宁通信B(200468)宁通信Ｂ2005年年度报告（英文）

Nanjing Putian Telecommunications Co., Ltd. 2005 Annual Report (Based on IFRS) Important Note The Board of Directors, the Supervisory Committee, the directors, supervisors and senior management of the Company hereby confirm that there are no factitious record, misleading statements or material omission in the information carried in this report, and collectively and individually accepts full responsibility for the truthfulness, accuracy and completeness of the whole contents. Nine directors were present at the board meeting, including Mr. Li Weide who authorized Mr. Zhao Xinping to attend the meeting on his behalf. The Company’s Legal Representative Li Weide, General Manager Sun Liang, and Associate Chief Accountant Shi Lian hereby confirm that the financial report in this report is truthful and complete. This report is prepared both in Chinese and in English. In case of any inconsistency between the two versions, the Chinese version should prevail. -1- Contents I. Company Profile ┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 3 II. Financial & Operating Highlights ┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 3 III. Share Capital Variation & Shareholders Introduction ┄┄┄┄┄┄ 5 IV. Directors, Supervisors, Senior Management & Employees┄┄┄┄ 8 V. Corporate Governance Structure┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 14 VI. Highlights of Shareholders General Meetings ┄┄┄┄┄┄┄┄┄ 15 VII. Report of the Board of Directors ┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 16 VIII. Report of the Supervisory Committee ┄┄┄┄┄┄┄┄┄┄┄┄ 22 IX. Significant Events ┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 23 X. Financial Report ┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 26 XI. Documents for Inspection ┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄┄ 27 Attached Financial Statement and notes ┄┄┄┄┄┄┄┄┄┄┄ 28 -2- I. Company Profile 1. Legal Chinese Name of the Company: 南京普天通信股份有限公司 Legal English Name of the Company: Nanjing Putian Telecommunications Co., Ltd. 2. Legal Representative: Mr. Li Weide 3. Secretary of the Board of Directors: Mr. Xiao Zhaokai Mailing Address: No. 1 Putian Road, Qinhuai District Nanjing Telephone: 86-25-52418518-2278,86-25-52409954 Fax: 86-25-52409954 Email Address: xzk@postel.com.cn Securities Affair Representative: Mr. Shi Lian Mailing Address: No. 1 Putian Road, Qinhuai District Nanjing Telephone: 86-25-52418518-2258 Facsimile: 86-25-52409954 Email Address: sl@postel.com.cn 4. Registered Address: No. 58 Qinhuai Road, Jiangning Economics and Technology Development Zone, Nanjing, Jiangsu Province PRC Business Address: No. 1 Putian Road, Qinhuai District Nanjing Postal Code: 210012 Web Site: www.postel.com.cn Email Address: securities@postel.com.cn 5. Appointed Newspaper for Company Information Disclosure: Securities Times & Hong Kong Ta Kung Pao Appointed Web Site for Annual Report Publication: www.cninfo.com.cn Annual Report Prepared At: Financial & Securities Department 6. Listing and Trading Place of Company stock: Shenzhen Stock Exchange Stock Abbreviation: NJ TEL Stock Code: 200468 7. Latest Registration Date: 27 October, 2005 Registered At: Jiangsu Administration for Industry and Commerce Legal Person Operating License Qi Gu Su Zong Zi No. 000225 Registration Code: Taxation Registration Code: 320121134878054 Appointed Public Accounting Firm: Domestic: Shulun Pan Certified Public Accountants Co., Ltd. Overseas: Horwath Hong Kong CPA Limited Business Address: Domestic:61 Nanjing Dong Road, Shanghai Overseas: 2001 Central Palaza,18 Harbour Road, Wanchai,Hong Kong II.Financial & Operating Highlights 1. Financial data for 2005(RMB’000) Profit/(loss) before taxation 9,228 Profit/(loss) attributable to equity holders of the parent -263 Gross profit/(loss) 127,282 -3- Profit/(loss) from operations 22,313 Subsidy Receipt 1,000 Net Cash Generated from Operating Activities -5,774 Increase of Cash and Cash Equivalent -5,711 Note: Explanation of discrepancy as audited under CAS and IFRS (RMB’000) Profit for the year Equity attributable attributable to to equity holders of equity holders of the parent the parent RMB’000 RMB’000 As determined pursuant to PRC accounting 6,303 341,275 regulations Adjustment for provision of staff welfare and bonuses (60) - Income and expenditure taken directly to reserves 52 - Recognition of losses of subsidiaries in excess of the (2,970) - Company’s investment costs in profit and loss account Recognition of losses attributable to the minority over (2,246) (13,154) their contribution in the Company’s accounts Difference in recognition and amortisation of goodwill (1,333) 1,047 Minority interests (9) - As determined pursuant to IFRS (263) 329,168 2. Main financial data for the last 3 years: Financial Indicators 2005 2004 2004(before 2003 adjusted) Turnover(RMB’000 yuan) 775,783 851,292 851,292 818,647 Profit/(loss) attributable to equity -263 -36,614 -27,461 12,068 holders of the parent (RMB’000 yuan) Total Assets(RMB’000 yuan) 1,085,994 948,276 948,276 1,026,102 Shareholder’s Equity(excluding 329,168 329,040 339,948 366,365 minor shareholder’s equity) (RMB’000 yuan) Earnings Per Share(yuan) -0.001 -0.170 -0.128 0.056 Net Assets Per Share(yuan) 1.531 1.530 1.581 1.704 Net Cash Per Share Generated -0.027 0.274 0.075 0.250 from Operating Activities(yuan) Return On Net Assets(%) -0.08% -11.13% -8.08% 3.29% Note 1: The share capital of the Company kept unchanged from the end of the reporting period to the day when this report is published. Note2: Attached Profit Form Profit for Return On Net Equity（%） Earnings Per Share reporting period Fully diluted Weighted average Fully diluted Weighted average Gross profit 38.67% 38.70% 0.5920 0.5920 Profit/(loss) 6.78% 6.78% 0.1038 0.1038 -4- from operations Profit/(loss) -0.08% -0.08% -0.0012 -0.0012 attributable to equity holders of the parent 3. Changes on Shareholders’ Equity during the reporting period (RMB’000) Capital Statutory and Statutory Exchange Share surplus discretionary public Translation Other Retained Shareholder’s Item capital surplus reserve welfare reserve reserves earnings equity in total fund fund At 215,000 168,817 16,151 10,054 -123 115 -80,974 329,040 year-beginning Increase 678 264 391 1,148 2,481 Decrease 792 356 1,205 2,353 At year-end 215,000 168,817 16,037 9,962 268 115 -81,031 329,168 Increase of statutory and discretionary surplus reserve fund and statutory public welfare fund was due to profits appropriation by subsidiaries, and the decrease was due to disposal of a subsidiary. Increase of retained earnings was due to disposal of a subsidiary, and the decrease was due to net loss for the year and profits appropriation by subsidiaries. III. Share Capital Variation & Shareholders Introduction 1. Share Capital Variation (1)Change of the Company’s shares Increase/decre Year-beginning ase during the Year-end year Number Proportion Number Proportion Un-listed non-tradable shares 1.Promoter shares 115,000,000 53.49% 115,000,000 53.49% Including: State-owned shares 115,000,000 53.49% 115,000,000 53.49% Domestic legal person shares Foreign legal person shares Other 2.Placement legal person shares 3.Employee’s shares 4.Preference shares and other Listed shares 1.RMB ordinary shares 2.Domestically-listed foreign shares 100,000,000 46.51% 100,000,000 46.51% 3.Overseas listed foreign shares 4.Other Total number of shares 215,000,000 100% 215,000,000 100% (2)Share issuing and listing in the last three years -5- The Company did not issue shares in the last three years ended by 2005. 2. Shareholders introduction Total number of shareholders 17410 Top ten shareholders Non-tradable Number of Shareholder’s Type of Proportion in shares held Shareholding mortgaged or name shareholder share capital by the frozen shares shareholder China Potevio State-owned 53.49% 115,000,000 115,000,000 0 Company legal person Limited shareholder Cai Weiguang B-shareholder 0.21% 460,000 0 Unknown Chen Chaofan B-shareholder 0.19% 416,879 0 Unknown Lin Xiaoyan B-shareholder 0.19% 410,542 0 Unknown Lin Wenguang B-shareholder 0.17% 357,698 0 Unknown Li Yi B-shareholder 0.16% 351,837 0 Unknown Wu Fenqian B-shareholder 0.15% 332,900 0 Unknown Ye Zhuanyou B-shareholder 0.15% 322,900 0 Unknown WONG LAI B-shareholder 0.14% 308,600 0 Unknown Zhang Zhimei B-shareholder 0.13% 285,600 0 Unknown Top ten shareholders of tradable shares Shareholder’s name Number of tradable shares Share type Cai Weiguang 460,000 B-share Chen Chaofan 416,879 B-share Lin Xiaoyan 410,542 B-share Lin Wenguang 357,698 B-share Li Yi 351,837 B-share Wu Fenqiang 332,900 B-share Ye Zhuanyou 322,900 B-share WONG LAI 308,600 B-share Zhang Zhimei 285,600 B-share Huang Peiling 276,600 B-share Specification of related parties Among the top ten shareholders, China Potevio Company Limited or persons acting in concert is neither a related party nor a person acting in concert with the among the above-mentioned others. It’s unknown by the Company whether there are related shareholders parties or persons acting in concert among the other shareholders. The Company does not know whether there are related parities or persons acting in concert among the top ten holders of tradable shares. 3. Introduction of the Company’s controlling shareholder and effective controller: Name of the controlling shareholder: China Potevio Company Limited Company type: a company limited by shares Legal representative: Xing Wei Date of corporation: July 23, 2003 Registered capital: RMB 1.9 billion Business scope: to develop, manufacture, sell and provide services for mobile telecommunications products and terminal equipment, data communication products, internet communication products, computers, software as well as related spare and parts of these products; to engage in technology transfer, consultancy and services; to engage in project contracting and design; to engage in industry investment. -6- Name of the Company’s effective controller: China Putian Corporation Company type: state-owned sole enterprise Legal representative: Xing Wei Registered capital: RMB 1093.37 million Date of corporation: 1980 Business scope: to develop and manufacture various communications equipment such as large-scale digital program-controlled switchboard, GSM and CDMA mobile telecommunication equipment and mobile phone, IP serial products, micro-wave telecommunication equipment, optical telecommunication equipment, optical and electric telecommunication cable, communication power supply, distribution equipment, IC phone, multi-media computer terminal, fax machine, postal mechanic and so on; engage in contract for international and domestic telecommunication project, engage in technical and economic business such as cooperation, technology introduction, import and export of relevant products. Originally named China Posts and Telecommunications Industry Corporation, China Putian Corporation is a large-scale enterprise under the State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”). The Company’s original controlling shareholder was China Putian Corporation. In this reporting period the shareholder transferred 115,000,000 domestic legal person shares of the Company without consideration to China Potevio Company Limited. Therefore the Company’s controlling shareholder was transformed to China Potevio Company from China Putian Corporation. The settlement procedure of the share transfer was completed with China Securities Depository and Clearing Corporation Limited Shenzhen Branch on 28 June 2005. The Company published announcement about this news on the Securities Times and Ta Kung Pao on 30 June 2005. This diagram illustrates the ownership and controlling relationship between the Company and its effective controller: SASAC 100% China Putian Corporation 100% China Potevio Company Limited 53.49% Nanjing Putian Telecommunications Co., Ltd. -7- IV. Directors, Supervisors, Senior Management & Employees 1. Directors, supervisors and senior management (1) Profile Shareholdi Shareholding Whether ng at at year-end receive Name Sex Age Position Term of office year-begin remuneration ning from the Company June 2003 Director -May 2006 Li Weide Male 58 0 0 Yes Chairman of the Jan 2005 BOD -May 2006 June 2005 Director Sun -May 2006 Male 41 0 0 Yes Liang Jan 2005 General Manager -May 2006 Zhang June 2005 Xiaoche Male 48 Director 0 0 No -May 2006 ng Wu June 2003 Male 35 Director 0 0 No Xiaohua -May 2006 Jiang June 2005 Male 37 Director 0 0 No Kun -May 2006 Shi June 2003 Male 50 Independent Director 0 0 Yes Jianjun -May 2006 Yang June 2003 Male 44 Independent Director 0 0 Yes Zhen -May 2006 Yu June 2003 Honglian Male 51 Independent Director 0 0 Yes -May 2006 g Chairman of the Wang June 2003 Male 55 Supervisory 0 0 No Jiaqiang -May 2006 Committee Xu Fema June 2005 37 Supervisor 0 0 No Xiaohui le -May 2006 Shi June 2003 Male 55 Supervisor 0 0 Yes Xinhua -May 2006 Jiang Deputy General June 2003 Male 50 0 0 Yes Haishan Manager -May 2006 Sun Male 48 Deputy General June 2003 0 0 Yes -8- Qiang Manager -May 2006 Jiang Deputy General June 2003 Male 43 0 0 Yes Hanbin Manager -May 2006 Liu Deputy General June 2003 Male 51 0 0 Yes Chuanxi Manager -May 2006 Yuan Deputy General June 2003 Male 42 0 0 Yes Yong Manager -May 2006 Zou Deputy General June 2003 Male 45 0 0 Yes Dezhong Manager -May 2006 Xiao Secretary of the June 2003 Male 40 0 0 Yes Zhaokai BOD -May 2006 Note: this chapter discloses the directors, supervisors and senior management by the end of 2005. In March 2006, Mr. Zhao Xinping was elected into the Third BOD in the shareholders general meeting. (2) Major work experience of the directors, supervisors and senior management in the last five years Name Office term Entity Position June 2000 The Company Vice Chairman of the Second -June 2003 BOD and concurrently General Manager Le June 2003 The Company Vice Chairman of the Third Weide -Jan 2005 BOD and concurrently General Manager Jan 2005 The Company Chairman of the Third BOD -Present Mar 2001 Shanghai Posts & Executive Deputy General -Dec 2002 Telecommunications Equipment Manager, and concurrently Co., Ltd. general manager of Multimedia Department Mar 2001 Shanghai ADC General Manager -Dec 2002 Telecommunications Equipment Co., Ltd. Mar 2001 Shanghai Lucent Technologies Deputy General Manager Sun -Dec 2002 Transmission Equipment Co., Liang Ltd. Jan 2003 Shanghai Posts & Executive Deputy General -Jan 2005 Telecommunications Equipment Manager Co., Ltd. Jan 2005 The Company General Manager -Present June 2005 The Company Member of the Third BOD -Present Oct 2000 China Putian Corporation General Manager of Enterprise -Nov 2001 Management Department Nov 2001 China Putian Corporation General Manager of Capital Zhang -Mar 2004 Operation Department Xiaoche June 2003 China Potevio Company General Manager Assistant ng -Present Limited June 2005 The Company Member of the Third BOD -Present -9- Dec 2001 China Putian Corporation Deputy General Manager of -Present Strategy & Development Wu Department Xiaohua June 2003 The Company Member of the Third BOD -present Nov 2000 China Putian Corporation Deputy head of Investment & -Nov 2001 Development Division of Operation & Finance Departmen Nov 2001 Chongqing Telecommunications Deputy General Manager -May 2003 Equipment Company Ltd. Jiang May 2003 China Putian Corporation Deputy General Manager of Kun -Apr 2005 Capital Operation Department June 2003 The Company Member of the Third -April 2005 Supervisory Committee April China Potevio Company Deputy General Manager of 2005-Present Limited Capital Operation Department June 2005 The Company Member of the Third BOD -Present Jul 1997 Nanjing University Vice President Shi -Present Jianjun June 2003 The Company Independent Director of the -Present Third BOD Dec 2001 Nanjing University of Posts & Vice President Yang -Present Telecommunications Zhen June 2003 The Company Independent Director of the -Present Third BOD Oct 1993 Finance Department of Nanjing Associate Professor Yu -President Audit University Honglia June 2003 The Company Independent Director of the ng -Present Third BOD June 2000 The Company Member of the Second BOD -May 2001 May 2001 The Company Chairman of the Second -June 2003 Supervisory Committee Wang Nov 2001 China Putian Corporation General Manager of Financial Jiaqiang -Mar 2005 Department Mar 2005 China Putian Corporation Financial Advisor -Present June 2003 The Company Chairman of the Third -Present Supervisory Committee Oct 2000 China Putian Corporation General Manager Assistant of -Apr 2005 Audit Department Xu Apr 2005 China Putian Corporation Business Manager of Audit Xiaohui -Present Department June 2005 The Company Member of the Third -Present Supervisory Committee Jul 1997 The Company Deputy secretary of the Party -Aug 2002 Committee May 2002 The Company Member of the Second Shi -June2003 Supervisory Committee Xinhua June 2003 The Company Member of Third Supervisory -Present Committee and concurrently Chairman of the labor union Jiang June 2000 The Company Deputy General Manager Haishan -Present -10- May 2002 The Company Member of the Second BOD -June 2003 June 2003 The Company Member of the Third BOD -Apr 2005 June 2000 The Company Member of Second Supervisory -May 2002 Committee and concurrently Sun Chairman of the labor union Qiang May 2002 The Company Deputy General Manager -Present Jiang Dec 1998 The Company Deputy General Manager Hanbin -Present Jan 1997 The Company Deputy General Manager and -Dec 2001 then General Manager of Marketing Department Liu Mar 2002 The Company Deputy General Manager Chuanxi -Present May 2002 The Company Member of the Second BOD -June 2003 Yuan Aug 2002 The Company Deputy General Manager Yong -Present Zou Aug 2002 The Company Deputy General Manager Dezhon -Present g June 2000 The Company Secretary of the Second BOD Xiao -June 2003 Zhaokai June 2003 The Company Secretary of the Third BOD -Present (3) Concurrent jobs of the directors, supervisors and senior management ① Persons concurrently working for the Company’s shareholders Name Name of Shareholder Position Office term Zhang China Potevio Company Since June CEO Assistant Xiaocheng Limited 2003 China Putian Corporation Deputy General Since Wu Manager of Strategy December Xiaohua and Development 2001 Department China Potevio Company Deputy General Since April Jiang Kun Limited Manager of Capital 2005 Operation Department Wang China Putian Corporation Since March Financial Advisor Jiaqiang 2005 China Putian Corporation Business manager of Since April Xu Xiaohui Audit Department 2005 ② Persons concurrently working for the subsidiaries and other units Name Work Unit Position Nanjing Mennekes Electric Appliance Vice Chairman of the Li Weide Company Ltd. BOD Chairman of the Zhang Chengdu Putian Telecommunications Cable Supervisory Xiaocheng Co., Ltd. Committee Putian Eastern Communications Group Co., Director Ltd. Eastern Communications Co., Ltd. Director -11- Shenzhen Putianlingyun Electronic Co., Ltd. Director Shanghai Posts & Telecommunications Director Equipment Co., Ltd. Infotech Ventures Co., Ltd. Director Wu Xiaohua Beijing Capitel Co., Ltd. Director Chongqing Putian Communication Jiang Kun Director Equipment Co., Ltd. Putian Telecommunications (H.K.) Co., Ltd. Chairman of the BOD Sun Liang Nanjing Postel Wongzhi Telecommunications Director Company Ltd. Shi Jianjun Nanjing University Vice President Nanjing University of Posts & Yang Zhen Vice President Telecommunications Finance Department of Nanjing Audit Yu Hongliang Associate Professor University Beijing Matsushita Putian Communication Manager of Financial Equipment Co., Ltd Department Wang Putian Eastern Communications Group Co., Jiaqiang Supervisor Ltd. Eastern Communications Co., Ltd. Supervisor Beijing Great Dragon Information Tech. Co. Supervisor Xu Xiaohui Chongqing Putian Communication Supervisor Equipment Co., Ltd. Jiang Nanjing Putian Smart-building Company Ltd. Chairman of the BOD Haishan Nanjing Putian Shiye Company Ltd. Chairman of the BOD Nanjing Putian Hongyan Electric Appliances Chairman of the BOD Company Ltd. Putian Telecommunications (H.K.) Co., Ltd. Director Sun Qiang Hangzhou Hongyan Electric Appliances Director Company Ltd. Nanjing Putian Zhongyou Supervisor Telecommunications Company Ltd. Nanjing Putian Changle Telecommunications Chairman of the BOD Equipment Company Ltd. Nanjing Bada Telecommunications Chairman of the BOD Equipment Company Ltd. Shanghai Huaning Telecommunications Jiang Hanbin Chairman of the BOD Development Ltd. Nanjing Putian Zhongyou Director Telecommunications Company Ltd. Nanjing Tailitong Telecommunications Director Company Ltd. Shanghai Huaning Telecommunications Liu Chuanxi Director Development Ltd. Beijing Picom Telecommunications Director Equipment Ltd. Nanjing Postel Wongzhi Telecommunications Chairman of the BOD Yuan Yong Company Ltd. Nanjing Dongda Wideband Telecommunications Technology Company Independent Director Ltd. Zou Dezhong Nanjing Putian Network Company Ltd. Chairman of the BOD Nanjing Putian Smart-building Company Ltd. Director Nanjing Nanafang Telecommunications Chairman of the BOD Company Ltd. -12- Vice Chairman of the Xishan Putian Information Network Co., Ltd. BOD Xiao Zhaokai Xishan Putian Information Network Co., Ltd. Director (4) Annual remuneration ① Procedure of making decision on the annual remuneration of the directors, supervisors and senior management, and the basis on which such decisions are made. Members of the senior management receive yearly remuneration from the Company in accordance with their performance. The remuneration scheme for the senior management is proposed by the Remuneration & Appraisal Committee of the BOD and is implemented upon the approval of the board. The independent directors receive allowance from the Company at the level that is decided by shareholders’ general meeting. ② Annual remuneration of the directors, supervisors and senior management in 2005: Total amount of remuneration received Name Position Note from the Company in 2005(Yuan) Li Weide Chairman of the BOD 201,772 Director and concurrently Sun Liang 118,812 general manager Allowance for Shi Jianjun Independent Director 30,000 independent directors Allowance for Yang Zhen Independent Director 30,000 independent directors Allowance for Yu Hongliang Independent Director 30,000 independent directors Shi Xinhua Supervisor 142,136 Jiang Haishan Deputy General Manager 153,830 Sun Qiang Deputy General Manager 186,296 Jiang Hanbin Deputy General Manager 186,248 Liu Chuanxi Deputy General Manager 163,710 Yuan Yong Deputy General Manager 194,132 Zou Dezhong Deputy General Manager 194,192 Xiao Zhaokai Secretary of the BOD 142,016 Of all the directors and supervisors, Mr. Zhang Xiaocheng, Mr. Wu Xiaohua, Mr. Jiang Kun, Mr. Wang Jiaqiang and Ms. Xu Xiaohui do not receive remuneration from the Company. Mr. Zhang Xiaocheng and Mr. Jiang Kun receive remuneration from China Potevio Company Limited, the Company’s controlling shareholder. Mr. Wu Xiaohua, Mr. Wang Jiaqiang and Ms. Xu Xiaohui receive remuneration from China Putian Corporation, the Company’s effective controller. (5) Appointment and resignation of the directors, supervisors and senior management in the reporting period ① In the reporting period, due to job arrangement, Mr. Huang Zhiqin, Mr. Cao Bin, Mr. Jiang Haishan and Ms. Wang Lili resigned from the BOD, and Mr. Jiang Kun resigned from the supervisory committee. Mr. Zhang Xiaocheng, Mr. Sun Liang and Mr. Jiang Kun were elected into the Third BOD, Ms. Xu Xiaohui elected into the Third Supervisory Committee by the shareholders’ general meeting held on 9 June 2005. Mr. Li Weide was -13- elected as Chairman of the BOD in the 16th meeting of the Third BOD on 9 January 2005. ② In the reporting period, as approved by the board of directors on 9 January 2005, Mr. Li Weide left the post of general manager, and Mr. Sun Liang, who was nominated by the chairman, was appointed as the general manager. 2. Employees of the Company At the end of 2005, the Company had 1,576 employees. A breakdown by job duties of the employees is as follows: Technology 327 Production 496 Sales 370 Services 148 Administration 235 A breakdown by educational level is as follows: University degree and above 374 Technical secondary school 201 College 459 High school and below 542 The Company should bear expenses for 559 retired employees. V. Corporate Governance Structure 1. Present state of the Company’s governance The Company has been continuously optimizing its legal person governance structure in accordance with the PRC Company Law, Securities Law and relevant requirements of CSRC ever since its IPO in the stock market. In the reporting period, the Company formulated Rules on Independent Directors and Detailed Working Rules of General Manager, and amended the Articles of Association，Rules on Shareholders’ General Meeting, and Rules on Board Meeting. At present, the legal person governance structure of the Company is generally in conformity with the requirement of the documents promulgated by CSRC on standardizing the corporate governance of the listed companies. 