飞亚达Ｂ(200026)2007年年度报告（英文版）

SHENZHEN FIYTA HOLDINGS LTD. 2007 Annual Report April 11, 2008Definition The following names in abbreviation shall refer to the following organizations unless the context hereof otherwise clearly requires: The Company or Fiyta: Shenzhen Fiyta Holdings Co., Ltd. CATIC Shenzhen Corporation: China National Aero-Technology Import & Export Corporation Shenzhen Shenzhen CATIC Group: Shenzhen CATIC Group Ltd. Harmony: Shenzhen Harmony World Watches Center Co., Ltd. Rainbow Supermarket: Shenzhen Rainbow Department Store Co., Ltd. CATIC Property: Shenzhen CATIC Property Management Co., Ltd. CATIC Real Estate: Shenzhen CATIC Real Estate Development Co. Important I. The Board of Directors, the Supervisory Committee, directors, supervisors and senior executives of the Company hereby confirm that there are no important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individually and/or jointly, for the authenticity, accuracy and completeness of the whole contents. II. No director, director or any senior executive has expressed that he/she is not sure for the genuineness, accuracy or completeness of this annual report or has any different opinion on the same. III. Zhongrui Yuehua Certified Public Accountants Co., Ltd. and Gold Yue Hua CPAs produced a standard unqualified audit report for the Company. IV. Mr. Wu Guangquan, the Chairman of the Board, Mr. Xu Dongsheng, the Managing Director, Mr. Li Dehua, Deputy General Manager and Chief Financial Officer and Mr. Hu Xinglong, Manager of the Financial Department, hereby ensure the accuracy and completeness of the financial report enclosed in this quarterly report. 1 Contents Chapter 1 Company Profile Chapter 2 Financial and Business Highlights Chapter 3 Change in Capital Stock and Shareholders Chapter 4 Directors, Supervisors, Senior Executives and Staff Chapter 6 Corporate Governance Structure Chapter 6 Shareholders’ General Meeting Chapter 7 Report of the Board of Directors Chapter 8 Report of the Supervisory Committee Chapter 9 Significant Events Chapter 10 Financial Report Chapter 11 Documents Available for Inspection Chapter 1 Company Information I. Legal Name in Chinese and English and Short Form: Company Name in Chinese: 深圳市飞亚达（集团）股份有限公司 Short Form in Chinese: 飞亚达公司 In English: SHENZHEN FIYTA HOLDINGS LTD Short Form in English: FIYTA II. Legal Representative: Mr. Wu Guangquan III. Secretary of the Board: Mr. Hao Huiwen Securities Affairs Representative: Ms. Li Wenjing Liaison Address: 20th Floor, FIYTA Technology Building, Gaoxin S. Road One, Nanshan District, Shenzhen Tel : 0755－86013992 86013669 Fax: 0755－83348369 E-mail: investor@fiyta.com.cn IV. Registered Office Address: FIYTA Technology Building, Gaoxin S. Road One, Nanshan District, Shenzhen Office Address: 20th Floor, FIYTA Technology Building, Gaoxin S. Road One, Nanshan District, Shenzhen Postal Code: 518057 Internet Website: http:// www.fiyta.com.cn V. Newspapers Designated for Disclosing the Information: Securities Times, Hong Kong Commercial Daily Internet Website for publishing this annual report: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Securities Department of the Company VI. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form & Code of the Stock: FIYTA A 000026 FIYTA B 200026 VII. Other Relevant Information 1. Date of the initial registration: March 30, 1990 Date of change in registration: January 30, 1997 Registration with: Shenzhen Municipal Administration for Industry and Commerce. 2. Business License No.: 440301103196089 3. Taxation Registration No.: 440301192189783 4. Organization No：19218978-3 5. Certified public accountant engaged Type Description Office address s A-sh Zhongrui Yuehua Certified Public B01-B03, 12th Floor, Pengrun Building, No. ares Accountants Co., Ltd. 26, Xiaoyun Road, Chaoyang District, Beijing B-Sh 20th Floor, No. 1 CANNON ST.,CAUSEWAY Gold Yue Hua CPAs ares BAY, Hong Kong 1 Chapter 2 Financial and Business Highlights I. Financial Highlights of the Year 2007 Items Amount In RMB Total profit 71,491,255.72 Net profit 60,876,912.74 Net profit after deduction of non- recurring 58,923,180.78 loss/gain Operating profit 71,435,914.89 Investment income 1,872,228.96 Subsidy income 1,105,800.00 Net amount of non-operating income and 55,340.83 expenses Net cash flows arising from operating activities -57,409,010.78 Net increase/ decrease of cash and cash 23,663,682.96 equivalents * Deducting non-recurring gain/loss items and amount involved Non-recurring gain and loss items Amount In RMB Income from disposal of fixed assets -34,877.87 Governmental subsidy 1,105,800.00 Earnings from short term investment 1,872,228.96 Other non-operating income -1,015,581.30 Amount affected by the income tax 26,162.17 Total 1,953,731.96 II. Discrepancies between CAS and IAS. In RMB Domestic Accounting Standard International Accounting Standards Net profit 60,876,912.74 60,876,912.74 Net asset 642,124,427.84 642,124,427.84 For the domestic A shares, the Company started implementing the new accounting standards in 2007 and made retroactive adjustment over the previous accounting standards according to the new accounting standards. In 2007, the Company audited Note to the adjustment and the standards in connection with the matters of previous years discrepancy involved in the retroactive adjustment and found there was no discrepancy. Therefore, there was no discrepancy in the net profit and the net asset calculated based on the domestic accounting standard and the international accounting standard. III. Financial Highlights Over the Past Three Years Ended the Report Period 1 Accounting Data Summary In RMB Year-on-y ear 2007 2006 increase/ 2005 decrease (%) 2 After Before After Before After adjustme adjustment adjustment adjustment adjustment nt Operation 805,273,114.09 491,825,821.81 491,825,821.81 63.73% 343,979,663.32 343,979,663.32 income Total profit 71,491,255.72 34,846,010.21 34,846,010.21 105.16% 18,563,592.41 18,563,592.41 Net profit attributable to 60,876,912.74 29,263,221.63 30,509,476.39 99.53% 16,006,999.87 16,338,540.19 the shareholders Net profit attributable to the shareholders less the 58,923,180.78 28,000,226.95 29,246,481.71 101.47% 17,181,233.23 17,512,773.55 nonrecurring gain or loss Net cash flows arising from -57,409,010.78 -86,133,036.02 -86,042,293.92 -14,006,618.19 -13,975,109.12 operating activities Year end-on-y ear end End of 2007 End of 2006 End of 2005 increase/ decrease (%) After Before After Before After adjustme adjustment adjustment adjustment adjustment nt Total assets 1,045,497,639.53 771,947,475.56 775,314,838.38 34.85% 621,275,547.20 627,480,215.47 Owners’/share 642,124,427.84 562,634,460.99 571,836,384.02 12.29% 533,371,239.36 539,575,907.63 holders’ equity 2. Financial Data Summary In RMB Year-on-y ear 2007 2006 increase/ 2005 decrease (%) After Before After Before After adjustme adjustment adjustment adjustment adjustment nt Basic earnings per 0.244 0.117 0.122 100.00% 0.064 0.066 share Diluted earnings per 0.244 0.117 0.122 100.00% 0.064 0.066 share Basic earnings per share less 0.236 0.112 0.117 101.71% 0.069 0.070 non-recurring gains and loss Net assets-income 9.48% 5.20% 5.34% 4.14% 3.00% 3.03% ratio (fully 3 diluted) Net assets-income 10.03% 5.34% 5.57% 4.46% 3.05% 3.11% ratio, weighted average Net assets-income ratio after taking off 9.18% 4.98% 5.11% 4.07% 3.22% 3.25% nonrecurring gains and loss, diluted Net assets-income ratio after taking off 9.71% 5.11% 5.34% 4.37% 3.27% 3.33% nonrecurring gains and loss, weighted Net cash flows per share arising from -0.23 -0.35 -0.35 - -0.06 -0.06 operating activities Year end-on-y ear end End of 2007 End of 2006 End of 2005 increase/ decrease (%) After Before After Before After adjustme adjustment adjustment adjustment adjustment nt Net asset per share attributable to 2.576 2.257 2.294 12.29% 2.139 2.164 the shareholders IV. Net assets calculated in accordance with the Rules for Public Companies to Disclose Information and Prepare Statements (No. 9) promulgated by China Securities Regulatory Commission Earning Rate and Earnings per Share: Net assets-income ratio Earnings per share Items Profit of the (%) (RMB/share) report period Fully Weighted Fully Weighted in RMB diluted average diluted average Net profit available to the shareholders of ordinary 9.48% 10.03% 0.244 0.244 60,876,912.74 shares in the Company Net profit belonging to the shareholders of ordinary 58,923,180.78 9.18% 9.71% 0.236 0.236 shares in the Company less non-recurring gains and loss 4 Chapter 3 Change in Capital Stock and Shareholders I. Change in Shares 1. Changes in the Company’s capital stock ended December 31, 2007 are as follows: In shares Before the change Increase/ Decrease (+ / -) After the change Share s New conve Proport Bonus Q’ty issui rted Others Sub-total Q’ty Proportion ion shares ng from reserv e I. Shares with 130,296,210 52.26% -18,821,291 -23,894 -18,845,185 111,451,025 44.70% sales restriction 1. State shares 2. State owned corporate 130,248,000 52.24% -18,832,499 -18,832,499 111,415,501 44.69% shares 3. Other 48,210 0.02% 11,208 -23,894 -12,686 35,524 0.01% domestic shares Including: Domestic non-state owned corporate shares Domestic natural person 48,210 0.02% 11,208 -23,894 -12,686 35,524 0.01% shares 4. Foreign shares Including: Foreign corporate shares Overseas natural person shares II. Shares without sales 119,021,789 47.74% 18,821,291 23,894 18,845,185 137,866,974 55.30% restriction 1. RMB 60,701,789 24.35% 18,821,291 23,894 18,845,185 79,546,974 31.91% common shares 2. Foreign invested shares listed in 58,320,000 23.39% 58,320,000 23.39% Mainland China 3. Foreign invested shares listed out of Mainland China 4. Others 100.00 III. Total Shares 249,317,999 249,317,999 100.00% % 5 Change of the shares with sales restriction: Shares with Number of Increase of Shares with sales shares Causes of shares with sales Date of Shareholders restriction at discharged for sales sales restriction at discharging year sales restriction restriction year end beginning restriction November 9, Corporate 2010, Shenzhen commitment November 9, CATIC Group 130,248,000 18,832,499 0 111,415,501 Ltd. for equity 2011, reform November 9, 2012, Refer to the Lu Bingqiang 48,210 23,894 11,208 35,524 － note Total 130,296,210 18,856,393 11,208 111,451,025 － － Note: Lu Bingqiang, deputy general manager, held 48,210 shares. After he sold 12,053 shares on August 8, 2007, he held 36,157 shares. After the Company distributed bonus shares in the equity separation reform, Deputy General Manager Lu Bingqiang is holding 47,365 shares. 2. Issuing and Listing (1) Within three years prior to the end of the report period, the Company had not issued any shares or derivatives. (2) Change in the stock structure caused by equity separation reform in the report period. On October 26, 2007, the shareholders’ meeting concerning the equity separation reform reviewed and approved the Equity Separation Reform Proposal of SHENZHEN FIYTA HOLDINGS LTD., namely Shareholders of negotiable A-shares were entitled to obtain shares paid by the shareholders of non-negotiable shares at the rate of 3.1 shares for every 10 shares. On November 9, 2007, the Company implemented the equity separation reform proposal. After the implementation, the Company’s stock structure was changed into: 249,317,999 A-shares, of which the promoter held 111,415,501 shares, other domestic shareholders held 79,582,498 shares and shareholders of B shares held 58,320,000 shares. (3) At present, there are no employees’ shares in the Company. II. Shareholders 1. Ended December 31, 2007, there were altogher 31813 shareholders in the Company, including 21269 shareholders of A shares (including one senior executive shareholder) and 10544 shareholders of B shares. 2. Top Ten Shareholders Total Number of 31,813 Shareholders Shares held by the top ten shareholders Proportio Number of shares Nature of n of Total shares Shares pledged Names of Shareholders held with sales Shareholders shares held or frozen restriction held Shenzhen CATIC Group Co., State owned Ltd. 44.69% 111,415,501 111,415,501 0 corporate Industrial and Commercial Domestic Bank of China – E Fund non-state 1.57% 3,910,109 0 0 Value Based Growth Mixed corporate Securities Investment Fund Construction Bank of China - Domestic 1.37% 3,417,745 0 0 6 Guotai Jinma Stable Return non-state Securities Investment Fund corporate HSBC MULTIALPHA CHINA Foreign 1.16% 2,899,860 0 0 FUND corporate China Construction Bank – Domestic Baokang Consumer Goods non-state 0.88% 2,199,768 0 0 Securities Investment Fund corporate Bank of China – Huabao Domestic Xingye Advance Growth non-state 0.80% 2,000,000 0 0 Stock Type Securities corporate Investment Fund Domestic Everbright Securities Co., non-state 0.61% 1,514,905 0 0 Ltd. corporate Bank of China – Guotai Domestic Golden Deer Breakeven non-state 0.53% 1,312,882 0 0 Value-Added Mixed corporate Securities Investment Fund Domestic National Social Security non-state 0.52% 1,300,002 0 0 Fund 601 Portfolio corporate GUOTAI JUNAN Foreign SECURIES HONG KONG 0.44% 1,098,898 0 0 corporate LIMITED The number of shares held by Shenzhen CATIC Group Ltd., the shareholder holding over 5% of the Company’s shares, changed to 111,415,501 shares after acquisition of 18,832,499 bonus shares resulted from the equity separation reform, taking 44.69% of the Company’s total shares. The Company has never found any business relations among them or they belong to the persons of concerted action as specified in the Measures on Listed Companies on Disclosing the Shareholding Information. 3. About Control Shareholder: Shenzhen CATIC Group Ltd.,was founded in June, 1997, with total capital stock of RMB 636 million, its legal representative is Wu Guangquan. CATIC Shenzhen Holdings Ltd. is a diversified holding company, engaged in the business of LCD, PCB, medium and high grade watches, etc. through its subsidiaries. Shenzhen CATIC Group was listed with Hong Kong Stock Exchange in September 1997 with original total capital stock of 636,000,000 shares, of which 400,000,000 shares are non-listed domestic corporate shares and 236,000,000 shares are foreign invested shares listed outside Mainland China. In December 2007, approved by China Securities Regulatory Commission (CSRC) additionally issued 47,199,999 foreign invested shares listed outside Mainland China in Hong Kong stock market (including 4,290,909 state-owned shares reduced by stock issuance). Upon the additional issuing, the applicant’s total capital stock increased to 678,909,090 shares, including 395,709,091 non-listed domestic corporate shares and 283,199,999 foreign invested shares listed outside Mainland China. 4. Controlling Shareholder and Eventual Controller China National Aero-Technology Import & Export Corporation (CATIC) was established in 1979 with registered capital of RMB 300 million, legal representative: Fu Shula, principal business: export of three categories of planned commodities, other three types of commodities, rubber products upon authorization, import of two categories of commodities and three categories of commodities; import and export of the aforesaid commodities on commission; technology import and export within the Group; processing with materials supplied, processing with samples supplied, assembling with components supplied and compensation trade; counter trade and transit trade; barter trade upon authorization; import and export of the commodities other than the 16 catagories of commodities under joint operation organized by the government and the 12 catagories of import commodities operated by the importers authorized by the government; 7 participating in international bidding by using foreign loans and for purchasing mechanical and electrical products by using the domestic funds and other international procurement business by public bidding; sales of automobiles (excluding sedan cars). 