Amounts guaranteed by the Company and/or shareholders to subsidiaries 49,325 29,900 Amounts guaranteed by the Company, shareholders and directors to subsidiaries 31,280 - Amounts secured by machinery and guaranteed by a shareholder and directors - 20,000 Amounts guaranteed by a third party and a director - 20,000 Amounts secured by buildings and machinery and guaranteed by shareholders and the Company to a subsidiary 69,500 - Amounts secured by machinery and buildings 51,000 11,000 Amounts secured by shares and guaranteed by shareholders and subsidiaries 150,000 Amounts secured by buildings and guaranteed by directors - 10,000 486,281 504,900 As of December 31, 2005, the Company has Rmb82,651,111 overdue amount of short-term bank loan. The Directors consider that the carrying amounts of short-term bank loans approximates their fair values - 26 - 25. SHARE CAPITAL As of December 31, 2005, the share capital included promoters’ shares and B shares, which ranked pari passu. The details of registered, issued and fully paid share capital were as follows: 2005 2004 2005 2004 Number of shares RMB’000 RMB’000 (in thousands) Unlisted Promoters’ shares of RMB1 each 164,026 136,688 164,026 136,688 Issue of 13,668,800 shares of RMB1 each as - 13,669 - 13,669 dividends in 2004 Issue of 13,668,800 shares of RMB1 each from share - 13,669 - 13,669 premium account in 2004 Listed B shares of RMB1 each 154,574 128,812 154,574 128,812 Issue of 12,881,200 shares of RMB1 each as - 12,881 - 12,881 dividends in 2004 Issue of 12,881,200 shares of RMB1 each from share - 12,881 - 12,881 premium account in 2004 318,600 318,600 318,600 318,600 26. RESERVES According to the Company Laws of the PRC and Articles of Association of the Company, the Company is required to provide certain statutory reserves which are appropriated from the net profit as reported in the statutory accounts prepared in accordance with the PRC GAAP. Accordingly, the Company shall set aside 10% of its net profit for statutory revenue reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5% for the statutory common welfare fund. The Company may make appropriations from its net profit to the discretionary revenue reserve fund upon approval by shareholders. These reserves cannot be used for purposes other than those of which they are created and are not distributed as cash dividends without the prior approval by shareholders under certain conditions. The directors have resolved that the statutory common welfare fund is to be utilized to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. For the year ended December 31, 2005, the directors proposed that 10% and 5% (2004: 10% and 5%) of the net profit as reported in the statutory accounts be appropriated to statutory revenue reserve fund and statutory common welfare fund, totaling approximately RMB1,694,000 (2004: approximately RMB8,174,000). The resolution is subject to approval by shareholders in the annual general meeting. - 27 - 27. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Relationship Name Relationship Shenzhen Sheng Heng Chang Industrial Co. Ltd. One of the shareholders holding 37% equity interest of the (“Sheng Heng Chang”) Company Chen Xuewen, Ma Chanying The direct relatives of the director of the company Shenzhen Risheng Investment Co., Ltd. (“Risheng One of the shareholders holding 11% equity interest of the Investment”) Company Chen Meixiang One of the shareholders holding 8% equity interest of the Company Shantou Lianhua Industrial Co., Ltd. (“Shantou One of the shareholders holding 4% equity interest of the Company Lianhua”) Ding Lihong One of the director of the Company Shanghai New World International Trading Limited Common director and shareholder (“Shanghai New World”) Shanghai Hong Yi Property Limited (“Shanghai Hong Common director and shareholder Yi”) (b) Transactions 2005 2004 Sales of goods to Shanghai Hong Yi 359 - The above sales and purchase transactions were made at prices comparable to those offered to other third parties. 