2. Independent directors’ working performance In the reporting period the independent directors of the Company actively participated the Company’s decision-making and paid great attention on the Company’s operating and financial condition, and presented independent opinions on relevant significant issues including related-party transactions, guarantee providing, assets selling, director nomination and appointment of members of senior management. They performed the duties and rights granted by the relevant laws, regulations and the Company’s articles of association, and safeguarded the interests of the shareholders and the Company. (1) Independent directors’ attendance at the board meetings during the reporting period: Number of Attendance Attendance Name board Absence Note in person by proxy meetings Away on a business Shi Jianjun 10 8 2 trip Yan Zhen 10 9 1 Away on a business -14- trip Yu Away on a business 10 8 1 1 Hongliang trip (2) objections raised by independent directors against certain issues of the Company During the reporting period, the independent directors did not raise objections against any proposals of the BOD or other significant issues of the Company.. 3. The Company’s separation from the controlling shareholder in five aspects (1) Personnel: The Company has independent labor and personnel system. All members of the senior management receive remuneration from the Company and do not work for the controlling shareholder. (2) Assets: The Company’s assets are clearly separated from the controlling shareholder with ownership, subject to no impropriation or control by the controlling shareholder. (3) Finance: The Company has established independent financial department and financial control policies. The controlling shareholder did not interfere the Company on using its own fund. (4) Organization: The Company has a complete and independent internal organization. The individual sectors, such as the Board of Directors and Supervisory Committee, can all perform their duties independently. (5) Business: The Company operates independently and does not rely on its controlling and related companies. 4. Establishment and implementation of appraisal and incentive system for the senior management In the reporting period the BOD considered and passed the remuneration scheme and appraisal method for senior management. According to the scheme, the senior management’s annual remuneration was made up of three parts including basic remuneration, post remuneration and performance remuneration. The first two parts will be paid monthly and the last part will be paid after the senior management are appraised by the BOD according to the Company’s operating results and their personal performance. VI. Highlights of Shareholders’ General Meeting In the reporting period the Company held the 2004 Shareholders’ General Meeting on June 9, 2005, in which the following proposals were passed: (1) 2004 Work Report of the Board of Directors (2) 2004 Work Report of the Supervisory Committee (3) 2004 Work Report of General Manager (4) 2004 Financial Report (5) 2004 Profit Distribution Plan (6) 2004 Annual Report of the Company (7) Amendment to the Articles of Association -15- (8) Amendment to the Rules of the Shareholders’ General Meeting (9) Amendment to the Rules of the Board of Directors (10) Proposal on adjusting members of the BOD (11) Proposal on adjusting members of the supervisory committee (12) Proposal on executing related-party transactions with Shanghai Posts & Telecommunications Equipment Co., Ltd and Shenzhen Putianlingyun Electronics Co., Ltd. The announcement of the meeting was published on Securities Times and Ta Kung Pao on 10 June 2005. VII. Report of the Board of Directors I. Review of operations during the reporting period 1. Discussion and analysis of the overall operating condition of the Company during the reporting period The Year 2005 was an important year for the Company. It was a year in which the Company laid a solid foundation to make its industries stronger and better. During the year, the Company further sorted out its idea on the direction of its development, deciding to engage in three industries, including application industry, processing industry and integration trade industry. It put more efforts on capital operation and organizational adjustment, effectively optimizing its structure of production. During the year, the Company achieved awarding results in expanding both overseas and domestic markets, and successfully maintained the lead in market shares in the fields of distribution frame products, intelligent building products and electrical appliances. During the year, the Company developed a lot of new products and technology that were guided by the market demand and catered to the trend of technology development and the shift of customer needs, such as IP video terminal and digital Set-top Box, fostering many new economic growth points. Meanwhile, fundamental management was further intensified by the standard of simplicity, high-efficiency and pragmatism, and good results were achieved in different areas such as cost control, financial management and human resources system establish. The revenue and profit for the reporting period is as follows(RMB’000): 2005 2004 Change(%) Change(%) Sales revenue 775,783 851,292 -75,509 -8.87% Gross profit 127,282 157,712 -30,430 -19.29% Profit/(loss) -263 -36,614 36,351 99.28% attributable to equity holders of the parent Decrease of revenue and gross profit was mainly due to the decrease of revenue from telecommunications products and electric appliances as a result of the rising of the raw material prices and the falling of the product prices. Main reasons for the growth of net profit were: compared with last year, administrative expenses dropped 70,490 thousand yuan, gain from disposal of subsidiaries rose 10,753 thousand yuan, and share -16- of losses of associates decreased 6,842 thousand yuan. 2. Operating condition of main business (1) A breakdown of main business by industry and product( RMB’000) A breakdown of main business by industry Year-on-year A breakdown Year-on-year Year-on-year Gross margin increase/decre by industry or Revenue Cost increase/decrease increase/decrease （％） ase of gross product of revenue（％） of cost（％） margin（％） Telecommunic 654,019 546,452 16.45% -8.79% -6.31% -2.21% ations industry Electric 115,294 95,179 17.45% -8.69% -7.77% -0.82% appliances Other 6,470 4,060 37.25% -18.71% -16.73% -1.49% A breakdown of main business by product Distribution frame series 229,431 165,579 27.83% -10.08% -8.73% -1.07% product Comprehensiv e wiring and data 315,364 262,226 16.85% -6.08% -8.24% 1.96% transmission products Plugs and receptacles for 115,294 95,179 17.45% -8.69% -7.77% -0.82% industrial and civilian use Other 115,693 122,707 -6.06% -13.72% 1.45% -15.86% (2) A breakdown of main business by region( RMB’000) Year-on-year increase/decrease of revenue Region Revenue Cost （％） North China 194,470 157,344 -31.12% East China 306,398 250,623 13.27% Other regions 274,915 237,724 -7.89% 3. Major suppliers and customers In 2005, the Company’s purchase from the top five suppliers amounted to RMB 209,418 thousand, accounting for about 28.27 percent of the total purchase, and sales to the top five customers amounted to RMB 67,202 thousand, accounting for about 8.66 percent of the total revenue. 4. Composition and changes of assets in the reporting period 2005 Year-en 2004Year-end Change(RMB’000) Change(%) Main factors that cause a d material change Receivables 461,221 399,743 61,478 15.38% Increase of trade and other and receivables prepayments Inventories 163,202 162,462 740 0.46% - Property, plant 116,873 130,702 -13,829 -10.58% Disposal of fixed assets and equipment Construction in 5,842 3,198 2,644 82.68% progress Short-term 434,000 349,200 84,800 24.28% Necessity for current capital bank loan turnover Long-term bank 35,000 35,000 0 0.00% - loan -17- 2005 2004 Change(RMB’000) Change(%) Selling costs 72,511 71,546 965 1.35% - Administrative 34,111 104,589 -70,478 -67.39% Disposal of the inventories expenses for which provisions for falling price reserves had been partly or wholly made Finance costs 18,235 18,174 61 0.34% - Tax 4,314 2,194 2,120 96.63% In this year the Company paid tax for the previous year 5. Composition of cash flows and material change 2005 2004 Change(’000) Change(%) Main factors that cause a material change Cash flows form operating -5,774 58,806 -64,580 -109.82% Trade and other payables activities increased as a result of the company’s taking advantage of its business credit, meanwhile raw material prices rose, causing the cost to rise Cash flows form investment 19,704 -1,809 21,513 1189.22% Gain on disposal of equity activities of subsidiaries Cash flows form financing -19,641 -32,123 12,482 38.86% Part of bank loans activities reached maturity at the end of 2005 and was obtained again at the beginning of 2005 6. Operating results of main subsidiaries and associated companies in 2005 (Yuan) (1) Main subsidiaries Equity owned Registered Net Subsidiary by the Main business Total Assets Revenue capital Profit/loss Compa ny Nanjing Manufacture and Nanfang sales of data Telecommunicat 98.24% 34,205,148 151,768,561 166,473,738 3,023,031 communication ions Company equipment Limited Nanjing Putian Manufacture and Smart-building 41.35% sales of intelligent 12,000,000 70,397,899 104,372,072 9,381,797 Technology Ltd. building system Beijing Picom Network electronic Telecommunicat products, digital USD 51% 19,699,861 34,912,371 -5,823,078 ions Equipment transmission 500,000 Ltd. system Nanjing Putian Electric Hongyan appliances, USD Electric 51.2% 67,464,496 85,924,734 799,147 telecommunicatio 1,930,000 Appliance n parts Company Nanjing Putian manufacture and Network sales of software Company Ltd. of 91.16% telecommunicatio 10,000,000 8,460,788 2,687,041 -1,040,070 ns, network and electronic equipment -18- Nanjing Putian Manufacture and Changle sales of Telecommunicat 50.7% 5,000,000 16,527,651 40,284,057 2,776,816 telecommunicatio ions Equipment n equipment Co., Ltd. Putian Export and import Telecommunicat of ions (H.K.) Co., telecommunicatio HKD Ltd. 90% ns equipment, 19,260,914 16,459,727 5,903,136 2,000,000 Hi-tech R & D and transfer, technology trade Nanjing Postel Design, Wongzhi production and 90,000,000 67% 29,967,367 - 983,378 Telecommunicat sales of CDMA ($10,900,000) ions Co., Ltd. cell phone Note: The net profit of Nanjing Nanfang Telecommunications Company Limited increased 16.65 million Yuan from that of last year, mainly because that more provisions for receivables and inventories were made in last year, and meanwhile this year’s product gross margin was higher than last year’s. (2) Associated companies that contributed more than 10 percent of the Company’s net profit. Investment Equity owned Registered Income Company by the Main business Net profit capital contributed to Company the Company Data Xishan Putian communications, Information Network 49% 20,000,000 -4,072,968 -1,995,754 voice transmission, Co., Ltd. internet services II. Forecast of future development 1. Analysis of the trend of industrial development and market competition The Company is a telecommunications equipment manufacturer. With the soaring growth of telecommunications and internet industries, the telecommunications equipment manufacturers are faced with a golden opportunity for development, but meanwhile the competition in this industry is very fierce. The Company will try to grasp the opportunity, keeping up with the trend of new technologies such as 3G and FTTH, setting a target that conforms to the Company’s realities, entering the coordinated product market in a short time, ensuring it develops in a sustainable and healthy way. 2. Operating plan for the new year (1) Further conduct institutional restructure and enhance outside cooperation, facilitating new progress of the Company’s industries. (2) Strengthen the opening up of new markets both at home and abroad, enhance the sense of service and promote the standard of service, widening the influence of the Company’s brand, emphasizing effective publicity. (3) Make innovations, speeding up the development of new products, fostering new economic growth points for the Company. (4) Conduct reforms in mechanism and structure and implement capital operation to promote the development of the Company -19- (5) Adopt a modern lean management model to raising work efficiency and try to gain actual effect (6) Strengthen the management and exploiting of human resources, building the corporate culture with a spirit of keeping innovation. 3. Fund demand and usage plan According to its operating plan, the Company needs current capital of about RMB 200 million in 2006, which will mainly be its own funds and bank loans. 