5. Top 10 shareholders of shares with no sales restriction Shares held by the top ten shareholders without sales restriction Number of shares held without Names of Shareholders Share Type sales restriction Industrial and Commercial Bank of China – E Fund Value Based Growth 3,910,109 RMB ordinary shares Mixed Securities Investment Fund Construction Bank of China - Guotai Jinma Stable Return Securities 3,417,745 RMB ordinary shares Investment Fund Foreign shares listed HSBC MULTIALPHA CHINA FUND 2,899,860 domestically China Construction Bank – Baokang Consumer Goods Securities 2,199,768 RMB ordinary shares Investment Fund Bank of China – Huabao Xingye Advance Growth Stock Type 2,000,000 RMB ordinary shares Securities Investment Fund Everbright Securities Co., Ltd. 1,514,905 RMB ordinary shares Bank of China – Guotai Golden Deer Breakeven Value-Added Mixed 1,312,882 RMB ordinary shares Securities Investment Fund National Social Security Fund 601 1,300,002 RMB ordinary shares Portfolio 8 GUOTAI JUNAN SECURIES HONG Foreign shares listed 1,098,898 KONG LIMITED domestically Orient securities company limited 1,000,062 RMB ordinary shares The Company has not found any connectivity relations among the Connectivity relations among the aforesaid shareholders or persons of concerted action as aforesaid shareholders or persons of specified in the Measures on Management of the Information concerted action concerning Change of Shares Held by Listed Company 9 Section 4 Directors, Supervisors, Senior Executives and Staff I. Directors, Supervisors and Senior Executives 1. About Directors, Supervisors and Senior Executives Numbe Numbe Reason r of r of of Start/expiry shares shares Chang Gend Name Post Age date of office held at held at e: er term year year beginni end ng Wu Chairman of the Guang male 45 2006.5-2009.5 0 0 — Board quan Lai Weixua Vice-Chairman male 43 2006.5-2009.5 0 0 — n Sui Director male 49 2006.5-2009.5 0 0 — Yong Xu Director and General Dongsh male 41 2006.5-2009.5 0 0 — Manager eng Wang Baoyin Director male 43 2006.5-2009.5 0 0 — g Chen 2007.11-2009. Honglia Director male 39 0 0 — 5 ng Hua Xiaonin Independent director male 44 2006.5-2009.5 0 0 — g Guo Independent director male 42 2006.5-2009.5 0 0 — Wanda Ji femal Independent director 66 2006.5-2009.5 0 0 — Qinzhi e Chairman of Huang Supervisory male 51 2006.5-2009.5 0 0 — Gaojian Committee Zhang Songhu Supervisor male 54 2006.5-2009.5 0 0 — a: Tang Supervisor male 46 2006.5-2009.5 0 0 — Boxue Lu Refer Deputy General Bingqia male 46 2006.5-2009.5 48,210 47,365 to the Manager ng: note Deputy General Li Manager and Chief male 47 2006.5-2009.5 0 0 — Dehua: Accountant Deputy General Li Bei male 52 2006.5-2009.5 0 0 — Manager Fang Deputy General femal 48 2006.5-2009.5 0 0 — Juan Manager e Deputy General Hao Manager & Secretary male 39 2006.5-2009.5 0 0 — Huiwen of the Board 10 Notes: 1. Lu Bingqiang, deputy general manager, held 48,210 shares. After he sold 12,053 shares on August 8, 2007, he held 36,157 shares. After the Company distributed bonus shares in the equity separation reform, Deputy General Manager Lu Bingqiang is holding 47,365 shares. 2. The Company has not yet implemented equity incentive plan. In the report period there is no director, supervisor and senior executive who holds any option or restrictive shares of the Company. 2. Engagement of Directors and Supervisors in the Shareholders Titles engaged in the Names Shareholders Office term shareholders Wu Shenzhen CATIC Group Ltd. Chairman of the Board 2006.6-2009.6 Guangquan Lai Weixuan Shenzhen CATIC Group Ltd. Vice-Chairman 2006.6-2009.6 Sui Yong Shenzhen CATIC Group Ltd. Director 2006.6-2009.6 Xu Shenzhen CATIC Group Ltd. Director 2006.6-2009.6 Dongsheng Wang Shenzhen CATIC Group Ltd. Director 2006.6-2009.6 Baoying Huang Chairman of Supervisory Shenzhen CATIC Group Ltd. 2006.6-2009.6 Gaojian Committee 3. Curriculum Vitae of Directors, Supervisors and Senior Executives and the Offices Taken or Part Time Jobs Engaged by them in other Organizations except Shareholders (1) Directors Mr. Wu Guangquan, 45, senior accountant and MBA of Tongji University. Mr. Wu is the Chairman of the Board of the Company and the president of CATIC Shenzhen Corporation. He used to be vice chief accountant & financial manager of CATIC Shenzhen Corporation, general manager and chairman of the board of Jiangxi Jiangnan Trust & Investment Co., Ltd. Mr. Lai Weixuan, 43, senior accountant, EMBA of Beijing University, MBA of (USA) IVY UNIVERSITY. Mr. Lai is now Vice Chairman of the Board of the Company, vice president and the Secretary of the CPC Committee of CATIC Shenzhen Corporation and the managing director of Shenzhen Rainbow Department Store Co., Ltd. He used to be assistant to the general manager of CATIC Commercial & Trading Co. and deputy general manager of Shenzhen Rainbow Department Store Co., Ltd. Mr. Sui Yong, 48, senior accountant. Mr. Sui graduated from Beijing University of Aeronautics & Astronautics. He is a director of the Company and chief accountant of CATIC Shenzhen Corporation, general manager of CATIC Shenzhen Resource Co., Ltd. He used to be deputy section-chief of Financial Section of Shenyang Liming Engine Company, deputy section-chief of Financial Section of CATIC, assistant general manager of CATIC Property Beihai CATIC Associated Development Co., manager and vice chief accountant of Financial Dept. of CATIC Shenzhen Corporation. Mr. Xu Dongsheng, 40, senior economist, graduated from MBA of Tongji University., on-campus doctor of Beijing University of Aeronautics & Astronautics. He is now the general manager of the Company, vice president of China Timepieces Association and president of Shenzhen Timepieces Association. He used to be the secretary of the Youth League Committee of CATIC Shenzhen Corporation, general manager of the life service company of Shenzhen CATIC Enterprise Group, vice secretary of the discipline committee of CATIC Shenzhen Corporation. and assistant to the president of CATIC Shenzhen Corporation. 11 Mr. Wang Baoying, 42, senior engineer, undergraduate of Beijing University of Aeronautics & Astronautics, MBA of SCUPS. He is now a director of the Company, assistant to the president of CATIC Shenzhen Corporation and executive deputy general manager of CATIC Shenzhen Resources Co., Ltd. He used to be a technician, deputy chief of the labor and capital devision, chief of comprehensive division and chief of the investment management division of Tianjin State-run No. 105 Factory, assistant to the general manager and deputy general manager of Shenzhen Rainbow Department Store Co., Ltd. and deputy general manager of Shenzhen Nanguang (Group) Co., Ltd. and manager of the Strategic and Management Department of CATIC Shenzhen Corporation. Mr. Chen Hongliang, 39, first class senior economist, graduated from MBA of Tongji University, he is now deputy general manager of CATIC Shenzhen Corporation. He used to be the secretary, deputy directory secreaty and directory secretary of the manager department of CATIC Shenzhen Corporation; the secretary and authorized representative of China National Aero-Technology Import & Export Corporation; deputy manager and manager of the human resource department of CATIC Shenzhen Corporation; manager and assistant to the general manager of human resource of China National Aero-Technology Import & Export Corporation. Mr. Hua Xiaoning, 44, Chinese certified public accountant, holding master’s degree of Hangzhou Dianzi University. He is now an independent director of the Company, president of Shenzhen Youlian Shijun Business Administration Consulting Co., Ltd.; he used to be independent director of Hangzhou Steam Turbine Co., Ltd. and Shenzhen Tianma Microelectronics Co., Ltd. He used to be an officer at Ernst & Young and Arthur Anderson. Mr. Guo Wanda, 42, research fellow, Dr. of economics of Nankai University. He is now an independent director of the Company and vice president of China Development Institute (Shenzhen, China). He used to be research fellow of Eonomics Research Institute of Nankai University, director of the Macro Economy Office of the Eonomy Prediction Department of Shenzhen Information Center, investment manager, secretary of the board of directors and assistant general manager of Shenzhen Guangshun Co., Ltd., and the chairman of the board and general manager of Guangshun Investment Hubei Shashi Company. Madam Ji Qinzhi, 65, senior engineer, bachelor of timepieces of Tianjin University. She is now independent director of the Company, vice president of the 6th Council of China Timepieces Association, Chairman of All-China Timepieces Standardization Technology Committee and Vice President of China Timepieces History Society. She used to be a technician of the Timepieces Science Research Institute of the Ministry of Light Industry, a technician, vice chief and chief of the Timepieces Division of the First Light Industry Bureau of the Ministry of Light Industry, the president of the 4th Council of China Timepieces Association, the president and secretary general of the 5th Council of China Timepieces Association, representative of the 8th People’s Congress of Beijing. (2) Supervisors Mr. Huang Gaojian, 50, senior political work engineer, holding bachelor’s degree of Huazhong Normal University. He now is Chairman of the Supervisory Committee of the Company, vice president and chairman of the trade union of CATIC Shenzhen Corporation. He used to be a teacher of Yanglin Middle School, Songzi, Hubei, vice president of the Higher Education Research Institute of Huazhong Normal University, director of the Party and Mass Work Department of CATIC Shenzhen Corporation and the editor in chief of CATIC Shenzhen, the Secretary of the CPC Committee and deputy general manager of Jiangxi Jiangnan Trust & Investment Co., Ltd. and assistant to the president of CATIC Shenzhen Corporation. Mr. Zhang Songhua, 54, senior engineer, undergraduate degree. Mr. Zhang is now a supervisory of the Company and deputy general manager of Shenzhen FIYTA Sophisticated Manufacture Co., Ltd. Mr. Zhang used to be technician of Inspection Section, director, deputy chief and chief of Technology Office of Hongtu Aircraft Factory of China Aviation Industry Corporation , department manager of Shenzhen Flydart Watch Industry Co., Ltd. and manager of Operation Dept. of 12 Shenzhen Fei’ou Precision Timepiece Manufacture Co., Ltd., the general manager of Shenzhen Feitu New Technology Development Co. Mr. Tang Boxue, 45, holding bachelor’s degree and accountant. He is a supervisor and the person in charge of internal auditing of the Company. He used to be the project manager of the financial department and general manager of Shenzhen Pengmen Restaurant Co., Ltd. (3) Senior Executives Mr. Xu Dongsheng is now the general manager of the Company. Refer to the curriculum vitae of directors. Mr. Lu Bingqiang, 46, senior economist, graduated from Guangzhou Jinan University. Mr. Lu is deputy general manager of the Company. He used to be the president secretary of CATIC Shenzhen Corporation, assistant to the general manager of the Company, director of the Company, and general manager and chairman of the board of Shenzhen Harmony World Watches Center. Mr. Li Dehua, 47, senior accountant, graduated from Beijing University of Aeronautics & Astronautics. He is deputy general manager & chief accountant of the Company. He used to be cost accountant of Shenyang Liming Engine Manufacture Co., Ltd., financial supervisor of Shenzhen Baohang Aluminum Co., Ltd., accounting supervisor of Catic Shenzhen Corporation, manager of the financial department and chief financial officer of the Company. Mr. Li Bei, 52, senior engineer at research fellow level, graduated from Shenyang Liming Polytechnical College. He is deputy general manager of the Company. He used to be department manager of Shenzhen Feida Watch Co., Ltd. and Shenzhen Feibiao Watch Appearance Pieces Co., Ltd. Madam Fang Juan, 48, administrator, graduated from the English Department of Jiangxi Normal University. He is studying for EMBA at China Europe International Business School. She now is deputy general manager of the Company and general manager of Harmony World Watches Center. She used to be a translator of Jiangxi Ceramics Co., director of the scientific information office of Jingdezhen City, Jiangxi Province, manager of the human resource department and assistant to the general manager of the Company. Mr. Hao Huiwen, 39, senior economist, master’s degree of economics of Beijing Institute of Economics. He is studying for EMBA at China Europe International Business School. He is a deputy general manager, the secretary of the Board and the manager of the human resource department of the Company. He used to be a teacher of market science department of Shanxi University of Finance and Economy, assistant manager of Personnel Dept. and secretary of the general manager of Shenzhen Hongchang Industrial Co., Ltd., director of Human Resource Dept. of CATIC Shenzhen Corporation, and manager and assistant of the general manager of the administrative management department of the Company. 4. Annual Emolument to Directors, Supervisors and Senior Executives (1) The annual remuneration to senior executives of the Company was distributed by the Board of Directors according to the posts and the work performances; allowance to the independent directors was reviewed and approved by the Shareholders’ General Meeting. Total remuneration received from the Name Post Company in the report period (RMB’000) Xu Dongsheng Director and General 120.00 Manager 13 Hua Xiaoning Independent director 6.00 Guo Wanda Independent director 6.00 Ji Qinzhi Independent director 6.00 Zhang Songhua Supervisor 31.75 Tang Boxue Supervisor 20.86 Lu Bingqiang Deputy General Manager 65.66 Deputy General Manager, Li Dehua 78.23 Chief Accountant Li Bei Deputy General Manager 76.66 Fang Juan Deputy General Manager 89.02 Deputy General Manager Hao Huiwen and Secretary of the 68.05 Board Total － 568.23 (2) In the report period, the total annual compensation to the above listed directors, supervisors and senior executives is RMB 5.6823 million. (3) The allowance provided to the 3 independent directors in current office is RMB 60,000 per person per year. There is no other remuneration to them. (4) Mr. Wu Guangquan, Chairman of the Board, Mr. Sui Yong and Mr. Chen Hongliang, two directors and Mr. Huang Gaojian, Chairman of the Supervisory Committee all received their pays from the Company’s shareholder; Mr. Lai Weixuan, vice Chairman of the Board, received his pay from Shenzhen Rainbow Co., Ltd., Mr. Wang Baoying, a director, received his pay from CATIC Shenzhen Resource Co., Ltd. instead of the Company and received neither remuneration nor allowance from the Company. 5. Personnel change of directors, supervisors and senior executives in the report period At 2007 2nd Extraordinary Shareholders’ Meeting, Mr. Chen Hongliang was elected director of the Company on November 16, 2007. In the report year, there was no change in the personnel of other directors, supervisors and senior executives. II. Employees: Ended the report period, there were altogether 1934 employees in the Company. The composition of their disciplines and education background are indicated in the following figures. There are no retired employees whose pension has to be paid by the Company. 