ST华发Ｂ(200020)2007年年度报告（英文版）

Annual Report 2007 Shenzhen Zhongheng Huafa Co., Ltd. Annual Report 2007 Stock Code: 000020, 200020 Short Form of the Stock: ST HUAFA-A, ST HUAFA-B Annual Report 2007 Important Notice The Board of Directors and the Supervisory Committee its members of Shenzhen Zhongheng Huafa Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives hereby confirm that there are no any fictitious statements, misleading statements, or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. All the directors attended the meeting of the board of directors. Mr. Li Zhongqiu, Chairman of Board and General Manager of the Company, Mr. Shi Cheng, Person in charge of Accounting Work, and Mr. Zhang Zhiyong, Person in Charge of Accounting Organ hereby confirm that the Financial Report of Annual Report 2007 is true and complete. Shinewing Certified Public Accountants audited the 2007 financial report of the Company and issued the standard unqualified Auditors’ Report. The Board of Directors of Shenzhen Zhongheng Huafa Co., Ltd. Contents Ⅰ. Company Profile Ⅱ. Summary of Financial Highlight and Business Highlight Ⅲ. Changes in Capital Shares and Particulars about Shareholders Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees Ⅴ. Administrative Structure Ⅵ. Brief Introduction to the Shareholders’ General Meeting Ⅶ. Report of the Board of Directors Ⅷ. Report of the Supervisory Committee Ⅸ. Significant Events Ⅹ. Financial Report Ⅺ. Documents for Reference 1 Annual Report 2007 I. Company Profile 1. Name of the Company In Chinese: 深圳中恒华发股份有限公司 In English: SHENZHEN ZHONGHENG HUAFA CO., LTD. 2. Legal Representative: Li Zhongqiu 3. Agent Secretary of the Board: Shi Cheng Securities Affairs Representative: Weng Xiaojue Contact Address: 6/F, East Tower of 411 Bldg., Huafa Road (N), Futian District, Shenzhen.Tel: Tel: (86) 755-83352207, 83352206 Fax: (86) 755-83323160, 83352200 E-mail: hwafainvestor@163.com 4. Registered Address: 411 Bldg., Huafa North Road, Futian District, Shenzhen Office Address: 6/F, East Tower of 411 Bldg., Huafa Road (N), Futian District, Shenzhen. Post Code: 518031 Company’s Internet Web Site: http://www.hwafa.com 5. Newspapers for Disclosing the Information of the Company: China Securities, Securities Times and Hong Kong Wen Wei Po Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: OFF. of Board of Directors of Shenzhen Huafa Electronics Co., Ltd. 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: ST HUAFA-A, ST HUAFA- B Stock Code: 000020, 200020 7. Other Relevant Information of the Company Initial registered date and place or changed registered date and place: Registered date: May, 1992 Registered place: 411 Bldg., Huafa North Road, Futian District, Shenzhen Registered number of enterprise legal person’s business license: 100296 Registered number of tax: 113260 Name and office address of Certified Public Accountants engaged by the Company: Name: Shinewing Certified Public Accountants Address: 9/F, Block A, Fu Hua Mansion No.8 Chaoyang Men, Bei da jie, Dong Cheng District, Beijing, P.R.China II. Financial highlights and business highlights (I) Major accounting data as of the year 2007 Unit: RMB Items Amount Operating profit 1,284,010.65 Total profit 25,163,249.89 2 Annual Report 2007 Net profit attributable to shareholders of the 25,864,037.18 listed company Net profit attributable to shareholders of the listed company after deducting non-recurring 1,984,797.94 gains and losses Net cash flow arising from operating activities 14,843,814.16 Items of non-recurring gains and losses deducted and its revolved amount Items Amount Gains from donation of Wuhan Zhongheng due to 19,554,224.24 ShareMerger Reform The items which could not be paid 1,009,706.51 Net lease income of the transferred the property 3,523,045.69 right of Huafa Yard Other -207,737.20 Total 23,879,239.24 CAS IAS Net profit 25,864,037.18 25,864,037.18 Net asset 245,998,316.81 245,998,316.81 (II) Major accounting data and financial indexes over the past three years ended by the report year 1. Main accounting data Unit: RMB Increase/decrease in this year 2006 2005 2007 compared with last year (%) Before Before After adjustment After adjustment After adjustment adjustment adjustment Operating income 193,244,882.85 161,208,668.37 201,883,363.71 -4.28 114,421,667.78 153,505,946.98 Total profit 25,163,249.89 -19,554,248.65 -23,262,805.55 208.17 6,622,306.73 6,622,306.73 Net profit attributable to 25,864,037.18 -19,554,248.65 -23,262,805.55 211.18 6,622,306.73 6,622,306.73 shareholders of the listed company Net profit attributable to shareholders of the listed company after 1,984,797.94 -19,610,828.58 -23,319,385.48 108.51 6,291,825.58 6,291,825.58 deducting non-recurring gains and losses 3 Annual Report 2007 Net cash flow arising from 14,843,814.16 26,649,992.33 26,649,992.33 -44.30 27,577,022.56 27,577,023.56 operating activities Increase/decrease at the end of this year compared At the end of 2006 At the end of 2005 At the end of with that at the 2007 end of last year (%) Before Before After adjustment After adjustment After adjustment adjustment adjustment Total assets 377,755,155.15 377,755,155.15 376,031,844.21 0.46 389,185,291.70 389,185,291.70 Owners’ equity(Shareholders’ 245,998,316.81 223,842,836.53 220,134,279.63 11.75 238,858,928.26 238,858,928.26 equity) 2. Main financial indexes Unit: RMB Increase/decrease in this year 2006 2005 compared with 2007 last year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Basic earnings per 0.09 -0.0691 -0.08 211.07 0.0234 0.0234 share Diluted earnings per 0.09 -0.0691 -0.08 211.07 0.0234 0.0234 share Basic earnings per share after deducting 0.007 -0.069 -0.082 1.09 0.022 0.022 non-recurring gains and losses Increased 21.0 Fully diluted return on 10.51% -8.74% -10.57% 8 percentage 2.77% 2.77% equity points Increased Weighted average 21.34 11.10% -8.54% -10.24% 2.81% 2.81% return on equity percentage points Fully diluted return on Increased equity after deducting 11.40 0.81% -8.76% -10.59% 2.63% 2.63% non-recurring gains percentage and losses points Weighted average Increased return on equity 11.11 after deducting 0.85% -8.56% -10.26% 2.87% 2.87% percentage non-recurring gains points and losses Net cash flow arising from operating 0.05 0.09 0.09 -44.44 0.10 0.10 activities per share 4 Annual Report 2007 Increase/decrease at the end of this year compared At the end of 2006 At the end of 2005 At the end of with that at the 2007 end of last year (%) Before After Before After After adjustment adjustment adjustment adjustment adjustment Net asset per share attributable to 0.87 0.79 0.78 11.54 0.84 0.84 shareholders of listed company Return on equity Earnings per share Item Weighted Basic earnings per Diluted earnings Fully diluted (%) average (%) share(RMB) per share(RMB) Net profit attributable to shareholders of the listed 10.51 11.10 0.0913 0.0913 company Net profit attributable to shareholders of the listed company after deducting 0.81 0.85 0.007 0.007 non-recurring gains and losses Note: In June 2005, the former first largest and second largest shareholders of the Company Shenzhen SEG Group Co., Ltd (hereinafter refers to SEG Group) and China Zhenhua Electronic Group Co., Ltd (hereinafter refers to Zhenhua Group) signed Equity Transfer Agreement with Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. (hereinafter refers to Wuhan Zhongheng Group) in which the equity of the Company held by them was transferred to Wuhan Zhongheng Group. In accordance with the equity transfer agreement of the Company and the spirit of meeting summary from leader group on works of employee compensation and allocation, the on-job employees with Shenzhen registeration and no Shenzhen registeration who signed labor contracts in fixed period and unfixed period with the Company before July 13, 2005 needed to terminating labor contract with the Company; the expense on teminating contract and compensating allocation were paid by the Company and the former shareholders SEG Group and Zhenhua Group, in which the Company needed bearing the following expenses: the expense on teminating contract and compensating allocation for employee without Shenzhen registeration; extra compensation expense for the employee with Shenzhen registeration in Circuit Board Department; and the wages and welfare for early retiree and job-waiting people. The aforesaid expenses were initially confirmed in year 2006. From Jan. to June of 2007, the actual expense for paying the aforesaid items totaled to RMB 3,708,556.90, in which the expense on teminating contract and compensating allocation for employee without Shenzhen registeration amounting to RMB 2,400,784; extra compensation expense for the employee with Shenzhen registeration in Circuit Board Department amounting to RMB 604,000; and the wages and welfare for early retiree and job-waiting people amounting to RMB 703,772.90. From Jan.1, 2007, the Company began to adopt new Accounting Standards for Business Enterprises. The Article 8 of Accounting Standards for Business Enterprises No. 38 – First Adpotioon of Accounting Standards for Business Enterprises regulated: As to a plan on terminating the labor 5 Annual Report 2007 relationship with an employee which is already existing on the date of initial implementation, in case it meets the conditions described in the Accounting Standards for Business Enterprises No. 9 - Wages and Salaries of Employees for the recognition of expected liabilities, the liability resulting from the compensation made for the cancellation of the labor relationship with the employee shall be recognized as well as the retained earnings shall be modulated. The Article 6 of Accounting Standard for Business Enterprises No. 9 - Employee Compensation regulated: If an enterprise cancels the labor relationship with any employee prior to the expiration of the relevant labor contract or brings forward any compensation proposal for the purpose of encouraging the employee to accept a layoff, and the following conditions are met concurrently, the enterprise shall recognize the expected liabilities incurred due to the compensation for the cancellation of the labor relationship with the employee, and shall simultaneously record them into the profit or loss for the current period: (1)Where the enterprise has formulated a formal plan on the cancellation of labor relationship or has brought forward a proposal on voluntary layoff and will execute it soon; (2) The enterprise is unable to unilaterally withdraw the plan on the cancellation of labor relationship or the layoff proposal. The aforesaid three expenses paid from Jan. to June of 2007 by the Company conformed to the above regulations, in according to the Article 4 of Accounting Standards for Business Enterprises No. 38 – First Adpotioon of Accounting Standards for Business Enterprises regulated: On the date of initial implementation, according to the Accounting Standards for Enterprises, an enterprise shall make classification, recognition and measurement on all assets, liabilities and the owner's equities again, as well as shall make a balance sheet for the initial period, the retroactive adjustment on the aforesaid three items were adjusted to retained profit in year-begin of 2007 and projected liabilities; the retroactive adjustment influenced the data of 2006 financial statement with follows: Difference before Difference after adjustment for first adjustment adpotioon of first adpotioon of The influenced Item Accounting Standards Accounting amount for Business Standards for Enterprises Business Enterprises Projected 0.00 3,708,556.90 3,708,556.90 liabilities Total liabilites 152,189,007.68 155,897,564.58 3,708,556.90 Shareholders’ 223,842,836.53 220,134,279.63 -3,708,556.90 equity Net profit -19,554,248.65 -23,262,805.55 -3,708,556.90 III. Changes in capital shares and particulars about shareholders (I) Particulars about the changes in share capital Before the change Increase or decrease of this time (+) After the change New Capitalization Bonus Amount Proportion shares of public Amount Proportion Others Subtotal (Share) (%) shares (Share) (%) issued reserve I. Restricted shares 124,956,261 44.13 -8,440,119 -8,440,119 116,516,142 41.15 6 Annual Report 2007 1. State-owned shares 2. State-owned legal person’s shares 3. Other domestic shares 124,956,261 44.13 -8,440,119 -8,440,119 116,516,142 41.15 Including: Domestic non-state-owned 124,925,828 44.12 -8,435,934 -8,435,934 116,489,894 41.14 legal person’s shares Domestic natural person’s 30433 0.01 -4185 -4185 26248 0.01 shares 4. Foreign shares Including: Foreign legal person’s shares Foreign natural person’s shares II. Unrestricted shares 158,204,966 55.87 8,440,119 8,440,119 166,645,085 58.85 1. RMB Ordinary shares 56,209,130 19.85 8,440,119 8,440,119 64,649,249 22.83 2.Domestically listed 101,995,836 36.02 0 0 101,995,836 36.02 foreign shares 3. Overseas listed foreign shares 4. Others Ⅲ. Total shares 283,161,227 100 0 0 283,161,227 100 Note: 1. On May 18, 2007, the share stock structure of the Company changed for the implementation of Share Merger Reform. 2. In accordance with the provisions of China Securities Regulatory Commission and China Securities Depository and Clearing Corporation Limited Shenzhen Branch on releasing the sale restriction of shares held by directors, supervisors and senior executives of listed companies, 8,750 shares held by directors, supervisors and senior executives of the Company are released from the sale restriction in the report period. (II) The amount of shares held by the top ten restricted shareholders and restricted condition Amount of Amount of newly added Name of restricted Date of being listed for restricted shares shares being Restriction condition shareholders transactions held listed for transactions Promising that the non-tradable shares of the Company held Wuhan Zhongheng New by it will not be Science & Technology 116,489,894 May 18, 2010 0 listed for transaction Industrial Group Co., within 36 months Ltd. since the date of acquiring circulating right. (III) Issuance and listing of shares (1) The previous three year ended the period-end; the Company issued neither new share nor 7 Annual Report 2007 derived securities. (2) There existed no inner employees’ shares in the Company. (IV) About shareholders (ended Dec. 31, 2007) 1. The number of shareholders and particulars about the shares held by them Unit: share Total shareholders 23,372 Particulars about shares held by the top ten shareholders Proportion Amount of Shares Nature of Amount of Names of shareholders of share restricted shares pledged or shareholder share held held held frozen Domestic Wuhan Zhongheng New Science & non-state-owned 41.14% 116,489,894 116,489,894 0 Technology Industrial Group Co., Ltd. legal person shares Foreign legal SEG (HONG KONG) CO., LTD. 5.85% 16,569,560 0 Unknown person Foreign legal GOOD HOPE CORNER 4.91% 13,900,000 0 Unknown INVESTMENTS LTD person Domestic ZHOU ZAI MING 0.50% 1,432,985 0 Unknown natural person HUNAN RUIHE INVESTMENT Dometic legal 0.45% 1,291,031 0 Unknown HOLDING(GROUP) CO., LTD. person Domestic NIE PING 0.44% 1,266,755 0 Unknown natural person RENJUN DEVELOPMENT CO., Foreign legal 0.42% 1,200,000 0 Unknown LTD. person Domestic WU WEI MIN 0.34% 965,600 0 Unknown natural person JIANGYIN POWER Domestic legal 0.31% 880,000 0 Unknown DEVELOPMENT CENTER person Foreign natural BINGHUA LIU 0.31% 876,213 0 Unknown person Particulars about shares held by the top ten unrestricted shareholders Name of shareholder Amount of unrestricted shares held Type of share Domestically listed foreign SEG (HONG KONG) CO., LTD. 16,569,560 share GOOD HOPE CORNER INVESTMENTS Domestically listed foreign 13,900,000 LTD share ZHOU ZAI MING 1,432,985 RMB common share HUNAN RUIHE INVESTMENT 1,291,031 RMB common share HOLDING(GROUP) CO., LTD. NIE PING 1,266,755 RMB common share 8 Annual Report 2007 Domestically listed foreign RENJUN DEVELOPMENT CO., LTD. 1,200,000 share WU WEI MIN 965,600 RMB common share JIANGYIN POWER DEVELOPMENT 880,000 RMB common share CENTER Domestically listed foreign BINGHUA LIU 876,213 share Domestically listed foreign LUO YA 756,620 share Among the top ten shareholders, Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. neither bears associated relationship with other shareholders, nor belongs to the consistent actor that are prescribed in Measures for the Administration of Disclosure of Shareholder Explanation on associated relationship among Equity Changes of Listed Companies. the aforesaid shareholders or consistent action The Company neither knew whether there exists associated relationship among the other shareholders, nor they belong to consistent actors that are prescribed in Measures for the Administration of Disclosure of Shareholder Equity Changes of Listed Companies. (V) The controlling shareholder of the Company (1) Change of the controlling shareholder of the Company On June，2005, Shenzhen SEG Group Co., Ltd. (hereinafter referred to as SEG Group) and China Zhenhua Electrics Group Co., Ltd. (hereinafter referred to as Zhenhua Group), which are the former first and second largest shareholders of the Company, signed the Equity Transfer Agreement with Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. (hereinafter referred to as “Wuhan Zhongheng”) and transferred all the equity of the Company held by them to Wuhan Zhongheng. On Apr.12, 2007, all the transfer procedures of the equity transfer was completely settled, and the shares held by the shareholders of the Company changed; SEG Group and Zhenhua Group no longer hold the shares of the Company, and Wuhan Zhongheng holds 124,925,828 shares of the Company, accounting for 44.12% of the total capital stock of the Company, so that it becomes the first largest shareholder of the Company. On May 18, 2007, for the implementation of Share Merger Reform Plan of the Company, the amount of shares held by Wuhan Zhongheng were changed as 116,489,894 shares, proportion of holding shares changed as 41.14%. Wuhan Zhongheng New Science & Technology Industrial Name of new controlling shareholder Group Co., Ltd. Date of changing new controlling shareholder Apr.12, 2007 Date of disclosure on changing new controlling Apr.13, 2007 shareholder Newspapers for disclosure on changing new controlling China Securities, Securities Times and Hong Kong Wen Wei Po shareholder (2) Name of the controlling shareholder: Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. Legal representative: Li Zhongqiu Date of foundation: Mar.21, 1996 Registered capital: RMB 138,000,000 9 Annual Report 2007 Business scope: Production; sales of computers, TV set, display, other hardware and computer software; development of internal data communication network, building of packing materials and light weight building material for packaging; hardware metal product, plastic product; acoustic product and electronic equipment; fabrics and garments; sales of building materials; management of exports business for the own products and technologies for the Company and member enterprise; management of export business on raw material, apparatus and instrument, machinery equipments, spare parts and technologies (barring those limited on operations or forbidden products or techniques of export and import by nation), development of real-estate and sales of commercial housings. (3) Name of the actual controller was Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd with legal representative of Li Zhongqiu( for the resume, please refers to the IV. Particulars about directors, supervisors, senior executives and employees) Li Zhongqiu 98.4% Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. 41.14% Shenzhen Huafa Electronics Co., Ltd. IV. Particulars about directors, supervisors, senior executives and employees (I) Directors, supervisors and senior executives during the report period 1. Basic information Drawing remuneration Shares Shares Reason from held at held at Name Title Sex Age Office term for shareholders’ year-be year change units or other gin -end related units or not Chairman, 2007.7.18－ Li Zhongqiu Male 45 0 0 Naught Yes GM 2010.7.18 Vice 2007.7.18－ Tang Chongyin Male 47 0 0 Naught Yes Chairman 2010.7.18 2007.7.18－ Chen Zhigang Director Male 34 0 0 Naught Yes 2010.7.18 Director, 2007.7.18－ Shi Cheng Male 44 0 0 Naught No Deputy GM 2010.7.18 Independent 2007.7.18－ Yan Haizhong Male 62 0 0 Naught No Director 2010.7.18 10 Annual Report 2007 Independent 2007.7.18－ Song Pingping Female 40 0 0 Naught No Director 2010.7.18 Chairman of 2007.7.18－ Cao Li Supervisory Female 37 0 0 Naught No Committee 2010.7.18 2007.7.18－ Tang Ganyu Supervisor Female 30 0 0 Naught Yes 2010.7.18 2007.7.18－ Weng Xiaojue Supervisor Female 27 0 0 Naught No 2010.7.18 2. Major business experience of directors, supervisors and senior executives in recent 5 years. (1) Member of the board of directors Li Zhongqiu: Male, was born in 1962 with Master of Engineering. He is representative to the NPC (the tenth) of Hubei Province, Wuyi labor medalist of Wuhan. He is Chairman of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. from 1996 till now. From July, 2007 till now, he works as Chairman and the General Manager of the Company. Tang Chongyin: Male, was born in 1960. He is a Doctor of Laws. He worked as Chief of the law office in Shenzhen SEG Group Co., Ltd. from November 1998 to April 2004, and chief of the audit office of Shenzhen SEG Group Co., Ltd. from May 2000 to April 2003. Moreover, he has been chief legal adviser of Shenzhen SEG Group Co., Ltd. from July 2000 till now and Manager of the Assets Department of Shenzhen SEG Group Co., Ltd. from April 2003 till now. Since July 2007, he held the position of Vice-chairman of the Company. Chen Zhigang: Male, born in 1973, Master of Business Administration. From 2002 to 2005, he was supervisor, investment manager, securities representative of Wuhan Huaxin Hi-Tech Co., Ltd. He is CFO and secretary of the board of directors of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. from June 2005 till now. He works as Director of the Company since July 2007. Shi Cheng: Male, was born in 1965, Master. He was deputy general manager of International Business Department of Wuhan Huaxia Bank from 2000 to 2002 and worked as Vice president of Wuhan Huaxia Bank Qingshan Branch from 2003 to 2005. He was general manager of International Business Department of Wuhan Huaxia Bank from 2005 to May 2007, and Special Assistant to General Manager of the Company from May to July of 2007. He works as Director and Deputy General Manager of the Company since July 2007. Yan Haizhong: Male, was born in 1945. He is senior engineer of researcher level, enjoys specially subsidized by the State Council. He was General Manager of Shenzhen Shennan Circuits Co., Ltd from 1987 to 2005 and Vice-president of CATICSZ from 2002 to 2005. He has been deputy director of CPCA from 1992. He is in charge of Lean Six Sigma and management innovation and leadership of CATICSZ from 2005 to now. Since July 2007, he becomes the Independent Director of the Company. Song Pingping: Female, was born in 1967. She holds Bachelor Degree of Law and Master of Civil and Commercial Law of Zhongnan University of Economics and Law. She was Partner lawyer of Beijing King & Wood, permanent legal advisor of listed companies such as SEG, Gemdale Corporation, etc. and independent director of Shenzhen Changyuan New Material Co., Ltd since 2002. Since July 2007, she became the Independent director of the Company. (2) Member of the supervisory committee Cao Li: Female, was born in 1970, graduated from Junior College, Intermediate Accountant. She 11 Annual Report 2007 was CFO of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. from 2000 to May 2005, was a member of transition period workgroup of the Company from June 2005 to June 2006. She worked as Assistant General Manger from July 2006 to October 2007 and Secretary of the Board of Directors from October 2006 to July 2007. She worked as General Manager of Purchasing Center from May to October 2007. Since July 2007, she works as Chairman of the Chariman of the Supervisory Committee of the Company. Tang Ganyu: Female, was born in 1977, holding bachelor. She was assistant to Plant Manager of Wuhan Hengsheng Photoelectrical Industry Co., Ltd. from August 2003 to July 2005 and Engineering Manager from August 2005 to July 2006. She became of Special Project Manager in office of deputy general manager, and production manager since August 2006. She is Supervisor of the Company since July 2007. Weng Xiaojue: Female, was born in 1980. She graduated from Zhongshan University. She was engaging in securities work in the office of board of directors of Guangzhou Friendship Co., Ltd. from July 2002 to August 2006 and became Representative for Securities Affairs of the Company since January 2007. She is Supervisor and Vice Chairman of Labor Union of the Company since July2007. The above-mentioned personnel excluding independent directors have not held any post in other units other than the shareholders' units. 3. Particulars about the annual remuneration i. The decision-making processes of annual remuneration held by directors, supervisors and senior executives The remunerations of directors and supervisors of the Company are decided by the shareholders’ general meeting, the remuneration of senior executives is confirmed by the board of directors in accordance with the general remuneration management system of the Company and the actual achievements of operations targets. ii. The annual remuneration of directors, supervisors and senior executives Total 3 director, supervisor and senior executive drew remunerations from the Company,and calculated from July 2007(the begin date of office term), and the total annual remuneration was RMB 260,000(excluded the allowance of independent director) Names Title Total amount of annual remuneration (July, 2007-Dec., 2007) Shi Cheng Director, GM 120,267 Chairman of Supervisory Cao Li 92719 Committee Weng Xiaojue Supervisor 47,324 iii.The allowance for independent director: 36,000/person/year(befor tax) 4. Changes on directors, supervisors and senior executives in the report period On Jun.29, 2007, decided by the 6th extraordinary meeting of the board of directors of the Company in 2007 and the 8th extraordinary meeting of the 5th supervisory committee, the board of directors, the board of directors and the supervisory committee of the Company carry on election at expiration of office terms in advance. On Jul.18, 2007, decided by the 2nd extraordinary shareholders’ meeting in 2007, Li Zhongqiu, Tang Chongyin, Chen Zhigang, Shi Cheng, Yan Haizhong, Song Pingping were elected as directors of the 6th board of directors of the Company, thereinto Yan Haizhong and 12 Annual Report 2007 Song Pingping as independent director; Cao Li, Tang Ganyu were elected as the supervisors of 6th supervisory committee of the Company. In addition, elected by the whole people of the Company, Weng Xiaojue was elected the employee representative supervisor of the 6th supervisory committee of the Company. On Jul.18, 2007, elected by the 1st meeting of the 6th board of directors of the Company, Li Zhongqiu was elected as the chairman of the board of the Company; Tang Chongyin was elected tas he vice chairman of the board of the Company; according to the nomination of chairman of the board, Mr. Li Zhongqiu was engaged as the general manager; according to the nomination of general manager, Mr. Shi Cheng was engaged as deputy general manager, and act on secretary of the board’s responsibility as a deputy. At the same day, elected by the 1st meeting of the 6th supervisory committee of the Company, Cao Li was elected as the chairman of supervisory committee of the Company. In the later half of 2007, with the nomination of 2007 7th extraordinary meeting of the board of directors of the Company and the approval of 2007 3rd extraordinary shareholders’ general meeting of the board of directors of the Company, Mr. Mai Jianguang was supplementarily eleted as the independent director of the 6th board of directors of the Company, however, later he resigned due to individual reason. (II) About Employees In the end of report period, the Company had in-job staff of 625; the Company did not have retiree to bear the expenses. The structure of the employee is as follows: Profession constitution Production personnel 428 68.5% Salesperson 20 3.2% Technicians 34 5.4% Financial personnel 15 2.4% Administrative personnel 56 9.0% Other 72 11.5% Education background Master and On-the -job master 2 0.32% Bachelor degree 31 4.96% 3-years regular college graduate 70 11.2% Other 522 83.5% 13 Annual Report 2007 V. Administrative Structure I. Administration of the Company The Company always strictly conformed to Company Law, Security Law, Code of Corporate Governance for Listed Companies, Guidelines for the Articles of Association of Listed Companies, Rules Governing Listing Of Stock On Shenzhen Stock Exchange, and requirements of other laws and administrative rules related to administration of listed companies, constantly perfected legal person administrative structure, regulated operation of the Company, and formed management systems for decision-making and operation with the main structure of Shareholders’ General Meeting, Board of Directors, Supervision Committee and management team. The actual situation of legal person administrative structure basically accorded with the requirements of aforesaid rules, and specific information in the report period was as follows: (I) The Company revised The Articles of Association and rules of procedure of Shareholders’ General Meeting, Board of Directors and Supervision Committee, Detailed Rules of General Manager’s Working and Working System of Independent Directors; formulated all kinds of internal control management systems such as Management Measures of Shares Held by Directors, Supervisors and Senior Managers and Changes, Management System of Collected Funds, Management System of Information Disclosure, Management System of Connected Transaction, Working System of Reception and Extension and Internal Audit System. (II) Election and engagement of directors, supervisors and senior managers accorded with laws, administrative rules and requirements of The Articles of Association, and directors, supervisors and senior managers could all seriously participated study and training organized by supervision department to grasp relevant knowledge required to possess; Board of Directors, Supervision Committee could implement their duties in accordance with laws, administrative rules and The Articles of Association. Notice, decision-making and information disclosure of each meeting were all completed according to legal proceedings. (III) According to the requirements of Notice on Issues Concerning Campaign to Strengthen Governance of Listed Companies promulgated by CSRS ZJGSZ[2007] No.28 and Notice on Issues Concerning Doing Well of Strengthening Governance of Listed Companies promulgated by Shenzhen Stock Exchange SZS[2007]No.39, the Company started Special Activities of the Company Administration, established special group with Chairman of the Board as the leader, with the principle of being practice and realistic, compared contents of aforesaid documents one item by one item, started self-inspection, and received completed inspection of the Company administration by Shenzhen Security Regulatory Office and public comments. After these special activities, the Company feasibly reformed the found problems, newly carded each process of the Company administration, supplemented and perfected a set of basic management systems and operating criteria, further standardized the operation of three meetings of the Company. Relevant information was published on China Securities, Securities Times, Hong Kong Wen Wei Po and Juchao website respectively on Sep.1, 2007 and Oct.24, 2007. The problems founded in Special Activities and reform information were summarized as follows: 1. Board of Directors did not establish special committees: Board of Directors had established Strategy Committee, Nomination Committee, Audit Committee and Remuneration and Appraisal Committee, and formulated detailed working rules of special committees, to provide specialized support to decision-making of Board of Directors. 