4. Difficulties and risks in operations (1) Due to hot market competition, production prices continued to fall in this year. Meanwhile, prices of raw materials got still higher, causing the production cost to rise. That is a difficulty the Company is faced with. In the last few years, the Company has taken a series measures, such as purchasing by public bidding and raising sales volume, to counteract the unfavorable influences. In the future it will adopt more methods including setting up a purchasing center to further control the cost and expenses. (2) In order to prevent and reduce financial risks, the Company will continue to clear up receivables, reduce inventories and conduct reorganization of assets to further perfect assets structure and enhance assets quality. III. Investment in the reporting period 1. Use of proceeds from share issuing The Company did not raise any proceeds by issuing shares in the reporting period or use proceeds raised in previous periods. 2. Other investment in the reporting period (1) There is no significant investment in the reporting period. (2) In this reporting period, the Company and Germany Mennekes Electrical Products reinvested a total of 500,000 dollars, or 250,000 dollars each, in Nanjing Mennekes Electric Appliances Ltd., increasing its registered capital from 2.2 million dollars to 2.7 million. After the reinvestment, the Company still had 50% equity in it. IV. Day-to-day work of the Board of Directors 1. Meetings and resolutions of the BOD during the reporting period (1)On 9 January 2005, the Company held the 16th Meeting of the Third BOD, which considered and approved the proposal of changing the chairman of the board and general manager of the Company. Announcement of the meeting was published on the Securities Times and Ta Kung Pao on 11 January 2005. (2)On 3 February 2005, the Company held the 17th Meeting of the Third BOD, which considered and approved the Report of the BOD to All Shareholders Regarding Share Purchasing by China Potevio Company Limited (or Legal Person Share Transferring without Consideration). Announcement of the meeting was published on the Securities Times and Ta Kung Pao on 4 February 2005. -20- (3) On 5 April 2005, the Company held the 18th Meeting of the Third BOD, which considered and approved the proposal of purchasing 3.76% equity of Nanjing Putian Network Company Ltd. from one of its individual shareholders at the price of 130,582.69 Yuan. (4) On 15 April 2005, the Company held the 19th Meeting of the Third BOD, which considered and approved 15 proposals including 2004 Work Report of the BOD. Announcement of the meeting was published on the Securities Times and Ta Kung Pao on 19 April 2005. (5) On 27 April 2005, the Company held the 20th Meeting of the Third BOD, which considered and approved 2005 First Quarterly Report of the Company. (6) On 8 June 2005, the Company held the 21st Meeting of the Third BOD, which considered and approved the following proposals: ① the proposal of exchanging a block of land with Jiangsu Honghui Real Estate Company ② the proposal of purchasing 1% equity of Nanjing Putian Network Company Ltd. from one of its individual shareholders for RMB 34,787.67 yuan. ③ the proposal of establishing a branch company in Shenzhen ④ the proposal of deferring changing an independent director ⑤ the proposal of mortgaging the property of the Company to apply for bank loans (7) On 28 June 2005, the Company held the 22nd Meeting of the Third BOD, which considered and approved the proposal of transferring 45% equity of Nanjing Putian Smart-building Company Ltd. for 21.02 million yuan. Announcement of the meeting was published on the Securities Times and Ta Kung Pao on 30 June 2005. (8) On 27 July 2005, the Company held the 23rd Meeting of the Third BOD, which considered and approved two proposals including: ① the proposal of restructuring the electronic product processing center into a limited company ② the proposal of reinvesting in Nanjing Mennekes Electric Appliance Ltd. (9) On 12 August 2005, the Company held the 24th Meeting of the Third BOD, which considered and approved Work Report of General Manager for the First Half of 2005 , the proposal of changing the public accounting firm and other 4 proposals. Announcement of the meeting was published on the Securities Times and Ta Kung Pao on 16 August 2005. (10) On 28 October 2005, the Company held the 25th Meeting of the Third BOD, which considered the 2005 Third Quarterly Report and other two proposals. Announcement of the meeting was published on the Securities Times and Ta Kung -21- Pao on 31 October 2005. (2) Implementation of resolutions of shareholders’ general meeting by the board of directors During the reporting period the board of directors was not authorized by the shareholders’ general meeting to implement any resolutions, nor were there a profit distribution plan or subsequent share offering plan for the BOD to conduct. 5. Profit distribution preplan for the year Audited by the international accounting standard, the Company reported net loss of RMB 263 thousand for 2005 and accumulated losses of RMB 81,031 thousand at year-end (according to the Chinese accounting standard, the Company reported net profit of RMB 6,303,424 and attributable profit of RMB –86,314,665 at year-end). According to the fact, the Board of Directors advised that no dividends be declared for 2005, and that no capital reserve be transferred into share capital. VIII. Report of Supervisory Committee 1. Meetings of the Supervisory Committee during the reporting period The Supervisory Committee held four meetings in the reporting period: (1) On 15 April 2005, the Company held the 8th Meeting of the Third Supervisory Committee, which considered and approved the 2004 work report of the Supervisory Committee, the Company’s 2004 financial report and 2005 financial budget, the full text and summary of the Company’s 2004 annual report, and the proposal of adjusting supervisory committee member. Announcement of the meeting was published on the Securities Times and Ta Kung Pao on 19 April 2005. (2) On 26 April 2005， the Company held the 9th Meeting of the Third Supervisory Committee, which considered and approved the Company’s First Quarterly Report of 2005. (3) On 12 August 2005, the Company held the 10th Meeting of the Third Supervisory Committee, which considered and approved the full text and summary of the Company’s 2005 Semi-annual Report. (4) On 27 October 2005, the Company held the 11th Meeting of the Third Supervisory Committee, which considered and passed the Company’s 2005 Third Quarterly Report. 2. Independent opinion presented by the Supervisory Committee (1) The Company’s operation according to the laws The Supervisory Committee supervised the procedures and resolutions of -22- shareholders’ general meeting and meetings of the Board of Directors, the implementation of resolutions of shareholders’ general meeting by the Board of Directors, and the actions of senior management in performing their duties, as well as the managerial rules formulated by the Company. The Supervisory Committee believe that the Company’s operations were in conformity with the PRC Company Law, Rules Governing Listing of Stocks on Shenzhen Stock Exchange, and the Company’s Articles of Association. The Company’s procedures of decision-making is in conformity with the relevant laws and sound internal control system has been established. No acts of the directors and senior management were observed violating the laws, regulations and the Company’s Articles of the Association or contrary to the interest of the Company. (2) The Company’s financial position: The Supervisory Committee believe that the 2005 Financial Statements give a true view of the Company’s financial position and operating results (3) The Company’s transaction in purchasing and selling assets The Company’s transactions in purchasing and selling assets in the reporting period were executed at fair prices. No insider deals, actions harmful to certain shareholders’ interest, or causing loss of the Company’s assets were found. (4)The Company’s related-party transactions: The Company’s related-party transactions in the reporting due to objective reasons were executed with contracts signed under the rule of fair trade. No actions of harming the interests of the Company were observed. IX. Significant Events 1. Significant lawsuit or arbitration during the reporting period The Company was not engaged in any lawsuit or arbitration of material importance during the reporting period. 2. Matters related to purchasing assets, selling assets, acquisition or merging during the reporting period (1) Brief introduction on assets acquisition and selling during the reporting period and progress of such issues ① As approved by the 22nd meeting of the 3rd BOD, the Company transferred 45% equity of Nanjing Putian Smart-building Company Ltd. to Shanghai Linyan Investment Consulting Company Ltd. at the price of 21.02 million yuan(see the Company’s announcement on assets selling published on the Securities Times and Hong Kong Ta Kung Pao on 30 June 2005). As a result of the transaction, the Company’s shareholding in Nanjing Putian Smart-building Company ltd. was decreased from 90.767% to 45.767%. According to the share transfer agreement, the Company kept actual control of the subsidiary. From this transaction the Company acquired an income up to 11.78 million Yuan, which was counted as an item of profit in the financial statement for this fiscal year. -23- ② As approved by the 21st meeting of the 3rd BOD, the Company purchased 1% equity of Nanjing Putian Network Company Ltd. for 34787.67 yuan from one of the subsidiary’s individual shareholders, thus increasing the Company’s equity in this subsidiary to 93.76%. ③ In the reporting period, Nanjing Putian Shiye Company Ltd., one of the Company’s subsidiaries, sold 35% equity of Nanjing Putian Communications Company Ltd. for 633,850 yuan, reducing its equity from 45% to 10%. Nanjing Putian Communications Company Ltd. was no longer consolidated into the financial statement of the Company. (2) Influence of the above issues on the continuity of the Company’s business and the stability of the management The above-mentioned assets purchase and selling will not affect the continuity of the Company’s business and the stability of the management. 3. Related-party transactions and receivables and payables with the related parties: (1) Related-party transactions that are relevant to day-to-day operations in the reporting period ① Purchase from the related parties Related Party Relations with the Amount(Yu Proportion in total purch Company an) ase amount in 2005 Nanjing Yuhua Electroplating Associated company 1,824,015 0.24% Factory Total 1,824,015 0.24% ② Sales to the related parties Related Party Relations with the Amount(Yuan) Proportion in total Company revenue in 2005 Shanghai Posts & Both controlled by the 484,501 0.06% Telecommunications Equipment same parent company Co., Ltd. Chongqing Putian Communication Both controlled by the 2,092,996 0.27% Equipment Co., Ltd. same parent company Shanghai Huanying Display Both controlled by the 5,892,906 0.76% Technology Company Ltd. same ultimate shareholder Shenzhen Putianlingyun Electronic Both controlled by the 245,299 0.03% Ltd. same parent company Naning Putian Zhongyou Both controlled by the 686,476 0.09% Telecommunications Co., Ltd. same parent company Guangxi Putainyoutong Both controlled by the 392,405 0.05% Telecommunications Equipment same parent company Company Ltd. Nanjing Putian Datang Information Associated company 1,111,043 0.14% Electric Company Ltd. Total 10,905,626 1.40% ③ Note on day-to-day related-party transactions The above-mentioned transactions were regular purchase and sales with related parties in accordance with the demand of operation of the Company on the basis of equality, mutual benefit and fair trade. These transactions, which were executed on the principle of market price, constituted only a small proportion of the Company’s total revenue or purchase amount, and thus will not affect the independence of the Company or cause the Company to rely on the related parties. According to the demand of the operation of the Company, such transactions of purchase and sales will continue in the next year. -24- (2) Receivables and payables with the related parties Account receivable： Related party Relations with the Amount(Yuan) Company Shanghai Posts & Telecommunications Equipment Both controlled by the 454,266 Co., Ltd. same parent company Shanghai Huanying Display Technology Company Both controlled by the 5,054,577 Ltd. same ultimate shareholder Shenzhen Putianlingyun Electronic Ltd. Both controlled by the 287,000 same parent company Chongqing Putian Communication Equipment Co., Both controlled by the 266,305 Ltd. same parent company Guangxi Putainyoutong Telecommunications Both controlled by the 233,969 Equipment Company Ltd. same parent company Naning Putian Zhongyou Telecommunications Co., Associated company 2,987,777 Ltd. Nanjing Putian Datang Information Electric Associated company 593,986 Company Ltd. Other notes receivable Related party Relations with the Amount(Yuan) Company Xishan Putian Information Network Co., Ltd. Associated company 1,000,000 Account payable： Related party Relations with the Amount(Yuan) Company Nanjing Yuhua Electroplating Factory Associated company 1,131,358 4. Material contracts (1) During the reporting period the Company did not trust, contract or lease assets to other companies or from other companies. (2) Guarantee providing During the reporting period the Company provided guarantee for its consolidated subsidiaries, with the accumulative amount of RMB44,000,000, and the balance of RMB35,000,000, constituting 10.26% of net assets at year-end. Except the afore-said guarantee, the Company did not provide guarantee for any other parties. Particulars of the guarantee provided for the subsidiaries are as follows: (Yuan) Amount of Starting time Ending time Type of Name guarantee guarantee Nanjing Putian Hongyan Electric 4,000,000 2005-2-6 2005-8-6 Joint liabilities Appliance Company Nanjing Putian Hongyan Electric 5,000,000 2005-5-27 2006-5-27 Joint liabilities Appliance Company Nanjing Putian Hongyan Electric 4,000,000 2005-8-9 2006-2-9 Joint liabilities Appliance Company Nanjing Nanfang 5,000,000 2005-2-24 2005-5-8 Joint liabilities Telecommunications Company Nanjing Nanfang 10,000,000 2005-5-25 2006-5-24 Joint liabilities Telecommunications Company Nanjing Nanfang 9,000,000 2005-7-26 2006-7-26 Joint liabilities Telecommunications Company Nanjing Mennekes Electric 2,000,000 2005-3-3 2006-3-3 Joint liabilities Appliance Ltd. Nanjing Putian Smart-building 5,000,000 2005-5-25 2006-5-25 Joint liabilities Technology Ltd. -25- (3) Entrustment investment The Company made no entrust investment during the reporting period. 