14 员工构成示意图 83% 2% 行政人员 5% 财务人员 销售人员 7% 技术人员 3% 生产人员 员工构成示意图 Schematic Diagram of Composition of Employees 行政人员 Administrative personnel 财务成员 Financial personnel 销售人员 Sales personnel 技术人员 Engineers and technicians 生产人员 Production workers 学历构成示意图 1% 9% 硕士及以上 36% 54% 本科 大专 中专及高中 Schematic Diagram of Composition of Education Background 硕士及以上 Master’s degree or higher 本科 University undergraduate 大专 College graduate 中专及高中 Secondary technical school and senior middle school 15 Chapter 5 Corporate Governance Structure I. About the Corporate Governance in the Report Period The Company has been continuously improving the corporate governance structure, tried every means to reinforce construction of enterprise system and improved the corporate governance level according to the Company Law, the Securities Law and the rules and regulations concerning corporate governance promulgated by China Securities Regulatory Commission, continuously improved the corporate governance structure, tried every means to reinforce construction of modern enterprise system and promoted the corporate governance level. In the report period, the Company carried out the campaign for corporate governance according to the Notice on Issues concerning Campaign to Strengthen Corporate Governance of Listed Companies promulgated by China Securities Regulatory Commission. On April 30, 2007, the Company formally started the campaign for corporate governance, established the working team for reinforcing the campaign of corporate governance with Chairman Wu Guangquan as the team leader and worked out the work plan and the work objective. Meanwhile, the Company established the special column “corporate governance” in the column of “relations with investors” in the Company’s external website www.fiyta.com.cn, published relevant document on corporate governance, stated the phone number, fax and e-mail for communication, collected the opinions and suggestion from the investor and the public on the corporate governance. Afterwards, the Company carried out strict self-inspection work concerning corporate governance, established correspondingly detailed self-inspection work manuscript and truly recorded the existing problems. On September 18, 2007, Shenzhen Securities Regulatory Bureau conducted site-inspection over the corporate governance and the campaign of the Company and issued the Official Opinion on the Supervision of the Corporate Governance of SHENZHEN FIYTA HOLDINGS LTD. (SHEN ZHENG JU GONG SI ZI [2007] No. 77) on October 18, 2007. In the Company’s self-inspection and the site-inspection conducted by Shenzhen Securities Regulatory Bureau, the following issues were found: (1) Revision and improvement necessary for partial corporate governance; (2) The number of directors was 1 person less than the 9 as specified in the Articles of Association and various specialized committees of the Board of Directors had not been established; (3) As there existed incompliance issues, such as that the Company provided regularly undisclosed information to principal shareholders; independence needed to be further improved; (4) There existed the following issues in respect of operation of the THREE MEETINGS in a regulatory way: in election for directors, the accumulative voting system should be adopted and in 2006 independent directors failed to submit annual work report; (5) The Company had not started implementation of equity incentive program for the management and the long term incentive mechanism needed to be established and improved;(6) The management work of relationship with investors needed to be further enhanced. The Company implemented the responsibility of adjustment and improvement and conducted adjustment and improvement practically according to the self-inspection, the adjustment and improvement opinion proposed by Shenzhen Securities Regulatory Bureau and the opinions and suggestion proposed by the investors and the public. The 5th meeting of the Fifth Board of Directors held on July 31, 2007 reviewed and approved the Self-inspection Report on the Campaign to Enhance Corporate Governance and Correction Plan. On October 29, 2007, the 9th meeting of the Fifth Board of Directors reviewed and approved the Correction Report on the Campaign of Corporate Governance which is summarized as follows: (1) Revised and Improved Partial Governance System In the self-inspection stage, the Company prepared the Regulations for Independent Directors, the Regulations on Related Transactions, the Regulations on Management of Application of IPO Proceeds, the Regulations on Management of the Company’s Shares Held by Directors, Supervisors and Senior Executives and the Change, revised and improved the Regulations on Management of Information Disclosure. These regulations were reviewed and approved by the 5th 16 Meeting of the Fifth Board of Directors on July 31; after Shenzhen Securities Regulatory Commission issued the supervision opinion, the Company once again revised and improved the Regulations on Management of Information Disclosure, the Working Rules for the General Manager, which were reviewed and approved at the 9th Meeting of the Fifth Board of Directors. (2) Election of Additional Driector and Establishment of Special Committees of the Board of Directors The 9th meeting of the Fifth Board of Directors recommended Mr. Chen Hongliang as new director candidate who was reviewed and approved by 2007 2nd Extraordinary Shareholders’ Meeting dated November 16, 2007. So far, there were 9 directors in the Company which complies with the Articles of Association. Based on the Company’s development conditions, the Company established three special committees, namely the committees of strategy, audit and nomination, prepared the Rules for Implementation of Special Committees of the Board of Directors, which were reviewed and approved at the 9th Meeting of the Fifth Board of Directors and the 9th Meeting of the Fifth Supervisory Committee respectively held on October 29. (3) Regulation of the Non-compliance Practice in Corporate Governance such as Issuing Non-disclosed Information to Principal Shareholders and Enhancement of the Independence of the Company The Company, as a controlled subsidiary of CATIC Shenzhen Corporation listed with Hong Kong Exchange (0161HK), needs to regularly submit the relevant information, such as the annual plan budget, statements, etc. so as to satisfy the requirements of disclosure on CATIC Shenzhen Corporation. Meanwhile, acception of the internal audit from the parent company or special inspection of operation financial management is the requirement of the supervisory authority on the listed company which plays a role of promoting standardized management of the Company. As CATIC Shenzhen Corporation is a stated owned holding company, in accepting inspection or audit from the enterprise at higher level or the relevant governmental authority, such inspection or audit may extend to the principal enterprises. The Company submitted the relevant information and the list of the insiders to Shenzhen Securities Regulatory Bureau and the Stock Exchange before October 31, submitted a letter of undertaking to the authority for producing the corporate governance incompliance information and the name list of insiders strictly according to the Administrative Measures for the Disclosure of Information of Listed Companies and the Circular of Shenzhen Securities Regulatory Bureau on Enhancing Supervision over Listed Companies’s Practice of Providing Undisclosed Information to their Principal Shareholders and Eventual Controllers (SHEN ZHENG JU GONG SI ZI [2007] No. 11) and the Additional Circular of Shenzhen Securities Regulatory Bureau on Enhancing Supervision over Listed Companies’s Incompliance Practice of Providing Undisclosed Information to their Principal Shareholders and Eventual Controllers, etc. (SHEN ZHENG JU GONG SI ZI [2007] No. 39), and got commitment on enhancing the controlover the undisclosed information from the principal shareholders and eventual controllers. In addition, the Company submitted the Form of Report for Record on Listed Companies to Provide Information to Principal Shareholders and Eventual Controllers to the regulatory authority. The information submitted is summarized as follows: according to the Circular of the State-Owned Assets Supervision and Administration Commission on Some Issues concerning Supervision over Enterprises to Prepare Monthly Enterprises’ Financial Report, the Company’s financial department submitted monthly financial report of the previous month to CATIC Shenzhen Corporation, the principal shareholder, where notes to the financial information is added to the financial report every quarter. All the information covered in the report is disclosed in the quarterly regular report of the Company. (4) Regulating the Operation of the Three Meetings As to the issue that the accumulative voting system had not been adopted in summarization of the voting practice as specified in the Proposal on Election for the New Board of Directors at 2005 Annual Shareholders’ General Meeting as pointed in the Opinions on Correction, in the afterwards daily work, the Company shall strictly implement the accumulative voting system so as to fully 17 ensure the minority shareholders’ equity. As to the issue that independent directors failed to submit work report in 2006, the Company shall make correction in the 2007 annual report and the independent director shall make 2007 Annual Work Report at the 13th meeting of the Fifth Board of Directors. (5) Gradual Estalishment and Improvementof Long Term Incentive Mechanism The Company shall make use of the successful experience of other listed companies, with consideration of the Company’s practice, positively explore and gradually establish a long term incentive mechanism. (6) Further Enhancing the Management of the Relationship with Investors The Company has worked out the Regulations on Management of the Relationship with Investors. The Company has good communications with institutional investors of funds, etc. In the future, the Company shall further enhance the communications with investors by means of call, network, irregular interview with investors, performance presentation meeting, etc. according to the Company’s operation conditions, try every means to create a better platform for communication with the investors. In the report period, through the specialized inspection of the corporate governance, the whole directors, supervisors, senior executives and relevant personnel reviewed all the links of the corporate governance according to the relevant law, added and improved the concerned rules and regulations of the Company, promoted the Company to conduct its operation in a regulatory way and improved the Company’s governance level. The Company complies with such regulations as the Rules for Administration of Listed Companies promulgated by China Securities Regulatory Commission in its practical administration. II. Incompliance Practice in the Corporate Governance in the Report Period According to the Circular of Shenzhen Securities Regulatory Bureau on Enhancing Supervision over Listed Companies’s Practice of Providing Undisclosed Information to their Principal Shareholders and Eventual Controllers and the Additional Circular of Shenzhen Securities Regulatory Bureau on Enhancing Supervision over Listed Companies’s Incompliance Practice of Providing Undisclosed Information to their Principal Shareholders and Eventual Controllers, etc., in the report period, the Company had the incompliance administrative practice of providing undisclosed information, regular provision of the annual budget, financial statements, etc. to its principal shareholders, eventual controller. (For the detail and the measures of correction, refer to the above (3). In the report period, the Company had not been involved in such practice as accepting internal audit or specialized inspection of the operation and financial management from the parent company, accepting engagement and disengagement of the Company’s senior executives and middle level executives or audit over the detailed projects of the Company and its subsidiaries, review and approval of the Company’s asset acquisition or external investment projects, or such incompliance practice in administration as practicing ownership representative reporting system, etc. from the principal shareholder or eventual controller. III. Performances of Independent Directors In the report period, Mr. Hua Xiaoning, Mr. Guo Wanda and Madam Ji Qinzhi, the Company’s three independent directors, fully exercised the power as endowed with in the Articles of Association, played their strong points into full play, made independent, objective and fair judgment on exchange of senior executives and related transactions strictly according to relavent regulations, pushed ahead scientificity in decision making and decision making procedures of the Board of Directors and protected practically the interests of the Company and shareholders. 1. Independent Directors’ Attendance in Board Meetings Board Number of Number of Number Names Remarks meetings personal entrusted of 18 necessary to attendances attendances absences be attended Hua 10 10 0 0 Xiaoning Guo 10 10 0 0 Wanda Failed to attend the extraordinary meeting of the Fifth Board of Ji Qinzhi 9 9 0 1 Directors on September 7, 2007 due to business trip 2. Objection of independent directors on some relevant issues In the report period, the independent directors made no objection on various proposals of the Board of Directors and other relevant issues of the Company. IV. Separation between the Company and its Controlling Shareholder in terms of Business, Personnel, Assets, Organization and Finance. The Company is independent in business, personnel, assets, organization and finance from its controlling shareholder. The Company has complete and independent business and the ability of autonomous operation. Business. The Company is mainly engaged in timepiece businesses and has independent production, auxiliary production system and complementary facilities, and possesses its own procurement and sales systems. There exists no competition in the same sector between the Company and its controlling shareholder. Personnel: The Company is completely independent organizations and sound systems in labor, personnel and salaries management. Except Mr. Wu Guangquan, Chairman of the Board, Mr. Lai Weixuan, vice Chairman of the Board, Mr. Sui Yong, Mr. Wang Baoying, Mr. Xu Dongsheng and Mr. Chen Hongliang, the four directors, and Mr. Huang Gaojian, Chairman of the Supervisory Committee, who take offices in the controlling shareholder concurrently, no other senior executives hold any other offices in shareholders or financial staff take concurrent job in the related companies. Assets: The assets of the Company and its controlling shareholder are highly distinct. The Company enjoys the corporate ownership over its assets and the assets are completely independent from its controlling shareholder. In addition, the Company enjoys sole ownership of the Trademark FIYTA. Organization: The Company has established its own intra-company organizations independent from the controlling shareholder. The Board, the Supervisory Committee and the other internal departments and offices work independently. There exist neither subordinate relations between the controlling shareholder/its functional departments nor doing joint office work. The controlling shareholder exercises its rights and assumes its corresponding obligations, and has never performed any direct or indirect interference with the Company’s operation activities. Finance: The Company has established independent financial department, accounting system and financial management system and independently opened bank accounts. The controlling shareholder has never interfered the Company in its financial and accounting activities. V. Self-assessment of the Company’s Internal Control The Company has been unceasingly improving its corporate governance structure, regulating the corporate governance activities, revised the Regulations on Management of Information Disclosure, the Regulations on Management of Related Transactions, etc. according to the 19 Company Law, the Securities Law, the Code of Corporate Governance for Listed Companies, Guidelines for the Internal Control of Listed Companies, etc., ensured effective implementation of the internal control management of the Company, made self-assessment of various aspects of the Company’s internal control and issued the Report on Self-assessment of the Internal Control. (For the detail, refer to the Report of Self-assessment on Internal Control issued by the Company). VI. Assessment and Incentive Mechanism for Senior Executives In 2007, the Company had a cooperation project with e-Gate Consulting Shanghai Co., Ltd., introduced Balance Scorecard Strategic Management Structure, started to establish strategy based performance management system, decompose the Company’s strategy to every department and post through the balance scorecard, determine senior executives’ performance indicators and action plan on this basis, conduct regular strategic review, work report and assessment, and decide their total remuneration and renewal of engagement according to the assessment results and fulfillment of performances. The Company shall further improve the incentive mechanism, further explore the way of effective combination of the shareholders’ interests, the Company’s interests and operator’s personal interests thorugh establishment of the long efficient incentive mechanism, such as equity incentive program. 