2. There were the situations of mending and not timely disclosing in respect of information disclosure: the Company formulated and perfected Management System of Information Disclosure Affairs, and strengthened operation study and training of information disclosure. 3. Internal control remained to be perfected according to new organize structure and operation flows: the Company revised and perfected internal control system. 4. The situation of overlapping of personnel in supervision committee and operation team remained 14 Annual Report 2007 to be changed: the Company adjusted the working of Chairman of Supervision Committee Ms. Cao Li, dismissed her post as assistant of General Manager. 5. There were no person majored in accounting in independent directors: the Company held 2007 the 3rd Extraordinary Shareholders’ general Meeting on Oct.15, 2007, added Mr. Mai Jianguang as independent director of the sixth Board of Directors. But later he resigned with individual reasons. At present, because of lacking independent directors specialized in accounting, the member structure of Board of Directors remained imperfect, and the Company will complete the working of adding independent directors in the next year as soon as possible to exert the special function of the subsidiary committees of Board of Directors. 6. The Company did not engage intermediary agencies to evaluate or audit the object of connected transaction bid: according to 10.2.5 regulations of Rules Governing Listing Of Stock On Shenzhen Stock Exchange, the object of transaction referred to connected transaction related to daily operation could not be evaluated or audited, therefore, the Company did not engaged intermediary agencies to evaluate and audit object of daily connected transaction. In order to regulate the performance of connected transaction, to protect legal rights and interests of the Company and shareholders, the Company formulated Management System of Connected Transaction in Jun., 2007, and according to the requirements of relevant regulations, reasonably made prediction of the total amount of daily connected transaction of the whole year, which was put in to Board of Directors and Shareholders’ General Meeting to approve. Besides implementation of the information disclosure process before, the Company audited and monitored the process of each transaction through internal contact appraising procedure, Audit Department audited later, Certified Public Accountants completely audited connected transaction affairs of the whole year in the annual audit, and ensured connected transaction accorded with the principles of fairness, justice and publicity. (IV) There was no situation of regularly or irregularly reporting unopened information to majority shareholders and actual controllers in the Company; there was no situation of depositing in financial institution of majority shareholders in the Company and subsidiary enterprises. II. Implementation of independent directors’ duties of the Company 1. Particulars about independent directors’ presenting the board meeting: Times of Times of Names of Times that should have personal commission Times of absence independent attended the Board presence presence (Time) directors meeting (Time) (Time) Yan Haizhong 5 3 2 0 Song Pingping 5 5 0 0 2. After completing the election in Jul., 2007, new Board of Directors held five board meetings totally. Each independent director actively participated decision-making of Board of Directors, with the attitude of taking responsibility for shareholders, discussed each proposal of meetings and expressed individual opinions from the point of view of industry operation and risk control with due diligence, and did not expressed disagreement. III. Explanation about relations of the Company and controlling shareholders The Company and controlling shareholders feasibly managed to achieve Five Separation in respect of operation, personnel, assets, institution and finance. The Company had independent and complete operation ability and independent management ability. IV. Particulars about establishing and implementing appraisal and incentive mechanism of senior managers 15 Annual Report 2007 The Company established System of Employee Rank and Basic Salary, the salaries of senior managers connected with the benefit index, work quality index, and were granted floatingly, increased and decreased the grade of salaries on the basis of annual check each year, and preliminarily formed incentive and control mechanism of Income Could Increase and Decrease. V. Self-evaluation on internal control (I) Summary on internal control The Company established legal person administration system with the main structure of Shareholders’ General Meeting, Board of Directors, Supervision Committee and Senior Managers, and Board of Directors set up four special committees (Strategy Committee, Nomination Committee, Audit Committee and Remuneration and Appraisal Committee) and two routine implement departments (Audit department and Board Office), which efficiently ensured the exertion of decision-making right, exerting right and supervising right by the Three Meeting system, with The Articles of Association as general rules, all kinds of systems including production operation, human resource, finance management, internal audit and information transfer control formed internal control system of the Company. The Board of Directors set up Audit department, which was in charge of the audit working of each unit of the Company, weighed and estimated current operation risk, security of finance and management information; the operation team set up Check and Supervision Office, which was in charge of supervising the efficiency of internal control operation, follow-up checked operation implementation of each department and evaluated department work performance. (II) Key activities of internal control 1. Management and control of holding subsidiaries At present, the Company owned one holding subsidiary—Shenzhen Huafa Real Estate Tenancy 16 Annual Report 2007 Management Co. Ltd., which held 60% shares. Holding subsidiary conformed systems of the Company and combined to its actual situation to establish and perfect operation and financial management system. The Company implemented flatting management. Functional department gave special guidance, supervision and support to the suitable department in subsidiary company, especially controlled significant operations such as capital transaction, operation trade and investment activities, Operation audit and report authority were clear, estimated the operation performance of the subsidiary company according to annual operation achievement, made the rewards and punishment clear, and efficiently formed supervision of significant operation affairs and risks in subsidiary company. 2. Management and control of connected transaction The Company established Management System of Connected Transaction, made clear of the object, content, approval procedure and information disclosure. The Company tried to avoid connected transaction. To the possible connected transaction, the Company would asked independent directors for opinions, and put in to Board of Directors or Shareholders’ General Meeting to approve. The Board of Directors and Shareholders’ General Meeting strictly conformed to the system of avoiding when approving to ensure the fairness and justice of transaction, and according to relevant regulations, timely disclosed relevant information to ensure the publicity of transaction. The connected transactions in the report period all accorded with the requirement of relevant administrative rules, and to the routine connected transaction affairs, besides implementing the procedure of information disclosure, the Company audited and supervised the process of each transaction with internal contact audit procedure, audit department audited later, and certificated public accountants made complete audit of connected transaction of the whole year in the annual audit. 3. Management and control of external guarantee Internal control system made clear definition of external guarantee, and there was no external guarantee affair in the report period. 4. Management and control of the use of collected funds The Company formulated Management System of Collected Funds in accordance with relevant regulations of collected funds management issued by CSRC, which made clear of the requirements of store, use and supervision of collected funds. There was no situation of using collected funds in the report period. 5. Management and control of significant investment Significant investment of the Company conformed to the principles of being within the law, prudence, security and efficiency to control investment risks and pay attention to investment benefits. The Articles of Association made clear definition of approval authority of significant investment of Board of Directors and Shareholders’ General Meeting. There was no significant investment activity in the report period. 6. Management and control of information disclosure The Company formulated Management System of Information Disclosure affairs in accordance with security laws and regulations of relevant information disclosure, which made clear of the content, procedure, responsibility division and management of information disclosure, and formulated procedures of reporting, transferring auditing and disclosing significant events to completely and efficiently control opened information disclosure and significant internal information communication. The Company took the work of strengthening information disclosure affairs management and protecting investors’ legal benefits as an important one, and would pay persistent attention to it. (III) Problems in internal control and reform plans In the report period, the Company experienced significant revolution from state-own system to private mechanism. Each operation was in the initial period of transition, adaptation and 17 Annual Report 2007 readjustment; internal control was confronted with severe challenges, which proposed new problems to comprehensive and scientific management; the ability of coping with emergencies remained to be strengthened; each warning mechanism remained to be perfected. The Company will constantly optimize internal control including operation control, financial management control and information disclosure control, timely supplement and perfect internal control system to increase the operability of internal mechanism. (IV) Comprehensive evaluation of internal control The definition of rights and duties of Shareholders’ General Meeting, Board of Directors and Supervision Committee were accurate, Board of Directors and Management team separated with each other respectively, the location and duties of each department were accurate and clear to ensure deferent institutions and posts restrict and supervise with each other with accurate rights and duties; the Company established reasonable internal control system in significant respects and was fulfilled and implemented well; the Company timely found problems, blocked holes, corrected deviations and eliminated hidden dangers to guaranteed normal performance of operation activities, protect the security and integrity of the Company assets and ensure the whole internal monitoring system normally operating. (V) Opinions on self-evaluation of internal control expressed by Supervision Committee 1. According to Company Law, Security Law, relevant regulations of supervision institution, and other relevant national laws and administrative regulations, combined to the industry the Company placed, operation method and its own characters, the Company formulated relevant internal control system to ensure normal performance and risk control of operation activities; 2. In the report period, there was no situation of disobeying Guidance to Listed Company Internal Control promulgated by Shenzhen Stock Exchange and internal control system of the Company. Self-evaluation on internal control of the Company was comprehensive, authentic and accurate, which reflected the actual situation of internal control of the Company. (VI) Opinions on self-evaluation of internal control expressed by independent directors Important activities of internal control processed in accord with all the systems of internal control. The internal control of holding subsidiary, connected transaction, external guarantee, use of collected funds, significant investment and information disclosure were strict, sufficient and efficient, and ensured normal operation management of the Company. Self-evaluation of internal control accorded with the actual situation of internal control of the Company. VI. Brief Introduction to the Shareholders’ General Meeting In the report period, the Company held five shareholders’ general meetings: 1. On Apr.2, 2007, the 2007 1st Extraordinary Shareholders’ General Meeting was held in spot way; 2. On Jun.29, 2007, the Annual Shareholders’ General Meeting 2006 was held in spot way; 3. On Jul.18, 2007, the 2007 2nd Extraordinary Shareholders’ General Meeting was held in spot way; 4. On Oct.15, 2007, the 2007 3rd Extraordinary Shareholders’ General Meeting was held in spot way; 5. On Jan.3, 2008, the 2007 4th Extraordinary Shareholders’ General Meeting was held in spot way. Notices on aforesaid shareholders’ general meetings were respectively published on China Securities, Securities Times, Hong Kong Wen Wei Po and Juchao website (http://www.cninfo.com.cn.) dated Apr.3, 2007, Jun.30, 2007, Jul.19, 2007, Oct.16, 2007 and Jan.4, 2008. 18 Annual Report 2007 VII. Report of the board of directors I. Review on the operation of the Company in the report period (I) Overall operation of the Company In 2007, the Company experienced a significant change in its system that the state-owned shareholders withdrawed and shareholders from private enterprises joined in. Great administration and changes have been carried out covering aspects of supply and sale of products, staff, finance and material. Balance between the new and old systems, collision between different cultures, great change in staff and change and adjustment of positions make the Company’s operation and management faced with various unsteable elements and conflicts of deep level in short term. Once for a while, the business of printed circuit and injection molding parts process had to partly stop operation. The Company had been plunged in the smoothing difficult situation brought by the merger and restructure, experiencing the baptism presented by complicated situation. Due to that the holding shareholder-Wuhan Zhongheng Group endowed the relevant assets concerning the assembly business of whole machine of EPS and liquid crystal display to the Company in the share merger reform, the Company has realized net profit of RMB 25.86 million for a whole year, which made a turnover compared to the same period of last year, among which: revenue of RMB 0.64 million has been made in business of injection molding; being in the start step, the whole machine business of liquid crystal display which was newly increased after the merger and restructure, has received gross profit of RMB 1 million approximately with its clients group to be cultivated; while being the main profit source of the Company, property leasing business maintains steady growth in the report period, with the leasing rate of 98%, leasing income of RMB 33,950,000, leasing profit of RMB2,2050,000 and the rent returned rate of 98%. 1. Improve the operation and make the efficiency turn over from the easy to the hard. The consequent disadvantages, such as customers’ wait-and-see attitude, sufficient orders, old equipments, low efficiency and frequent change in staff, presented hard examination in the initial period of the change in the holding shareholders of the Company and period of linking up and transition. The Company actively takes advantage of the new holding shareholders, their working experience and personnel reserve resource in injection molding and liquid crystal, borrows part talents in management and technology from the Group Company, refers to and brings in part management pattern of the Group Company, re-smooths and captures the obstacles in taches of production and operation, gradually improve client relationship, takes live use of the bad materials in stock, strictly controls consume in production, the operation gradually walks into the expected way, the injection molding department said goodbye to loss in August and the capacity has been improved in some degree. 2. Cut down the consumption and dig the potential and raise income from property leasing. Grabbing the advantages that some self-owned property is located in the center area of Shenzhen’s commercial and trading area, the Company digs potential in rent and field. According to the market situation, the Company raised the rent price in the newly achieved agreement in time. Meanwhile, it enlarges the scope available for leasing, increases shops next to streets and attracts and brings rent by many channels. The billboards are used with pay and methods for operating property have been innovated; at the same time, strictly controls the various leasing management expenses in fitment, maintaining and reform. Labor cost has been shortened, with controls in every taches and fine calculation and consideration. 3. Clear up the accouns, stop the hole and advance the capital to return. With the problems of comparatively big amounts in accounts receivable, difficulty to call back and lacking position of management and control, the Compay has stipulated the encouragement method for examination on calling back the accounts receivable, estimation and examination system of sales contract, spot investigation system to customers, which helps the Company to conreol and avoid the occurance of bad debts in accounts receivable in source, and enhances the sales men could actively and forwardly 19 Annual Report 2007 call back the accounts receivable in long term; with the method of concentrative management in head office, accounts receivable would be cleared up every month and the task of calling back the accounts is divided and practically sent to sales men or person in charge; through law litigation and external commission, par accounts receivable left in history has been cleared up. With efforts made in a half year, the Company has received obvious effect in managing accounts receivable. Totally RMB 50 million accounts have been called back from June to December, which completely changes the former situation that more sales and more arrearage, effectively controls increase in accounts receivable and assures circulation of the capital used in daily operation. 4. Make stipulation, establish system, smooth procedure and complete team construction. Faced with the situation of great change in staff and operation in mess, the Company successively carried out works which could make the operation of the enterprise in order, such as business restructure, system rebuidling and perfecting procedure. The details were: re-smoothed the examine-and-approve procedure and management method of the important economic tache such as purchase, inviting public bid, examination of contract, calling back accounts receivable and in-and-out of staff and materials; signed target responsibility book with the persons in charge of the various economic departments, established examination system, annually and monthly, classified level of employees and offerred with relevant remuneration to form the incentive and eliminated system that Up and Down in Duty and Income, and In and Out in Staff, which also meant encourage the good and the diligent, and punish the bad and the lazy; established the supervision system for work, made every work detail dispatched to individual, supervised the practice of the work in aspects of plan process, supervision record, result estimation and method of punishment and detainment. This can avoid phenomenon of deferring and shuffle and greatly enhanced the execution of work and quality efficiency; controled personnel arrangement, be strict in discipline of personnel and labor and capital, built working responsibility commitment system of positions offerred to all staff, absorbed person of ability through many channels, realized the effective allotment and renewal of employee team, effectively controled operation cost, maintained the normal working order of human resource and labor and capital. 5. Care about the employees, do more practical things and build enterprise culture. In order to quickly cultivate the collective ascription feeling of the staff, and strengthen the team coherence, the Company started the theme activity that the Company do Practice for You. The Company took out some outlay to improve the staff’s live, in aspects of repast, accommodation, environment, entertainment and safety. Cared about the needs of its staff, heared their thinking, promoted the internal journal Huafa Person, made follow-up report on the important news, production and operation, and staff spirit of the Company, held the big-typed literature gam party involving all staff, tried to create the enterprise atmosphere of harmony and union and gradually built the new enterprise culture for the Company. (II) Main business and its operation of the Company The main operation of the Company focuses on the industry of electronic products, including the production and sales of circuit boards and plastic injection hardware and LCD whole machine business. The sales of products of the Company focus on the area of South China. Details could be available in the following table: Unit: RMB Gross Increase/decrease Increase/decrease Increase/decrease Income from Cost of profit in income from in cost of in gross profit Industry operations operations ratio operations over operations over ratio over the last (%) the last year (%) the last year (%) year (%) Plastic Increased 0.59 injection 15,849,667.48 14,308,379.98 9.72% -6.17% -6.78% percentage points hardware 20 Annual Report 2007 Circuit Decreased 4.03 64,650,992.46 65,695,271.08 -1.62% -35.88% -33.24% Boards percentage points LCD Decreased 0.46 58,798,941.86 58,743,984.85 0.09% 35.22% 35.85% business percentage points Color TV 1,884,615.45 1,257,458.02 33.27% —— —— —— process Decreased 1.78 Total 141,184,217.25 140,005,093.93 0.84% -12.42% -10.82% percentage points Increase/decrease in income from Area Income from operation operations over the last year (%) South China 128,382,501.46 -28.93 Hong Kong 50,462,909.45 480.19 Southwest 14,399,471.94 14.87 (III) Customers of purchase and sales The total amount of purchase from the top five suppliers was RMB 67,207,800, taking 61.34% of the total amount of purchase. The total amount of sales of the top five customers was RMB 86,812,100, taking 44.92% of the total amount of sales. (3) The constitution of assets Increase/decrease Increase/decrease Proportion of the Amount amount over the last proportion over total assets year the last year Net account 57,501,749.38 15.22% -31,255,820.00 -35.21% receivable Inventory 32,595,773.55 8.63% 18,195,448.91 126.35% Real estate 49,617,510.58 13.13% 1,208,283.07 2.50% investment Net fixed assets 187,238,973.29 49.57% -1,380,748.06 -0.73% Short-term loans 60,400,000.00 15.99% -6,900,000.00 -10.25% Total assets 377,755,155.15 100.00% 1,723,310.94 0.46% Reasons for changing: 1. Great decrease in accounts receivable over the same period of last year is mainly due to that the arrearage of RMB 36,990,000 of last period-end from the customers of LCD have been taken back in this period, at the same time, the new LCD customers made payment in time. 2. Great increase over the same period of last year in inventory is mainly due to increasing reserve for LCD. 21 Annual Report 2007 (V) Constitution of period expense Ratio of Increase 2007 2006 Increase or decrease or decrease Operating expenses 3,733,724.38 3,445,845.36 287,879.02 8.35% Administrative 17,100,889.55 18,175,239.26 -1,074,349.71 -5.91% expenses Financial expenses 4,227,096.85 5,203,253.28 -976,156.43 -18.76% (VI) Constitution of cash flow Ratio of Increase 2007 2006 Increase or decrease or decrease Cash flow arising from operating 14,843,814.16 26,649,992.33 -11,806,178.17 -44.30% activities Cash flow arising from investment -6,401,787.21 8,211,339.56 -14,613,126.77 -177.96% activities Cash flow arising from financing -11,371,829.59 -31,985,881.05 20,614,051.46 -64.45% activities Net increase of cash 16,272,633.42 19,610,336.01 -3,337,702.59 -17.02% and cash equivalent Reasons for changing: 1. Great decrease in cash flow arising from operating activities over the same period of last year is mainly due to paying for the goods to the suppliers of previous period for business of circuit board and plastic injection hardware 2. Great decrease in cash flow arising from investment activities over the same period of last year is mainly due to that the Company received amount of RMB 10,190,000 from transferring the No.1 workshop and its subsidiary building in Shangbu Industry Park in 2006. 3. Great decrease in cash flow arising from financing activities over the same period of last year is mainly due to that nore arrearage of RMB 19,900,000 has been paid in 2006 over in 2007. (VII) Operation and achievement of main holding and share-holding companies The controlling company, Shenzhen Huafa Property Rent and Management Co., Ltd., is mainly engaged in the lease surrogate of property and property management of the Company with a registered capital of RMB 1 million. Its 60% equity is held by the Company, and the total asset at the end of this year was RMB 3,261,400. The income from property management expense of the Company in 2007 was RMB 1,952,900, with a net profit of RMB 977,200. II. The prospect for future of the Company (I) Development of the Industry and analysis to the market The original main business of the Company is the production and process of printed circuit board and plastic injection hardware. The merger and restructure in assets has injected live blood to the Company. The new holding shareholder endowed whole machine business of LCD, assissts the Company to switch to industry of LCD. In future, the Company will position itself in production and manufacture of LCD and LC TV, and will offer itself with the printed circuit board and precise plastic injection hardware made by it. LCD products have been variedly used in industries of 22 Annual Report 2007 computer, vedio terminal, communication and instrument. The market is vast, with great climbing in performance of production and sales. With the uncomparable advantages of non-radiation, low-energy-consumption, little-heat, fine and legerity and reverting picture exactly, LCD is replacing the traditional display product-CRT, and becomes the mainstream of the market. In recent years, government has treated it as one of the leading industries and offered it with lots of support. Meanwhile, the production and process of the global LCD products is gradually displaced and concentrated to China, which obviously a good opportunity for the Company to develop its industry of vedio and information. (II) Business plan of the new report year 1. Actively build the rudiment of the industry chain of vedio and information. In order to completely turn over the not-so-well operation of the listed company formed in many years, the new holding shareholder-Wuhan Zhongheng Group plans to conform the group industry assets (including business of plastic injection hardware and assemble of LC pattern) and the industry assets of listed company (including business of printed circuit board, plastic injection and manufacture of whole LCD) by way of capital operation. This is done to realize rational allotment of resources, cut down operation cost and integrity listing with excellent assets. Once the assets conformity is finished, the Company will possess the top, middle and low resources in production of LC—take printed circuit board business as top, the fittings business of LC, plastic injection and ESP as middle, and the whole machine business of LCD and LC TV as low. By getting through every tache in the top, middle and low level, conforming production resource, advancing operation efficiency, the production cost of the relevant products in the industry chain could be forwardly cut down and then market advantage could be won. 2. Steadily enhance the property operation level. Further optimize commercial structure, collect leasing information through many ways, visit the nearby leasing property to get known of the market situation in time, broaden clients resource and strive for steady growth in leasing rate; focus on the potential of property, seek for new measurement to make profit, save unnecessary expenditure, actively create income; improve management ability in property service, assure safety management system is practical, do well in daily check and maintaining of property equipment, take the customers as basis to detail the various fitting service measurement, consolidate and enhance satisfaction from customers. 