5. Commitment of the Company or a shareholder holding over 5 percent of the Company’s share capital (1) Schedule for the split share structure reform The Company enquired the holder of the Company’s non-tradable shares, and was informed that the shareholder had no plans for the split share structure reform at present because according to the current government policy, the listed companies that had only issued B shares except non-tradable shares were not permitted to conduct the reform. (2) Other commitment During the reporting period, the Company or the shareholder holding over 5 percent of the Company’s share capital did not made other commitment. 6. Appointment and discharging of a public accounting firm The Company discharged Price WaterHouseCoopers Zhong Tian CPAs Co., Ltd., the public accounting firm which audited the Company’s annual report in accordance with the CAS and IFRS, and appointed Shulun Pan Certified Public Accountants Co., Ltd. and Horwath Hong Kong CPA Limited to conduct such audit work. This issue has been approved by the 2006 First Extraordinary Shareholders’ Meeting held on 2 March 2006. The Company paid RMB1.15 million to Shulun Pan Certified Public Accountants Co., Ltd. and Horwath Hong Kong CPA Limited for their audit in 2005. Except this payment, there was no other money paid to the auditors. 7. The Company, the Board of Directors or the directors were not punished by the securities regulatory departments during the reporting period. X. Financial Report 1. Auditor’s report The Company’s 2005 Financial Statements were audited and issued a report with unqualified opinion by Horwath Hong Kong CPA Limited. Report of the auditors (attached ) 2. Financial statements(attached) 3. Notes to the financial statements (attached) -26- XI. Documents for Inspection 1. Original text of accounting statements signed and sealed by legal person representative, financial controller and accountant officer. 2. Original text of Auditor’s Report signed and sealed by Certified Public Accountant with the public accounting firm’s seal on. 3. Original texts of all the files and announcements published on the newspapers appointed by China Securities Regulatory Commission during the reporting period. Nanjing Putian Telecommunications Co., Ltd. 11 April 2006 -27- AUDITORS’ REPORT TO THE SHAREHOLDERS OF NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. (Incorporated in the People’s Republic of China with limited liability) We have audited the financial statements which have been prepared in accordance with International Financial Reporting Standards. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. BASIS OF OPINION We conducted our audit in accordance with International Standards on Auditing. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2005 and of its results and cash flows for the year then ended. HORWATH HONG KONG CPA LIMITED 2001 Central Plaza Certified Public Accountants 18 Harbour Road Wanchai 7 April 2006 Hong Kong Chan Kam Wing, Clement Practising Certificate number P02038 28 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Notes RMB’000 RMB’000 (Restated) Turnover 5 775,783 851,292 Cost of sales (648,501) (693,580) Gross profit 127,282 157,712 Other operating income 6 1,641 7,324 Selling expenses (72,511) (71,546) Administrative expenses (34,099) (104,589) Profit/(loss) from operations 22,313 (11,099) Other gains and losses 7 (3,553) 3,280 Finance costs 8 (18,235) (18,174) Gain/(loss) on disposal of subsidiaries 10,698 (55) Share of losses of associates (1,995) (8,837) Profit/(loss) before taxation 9 9,228 (34,885) Taxation 11 (4,314) (2,194) Profit/(loss) for the year 4,914 (37,079) Attributable to: Equity holders of the parent (263) (36,614) Minority interests 5,177 (465) 4,914 (37,079) Basic loss per share 12 RMB (0.001) RMB (0.17) The notes form part of these consolidated financial statements. 29 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Notes RMB’000 RMB’000 (Restated) Non-current assets Property, plant and equipment 13 116,873 130,702 Construction in progress 5,842 3,198 Land use rights 14 33,632 34,410 Interests in associates 15 1,408 2,803 Available-for-sale investments 17 1,212 4,780 Intangible assets 18 5,503 9,844 164,470 185,737 Current assets Inventories 19 163,202 162,462 Trade and other receivables 20 461,221 399,743 Investments held for trading - 363 Pledged bank deposits 103,000 - Cash and bank balances 194,101 199,971 921,524 762,539 VI. Current liabilities Bank loans 21 434,000 349,200 Tax payable 1,199 1,123 Trade and other payables 22 222,295 175,806 657,494 526,129 Net current assets 264,030 236,410 Total assets less current liabilities carried forward 428,500 422,147 30 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED BALANCE SHEET (CONTINUED) AS AT 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Notes RMB’000 RMB’000 (Restated) Total assets less current liabilities brought forward 428,500 422,147 Non-current liabilities Bank loans 21 35,000 35,000 Employee housing benefits payable 10,691 15,069 Other non-current liabilities 80 2,529 (45,771) (52,598) Net assets 382,729 369,549 Equity Share capital 23 215,000 215,000 Reserves 24 114,168 114,040 Attributable to equity holders of the parent 329,168 329,040 Minority interests 53,561 40,509 Total equity 382,729 369,549 The financial statements were approved and authorised for issue by the board of directors on 7 April 2006 The notes form part of these consolidated financial statements. 31 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) Statutory and discret Attributable -ionary Statutory to equity surplus public Exchange holders of Share Capital reserve welfare translation Other Accumu- the Minority Total Capital surplus fund fund reserve reserves lated losses parent interests Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Notes (Note 24 (Note 23) 24(a)&( c)) (b)) At 1 January 2004 - As previously reported 215,000 167,664 15,216 9,640 (14) 115 (41,256) 366,365 15,820 382,185 - Prior year adjustment (Note 28) - - - - - - (1,755) (1,755) 1,755 - - As restated 215,000 167,664 15,216 9,640 (14) 115 (43,011) 364,610 17,575 382,185 Exchange translation difference - - - - (109) - - (109) - (109) Share of waived debts of an associate - 423 - - - - - 423 - 423 Others - 730 - - - - - 730 - 730 Net income recognised directly in equity - 1,153 - - (109) - - 1,044 - 1,044 Loss for the year - - - - - - (36,614) (36,614) (465) (37,079) Total income and expenses recognised for the year - 1,153 - - (109) - (36,614) (35,570) (465) (36,035) Acquisition of subsidiaries - - - - - - - - 20,711 20,711 Disposal of a subsidiary - - - - - - - - (41) (41) Changes in minority interests - - - - - - - - 852 852 Capital contributed by minority shareholders - - - - - - - - 3,165 3,165 Dividend paid to minority shareholders - - - - - - - - (1,288) (1,288) Profits appropriation of subsidiaries - - 935 414 - - (1,349) - - - 215,000 40,509 369,549 At 31 December 2004 168,817 16,151 10,054 (123) 115 (80,974) 329,040 32 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) Statutory and discret Attributable -ionary Statutory to equity surplus public Exchange holders of Share Capital reserve welfare translation Other Accumu- the Minority Total Capital surplus fund fund reserve reserves lated losses parent interests Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Notes (Note 24 (Note 23) 24(a)& (c)) (b)) At 1 January 2005 - As previously reported 215,000 168,817 16,151 10,054 (123) 115 (70,066) 339,948 29,601 369,549 - Prior year adjustment (Note 28) - - - - - - (10,908) (10,908) 10,908 - - As restated 215,000 168,817 16,151 10,054 (123) 115 (80,974) 329,040 40,509 369,549 Exchange translation difference recognised directly in equity - - - - 391 - - 391 - 391 (Loss)/profit for the year - - - - - - (263) (263) 5,177 4,914 Total income and expenses recognised for the year - - - - 391 - (263) 128 5,177 5,305 Partial disposal of a subsidiary - - - - - - - - 10,316 10,316 Elimination on disposal of a subsidiary - - (792) (356) - - 1,148 - - - Changes in minority interests - - - - - - - - (1,000) (1,000) Dividend paid to minority shareholders - - - - - - - - (1,441) (1,441) Profits appropriation by subsidiaries - - 678 264 - - (942) - - - 215,000 53,561 382,729 At 31 December 2005 168,817 16,037 9,962 268 115 (81,031) 329,168 The notes form part of these consolidated financial statements. 33 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Note RMB’000 RMB’000 (Restated) Operating activities Profit/(loss) before taxation 9,228 (34,885) Adjustment for: Depreciation 17,242 15,088 Provision for impairment loss on property, plant and equipment - 256 (Write back of)/provision for bad and doubtful debts of trade and other receivables (426) 4,403 (Write back of)/provision for slow-moving inventories (19,071) 27,194 Amortisation of land use rights and intangible assets 5,436 6,425 Interest expenses 22,121 20,554 Interest income (4,857) (3,392) Share of losses of associates 1,995 8,837 Negative goodwill credited to income statement - (8,103) Loss/(gain) on disposal of property, plant and equipment 981 (43) Gain on disposal of investments held for trading (359) - Gain on partial disposal of equity interest of a subsidiary (10,704) - Loss on disposal of subsidiaries 27 6 55 Cash flows before changes in working capital 21,592 36,389 Decrease in inventories 17,406 27,277 Increase in trade and other receivables (65,252) (3,917) Increase/(decrease) in trade and other payables 53,036 (20,508) Decrease in employee housing benefits payable (4,378) (6,511) Decrease in other non-current liabilities (2,449) - Decrease in bank fixed deposits with maturity over 3 months - 49,208 Effect of foreign exchange rate changes 550 - Cash generated from operations 20,505 81,938 Interest paid (22,121) (17,162) Income tax paid (4,158) (5,970) Net cash (used in)/generated from operating activities (5,774) 58,806 34 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Note RMB’000 RMB’000 (Restated) Investing activities Proceeds from disposal of property, plant and equipment 1,955 695 Purchase of property, plant and equipment, and payments on construction in progress (9,147) (9,561) Purchase of investments held for trading - (363) Purchase of intangible assets (317) (2,049) Proceeds from disposal of investments held for trading 722 - Increase in investment in an associate (600) - Purchase of subsidiaries - 8,795 Refund of deposit on investment 2,500 - Purchase of additional equity interest of a subsidiary - (75) Dividends from associates - 790 Disposal of a subsidiary 27 (1,286) (41) Partial disposal of equity interest of a subsidiary 21,020 - Interest received 4,857 - Net cash generated from/(used in) investing activities 19,704 (1,809) Financing activities New borrowing of bank loans 464,000 381,000 Repayment of bank loans (379,200) (415,000) Capital contributed by minority shareholders - 3,165 Increase in pledged bank deposits (103,000) - Dividend paid to minority shareholders (1,441) (1,288) Net cash used in financing activities (19,641) (32,123) Net (decrease)/increase in cash and cash equivalents (5,711) 24,874 Cash and cash equivalents at beginning of year 199,971 175,097 Effect of foreign exchange rate changes (159) - Cash and cash equivalents at end of year 194,101 199,971 The notes form part of these consolidated financial statements. 