20 Chapter 6 Shareholders’ General Meeting I. Annual Shareholders’ General Meeting 2006 Annual Shareholders’ General Meeting was held on May 31, 2007 at the 20th floor meeting room of FIYTA Technology Building. There were 4 shareholders and shareholders’ representatives present at the meeting, representing 137,158,521 shares, taking 55.01% of the Company’s total capital stock. The shareholders present at the meeting examined and adopted the following proposals through voting: (1) 2006 Work Report of the Board of Directors; (2) 2006 Work Report of the Supervisory Committee; (3) 2006 Final Settlement Report; (4) 2006 Annual Profit Distribution Proposal; (5) 2006 Annual Report; (6) Proposal on Cancellation after Verification of Partial Long Term Investment, Accounts Receivable and Inventories; (7) Proposal on Payment of the Auditing Fee for the Year 2006 and Renewing the Engagement of the Auditing Agency for the Year 2007; (8) Proposal on Implementation of the Regular Related Transactions in the Year 2006 and the Prediction of Regular Related Transactions in 2007; (9) Proposal on Adjustment of Allowances to Independent Directors; (10) Proposal on Application for the Total Credit Line from Banks in 2007. The resolutions of the Sharehodlers’ General Meeting were published on Securities Times and Hong Kong Commercial Daily respectively dated April 26, 2007. II. 2007 1st Extraordinary Shareholders’ Meeting 2007 1st Extraordinary Shareholders’ Meeting was held on November 7, 2007 at the 20th floor meeting room of FIYTA Technology Building. There were 4 shareholders and shareholders’ representatives present at the meeting, representing 130,304,257 shares, taking 52.26% of the Company’s total capital stock. The shareholders present at the meeting reviewed and approved the Proposal on Acquisition of Xi’an Prince International Hotel Building. The resolution of the Sharehodlers’ General Meeting was published on Securities Times and Hong Kong Commercial Daily respectively dated November 8, 2007. III. 2007 2nd Extraordinary Shareholders’ Meeting 2007 2nd Extraordinary Shareholders’ Meeting was held on November 16, 2007 at the 20th floor meeting room of FIYTA Technology Building. There were 20 shareholders and shareholders’ representatives present at the meeting, representing 111,714,754 shares, taking 44.81% of the Company’s total capital stock. Through voting by the shareholders present at the meeting, the Proposal on Additional Election of Mr. Chen Hongliang as Independent Director was approved. The resolution of the Sharehodlers’ General Meeting was published on Securities Times and Hong Kong Commercial Daily respectively dated November 17, 2007. 21 Chapter 7 Report of the Board of Directors I. Operation Review (I) General In 2007, the Company continued implementation of various work under the guidance of the brand strategy, according to directing policy of “strengthening the development conviction, sparing no effort on constructing brand, improving qualification of human resource and deepening the innovation management” and brought about pleasant attacks one after another to the Chinese watch market: FIYTA watch has been continuously improving the brand value, enhanced technology R & D and new product development through coordinative efficiency enhancement; launched a number of highly competitive new products, including “GOLDEN MARRIAGE”, TOURBILLON watches with the unit price and gross interest rate being improved steadily and started exploration of the channels of brand franchised shops. In the report period, FIYTA watches tried to enter the overseas market and have enterted the market of four countries, including Canada. Harmony World Watch Centre continue to develop famous brand watch chain shops in a quick and healthy way. At the end of the eyar, there were 98 chain shops (including 71 Harmony shops and 27 Henglianda shops). continuously optimized and improved the network quality, deepened the “3-level marketing”, upgraded the customers’ experience, enhanced the international cooperation and realized big growth of sales and profit. The property continued to keep high lease rate and actual collection rate and the rental income grew steadily. The Company realized quick growth in the three principal business lines. In the report period, the Company’s profit growth rate exceeded 100%. 1. FIYTA Watches In the report period, the Company attached importance on technology and new product R & D, continuously launched high-end watches and differentialized product series. In 2007, the Company launched “Golden Marriage” Pair Watches with lucky colorful patterns. In early September, the Company launched products of new material “space reinforced titanium”. On December 21, 2007, 6 FIYTA tourbillon wristwatch with novel structure and unique conformation was solemnly launched to the market and aroused big interest of consumers. By the end of the year, 6 Navigtion tourbillon watches at unit price of RMB 99,800 were sold and 1 HOUYI’s MAGIC BOW tourbillon wristwatch at unit price of RMB 89,800 was sold, which powerfully upgraded the brand identity; added with the Company’s existing high-grade products, such as Space Watch Series and HAPPINESS PRAYING Watch (“Gold Buddha Watch”) full of oriental culture have been in great demand in the market, these products have been playing a role of powerful driving force for upgrading the products. In the whole year the Company launched 30 newly developed products in the market with new product contribution rate exceeding 17%, the sound and fair sales rate exceeded 82% and made contribution to the steady growth in income from the Company’s watch business. In the report period, the Company held the Third “FIYTA Cup watch Design Competition”, received 600 pieces of works for the competition from over 70 colleges from UK, Germany, the United States, Japan, Mainland China, Hong Kong, and was listed in the projects of Shenzhen Cultural Fair projects. The Company developed the eyesight and enhanced the international cooperation by means of the design competition platform. Meanwhile, the Company positively participated in the national standardization organization and international Standardization organization concerning preparation and revision of the watch standards. Ended December 2007, the Company participated in preparation and revision of 10 industrial standards, 1 national standard. At present, the Company is participating in preparation and revision of 4 international standards, 4 national standards and 4 industrial standards; the Company has laid a solid foundation of the brand through improvement of the supply chain management, reinforced the quality management, and continued to reinforce the implementation of Six Sigma project. The Company has accumulatively applied for 119 patents, including 3 invention patents, 9 utility model patents and 107 design patents. The Company has been unceasingly developing and optimizing the sales network for FIYTA 22 watches, started exploration on trial basis for brand franchised shops and the international market. In the report period, the Company opened 5 new identity franchised shops in Shenzhen, Chongqing, Datong, etc., gradually developed overseas market, entered the markets of Malaysia, Canada, Singapore, Spain, etc. FIYTA has a good start in advancing towards the internationalizaed brand. In the report period, the Company shall continue to reinforce the marketing promotion, carried out a number of theme based activities in brand positioning, attaching importance to the substantial result. FIYTA, as the unique sponsor of timing equipment for the 6th Asia Winter Games, carefully designed Model G748 theme based sports watches and conducted theme activity of ICE & SNOW Asia Games, Passion based Speed per Hour. On December 21, 2007, the Company held a grand press conference with “Sophisticated Technology and Perfect Quality” in Beijing, and formally announced 6 TOURBILLON wristwatches with noval design and unique structure. TOURBILLON wristwatches aroused big interest of consumers once launched to the market and received a good promotion effect. The Company reinforced the management of the sales terminal by practicing of the 5 step approach of sales management, enhancing assessment of sales personnel and holding quarterly meetings, etc. In the report period, FIYTA Watch realized a turnover of RMB 152.2532 million, a 19.10% growth over the same period of the previous year. 2. Retail of Famous Brand Watches In the report period, Harmony World Watch Centre, based on the strategic objective of stabilizing operation and quickening the steps of development, devoted great efforts in developing customers, network development, professionaloperation teamwork construction, brand upgrading, etc. by means of the Balance Scorecard Strategic Management Structure, significantly enhanced the operation capacity, continuously intensified the positive brand influence and realized high speed growth in sales and increase of profit by a big margin. Quick and Healthy Development of Network In the process of development, Harmony World Watch Centre insisted on connotational development and growth model, quickly and healthily developed the sales network while paying attention to the quality. The Company had clear development orientation by basing itself on the central and key cities and radiating towards other cities in a progressive way; enhanced the development power and optimized the process of network developmentp achieved long term win-win in selection of good business partners. In the report period, Harmony World Watch Centre newly opened 21 shops. As a result, there were totally 71 chain shops throughout the country (within HENGLIANDA exclusive). These new shops are: Rolex franchised shops of Changsha Bailian Orient Commercial Mansion, Yinchuan Xinhua Shop, Shenzhen Yijing Center Town Integrated Shop, Yijing Center Town Omega Franchised Shop, Yijing Center Town Franchised Shop, Chongqing Century Xindu Shop, Kunming Golden Eagle Shop, Beijing Jinrong Street Franchised Shop, Beijing Jinrong Street Girard-Perrgaux Franchised Shop, Wuhan Qunguang Franchised Shop, Shenzhen Bao’an Haiya Shop, Nanchang Baisheng Shop, Nanchang Baisheng Kadiya Franchised Shop, Shanghai Yongan Rolex Franchised Shop, Changshu Taigu Shop, Changsha Pinghetang Dongtang Shop, Urumqi Jinhua Omega Franchised Shop, Shanghai Henglong Plaza Girard-Perrgaux Franchised Shop, Fuzhou Dayang Second Shop, Shenzhen Baoli Rainbow Shop and Shenzhen Coast City Shop;closed 5 shops, namely, Qingdao Liqun Shop, Changsha Tongcheng Shop, Shenzhen Fumin Rainbow Shop, Zibo Liqun Shop, Nanjing Suning Global Shop; in addition, completed partial refurbishment and brand expansion work of the 11 existing chain shops. Enhancing Construction of Brand Cooperation Relations The Company started the front terminal of the marketing value chain, reinforced and deepened the communication and cooperation with internatal watch groups and brands and obtained extensive support from SWATCH, ROLEX, RICHEMONT, SOWIND, Audemars Piguet, Ulysse Nardin, Chopard, RaymondWeil, TITONI, etc. Based on the thorough understanding of famous brand watch culture and common understanding of the brand operation philosophy added with continuous enhancement of the brand value at the terminal, connotational positve transmission of the brand, and Harmony World Watch Centre has powerful core capability in maintenance of brand 23 resource and development of brand relations. Deepening the segmentized three level marketing theory, enhancing terminal operation and enhancing management of the customer relations Harmony has creatively proposed the theory of “three level marketing” in the practice of famous brand marketing, according to the characteristics of the sales of famous watches, has segmentized the sales process into the “three level marketing” concept of surface level, medium level and deep level in order to let customers have richer experience at more levels, summarized the techniques and skills in terminal sales, management, services, etc. so that the marketing may make customers enjoy the goods from the three deepened levels, namely sense organs, process of transaction, spiritual demand so that the goods may get extensive acceptance from customers. In the report period, Harmony further made clear the orientation of “three level marketing” construction so that the spirit of the “three level marketing” theory permeates to various departments of the Company and various links of work from the front line management, would spend around 3 years’ time to enrich and improve the “three level marketing” theory through sustainable and continious exploitation, practice and summary. The Company gradually improved and implemented superficial marketing system; focused on specialized management of CRM; while continuously upgrading the specialized operation and service quality, further improved the work of holding together the relations with the customers, established good, mutual trust based and close relations with customers and the Customer’s repeated purchase rate increased significantly. The secret customer survey result showed that the terminal operation quality improved significantly. Promotion of Harmony Brand The Company has been positively striving and making full use of the brand resource to promote Harmony Brand; fully enhancing contact with customers; enhancing the relation with high terminal and specialized media, has established long term cooperation and upgraded notability of Harmony. In 2007, the Company planned and implemented the theme activity of “HARMONY 10th Anniversary Luxurious Brand Show, enhanced the promotion of Harmony Brand through the activity. Enhancing Financial and Logistic