3. Standardize and strengthen the internal control system. Focusing on the key taches such as exchange of important business, significant investment, related transaction, the Company reinforces the audit and daily supervision power in operation procedure, strengthens power in self-examination, self-correction, internal audit and internal correction, and finds deficiency of control and hole in management in time, presents practical countermeasure and suggestion for improvement, standardizes operation procedure, perfects ask-for-responsibility and ask-for-effect mechanism, solves problems internal, perfects works internal, makes sure that the supervision is accomplying with examination, result and change, gradualy forms the internal control system of clear work dispatch, responsibility dispatched to individual, and supervision from every round. It is avoided to have breaking discipline, loss, waste and lacking position in management happened. 4. Perfect and optimize management in human resources. On the basis of further doing well the fundamental works of human resources, the Company continuously perfects the human resources system in aspects of engagement, training, examination, remuneration and career life management. By analysis on position whole and duty content, the Company continues to standardize works of fixed-posion and fixed-human. With the principle of high efficiency, the Company optimizes the allocation of human resources and controls staff number and labor cost; takes human resources into management category of information, improves quality and efficiency of work of calculating remuneration; continues to strengthen the development and trainings of human resources, put emphasis on programming, implementation and coordination of training. Through the general 23 Annual Report 2007 subject trainings and work skill trainings held by the Company, the theory knowledge, business level and actual working ability of employees could be improved, then to fulfill the demand for the Company’s development. 5. Further carry out activity to build the enterprise culture. Continue to carry out team activity of variety, entertainment and knowledge. On favor of health in phsical and emotion of employees, and also their life quality, as well as the human care activity of Do Well in Tiny Things and Show True Emotion in Tiny Things, the Company increases the belonging feeling and centripetal force of its staff, making bridge between the Company and staff for effective communication. III. Investment in the report period (I) Application of raised proceeds In the report period, there were no events of raising funds or previous annual raising funds used till the report period. (II) Significant investing projects of non-raising funds In the report period, there were no significant investing projects of non-raising funds IV. Audit In the report period, ShineWing Certified Public Accountant issued standard unqualified auditor’s report for the Company. V. Change in accounting policy, accounting estimation and accounting errors correction (I) No change in accounting policy and accounting errors correction have happened to the Company in the report period. (II) Change in accounting estimation The use term of the self-owned property of the Company-Huafa Building was expected to be 30 years, from Nov 21st of 1981 to Nov 20th of 2011. Its depreciation term was also 30 years. With approval from the relevant department, the use term of the Building exceeds to Nov 20th of 2031, so the combined use term should be changed to 50 years, and so should the depreciation term. This accounting estimation change will bring a decrease of RMB 5,058,422.25 in the depreciation amount for 2007; correspondingly, the profit for 2007 will increase RMB 5,058,422.25. The change of the above depreciation of real estate investment is as follows: Depreciation amount calculated Item Original Before change After change Balance Huafa Building 90,188,800.85 6,091,479.18 1,033,056.93 5,058,422.25 (III) Balance adjustment when first adoption of the new Accounting Standard for Business Enterprise (details could be available in the Section 2 Accounting Data and Business Data Summary VI. Routine work of the Board of Directors (I) Meetings and resolutions of the Board of Directors in the report period The Board totally held 13 meetings in the report period: 1. On Feb 12th of 2007, the 8th meeting of the 5th Board of Directors was held by way of spot. 24 Annual Report 2007 th Details could be available in the public notice of the Company dated Feb 14 of 2007. 2. On Mar 14th of 2007, the 1st 2007 provisional meeting of the Board was held by way of spot. In this meeting, it was agreed to sell the No.1 workshop and its subsidiary building inShangbu Industry Park to China Zhenhua Electron Group Co., Ltd; the independent directors was in duty of engaging agency organization to issue independent finance consultant report for the price transacted; after negotiation, planed to take the estimation and analysis resultfrom the agency organization as the basis to assure the transaction price and planed to make examination and voting on the proposal of selling the No.1 workshop and other assets in Shangbu Industry Park in the next meeting of the Board; agreed to engage Shenzhen Zhongqin Asset Estimation Co., Ltd to carry out assets estimation. 3. On Apr 3rd of 2007, the 2nd 2007 provisional meeting of the Board was held by way of communication. Details could be available in the public notice of the Company dated Apr 6th of 2007. 4. On Apr 5th of 2007, the 3rd 2007 provisional meeting of the Board was held by way of communication. Details could be available in the public notice of the Company dated Apr 10th of 2007. 5. On Apr 17th of 2007, the 9th meeting of the 5th Board of Directors was held by way of spot. Details could be available in the public notice of the Company dated Apr 20th of 2007. 6. On Apr 27th of 2007, the 4th 2007 provisional meeting of the Board was held by way of communication. Details could be available in the public notice of the Company dated May 8th of 2007. 7. On May 28th of 2007, the 10th meeting of the 5th Board of Directors was held by way of spot. Details could be available in the public notice of the Company dated May 29th of 2007. 8) On Jun.29, 2007, the 6th Extraordinary Meeting of 2007 was held by way of spot and details refer to Company Notice dated on July 3, 2007. 9) On July 18, 2007, the 1st Extraordinary Meeting of the 6th Board of Directors’ Meeting was held by way of spot and details refer to Company Notice dated on July 19, 2007. 10) On Aug.24, 2007, the 2nd Extraordinary Meeting of the 6th Board of Directors’ Meeting was held by way of spot and the meeting examined and approved 2007 Semi-Annual Report. 11) On Sep. 28, 2007, the 7th Extraordinary Meeting of 2007 was held by way of spot and details refer to Company Notice dated on Sep. 29, 2007. 12) On Oct.22, 2007, the 8th Extraordinary Meeting of 2007 was held by way of spot and details refer to Company Notice dated on Oct.24, 2007. 13) On Dec.14, 2007, the 9th Extraordinary Meeting of 2007 was held by way of spot and details refer to Company Notice dated on Dec.15, 2007. (II) The Board of Directors implemented all resolutions of Shareholders’ General Meeting The Board had implemented resolutions of Shareholders’ General Meeting. In the report period, the Company didn’t authorize the Board about any matters; distribute profit and ration, and additionally issue any shares. (III) Summary report of Auditing Committee’s duty taking In the report period, the Auditing Committee, according to requirements in Working Rules of Board of Directors’ Special Committees and Board of Directors’ Auditing Committees’ Working Procedure 25 Annual Report 2007 for Annual Report, earnestly took responsibility to exam annual financial auditing. 1. Twice issued checking opinions on 2007 Annual Financial Report of the Company In the repot period, according to related regulations and requirements of CSRC, the Auditing Committee twice issued checking opinions on Annual Financial Report of the Company, Before the annual examining CPA entered, the Auditing Committee initially issued written opinions on not audited financial report. The Auditing Committee, in accordance with Enterprise Financial Codes-Basic Codes, Enterprise Financial Codes No.1 – Storage and 38 detailed rules as well as related financial system regulations, paid lots of attention on accuracy and completeness of financial documents, accordance of financial report with new Enterprise Financial Codes as well as regulations of related financial systems. Through checking and analyzing financial documents, the Auditing Committee believe that the Company according to related regulations of new Enterprise Financial Codes and combining its actual condition, made reasonable financial policy and proper financial assessing; transaction record is accurate and complete; financial report made by the Company truly reflects financial status of the Company until Dec.31 of 2007 and operation achievement and cash flow of 2007. And it agreed to carry out 2007 annual financial audit with the basis of this financial report. After the 1st draft of auditing report was made by annual examining CPA, the Auditing Committee timely communicated with CPA. Both of them had no difference on important problems of annual financial report of the Company. Financial report of the Company agrees with related regulations of Enterprise Financial Codes and relevant laws and regulations, and it fairly reflects financial status before Dec.31 of 2007 and 2007 operation achievement and cash flow on significant aspects. The Auditing Committee agreed to make 2007 Annual Report and Summary with the basis of this financial report, to ensure 2007 Annual Report disclosure in appointed time. 2. Particulars about urging for auditing of certified public accountants Due to the late engagement for its annual auditing organization, in order to ensure timely disclosure of the annual report, the Company negotiated with Shinewing Certified Public Accountants who is mainly responsible for auditing for audit entering in advance of the time. And the Company made schedule for auditing at the beginning of 2008, and the schedule is suitable. According to appointment of auditing plan, Shinewing Certified Public Accountants entered to audit on March 4, 2008. During the auditing, the Auditing Committee had communication with main project responsible persons and got to know work development and focused problems by CPA. At the same time, the Auditing Committee sent Audit urging letter to certified public accountants and required auditing people to promote auditing to appointed schedule. 3. Summary report on 2007 annual auditing by certified public accountants 2007 is the first year for carrying out new Enterprise Financial Codes as well as the special year transition after important equity transfer of the Company. For the hard auditing work, through active negotiation, the certified public accountant participated year end inventorying and entered for auditing before appointed time, thus finishing different debt adjustment and technical reserves. During the annual auditing, by communication with CPA and exam of fist draft annual financial report made by CPA, the Auditing Committee believed that the annual examining CPA kept independence and preciseness, strictly according to regulations of CPA Independent Auditing Code to audit. Auditing time was adequate; auditing staff assignment was reasonable and powerful to know its operation environment and implementation of internal control system; they had strong risk idea and could finish auditing to appointed time; the issued auditing report was objective and fair. 4. Proposal on engaging Shinewing Certified Public Accountants for its 2008 annual national auditing Considering Shinewing Certified Public Accountants’ familiar with financial status of the Company for being the Company’s annual auditing organization in the past two years, and professionalism, strong implementation, diligence and devotion spirit it proved, the Auditing Committee proposed to continue engaging Shinewing Certified Public Accountants as the 2008 annual national auditing 26 Annual Report 2007 organization for the Company. VII The preplan of 2007 annual profit distribution and converting capital public reserve into share capital: In 2007, the realized net profit of the Company amounted to RMB 25.86 million, which all used to make up prior year losses; and the Company didn’t distribute profit and convert capital public reserve into share capital. VIII Other information disclosure events: In the report period, the newspapers for publicly disclosing engaged by the Company were China Securities, Securities Times and Hong Kong Wen Wei Po, and no alteration of information disclosure newspaper occurred. Juchao information website http://www.cninfo.com.cn is the assigned website for information disclosure. VIII. Report of the Supervisory Committee (I) Working of the Supervisory Committee The Supervisory Committee held eleven meetings, and details are as follows: 1. On Feb.12, 2007, the 7th meeting of the 5th Supervisory Committee was held and details of the meeting can be seen in the notice of the Company dated on Feb.14, 2007. 2. On April 3, 2007, the 5th extraordinary meeting of the 5th Supervisory Committee was held by way of communication, and details of the meeting can be seen in the notice of the Company dated on April 6, 2007. 3. On April 5, 2007, the 6th extraordinary meeting of the 5th Supervisory Committee was held by way of communication，and details of the meeting can be seen in the notice of the Company dated on April 10, 2007. 4．On April 17, 2007, the 8th meeting of the 5th Supervisory Committee was held, and details of the meeting can be seen in the notice of the Company dated on April 20, 2007. 5．On April 27, 2007, the 7th extraordinary meeting of the 5th Supervisory Committee was held by way of communication，and details of the meeting can be seen in the notice of the Company dated on May 8, 2007. 6. On May 28, 2007, the 9th meeting of the 5th Supervisory Committee was held, and details of the meeting can be seen in the notice of the Company dated on May 29, 2007. 7. On June 29, 2007, the 8th extraordinary meeting of the 5th Supervisory Committee was held，and details of the meeting can be seen in the notice of the Company dated on July 3, 2007. 8. On July 18, 2007, the 1st meeting of the 6th Supervisory Committee was held，and details of the meeting can be seen in the notice of the Company dated on July 19, 2007. 9. On August 24, 2007, the 2nd meeting of the 6th Supervisory Committee was held，and 2007 Semi-Annual Report was examined and passed. 10. On Oct. 22, 2007, the 1st extraordinary meeting of the 6th Supervisory Committee was held，and details of the meeting can be seen in the notice of the Company dated on Oct. 24, 2007. 11. On Dec.14, 2007, the 2nd extraordinary meeting of the 6th Supervisory Committee was held，and details of the meeting can be seen in the notice of the Company dated on Dec. 15, 2007. (II) Independent opinions of the Supervisory Committee on operation of the Company 1. The Company’s operation according to laws The Supervisory Committee believed that the Company could operate strictly according to relevant laws, and the Board had made full use of their rights in the daily operation and management work within the range authorized by the Shareholders’ General Meeting to ensure the standard operation of the Company. The voting procedures, voting style, voting process of each proposal had 27 Annual Report 2007 conformed to the relevant laws and regulations promulgated by the CSRC and Shenzhen Stock Exchange as well as the Articles of Association of the Company, with the procedures of decision-making reasonable and effective. The Company had established a relatively complete inner control system. While performing their duties, the directors and managers of the Company had no deeds against the national laws or regulations, or done harm to the interest of the Company. 2. Inspection of the financial status of the Company The Supervisory Committee had inspected and looked through financial systems and financial status carefully, and the Supervisory Committee believed that auditing opinions issued by Shinewing Certified Public Accountants on 2007 Annual Financial Report had truly reflected the financial status and operation achievements of the Company in the report period. 3. Particulars about assets selling The Company’s asset selling procedure was legal, and transaction price was identified by agency’s asset assessing. Transaction price was fair and reasonable, and no internal transaction and hurt behavior to the Company and its shareholders has been found. 4. Particulars about related transaction The Company’s routine related transaction of this period was to satisfy daily operation needs. Transaction price was fair and reasonable, and no internal transaction and hurt behavior to the Company and its shareholders has been found. 5. Particulars about administration of the Company The Supervisory Committee examined self inspection report and change plan as well as change report on Strengthening Governance Campaign for Listed Companies, and believed that the above documents truly reflect basic conditions of the present administration, existing problems, change particulars and received security supervisory bureau checking and public commenting; change method is clear and specific, and agrees with actual facts of the Company, which is good for increasing administration level of legal representatives and protecting its health and stable development. IX. Significant events (I)Significant lawsuit and arbitration There was no significant lawsuit or arbitration in current year. (II)Security investment 1. In the report period, the Company hasn’t carried on security investment, nor held equity of other listed company, non-listed financial enterprise or company that planned to be listed. 2. In the report period, the Company participated in new stock purchase applying and realized investment income of RMB 32,045.04. Details are as follows: Share Buying in/ Selling out Initial share amount at Investment Stock name share amount in the Used capital amount the end of income report period the period China Shipping 0 3,000 0 RMB19,860 —— Buying in China Pacific 0 1,000 0 RMB30,000 —— Insurance China Shipping 0 3,000 0 RMB34,196.29 RMB 14,336.29 Selling out China Pacific 0 1,000 0 RMB47,708.75 RMB 17,708.75 Insurance III. Significant asset purchase, sales and restructure The former 1st and 2nd largest shareholder of the Company SEG Group and Zhenhua Group has signed Equity Transfer Agreement with Wuhan Zhongheng in Jun. 2005, transferred its equity of the Company to Wuhan Zhongheng. On Apr.12, 2007, the registration transfer procedure of this equity 28 Annual Report 2007 transfer has been fully completed, Wuhan Zhongheng held 124,925,828 shares of the Company, which accounting for 44.12% of the total shares capital of the Company, and is the 1st largest shareholder of the Company. On Nov.13, 2006, the Company held related A-share shareholders’ meeting, examined and approved share merger reform scheme: Wuhan Zhongheng take asset restructuring of the Company and bonus shares for circulating share shareholders as consideration, donate Baolilong and LCD whole machine installment business relevant assets to the Company and implement business integration on the Company. On May 18, 2007, the Company completed implementation of share consideration paying in the share merger reform scheme; in Aug., 2007, the assets donated by Wuhan Zhongheng have been totally completed transfer registration. Due to that transaction procedure for business license is complicated, Wuhan Branch has not finished the industrial and commercial registration procedure until Dec 27th of 2007. Besides, the long-term cooperation customers of the relevant assets of Baolilong need 3 months to examine that whether the Company is qualified. Taking the special situation occurred during the endowment and transition procedure for the aforesaid assets into consideration, in order to assure the continuity of assets operation and realize a smooth transition for operation, the Company entrusts Wuhan Zhongheng Group to operate and manage the relevant assets of Baolilong business from Aug 1st of 2007 to Jun 30th of 2008. Wuhan Zhongheng Group promises not to collect entrustment fee for the entrustment from the Company in any way. Hubei Zhonglian Assets Estimation Co., Ltd had ever issued Assets Estimation Report (EZLPBZ (2006) No.080) for the endowment assets of Wuhan Zhongheng Group taking May 31st of 2006 as the estimation basic day. The effective term is 1 year since the estimation basic day, that is to say, from May 31st of 2006 to May 31st of 2007. While the relevant assets of Baolilong business would be transferred totally in August of 2007, so, in consideration for prudence, Wuhan Zhongheng Group re-evaluated the relevant assets of Baolilong business. Hubei Zhonglian Assets Estimation Co., Ltd had issued Assets Estimation Report (EZLPBZ (2008) No.043) , taking May 31st of 2007 as the estimation basic day. The estimation value of the relevant assets of Baolilong business amounted to RMB 15,893,603.03, with an increase of RMB 45,457.35 compared to last estimation value RMB 15,848,145.68 made on May 31st of 2006. Wuhan Zhongheng Group agreed to endow the increased amount to the Company for free. Wuhan Zhongheng Group had ever signed Agreement of Assets Endowment and Business Conformity with the Company on issue of the assets endowment and the agreement regulated that: the assets object contains current liabilities relevant to the assets and party Yi (Huafa Company) has no objection on bearing the liabilities when endowed with the assets. As for the current liabilities which the creditor disagrees to transfer, party Jia (Wuhan Zhongheng Group) is responsible to repay the liabilities on behalf of party Yi (Huafa Company). After party Jia (Wuhan Zhongheng Group) repays the current liabilities on behalf of party Yi (Huafa Company), party Yi (Huafa Company) should repay to party Jia (Wuhan Zhongheng Group) and the repayment term is within 30 days since the day when party Jia (Wuhan Zhongheng Group) makes the repayment for party Yi. Until Jun 31st of 2007, for Baolilong business, the payment for goods payable to suppliers is RMB 9,841,276.75, and RMB 1,707,756.06for the various taxes, so the total is RMB 11,549,032.81. 29 Annual Report 2007 Considered that the procedure for transferring current liabilities is complicated, Wuhan Zhongheng Group presented the above current liabilities would be repaid by itself on behalf of Baolilong business. Since the relevant assets of Baolilong business was carried on by Wuhan Branch of the Company, the aforesaid debt arising from agent repayment would be converted into accounts payable of the Company-paid to Wuhan Zhongheng Group. IV. Significant related transaction 1.The asset purchase and restructuring made the Company started to set foot in the whole machine business of LCD, based on the upper and lower stream relationship of industrial chain, Wuhan Zhongheng completed the production of liquid crystal screen of LCD, the Company purchase liquid crystal screen from Wuhan Zhongheng and its controlling subsidiary Wuhan Hengsheng Photoelectricity Industry Co., Ltd., and complete whole machine installment and channel sales link in LCD industry flow, held 2006 annual shareholders’ meeting on Jun.29, 2007 and examined and approved Proposal on Wuhan Zhongheng New Science & Technology Industrial Group Carrying on Routine Related Transactions in 2007, and the Company can buy 350,000 LCDs of 15 inch, 17 inch, 19 inch, and width of 19 inch as well as 22 inch etc. This involved about US dollar 38.5 million, which was converted into nearly RMB 0.3 billion (with the exchange rate of 7.75RMB/USD). The pricing principle is that transaction price is lower than average market price of that time at least 1%, for details please refer to public notice dated on May 8, 2007. In 2007, the Company made 17 related transaction contracts with related parties for purchase 80,972 LCDs. Due to part of the order was cancelled or delayed, raw material purchase return, the actual implemented LCD was 51,576 with transaction amount RMB 48.9 million, thus finishing 17% of approved amount. 2007 is the first year of developing whole machine business of LCD. For the stepping phrase, client acknowledge for Huafa still need time and process, business order for the whole year is not adequate, thus causing difference of related purchase compared to the beginning of the year. Product selling and labor Product purchase and labor offering to related parties receiving from related parties Related Proportion of Proportion of parties Transact Transaction same field same field ion amount amount transaction transaction Wuhan Zhongheng —— —— 18,578,027.72 12.26% Group Wuhan Hengsheng —— —— 30,318,120.11 20.01% Eletric Co., Ltd 2. The board of directors of the Company examined and passed asset selling proposal at the 2nd extraordinary shareholders’ general meeting dated May 20, 2005, which agreed to sell the No.1 factory and its accessory buildings in Shangbu Industry District to Zhenhua Group Shenzhen Electronic Co., Ltd with RMB 12.8 million. The above asset assessing was made on August 23, 2004, and board of director required property transferring procedure should be finished before April 30, 2006. However, the actual transferring procedure finished in Nov. of 2006, and Zhenhua Group has paid RMB 12.8 million. Considering the above period was delayed, the board of directors held the 1st extraordinary meeting of 2007 and the 2nd extraordinary meeting of 2007 respectively on 30 Annual Report 2007 March 14, 2007 and April 3, 2007 to reexamine above transferring issue. The Company negotiated with Zhenhua Group that the above property rent from Nov. 1, 2006 to August 31, 2008 about RMB 7.31 million belonged to the Company, and details refer to the Company notice dated on May 24, 2005 and April 6, 2007. 3.The Company’s liability and debt issue with related party Offered capital to related party Offered capital by related party Related party Occurred amount Balance Occurred amount Balance Wuhan Zhongheng 899,687.53 889,889.53 8,429,759.96 9,818,560.21 Group Total 899,687.53 889,889.53 8,429,759.96 9,818,560.21 VII. Significant contracts and their implementations (I) In 2001, the Company signed Building Leasing Contract of first to forth floor of Huafa building with Shenzhen Wanshang Friendship Department Store Co., Ltd. and China Resources Vanguard Co., Ltd., with total leasing area amounting to 22,241.7 square meter with ten years leasing period, established “CR Vanguard Department Store” etc. emporium. In the report period, this contract is performed well. (II) The Company hasn’t any significant guarantee contract occurred in the report period or occurred in previous period but lasted to the report period. (III) The Company hasn’t any significant entrusting event of others to manage assets of the Company occurred in the report period or previous period but lasted to the report period; neither has other entrusted financing events. VI. Particulars about engagement of certified public accountant 1. Examined and passed by the 1st extraordinary shareholders’ general meeting, the Company cancelled engagement with Shenzhen Nanfang-Minhe Certified Public Accountants and engaged Shinewing Certified Public Accountants for its 2006 annual national and oversea auditing organization, with yearly RMB 300,000. 2. Examined and passed by the 4th extraordinary shareholders’ general meeting, the Company continued to engage Shinewing Certified Public Accountants for its 2007 annual auditing organization to be responsible for domestic auditing with yearly auditing expense of RMB 300,000. Besides, according to regulations in Notice of China Securities Regulatory Commission on the Relevant Issue about the Auditing of the Companies That Issue the Domestically Listed B-shares in Foreign Currencies (No. 30 [2007] of China Securities Regulatory Commission) issued on Sep. 12 says that the requirements in relevant information disclosure provisions promulgated by this Commission that a company which issues the domestically listed B-shares in foreign currencies shall carry out the overseas auditing when hiring an accounting firm with the securities or futures business qualification for the auditing will not be implemented. And the Company will not engage certified public accountant for oversea auditing. VII.Commitments (I) Commitments that probably have significant influence on operational result and financial status of the Company occurred in the report period or previous period but lasted to the report period made by the Company or shareholders holding over 5% (including 5%) of the Company. Name of shareholder Commitment Performance of commitment 31 Annual Report 2007 Since the implementation date of share merger reform scheme, transfer Baolilong and current Wuhan Zhongheng asset, machinery equipment, other asset, current The procedure of transferring New Science & liability and other liabilities that related with Technology whole machine installment business to the registration has been transacted Industrial Group Company within a month; transfer relevant completely in Aug. 2007 Co., Ltd. housing construction and land use right to the Company within 3 months, and complete all procedure of the transfer. Wuhan Zhongheng New Science & Planed to put related capital of plastic injection Technology business and its owned 70% HSGD equity into Under implementation Industrial Group Shenzhen Huafa Co., Ltd. (II) Commitments in the Company’s Share Merger Reform of holding shareholders Name of shareholder Special commitment Performance of commitment Wuhan Zhongheng Promised that the holding non-circulating shares New Science & of the Company won’t be traded on the market Under implementation Technology within 36 months since they acquired listed Industrial Group trading right. Co., Ltd. VIII. Other significant events (I) In the report period, the Company, directors, supervisors, senior executors, holding shareholders, actual holding person of the Company haven’t received any inspection, administrative penalty, criticism by circulation, other penalty from administrative departments and public condemn of Stock Exchange. (II) In the report period, the Company hasn’t had any reception or research, communication, interview etc. activities according to Fair Information Disclosure Guidelines for Listed Companies. 