35 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. NOTES TO THE FINANCIAL STATEMENTS (Expressed in Renminbi thousands) 1. GENERAL INFORMATION Nanjing Putain Telecommunications Co., Ltd. (the “Company”) was established in May 1997 in the People’s Republic of China (the “PRC”). The principal activities of the Company and its subsidiaries (the “Group”) are the manufacture and marketing of telecommunication equipment, electronic appliances and other related accessories in the PRC. All the operating assets and substantially all the sales of the Group are based in the PRC. The registered office of the Company is located at No. 58 Qing Huai Road, Jiangning Economic-tech Development Zone, Nanjing City Jiangsu Province, the PRC. 2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January 2005. The adoption of these new and revised Standards and Interpretations has resulted in changes to the Group’s accounting policies in the following areas: IFRS 3, Business Combinations Goodwill IFRS 3 has been adopted for business combinations for which the agreement date is on or after 31 March 2004. The option of limited retrospective application of the Standard has not been taken up, thus avoiding the need to restate past business combinations. After initial recognition, IFRS 3 requires goodwill acquired in a business combination to be carried at cost less any accumulated impairment losses. Under IAS 36 Impairment of Assets (as revised in 2004), impairment reviews are required annually, or more frequently if there are indications that goodwill might be impaired. IFRS 3 prohibits the amortisation of goodwill. Previously, under IAS 22, the Group carried goodwill in its balance sheet at cost less accumulated amortisation and accumulated impairment losses. Amortisation was charged over the estimated useful life of goodwill, subject to the rebuttable presumption that the maximum useful life of goodwill was 20 years. 36 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED) In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy for goodwill prospectively from the beginning of its first annual period beginning on or after 31 March 2004, i.e. 1 January 2005, to goodwill acquired in business combinations for which the agreement date was before 31 March 2004. Therefore, from 1 January 2005, the Group has discontinued amortising such goodwill and has tested the goodwill for impairment in accordance with IAS 36. Because the revised accounting policy has been applied prospectively, the change has had no impact on amounts reported for 2004 or prior periods. Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost (previously known as negative goodwill) IFRS 3 requires that, after reassessment, any excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost of the business combination should be recognised immediately in profit or loss. IFRS 3 prohibits the recognition of negative goodwill in the balance sheet. Previously, under IAS 22 (superceded by IFRS 3), the Group released negative goodwill to income over a number of accounting periods, based on an analysis of the circumstances from which the balance resulted. Negative goodwill was reported as a deduction from assets in the balance sheet. In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy prospectively from 1 January 2005. Therefore, the change has had no impact on amounts reported for 2004 or prior periods. At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: IFRS 7 Financial instrument: Disclosure IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 8 Scope of IFRS 2 The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. 37 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Group also prepares a set of consolidated financial statements which comply with accounting regulations in the PRC. A reconciliation of the Group’s results and shareholders’ equity under IFRS and PRC accounting regulations is presented in Note 34. The principal accounting policies adopted are as follows: (a) Consolidation The consolidated financial statements include those of the Company and its subsidiaries and the Group’s interests in associates and joint ventures on the basis as set out in Notes 3(c), (d) and (e) below. The acquisition method of accounting is used for acquired businesses. Results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or to the date of disposal. All significant intercompany balances and transactions, including intercompany profits and unrealised profits and losses are eliminated on consolidation. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. (b) Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquire, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IRFS 3 are recognised at their fair values at the acquisition date. 38 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (b) Business combinations (continued) Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is intitially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (c) Subsidiaries A subsidiary is a company in which the Company has control. Control exists when the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. Details of the Company’s subsidiaries as of 31 December 2005 are set out in Note 32 to the financial statements. (d) Associates An associate is a company, not being a subsidiary or a joint venture, in which the Company has significant influence. Significant influence exists when the Company has the power to participate in, but not control, the financial and operating decisions of the associate. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are not recognised, unless the Group has incurred obligations or made payments on behalf of the associate. 39 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (d) Associates (continued) Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. (e) Joint ventures A joint venture is a venture undertaken by two or more parties whose rights and obligations with respect to the venture are specified in a joint venture agreement. No single venture is in a position to control unilaterally the activity of the venture. Joint venture arrangements that involve the establishment of a separate entity in which each venture has an interest are referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities using proportionate consolidation. The Group’s share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line-by-line basis. Any goodwill arising on the acquisition of the Group’s interest in a jointly controlled entity is accounted for in accordance with the Group’s accounting policy for goodwill arising on the acquisition of a subsidiary. Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s interest in the joint venture. (f) Goodwill Goodwill arising on the acquisition of a subsidiary or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. 40 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (f) Goodwill (continued) For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group’s policy for goodwill arising on the acquisition of an associate is described under “Associate” above. (g) Property, plant and equipment and depreciation Property, plant and equipment 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 put into operation, such as repairs and maintenance and overhaul costs, are recognised as expense in the year in which it is incurred. In situations where it is probable that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalised as an additional cost of the asset. Depreciation is calculated on the straight line method to write off the cost of each asset to their residual value over their estimated useful life. The estimated useful lives of the assets are as follows: Buildings 15 to 35 years Plant and machinery 10 to 15 years Furniture, fixtures and office equipment 4 to 11 years Motor vehicles 6 to 8 years The useful lives of assets and depreciation method are reviewed periodically. When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. 41 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (h) Construction in progress Construction in progress represents buildings under construction and machinery under installation and testing and is stated at cost. This includes costs of construction, attributable borrowing costs and other direct costs capitalised during the period of construction, installation or testing up to the date of commissioning. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. (i) Land use rights Land use rights are stated at cost less accumulated amortisation. Land use rights are amortised on the straight-line basis over its lease term of land use rights. (j) Intangible assets Intangible assets are measured initially at cost. Intangible assets are recognised if it is probable that the future economic benefits that are attributable to the assets will flow to the enterprise and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets are amortised on a straight line basis over the best estimate of their useful lives. The amortisation period and amortisation method are reviewed annually. (k) Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 42 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (k) Impairment of tangible and intangible assets excluding goodwill (continued) If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduce to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which cash the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (l) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. Provision is made for obsolete, slow-moving and defective items where appropriate. (m) Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet which the Group becomes a party to the contractual provisions of the instrument. (i) Trade receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. 43 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (m) Financial instruments (continued) (ii) Investments Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs. At subsequent reporting dates, debts securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulate gain or loss previously recognised in equity is included in the profit or loss for the period. For investment in an equity instrument that does not have a quoted market price in active market and for which other methods of reasonably estimating fair value are clearly inappropriate or unworkable, the instrument would be measured at cost, subject to review of impairment. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. 44 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (m) Financial instruments (continued) (iii) Cash and cash equivalents Cash represents cash in hand and deposits with any banks or other financial institutions which are repayable on demand. Cash equivalents represent short term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. (iv) Bank borrowings Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs (see below). (v) Trade payables Trade payables initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. (n) Operating leases Leases are classified as operating leases whenever substantially all the risks and rewards incidental to the ownership of the leased assets remain with the lessor. Lease payments under operating leases are recognised as an expense in the consolidated income statement on a straight line basis over the lease term. Aggregate benefit of incentives on operating leases is recognised as a reduction of rental expense over the lease term on a straight line basis. (o) Provisions A provision is recognised 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 expenditure 45 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. expected to be required to settle the obligation. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (p) Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. (q) Pension obligations The Group participates in a government defined contribution retirement scheme. Under the scheme, retirement benefits of existing and retired employees are guaranteed by the local Unified Retirement Fund and the Group has no further obligations beyond the annual contributions. The Group’s contributions are charged to the consolidated income statement in the period to which they relate. (r) Government grants Grants from the government are recognised at their fair value when there is a reasonable assurance that the grant will be received and all attached conditions are complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant, on a systematic basis, to the costs which it is intended to compensate. Where the grant relates to an asset, the fair value is deducted in arriving at the carrying amount of the related asset. (s) Foreign currency transactions The Group maintains its books and records in RMB, which is not a freely convertible currency. Transactions in other currencies are translated into RMB at the exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated into RMB at the exchange rates prevailing at that date. Non-monetary assets and liabilities denominated in other currencies are translated at historical rates. Exchange differences, other than those capitalised as a component of borrowing costs, are recognised in the income statement in the period in which they arise. 46 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (t) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, associated companies and joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. 47 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (u) Borrowing costs Borrowing costs are expensed as incurred except that borrowing costs directly attributable to the construction of buildings and installation of machinery and equipment that require a substantial period of time to bring them to their intended use are capitalised as cost of the buildings and machinery and equipment at rates based on the actual cost of the specific borrowings. (v) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. (i) Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the customers; (ii) Revenue from rendering of services is based on the stage of completion determined by reference to services performed to date as a percentage of total services to be performed; and; (iii) Interest income is recognised on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable. (w) Use of estimates The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 4. SEGMENT INFORMATION The Group is organised into one main business segment, telecommunication and related products. Accordingly no business segment information is presented. All assets and operations of the Group are located in the PRC, which is considered as one geographic location in an environment with similar risks and returns. Accordingly, no geographical segment information is presented. 48 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 5. TURNOVER Turnover represents the gross value of goods sold/services provided less value-added tax and returns/discounts and is analysed as follows: 2005 2004 RMB’000 RMB’000 Self manufactured telecommunication and electrical products 474,989 425,274 Purchased telecommunication and electrical products 292,449 319,068 Self manufactured electronics products - 96,574 Subcontracting services - 2,327 Others 8,345 8,049 775,783 851,292 6. OTHER OPERATING INCOME 2005 2004 RMB’000 RMB’000 Subsidy income 1,000 761 Service income, net 413 2,200 Others 228 583 Compensation received - 3,780 1,641 7,324 49 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 7. OTHER GAINS AND LOSSES 2005 2004 RMB’000 RMB’000 Loss on disposal of raw materials (3,227) (5,053) (Loss)/gain on disposal of property, plant and equipment (981) 43 Provision for impairment loss on construction in progress - (295) Provision for impairment loss on property, plant and equipment - (256) Negative goodwill credited to income statement - 8,103 Others 655 738 (3,553) 3,280 8. FINANCE COSTS 2005 2004 RMB’000 RMB’000 Interest expenses on bank loans 22,121 20,554 Interest income (4,857) (3,392) Net foreign exchange (gains)/losses (187) 415 Others 1,158 597 18,235 18,174 50 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 9. PROFIT/(LOSS) BEFORE TAXATION Profit/(loss) before taxation is arrived at after charging/(crediting): 2005 2004 RMB’000 RMB’000 Depreciation of property, plant and equipment 17,242 15,088 (Write back of)/provision for bad and doubtful debts of trade and other receivables (426) 4,403 (Write back of)/provision for slow-moving inventories (19,071) 27,194 Provision for impairment loss on property, plant and equipment - 256 Amortisation of land use rights 778 861 Amortisation of intangible assets 4,658 5,564 Repairs and maintenance cost on property, plant and equipment 2,264 1,374 Research and development expenditure 5,946 8,404 Operating lease rentals 1,652 1,795 10. STAFF COSTS 2005 2004 RMB’000 RMB’000 Employees’ wages and salaries 54,476 54,157 Directors’ remuneration 320 400 Pension costs 17,514 9,865 Medical insurance and others 8,661 6,767 80,971 71,189 Average number of staff employed by the Group during the year 1,894 2,010 11. TAXATION Taxation in the consolidated income statement represents: 2005 2004 RMB’000 RMB’000 Current year taxation 4,314 2,194 51 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 11. TAXATION (CONTINUED) The Company is qualified as a High and New Technology Enterprise established in Nanjing Jiangning National Hi-technology Development Zone. In accordance with relevant regulations, the company is subject to income tax at a reduced rate of 15%. All subsidiaries and jointly controlled entities of the Company are subject to income tax at the rates between 12% and 33%. The total tax charge for the year can be reconciled to the accounting profit/(loss) as follows: 2005 2004 RMB’000 RMB’000 (Restated) Profit/(loss) before taxation 9,288 (34,885) Tax charge/(credit) calculated at a tax rate of 15% 1,384 (5,233) Over/(under) provision for taxation 407 (770) Tax effect of share of loss of associates 299 1,326 Temporary differences which could be deductible in future years 2,666 4,817 Income and expense items which are not taxable or deductible for income tax purposes (1,718) 1,593 Effect of different tax rates for certain subsidiaries and a joint venture 1,276 461 Tax expenses 4,314 2,194 12. BASIC LOSS PER SHARE The calculation of basic loss per share for the year ended 31 December 2005 is based on the loss attributable to equity holders of the parent for the year of RMB263,000 (2004: loss of RMB36,614,000 (restated)) and the total number of 215,000,000 shares (2004: 215,000,000 shares) in issue during the year. 52 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 13. PROPERTY, PLANT AND EQUIPMENT Furniture, fixtures Plant and and office Motor Buildings machinery equipment vehicles Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost: At 1 January 2004 105,124 87,512 47,726 10,565 250,927 Acquisition of subsidiaries 4,023 24,168 4,946 148 33,285 Additions 5,072 2,260 2,935 767 11,034 Disposals - (737) (4,420) (598) (5,755) At 31 December 2004 114,219 113,203 51,187 10,882 289,491 Additions 251 1,013 2,243 1,154 4,661 Transfer from construction in progress 561 457 824 - 1,824 Disposal of a subsidiary - - (41) (205) (246) Disposals (1,216) (11,928) (27,185) (1,664) (41,993) Reclassification 1,485 (32,881) 30,360 1,036 - At 31 December 2005 115,300 69,864 57,388 11,203 253,755 Accumulated depreciation and impairment losses: At 1 January 2004 36,604 59,842 35,567 7,765 139,778 Acquisition of subsidiaries 808 5,833 1,942 111 8,694 Charge for the year 4,241 4,642 5,493 968 15,344 Disposals - (668) (4,006) (353) (5,027) At 31 December 2004 41,653 69,649 38,996 8,491 158,789 Disposal of a subsidiary - - (11) (81) (92) Charge for the year 5,012 5,777 5,273 1,180 17,242 Disposals (1,373) (10,184) (26,102) (1,398) (39,057) Reclassification 3,030 (29,413) 26,936 (553) - At 31 December 2005 48,322 35,829 45,092 7,639 136,882 Net book value: At 31 December 2005 66,978 34,035 12,296 3,564 116,873 At 31 December 2004 72,566 43,554 12,191 2,391 130,702 53 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 14. LAND USE RIGHTS 2005 2004 RMB’000 RMB’000 Cost: At 1 January and 31 December 40,824 40,824 Accumulated amortisation: At 1 January 6,414 5,553 Charge for the year 778 861 At 31 December 7,192 6,414 Net book value: At 31 December 33,632 34,410 Amortisation of RMB778,000 (2004: RMB861,000) is included in administrative expenses. 15. INTERESTS IN ASSOCIATES 2005 2004 RMB’000 RMB’000 Unlisted investment, at cost 10,700 10,100 Share of post-acquisition loss, net of dividend received (9,292) (7,297) 1,408 2,803 Details of the Group’s associates at 31 December 2005, all of which were established in the PRC, were as follows: Proportion of ownership interest of associate 2005 2004 pal activity Xishan Putian Information 49% 49% Provision of data and voice Network Co., Ltd. transmission services Nanjing Zhongyou 30% 30% Manufacture and sale of Telecommunications Co., Ltd. telecommunication equipment and electrical accessories 54 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 15. INTERESTS IN ASSOCIATES (CONTINUED) Proportion of ownership interest of associate 2005 2004 pal activity Nanjing Putain Datang 40% - Manufacture and sale of Information and Electronics telecommunication equipment Co., Ltd. and electrical accessories Summarised financial information in respect of the Group’s major associate is set out below: 2005 2004 RMB’000 RMB’000 Total assets 15,927 17,662 Total liabilities (13,390) (12,554) Net assets 2,537 5,108 Group’s share of net assets of associates 1,408 2,803 Revenue 5,572 22,908 Loss for the year (4,071) (11,615) Group’s share of losses of associates (1,995) (8,837) 16. JOINT VENTURE Details of the Group’s joint venture at 31 December 2005, which was established in the PRC, were as follows: oportion of ercentage ership interest of voting of joint venture power pal activity Nanjing Mennekes Electric 50% 50% Manufacture and sale of switches Appliance Ltd. 55 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 16. JOINT VENTURE (CONTIUNED) The following amounts are included in the Group’s financial statements as a result of the proportionate consolidation of the joint venture: 2005 2004 RMB’000 RMB’000 Current assets 39,447 30,866 Non-current assets 14,851 13,169 Current liabilities 20,878 19,576 Income 61,518 26,712 Expenses 57,993 25,242 17. AVAILABLE-FOR-SALE INVESTMENTS 2005 2004 RMB’000 RMB’000 Unlisted equity investments 1,224 4,792 Less: Provision for impairment losses (12) (12) 1,212 4,780 Available-for-sale investments do not have quoted market prices in an active market and their fair values cannot be reliably measured. As a result, these investments are carried at cost. 56 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 18. INTANGIBLE ASSETS 2005 2004 RMB’000 RMB’000 Cost: At 1 January 33,382 31,333 Additions 317 311 Acquisition of subsidiaries - 1,738 At 31 December 33,699 33,382 Accumulated amortisation: At 1 January 23,538 17,270 Charge for the year 4,658 5,564 Acquisition of subsidiaries - 704 At 31 December 28,196 23,538 Net book value: At 31 December 5,503 9,844 The intangible assets represent expenditure on software and proprietary technologies. Amortisation of RMB4,658,000 (2004: RMB5,564,000) is included in administrative expenses. 19. INVENTORIES 2005 2004 RMB’000 RMB’000 Raw materials 45,587 41,178 Work in progress 21,994 17,276 Finished goods 95,621 104,008 163,202 162,462 57 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 20. TRADE AND OTHER RECEIVABLES 2005 2004 RMB’000 RMB’000 Trade receivables 359,993 386,951 Other receivables 66,860 26,659 Less: Provision for bad and doubtful debts (20,040) (26,208) Trade and other receivables, net 406,813 387,402 Prepayments 43,530 6,205 Receivables from and prepayments to related companies 10,878 6,136 461,221 399,743 21. BANK LOANS 2005 2004 RMB’000 RMB’000 Bank loans - secured (Note 26) 166,000 - - unsecured 303,000 384,200 469,000 384,200 The borrowings are repayable as follows: On demand or within one year 434,000 349,200 In the second year 35,000 - In the third year - 35,000 469,000 384,200 Less: Amount due for settlement within 12 months (shown under current liabilities) (434,000) (349,200) Amount due for settlement after 12 months * 35,000 35,000 As at 31 December 2005, all bank loans bore interest at rates ranging from 5.16% to 6.21% (2004: 4.536% to 6.37%) per annum. The loan of RMB259,000,000 is guaranteed by the Company’s ultimate holding company. * Long-term bank loan represents an unsecured loan borrowed from China Construction Bank and will be due on 4 February 2007. 58 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 22. TRADE AND OTHER PAYABLES 2005 2004 RMB’000 RMB’000 Trade payables 186,328 158,282 Other payables 19,474 11,636 Deposits received from customers 14,954 5,664 Accrued expenses 408 224 Payables to related companies 1,131 - 222,295 175,806 23. SHARE CAPITAL 2005 2004 Number Number of shares RMB’000 of shares RMB’000 Registered, issued and fully paid: State-owned shares of par value of RMB 1 each 115,000,000 115,000 115,000,000 115,000 B shares of par value of RMB 1 each 100,000,000 100,000 100,000,000 100,000 215,000,000 215,000 215,000,000 215,000 The shareholders of “State” shares and “B” shares are entitled to receive the same amount of dividend per share as declared from time to time and are entitled to one vote per share at the annual general meeting of the Company and rank pari passu in all other respects. 