Management and Constructing Professional Team Harmony enhanced construction of IT management platform, conducted financial management in a strict way, sustainedly optimized allocation of purchase and goods and reduced risk of stock. Meanwhile, Harmony improved employees’ growth and development channel, established shop employees’ professional development channel, took sales consultant and sales expert as the cultivation objective, encouraged the frontline sales persons to continuously improve themselves; at the same time continuously enhanced training of employees and improved the employees’ qualification. In the report period, Famous Brand Watches realized sales income amounting to RMB 588.5781 million, an 89.29% growth over the same period of previous year; Harmony realized net profit amounting to RMB 32.0709 million, a 346.19% growth over the previous year. 3. Property Operation In the report period, the Company realized property income amounting to RMB 56.6261 million by means of enhancing management, upgrading average rental level, etc., a year-on-year growth of 23.73% over the previous year, and it is the Company’s steady cash flow source. Both the lease rate and rental collection ratio of FIYTA Building and FIYTA Technology Building are close to 100%. In November 2007, the Company acquired Xi’an Prince International Hotel Building, increased a property more for the Company. It is predicted that the the income from property shall increase correspondingly in 2008. In the report period, the Company continued to insist on the strategic human resource principle of “omnibearing and integration”, enhanced organizational abiity and focused on upgrading of the preparation of human resource according to the characteristic of rapid expansion of the 24 Company’s business; enhanced the work of recruitment from the society and the key colleges and universitities nationwide and expanded the brand influence; and continuously deepened training of employees, tried every means to establish learning type organization and achieve a better result. In 2007, the Company was once again elected “2007 TOP 10 Employees” sponsored and elected by International Human Resource Management Association, PKU Business Review and the employor’s brand identity image was further upgraded. In the report period, the Company continued to insist on segmentized management, carried forward application of the advanced management tool: Balance Scorecard is used as the principal tool of performance assessment and management and has been popularized and applied to all the business units of the Company and has been gradually deepened to each post. By the end of 2007, the Company had applied the Balance Scorecard to the employees’ performance assessment. On the other hand, in 2007, according to the precise 6 SIGMA management plan, the Company for the first time added 5 black belt projects and 12 green belt projects; in respect of watch research and development, manufacture and sales, etc., the Company trained up first team of FIYTA precise 6 SIGMA black belt teachers. Application of these two advanced management tools has become the powerful driving force of the Company’s segmentized management, improvement of efficiency and benefit and realizaton of strategic objective. In the report period, the Company upgraded ERP Kingdee financial system, introduced CRM software 3CX Phone System so that the Company’s customer relation management entered into the systemized management stage. In the report period, the Company compiled its growth course into a case titled “FIYTA: China Space Watch” which was selected the case database of Harvad Business School and also became a window of the Company to the world. (II) Principal Business and Operation The Company was mainly engaged in design, development, manufacture, sales and repairing of clocks and watches and spares and parts, including operation of FIYTA watch products and sales of world top brand watches through chain shops. In addition, the Company has income from properties of FIYTA Building and FIYTA Technology Building. 28. The Company’s income and profit from principal business are classified as follows: In RMB 10,000 Increase/de Increase/d crease of Increase/decre ecrease of Operati revenue ase of business Operation Operation ng from business profit Sectors cost over income costs profit businesses rate over the the rate (%) over the previous year previous previous (%) year (%) year (%) Manufact 15,225.32 5,920.06 61.12% 16.64% 1.61% 10.38% ure Commerc 58,857.81 45,003.97 23.54% 89.29% 85.43% 7.23% e Property Operatio 5,662.61 947.13 83.27% 23.73% 23.72% 0.00% n Incl: Related 225.22 — — — — — transactio n 2. Watch industry and property taking over 10% of the Company’s income and profit from principal business (1) Watch Industry Sales income and product sales costs of FIYTA watches and foreign 25 famous brand watches are stated as follows: Table 1: Stated based on the types of products In RMB 10,000 Increase/d Increase/de ecrease of Increase/decre Operat crease of revenue ase of ing business Operation Operation from business profit Products profit cost over income costs businesse rate over the rate the s over the previous year (%) previous previous (%) year (%) year (%) Sales of FIYTA 15,225.32 6,993.57 54.07% 19.10% 12.85% 4.94% watches Sales of foreign famous 58,857.81 45,003.97 23.54% 89.29% 85.43% 7.23% brand watches Incl: Related transaction Table 2: Stated based on distribution over regions In RMB 10,000 Increase/decrease of revenue Regions Operation income from businesses over the previous year (%) Northeast China 8,047.89 64.21% North China 11,742.53 68.93% Northwest China 17,281.14 130.84% East China 4,931.75 45.99% Southwest China 10,259.42 55.71% South China 21,820.39 49.74% Total 74,083.12 68.84% (2) Property The Company’s revenue and profit from property operation mainly came from lease of FIYTA Building and FIYTA Technology Building. 3. Major Suppliers and Customers In RMB Total procurement from the top Proportion in total 557,304,038.73 82.52% five suppliers procurement Total sales to the top five Proportion in total 24,418,062.54 3.03% customers sales 4. In the report period, no material change took place in the Company’s principal business or its structure, and earning power of the principal business in comparison with the previous year. 4. Changes in the Asset Composition and Gains and Losses in the Report Period 26 Opening Increase/De Ending balance Items balance crease Rate Reason of Change (RMB) (RMB) (%) Monetary 84,043,521.74 60,379,838.78 39.19% funds Sales of the stock investment in Short-term - 2,138,400.00 -100.00% the report year investment Advance to Acquisit Xi’anPrince International 76,850,318.78 7,785,252.34 887.13% Suppliers Hotel Building Opening new Harmony chain Inventories 517,698,982.35 371,583,598.72 39.32% shops Long-term Income from investment in equity 1,891,522.16 1,585,000.00 19.34% associates calculated based on investment the equity method Long-term expenses to 18,485,098.29 18,107,125.21 2.09% be apportioned Short-term 310,000,000.00 140,000,000.00 121.43% Increased bank loan Loan: Accounts Accounts not paid due to 56,312,772.48 39,412,270.00 42.88% payable increase of purchases Shareholders’ 642,124,427.84 571,836,384.02 12.29% Increase in net profit Equity: Amount of the Amount in the increase/dec same period of report period rease rate Reason of Change: Items the previous (RMB) (%) year (RMB) Operating 71,435,914.89 34,929,455.11 104.51% Growth of sales profit Growth of sales and expansion Overheads 82,229,298.81 58,244,296.39 41.18% of network Financial 18,162,268.05 5,684,119.43 219.53% Increase of bank loan expenses Net profit 60,876,912.74 30,509,476.39 99.53% Growth of sales 5. Composition of Cash Flow Amount of the Amount in the same period of the increase/decrease Items report period previous year rate (%) (RMB) (RMB) Net cash flows arising -57,409,010.78 -86042293.92 - from operating activities Net cash flow arising from investment -74,615,563.52 -22,064,841.96 - activities Net cash flow arising from fund-raising 155,688,257.26 120,745,259.48 28.94% activities In 2007, the Company’s cash and cash equivalents In 2007, the net increase of the Company’s cash and cash equivalents amounting to RMB 23.6637 million and net cash flow arising from operation activities amounting to RMB –57.409 million were mainly due to increase of Harmony Chain Shops and big increase of the fund for purchase of inventories. 27 6. Operation and Performances of the Principal Subsidiaries and Joint Stock Companies (1) Shenzhen FIYTA Sophisticated Manufacture Co., Ltd., with registered capital of RMB 10 million, mainly engaged in producing and repairing services of watches and movements, components and parts, and sophisticated timepieces; the Company holds 99.879% of its equity. At the end of 2007, its total assets amounted to RMB 462.9882 million, net assets: RMB 29.5516 million and net profit realized: RMB 13.5973 million. (2) Shenzhen Harmony World Watches Center Co., Ltd., with registered capital of RMB 123.80 million, mainly engaged in purchase and sales of watches and components and accessories as well as repairing services; the Company holds 98.79% of its equity. At the end of 2007, the total assets amounted to RMB 519.5729 million, net assets: RMB 159.8343 million, profit from principal business in 2007: RMB 131.9058 million and net profit: RMB 32.0709 million. (3) Shenzhen World Watches Center Co., Ltd., with registered capital of RMB 2.8 million, mainly engaged in marketing high grade watches, glasses, ornaments, gifts, general merchandise and arts and crafts (excluding jewelry); the Company holds 50% of its equity. At the end of 2007, its total assets amounted to RMB 19.6977 million, net assets: RMB 2.80 million and net profit realized in 2007: RMB 3.1060 million. II. Development Prospect 1. Development Trend of the Industry and the Future Competition Pattern China’s macro economy has been sound sustainedly; the residents’ disposable income grew steadily and consumption structure has been improved year by year and is gradually shifting to high grade consumption field, including housing, cars, gold and jewelry, watches, etc. which has created extensive demand and consumption base for the watch market. Meanwhile, the consumers’ income level is differentiating significantly day after day in terms of consumption tending to the direction of diversification; the number of consumers with higher income is increasing. They are particular about life enjoyment and improvement of living grade and have eager desire for medium and high grade watches. The domestic steady situation has also improved the consumption confidence in high grade consumer goods. With the tide of economic globalization and information globalization, people have more opportunity to access to luxuries. In respect of the industry itself, all luxuries brands including famous watches made in Switzerland are very interested in the Chinese market and the steps of taking and developing the market are significantly quickened. The situation of the future famous brand watch market is: the competition between the big chain groups, regional retailers and brand franchised shops shall become the principals involved in the famous brand watch competition. The existing form of famous brand watch shops shall consist of franchised counters, shops inside shops and famous brand watch franchised shops of supermarkets or high grade SHOPPING MALL. The Company’s sustainable competitiveness mainly lies in contest of comprehensive actual strength not only in terms of operation size and understanding of brand and the culture it represents but also in terms of comprehensive power, including development strategy, specialization and capacity of differentialized operation, readiness of human resource and teamwork construction, operation and maintenance capability of brands, ability of information asset management and quick response capability, etc. Therefore, the future competition and comprehensive power shall be the key element deciding whether an enterprise can develop sustainably and finally succeed. 2. Development Strategy and Operation Plan in 2008 Although watch industry development has huge potential, yet the competition situation is still severe, and the Company is still confronted with a lot of challenge. We see clearly that in internationalized operation and internationalized management, accumulation and conposition of core technology and core professional speciality; upgrading of appreciation of the beauty, taste and details; internationization of principle, philosophy, concept, view and thought; the Company still has a lot of shortage in respect of construction of internationalized operation team. The difference between us and international brand is not just in some aspect, but systematic difference: 28 therefore, we need to enhance awareness of crisis and enhance urgency; judge ourselves with internationalized vision within the whole sector; upgrade qualification, improve criteria, heighten level and perfect capability. in more detail, the Company’s operation plan in 2008 is as follows: (1) continue to upgrade FIYTA Brand identity, take “launching high quality products with high added value, positiong with famous brand, seeking for novelity and variation and improving details” as the guiding policy, continue coordination and efficiency improvement between deepened research, production and marketing, insist on product research and development principle of independence and innovation with concept going ahead, speed up seriation and standardization of FIYTA products; establish systematic and continuous advertisement and public relation and media strategy; speed up upgrading of channel quality, display good products and brand identity of FIYTA to medium and high end customers; establish FIYTA’s market and customer survey system, and provide information reference and decision making support for the detailed work, including brand research and development, promotion, channels, terminal, etc. enhance the training of personnel.** (2) continue to reinforce promotion of HARMONY retail brand, speed up development of retail channels, realize initiative and quick development of competition and plan to develop 15 – 20 new chain shops in key cities; meanwhile, continue to reinforce shop front optimization and upgrading of the existing retail shops and expansion of famous brand watches, maintain and develop brand resources, and realize quality operation; standardize financial and logistic management and ensure healthy development of the Company. (3) Enhance customer relation management of FIYTA Building and FIYTA Technology Building, ensure to prevent quality customers from running off, ensure high lease rate and rental collection rate; upgrade property management level and maintain the identity of the buildings and the Company. (4) Optimize the corporate governance structure, introduce advanced management instruments, enhance human resource management, improve the readiness of human resource, promote joint growth of the Company and employees, continue to establish and improve positive remuneration mechanism and construct high efficiency enterprise team. 3. Fund Demanded for Realization of the Future Development Strategy and Application Plan In 2008, the Company plans to increase short term loan amounting to RMB 490 million, of which RMB 350 million is used for expansion of Harmony World Watch Chain Shop Network, trying to open more than 15 new shops and the number of chain shops shall reach 86 at the end of 2008 (with Henglianda exclusive). Meanwhile, the Company shall make partial refurbishment of 15-20 old shops and expansion of brands, etc. RMB 140 million shall be used for purchasing Xi’an Prince Hotel Building (RMB 60 million had been paid at the end of 2007). 