32 Annual Report 2007 Special Statement on Non-operating Capital Dispossession and Interactive Capital Flows with Associated Party in 2007 of Shenzhen Zhongheng Hwafa Co., Ltd. XYZH/2007SZATS018-2 Board of Directors of Shenzhen Zhongheng Hwafa Co., Ltd., We have, upon entrustment and in line with the Auditing Standards of Chinese Certified Public Accountants, audited the consolidated financial statements of Shenzhen Zhongheng Hwafa Co., Ltd. (“your Company”) and its mother company, which comprises the Balance Sheet ended 31 December 2007 and the Income Statement, Cash Flow Statement and Breakdown of Alteration of Shareholders’ Equity for the year then ended as well as the relevant notes (“the Financial Statements”), and further released the standard Auditor’s Report (ref.No. XYZH/2007SZATS018-1) without reservation on 27 April，2008. In line with the requirements of the Notice concerning Some Issues on Regulating the Funds between Listed Companies and Associated Parties and Listed Companies’ Provision of Guaranty to Other Parties (ref. Z.J.F.[2003] No.56) jointly released by China Securities Regulatory Commission (“CSRC”) and the State Asset Supervision and Administration Commission of the State Council as well as the Notice on Regulating the External Guaranties Provided by Listed Companies (ref. Z.J.F.[2005] No.120) jointly released by China Securities Regulatory Commission and the China Banking Regulatory Commission, your Company has prepared the hereto attached Sumamry Sheet of Non-operating Capital Dispossession and Interactive Capital Flows with Other Associated Party in 2007 of Listed Company (“the Summary Sheet”). You are responsible for preparing for and revealing the Summary Sheet as well as assure its authenticity, legality and integrity, while we have verified the information set out in the Summary Sheet against the reviewed accounting information as auditing the 2007 annual financial statement and relevant materials of audited financial statements of your Company, no inconsistency or conflicts discovered in all material aspects. Other than relevant auditing procedures over associated party transactions executed during the 2007 annual financial statements auditing of your Company, we have not carried out extra auditing or other procedures to the materials set out in the Summary Sheet. In order to obtain a better understanding of the non-operating capital dispossession and interactive capital flows with other associated party in 2007 of your Company, you are advised perusing this Summary Sheet together with the audited financial statements. 33 Annual Report 2007 This statement only serves for the purpose of your submitting your annual report to the CSRC and Stock Exchange. Unless agreed by our agreement in written, it can’t be announced or accessed by the public in any form or for any other purpose. Annex 1: Sumamry Sheet of Non-operating Capital Dispossession and Interactive Capital Flows with Other Associated Party in 2007 of Listed Company Shinewing Certified Public Accountants Beijing China 27 April，2008 34 Sumamry Sheet of Non-operating Capital Dispossessio and Interactive Capital Flows with Other Associated Party in 2007 of L Name of the Listed Company: Shenzhen Zhongheng Hwafa Co., Ltd. Non-operating Relation with the Account Entry Listed by Balance at the Aggregate Aggregate Capital Dispossessor Listed Company the Listed Company Beg. Of 2007 Amount in 2007 Repayment in 2007 Dispossession Subsidiaries & Shenzhen Hwafa Property Subsidiary Other Receivables 6,904,570.65 Affiliates of the Lease Management Co., Lt.d Listed Company Subtotal 6,904,570.65 - - Large Shareholder & Its Affiliates Subtotal - - - Associated Natural Persons & Its Legal Persons Subtotal - - - Other Associated Parties & Its Affiliates Subtotal - - - Relation with the Account Entry Listed by Balance at the Aggregate Aggregate Other Fund Flows Transaction Party Listed Company the Listed Company Beg. Of 2007 Amount in 2007 Repayment in 2007 Large Shareholder Wuhan Zhongheng New Controlling Other Receivables 899,687.53 9,798.00 & Its Affiliates Tech Indstry Group Co., Ltd. Shareholder Wuhan Zhongheng New Controlling Other Receivables 1,388,800.25 8,429,759.96 Tech Indstry Group Co., Ltd. Shareholder Wuhan Hengsheng Same controlling Accounts Paid in Advance 15,348,176.44 15,090,000.00 Optronics Industry Co., Ltd. shareholder Annual Report 2007 Wuhan Hengsheng Same controlling Other Receivables 190,000.00 21,000.00 Optronics Industry Co., Ltd. shareholder Subsidiaries & Shenzhen Hwafa Property Affiliates of the Subsidiary Other Receivables 288,257.00 1,799,273.00 994,398.73 Lease Management Co., Lt.d Listed Company Shenzhen Hwafa Property Subsidiary Other Receivables 1,451,133.26 12,273,926.52 13,171,300.67 Lease Management Co., Lt.d Subtotal 3,128,190.51 38,940,823.45 29,286,497.40 Total 10,032,761.16 38,940,823.45 29,286,497.40 Note: 1 Operating dispossession refers to the business accounts occured due to such associated transactions as purchasing/selling goods and providing labors, etc.; 2 Non-operating dispossession refers to the creditor’s right relationship occurd throughproviding loans, paying moneys, repaying bank loans and investing instead for associated parties. 36 Annual Report 2007 X. Financial Report Auditor’s Report XYZH/2007SZATS018-1 Board of Directors of Shenzhen Zhongheng Hwafa Co., Ltd., We have audited the accompannying consolidated financial statements of Shenzhen Zhongheng Hwafa Co., Ltd. (“Zhongheng Hwafa Company”) and its mother company, which comprises the Balance Sheet ended 31 December 2007 and the Income Statement, Cash Flow Statement and Breakdown of Alteration of Shareholders’ Equity for the year then ended as well as and notes to the financial statements. I. Management’s Responsibility for the Financial Statements Zhongheng Hwafa Company’s management is responsible for the preparation of these financial statements in accordance with the Accounting Standards for Business Enterprises and the Accounting Regulations for Business Enterprises. This responsibility includes: (1) designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; (2) selecting and applying appropriate accounting policies; and (3) making accounting estimates that are reasonable in the circumstances. II. Certified Public Accountant’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with China’s Auditing Standards for the Certified Public Accountants. Such standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Halcyon Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis 37 Annual Report 2007 for our audit opinion. III. Auditor’s Opinion In our opinion, the financial statements comply with the requirements of the Accounting Standards for Business Enterprises and present fairly, in all material respects, the financial position of Zhongheng Hwafa Company as at 31 December 2007, and the results of operations and cash flows of the same for the year then ended. Shinewing Certified Public Accountants China CPA: Guo Jinlong China CPA: Pan Chuanyun Beijing, China 27 April 2008 38 Annual Report 2007 Accounting Statements: Balance Sheet (As of 31 December 2007) Prepared by: Shenzhen Zhongheng Hwafa Co., Ltd. Unit: (RMB) Yuan CONSOLODATED MOTHER COMPANY ITEM NOTE 31 Dec. 2007 31 Dec. 2006 31 Dec. 2007 31 Dec. 2006 CURRENT ASSETS: Monetary Fund VIII.1 18,308,223.25 17,175,103.18 17,579,528.19 19,610,336.01 Tradeable Financial Assets - - - Notes Receivable VIII.2 3,949,751.05 3,965,810.00 3,949,751.05 3,965,810.00 Accounts Receivable VIII.3 57,501,749.38 57,474,744.38 88,730,872.11 88,757,569.38 Accounts Paid in Advance VIII.4 2,469,127.52 2,469,127.52 363,575.68 363,575.68 Interest Receivable - - - Stock Dividends Receivable - - - Other Receivables VIII.5 17,885,097.37 11,744,468.19 20,338,083.04 13,622,750.77 Inventories VIII.6 32,595,773.55 32,595,773.55 14,400,324.64 14,400,324.64 Noncurrent Assets Due Within one Year Other Current Assets TOTAL CURRENT ASSETS 132,709,722.12 134,002,582.72 138,662,861.39 138,842,083.90 NONCURRENT ASSETS: Sellable Monetary assets Investment Holding till Maturity Long-term Receivables Long-term Investment on VIII.7 stock Properties as Investment VIII.8 49,617,510.58 49,617,510.58 48,409,227.51 48,409,227.51 Fixed Assets VIII.9 187,238,973.29 187,148,677.44 188,464,475.30 188,619,721.35 Project in Progress VIII.10 1,036,612.52 1,036,612.52 160,811.45 160,811.45 Project Materials Liquidation of Fixed Assets Biological Assets for Production Oil assets Intangible assets VIII.11 6,451,549.35 6,451,549.35 Development CosT Goodwill 39 Annual Report 2007 Long-term Expenses to be Apportioned Deferred Income Tax Assets VIII.12 700,787.29 Other Noncurrent Assets Total Noncurrent Assets 245,045,433.03 244,254,349.89 237,034,514.26 237,189,760.31 TOTAL ASSETS 377,755,155.15 376,031,844.21 378,256,932.61 375,697,375.65 Balance Sheet (continued) (As of 31 December 2007) Prepared by: ShenzheN Zhongheng Hwafa Co., Ltd. Unit: (RMB) Yuan CONSOLODATED MOTHER COMPANY ITEM NOTE 31 Dec. 2007 31 Dec. 2006 31 Dec. 2007 31 Dec. 2006 CURRENT LIABILITIES: Short-term Borrowings VIII.13 60,400,000.00 67,300,000.00 60,400,000.00 67,300,000.00 Monetary Debts Notes Payable VIII.14 2,812,914.35 2,812,914.35 Accounts Payable VIII.15 42,777,941.82 74,524,574.49 42,668,092.72 74,414,725.39 Accounts Received in Advance VIII.16 666,261.81 1,079,361.39 655,415.81 1,079,361.39 Accrued Payrolls VIII.17 1,028,977.77 200,183.08 974,636.79 36,697.58 Taxes Payable VIII.18 1,870,755.16 2,142,725.88 1,836,152.65 2,105,319.12 Interest Payable Stock Dividends Payable Other Payables VIII.19 22,199,987.43 6,942,162.84 22,911,403.48 6,918,435.64 Noncurrent Liabilities Due within One year Other Current Liabilities TOTAL OF CURRENT LIABILITIES 131,756,838.34 152,189,007.68 132,258,615.80 151,854,539.12 NONCURRENT LIABILITIES: Long-term Borrowings BondsPayable Long-term Payable Special-purpose Payables Predicted Liabilities VIII.20 3,708,556.90 3,708,556.90 Deferred Income Tax Liabilities Other NoncurrenT Liabilities TOTAL NONCURRENT 3,708,556.90 3,708,556.90 LIABILITIES TOTAL LIABILITIES 131,756,838.34 155,897,564.58 132,258,615.80 155,563,096.02 SHAREHOLDERS’ EQUITY: Capital Stock VIII.21 283,161,227.00 283,161,227.00 283,161,227.00 283,161,227.00 Capital Reserves 八.22 106,032,173.92 106,032,173.92 106,032,173.92 106,032,173.92 Less: treasury stock Surplus Reserves VIII.23 77,391,593.25 77,391,593.25 77,391,593.25 77,391,593.25 Profit Retained VIII.24 -220,586,677.36 -246,450,714.54 -220,586,677.36 -246,450,714.54 40 Annual Report 2007 Converted Difference in Foreign Currency Subtotal of Shareholders’ Equity of 245,998,316.81 220,134,279.63 245,998,316.81 220,134,279.63 Mother Company Minor Shareholders Equity TOTAL SHAREHOLDERS’ 245,998,316.81 220,134,279.63 245,998,316.81 220,134,279.63 EQUITY TOTAL LIABILITIES AND 377,755,155.15 376,031,844.21 378,256,932.61 375,697,375.65 SHAREHOLDERS’ EUQITY Company Principal: Li Zhongqiu Chief Accountant: Shi Cheng Principal of Accounting Unit: Zhang Zhiyong 41 Annual Report 2007 Income Statement (Jan. to Dec. 2007) Prepared by: ShenzheN Zhongheng Hwafa Co., Ltd. Unit: (RMB) Yuan CONSOLODATED MOTHER COMPANY ITEM NOTE 31 Dec. 2007 31 Dec. 2006 31 Dec. 2007 31 Dec. 2006 I. Business Revenues VIII.25 193,244,882.85 201,883,363.71 191,291,959.85 199,808,390.71 less: business cost VIII.25 163,337,281.82 178,104,866.99 163,337,281.82 176,588,955.44 business tax & additional VIII.26 1,625,087.63 1,950,563.68 1,522,922.00 1,842,665.06 sales expenses 3,733,724.38 3,445,845.36 3,733,724.38 3,445,845.36 management expense 17,100,889.55 18,175,239.26 16,348,632.48 18,175,239.26 financial expense VIII.27 4,227,096.85 5,203,253.28 4,235,993.77 5,208,899.09 loss of assets depreciation VIII.28 2,062,177.47 18,322,980.62 253,547.46 17,866,171.98 add: yield from change of fair value investment return VIII.29 32,045.04 32,045.04 among it, that from associated - enterprises and joint enterprises yield from entrusted operation VIII.30 93,340.46 93,340.46 II. Business Profit -23,319,385.48 -23,319,385.48 1,284,010.65 1,985,243.44 add: non-business revenues VIII.31 24,122,046.44 57,147.98 24,121,600.94 57,147.98 less: non-business expenditure VIII.32 242,807.20 568.05 242,807.20 568.05 among it, loss of disposal of noncurrent assets 58,846.35 58,846.35 III. Total Profit -23,262,805.55 -23,262,805.55 25,163,249.89 25,864,037.18 less: income tax VIII.33 -700,787.29 IV. Net Profit 25,864,037.18 -23,262,805.55 25,864,037.18 -23,262,805.55 among it, that for shareholders -23,262,805.55 -23,262,805.55 of mother company 25,864,037.18 25,864,037.18 that as of merging day of merged enterprises under same controlling Loss/Profit of Minor Shareholders V. Earnings Per Share 1. primary earnings per share 0.0913 -0.0822 2. diluted earning per share 0.0913 -0.0822 42 Annual Report 2007 Company Principal: Li Zhongqiu Chief Accountant: Shi Cheng Principal of Accounting Unit: Zhang Zhiyong Cash Flow Statement (Jan. to Dec. 2007) Prepared by: Shenzhen Zhongheng Hwafa Co., Ltd. Unit: (RMB) Yuan CONSOLODATED MOTHER COMPANY ITEM NOTE 31 Dec. 2007 31 Dec. 2006 31 Dec. 2007 31 Dec. 2006 I. Cash Flows from operating Activities: Cash Acquired from Sold Goods or Services Provided 271,575,256.33 125,414,469.88 269,907,729.33 123,386,589.88 Net Increment from Disposal of Trading Monetary Assets Tax Rebates Received 126,229.25 415,206.90 126,229.25 415,206.90 Other Cash Receipts Related to VIII.34 Operating Activities 15,142,720.30 16,744,509.30 14,934,496.20 16,089,352.47 Subtotal of Cash Flows from operating Activities 286,844,205.88 142,574,186.08 284,968,454.78 139,891,149.25 Cash Paid for Commodity Purchase or Services 215,292,129.67 45,958,017.08 215,292,129.67 45,958,017.08 Cash Paid to and for Employees 26,819,335.17 26,726,083.74 26,292,033.39 25,840,837.00 Taxes Paid 5,628,339.10 9,712,807.91 5,526,173.47 9,585,363.52 Other Cash Payments Related to VIII.34 Operating Activities 24,260,587.78 33,527,285.02 22,116,616.34 32,666,010.38 Subtotal of Cash Outflows from operating Activities 272,000,391.72 115,924,193.75 269,226,952.87 114,050,227.98 Net Cash Provided by Operating Activities 14,843,814.16 26,649,992.33 15,741,501.91 25,840,921.27 II. Cash Flows from Investing Activities: Cash Received from Investment Withdrawing 2,500,000.00 2,500,000.00 Cash Received from Investment Yield 32,045.04 32,045.04 Net Cash Received for Disposal of FA, Intangible Assets & Other Long-term 358,200.00 10,221,724.56 358,200.00 10,221,724.56 Assets Net Cash Received for Disposal of Subsidiaries & Other Operating Units Other Cash Received Related to Investing Activities Subtotal of Cash Inflows from Investing Activities 2,890,245.04 10,221,724.56 2,890,245.04 10,221,724.56 Cash Paid for Acquisitionl of FA, Intangible Assets & Other Long-term 6,792,032.25 2,010,385.00 6,792,032.25 2,006,397.00 Assets Cash Paid for Investment 2,500,000.00 2,500,000.00 43 Annual Report 2007 Net Cash Received for Acquiring Subsidiaries & Other Operating Units Other Cash Paid Related to Investing Activities Subtotal of Cash Outflows from Investing Activities 9,292,032.25 2,010,385.00 9,292,032.25 2,006,397.00 Net Cash Flow from Investing Activities -6,401,787.21 8,211,339.56 -6,401,787.21 8,215,327.56 III. Cash Flows from Financing Activities: Cash Receipted by Absorbing Investment among it, that absorbed by subsidiaries from investment of minor shareholders Cash Acquired from Borrowings 71,000,000.00 104,230,000.00 71,000,000.00 104,230,000.00 Other Cash Acquired from Financing Activities Subtotal of Cash Inflows from Financing Activities 71,000,000.00 104,230,000.00 71,000,000.00 104,230,000.00 Cash Paid for Debt Repayment 77,900,000.00 131,030,000.00 77,900,000.00 131,030,000.00 Cash Paid for Dividend or Payment of Interest 4,471,829.59 5,185,881.05 4,471,829.59 5,185,881.05 among it, dividends & profit paid by subsidiaries to minor shareholders Other Cash Paid Related to Financing Activities Subtotal of Cash Outflows from Financing Activities 82,371,829.59 136,215,881.05 82,371,829.59 136,215,881.05 Net Cash Flow Provided by Financing Activities -11,371,829.59 -31,985,881.05 -11,371,829.59 -31,985,881.05 IV. Affects to Cash & Cash Equivalents by Exchange Rate Change -407,899.95 -355,806.03 -407,899.95 -355,806.03 V. Net Increment in Cash & Cash Equivalents -3,337,702.59 2,519,644.81 -2,440,014.84 1,714,561.75 add: balance of cash & cash equivalents at term beginning 19,610,336.01 17,090,691.20 17,579,528.19 15,864,966.44 VI. Balance of Cash & Cash Equivalents at Term End 16,272,633.42 19,610,336.01 15,139,513.35 17,579,528.19 Company Principal: Li Zhongqiu Chief Accountant: Shi Cheng Principal of Accounting Unit: Zhang Zhiyong 44 Annual Report 2007 Breakdown of Alteration of Shareholders’ Equity (2007 Yea Prepared by: Shenzhen Zhongheng Hwafa Co., Ltd. Unit: (RMB) Yuan AMOUNT THIS TERM OWNERS’ EQUITY FOR MOTHER COMPANY ITEM less: General Paid-in Capital Capital Surplus treasury Risk Profit Ret (or Capital Stock) Reserves Reserves stock Provision I. Balance as at End of Lat Year 283,161,227.00 106,032,173.92 - 77,391,593.25 - -242,742 Add: change of accounting policies -3,708 correction of errors in last term II. Balance as at Beg. This Year 283,161,227.00 106,032,173.92 - 77,391,593.25 - -246,450 III. Amount Increased/Decreased This Year - - - - - 25,864 i. Net Profit 25,864 ii. Gains and Losses Directly Recorded into - - - - - Owner's equity 1.net fair value change of financial assets available for sale 2.effects of equity change of other shareholders of invested units under equity law 3.effects to income tax accured into shareholders’ equity 4.others Subtotal of i & ii - - - - - 25,864 iii. Investing & Decreasing Capital by - - - - - Shareholders 1.investing capital by shareholders 2.amount accrued into shareholder equity from shares payment 3.others iv. Profit Distribution - - - - - 1.drawing surplus reserves 2.distribution among shareholders 3.drawing general risk provisions 4.others v. Internal Carryover of Shareholders’ Equity - - - - - 1.capital reserves brought to capital (or capital stock) 2.surplus reserves brought to capital (or capital stock) 3.surplus reserves to cover loss 45 Annual Report 2007 4.others IV. Balance Ended This Year 283,161,227.00 106,032,173.92 - 77,391,593.25 - -220,586 Company Principal: Li Zhongqiu Chief Accountant: Shi Cheng Principal of Accounting Unit: Zh 46 Annual Report 2007 Breakdown of Alteration of Shareholders’ Equity (2006 Yea Prepared by: ShenzheN Zhongheng Hwafa Co., Ltd. Unit: (RMB) Yuan AMOUNT THIS TERM OWNERS’ EQUITY FOR MOTHER COMPANY ITEM less: General Paid-in Capital Surplus Capital Reserves treasury Risk Profit Retain (or Capital Stock) Reserves stock Provision I. Balance as at End of Lat Year 283,161,227.00 101,494,017.00 77,391,593.25 -223,187,9 Add: change of accounting policies correction of errors in last term II. Balance as at Beg. This Year 283,161,227.00 101,494,017.00 - 77,391,593.25 - -223,187,9 III. Amount Increased/Decreased This Year - 4,538,156.92 - - - -23,262,8 i. Net Profit -23,262,8 ii. Gains and Losses Directly Recorded into - 4,538,156.92 - - - Owner's equity 1.net fair value change of financial assets available for sale 2.effects of equity change of other shareholders of invested units under equity law 3.effects to income tax accured into shareholders’ equity 4.others 4,538,156.92 Subtotal of i & ii - 4,538,156.92 - - - -23,262,8 iii. Investing & Decreasing Capital by - - - - - Shareholders 1.investing capital by shareholders 2.amount accrued into shareholder equity from shares payment 3.others iv. Profit Distribution - - - - - 1.drawing surplus reserves 2.distribution among shareholders 3.drawing general risk provisions 4.others v. Internal Carryover of Shareholders’ Equity - - - - - 1.capital reserves brought to capital (or capital stock) 47 Annual Report 2007 2.surplus reserves brought to capital (or capital stock) 3.surplus reserves to cover loss 4.others IV. Balance Ended This Year 283,161,227.00 106,032,173.92 - 77,391,593.25 - -246,450,7 Company Principal: Li Zhongqiu Chief Accountant: Shi Cheng Principal of Accounting Unit: Zh 48 Annual Report 2007 Notes to Financial Statement: I. Company Profile Shenzhen Zhongheng Hwafa Co., Ltd. (“the Company” for short, but “the Company (or ‘the Group’)” when including subsidiaries), previously known as Shenzhen Huafa Electronics Co., Ltd. (renamed as set out herein in this term), is a Sino-foreign joint venture jointly invested and incorporated by such three legal persons as Shenzhen Electronics Group Co., Ltd. (“SEG” for short), China Zhenhua Electronics Group Co., Ltd. (“Zhenhua Group” for short) and Luks Industrial (Group) Limited (“Luks Group” for short) on 08 December 1981. In 1991, the Company was reorganized as a company of limited liabilities by stocks (registered number of the License for a Corporation Legal Person: Q.G.Y.S.Z.Z.No. 100296 and is changed as 440301501120670 in this term) and made its IPO in the same year, issuing 53,130,000 shares of RMB common stock with par value 1 Yuan per share, including 29,630,000 shares of A shares and 23,500,000 shares of B shares. In 1992, the Company launched it’s A shares and B shares in Shenzhen Stock Exchange, 53,130,000 shares were tradable and 159,203,000 shares remaining unlisted. In November 1996, Luks Group assigned 12% of its shares in the Company, totaling 25,500,000 shares, to SEG through agreement, which was approved in the reply of Shenzhen Stock Regulatory Office and ceded on 05 March 1997. After such assignment, Luks Group held 25,796,663 shares of the Company, accounting for 12.16% of the total shares capital, and SEG held 25,500,000 shares of the Company, accounting for 12% of the total shares capital. In December 1997, the Company conducted shares allotment program, issuing extra 63,699,895 shares to all shareholders by the ratio of 10:3 against the total 212,332,989 shares before the allotment, among which, 30,777,997 shares were alloted to domestic corporate shareholders and 3,600,000 shares were subscribed, with the remaining 27,177,997 shares assigned to public shareholders on paid basis, 15,388,998 shares were allotted to foreign corporate shareholders and 1,800,000 shares were subscribed with 13,588,998 shares abandoned, and also 9,777,900 shares allotted to public shareholders and 7,755,000 shares to domestic-listed foreign shareholders. In January 1998, the Company carried out the capital reserve-to-capital program for year 1996, i.e. based on the total 212,332,989 shares ended 1996, 2 shares will be increased to per 10 shares for all shareholders, and based on the total 240,701,488 shares ended 1997 after allotation, 1.764 shares will be increased to each 10 shares for all shareholders. On 05 January 2001, upon ratification, the increased shares of the Company, totaling 6,394,438 shares, went public in Shenzhen Stock Exchange. 49 Annual Report 2007 On 29 May 2001, upon the approval of CSRC, the non-listed foreign capital totaling 62,462,914 shares of the Company were transferred as listed circulating stock, marking the irculation of entire foreign capital. On 30 November 2001 and 07 December 2001, Luks Group reduced the B-share of the Company, totaling 14,158,000 shares and 14,159,000 shares respectively. As of 17 December 2001, SEG had aggregately reduced B-share of the Company totaling 14,487,400 shares, accounting for 5.12% of total shares capital of the Company. On 06 June 2005, the Company bulletined that original shareholder SEG and Zhenhua Group assigned the state-owned corporate capital they held in the Company totaling 124,920,000 shares to Wuhan Zhongheng New Tech Industry Group Co., Ltd. (“Wuhan Zhongheng” for short), which was ratified by the State-owned Assets Committee, the State Ministry of Commerce and CSRC with relevant assignment procedures completed on 11 April 2007. On 13 November 2006, the Board of Shareholders of the Company passed the Equity Division Reform Program of Shenzhen Huafa Electronics Co., Ltd.. In line the program, Wuhan Zhongheng carried out assets reorganization to the Company, including bestowing assets and integrating industries covered by the Company, also paying 1.5 shares as consideration for per 10 shares to all A-share shareholders enrolled as at the equity registration day for the program, totaling 8,435,934 shares which may be tradable since the first business day after the implementation of the program. As of 31 December 2007, the Company had completed the equity division reform program with ceding procedures for bestowed assets completed. As of 31 December 2007, the aggregate shares of the Company are 28,316,000 shares, among which, restricted shares total to 116,516,142 shares, accounting for 41.15% of total shares, and unrestricted shares total to 166,645,085 shares, accounting for 58.85% of total shares. Among the unrestricted shares, there are 64,649,249 A shares and 101,995,836 B shares, accounting for 22.83% and 36.02% of total shares respectively. The business scope: manufacturing & operating each kind of color TV, LCD monitor, LCD screen (subject to branch offices), hi-fi equipment, digital watch, TV game player and computer as well as auxiliary circuit boards, precise injection moulding ware, light packing materials (manufacturing & operting in Wuhan), hardware (including molds), electroplate and solder stick, real estate development and operation (ref. S.F.D.C.No. 7226760), property management. Establishing affiliatd companies in Wuhan and Jilin, branch offices in each capital city (excluding Lhasa) and cities directly under jurisdiction of the Central Government. 50 Annual Report 2007 Its major business is manufacturing and sales of circult board, processing of precise injection moulding ware, hardware (including molds); property lease and processing and sales of LCD displayer and color TV. The Company is registered at Block 411, Huafabei Road, Futian District, Shenzhen Cty; legal representative is Li Zhongqiu. The Company sets up the Board of Directors which functions at implementing management and control to the key decisions and daily work of the Company. II. Basis of Preparation of Financial Statements This Financial Statement is prepared on the basis of continual operation of the Company. The Company previously prepared for Financial Statement in compliance with the enterprise accounting standards and Business Accounting System (jointly referred to as “Original Accounting Standards & System” hereinafter) promulgated prior to 2006. Since 01 January 2007, the Company has executed the business accounting standards (referred to as “Business Accounting Standards” hereinafter) enacted by the State Ministry of Finance in 2006. The Financial Statement set out for 2007 is the first to be prepared in line with the Business Accounting Standards. During preparing for the 2007 Financial Statement, the relevant comparable figures in 2006 have been retrospectively adjusted in line with the requirement of the Business Accounting Standards No.38- Initial Implementation of the Business Accounting Standards, and all items have been re-presented in line with the Business Accounting Standards. III. Statement regarding Following Business Accounting Standards The Financial Statement prepared by the Company complies with the requirements of Business Accounting Standards, and reflect such information regarding enterprise financial situation, operation result and cash flows, etc. on the factual and complete basis. IV. Change of Material Accounting Policy and Estimate and Correction of Key Accounting Mistakes 1． Effect of Change of Material Accounting Policy and Estimiate (1) Change of Material Policy Calculated by Retrospective Adjustment Method 51 Annual Report 2007 ① Long-term Investment on Stock: prior to executing the new Business Accounting Standards, if the equity method is adopted to calculate long-term equity investment, the excess part of initial investment cost over the owner’s equity entitled to in the invested unit shall be calcaulated as debit’s difference in stock investment and be entered into loss/profit through averagely amortization in certain term, while the less part of initial investment cost over the owner’s equity entitled to in the invested unit shall, if occurred before announcement of the government article (ref. C.K.[2003] 10), be calcaulated as credit’s difference in stock investment and be entered into loss/profit through averagely amortization in certain term, or be accured into capital reserves if occurred after the announcement of the same. Prior to executing new Business Accounting Standards, the mother company shall adopt equity method to calculate the long-term equity investment against its subsidiaries in its financial statements. After executing the new Business Accounting Standards, the accounting policies regarding long-term equity investment are specified in Note V “Long-term Equity Investment”. If a long-term equity investment is generated from a business combination under common control at the date of initial implementation, the unamortized equity investment difference shall be entirely written off, so shall be the equity investment difference on debit side for other long-term equity investment calculated by equity method, with taking the book balance of the long-term equity investment after the writing-off of the equity investment difference as the cost recognition on the date of initial implementation. For any other long-term equity investment calculated by equity method, in case there is any equity investment difference on the debit side, the book value of the long-term equity investment shall be considered as the cost recognition on the date of initial implementation. Since the date of initial implementation, if the mother company in its financial statement has conducted retrospective adjustment over long-term equity investment of subsidiaries, it shall be deemed that such subsidiaries have calculated by cost method since the beginning. ② Income tax: prior to executing new Business Accounting Standards, the income tax is calculated by tax payable method. After that, the Balance Sheet Liability Method is adopted. The accounting policies regarding income tax are specified in Note V “Accounting Calculation of Income Tax”. ③ Consoldiated Financial Statement: prior to executing new Business Accounting Standards, the minor shareholders’ equity is separately presented in the column of “Liabilities and Shareholders’ Equity” in the consolidated financial statement, and “Loss & Profit of Minor Shareholders” is reflected as deduction item before “Net Profit”. 