2005 2004 Guarantee of short-term bank loans provided by the Company, Sheng Heng Chang, Chen Xuewen, Ma Chanying, Risheng Investment, Chen Meixiang, Shantou Lianhua, Ding Lihong, Shenzhen Rieys, Puning Tianhe, Shenzhen Chuanger, Dongguan Jinjing and Chen Hongcheng 375,556 464,000 - 28 - 27. RELATED PARTY TRANSACTIONS (CONTINUED) (c) Balances with related parties 2005 2004 Amount due from Shanghai Hongyi Property (Included in account receivables and other receivables) 570 - Amounts due from Shanghai New World (Repayments in accordance with the purchase agreement) (Included in other receivables and advance to suppliers) 18,840 23,490 Amount due from Chen Meixiang (Included in other receivables) 1,085 - Amounts due from/(to) Risheng Investment (Included in other receivables and other payables) 550 (165) Amounts due from/(to) Ding Lihong (Included in other receivables) 577 (545) Amounts due to Sheng Heng Chang (No fixed terms of repayment) (Included in accruals, other payables) (548) (8,000) Amounts due to Chen Xuewen (Included in other payables) (2,431) (40) Amounts due to Cheng Hong Cheng (Included in other payables) (583) (192) The above balances are all unsecured and interest free. 28. CONTINGENT LIABILITIES As of December 31, 2005, the Company provide a guarantee to a subsidiary, Shenzhen Chaunger for a short-term bank loan of RMB2,900,000 (2004: RMB5,000,000) and provide a guarantee to a subsidiary, Shenzhen Rieys for short-term bank loan of RMB100,000,000 (2004: RMB100,000,000). As of December 31, 2005, the Company provide a guarantee to a subsidiary, Puning Tianhe for a short-term bank loan of RMB40,050,000 (2004: RMB63,000,000). - 29 - 雷伊 B（200168） 2005 年年度报告 29. SEGMENT INFORMATION (a) Business segment The Group conducts its business within one business segment - the business of production and sales of clothes. (b) Geographical segments The Group’s activities are mainly conducted in Mainland China and Hong Kong and Overseas outside China. The geographical segments are primary reporting segments of the Group. An analysis by geographical segments is as follows: Hong Kong and Mainland China Overseas Unallocated Total 2005 2004 2005 2004 2005 2004 2005 2004 Revenue from external 255,091 209,660 203,958 442,058 - - 459,049 651,718 customers Segment results 141,103 118,355 43,328 74,725 - - 184,431 193,080 Other operating income 5,459 11,177 - - - - 5,459 11,177 Unallocated expenses - - (136,477) (99,415) (136,477) (99,415) Profit from operations 146,562 129,532 43,328 74,725 (136,477) (99,415) 53,413 104,842 Finance costs, net - - - - (27,039) (21,588) (27,039) (21,588) Share of gain of an 19 116 - - - - 19 116 associate Income tax expenses - - - (2,577) (7,870) (2,577) (7,870) Minority interests - - - (15,623) (22,290) (15,623) (22,290) Net profit for the year 146,581 129,648 43,328 74,725 (181,716) (151,163) 8,193 53,210 Segment assets 1,082,472 1,263,359 145,629 - - - 1,228,101 1,263,359 Investment in an associate 12,980 12,961 - - - - 12,980 12,961 Total assets 1,095,452 1,276,320 145,629 - - - 1,241,081 1,276,320 Total liabilities 615,451 643,768 - - - - 615,451 643,768 Substantially all the capital expenditures of the Group are in Mainland China. 30. COMMITMENTS (a) Capital commitments 2005 2004 Contracted but not provided in respect of: - Property, plant and equipment 76,948 72,505 Authorized but not contracted in respect of: - Capital contribution to investee companies not yet contributed - 18,483 76,948 90,988 30 雷伊 B（200168） 2005 年年度报告 30. COMMITMENTS (CONTINUED) (b) Operating lease commitments Total future minimum lease payments under non-cancelable operating leases are as follows: 2005 2004 Office buildings and shops - Within one year 5,159 3,056 - Within two to five years 8,127 5,098 - Over five years - 3,532 13,286 11,686 31. IMPACT OF IFRS ADJUSTMENTS ON NET PROFIT/NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if those standards had been applied consistently throughout the years. This basis of accounting differs from that used in the statutory accounts of the Group prepared in accordance with PRC GAAP. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of December 31, December 31, 2005 2004 2005 2004 As reported in the statutory accounts 12,619 53,052 632,232 634,728 Impact of adjustments: - Reversal of amortization of goodwill 6,158 - 6,158 - - Reversal of revaluation on fixed assets - - (3,527) (3,527) - Depreciation (8,603) - (8,603) - - Reversal of depreciation on revalued fixed assets 66 27 93 27 - Deferred tax 2,400 236 6,198 3,798 - Pre-operating expenses (4,447) (105) (6,921) (2,474) As restated in the Group’s IFRS financial statements 8,193 53,210 625,630 632,552 32. APPROVAL OF FINANCIAL STATEMENTS The financial statements have been approved by the Board of Directors on April 26, 2006. 31