4. Risks in Development of the Operation Objectives and the Measures (1) Market Risk. With upgrading of self-positioning of medium and high grade markets in partial key cities, home-made watches are gradually approaching to edge. The high-end channel is confronted with risk of recession; medium grade watch market is confronted with various compressions and severe competition from imported brands and home-made watches; As to Harmony, as domestic and foreign famous brand watch retailers are interested in China’s famous brand watch market, it shall enthusiastically develop network on the one hand; on the other hand, partial powerful brands have opened their on franchised shops in China and the market competition becomes severer and severer. In the light of such market development trend, strategy adopted by FIYTA Watch for adjustment of the terminal channel: On the one hand, enhance cooperation with Harmony, Henglianda and other domestic famous chain shop network and watch retailers, positively look for channels, try to establish FIYTA franchised shops, enrich and develop medium and high-grade sales channels; on 29 the other hand, stabilize the positions of cooporation partners through improvement of unit output of key supermarkets. meanwhile, enhance brand construction and promotion, continuously upgrade brand identity and get out of the situation of the present low-end market; enhance customer survey and product seriation work, unceasingly upgrade products’ reputation and customers’ satisfaction, improve market share and rapidly develop overseas market by means of brand sale forms. Harmony shall enhance brand cooperation and foreign relations, continue to deepen the 3-level marketing, steadily speed up development network, and establish Harmony’s core position in the market relation with complicated competition. (2) Risk of Rise of Raw Materials. The increasing rise of purchase prices of domestic raw materials shall cause drop of the competitiveness and earning power. To deal with this problem, the Company shall practically analyze customers’ demand, reinforce cooperation with suppliers, balance the relationship between quality, cost and sales volume, choose product accessories with suitable performance-price ratio; push ahead product standardization, centralize purchase, reduce costs; improve the pricing system of new products and implement new pricing method; (3) Financial Risk. Risks from fund occupancy of fund by inventories and price falling resulted from new FIYTA watch products being launched to the market. It takes a certin time to foster a famous brand watch shop; there exists the issue of big investment and slow turnover in sales of famous brand watches in short term. The earning in the short term may not be ideal; the short term income situation may affect investors’ confidence. In order to prevent risks from the newly launched FIYTA watches, the Company shall enhance customer survey and improve the success rate of products through demonstration of quality and functions; enhance product life cycle management and improve product withdrawal mechanism. In opening shops, Harmony shall try every means to improve the feasibility study procedure of the new shop project, make careful inspection of the reputation and actual power of the cooperation partners so as to control the investment risk to the minimum; reinforce reserve and training of professionals, enhance the concept of three-level marketing and shorten the fostering period of new shops; strengthen internal operation and management, speed up circulation of inventories, improve the input and ouput proportion and economic result and improve investors’ confidence. III. Investment (I) In the report period, there were neither proceeds raised through share offering nor previous IPO proceeds deferred to the report period for use (II) Other material investments with the funds not raised through share offering. In the report period, the Company further increased the investment in Harmony Famous Brand Watches Chain Shops. Harmony Famous Brand Watches Center newly added 16 chain shops. At the end of the year, there were 71 chain shops in big and medium cities all over China. In 2007, the additional investment was RMB 118.5599 million, the revenue from retail of famous watches hit RMB 588.5781 million and the net profit hit RMB 32.0709 million. IV. Opinions of the Certified Public Accountants 1. Opinions of the Certified Public Accountants Both Zhongrui Yuehua Certified Public Accountants Co., Ltd. and Gold YueHua CPAs produced a standard unqualified audit report for the Company in the year of 2007 after auditing. 2. Change in accounting policy, accounting estimate possibly to take place to the Company upon implementation of the new enterprise accounting standard and the influence upon the Company’s financial conditions and operation result The Company started to implement the new accounting standards commencing from January 1, 2007. According to the relevant provisions specified in the Circular on Doing a Good Job in Disclosing Financial and Accounting Information in Connection with the New Accounting 30 Standards (ZHENG JIAN FA [2006] No. 136) and the Circular on Issuing the No.7 Questions and Responses of Information Disclosure Standards of Public Companies ------ ompilation and Disclosure of the Comparative Financial Accounting Information during the Transition Period between the New and Old Accounting Standards promulgated by China Securities Regulatory Commission, the Company made change of the following accounting policy and made retroactive adjustment of the financial statements during the comparison period, where: (1) According to Article 9 of the Accounting Standards for Enterprises – Interpretation No. 1 (CAI KUAI (2007) No. 14), in compiling consolidated financial statements according to the Accounting Standards for Enterprises Interpretation No. 1, in case provisional discrapency incurred between the book value of assets and liabilities in consolidated balance sheet and the taxation basis of the tax payment principal arising from offsetting of unrealized internal sales gain and loss, the deferred income tax asset or deferred income tax liability should be recognized in the consolidated balance sheet and at the same time the income tax expense in the consolidated statement of profit is adjusted, but the transaction or matters directly charged to the owner’s equity and the deferred income tax in connection with enterprise consolidation are exclusive. On December 31, 2006, the offsetable provisional discrepancy arising between the book value of assets and liabilities in the balance sheet caused by offsetting of internal sales gain/loss and the taxation base of the tax payment principals involved totaled RMB 16,127,317.73. Therefore, this matter was adjusted by means of retroactive adjustment method according to change of the accounting policy, therefore, the income tax expenses in 2006 was reduced through adjustment by RMB 2,419,069.76; the shareholder’s equity as of January 1, 2007 was adjusted to RMB 2,419,069.76. where: the shareholders’ equity attributable to the parent company increased through adjustment to RMB 2,399,643.99 and the minority shareholders’ equity amounted to RMB 19,425.77. (2) For the financial assets available for sale calculated according to the cost method originally adopted by the Company, according to the new accounting standards, it is necessary to use the fair value to measure the financial assets available for sale. As at March 7, 2007, the proposal on equity separation for the financial assets available for sale – equity in Wanneng Power was approved. Therefore, the Company adjusted this item by means of the retroactive adjustment method based on the change of the accounting policy. As a result, the capital reserve in 2006 increased by RMB 1,751,000.00 through adjustment; the shareholders’ equity attributable to the parent company increased through adjustment by RMB 1,751,000.00 on January 1, 2007. (3) On December 31, 2006, the Company took adjustment of the long term equity investment gain and loss as the provisional time discrepancy of taxes payable; therefore, the income tax expense and deferred inome tax liabilities as of 2006 increased through adjustment to RMB 967,398.56. According to the interpretation of the Ministry of Finance on the accounting standards for enterprises, the provisional time discrepancy of taxes payable should not be considered as the deferred income tax liability. Therefore, the Company adjusted this item by means of the retroactive adjustment method according to the change of the accounting policy and therefore the income tax expense of 2006 decreased to RMB 967,398.56; the equity attributable to the parent shareholders’ shareholders as of January 1, 2007 increased through adjustment by RMB 967,398.56. (4) Through re-check by the Company’s management, of the offsetable provisional discrepancy of taxes payable arising between the book vlue of the assets and liabilities as of December 31, 2006 and the taxation base attributable to the tax payment principal involved, the offsetable provisional discrepancy formed from provision for impairment of inventories amounting to RMB 12,741,399.00 may be reversed in the future year. Therefore, the Company adjusted this item by the retroactive adjustment according to the change of the accounting policy. As a result the income tax expense in 2006 decreased through adjustment to RMB 1,911,209.85. The shareholders’ equity attributable to the parent company increased through adjustment amounted to RMB 1,911,209.85 on January 1, 2007. 31 V. Routine Work of the Board of Directors 1. In the report period, the Company held 10 Board Meetings, whose agenda and proposals all complied with the Company Law and the Articles of Association with the details as follows: (1) The extraordinary meeting of the Fifth Board of Directors held on March 9, 2007 reviewed and approved the application for the comprehensive credit line amounting to RMB 50 million for a term of one year from China Merchants Bank Shenzhen Futian Sub-branch; the application for the comprehensive credit line amounting to RMB 30 million for a term of one year from Guangdong Development Bank Shenzhen Zhenhua Road Sub-branch. The announcement of the resolution of board meeting and the Bank Credit Line was published on the Securities Times and Hong Kong Commercial Daily on March 13, 2007. (2) The 4th meeting of the Fifth Board of Directors was held on April 4, 2007. The meeting reviewed and approved the following proposals: 2006 Work Report of the Board of Directors, 2006 Financial Settlement Report, Proposal of 2006 Profit Distribution and Making up for Loss with Surplus Reserve; 2006 Annual Report and Summary, Proposal on Payment of Auditing Fee for the Year 2006 and Renewing Engagement of the Company’s Auditor for the Year 2007, Proposal on Regular Related Transactions in 2006 and Prediction of Regular Related Transactions in 2007, Proposal on Election for the New Board of Directors, Proposal for Adjustment of Allowance to Independent Directors, Proposal on Implementation of the New Accounting Standards, Proposal on Application for Total Bank Credit Line in 2007, Notice on holding 2006 Shareholders’ General Meeting, 2007 1st Quarterly Report, etc. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on April 26, 2007. (3) The 5th meeting of the Fifth Board of Directors was held on July 31, 2007. The meeting reviewed and approved the following proposals: Report on Self-inspection the Campaign of Corporate Governance and the Adjustment and Improvement Plan, Working Rules for General Manager, Information Disclosure Management System, Reception and Promotion System, Related Transaction System, Work System of Independent Directors. Regulations on Management of Application of IPO Proceeds, Regulations on Manangement of the Shares of the Company Held by Directors, Supervisors and Senior Executives and the Change, Regulations on Administration of Subsidiaries, Regulations on External Guarantee, Regulations on Administration of Material Investments. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on August 2, 2007. (4) The 6th meeting of the Fifth Board of Directors was held on August 16, 2007. The meeting reviewed and approved: 2007 Semi-annual Report and the Summary. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on August 20, 2007. (5) The extraordinary meeting of the Fifth Board of Directors was held on September 7, 2007. The meeting reviewed and approved: Application for the comprehensive credit line amounting to RMB 150 million with a term of one year from Bank of China Co., Ltd. Shenzhen Branch. The announcement of the resolution of board meeting and the Bank Credit Line was published on the Securities Times and Hong Kong Commercial Daily on September 11, 2007. (6) The 7th meeting of the Fifth Board of Directors was held on October 18, 2007. The meeting reviewed and approved the following proposals: Proposal on Acquisition of Xi’an Prince International Hotel Building, Proposal on Holding 2007 1st Extraordinary Shareholders’ Meeting, The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on October 20, 2007. (7) The 8th meeting of the Fifth Board of Directors was held on October 22, 2007. The meeting reviewed and approved: 2007 3rd Quarterly Report. The relevant announcement was published 32 on Securities Times and Hong Kong Commercial Daily on October 24, 2007. (8) The 9th meeting of the Fifth Board of Directors was held on October 29, 2007. The meeting reviewed and approved the following proposals: Proposal on Establishment of Special Committees of the Board of Directors, Rules for Implementation for the Special Committees of the Board of Directors Proposal on Additional Election of Mr. Chen Hongliang a Director of the Company, Information Disclosure Management System, Working Rules for General Manager, The Self-inspection Report on the Campaign to Enhance Corporate Governance and Correction Plan, Proposal on Donating RMB 1.5 million to CATIC Kind Fund, Proposal on Holding 2007 2nd Extraordinary Shareholders’ Meeting. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on October 31, 2007. (9) The 10th meeting of the Fifth Board of Directors was held on October 31, 2007. The meeting reviewed and approved: Proposal on Investment in Subsidiary in Xi’an. The relevant document was not published but was filed with the secretariat of the Board of Directors and Shenzhen Stock Exchange. (10) The extraordinary meeting of the Fifth Board of Directors was held on November 9, 2007. The meeting reviewed and approved: Application for a comprehensive credit line amounting to RMB 40 million with a term of RMB 40 million from Shanghai Pudong Development Bank Shenzhen Branch. The announcement of the resolution of board meeting and the Bank Credit Line was published on the Securities Times and Hong Kong Commercial Daily on November 13, 2007. 2. Implementation of the Resolutions of the Shareholders’ General Meeting In the report year, the Board carried out the work strictly according to the Articles of Association and the resolutions of Shareholders’ General Meeting and seriously implemented all the resolutions of 2007 Shareholders’ General Meeting. All the proposals approved by the shareholders’ general meeting had been completed in implemenation in the report period. 