52 Annual Report 2007 After that, minor shareholders’ equity shall be separately presented as “Shareholders’ Equity”, and “Loss & Profit of Minor Shareholders” shall be separately presented as part of “Net Profit” thereunder. ④ Dismission welfare: in line with relevant regulations in Business Accounting Standards, the Company shall, at the date of initial implementation, recognize the liabilities occurred regarding compensation for canceling labor relations with employees and adjust retailed yield. Relevant policies are specified in Note V 18-19. For the foregoing change of accounting policies, the Company has, in line with the Business Accounting Standards No.38- Initial Implementation of the Business Accounting Standards and relevant regulations, conducted retrospective adjustment and re-formulated the Financial Statement. The foregoing change of accounting policies have exerted no effect to shareholders’ equity set out in the consolidated financial statement of the Company and its mother company dated 01 January 2006 but to that ended 31 December 2006 which resulted in the decrease of 3,708,556.90 Yuan to shareholders’ equity and 3,708,556.90 Yuan to the net profit therein. (2) Change to Key Accounting Estimate Calculated by Prospective Application Method The Company has, since 01 January 2007, adjusted the depreciation term of the property for investment—Huafa Building. Its original service term lasted 30 years, from 21 November 1981 to 20 November 2011, which, upon ratification of relevant authority, is extended to 50 years till 20 November 2031 in this fiscal year. The Company has been granted the altered Title Deed of such property in November 2007. Since 01 January 2007, the Company has changed its depreciating term to 50 years. (3) Effects of Changing Accounting Estmiate to the Company ① Amount Affected The table below indicated the depreciated amount of such property before and after the change: Depreciated Amount Drawn Item Original Value Before Change After Change Difference Huafa Building 90,188,800.85 6,091,479.18 1,033,056.93 5,058,422.25 As of 31 December 2007, the original value of Huafa Building is 90,188,800.85 Yuan. Due to this 53 Annual Report 2007 change, the depreciation amount this term will be reduced by 5,058,422.25 Yuan which will then be accrued into the entry of profit this term. ②Percentage affected: the aforegoing change will affect 24.31% of the achievement of the Company in 2007. 2． Correction & Effect of Key Accounting Error: none V. Key Accounting Policies, Accounting Estimate and Preparation Method of Consolidated Financial Statement 1. Accounting Period The accounting period of the Cmpany is from each 01 January to 31 December in the Gregorian calendar. 2. Standard Currency RMB is adopted as standard currency by the Company. 3. Recording Basis and Pricing Principles Accrual system is adopted as recording basis of the Company. Except for tradable financial assets, financial assets for sales and those measured by fair value, history cost is adopted as pricing principle. 4. Cash & Cash Equivalents The cash referred to in the Cash Flow Statement of the Company means stocked cash and deposit available for payment at any time. The cash equivalents therein refer to investment with short maturity term (generally due within 3 months since purchasing day), strong fluidity, small risk in value variation and easy to converted into cash of predictable sum. 5. Translation of Foreign Currency The transactions in foreign currencies of the Company are recorded after translating into RMB at fixed exchange rate, and at the reporting day of Balance Sheet, the monetary assets and debts in foreign currencies are translated at the prevailing market exchange rate announced by China 54 Annual Report 2007 People’s Bank in the same day. As for the exchange loss and profit occurred, if related to acquisition of fixed assets and prior to reaching the preset service status, shall be accured into the acquiring cost of such fixed assets, if irrelevant with acquisition of fixed assets and during construction, shall be accrued into long-term expenses to be apportioned, or be accrued into financial expenses that term if during production and operation. Those no-monetary assets measured by fair value are translated into RMB at the instant exchange rate of the recognizing day of fair value, with translation different occurred accured into loss and profit in current term as change of fair value. The cash flows in foreign currencies and that of overseas subsidiaries are translated at the instant exchange rate on the occurring day of cash flows, with sum affected by exchange rate separately presented in the Cash Flow Statement. 6. Financial Assets (1) Type of financial assets: the Company divides its controlling financial assets in 4 types according to investment purpose and economic property: fair value through profit or loss, held to maturity investments, receivables and for sale assets. 1） Fair value through profit or loss: referring to those financial statements to be sold within short term which are measured by fair value with any change accrued into current loss and profit, presented as “Tradable Financial Assets” in the Balance Sheet. 2） Held to maturity investments: referring to those non-derived financial assets which have fixed due date and fixed or affirmable recovered sum and reflect the clear intention and capacity of the management to hold till maturity. 3） Receivables: referring to non-derived financial assets which have fixed or assured recovered sum without quotation in an acitive market, including note receivable, account receivable, interest receivable, dividends receivable and other receivables, etc.. 4） For sale assets include those non-derived financial assets appointed as sellable assets at initial recognition and those are not classified as other types. (2) Recognition and Measuremnet of Financial Assets Financial assets are initially recognized by fair value. For fair value through profit or loss, the relevant trade expenses at acquisition are directly accrued into current loss and profit. The relevant 55 Annual Report 2007 trading expenses of other types of financial assets are accrued into initial recognized sum. When the rights as set out in a contract to receive cash flow of a certain kind of financial assets have expired, or when almost all the risk and reward of the ownership of such financial assets have been transferred to the transferee, recognition of such financial assets will be terminated. Fair value through profit or loss and for sale assets shall be subsequently measured as per fair value, but those investments through equity tools, if there is no quotation in an active market and their fair value can’t be reliably measued, shall be measued as per cost. The moneys receivable and investment holding till maturity shall be presented as per amortized cost by actual interest method. The fair value variation of the fair value through profit or loss shall be accured into loss and profit of fair value variation. The interests or cash dividends obtained during holding the investment will be recognized as investment yield. During processing, the difference between its fair value and initial amount entered into the account will be recognized as investment loss and profit, and the loss and profit of fair value variation will be adjusted at the same time. The fair value variation of for sale assets shall be accrued into shareholders’ equity, and interests calculated against actual interest method durng holding the investment will be accured into investment yield. The cash dividends of investment through equity tools for sales will be accrued into investment yield when the invested unit announced to issue dividends. Durng processing, after deducting the accumulated sum of fair value variation that are directly accrued into shareholders’ equity, the remaining of payment and book value will be accrued into investment yield and loss. (3) Impairment of Financial Assets: Other than the fair value through profit or loss, the Company has checked the book value of the financial assets as at the reporting date of the Balance Sheet: if there is any objective evidence showing impairment has occurred to certain kind of financial assets, a provision for impairment shall be drawn. If the fair value of for sale assets reduces largely or non-temporarily, the accumulated loss occurred due to decrease of fair value which are directly accrued into shareholders’ equity shall be accrued into impairment loss. For investment through debt tools for sales which have recognized its impairment loss, in case the fair value rises which objectively relates with matters incurred after confirming original impairment loss preceding current term, the originally recognized ipairment loss shall be carried back and accrued into current loss and profit. For investment through equity tools for sales which have recognized its impairment loss, in case the fair value rises which objectively relates with matters incurred after confirming original impairment loss preceding current term, the originally recognized impairment loss shall be carried back and accrued into shareholders’ equity, 56 Annual Report 2007 with an exception of those without quotation in an active market with fair value unable to be reliably measured. 7. Receivables, Provisions for Bad Debts Rreceivables include account receivable and other receivables, etc.. For receivables occurred to the Company through sales of goods or providing services to others, the fair value of price set out in the contract or agreement with the purchasers shall be deemed as initial recognized amount. Receivables will be processed by actual interest method and through deducting the bad debts from amortized cost. Such receivables of the Company, if any exceeding 500,000 Yuan, are deemed as key item. If there is any objective evidence showing that the Company is predicted impossible to recover all receivables as originally agreed, an impairment test shall be conducted separately against the less part between its present value of the future cash flows than its book value so as to draw provisions for bad debts. Any single item of receivables, if involving large sum, shall be divided into several groups as per their credit risk features together with those tested unimpaired receivables, which shall then, based on the actual loss rate of receivables group with same or similar type and credit risk features in previous years and in combination with present situation, fix the provision percentage to be drawn for bad debts for each group in current term so as to determine the privisions drawable this term. In the table below is the percentage of provisions drawn for bad debts of moneys receivable: Account Age Percent Drawn Within 1 Year 0 1-2 Year (s) 5% 2-3 Years 10% Over 3 years 30% In the table below is the percentage of provisions drawn for bad debts of other receivables: Account Age Percent Drawn Within 1 Year 0 1-2 Year (s) 5% 57 Annual Report 2007 2-3 Years 10% Over 3 years 30% 8. Inventories (1) Inventories are divided in such types as raw materials, packing materials, low-value consuming product, product finishing and goods in stock, etc.. (2) Pricing method of acquiring and delivery of inventories: the perpetual inventory system is applied to inventories. Purchasing and stocking are priced at the actual cost, receiving and selling raw materials are calculated by first-in first-out method, and sales of finished products are calculated by weighted average method. (3) Low-value consuming goods and packing materials are amortized by one-off write-off method and recorded into relevant cost and expenses. (4) Inventories pricing principles at term end and recognition standards for provisions for inventories depreciation and its drawing method: the inventories at term end shall be priced at the lower one between cost and net realizable value; at term end, based on the full checking of inventories, the provisions for inventories depreciaton shall be drawn against the predicted uncollectible cost caused by inventories damage, part or entire out-of-fashion or selling price lower than cost. The provisions depreciation of finished products and large bulk of raw materials shall be drawn against the excess prat between the cost of single inventory item and its net realizable value. The provisions depreciation of the other raw and auxiliary materials with various kinds and low unit price shall be drawn as per category. (5) Recognition of Net Realizable Value: for such stocked goods directly for sales as finished products, finishing products and materials for sales, their net realizable value shall be recognized after deducting the estimated sales expenses and relevant taxes from estimated sales price of such inventories. For stocked materials for production use, their net realizable value shall be recognized after deducting estimated cost ocucring at completion, sales expenses and relevant tax from estimated sales price of products to be manufactured; for inventories holding for executing sales contract or labor contract, its net realizable value shall be calculated based on the price set out in relevant contracts. 9. Long-term Equity Investment (1) Pricing of Long-term Equity Investment 58 Annual Report 2007 If the long-term equity investment is acquired via business merger under the same control, it shall, on the day of merger, regard the share of the carrying amount of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. As for the long-term equity investment acquired via business meger under different control, the merger cost shall be, shall be the fair values, on the merger (acquiring) date, of the assets given, the liabilities incurred or assumed, and the equity securities issued by the acquirer, in exchange for the control of the merged (acquired) enterprise, which will be, on the merger (acquiring) date, further regarded as the initial investment cost of long-term equity investment. Apart from the aforesaid long-term equity investment acquired through business merger, those long-term equity investment, if acquiring through paying cash, providing non-monetary assets or issuing equity stock, shall consider its fair value as the initial investment cost; if acquired from debt reorganization, shall consider the fair value of equity converted from creditor’s right as the initial investment cost of the debetee; if invested by investors, shall consider the value agreed in the investment contract or agreement as the initial investment cost, with the exception of those of unfair value as is stipulated in such contract or agreement. If the initial cost of the long-term equity investment is more than the fair value of the identifiable net assets the investor obtains from the invested unit, the initial cost may not be adjusted; if on the contrary, the difference between them shall be included in the current profits and losses and the cost of the long-term equity investment shall be adjusted simultaneously. (2) Calculation of Long-term Equity Investment The investment of the Company to its subsidiaries refers to the equity investment in which the Company has actual control right to its subsidiaries. Such investment is calculated through cost method and shall be adjusted through equity method in the Financial Statement. The investment to the joint companies of the Company refers to the contractually agreed sharing of control over an economic activity, which does not exist unless the investing parties of the economic activity reach a consensus on sharing the control power over the relevant important financial and operating decisions. The company adopts equity method to calculate investment to joint enterprise. The investment to the associated companies of the Company refers to the equity investment in which the Company exerts serious influence. It is calculated through equity method. For the long-term equity investment without any serious influence for which there is no offer in the active market and of which the fair value cannot be reliably measured, the Company adopts cost 59 Annual Report 2007 method to calculate it. For the long-term equity investment without any serious influence for which there is offer in the active market and of which the fair value can be reliably measured, the Company presents it under the entry of “Financial Assets for Sales” and measures it through fair value with relevant changing accrued into shareholders’ equity. 10. Property of Investment (1) Type of property of investment: The right to use any land which has already been rented; The right to use any land which is held and prepared for transfer after appreciation; The right to use any building which has already been rented. (2) Pricing of property of investment: property of investment is priced as per its cost. The cost of purchased property of investment includes purchasing payment, relevant taxes and other expenditures which may be directly ascribed to such assets. The cost of building such property of investment is composed of all necessary expenditures occurred prior to that such property has reached the projected service status. The Company adopts cost mode to follow measurement of property of investment, for which, depreciation or amortization will be drawn aiming to the building and land-use right against the predictable service life and net salvage value. The following shows the net salvage value and annual depreciation (amortization) rate: Depreciation Term Annual Depreciation Type Salvage Rate (Year) Rate (%) Land-use Right 50 10% 1.80% Houses & Buildings 5--50 10% 1.80%--18.00% (3) Conversion and Disposal of Property of Investment In case the property of investment is taken for self-use, such property shall be recorded as fixed assets or intangible assets since the date of taking. If the self-use property is taken for rent or capital appreciating, such fixed assets or intangible assets shall be recorded as property of investment since the date of taking. For such reording, the book value before it shall be taken as the recording value after that. If the property of investment is disposed of, or if it withdraws permanently from use and if no economic benefit will be obtained from the disposal, the recognition of it as property of investment shall be terminated. Such revenues of disposal of the property of investment as sales, transfer, 60 Annual Report 2007 discard, or being damaged or destroyed, after deducting the book value of such property as well as the relevant taxes, shall be accrued into the current profits and losses. 11. Fixed Assets (1) Recognition Standards for Fixed Assets: fixed assets refer to the tangible assets that simultaneously possess the following features (a). they are held for the sake of producing commodities, rendering labor service, renting or business management; (b). their useful life is in excess of one fiscal year; and (c) unit value has exceeded 2,000 Yuan. (2) Type of Fixed Assets: houses & buildings, machinery equipment, mould equipment, transport equipment, apparatus equipment, tooling equipment and office equipment. (3) Pricing of Fixed Assets: fixed assets shall be measured at their cost, among which, the cost of a purchased fixed asset includes the purchase price, VAT, import duties and relevant taxes as well as other disbursements that bring the fixed asset to the expected conditions for use and that may be attributed to the fixed asset; the cost of self-constructed fixed assets shall be formed by the necessary disbursements incurred for bringing the asset to the expected conditions for use. The cost put into fixed assets by the investor shall be determined according to the value as stipulated in the investment contract or agreement, with the exception of those of unfair value as is stipulated in the contract or agreement. The costs of fixed assets acquired through financial leasing shall be determined at an amount equal to the the fair value of the leased asset or the present value of the minimum lease payments, whichever is lower. (4) Depreciation of Fixed Assets: The Company shall draw privisions for all fixed assets except for those having fully drawn provisions and under normal service. The available depreciation methods consist of the composite life method, workload method, double declining balance method and sum-of-years-digits method. Depreciation shall be made subject to the preset service years on a monthly basis and, in accordance with the purposes of the fixed assets, be included in the cost of the relevant assets or in the expenses in current term. The fixed assets with expected salvage rate of 10% may be depreciated in line with the following years and rate: Type Depreciation Term (Year) Annual Depreciation Rate (%) houses & buildings 20—50 Years 1.80-4.50% machinery equipment 10 Years 9.00% mould equipment 3 Years 30.00% transport equipment 5 Years 18.00% apparatus equipment 5 Years 18.00% 61 Annual Report 2007 tooling equipment 5 Years 18.00% office equipment 5 Years 18.00% (5) Treatment of subsequent disbursement of fixed assets: the subsequent disbursement of fixed assets mainly compose of repair expense, renovation expense and decoration expense, etc., which will be accrued into cost of fixed assets unless relevant economic benefits are likely to flow into the Company and its cost can be reliably measured; for the substituted part, its book value shall be terminating from recognition; all other subsequent disbursements shall be accrued into current loss and profit at occurring. (6)The Company will, at the end of each year, have a check on the useful life, expected net salvage value, and the depreciation method of the fixed assets and adjust where appropriate. (7) Where the fixed asset is in a state of disposal or unable to generate any economic benefits through use or disposal as expected, the recognition of it as a fixed asset shall be terminated: 23When an enterprise sells, transfers or discards any fixed asset, or when any fixed asset of an enterprise is damaged or destroyed, the Company shall deduct the book value and relevant taxes from the disposal income through disposal, transfer, discard or being damaged or destroyed, and then include the remaining in the current profits and losses. 12. Project in Process (1) Pricing of project in progress: it shall be measured at the actual cost. The self-operating project shall be measued in line with direct materials, direct salary and direct construction expenses, etc.. The out-contracted project shall be measued in line with project price payable, etc.. Equipment installation project shall determine its cost as per the occurring disbursements as equipment value, installation charge and project trial running, etc.. The cost of project in progress also includes borrowing costs to be capitalized and exchange loss and profit. (2) Standard and time point to carry over project in progress to fixed assets: the fixed assets constructed by the Company, since the day of reaching the expected service status, carry over the estimated value of the project to fixed assets in line with project budget, constrtuction cost or actual cost, etc. with depreciation drawn since the preceding month. After the completion procedures have been completed, an adjustment shall be made to the difference of original fixed assets value. 13. Borrowing Costs (1) Principles of recognizing the capitalization of borrowing costs: the borrowing costs incurred 62 Annual Report 2007 to the Company, if directly attributable to the acquisition of such fixed assets as may take a substantial period of time of acquisition or construction activities to reach its expected service status, can’t be capitalized and accrued into cost of such assets unless the assets disbursement and borrowing costs have taken place and such acquisition and construction activities have started. The capitalization shall be terminated if the assets acquired or constructed have reached the expected service status, with avenuing borrowing costs accrued into current loss and profit. (2) Period of Capitalization of Borrowing Costs: for the borrowing costs occurred regarding acquiring or constructing a fixed asset, if qualified for the capitalization conditions set out in the previous paragragh and occurred prior to such asset’s reaching expected service or sales status, shall be accrued into asset cost; where the acquisition or construction of a fixed assets or a property of investment is interrupted abnormally for more than 3 consecutive months, such borrowing costs shall be suspended capitalizing and recognized as expense of current term till the acquisition or construction of the asset restarts; such capitalization shall be terminated once the expected service or sales status has reached, with borrowing costs occurred thereafter recorded into the profits and losses of the current period. （3）Calculation method of capitalized amount of borrowing cost: if a special borrowing is made in order to acquire, manufacture or develop the assets qualified for capitalization conditions, the borrowing cost shall be capitalized as per the deducted amount between the interest expenses actually occurred in current term and either the interest gains obtained through bank deposit of or the investment return obtained through temporary investment of those untouched borrowings. 14. Intangible Assets (1) Precing Method of Intangible Assets: the major intangible assets of the Company are land-use right, patented technologies and non-patented technologies, etc.. The acquired intangible assets shall be recorded as per actual price and relevant other disbursements. The intangible assets invested by investors shall be priced as per the value agreed in investment contract or agreement, with the exception of those of unfair value as is stipulated in such contract or agreement. (2) Amortization Method and Term of Intangible Assets: the land-use right of the Company shall be averagely amortized based on its useful years since the beginning date of use; the patented technologies, non-patented technologies and other intangible assets will be averagely amortized by installments depending the shortest one among predicted service years, benefiting years set out in the contract and legal effective years. The amortized amount shall be accrured into relevant assets cost and current loss and profit as per their beneficiary objects. 63 Annual Report 2007 (3) The Company shall, at the end of each year, check the service life and the amortization method of intangible assets with limited service life and adjust where appropriate. It shall also check the service life of intangible assets with uncertain service life during each accounting period, where there are evidences to prove the intangible assets have limited service life, it shall be estimated of its service life, and be amortized within such estimiated life. 15. Research & Development The expenditures for its internal research and development projects of the Company shall be classified into research expenditures and development expenditures depending on the project property and the degree of uncertainty of the intangible assets finally brought out. The research disbursements for the internal research and development project shall be recorded in the profits and losses of the current period; its development disbursements may be recognized as intangible asset if meeting the following conditions simultaneously: (1) In respect of the technology, it is feasible to finish the intangible asset for use or sale; (2) It is intended to finish and use or sell the intangible asset; (3) there is a potential market for the products manufactured by applying this intangible asset or that there is a potential market for the intangible asset itself; (4) With the support of sufficient technologies, financial resources and other resources, it is able to finish the development of the intangible asset, and it is able to use or sell the intangible asset; and (5) The disbursements attributable to the development of the intangible asset can be reliably measured. The development disbursement not meeting the above conditions will be accured into current loss and profit at occurring. The development disbursement accrued into loss and profit in previous term will not be recognized as assets as term thereafter. The development disbursement capitalized will be presented as “Development Disburesement” in the Balance Sheet and then be brough forward to intangible assets since such project has reached the expected service status. 16. Asset Impairment 64 Annual Report 2007 The Company has, at the year end, checked the long-term equity investment (excluding that without any serious influence for which there is no offer in the active market and of which the fair value cannot be reliably measured), fixed assets, project in progress and intangible assets, etc.. In case of any of the following circumstances, possible impairment has occurred to assets. We will conduct impairment test at each year end over good will and those intangible assets without fixed beneficiary term. If difficult to test the recoverable amount of a single asset item, the test may be applied to the asset group or combined asset group containing such asset. After an impairment test to an asset, if the book value of such asset exceeds its recoverable amount, the positive difference shall be recognized as impairment loss. The recoverable amount shall be determined according to the net amount of the fair value of an asset minus the disposal expenses, and the current value of the expected future cash flow of the asset, whichever is higher. The following circumstances may constitute a sign of possible asset impairment: (1) The current market price of an asset declines drastically, and the price drop is obviously higher than the expected drop over time or due to the normal use; (2) The economic, technological or legal environment in which the enterprise conducts its business operations, or the market where an asset is situated has or will have any significant change in the current period or in the near future, and thus has or will have an adverse impact on the enterprise; (3) The market interest rate or any other market investment return rate has risen in the current period, and the enterprise' calculation of capitalization rate of the current value of the expected future cash flow of the asset is affected and thus leads to a big fall in the recoverable amount of asset; (4) Any evidence shows that an asset has become obsolete or it has been damaged substantially; (5) An asset has been or will be left unused, or the use of an asset has been or will be terminated, or an asset has been or will be disposed of ahead of schedule; (6) Any evidence in the internal report of the enterprise shows that the economic performances of an asset has been or will be lower than the expected performances, for example, the net cash flow created by an asset or business profit (or loss) realized (incurred) an asset is lower (higher) than the excepted amount, etc.; and 65 Annual Report 2007 (7) Other evidence that indicates that an asset impairment has probably occurred. 