59 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 24. RESERVES Movements in reserves are set out in the consolidated statement of changes in shareholders' equity. (a) Statutory surplus reserve fund In accordance with the relevant PRC regulations and the articles of association of the Company, the Company and its subsidiaries are required to allocate, where applicable, 10% of profit after taxation as determined in accordance with PRC accounting standards and regulations applicable to each individual company, to the statutory surplus reserve fund until such reserve reaches 50% of the registered capital of the respective companies. According to the relevant PRC regulations, statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of losses incurred, other usage should not result in the statutory surplus reserve falling below 25% of the registered capital. (b) Statutory public welfare fund In accordance with the relevant PRC regulations and the articles of association of the Company and its subsidiaries, the Group’s statutory public welfare fund, which is established through the appropriation from the Group’s profit after taxation, must be used for capital expenditure on staff welfare facilities. These facilities remain as properties of the Group. In the current year, entities of the Group with net profit appropriated 5% to 10% of the respective profit after taxation, as determined in accordance with PRC accounting standards and regulations applicable to each individual company, to the statutory public welfare fund. (c) Discretionary surplus reserve fund The appropriation of profit to discretionary surplus reserve fund is made in accordance with the Company’s articles of association and recommendation of the Board of Directors and is subject to approval by shareholders at the general meeting. (d) Retained earnings available for distribution According to the relevant regulations in the PRC, the amount of retained earnings available for distribution is the lower of the amount determined under PRC accounting standards and regulations and the amount determined under IFRS. In the PRC statutory financial statements as at 31 December 2005, accumulated loss carried forward amounted to RMB86,315,000 (2004 : RMB92,763,000). 60 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 25. RETIREMENT BENEFITS The Group participates in a government defined contribution retirement scheme. Under the scheme, retirement benefits of existing and retired employees are guaranteed by the local Unified Retirement Fund and the Group has no further obligations beyond the annual contribution. 26. ASSETS PLEDGED As at 31 December 2005, the Group’s short-term bank loans were secured by the following assets: (a) Buildings with a net book value of RMB49,632,000 (b) Land use rights with a net book value of RMB30,353,000 (c) Bank deposits totaling RMB103,000,000 61 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 27. DISPOSAL OF A SUBSIDIARY On 31 May 2005, the Group disposed of a 35% equity interest in Nanjing Putian Telecommunications Shiye Company Ltd. The Group held a 45% equity interest in this company prior to the disposal. Accordingly, the financial statements of the subsidiary had not been consolidated since that date. Details of the assets and liabilities of the subsidiary partially disposed of are as follows: RMB’000 Net assets disposed of: Property, plant and equipment 154 Inventories 925 Trade and other receivables 4,200 Cash and bank balances 1,916 Trade and other payables (5,297) Tax payable (80) 1,818 35% equity interest disposed of 636 Loss on disposal (6) Total consideration 630 Net cash outflow arising on disposal of a subsidiary: Cash consideration 630 Cash and bank balances disposed of (1,916) (1,286) The subsidiary disposed of contributed RMB3,928,000 of revenue and RMB22,000 of profit before tax for the period from beginning of year to the date of disposal. During the period from beginning of year to the date of disposal, the subsidiary disposed of contributed RMB295,000 on investing activities and utilised RMB3,000 on operating activities. 62 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 28. PRIOR YEAR ADJUSTMENT In prior years, losses attributable to the minority interests in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the minority. Due to the minority has no binding obligation and is not able to make an additional investment to cover the losses, such excess of losses are allocated against the interests of the Group and accordingly a prior year adjustment was made in these financial statements. 29. COMMITMENTS 2005 2004 RMB’000 RMB’000 (a) Capital commitments Contracted, but not provided for 18,950 15,938 (b) Operating lease commitments At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases for office buildings, which fell due as follow: 2005 2004 RMB’000 RMB’000 Within one year 506 535 In the second to fifth years inclusive 1,391 1,200 After five years 1,391 1,706 3,288 3,441 30. CONTINGENT LIABILITIES At 31 December 2005, the Group had provided guarantees to banks in respect of borrowings granted to a joint venture to the extent of RMB2,000,000 (2004: RMB Nil). 63 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 31. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each major class of the Group’s financial instruments for which it was practicable to estimate that value: (a) Fair values (i) Cash and cash equivalents and bank borrowings The carrying amounts approximate their fair values because these assets or liabilities either carry a current rate of interest or have a short period of time between the origination of the cash deposits or borrowings and their expected maturity. (ii) Investments The carrying amounts approximate their fair values. (iii) Notes receivable and payables, trade receivables and payables and loans to non-related parties The carrying amounts approximate their fair values. (iv) Balances with related parties Balances with related parties approximate their fair value because these are subject to normal commercial terms. No disclosure of fair values is made for other 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. 64 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 31. FINANCIAL INSTRUMENTS (CONTINUED) (b) Concentration of risks (i) Interest rate risk The Group has no significant interest-bearing assets, such as its income and operating cash flows are substantially independent of changes in market interest rates. Interest rates on bank loans are disclosed in Note 21. (ii) Credit risk The Group has no significant concentration of credit risk. The carrying amounts of receivables included in the balance sheet represent the Group’s maximum exposure to credit risk in relation to its financial assets. No other financial assets carry a significant exposure to credit risk. (iii) Foreign exchange risk The Group operates in the PRC and has no significant exposure to any specific foreign currency. (iv) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash, other liquid assets and the ability to close out market positions. The Group maintains flexibility in funding by keeping the current bank borrowings available. 32. PRINCIPAL SUBSIDIARIES Details of the Company’s subsidiaries at 31 December 2005, all of which are established in the PRC, were as follows: Proportion of ownership interest of subsidiary held by the Company pal activity Directly ndirectly Nanjing Nanfang 97% 1.24% Manufacture and sale of data Telecommunications communication equipment Company Limited 65 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 32. PRINCIPAL SUBSIDIARIES (CONTINUED) Proportion of ownership interest of subsidiary held by the Company pal activity Directly ndirectly Nanjing Bada 60% - Manufacture and sale of Telecommunications Co., Ltd. telecommunication equipment Shanghai Huaning 75% 12.8% Export agency business Telecommunications Development Ltd. Nanjing Golden Huali 60% - Manufacture and sale of lights, Electronics Ltd. electronic products and accessories Nanjing Putian Shiye Company 99% 1% Hotel and catering Ltd. Nanjing Putian Smart-building 41.35% - Manufacture and sale of smart Technology Ltd. (“Putian building system Smart-building”) (Note) Putian Telecommunications 90% - Export and import of (H.K.) Co., Ltd. telecommunications equipment Beijing Picom 51% - Manufacture and sale of data Telecommunications communication equipment Equipment Ltd. (“Beijing Picom”) Nanjing Putian Hongyan 51.2% - Manufacture and sale of electric Electric Appliance Company products and telecommunication equipment Nanjing Putian Network 91.16% 91.16% Manufacture and sale of network Company Ltd. equipment 66 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 32. PRINCIPAL SUBSIDIARIES (CONTINUED) Proportion of ownership interest of subsidiary held by the Company pal activity Directly ndirectly Nanjing Putian Wangzhi 67% - Design and production of CDMA Telecommunications Co., Ltd. and 3G products Nanjing Putian Changle 50.7% - Manufacture and sale of Telecommunications telecommunication equipment Equipment Co., Ltd. Note: The Company used to hold a 81.93% equity interest of Putian Smart-building and disposed of a 40.58% equity interest of this subsidiary during the year. After the disposal, the Company’s equity interest in Putian Smart-building fell to 41.35%. Since the Company still has control of more than half of the voting rights of the Board of Directors and control over its financial and operating policies, the financial statements of the subsidiary was consolidated in 2005. 67 NANJING PUTIAN TELECOMMUNICATIONS CO., LTD. 33. RELATED PARTY TRANSACTIONS The ultimate holding company of the Company is China Putian Information Industry Corporation, which was incorporated in the PRC. Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below: (a) Trading transactions During the year, the Group had the following trading transactions with related parties that are not members of the Group, which in the opinion of the Directors, were conducted at arms-length and on normal commercial terms: 2005 2004 RMB’000 RMB’000 Sale of products to: - associates 1,797 2,658 - fellow subsidiaries 3,215 - - related companies 5,893 2,084 Purchases from: - fellow subsidiaries - 54,556 - related companies 1,824 13,092 Guarantee fee to ultimate holding company 680 - (b) Balances with related parties Amounts due from/(to) associates and related companies are unsecured, interest-free and have no fixed terms of repayment. (c) Compensation of key management personnel The remuneration of directors and other members of key management during the year was RMB5,903,000 ( 2004: RMB5,600,000 ). 68 34. IMPACT OF IFRS ADJUSTMENTS ON PROFIT FOR THE YEAR AND EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT The statutory accounts of the Group are prepared in accordance with PRC accounting regulations applicable to joint stock limited companies. These accounting principles differ in certain significant respects from IFRS. The effects of these differences on the profit for the year attributable to equity holders of the parent for the year ended 31 December 2005 and equity attributable to equity holders of the parent at that date are summarised as follows: Profit for the Equity year attributable attributable to to equity holders equity holders of the parent of the parent RMB’000 RMB’000 As determined pursuant to PRC accounting regulations 6,303 341,275 Adjustment for provision of staff welfare and bonuses (60) - Income and expenditure taken directly to reserves 52 - Recognition of losses of subsidiaries in excess of the Company’s investment costs in profit and loss account (2,970) - Recognition of losses attributable to the minority over their contribution in the Company’s accounts (2,246) (13,154) Difference in recognition and amortisation of goodwill (1,333) 1,047 Minority interests (9) - As determined pursuant to IFRS (263) 329,168 35. SUBSEQUENT EVENT On 3 April 2006, the Company signed a letter of intent with China Putian Information Industry Corporation, the ultimate holding company of the Company, to dispose of its entire 41% equity interest in Beijing Picom. The consideration will be based on the valuation of Beijing Picom as at 31 December 2005. 36. COMPARATIVE FIGURES Certain comparative figures have been restated as a result of the prior year adjustment as set out in Note 28 and have been reclassified to conform with the current year’s presentation. 69