3. Summary Report on Performances of the Audit Committee of the Board of Directors October 29, 2007, the 9th meeting of the Fifth Board of Directors reviewed and approved establishment of the audit committee of the Board of Directors. As the audit committee was established not long in the report period, the audit committee of the Board of Directors did not hold any regular meeting. In process of audit of annual report, the audit committee performed its own performances strictly according to the law and regulations, the Articles of Association and the Rules for Implementation of the Audit Committee of the Board of Directors, and compiled the Summary Report on Performances of the Audit Committee and the Audit Work of Zhongrui Yuehua Certified Public Accountants Co., Ltd. in 2007 with details as follows: (1) Understanding the Basic Information of the Company in the Report Period and Checked and Approved the Financial Statements Prepared by the Company On January 17, 2008, the audit committee held 2008 1st meeting. The meeting heard the overall report of the general manager on the production and operation and progress of significant issues in the report period, reviewed 2007 annual financial and accounting statements compiled by the Company, In the opinion of the audit committee: the concerned data in the financial and accounting statements prepared by the Company had basically reflected the Company’s financial position and operation results ended December 31, 2007, and approved to carry out the auditing work of the year 2007 with the financial statements as the base, and issued the relevant written opinions. (2) Decision on Overall Audit Plan Before the certified public accountants started auditing, the audit committee, after consultation with the certified public accountants, decided the time schedule of the audit work in 2007. (3) Urging the Audit Work On January 14, 2007, the certified public accountants formally started the audit work. During the auditing, the Audit Committee issued three Letters of Urging Audit respectively on January 21, February 21 and March 20, 2008, demanding the certified public accountants to complete the 33 audit work according to the time schedule of audit and ensure timely disclosure of the Company’s annual report and relevant documents. (4) Priliminary Auditor’s Opinion after Reviewing the Financial and Accounting Statements On March 23, 2008, the Certified Public Accountants issued a preliminary auditor’s opinion on the financial and accounting statements. The audit committee held its 2008 2nd Meeting of the Audit Committee on the very day and once again reviewed the audited financial and accounting statements. In the opinion of the audit committee, these financial statements truly, accurately and completely reflected the financial position and operation result of the Company ended December 31, 2007 and approved 2007 Annual Report and Summary prepared on the basis of these statements. Meanwhile, the audit committee demanded the certified public accountants to complete the audit work according to the plan as soon as possible so as to ensure the Company to disclose 2007 Annual Report as scheduled. (5) Summary Work after the Formal Report On April 10, 2008, the certified public accountants issued the formal audit report and other relevant documents. The audit committee submitted the Summary Report on Performances of the Audit Committee and the Audit Work of Certified Public Accountants in 2007. In the opinion of the audit committee, Zhongrui Yuehua Certified Public Accountants Co., Ltd., the auditor engaged by the Company, honestly performed the duties in process of offering audit performances according to the professional principle of independence, objectiveness and fairness and did a good job in auditing 2007 Annual Report. (6) Resolution on Renewal of Engagement of the Certified Public Accountants As Certified Public Accountants offered its service according to the audit standards, strictly implemented the relevant audit rules and quality control regulations, it is quite qualified for the business, conscientiously did its duties and successfully completed various audit work and resolved to renew the engagement of the Zhongrui Yuehua Certified Public Accountants as the Company’s international auditor for the year 2008 to the Board fo Directors. 4. Summary Report on Performances of the Committees of Nomination, Remuneration and Assessment of the Board of Directors October 29, 2007, the 9th meeting of the Fifth Board of Directors reviewed and approved establishment of the committees of nomination, remuneration and assessment of the Board of Directors. As they were established not long in the report period, the committees of nomination, remuneration and assessment did not hold any regular meeting. the committees of nomination, remuneration and assessment of the Board of Directors performed their duties strictly according to the laws and regulations, the Articles of Association, the Rules for Implementation for the Committees of Nomination, Remuneration and Assessment of the Board of Directors. At 2008 1st meeting, the committees reviewed the annual salaries to the directors, supervisors and senior executives in 2007 with the opinion as follows: The decision making procedures for remuneration to the directors, supervisors and senior executives complied with the regulations. The distribution of remuneration to directors, supervisors and senior executives complied with the regulations concerning the remuneration. The information concerning remuneration to directors, supervisors and senior executives disclosed in 2007 Annual Report was authentic and accurate. VI. Technology Innovation in the Report Period The principle of constructing the Company’s core competitiveness with technology innovation and the enterprise culture have become the two major pillars of the brand. For a long time the Company has been continuously developing and consolidating the Company’s leading position in brand and technology of the Chinese timepiece industry and improving the international competitiveness of the brand and the whole industry through technology innovation. Following the successful development of “Shenzhou V Space Watch” and “Shenzhou VI Space Watch”, in 2007, the Company successfully launched “space reinforced titanium”, “Golden Marriage” pair watch and TOURBILLON wrist watches, which represent the highest level of FIYTA in independent R & D and design, watch making technology and process. “Shenzhou VI Space Watch” 34 project was rewarded the special prize of science and technology progress from China National Light Industry Council. The Company successfully developed “FZK-601 Special Clock Control System” which was applied in FIYTA special clock system. In the Company’s “high precision multi-function mechanical watch movement” project, the Company successfully won the bidding in the key and breakthrough project in the key fields of Guangdong Province and was granted Guangdong Provincial Technology R & D Fund amounting to RMB 2 million. FIYTA became of the second demonstration bases with integration of production and academic research and timepiece technology industrialization bases at provincial and ministry level in Guangdong Province. Ended December 2007, the Company participated in preparation or revision of 10 industrial standards, 1 national standard. At present, the Company is involved in preparation or revision of 4 international standards, 4 national standards and 4 industrial standards; the Company accumulatively applied for 119 patents, 3 inventions, 9 utility model patents and 107 designs. VII. Profit Distribution Proposal As audited by Zhongrui Yuehua Certified Public Accountants according to the Chinese Accounting Standards (CAS) and Gold Yue Hua CPAs according to the International Accounting Standards (IAS), the Company’s net profit in the consolidated statement in the year 2007 was RMB 60,76,912.74 and RMB 60.876.912.74 thousand respectively . According to the relevant provisions of the Company Law and the Articles of Association, the Company takes the net profit in 2007 amounting to RMB 60,876,912.74 as audited and confirmed by Zhongrui Yuehua Certified Public Accountants Co., Ltd. as the base, plus the retained earnings at the beginning of the previous year amounting to RMB 29,230,695.40 and after provision of the statutory public reserve amounting to RMB 3,885,567.30, the profit available for distribution to the shareholders is RMB 86,222,040.84. The Board of Directors decided that the Company intended to distribute cash dividend at the rate of RMB 1.00 (with tax inclusive) for every 10 shares to the whole shareholders for the year 2007. Calculated based on the total capital stock of 249,317,999 shares as at December 31, 2007, the Company has to pay cash dividend amounting to RMB 24,931,799.90. The independent directors of the Company all approved the aforesaid proposal prepared by the Board of Directors. The proposal is subject to approval by 2007 Annual Shareholders’ General Meeting. VIII. The Company has chosen Securities Times and Hong Kong Commercial Daily for disclosing the Company’s information. In the report year, the Company made no change. 35 Chapter 8 Report of the Supervisory Committee I. Work Summary 1. In the report period, the Supervisory Committee conducted effective supervision over the performances of directors, managers and other senior executives according to the power as specified in the Company Law and the Articles of Association and exercised the supervisory functions in terms of the Company’s operation according to the law, financial conditions, application of the IPO proceeds, related transactions, etc. through regular or irregular inspection and analysis. 2. In the report year, the Supervisory Committee held six meetings: (1) The 4th meeting of the Fifth Board of Directors was held on April 24, 2007. The meeting reviewed and approved the following proposals: 2006 Work Report of the Supervisory Committee, 2006 Annual Report, 2007 1st Quarterly Report, Proposal on Implementation of the Regular Related Transactions in the Year 2006 and the Prediction of Regular Related Transactions in 2007, Proposal on Cancellation after Verification of Partial Long Term Investment, Accounts Receivable and Inventories. (2) The 5th meeting of the 5th Supervisory Committee was held on July 31, 2007. The meeting adopted the following resolutions: Self-Inspection Report on the Campaign of Corporate Governance and Correction Plan, Work Rules of the General Manager, Information Disclosure Management System, Reception and Promotion System, Related Transaction System, Work System of Independent Directors. Regulations on Management of Application of IPO Proceeds, Regulations on Manangement of the Shares of the Company Held by Directors, Supervisors and Senior Executives and the Change, Regulations on Administration of Subsidiaries, Regulations on External Guarantee, Regulations on Administration of Material Investments. (3) The 6th meeting of the Fifth Supervisory Committee was held on August 16, 2007. The meeting reviewed and approved: 2007 Semi-annual Report and the Summary. (4) The 7th meeting of the Fifth Supervisory Committee was held on October 18, 2007. The meeting reviewed and approved: Proposal on Acquisition of Xi’an Prince International Hotel Building. (5) The 8th meeting of the Fifth Supervisory Committee was held on October 22, 2007. The meeting reviewed and approved: 2007 3rd Quarterly Report. (6) The 9th meeting of the Fifth Supervisory Committee was held on October 29, 2007. The meeting reviewed and approved: The Self-inspection Report on the Campaign to Enhance Corporate Governance and Correction Plan of SHENZHEN FIYTA HOLDINGS LTD. 3. Supervisors of the Supervisory Committee attended all the Board meetings held in 2007 as non-voting delegates, heard the relevant proposals and reports and learned the operation and significant decision-making process of the Company. 4. Supervisors of the Supervisory Committee also attended 2006 Shareholders’ General Meeting, addressed 2006 Work Report of the Supervisory Committee and expressed independent opinions on the Company’s production, operation, financial status and implementation of the duties of members of the Board and senior executives. II. Independent Opinion of the Supervisory Committee In 2007, the Supervisory Committee exercised fully the powers authorized according to the relevant laws and regulations of the state and the Articles of Association, conducted sustainable and effective supervisions over such issues as Company’s operation according to the law and the work of the senior executives. Our independent opinions are summarized as follows： 1. In the report period, the Company established sound internal control system and Company’s decision-making procedures complied with the laws and regulations; Holding of the shareholders’ 36 general meeting and board meetings and decision making procedures were legal and effective; the Board of Directors carried out their work conscientiously and with responsibility, the Company’s decision making was scientific and reasonable, the internal control system was sound and was implemented practically. Directors, managers and other senior executives had done due diligence in their work, seriously implemented the resolutions of the Shareholders’ General Meeting and the Board Meetings, and had never been found involved in any action against the law, regulations and the Articles of Association or harmful to the Company’s interest in implementing their duties. 2. Both Zhongrui Yuehua Certified Public Accountants and Gold Yue Hua CPAs produced a standard and unqualified audit report for the Company, which truly and objectively reflected the Company’s financial position and operation result of the year 2007. 3. In the report period, the Company had no investment project with IPO proceeds. 4. The Company’s acquisition of assets was based on the market price and was carried out according to the principle of openness, fairness and justness, had never been found involved in insider transaction without any harm to the minority shareholders’ equity or caused loss of the Company’s assets. 5. The related transactions incurred in the Company were carried out fairly and based on reasonable price; independent directors all expressed independent opinions; the related directors took the measure of avoiding voting for such transaction without any harm to the minority shareholders’ equity or caused loss of the Company’s assets. 37 Chapter 9 Important Events I. In the report period, the Company has not been involved in any material lawsuit or arbitration. II. Assets acquisition, sales, absorption or consolidation in the report period In the report period, the Company had conducted no such activities as assets sales, absorption or consolidation. Acquisition of assets: 1. Summary of Assets Acquisition In recent years, with continuous expansion of the Company’s operation scale, for the purpose of better consolidation and promotion of the strategic position and long term development of Xi’an Haomen Shop of Harmony World Watches Center Co., Ltd. and upgrading the overall operation capability and brand identity of Harmony, the Company executed the Agreement on Assignment of the Ownership of Xi’an Prince International Hotel Building Project with Xi’an Maike Metal International Group Co., Ltd. (hereinafter referred to as “Maike Metal”) on October 19, 2007. The Company accepted the assignment of Xi’an Prince International Hotel Building located at No. 32 Nandajie Avenue, Beilin District, Xi’an, including the land use right, building property title, supporting facilities, operation power and operative assets at the price of RMB Two Hundred Million (RMB 200,000,000). There existed no business relation with the assignee and assignor and therefore it was not a related transaction. 