17. Good Will Good will refers to the positive difference between the equity investment cost or business merger cost under different control and the fair value of the identifiable net assets of the invested unit or the acquiree which the Company is entitled to or obtains through business merger on the obtaining date or acquiring date. The good will in relation to its subsidiaries is separately presented in the consolidated financial statement, while that in relation to the assoiated enterprises and joint enterprises are included in the book value of long-term equity investment. The Company will conduct impairment test to those good will separately presented in the Financial Statement at lease on annual basis. During impairment test, the book value of good will will be apportioned to each beneficiary asset group or combination of asset group in line with the synergy effect of business merger. 18. Wages and Salaries of Employees (1) Wages and Salaries of Employees The employees' wages and salaries include: the employees' wages, bonuses, allowances and subsidies, welfare expenses, social insurance expenses, housing accumulation funds, operating funds for labor unions and the operating funds for the education of employees and other relevant disbursements for obtaining employees' services. During the accounting periods of the employees' rendering services to the Company, the Company shall recognize the payable salaries and wages as liabilities, which shall, according to beneficiaries of the services offered by employee, be accrued into relevant asset cost and expense. The compensations for the cancellation of the labor relationship with an employee will be accrued into current loss and profit. (2) Dismiss Welfare Treatment Dismiss welfare treatment refers to the compensation offered by the Company regarding canceling employment relation with its employees, including the compensation offered to such employees as are dismissed prior to the maturity of employment contract regardless of their will, the compensation offered to such employees as are encouraged to quit willingly prior to such maturity as well as the 66 Annual Report 2007 internal retirement plan carried out by the Company. Principles of Recognition of Dismiss Welfare Treatment: ①The Company has formulated official plan of canceling employment relation or raised the willing quittance suggestion which will be implemented immediately. ②The Company can’t withdraw the aforesaid plan or suggestion unilaterally. Measurement Method of Dismiss Welfare Treatment: ①For such dismiss plan which employees involved can’t refuse, the salary of employees payable shall be drawn regarding the compensation of each dismissed employer against the planned dismissed employee number. ②For the suggestion concern willing quittance, the Company shall first predict the number of employees who will accept, and then draw the salary employees payable in line with such number and the compensation for each one. Standards of Recognition of Dismiss Welfare Treatment: ①With respect to the plan of canceling employment relation and suggestion of willing quittance which will be implemented by installments or phases, the predictable debts caused by providing the dismiss welfare treatment in certain installment or phase shall be recognized if the plan for such installment or phase complies with the conditions to recognize predictable debts and then be recoreded as management expenses in current term for recognition of such compliance. ②For the internal retirement plan complying with regulations, the Company shall, in line with the regulations of such plan, recognize the salary and social insurance premium to be paid to such retired employees during the date of terminating service and their normal retirement date as predictable liabilities and accrure it into management expense of current term. 19. Predictable Liabilities (1) Principles of Recognition of Predictable Liabilities: in case all the obligations in relation to such contingent items as external guarnaty, suspensive lawsuit or arbitration, product quality guarantee, staff cutback plan, loss contract, restructuring obligation and fixed assets discarding 67 Annual Report 2007 obligation, etc. comply with the following conditions simultaneously, the Company will recognize them as liabilities. ①Such obligations are constant burdened by the Company; ②The execution of such obligations will possibly result in the outflowing of economic benefit from the Company; ③The amout of such obligations can be reliably measured. (2) Measurement Method of Predictable Liabilities: the predictable liabilities shall be initially measured as per the best estimatd amount to be paid for executing relevant instant obligations in combinaion with such factors as risk, uncertanity and time value of money regarding contingent issues. If the time value of money exerts serious effect, the best estimated amount shall be determined through discounting relevant cash outflows in the future. On the date of Balance Sheet, the Company shall double check the book value of predictable liabilities and make adjustement to it so as to reflect the best estimated amount at present. The amount increased to book value of predictable liabilities caused by time passing shall be recognized as interest expense. 20. Method of Revenues The business revenues of the Company are mainly composed of revenues from sales of goods, revenues from providing service and revenue from abalienating the right to use assets. Relevant revenues can be recognized only if the economic benefits related to transactions can flow into the Company, relevant revenues can be reliably measured and the standards of recognition of each kind of the following business activities can be met simultaneously. (1) Sales of goods: no revenue from the sale of goods may be recognized unless the following conditions are met simultaneously: the Company has transferred to the buyer the significant risks and rewards of ownership of the goods; the Company retains neither continuing managerial involvement which usually relates to the ownership nor exerts effective control over the goods sold; the relevant amount of revenue can be measured reliably; the economic benefits related to the transaction will flow into the Company; and the relevant costs incurred or to be incurred can be measured reliably. (2) Providing service: When the provision of services is commenced and completed within the same accounting year, revenue is recognized at the time of completion of the services. When the provision of services is commenced and completed in different accounting years and the outcome 68 Annual Report 2007 of a transaction involving the rendering of services can be estimated reliably, revenue is recognized at the balance sheet date by the use of the percentage of completion method. The completion progress shall be determined in line with the percentage of labor provided over total labors providable. (3) Revenue from Abalienating the Right to Use Assets The revenue from abalienating of right to use assets may be recognized on the condition that the relevant economic benefits are likely to flow into the Company and the amount of revenues can be measured in a reliable way. ①The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the Company's cash is used by others and the actual interest rate. ②The amount of royalty revenue should be measured and confirmed in accordance with the period and method of charging as stipulated in the relevant contract or agreement. ③The amount of rental revenues shall be determined through straight-line method within the lease term. 21. Government Grants The government grant may be recognized on the condition that the Company complies with the conditions for the government grant and that the Company can receive the government grant. If a government grant is a monetary asset, it shall be measured on the basis of the amount received, or that receivable if such grant is appropriated as fixed quota standard. If a government grant is a non-monetary asset, it shall be measured at its fair value, or at its nominal amount (1 Yuan) if its fair value cannot be obtained reliably. A government grant pertinent to assets shall be recognized as deferred income, equally distributed within the useful lives of the relevant assets, and included in the current profits and losses. The government grant pertinent to incomes, if used for compensating the related future expenses or losses of the Company, shall be recognized as deferred income and shall included in the current profits and losses during the period when the relevant expenses are recognized; or if used for compensating the related expenses or losses incurred to the Company, shall be directly included in the current profits and losses. 22. Deferred Income Tax Assets & Deferred Income Tax Liabilities 69 Annual Report 2007 The deferred income tax assets and deferred income tax liabilities shall be priced at the difference (temporary difference) between the tax base of assets and liabilities and their book value. For any deductible loss or tax deduction that can be carried forward to the next year, the corresponding deferred income tax asset shall be determined to the extent that the amount of future taxable income to be offset by the deductible loss or tax deduction to be likely obtained. The correspondent deferred income tax liabilities of the temporary difference arising from initial recognition of good will will not be calculated. As for the temporary difference arising from the initial recognition of assets or liabilities which generate from the trade of non-business merger and neither affect accouting profit nore affecting taxable income (or deductible loss), the correspondent deferred income tax assets and deferred income tax liabilities will not be determined. On the balance sheet date, the deferred income assets and deferred income tax liabilities shall be measured at the tax rate applicable to the period during which the assets are expected to be recovered or the liabilities are expected to be settled. The Company shall recognize the deferred income tax liability arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. The deferred income tax assets and deferred income tax liabilities arising from the taxable temporary differences relating to the investments of subsidiary companies, associated enterprises and joint enterprises shall be recognized, excluding those that the Company can control the time of the reverse of temporary differences and the temporary differences are unlikely to reverse in the foreseeable future. 23. Method of Accounting Process of Income Tax The Company adopts balance sheet debt method to calculate the income tax. The Company shall recognize the deferred income tax assets arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. For the determined deferred income tax assets, if it is unlikely to obtain sufficient taxable income to offset against the benefit of the deferred income tax asset, the carrying amount of the deferred income tax assets shall be written down. Any such write-down should be subsequently reversed where it becomes probable that sufficient taxable income will be available. 24. Determination of Fair Value of Financial Instruments 70 Annual Report 2007 As for the financial assets for which there is an active market, the quoted prices in the active market shall be used to determine the fair values thereof. Where there is no active market for a financial instrument, the Compay shall adopt value appraisal techniques to determine its fair value. The value appraisal techniques mainly include the prices adopted by the parties, who are familiar with the condition, in the latest market transaction upon their own free will, the current fair value obtained by referring to other financial instruments of the same essential nature, the cash flow capitalization method and the option pricing model, etc.. If adopting value appraisal techniques, one shall adopt, if possible, all the market parameters and avoid adopting those parameters that relate to the Compay. 25. Preparation of Consolidated Financial Statement (1) Principles of Recognition of Scope for Consolidation: the Company incorporates those subsidiaries actually controlled and objects with special purpose into the scope of the Consolidated Financial Statement. (2) Account Method Adopted in the Consolidated Accounting Statement: the Company has prepared for the Consolidated Financial Statement in line with the Business Accounting Standards No.33- Consolidated Financial Statement and its relevant regulations, with all key internal trades and transactions within the scope of consolidation offset. VI. Taxes The following taxes and rate are applied to the Company: 1． Enterprise Income Tax The applicable tax rate of enterprise income tax of the Company is 15%. 2． VAT VAT is applied to the sales of goods of the Company, among which, the input VAT rate of domestically-sold goods is 17%. The input VAT paid for purchasing raw materials, etc. may offset against output VAT at the rate of 17%, among which, the input VAT paid for import may be refunded upon application. VAT payable refers to the balance after deduction between the output VAT and input VAT at current term. 71 Annual Report 2007 3． Business Tax The applicable tax rate of business tax of the Company is 5%. 4．Urban Construction Tax & Educational Surcharge The urban construction tax of the Company is levied on the basis of the VAT and business tax payable at the rate of 1%; the urban construction tax and education surcharge of our subsidiary Shenzhen Huafa Property Lease Management Co., Ltd. are both levied on the basis of VAT and business tax payable at the respective rate of 1% and 3%. 5． Property Tax The Company applies 70% of original value of properties as tax basis with the rate of 1.2%. VII. Business Merger and Consolidated Financial Stateent (i) Key Subsidiaries and Profile Registered Business Registered Business Holding Voting Right Company Name Investment Address Nature Capital Scope Percentage Percentage Shenzhen Huafa Company of 1 million Property 600,000 Property Lease Shenzhen limited 60.00% 60.00% Yuan mangement Yuan Management Co., Ltd. liabiities Shenzhen Huafa Property Lease Management Co., Ltd. is a company of limited liabilities jointly invested and incorporated by the Company and Shenzhen Gangyin Trust Investment Co., Ltd. on 02 Augsut 1998. Its registered capital is 1 million Yuan, among which, the Company contributes 600,000 Yuan, accounting 60% shares, and Shenzhen Gangyin Trust Investment Co., Ltd. contributes 400,000 Yuan, accounting 40% shares. Such registered capital has been verified by Shenzhen Fawei Certified Public Accountants in the Capital Verification Report (ref. S.F.W.Y.Z.[98] No. A107). The number of its business license is 4403011005199, and its business scope is: management of self-possessed properties. 72 Annual Report 2007 (ii) Change of the Scope of Consolidation There is no change occured to the scope of consolidation during this reporting term. VIII. Note to Major Items in the Consolidated Financial Statement 1. Monetary Fund Item 31 Dec. 2007 31 Dec. 2006 Original Exchange Original Exchange Equal to RMB Equal to RMB Currency Rate Currency Rate Cash in Treasury Among it: RMB 123,970.87 123,970.87 272,753.99 272,753.99 HKD 4,801.83 0.93638 4,496.34 9,503.43 1.00 9,503.43 USD 9,188.74 7.3046 67,120.07 1,348.74 7.80 10,520.17 Subtotal: 195,587.28 292,777.59 Bank Deposit Among it: RMB 7,602,444.56 7,602,444.56 12,907,814.30 12,907,814.30 HKD 378,698.08 0.93638 354,605.31 911,063.63 1.00 911,063.63 USD 764,936.66 7.3046 5,587,556.32 71,802.37 7.80 560,058.49 Subtotal: 13,544,606.19 14,378,936.42 Other Monetary Fund Among it: RMB 4,567,070.93 4,567,070.93 4,937,598.00 4,937,598.00 HKD 1,024.00 0.93638 958.85 1,024.00 1.00 1,024.00 Subtotal: 4,568,029.78 4,938,622.00 Total Monetary Fund 18,308,223.25 19,610,336.01 (1)Other monetary fund mainly includes: deposit of acceptance bill of 1,181,392.67 Yuan, deposit of LC of 854,197.16 Yuan and deposited investment of 2,532,439.95 Yuan. 2. Notes Receivable (1)Type of Notes Receivable Type of Notes 31 Dec. 2007 31 Dec. 2006 bank acceptance bill 3,949,751.05 3,965,810.00 Total 3,949,751.05 3,965,810.00 73 Annual Report 2007 (2) Notes Receivable Pledged Type of Notes Issuer Issuing Date Due Date Amount bank acceptance bill Nanjing Wanlida Science & Tech Co., Ltd. 2007-7-13 2008-1-13 587,864.63 Total 587,864.63 (3) Undue Notes Endorsed by the Company to Others as of Term End Type of Notes Due Date Amount bank acceptance bill Jan. 2008 4,290,626.86 bank acceptance bill Feb. 2008 4,748,235.24 bank acceptance bill Mar. 2008 1,276,004.21 bank acceptance bill Apr. 2008 4,757,936.15 bank acceptance bill May 2008 4,049,366.49 bank acceptance bill Jun. 2008 1,809,522.16 Total 20,931,691.11 3. Accounts Receivable (1) Type of Risk of Accounts Receivable 31 Dec. 2007 31 Dec. 2006 Item Proportion Provision for Proportion Provision for Amount Amount % Bad Debts % Bad Debts That with large amount in 52,651,517.45 79.58% 4,256,504.67 89,148,087.26 87.69% 9,511,132.61 single item That in group with larger risk after grouping as per credit risk 3,106,743.57 4.69% 3,106,743.57 2,524,991.51 2.48% 2,524,991.51 features though single item sum is small That without large 10,406,858.92 15.73% 1,300,122.32 9,994,322.78 9.83% 873,708.05 amount in single item Total 66,165,119.94 100% 8,663,370.56 101,667,401.55 100% 12,909,832.17 The type of risk of accounts receivable see Note V.7. 74 Annual Report 2007 (2) Account Age of Account Receivable 31 Dec. 2007 31 Dec. 2006 Item Provision for Provision for Amount Proportion% Amount Proportion% Bad Debts Bad Debts Within 1year 50,915,565.22 76.95% 38,256.00 81,356,231.99 80.02% 744,415.11 1-2 year (s) 3,711,061.15 5.61% 828,147.41 2,696,082.63 2.65% 488,504.93 2-3 years 1,657,910.00 2.51% 526,230.79 5,404,171.10 5.32% 1,702,352.21 Over 3 years 9,880,583.57 14.93% 7,270,736.36 12,210,915.83 12.01% 9,974,559.92 Total 66,165,119.94 100% 8,663,370.56 101,667,401.55 100% 12,909,832.17 (3)Method and proportion to draw provision for bad debts see Note V. 7. (4) There is a reduction of 35.5 million Yuan or 34.92% in the account receivable this term end than that in last term end, because the recovery of the debts of LCD customer Computer World at last term end and the punctual payment of increased customers as well as the writing-off of the account receivable from Luks Group of 5,369,957.19 Yuan. (5) 5,369,957.19 Yuan is written off this term, details in Note XIV.4. (6) Among accounts receivable at term end, there is no debt of shareholders which hold 5% or more of voting right of the Company. (7) The top 5 accounts receivable at term end total 21,858,823.08 Yuan, accounting for 33.04% of total (among which, 19,341,704.33 Yuan occurred within 1 year, and 2,517,118.75 Yuan occurred over 1 year ago). (8) Among accounts receivable at term end, there is no debts owed by assocated parties. (9) There are the following foreign currency accounts in the receivable accounts: Foreign 31 Dec. 2007 31 Dec. 2006 Currency Original Exchange Original Exchange Equal to RMB Equal to RMB Currency Rate Currency Rate USD 1,163,327.46 7.3046 8,497,641.76 4,743,130.00 7.80 36,996,414.00 HKD 268,627.44 0.93638 251,537.36 Total 1,431,954.90 8,749,179.12 4,743,130.00 36,996,414.00 75 Annual Report 2007 4. Account Paid in Advance 31 Dec. 2007 31 Dec. 2006 Item Amount Proportion % Amount Proportion % Within 1year 2,247,164.84 91.01% 224,612.71 61.78% 1-2 year (s) 221,962.68 8.99% 138,962.97 38.22% 2-3 years Over 3 years Total 2,469,127.52 100% 363,575.68 100% (1) There is a growth of 2,105,551.84 Yuan this term end than that in last term end, because the Company has prepaid 531,375.00 Yuan and 308,619.35 Yuan as goods payment to Qingdao Hengjia Plastic Co., Ltd. and Qimei Electronic Co., Ltd. respectively. (2) Among accounts paid in advance at term end, there is no debt of shareholders which hold 5% or more of voting right of the Company. (3) There are the following foreign currency accounts in the accounts paid in advance: Foreign 31 Dec. 2007 31 Dec. 2006 Currency Original Exchange Original Exchange Equal to RMB Equal to RMB Currency Rate Currency Rate USD 42,250.00 7.3046 308,619.35 Total 42,250.00 7.3046 308,619.35 5. Other Receivables (1) Account age 31 Dec. 2007 31 Dec. 2006 Item Provision for Provision for Amount Proportion% Amount Proportion% Bad Debts Bad Debts Within 1year 8,194,519.90 33.90% 268,953.00 5,727,548.27 10.98% 1-2 year (s) 4,876,494.34 20.17% 1,139,726.33 4,471,168.25 8.57% 1,728,439.51 2-3 years 4,446,800.86 18.40% 2,014,698.04 1,427,397.08 2.74% 1,095,174.08 Over 3 years 6,653,261.92 27.53% 2,862,602.28 40,544,850.95 77.71% 37,602,882.77 Total 24,171,077.02 100% 6,285,979.65 52,170,964.55 100% 40,426,496.36 76 Annual Report 2007 (2) Method and proportion to draw provision for bad debts see Note V. 7. (3) There is a reduction of 27,999,887.53 Yuan or 53.67% in other receivables this term end than that in last term end, because the Company wrote off the provision for bad debts fully drawn in previous years against the debt of 35,363,325.79 Yuan oweed by Dayu Company, and that owed by Wanshang Friendship Daily Commidities Co., Ltd. saw an increment of 2,501,326.89 than last term end. (4) There is a reduction of 34,140,516.71 Yuan in provision for bad debts at this term end than that in last term, because the Company wrote off the provision for bad debts fully drawn in previous years against the debt of 35,363,325.79 Yuan oweed by Dayu Company, and drew another 1,369,401.00 Yuan as the provisions for bad debts of Boteman Company. Boteman Company is now under serious insolvency and unable to repay us the rentals, management expense and water & power bill in arrears totaling over 4 million Yuan. The company has filed an action at Shenzhen Futian People’s Court. In line with the correspondence of Guangdong Wanding Lawyer Office we entrust, as of the date of auditing report, the court has judged the case and sentence is suspending. The arrears we may recovered from it total around 200,000 Yuan only. The Company has fully drawn the provision for bad debts against the arrears of Boteman Company with over 1-year age in previous years. In this term, we draw another 1,369,401.00 Yuan after deducting 200,000 Yuan which may recovered against the remaining arrears. (5) In this term, the Company wrote off the arrears of 35,363,325.79 Yuan owed by Dayu Company, details in Note XIV.4. (6) Among other receivables at term end, there are 889,889.53 Yuan owed by shareholders who hold 5% or more of voting right of the Company. (7) At term end, the top 5 large amount and corresponding account age and proportion of total as follows: Over 3 Unit (Individual) Name Amount Within 1 Year 1-2 Year (s) 2-3 years proportion years Wanshang Friendship Daily 2,726,833.8 9,809,075.78 2,501,326.89 2,355,682.00 2,225,233.01 40.58% 8 Commidities Co., Ltd. Boteman 4,037,215.42 468,953.00 1,071,192.00 1,824,230.00 672,840.42 16.70% Luanfeng 1,411,963.90 1,411,963.90 5.84% 77 Annual Report 2007 Wuhan Zhongheng 889,889.53 680,691.70 209,197.83 3.68% Dept. Enterprsie Planning 683,644.79 683,644.79 2.83% 3,399,674.3 Total 16,831,789.42 5,746,580.28 3,636,071.83 4,049,463.01 69.63% 0 (8) Among the term-end balance, there are 1,058,889.53 Yuan payable by associated parties (among which, 889,889.53 Yuan is owed by Wuhan Zhongheng and 169,000.00 Yuan was owed by Wuhan Hengsheng Optronics Industry Co., Ltd.), accounting for 4.38% of term-end balance of other receivables. (9) There are the following foreign currency balance among other receivables: Foreign Currency 31 Dec. 2007 31 Dec. 2006 Original Exchange Original Equal to RMB Exchange Rate Equal to RMB Currency Rate Currency USD 3,897.90 7.3046 28,472.60 Total 3,897.90 28,472.60 6. Inventories & Depreciation Provisions (1) Type of Inventories Item 31 Dec. 2007 31 Dec. 2006 Raw Materials 13,365,662.97 11,669,392.23 Finishing Product 703,398.52 10,505,207.42 Stocked Goods 19,491,580.16 12,852,159.04 Delivered Goods 961,950.84 Revolving Materials 194,361.93 Low-value consuming products 2,719,574.69 Self-made semi-finished product 468,008.50 Processed Materials upon entrustment 48,594.56 Total 37,953,132.17 35,026,758.69 (2) Provision for Depreciation of Inventories Decrement This Term Amount Drawn Item 31 Dec. 2006 Other Carrying 31 Dec. 2007 This Term Carryover forward Raw Materials 6,680,225.71 -58,457.63 6,400,287.13 221,480.95 Finishing Product 6,848,922.53 6,848,922.53 - 78 Annual Report 2007 Stocked Goods 7,097,285.81 254,848.89 2,216,257.03 5,135,877.67 Total 20,626,434.05 196,391.26 15,465,466.69 5,357,358.62 ① Drawing method of provision for depreciation of inventories see Note V. ② Among such provision, there is 15,465,466.69 Yuan decreased from other carrying forward, which is caused by the Company’s writing off the inventories in current term, details se Note XIV.4. 7. Long-term Equity Investment (1) By Cost Method & Equity Method Shares Balance at Increment Decrement Balance at Invested Unit Initial Sum Proportion Held Term Beg. This Term This Term Term End The following are calculated by cost method Guizhou Huafa Electric 60% 300,000.00 300,000.00 300,000.00 Appliance Co., Ltd. Wuxi Jingfa Electronics 60% 300,000.00 300,000.00 300,000.00 Co., Ltd. Guangzhou Shuangshi 60% 300,000.00 300,000.00 300,000.00 Electrnics Co., Ltd. Total 900,000.00 900,000.00 900,000.00 (2) Provision for Impairment of Long-term Equity Investment Decrement This Term Amount Drawn Invested Unit 31 Dec. 2006 Other Carrying 31 Dec. 2007 This Term Carryover forward Guizhou Huafa Electric 300,000.00 300,000.00 Appliance Co., Ltd. Wuxi Jingfa Electronics 300,000.00 300,000.00 Co., Ltd. Guangzhou Shuangshi 300,000.00 300,000.00 Electrnics Co., Ltd. Total 900,000.00 900,000.00 79 Annual Report 2007 (3) In this term, the Company wrote off the long-term equity investment of 900,000.00 Yuan with full provision drawn, details in Note XIV.4. 8. Property of Investment Property of Investment Measured by Cost Mode Increment Decrement Item 31 Dec. 2006 31 Dec. 2007 This Term This Term Original Value 103,237,287.63 4,202,627.31 107,439,914.94 Among it, houses & buildings 103,237,287.63 4,202,627.31 107,439,914.94 land-use right Accumulated Depreciation & 54,828,060.12 2,994,344.24 57,822,404.36 Amortization Among it, houses & buildings 54,828,060.12 2,994,344.24 57,822,404.36 land-use right Accumulated Provision for Impairment of Property of Investment Among it, houses & buildings land-use right Book Value of Property of Investment 48,409,227.51 49,617,510.58 Among it, houses & buildings 48,409,227.51 49,617,510.58 land-use right (1) Among the property of investment in the form above, part of houses and buildings have been mortgaged with bank for loans, details in Note VIII.13. 9. Fixed Assets (1) Breakdown of Fixed Assets Houses & Machinery Mould Transport Apparatus Tooling Office Total Buildings Equipment Equipment Equipment Equipment Equipment Equipment Original Value 31 Dec. 2006 153,253,666.66 100,221,233.39 16,774,622.51 3,723,744.00 23,706,637.49 7,312,755.09 9,997,221.46 314,989,880.60 Increment This Term 3,006,293.72 8,777,211.28 94,370.10 1,608,088.54 1,894,183.80 367,688.00 486,815.56 16,234,651.00 80 Annual Report 2007 Among it, carried forward by 402,037.00 251,743.00 - - - 88,000.00 93,120.00 834,900.00 project in progress Decrement This Term 1,280,856.00 1,280,856.00 31 Dec. 2007 156,259,960.38 108,998,444.67 16,868,992.61 4,050,976.54 25,600,821.29 7,680,443.09 10,484,037.02 329,943,675.60 Accumulate d Depreciatio n 31 Dec. 2006 29,885,989.79 48,919,603.22 11,065,616.76 2,707,695.23 20,346,760.61 5,151,214.72 7,319,782.19 125,396,662.52 Increment This Term 3,693,496.48 9,187,760.46 2,066,141.45 288,166.51 941,437.28 628,728.16 392,622.37 17,198,352.71 Decrement This Term - - - 863,809.65 - - - 863,809.65 31 Dec. 2007 33,579,486.27 58,107,363.68 13,131,758.21 2,132,052.09 21,288,197.89 5,779,942.88 7,712,404.56 141,731,205.58 Impairment Provision 31 Dec. 2006 973,496.73 973,496.73 Increment This Term Carryover This Term Other Decrement 973,496.73 973,496.73 This Term 31 Dec. 2007 Net Value 31 Dec. 2006 123,367,676.87 51,301,630.17 5,709,005.75 1,016,048.77 3,359,876.88 2,161,540.37 1,703,942.54 188,619,721.35 31 Dec. 2007 122,680,474.11 50,891,080.99 3,737,234.40 1,918,924.45 4,312,623.40 1,900,500.21 1,798,135.73 187,238,973.29 (2) The fixed assets increased this term including that bestowed by our controlling shareholder Wuhan Zhongheng totaling 11,875,057.60 Yuan, among which, fixed assets in complete set value 3,516,628.00 Yuan and that of Baolilong value 8,358,429.60 Yuan, details in Note XIV.1. As of 31 December 2007, the bestowed houses and properties have completed relevant ceding procedures. As of the date of auditing report, the transport equipment is still in process for ownership right ceding procedures, which originally valued 262,529.54 Yuan and the its net book value as at 31 December 2007 is 225,20.44 Yuan. (3)Among the property of investment in the form above, part of houses and buildings have been mortgaged with bank for loans, details in Note VIII.13. (4) Among the increment to fixed assets this term, 834,900.00 Yuan is carried forward by project in 81 Annual Report 2007 progress, excluding capitalized interest, details in Note VIII. 10. Project in Progress (1) Breakdown of Projects in Progress That Carried 31 Dec. Increment forward as Other Decrement 31 Dec. Project Name 2006 This Term Fixed Assets This Term 2007 This Term 19W Mould 201,000.00 201,000.00 22W Mould 144,000.00 144,000.00 Renovating Project 116,771.95 574,840.57 691,612.52 Decoration of Dept. LCD 44,039.50 44,039.50 Business Rebuilding of LCD plant 194,279.50 194,279.50 Spider chain renovating 245,800.00 245,800.00 Epoxy Floor Project 163,718.00 163,718.00 ERPProject 76,800.00 76,800.00 LCD Testing Computer 16,320.00 16,320.00 Closed Circuit Television 60,000.00 60,000.00 Equipment Heating System 28,000.00 28,000.00 Installing LCD produton line 5,943.00 5,943.00 Total 160,811.45 1,710,701.07 834,900.00 1,036,612.52 (2) The fund used for project in process is from self-financing fund, and there is no capitalized interest occurred therein. (3) Among project in progress, 875,801.07 Yuan, or 544.61%, is increased this term than that in last term, because the 19W, 22W and renovating project are launched this term. As of 31 December 2007, such projects have not performed the settlement procedures for project completion. 11. Intangible Assets (1) Intangible Assets Non-patent Item Land-use Right Patent Right Total Technology 82 Annual Report 2007 Original Value 31 Dec. 2006 Increment This Term 6,353,451.70 163,020.00 6,516,471.70 Decrement This Term 31 Dec. 2007 6,353,451.70 163,020.00 6,516,471.70 Accumulated Amortization 31 Dec. 2006 Amortization This Term 60,394.02 4,528.33 64,922.35 Decrement This Term 31 Dec. 2007 60,394.02 4,528.33 64,922.35 Book Value 31 Dec. 2006 31 Dec. 2007 6,293,057.68 158,491.67 6,451,549.35 (2) The land-use right in the table above is destowed by the controlling shareholder Wuhan Zhongheng, which have gone through the ceding procedures. Such assets have been evaluated by Hubei Zhonglian Assets Evaluation Co., Ltd. with the Evaluation Report (ref. E.Z.L.P.B.Z.[2008] No. 043) issued on 24 January 2008, details in Note XIV. 1. 12. Deferred Income Tax Assets （1） Recognized Deferred Income Tax Assets Type 31 Dec. 2007 31 Dec. 2006 Income Tax Assets that may offset 700,787.29 temporary difference Total 700,787.29 (2) Temporary Difference Item of Deferred Income Tax Assets Recognized at Term End Deductible Temporary Difference 31 Dec. 2007 31 Dec. 2006 Item Bad debts provision- accounts 2,814,663.62 83 Annual Report 2007 receivable Bad debts provision- other receivables 105,102.41 Provision for Fixed Assets Impairment 973,496.73 Total 3,893,262.76 Tax Rate 18% Recognized Deferred Income Tax 700,787.29 Assets (3) The deferred income tax assets recognized this term is that of the subsidiary Shenzhen Huafa Property Lease Management Co., Ltd.. (4) The Company has not recognized any deferred income tax assets this term. In line with the resolution of the Board of Directors of the Company, The Company wrote off the assets worth 57.1 million Yuan for which full privision has been drawn this term, which, upon ratification of tax authority, will be presented in income tax. As of the date of auditing report, the Company has not received the reply from the tax authority regarding the writing off. Besides, as of 31 December 2007, the Company has accumulatively drawn from its book value 5,848,706.94 Yuan as provision for bad debts of accounts receivable, 10,969,110.17 Yuan as provision of bad debts of other receivables, 5,357,358.62 Yuan as provision for depreciation of inventories, and 600,000.00 Yuan as provision for impairment of long-term investment, such issues generate the deductible temporary difference worth 22,775,175.73 Yuan between the small assets book value and large tax basis as well as deferred income tax assets of 4,099,531.63 Yuan. It is predicted based on the profit of the Company, insufficient taxable income will be generated recently so as to deduct deductible temporary difference. With a vew to the stable presentation of Financial Statement, the Company has not recognized the deferred income tax assets in this term. 13. Short-term Borrowings Type 31 Dec. 2007 31 Dec. 2006 Debt of Honor Mortgage Loan 60,400,000.00 67,300,000.00 ICBC (Shenzhen) Shangbu Branch 30,400,000.00 30,400,000.00 Shenzhen Pingan Bank Shennan 20,000,000.00 22,400,000.00 84 Annual Report 2007 branch Shenzhen Development Bank 10,000,000.00 Zhenhua Branch China Merchants Bank Zhenxing 14,500,000.00 Branch Guaranteed Loan Pledged Loan Total 60,400,000.00 67,300,000.00 (1) The Comoany made the short-term borrowing of RMB 30.40 millio Yuan with ICBC (Shenzhen) Shangbu Branch upon the mortgage of 2F-5F of Block 1, 1F-3F of Block 5, 1F-3F of Block 6 and Block 7-10 with total coverage of 54,535 square meters of self-possessed property located at Huafa Electronics Center, Jiangshi Village, Gongming Town, Shenzhen City, and the original acquiring cost is 52,266,044.67 Yuan and evaluated price is 76,385,557.00 Yuan. (2) The Comoany made the short-term borrowing of RMB 20.60 millio Yuan with Shenzhen Pingan Branch Shennan Branch upon the mortgage of 2F-4F with total coverage of 21,22290 square meters of self-possessed Huafa Building, and the original acquiring cost is 28,686,582.00 Yuan and evaluated price is 84,467,142 Yuan. As of 31 December 2007, the Company has repaid the principal of 600,000 Yuan and the book value balance at term end is 20 million Yuan. (3) The Comoany made the short-term borrowing of RMB 10 millio Yuan with Shenzhen Development Bank Zhenhua Branch upon the mortgage of 1F of the plant of Huafa Electronic Center and 6F of Huafa Building with total coverage of 12,027 square meters of self-possessed property located at Jiangshi Village, Gongming Town, Shenzhen City, and the evaluated price is 22,347,018.00 Yuan. 14. Notes Payable Type 31 Dec. 2007 31 Dec. 2006 Bank Acceptance bill 2,812,914.35 Total 2,812,914.35 The Company adds payment and settlement busness through bank acceptance bills. 15. Accounts Payable (1)The balance of accounts payable dated 31 December 2007 is 42,777,941.82 Yuan (that 85 Annual Report 2007 dated 31 December 2006 was 74,524,574.49 Yuan), a reduction of 31,746,632.67 Yuan by 42.60%, because the Company reduces the goods payment of 33,172,035.98 Yuan to HONGKONG TOTWILL INDYSRIAL LIMITED. (2) In this term, there is no accounts payable to shareholder units with 5% or more voting right or associated party. (3) The accounts payable with over 1-year age is mainly owed by Kunshan Ritao Chemical Co., Ltd. totaling 1,086,840.00 which has not been fully settled. The following foreign currency balane is included: Foreign 31 Dec. 2007 31 Dec. 2006 Currency Original Exchange Original Currency Exchange Rate Equal o RMB Equal o RMB Currency Rate USD 2,619,967.73 7.3046 19,137,816.28 HKD 4,151.42 0.93638 3,887.31 Total 19,141,703.59 16. Accounts Received in Advance The balance of accounts receivable in advance dated 31 December 2007 is 666,261.81 Yuan (that dated 31 December 2006 was 1,079,361.39 Yuan), a reduction of413,099.58 Yuan by 38.27%, because the Company carries forward 365,827.23 Yuan which has long account age but is innecessary to repay to non-business revenues. In this term, there is no accounts payable to shareholder units with 5% or more voting right or associated party. The following foreign currency balane is included: Foreign Currency 31 Dec. 2007 31 Dec. 2006 Original Exchange Original Equal to RMB Exchange Rate Equal to RMB Currency Rate Currency USD 50,412.40 7.3046 368,242.42 Total 50,412.40 368,242.42 86 Annual Report 2007 17. Salary Payable to Employees Increment This Item 31 Dec. 2006 Decrement This Term 31 Dec. 2007 Term Salary (including bonus, allowance & 104,282.04 20,192,970.80 19,840,679.23 456,573.61 subsidies) Staff Welfare Treatment Fund 988.73 757,975.49 758,964.22 Social Insurance Premium 2,266,052.31 2,266,052.31 among it, 1. medical insurance premium 442,989.29 442,989.29 2.basic retirement insurance 1,652,840.89 1,652,840.89 premium 3.Unemployment Insurance 63,122.32 63,122.32 Premium 4.Industrial Injury Insurance 84,642.72 84,642.72 Premium 5.Birth Insurance Premium 22,457.09 22,457.09 Public Housing Fund Labor Union fund & staff educational fund 94,912.31 722,574.36 245,082.51 572,404.16 Non-monetary Welfare Treatment Compensation regarding Cancelling Employment Relation Others among it, shares paid in cash Total 200,183.08 23,939,572.96 23,110,778.27 1,028,977.77 (1) At this term end, 828,794.69 Yuan is increased to the salary payable to employees than that in last term end, mainly the bonus drawn at term end to be distributed and labor union fund and staff education fund drawing to pay. 18. Taxes Payab;e Applicable Tax Tax Type 31 December 2007 31 December 2006 Rate VAT 17% 438,958.57 230,772.07 Business Tax 5% 1,080,982.99 1,305,066.38 Urban Maintenance & Construction 1% 4,952.70 69,296.23 Tax Enterprise Income Tax 15% -119,731.50 -119,731.50 87 Annual Report 2007 Personal Income Tax 20,817.16 2,573.68 Property Tax 1.2% 444,952.95 654,894.46 Educational Surcharge 3% -177.71 -145.44 Total 1,870,755.16 2,142,725.88 19. Other Payables (1) Breakdown of Other Payables Item 31 December 2007 31 December 2006 Transaction with Wuhan Zhongheng 9,818,560.21 1,388,800.25 Lease Deposit 6,826,034.04 4,096,595.00 Security Money 104,123.00 551,390.94 Power & water bill collected for others 78,562.47 Other businss transactions 5,372,707.71 905,376.65 Total 22,199,987.43 6,942,162.84 (1) At term end, there is 15,257,824.59 Yuan, or 219.78% of balance of other payables increased than that in last term end, becase as accepting the assets bestowed by Wuhan Zhongheng, the Company also burdened the debts thereof accordingly, details in Note XIV.3. (2)Among the balance of other payables at term end, 9,818,560.21 Yuan is payable to controlling shareholder Wuhan Zhongheng, accounting for 44.23% of total at term end. (3) Large-sum other payables and account age at term end is: Item Arrears Account Age Nature or Content Wuhan Zhongheng 9,818,560.21 Within 1 year Business Transaction Lease deposit of Tianying Company 3,477,008.00 Over 3 yars Lease Deposit (Wanshang) Lease deposit of Chen Meiyu 1,000,000.00 Within 1 year Lease Deposit Shenzhen Dingchang Industry Co., Ltd. 424,400.00 Over 3 yars Lease Deposit Lease deposit of Demi Restaurant 351,568.00 Within 1 year Lease Deposit Total 15,071,536.21 20. Predictable Liabilities Item 31 Dec. 2006 Increment Carryover This 31 Dec. 2007 88 Annual Report 2007 This Term Term Dismiss welfare treatment 3,708,556.90 3,708,556.90 Total 3,708,556.90 3,708,556.90 In line with the Minutes of Meeting of the Leader Team of Staff Compensation and Arrangement during Assignment of Huafa Company (ref. H.F.A.L.Z.[2006] No. 1) made on 03 August 2006, Minutes of (Enlarged) Meeting of the Leader Team of Staff Compensation and Arrangement during Assignment of Huafa Company (ref. H.F.A.L.Z.[2006] No. 2) made on 14 August 2006 as well as Economic Compenation Method for Cancelling Contract with Non-Shenzhen Native Employees for Shares Assignment of Huafa Company, etc., the Company has recognized the liabilities of 3,708,556.90 Yuan arising from compensation for canceling the employment relation with employees, which was recognized as predictable liabilities in 2006. Such compensation is fully paid in this term. 21. Capital Stock The par value is RMB 1 Yuan per share. Shareholder Name/Type 31 Dec. 2007 31 Dec. 2006 Restricted Shares State-owned Shares State-owned Corporate Shares Other Domestic Shares among it, domestic corporate shares 116,489,894 124,925,828 Domestic natural person shares 26,248 30,433 Foreign Shares among it, foreign corporate shares foreign natural person shrares Total Restricted Shares 116,516,142 124,956,261 Unrestricted Shares RMB Common Shares 64,649,249 56,209,130 Foreign Shares Listed Domestically 101,995,836 101,995,836 Foreign Shares Listed Overseas Others Total Unrestricted Shares 166,645,085 158,204,966 89 Annual Report 2007 Total Shares 283,161,227 283,161,227 22. Capital Reserves Item 31 Dec. 2006 Increment This Term Decrement This Term 31 Dec. 2007 Shares Premium 98,460,750.00 98,460,750.00 Other Capital Reserves 7,571,423.92 7,571,423.92 Total 106,032,173.92 106,032,173.92 23. Surplus Reserves Item 31 Dec. 2006 Increment This Term Decrement This Term 31 Dec. 2007 Statutory Surplus Reserves 21,322,617.25 21,322,617.25 Any Surplus Reserves 56,068,976.00 56,068,976.00 Total 77,391,593.25 77,391,593.25 In line with the Corporation Law of the People’s Republic of China, Articles of Association of the Company and resolution of the Board of Directors, the Company has drawn 10% of annual net profit after covering loss of previous years as statutory surplus reserves which may be stopped drawing if accumulatively exceeding 50% of total shares capital. Such statutory surplus reserves may be approved to use for covering loss or increasing capital. Other than covering loss, if used for increasing capital, the balance of such statutory surplus reserve can’t be lss than 25% of that before the increasing. The Company has not drawn the statutory surplus reserves in 2007. The amount drawn for any surplus reserves shall be approved by the Board of Shareholders upon the proposal of the Board of Director, which may, after approval, be use for covering loss in previous years or increasing capital. The Company has not drawn any surplus reserves in 2007. 24. Profit Retained (1) Profit Distribution Statement Item For Year 2007 For Year 2006 Profit Retained at Term beginning -246,450,714.54 -223,187,908.99 add: net profit this year 25,864,037.18 -23,262,805.55 less: drawing surplus reserves distributing common stock dividends Profit Retained at Term End -220,586,677.36 -246,450,714.54 among it, monetary dividends to be distributed 90 Annual Report 2007 25. Business Revenues & Business Cost (1)Business Revenues Item For Year 2007 For Year 2006 Revenues from Major Business 141,184,217.25 161,208,668.37 Revenues from Other Business 52,060,665.60 40,674,695.34 Total 193,244,882.85 201,883,363.71 Sales Turnover from Top 5 Customers 86,812,055.57 99,220,305.58 Proportion of Total Turnover 44.92% 49.15% （2） Business Cost Item For Year 2007 For Year 2006 Cost of Major Business 140,005,093.93 156,991,380.02 Cost of Other Business 23,332,187.89 21,113,486.97 Total 163,337,281.82 178,104,866.99 (3) Cost of Revenues from Major Business—classified as per product/business type Item For Year 2007 For Year 2006 Revenues from Major Business among it, injection molding ware 15,849,667.48 16,891,889.08 single-sided PCB 16,261,060.51 19,437,382.43 dual-sided PCB 25,625,833.01 47,158,052.05 single-sided high frequency PCB 18,499,538.67 20,223,409.38 multi-sided PCB 4,264,560.27 14,015,041.43 LCD Displayer 58,798,941.86 43,482,894.00 color TV processing 1,884,615.45 Total 141,184,217.25 161,208,668.37 Cost of Major Business among it, injection molding ware 14,308,379.98 15,349,045.25 single-sided PCB 16,842,931.02 18,485,845.29 dual-sided PCB 26,698,239.96 47,973,318.35 single-sided high frequency PCB 17,671,733.74 16,826,520.23 multi-sided PCB 4,482,366.36 15,114,386.90 LCD Displayer 58,743,984.85 43,242,264.00 color TV processing 1,257,458.02 - Total 140,005,093.93 156,991,380.02 91 Annual Report 2007 Gross Profit of Major Business among it, injection molding ware 1,541,287.50 1,542,843.83 single-sided PCB -581,870.51 951,537.14 dual-sided PCB -1,072,406.95 -815,266.30 single-sided high frequency PCB 827,804.93 3,396,889.15 multi-sided PCB -217,806.09 -1,099,345.47 LCD Displayer 54,957.01 240,630.00 color TV processing 627,157.43 Total 1,179,123.32 4,217,288.35 (4) Cost of Revenues from Other Business—classified by types Item For Year 2007 For Year 2006 Revenues from Other Business among it, leasedproperty 35,900,627.50 37,987,727.91 sales of materials 15,480,038.10 2,100,162.43 equipment lease 680,000.00 540,725.00 others 46,080.00 Total 52,060,665.60 40,674,695.34 Cost of Other Business among it, leasedproperty 9,170,986.87 18,583,640.19 sales of materials 13,736,661.96 1,961,773.30 equipment lease 424,539.06 568,073.48 others Total 23,332,187.89 21,113,486.97 Gross Profit of Other Business among it, leasedproperty 26,729,640.63 19,404,087.72 sales of materials 1,743,376.14 138,389.13 equipment lease 255,460.94 -27,348.48 others 46,080.00 Total 28,728,477.71 19,561,208.37 26. Business Tax & Additionals Taxing Item Taxing Base For Year 2007 For Year 2006 Percent Business Tax Circulation Tax 5% 1,604,658.14 1,861,689.45 Urban Maintenance & Circulation Tax 1% 17,482.38 85,761.75 Construction Tax 92 Annual Report 2007 Educational Surcharge Circulation Tax 3% 2,947.11 3,112.48 Total 1,625,087.63 1,950,563.68 27. Financial Expenses Item For Year 2007 For Year 2006 Interest Expenditures 4,542,309.59 5,185,881.05 less: interest return 151,487.28 151,002.90 add: exchange loss 221,998.64 276,188.81 add: other expenditures -385,724.10 -107,813.68 Total 4,227,096.85 5,203,253.28 28. Assets Impairment Loss Item For Year 2007 For Year 2006 Bad Debts Loss 1,865,786.21 6,470,055.22 Loss of Depreciation of Inventories 196,391.26 11,852,925.40 Total 2,062,177.47 18,322,980.62 (1) There is a reduction of assets impairment loss this term totaling 16,260,803.15 Yuan by 88.75%, mainly because of the plenty of bad assets impairment loss drawn for account receivable and inventories, etc.. 29. Investment Yield Sources of Investent Yield For Year 2007 For Year 2006 Stock investment 32,045.04 (1) Stock investment yield refers to the investment yield gaining by subscribing for new share CSCL and CPIC in the primary market and then assigning through the secondary market in this term. 30. Return from Entrusted Operation Sources of Investent Yield For Year 2007 For Year 2006 Return from entrusted operation 93,340.46 （1） Arising of entrusted operation Item For Year 2007 For Year 2006 Revenues from Entrusted Operation 13,870,023.79 less: cost of entrusted operation 12,385,665.02 less: expenses of entrusted operation 1,391,018.31 Total 93,340.46 93 Annual Report 2007 （2） Specific return of entrusted operation are in Note XIV.1. 31. Non-business Revenues Item For Year 2007 For Year 2006 Gains of Disposalof non-current assets 14,160.00 Gains from Inventory Profit 16,500.00 Gains from Donation ① 19,554,224.24 Moneys unable to pay ② 1,009,706.51 Others ③ 3,558,115.69 26,487.98 Total 24,122,046.44 57,147.98 (1) There is a growth of 24,064,898.46 Yuan to non-business revenues this term than that in last term, mainly because: ①Wuhan Zhongheng given the Baolilong and LCD displayer integrated unit assembling business valuing 19,554,224.24 Yuan to the Company; ②The Company records the advance moneys and accounts payable innecessary to pay totaling 1,009,706.51 Yuan as non-business revenues in this term; ③Others of non-business revenues refer to the net rental revenues from Huafa Court which has been assigned. In line with the Assets Assignment Agreement the Company signed with original shareholder Zhenhua Group on 06 April 2007, since the assignment of Huafa Court till 31 August 2008, its rentals will be owned by the Company, while the Company shall be responsible for relevant fees and daily management of such object asset as well as each kind of taxes arising from obtaining the rentals; besides, the Company shall also be responsible for guaranteeing the intact status of the object asset. The ceding procdures for such asset was completed in November 2006. In respect of the rentals gained from such asset in November and December 2006, after deducting relevant cost-related expense, the remaining 570,923.45 Yuan was recorede into capital reserve- price difference of associated transaction in 2006. While the rentals gained in 2007, after deducting relevant cost-related expense, the remaining 3,523,045.69 Yuan was recorede into non-business revenues. 32. Non-business Expenditures Item For Year 2007 For Year 2006 Loss of Disposal of Non-current Assets 58,846.35 Penalties Expenditures 130,304.40 568.05 94 Annual Report 2007 Others 53,656.45 Total 242,807.20 568.05 (1) There is a growth of 242,239.15 Yuan to the non-business expenditures this term than that in last term, mainly because the Company paid 120,000 Yuan as the administrative fines by Shenzhen Environment Bureau and disposed the net loss of fixed assets totaling 58,846.35 Yuan. 33. Expenses of Income Tax Item For Year 2007 For Year 2006 Expenses of Income Tax This Term Deferred Income Tax Expenses -700,787.29 Total -700,787.29 (1) The deferred incme tax expenses occurred this term is that recognized by the subsidiary Shenzhen Huafa Property Lease Management Co., Ltd., see Note VIII.10. 34. Cash Flow Statement (1) Cash and cash equivalent presented in the cash flow statement include: Item For Year 2007 For Year 2006 Cash 16,272,633.42 19,610,336.01 Among it, ready money 195,587.28 292,777.59 Bank deposit available for payment anytime 13,544,606.19 14,378,936.42 Other monetary fund available for payment 2,532,439.95 4,938,622.00 anytime Moneys deposited with the Central Bank availablefor payment Due from Bank Interbank Moneys Cash Equivalents Among it, investment on bonds due within 3 months Balance of Cash & Cash Equivalents at Term End 16,272,633.42 19,610,336.01 Among it, cash and cash equivalents which are restrictedto the use of mother company or subsidiaries of the group (2) Other Cash Received/Paid Related to Operation Activities 95 Annual Report 2007 1) Other Cash Received Related to Operation Activities Item For Year 2007 For Year 2006 Power, water bill & rentals received for others 11,934,019.07 12,184,780.54 Security money of lease deposit 2,141,406.30 748,116.83 telephone management fees received for others 241,743.14 1,397,483.55 Business Transaction Payment 232,560.00 1,516,635.16 Transport Charge 192,187.49 Interest Return 151,487.28 151,002.90 Repayment for reserves 124,183.48 423,092.32 Net revenues from fines 12,690.00 18,790.00 quality deposit from Dazu digital control 200,000.00 Compensation for traffic accident 100,828.00 Others 112,443.54 3,780.00 Total 15,142,720.30 16,744,509.30 2) Other Cash Paid Related to Operation Activities Item For Year 2007 For Year 2006 Power & water bill paid for others 14,370,426.68 15,759,787.24 Borrowings from reserves 2,832,026.85 4,211,324.62 auditing, advise & checking charge 1,313,256.90 707,721.00 Transport charge 953,254.78 2,632,087.78 Telephone management fee 725,059.33 2,970,611.13 Office expenses, etc. 661,916.35 876,998.60 Security money of lease deposit 640,196.00 840,858.87 Business travel expenses, etc. 563,974.52 596,168.28 Stock reforming expenses, etc. 349,416.50 311,075.90 Rentals, power, water & management fee, etc. 318,524.93 1,162,909.89 Revealing charge for stock information 293,000.00 409,666.00 Lawyer Cost 272,584.09 148,664.00 Bank processing fee 152,430.72 101,663.33 Repair cost 144,173.40 289,588.00 expenditures of fines 129,904.40 568.05 Property insurance premium 121,651.00 181,380.60 Sales of servicve charge 117,788.89 311,722.24 Quality deposit paid to Dazu Digital Control 200,000.00 Business Transaction Payment 878,959.00 membership fee for Board of Directors 274,903.90 96 Annual Report 2007 Others 301,002.44 660,626.59 Total 24,260,587.78 33,527,285.02 (3) Supplementary Materials to Consolidated Cash Flow Staement Item For Year 2007 For Year 2006 Convert net profit to cash flow from operating activities: Net Profit 25,864,037.18 -23,262,805.55 Add: provision drawn for assets impairment 2,062,177.47 18,322,980.62 Fixed assets depreciation 20,192,696.95 23,722,965.80 Amortization of Intangible Assets 64,922.35 Amortization of Long-term Expenses to be Appotioned 1,697,541.96 Loss from Disposal of Fixed Assets, Intangible Assets 58,846.35 -30,660.00 & Other Long-term Assets (less: gains) Loss from Discard of Fixed Assets Financial Expenses 4,879,729.54 5,541,687.08 Investment Loss (less: yield) -32,045.04 Decrement of Deferred Income Tax Assets (less: -700,787.29 increment) Increment of Deferred Income Tax Liabilities (less: decrement) Decrement of Inventories (less: increment) -18,391,840.17 4,360,100.71 Decrement of Operative Receivbles (less: increment) 19,039,321.89 -33,068,404.06 Increment of Operative Payables (less: decrement) -20,019,613.97 28,795,662.32 Others (see remark) -18,173,631.10 570,923.45 Net Cash Flow Provided by Operating Activities 14,843,814.16 26,649,992.33 Remarek: “others” refer to such long-term assets as fixed assets and intangible assets that Wuhan Zhongheng given to the Company, details in Note XIV.1. IX. Remark for Major Items of Financial Statement of Mother Company 1、Account Receivable (1) Type of Risk of Accounting Receivable 31 Dec. 2007 31 Dec. 2006 Item Proportion Provision for Proportion Provision for Amount Amount % Bad Debts % Bad Debts 97 Annual Report 2007 That with large amount 50,096,142.70 79.11% 1,701,129.92 86,630,968.51 87.62% 6,994,013.86 in single item That in group with larger risk after grouping as per credit risk features 2,858,931.70 4.52% 2,858,931.70 2,277,179.64 2.30% 2,277,179.64 though single item sum is small That without large 10,368,376.92 16.37% 1,288,645.32 9,964,272.28 10.08% 870,354.82 amount in single item Total 63,323,451.32 100% 5,848,706.94 98,872,420.43 100% 10,141,548.32 (2) Account Age of Account Receivable 31 Dec. 2007 31 Dec. 2006 Item Provision for Provision for Amount Proportion% Amount Proportion% Bad Debts Bad Debts Within 1 year 50,877,309.22 80.45% 81,355,123.99 82.28% 744,415.11 1-2 year (s) 3,711,061.15 5.83% 828,147.41 2,705,262.13 2.74% 488,963.91 2-3 years 1,657,572.00 2.60% 526,196.99 5,366,049.10 5.43% 1,698,540.01 Over 3 years 7,077,508.95 11.12% 4,494,362.54 9,445,985.21 9.55% 7,209,629.29 Total 63,323,451.32 100% 5,848,706.94 98,872,420.43 100% 10,141,548.32 (3) Method and proportion to draw provision for bad debts see Note V. 7. (4) There is a reduction of 35.5 million Yuan or 35.95% in the account receivable this term end than that in last term end, because the recovery of the debts of 36.99 million Yuan of LCD by customer Computer World at last term end and the punctual payment of increased customers as well as the writing-off of the account receivable from Luks Group of 5.37 million Yuan. (5) 5,369,957.19 Yuan is written off this term, details in Note XIV.4. (6) Among accounts receivable at term end, there is no debt of shareholders which hold 5% or more of voting right of the Company. (7) The top 5 accounts receivable at term end total 21,659,331.79 Yuan, accounting for 34.20% of total, all receivable within 1 year. (8) Among accounts receivable at term end, there is no debts owed by assocated parties. (9) There are the following foreign currency accounts in the receivable accounts: 98 Annual Report 2007 Foreign 31 Dec. 2007 31 Dec. 2006 Currency Exchange Exchange Original Currency Equal to RMB Original Currency Equal to RMB Rate Rate USD 1,163,327.46 7.3046 8,497,641.76 4,743,130.00 7.80 36,996,414.00 HKD 268,627.44 0.93638 251,537.36 Total 1,431,954.90 8,749,179.12 4,743,130.00 7.80 36,996,414.00 2、Other Receivables (1) Account age 31 Dec. 2007 31 Dec. 2006 Item Provision for Bad Provision for Bad Amount Proportion% Amount Proportion% Debts Debts Within 1year 9,247,136.82 29.54% 268,953.00 7,661,774.93 12.66% 1-2 year (s) 4,871,994.34 15.56% 1,139,501.33 4,461,831.46 7.38% 1,728,439.51 2-3 years 4,442,511.36 14.19% 2,014,269.09 1,430,117.08 2.36% 1,095,074.08 Over 3 years 12,745,550.69 40.71% 7,546,386.75 46,940,904.42 77.60% 44,048,363.53 Total 31,307,193.21 100.00% 10,969,110.17 60,494,627.89 100.00% 46,871,877.12 (2) Method and proportion to draw provision for bad debts see Note V. 7. (3) There is a reduction of29,187,434.68 Yuan or 48.25% in other receivables this term end than that in last term end, because the Company wrote off the provision for bad debts fully drawn in previous years against the debt of 35,363,325.79 Yuan oweed by Dayu Company, and that owed by Wanshang Friendship Daily Commidities Co., Ltd. saw an increment of 2,501,326.89 than last term end. (4) There is a reduction of 35,902,766.95 Yuan in provision for bad debts at this term end than that in last term, because the Company wrote off the provision for bad debts fully drawn in previous years against the debt of 35,363,325.79 Yuan oweed by Dayu Company, and drew another 1,331,145.00 Yuan as the provisions for bad debts of Boteman Company. (5) Among other receivables at term end, there are 889,889.53 Yuan owed by shareholders who hold 5% or more of voting right of the Company. (6) In this term, the Company wrote off the arrears of 35,363,325.79 Yuan owed by Dayu 99 Annual Report 2007 Company, details in Note XIV.4. (7) At term end, the top 5 large amount and corresponding account age and proportion of total as follows: Unit (Individual) Name Amount Within 1 Year 1-2 Year (s) 2-3 years Over 3 years proportion Huafa Property 9,809,075.78 2,501,326.89 2,355,682.00 2,225,233.01 2,726,833.88 31.33% Management Co., Ltd. Wanshang Friendship Daily 7,458,329.76 1,033,852.21 6,424,477.55 23.82% Commidities Co., Ltd. Boteman 4,037,215.42 468,953.00 1,071,192.00 1,824,230.00 672,840.42 12.90% Luanfeng 1,411,963.90 1,411,963.90 4.51% Wuhan Zhongheng 889,889.53 680,691.70 209,197.83 2.84% Total 23,606,474.39 6,096,787.70 3,636,071.83 4,049,463.01 9,824,151.85 75.40% (8) Among the term-end balance, there are8,517,219.29 Yuan payable by associated parties, accounting for 27.21% of term-end balance of other receivables. (9) There is the following foreign currency balance among other receivables: Foreign Currency 31 Dec. 2007 31 Dec. 2006 Original Exchange Original Equal to RMB Exchange Rate Equal to RMB Currency Rate Currency USD 3,897.90 7.3046 28,472.60 Total 3,897.90 28,472.60 3、Long-term Equity Investment (1) by Cost Method & Equity Method Shares Balance at Increment Decrement Balance at Invested Unit Initial Sum Proportion Held Term Beg. This Term This Term Term End Controlling Subsidiaries Shenzhen Huafa Property 60% 600,000.00 600,000.00 600,000.00 Lease Management Co., Ltd. The following are calculated 100 Annual Report 2007 by cost method Guizhou Huafa Electric 60% 300,000.00 300,000.00 300,000.00 Appliance Co., Ltd. Wuxi Jingfa Electronics 60% 300,000.00 300,000.00 300,000.00 Co., Ltd. Guangzhou Shuangshi 60% 300,000.00 300,000.00 300,000.00 Electrnics Co., Ltd. Total 1,500,000.00 1,500,000.00 900,000.00 600,000.00 (2) Provision for Impairment of Long-term Equity Investment Amount Decrement This Term Invested Unit 31 Dec. 2006 Drawn Other Carrying 31 Dec. 2007 Carryover This Term Forward Shenzhen Huafa Property Lease 600,000.00 600,000.00 Management Co., Ltd. Guizhou Huafa Electric Appliance Co., Ltd. 300,000.00 300,000.00 Wuxi Jingfa Electronics 300,000.00 300,000.00 Co., Ltd. Guangzhou Shuangshi Electrnics Co., Ltd. 300,000.00 300,000.00 Total 1,500,000.00 900,000.00 600,000.00 (3) In this term, the Company wrote off the long-term equity investment of 900,000.00 Yuan with full provision drawn, details in Note XIV.4. 4、Business Revenues & Business Cost (1) Business Revenues Item For Year 2007 For Year 2006 Revenues from Major Business 141,184,217.25 161,208,668.37 Revenues from Other Business 50,107,742.60 38,599,722.34 Total 191,291,959.85 199,808,390.71 Sales Turnover from Top 5 Customers 86,812,055.57 99,220,305.58 Proportion of Total Turnover 45.38% 49.66% (2) Business Cost Item For Year 2007 For Year 2006 Cost of Major Business 140,005,093.93 156,991,380.02 Cost of Other Business 23,332,187.89 19,597,575.42 Total 163,337,281.82 176,588,955.44 101 Annual Report 2007 (3) Cost of Revenues from Major Business—classified as per product/business type Item For Year 2007 For Year 2006 Revenues from Major Business among it, injection molding ware 15,849,667.48 16,891,889.08 single-sided PCB 16,261,060.51 19,437,382.43 dual-sided PCB 25,625,833.01 47,158,052.05 single-sided high frequency PCB 18,499,538.67 20,223,409.38 multi-sided PCB 4,264,560.27 14,015,041.43 LCD Displayer 58,798,941.86 43,482,894.00 color TV processing 1,884,615.45 Total 141,184,217.25 161,208,668.37 Cost of Major Business among it, injection molding ware 14,308,379.98 15,349,045.25 single-sided PCB 16,842,931.02 18,485,845.29 dual-sided PCB 26,698,239.96 47,973,318.35 single-sided high frequency PCB 17,671,733.74 16,826,520.23 multi-sided PCB 4,482,366.36 15,114,386.90 LCD Displayer 58,743,984.85 43,242,264.00 color TV processing 1,257,458.02 Total 140,005,093.93 156,991,380.02 Gross Profit of Major Business among it, injection molding ware 1,541,287.50 1,542,843.83 single-sided PCB -581,870.51 951,537.14 dual-sided PCB -1,072,406.95 -815,266.30 single-sided high frequency PCB 827,804.93 3,396,889.15 multi-sided PCB -217,806.09 -1,099,345.47 LCD Displayer 54,957.01 240,630.00 color TV processing 627,157.43 Total 1,179,123.32 4,217,288.35 (4) Cost of Revenues from Other Business—classified by types Item For Year 2007 For Year 2006 Revenues from Other Business among it, leasedproperty 33,947,704.50 35,958,834.91 sales of materials 15,480,038.10 2,100,162.43 102 Annual Report 2007 equipment lease 680,000.00 540,725.00 others Total 50,107,742.60 38,599,722.34 Cost of Other Business among it, leasedproperty 9,170,986.87 17,067,728.64 sales of materials 13,736,661.96 1,961,773.30 equipment lease 424,539.06 568,073.48 others Total 23,332,187.89 19,597,575.42 Gross Profit of Other Business among it, leasedproperty 24,776,717.63 18,891,106.27 sales of materials 1,743,376.14 138,389.13 equipment lease 255,460.94 -27,348.48 others Total 26,775,554.71 19,002,146.92 5、Investment Yield Sources of Investent Yield For Year 2007 For Year 2006 Stock investment 32,045.04 Total 32,045.04 (1) Stock investment yield refers to the investment yield gaining by subscribing for new share CSCL and CPIC in the primary market and then assigning through the secondary market in this term. X. Relation of Associated Party & Associated Trade (i) Standards of Recognition of Associated Party 1. Those units the Company is controlling, jointly controlling or able to exert serious influence to. 2． Those units or individuals exerting control, joint control or serious influence to the Company. 3． Those units which are under the control, joint control or serious influence of the same party. 103 Annual Report 2007 (ii)Relation of Associated Party The subsidiaries with controlling relation are detailed in Note VII, Business Merger & Consolidated Financial Statement 1． Other Associated Party with Controlling Relation Relation Name of Affociated Code of Registry Economic Legal Major Business with the Party Organization Address Nature Representative Company production & sales of Company Wuhan, electronic product, Mother Wuhan Zhongheng 711954601 of limited Li Zhongqiu Hubei development & sales of real Company liabilities estate, etc. 2． Registered Capital and Change of Other Associated Party with Cntrolling Relation Increment Decrement Name of Associated Party Year 2006 Year 2007 This Term This Term Wuhan Zhongheng 138,000,000.00 138,000,000.00 3. Nature of Associated Party without Controlling Relation Associated Transaction with the Associated Party Name Relation of Association Company Wuhan Hengsheng Optronics Industry Co., Ltd. Same controlling shareholder Sourcing materials Wuhan Xindongfang Real Estate Development Same controlling shareholder None Co., Ltd. Wuhan Zhongheng Property Management Co., Same controlling shareholder None Ltd. Wuhan Guanggu Displayer System Co., Ltd. Same controlling shareholder none (iii) Associated Transactions 1． Pricing Policies Market price is adopted as the pricing basis for associated transactions with associated companies. 2. sourcing materials 104 Annual Report 2007 Year 2007 Year 2006 Name of Associated Party Proportion Amount Amount Proportion Wuhan Zhongheng 18,578,027.72 12.26% Wuhan Hengsheng Optronics Industry Co., Ltd. 30,318,120.11 20.01% 3. Capital Interaction with Associated Party (1)Year 2007 Associated Party Providing Capital to the Name of Associated Providing Capital to Associated Party Company Party Amount Balance Amount Balance Wuhan Zhongheng 899,687.53 889,889.53 8,429,759.96 9,818,560.21 Total 899,687.53 889,889.53 8,429,759.96 9,818,560.21 (2) Year 2006 Associated Party Providing Capital to the Name of Associated Providing Capital to Associated Party Company Party Amount Balance Amount Balance Wuhan Zhongheng 1,388,800.25 1,388,800.25 Total 1,388,800.25 1,388,800.25 (iv) Balance of Capital Interaction with Associated Party Name of Associated Party Subject 31 Dec. 2007 31 Dec. 2006 Other Wuhan Zhongheng 889,889.53 Receivables Wuhan Zhongheng Other Payables 9,818,560.21 9,818,560.21 Wuhan Hengsheng Optronics Industry Co., Advance Money 258,176.44 Ltd. Wuhan Hengsheng Optronics Industry Co., Other 169,000.00 Ltd. Receivables XI. Contingent Affairs 105 Annual Report 2007 1. Contingent Liabilities Arising from Suspending Lawsuit or Rrbitration (1) Dispute over the Contract Shaanxi Linghua Electronics Co., Ltd. (“Shannxi Linghua”) prosecuted us regarding a contract we undertook (ref. 2007 S.F.F.M.E.C.Z.No.2441): Shaanxi Linghua required us to compensate it for the loss brought ot it by the circuit board with hidden quality defects the Company sold to it during 30 May 2006 to 09 May 2007, totaling 3,100,773.20 Yuan. The Company received the process regarding this case issued by Futian People’s Court on 14 January 2008. The court held the first trial for the case on 06 March 2008 where both Parties examined mutual evidences. As of date of auditing report, the next court has been under arrangement. At present, this case has not been closed, so the loss may arise to the Company is unable to predict. The company filed a counterclaim in respect of this lawsuit on 12 November 2007 against Shaanxi Linghua for the goods payment and relevant interests totalling 1,054,290.19 Yuan. On 06 March 2008, the court held the first trial where both Parties examined mutual evidences. As of date of auditing report, the next court has been under arrangement, so this case has not been closed. The Company has drawn provision for bad debts regarding such arrears in line with accounting policies. (2) Dispute regarding Archiving for Poisonous and harmful work The 51 complainants such as Cai Yaoqiang originally worked for us since their joining in 1987 and cancelled their labor relation with us in April 2007. All the complainants were engaged in the poisonous and harmful work during working, and we began to pay the labor insurance for them since 1987, which was changed to pay such social insurance as retirement insurance since 1992. For the reason of our failing to archive for their such working experience at Shenzhen Labor & Security Bureau in line with relevant regulations which was impossible to re-archive, such complainants filed the sue to the court for the compensation of 5,178,567 Yuan. On 29 December 2007, Shenzhen Futian People’s Court judged that they were cast (ref. Court Verdict No.: (2007) S.F.F.M.Y.(L) C.Z. No. 956-992 and 994-1007). 30 of the complainants have raised appeal to Shenzhen Intermediate People’s Court against us, and as of the date of auditing report, this case has not been closed, so the loss may arise to the Company is unable to predict. (3) Lawsuit regarding the labor disputes The complainant Sun Lei had sued against us for delaying in distributing bonus and economic compensation to him totalling 403,560 Yuan, and Shenzhen Futian People’s Court turned down his request on 29 December 2007 (court verdict No.: (2007) S.F.F.M.Y.(L) C.Z.No. 1188), for which, Sun 106 Annual Report 2007 Lei has appealed to Shenzhen Intermediate People’s Court. As of the date of auditing report, Shenzhen Intermediate People’s Court has not held court for that, so the loss may arise to the Company is unable to predict. （4）Rent Contract Disputes： The company entrusted Guagndong Wanding Law Firm to participate in the first trial proceeding for the rent contract disputes between Boteman, Shenzhen Merchants Investment and Development Co., Ltd. (hereinafter referred to as “Merchant Company”), Xia Huijun. Boteman, engaging in operating bowling alleys, rents our real estate located in East of the Fifth Floor, 411 No., Huatian Beilu, Futian District, Shenzhen City for a long term, and owes Huafa company rent, utilities, management fees of over 4 million yuan. Boteman, Merchant Company, Xia Huijun sign the temporary agreement with Huafa Company, Merchangt Company and Xia Huijun would like to take the joint responsibility for Huafa Company’s action in the temporary operation period. The company has appealed to the People’s Court of Futian Distric, requiring Boteman to return the real estate, compensate rent, utilities, management fees, and requiring Merchant Company and Xia Huijun to take joint responsibility. The People’s Court of Futian Distric, Shenzhen City has trialed the case. Up to the audit reporting day, the case is still suspending. According to the letter of Guangdong Wanding Law Firm: Boteman has been an seriously insolvent company, unable to compensate rent, utilities, management fees, so, even though the court judges that Boteman shall repay the overdraft, it is difficult to excecute the judgement. However, it is probable to recover the concrete amount—about 200,000 yuan of Merchant Company and Xia Huijun’s joint responsibility after the court adjudges. The company has prepared the bad debts for the receivables of Boteman’s overdraft over 1 year. In addition to the rest receivables deducted 200,000 yuan that may recover, the company prepares a supplement 1,369,401.00 yuan of bad debts. 2. Except for the aforesaid contingent affairs, there is no other key contingent affairs happended to the Company as of 31 December 2007. 107 Annual Report 2007 XII. Undertakings As of 31 December 2007, there is no key promise happened to the Company. XIII. Events Occurring After the Balance Sheet Date 1、 On 16 March 2007, the National Congress passed the Law of Enterprise Income Tax of P.R.C (the “New Income Tax Law”) which has taken effect sine 01 January 2008, so the applicable enterprise income tax rate applicable for us is changed as 18%. 2 、 The Company repaid the 10 million Yuan of short-term borrowings to Shenzhen Development Bank Zhenhua Branch in January 2008, which further removed the mortgaged properties located at the first floor of the plant of Huafa Electronic Center and 6F of Huafa Building at Jiangshi Village, Gongming Town, Shenzhen City. 3、As at the date of signing and issuing this Financia Staement, there is no material event occurring after the balane sheet which may affect the perusing and understanding of this Financial Statement. XIV. Other Key Matters 1. Statement regarding the given assets valuing 19.55 million Yuan by Wuhan Zhongheng In line with relevant clauses in the Manual of Shares-spilit Reforming, the equity reforming is conducted based on such considerations, i.e. Wuhan Zhongheng conducted assets reorganization to the Company and gifting shares to common shareholders. The asset reorganization has the following points: Wuhan Zhongheng given relevant assets with Baolilong and assembling of integrated unit to the Company and conducted business combination for the Company. In line with the Evaluation Report (ref. E.Z.L.P.B.Z.[2006] No. 080) issued by Hubei Zhonglian Assets Evaluation Co., Ltd. on 22 July 2006, taking 31 May 2006 as standard evaluating day, the assets given were evaluated worth RMB 19,508,700 Yuan which remained effective till 31 May 2007, among which, assembling business of integrity unit was worth 3,660,621.21 Yuan and Baolilong business worth 15,848,145.68 Yuan. The transfer procedures for relevant assets with assembling business of integrity unit were completed prior to 31 May 2007, including fixed assets valuing 3,516,628.00 Yuan and inventories valuing 143,993.21 Yuan. Since the ceding procedures for relevant assets of Baolilong business was completed till August 108 Annual Report 2007 2007 when the original evaluation report had prescribed, Wuhan Zhongheng re-evaluated the relevant assets with Baolilong business. Hubei Zhonglian Assets Evaluation Co., Ltd., taking 31 May 2007 as standard evaluating day, issued the Evaluation Report (ref. E.Z.L.P.B.Z.[2007] No. 043), in which the reporting date was 24 January 2008). In line with this report, the relevant assets with Baolilong business was evaluated worth 15,893,603.03 Yuan, appreciated by 45,457.35 Yuan over the previous evaluated value of 15,848,145.68 Yuan made on 31 May 2007, which was given to the Company by Wuhan Zhongheng. The table below lists the value of relevant assets with Baolilong business as at the standard evaluating day on 31 May 2007 and the value as of the ceding day on 01 August 2007 as well as relevant note: Value as at standard evaluing Value as at ceding day on 01 Subject date on 31 May 2007 August 2007 18,870,790.80 15,428,585.05 I. Total Current Assets 13,729,166.95 11,768,770.36 Accounts Receivable 12,270.00 -48,765.59 Other Receivables 5,106,040.04 3,708,580.28 Inventories 23,313.81 Expenses to be Apportioned 14,821,069.80 14,657,003.11 II. Total Non-current Assets 8,499,665.00 8,358,429.60 Fixed Assets 75,800.00 75,800.00 Project Materials 218,142.80 218,142.80 Project in Progress 6,027,462.00 6,004,630.70 Intangible Assets 33,691,860.60 30,085,588.16 III. Total Assets 17,798,257.57 14,191,985.13 IV. Total Liabilities 8,783,730.98 9,841,276.75 Accounts Payable 7,367,829.48 2,511,050.23 Other Payables 94,116.16 131,902.09 Salary of Employees Payable 1,552,580.95 1,707,756.06 Taxes Payable 15,893,603.03 15,893,603.03 V. Net Assets (1) Accounting evidences for each kind of current assets and current liabilities (excluding business transactions with Wuhan Zhongheng) as at the assets ceding date: since the evaluated value of such assets as at the standard evaluating day are identical with the book value of the same, and such assets and liabilities have circulated since the standard evaluating day to assets ceding 109 Annual Report 2007 day, the evaluatd value is improper recorded, so the book value as at the assets ceding day as accounting evidneces of such assets. (2) Accounting evidences for fixed assets and intangible assets as at the assets ceding date: those assets existing prior to the standard evaluating day shall be recorded at the ceding day as per the net value on the standard evaluating day deducting the depreciation or amortization drawn against the evaluated value in June and July 2007. Those assets acquired between the standard evaluating day and ceding day, the original value of such assets on the ceding day shall be the acquiring price deducting the provision drawn in June and July 2007. (3) Accounting evidences for other payables—business transaction of Wuhan Zhongheng as at the assets ceding date: after recording the each kind of assets and liabilities given by Zhonghan Zhongheng as per the recording evidences set out above, the difference between theire net assets and that worth 15,893,603.03 Yuan as at the standard evaluating day on 31 May 2007 shall be the payables to Wuhan Zhongheng. 2、Statement regarding Entrustment Operation of Relevant Assets with the Given Baolilong Business After ceding the relevant assets with Baolilong business to the Company in August 2007, the Company set up Wuhan Branch to operate and manage such assets. While, since Wuhan Branch completed its registration till 27 December 2007, and the long-term customers of Baolilong business required a 3-month qualification certification against us, since Augsut 2007 till the reporting date of auditing report, the operation and management of Baolilong business wre still under the name of Wuhan Zhongheng. The Company signed an extra Agreement on Entrusted Operation in 11 April 2008 with Wuhan Zhongheng, which set out that, in view of the special situation during the transitional period of asset gifting, in order to guarantee the continuity of operation of such assets, the Company hereby entrusted Wuhan Zhongheng to operate and manage the relevnat assets with Baolilong business during o1 Augsut 2007 to 30 June 2008. Such entrustment served as a transitional arragement for the gift of assets, for which Wuhan Zhongheng agreed with avoiding charging the entrustment expense over the Company in any form. During the entrustment, the Company would possess the ownership of the entrusted assets, with the profit and loss arising brudened by the Company. As for the current liabilities arising, it shall be repaid by Wuhan Zhongheng for the Company and then be rapaid to Wuhan Zhongheng after such repayment completed. During 01 August 2007 to 31 December 2007, udner the operation of Wuhan Zhongheng, the given 110 Annual Report 2007 assets totally acquired profit of 93,340.46 Yuan which was presented in the entrance of “Return of Entrustment Operation”. 3、Statement regarding the Accounting Processing to Liabilities Included in the Given Assets In line with the Agreement on Assets Giving and Business Integrating the company signed with Wuhan Zhongheng in July 2006, the Company agreed with, as receiving the given assets, burdening the current liabilities which were included in and related to the given assets. If any debtee disagreed with transfering such current liabilities, Wuhan Zhongheng was responsible for repaying for the Company; once such repayment was completed, it shall be the turn of the Company to repay such current liabilities to Wuhan Zhongheng within 30 days after such completion. As of 31 July 2007, for Baolilong business, 9,841,276.75 Yuan of goods price shall be paid to the supplier and 1,707,756.06 Yuan of taxes shall be paid, totaling 11,549,032.81 Yuan. In line with the Agreement on Assets Giving and Business Integrating, Wuhan Zhongheng would repay such current liabilities for the Company. After Wuhan Branch of the Company took over relevant assets with Baolilong business, the aforesaid debts repaid by Wuhan Zhongheng for the Company were transferred as payables of the Company to Wuhan Zhongheng. During the entrustment operation by Wuhan Zhongheng during 01 Augsut 2007 to 31 December 2007, 3,749,260.13 Yuan and 323,913.09 Yuan were respectively increased to the goods price of suppliers and taxes. In line with the Agreement on Assets Giving and Business Integrating, it shall followed the arragement set out in preceding paragraph. As of 31 December 2007, Baolilong business totally aroused 13,590,536.88 Yuan of suppliers’ goods price and 2,031,669.15 Yuan of each kind of taxes, totaling 15,622,206.03 Yuan, which would be repaid by Wuhan Zhongheng for us while the Company would calculate it in the entry “Other Payables”. 4、Statement on Assets Written Off This Term Delete “In line with resolution of the Board of Directors, the following assets are written off this term:” (1) Among accounts receivable, 5,369,957.19 Yuan are written off against Luks Group, which 111 Annual Report 2007 have last over 5 years and the Company has fully drawn the privision for bad debts. (2) Among other receivables, 35,363,325.79 Yuan are written off against Dayu Company, which have last over 10 years composing of rentals and management expenses as Dayu Company has disappeared for a long time and the Company has fully drawn the privision for bad debts. (3) among inventories, 15,465,466.69 Yuan was written off, among which, ①The apparatus and part of color TV valuing 3,927,679.99 Yuan have been stored exceeding the storage limit, which can’t match with currently existing apparatus and parts and lost use value due to oxidization arising from overtime stocking. Since the cover TV manufacturer has ceased in April 2005, the Company has fully drawn the provisions for its impairment. ②The photosensitive fat, copper plating stabilizer, PCB materials, chemical materials and repair materials, etc. manufactured by the circuit board plant valuing 2,472,607.14 Yuan have been overdue stocked exceeding the stock limit without use value and sales value as unable to match with currently existing products in market, the Company has fully drawn the provisions for its impairment. ③The TV case, loaders and descramblers, all parts of color TV, totaling 6,848,922.53 Yuan; since the Company has ceased the production of color TV, the Company has fully drawn the provisions for its impairment. ④The overstock including oversupplied circuit boards and goods returned by customers, in spite of the originally book value of 2,216,257.03 Yuan, have been stocked for over 3 years and lost use value, so the Company has fully drawn the provisions for its impairment. (4)Long-term equity investment of 900,000.00 Yuan are written off. The Company has participated in investing 3 color TV manufacturers, i.e. Guizhou Huafa Electric Appliance Co., Ltd. (investing 300,000.00 Yuan), Wuxi Jingfa Electronics Co., Ltd, (investing 300,000.00 Yuan) and Guangzhou Shuangshi Electronics Co., Ltd. (investing 300,000.00 Yuan). Seeing the furious market competition in color TV market, the Company stopped supplying for them since 05 December 2000. It is indicated in the company search provided by the local business registry authority that, Wuxi Jingfa Electronics Co., Ltd. applied for log-off on 12 June 2002, Guangzhou Shuangshi Electronics Co., Ltd. was revoked the business license by local business registry authority on 21 September 2001, so was Guizhou Huafa Electric Appliance Co., Ltd. on 15 September 2003. A total of 57,098,749.67 Yuan are written off, which will not affect current loss and profit and has been approved by the Board of Directors. 112 Annual Report 2007 XV. Supplementary Materials 1. Non-operating Income Statement Item Year 2007 Year 2006 Profit & Loss of Disposal of Non-current Assets -58,846.35 14,160.00 Government Grants Accrued into current Loss & Profit Net Profit & Loss during Term Beginning to Merger Date of the Subsidiaries Arising from Business Merger under Same Control Net Non-business Receipts & Expenditures except for the above-said 23,938,085.59 42,419.93 Subtotal 23,879,239.24 56,579.93 Total of Net Incidental Loss & Profit 23,879,239.24 56,579.93 Among it, that ascribed to shareholder of mother company 23,879,239.24 56,579.93 2． Return on Net Assets and Earnings Per Share In line with the requirement of the Preparation Rules of Inforamtion Revealing of a Listed Company No.9- Figuration & Revealing of Return on Net Assets and Earnings Per Shrae issued by CSRC, the fully diluted and averagely weighted return on net assets and earning per share of the Company are set out below: (1) Year 2007 Return on Net Assets Earning per Share Profit during Reporting Period Full Averagely Basic Earning Diluted Earning diluted weighted Per Shre per Share Net profit ascribed to shareholder of mother company 10.51% 11.10% 0.0913 0.0913 Net profit ascribed to shareholder of mother company 0.81% 0.85% 0.007 0.007 after deducting incidental loss & profit (2) Year 2006 Return on Net Assets Earning per Share Profit during Reporting Period Full Averagely Averagely Full diluted diluted weighted weighted Net profit ascribed to shareholder of mother company -10.57% -10.24% -0.0822 -0.0822 Net profit ascribed to shareholder of mother company -10.59% -10.26% -0.0824 -0.0824 after deducting incidental loss & profit (3) Calculation Process of Return on Net Assets 113 Annual Report 2007 Item No. Year 2007 Year 2006 Net profit ascribed to mother company 1 25,864,037.18 -23,262,805.55 Incidental loss & profit ascribed to mother 23,879,239.24 2 56,579.93 company Net profit ascribed to shareholder of mother 3=1-2 1,984,797.94 -23,319,385.48 company after deducting incidental loss & profit Net assets at term end ascribed to shareholder 4 220,134,279.63 of mother company 245,998,316.81 Fully-diluted return on net asset (I) 5=1÷4 10.51% -10.57% Fully-diluted return on net asset (II) 6=3÷4 0.81% -10.59% Net assets at term beginning ascribed to 7 220,134,279.63 238,858,928.26 shareholder of mother company Net assets ascribed to shareholder of mother company which are newly increased through 8 issuing new shares or debt-to-stock, etc. number of months sine next month after increasing the net assets ascribed to 9 shareholders of mother company till term end of reporting term Net assets ascribed to shareholders of mother company which are decreased through counter 10 purchasing or cash dividends number of months sine next month after decreasing the net assets ascribed to 11 shareholders of mother company till term end of reporting term number of months during reporting period 12 12 12 Averagely weighted net assets ascribed to 13=7+1÷②+8×9÷12 233,066,298.22 227,227,525.49 shareholder of mother company -10×11÷12 Averagely-weighted return on net asset (I) 14=1÷13 11.10% -10.24% Averagely-weighted return on net asset (II) 15=3÷13 0.85% -10.26% (4) Calculation Process of Basic Earning per Share and Diluted Earning per Share Item No. Year 2007 Year 2006 Net profit ascribed to mother company 1 25,864,037.18 -23,262,805.55 Incidental loss & profit ascribed to mother 2 23,879,239.24 company 56,579.93 Net profit ascribed to shareholder of mother 3=1-2 1,984,797.94 -23,319,385.48 114 Annual Report 2007 company after deducting incidental loss & profit Total shares at term beginning 4 283,161,227.00 283,161,227.00 shares increased through capital reserve-to-shares or dividends distribution 5 (I) shares increased through issuing new 6 shares or debt-to-stock (II) number of months since next month after shares increasing (II) till term end of 7 reporting period Shares decreased due to counter 8 purchased or share shrinking number of months since next month after shares decreasing till term end of reporting 9 period number of months during reporting period 10 12 12 11=4+5+6×7÷10 Averagely weighted common shares issued 283,161,227.00 283,161,227.00 -8×9÷10 Basic earning per share (I) 12=1÷11 0.0913 -0.0822 Basic earning per share (II) 13=3÷11 0.0007 -0.0824 14 diluted potential common stock interest switch expenses which are recognized as 15 expenses income tax rate 16 shares increased through stock warrant & 17 exercising option 18=[1+(14-15)×(1-16)]÷(11+17 Diluted earning per share (I) 0.0913 -0.0822 ) 19=[3+(14-15)×(1-16)]÷(11+17 Diluted earning per share (II) 0.0007 -0.0824 ) 3. Breakdown of Provision for Asset Impairment Increment This Decrement This Term Item 31 Dec. 2006 31 Dec. 2007 Term carryover Writing-off provision for bad debt 53,336,328.53 2,346,304.66 40,733,282.98 14,949,350.21 115 Annual Report 2007 impairment Provision for inventories 20,626,434.05 196,391.26 15,465,466.69 5,357,358.62 impairment Provision for impairment of 1,500,000.00 900,000.00 600,000.00 long-term equity investment provision for fixed assets 973,496.73 973,496.73 impairment Total 76,436,259.31 2,542,695.92 56,798,749.67 21,880,205.56 4. Consolidated Income Statement for Reference (1) Presuming that the Company executed Business Accounting Standards since 2006, a consolidated income statement for reference shall be prepared: Item Year 2006 Business Revenues 201,883,363.71 Less: business cost 178,104,866.99 business tax & additional 1,950,563.68 sales expenses 3,445,845.36 management expense 18,175,239.26 financial expense 5,203,253.28 loss of assets impairment 18,322,980.62 add: return from variation of fair value Investment return Business Profit -23,319,385.48 add: non-business revenues 57,147.98 less: non-business expenditures 568.05 Total Profit -23,262,805.55 less: income tax expenses Net Profit -23,262,805.55 (2) Difference between the Consolidated Income Satement for Reference and Orginal Consolidated Income Statement Item Year 2006 Net Profit in Original Consolidated Income Statement -19,554,248.65 Adjust the diffeence in line with the Business Accounting Standards No.38- Accounting Standards for Enterprsies of Initial Implementation: Dismiss Compensation Complying with Recognition Conditions of Predictable Liabilities 3,708,556.90 Net Profit in the Consolidated Income Statement for Reference -23,262,805.55 116 Annual Report 2007 5． Contract Form of Adjustment of Shareholder Equity Difference under New and Original Accounting Standards Amount Original Amount Revealed in Revealed in No. Item name Difference Note Annual Report Annual Report 2007 2006 shareholder equity dated 01 223,842,836.53 223,842,836.53 Janaury 2006 The detail Dismiss compensation Complying explanation is 1 with recognition conditions of 3,708,556.90 3,708,556.90 referred to predictable liabilities Ⅳ1.④ shareholder equity dated 01 220,134,279.63 223,842,836.53 3,708,556.90 Janaury 2007 XVI. Approval of the Financial Report This financial report is announced upon the approval of the Board of Directors of the Company on 25 April 2008. XI. Documents Available for Reference 1. Annual Report with the signature of Chairman of the Board. 2. Accounting statements with the signatures and seals of legal representative, principal of the Company, principal in charge of accounting affairs and director of accounting department. 3. Original of all documents disclosed on China Securities, Securities Times and Hong Kong Wen Wei Po in the report period. 4. Articles of Association of the Company. 5. Other relevant materials. Note: This Report is prepared respectively both in Chinese and English. Should be there any difference in interpretation of these two versions, the Chinese version shall prevail. Board of the Directors of Shenzhen Zhongheng Huafa Co., Ltd. April 29, 2008 Chairman of the Board: Li Zhongqiu 117