2. Summary of Assets Acquisition The above acquisition was reviewed and approved at the 7th meeting of the Fifth Board of Directors held on October 18, 2007; and the Assets Acquisition Announcement was published on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn on October 20, 2007. (Announcement No. 2007-028). This acquisition proposal was reviewed and approved by 2007 1st Extraordinary Shareholders’ Meeting held on November 7, 2007. By then, the agreement came into force. According to the agreement, both parties conducted check and transfer of the operation power and operational asset of the hotel, and the supporting equipment and facilities in connection with the building and meanwhile, conducted check-up of the credit and liabilities before the date of handing over at the same time. In the report period, the procedures of property right transfer of Xi’an Prince International Hotel Building had not yet been completed. 3. Influene on the Company Xi’an Prince International Hotel Building involved in the acquisition is the place where Harmony World Watches Center Co., Ltd. Xi’an Haomen Shop (hereinafter referred to as Haomen Shop). Haomen Shop was located on the ground floor of the whole hotel building with floorage of 1137 square meters with original rental term of 15 years from November 1, 1994 to October 31, 2009. Haomen Hotel is now a flagship shop with biggest area, complete brands and best operation results, enjoying an important and strategic position in Xi’an and Northwest China, playing an extremely important role for development of Harmony and Harmony Brand, is helpful for long term development of the Company’s principal business and favorable for enhancing market competitiveness and improving profit earning power. III. Related Transactions Related Parties (1) Shenzhen Rainbow Department Store Co., Ltd. is a controlled subsidiary of the Company’s actual controller. Its legal representative is Wu Guangquan; its registered capital is RMB 88 million; its principal business is: wholesale and retail of commodities. The Company rents the special counter of the supermarket for selling watch products and makes payment settlement by means of credit transfer. (2) Shenzhen CATIC Property Management Co., Ltd. (hereinafter referred to as CATIC Property) is an indirectly controlled subsidiary of the Company’s actual controller; its legal representative is 38 Mr. Chou Shenqian; its registered capital amounts to RMB 20 million; its principal business is property management and services of managing the supplementary facilities. The Company entrusted CATIC Property for property management of FIYTA Building and FIYTA Technology Building based on the market prices and make payment settlement by means of credit transfer. (3) Shenzhen CATIC Real Estate Development Co., Ltd. is a subsidiary under control of the Company’s eventual controller, its legal representative is Wu Guangquan, registered capital is RMB 100 million; it is mainly engaged in development and operation of real estate. The Company provides the premises to CATIC Real Estate for lease based on the market price and makes payment settlement by means of credit transfer. 2. Regular Related Transactions in Terms of Commission Sale and Acceptance of Labor Services (1) In the report period, the Company paid property management fee amounting to RMB 1.688 million, property lease cost amounting to RMB 0.805 million. CATIC Property offered management services for both of the Company’s FIYTA Building and FIYTA Technology Building. The Company has a famous brand watch shop located in the real estate rented by CATIC Property. For the various related transactions, both parties executed the contract based on the principle of fairness and market based pricing, which was favorable for improving professional service and did not cause any harm to the Company’s interests. (2) The Company sells watches through Rainbow Supermarket, and paid sales cost for the special counters in the supermarket amounting to RMB 4.1741 million, taking around 10% of the corresponding expenses in the report period. Rainbow Supermarket has established 28 supermarkets in such big cities as Shenzhen, Xiamen, Nanchang, etc. As Rainbow Supermarket enjoys high market position and good reputation. With rapid expansion in the Pearl River Delta and the Changjiang River Delta in recent years, Rainbow Supermarket has become an excellent channel for the Company to sell watches. Meanwhile, Rainbow Supermarket can provide the Company with specialized counters, it has become an excellent channel for the Company to sell watches, which can promote the Company’s income from watches to rise without doing any harm to the Company’s interests. (3) In the report period, the Company received rental from CATIC Real Estate amounting to RMB 1.3571 million. Both parties executed the contract for the transaction according to the fair market pricing principle which caused no harm to the Company’s interest. 5. Transaction Purpose and the Impact upon the Company (1) CATIC Property offered management services for both of the Company’s FIYTA Building and FIYTA Technology Building which is favorable for improving professional service, improving the management level, ensuring and increasing the Company’s income from property lease. Shenzhen World Watches Center Co., Ltd., one of the Company’s subsidiaries, rented the face shop from CATIC Property which was also favorable for geographic location and good service. Meanwhile, the Company offered property lease service according to the marketing principle to CATIC Real Estate, Makway, CATIC Property and Jiangnan Securities. It is predicted that such related transaction shall continue in 2008. (2) The Company sells watches through the franchised counters in Rainbow Supermarket. Rainbow Supermarket has established several 10 supermarkets in such big cities as Shenzhen, Xiamen, Nanchang, etc. In 2008, it is predicted that more such supermarkets shall be set up throughout the country. The Company’s franchised counters shall follow at the same time and the transaction amount is predicted to increase somewhat. As Rainbow Supermarket enjoys high market position and good reputation and can provide the Company with superior specialized counters, it has become an excellent channel for the Company to sell watches, which can promote the Company’s income from watches to rise without doing any harm to the Company’s interests. (3) After acquisition of Xi’an Prince Hotel Building, the Company has changed its name into 39 Chengheng International Hotel, and entrusted CATIC Hotel Management Co., Ltd. to manage so that the hotel may get professional operation, its service level may be much improved and the better economic result may be achieved. (4) The above related transaction will be favorable for the Company’s principal business and belongs to the Company’s normal business scope. The related transaction is priced based on the market price of the similar service in a fair and reasonable way and will not cause any harm to the Company”s interest. (5) The above transaction does not affect the Company’s independence and the Company’s business will not be caused dependent on or be controlled by the related party due to such transaction. 4. For the detail of other related transactions, refer to notes to the financial statements. The related liabilities between the Company and Rainbow Supermarket, CATIC Property and CATIC real estate, three of the Company’s related parties were the liabilities to and from resulted from normal sales of goods or expenses for property management. 5. Actual Implemenation of Related Transactions For the detail, refer to the Announement of Shenzhen FIYTA Holdings Ltd. on Implementation of Regular Related Transactions in 2007 and the Predicted Regular Related Transactions in 2008. IV. Important Contracts and Implementation 1. In the report year, the Company had never kept as custodian, contracted or leased any other company’s assets and vice versa. 2. In the report period, the Company had never offered any external guarantee. 3．In the report year, the Company had never entrusted any other company for managing assets. 4. Other Important Contracts and Implementation (1) The Company executed the Agreement on Assignment of the Ownership of Xi’an Prince International Hotel Building Project with Xi’an Maike Metal International Group Co., Ltd. (MAIKE) on October 19, 2007. This acquisition proposal was reviewed and approved by 2007 1st Extraordinary Shareholders’ Meeting held on November 7, 2007. By then, the agreement came into force. According to the agreement, both parties conducted check and transfer of the operation power and operational asset of the hotel, and the supporting equipment and facilities in connection with the building and meanwhile, conducted check-up of the credit and liabilities before the date of handing over at the same time. Ended December 31, 2007, the procedures of property right transfer of Xi’an Prince International Hotel Building had not yet been completed. (2) The Company and China Merchants Bank Shenzhen Futian Sub-branch executed an agreement for the comprehensive credit line amounting to RMB 50 million with a term from February 28, 2006 to February 28, 2007.After the normal implementation of the agreement was completed, through mutual consultation, the term of repaying the old loan and borrowing the new was extended as follows: for RMB 20 million, from August 30, 2007 to August 30, 2008; for RMB 30 million: from September 12, 2007 to September 12, 2008. The announcement on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. (3) The Company and Shenzhen Development Bank Shenzhang Jiangsu Building Sub-branch executed an agreement for the comprehensive credit line amounting to RMB 40 million with a term from September 15, 2006 to September 15, 2007.After the normal implementation of the agreement was completed, through mutual consultation, the term of repaying the old loan and borrowing the new was extended from October 8, 2007 to October 8, 2008. The announcement 40 on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. (4) The Company and Shanghai Pudong Development Bank Shenzhen Branch executed an agreement for the comprehensive credit line amounting to RMB 40 million with a term from November 10, 2006 to November 10, 2007.After the normal implementation of the agreement was completed, through mutual consultation, the term of repaying the old loan and borrowing the new was extended from November 12, 2007 to November 12, 2008. The announcement on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. (5) The Company and Bank of China Shenzhen Branch executed an agreement for the comprehensive credit line amounting to RMB 50 million with a term from November 22, 2006 to November 22, 2007.After the normal implementation of the agreement was completed, through mutual consultation, the term of repaying the old loan and borrowing the new was extended as follows: for RMB 20 million, from February 8, 2007 to February 8, 2008; for RMB 20 million: from June 25, 2007 to June 25, 2008; for RMB 10 million: from November 22, 2007 to November 22, 2008. The announcement on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. (6) The Company and Guangdong Development Bank Zhenhua Sub-branch executed an agreement for the comprehensive credit line amounting to RMB 30 million with a term from March 14, 2007 to March 13, 2008.The announcement on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. (7) The Company and Bank of Bank of China Shenzhen Branch executed an agreement for the comprehensive credit line amounting to RMB 100 million with a term from September 10, 2007 to September 10, 2008.The announcement on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. (8) The Company and Shanghai Pudong Development Bank Shenzhen Branch executed an agreement for the comprehensive credit line amounting to RMB 40 million with a term from November 12, 2007 to November 12, 2008.The announcement on the aforesaid information was published respectively on Securities Times, Hong Kong Commercial Daily and http://www.cninfo.com.cn. The aforesaid agreements were all implemented according to regular procedures. Ended the report period, the Company actually used the bank credit line amounting to RMB 310 million. V. Implementation of the Commitments by the Company or the Shareholders Holding over 5% of the Company’s Shares The Company started to implement the equity separation reform plan on November 7, 2007. In the Company’s equity separation reform plan, the commitments made by Shenzhen CATIC Group, the shareholder holding over 5% of the Company’s shares, and the implementation are summarized as follows: (1) Shenzhen CATIC Group committed that upon completion of the equity separation reform of FIYTA, the non-negotiable shares held by Shenzhen CATIC Group would not be listed with Shenzhen Stock Exchange for trading within 36 months after the day when such shares got approved for listing. (2) Within 24 months after the 3-year sales restriction term expires, in case Shenzhen CATIC Group would sell the non-negotiable FIYTA shares it was holding through listing with Shenzhen Stock Exchange, the sales price must not be lower than RMB 25.00 per share. Implementation of the commitment: The commitment is in process of implementation. Commencing from the date when the equity separation reform was finished to the end of the 41 report period, Shenzhen CATIC Group has not reduced or assigned any shares with sales restriction held by Shenzhen CATIC Group. VI. Engagement of Certified Public Accountants and the Pay In the report period, the Company engaged Zhongrui Yuehua Certified Public Accountants Co., Ltd. and Gold Yue Hua CPAs as the domestic and international auditors respectively. Succesiv Remuneration in 2007 Types Description e service (RMB ‘000) years A-shar Zhongrui Yuehua Certified Public 350 1 e Accountants Ltd. B-shar Gold Yue Hua CPAs 250 1 e VII. Securities Investment In RMB Proportion in the total Initial Book value securities Gain and Seria Type of Stock Short form of investmen Quantity at the end at the end loss in the l No. Security Code stock t amount held of the of the report period (RMB) period report period (%) Corporate HUANENG 3,000,000 16,995,000. 1 000543 1,100,000 100.00% 0.00 shares POWER .00 00 Other securities investments held at the end 0.00 - 0.00 0.00% 0.00 of the period Gain and loss from investment in securities - - - - 0.00 already sold in the report period 3,000,000 16,995,000. Total - 100% 0.00 .00 00 Trading of shares in other listed companies In RMB Number of Shares at the Number of shares shares held Return on Stock name beginning of the bought/sold in the Fund applied at end of the Investment report period report period report period Bought Xiaxin Sold 540,000 540,000 0 0 1,565,706.79 Electronics VIII. Investigation Reception and Interviews In the report period, the Company implemented the Guidelines of Listed Companies for Fair Information Disclosure. In receiving surveys and interviews, the Company and its officer in charge of information disclosure strictly observed the principle of fair information disclosure without any discrimination policy and had never been engaged in any activity of revealing, disclosing or letting out in advance any private information to any designated addressees in a secret way. Reception of visitors is summarized as follows: 42 Reception time Receptio Way of Visitors received Matters discussed and n place reception information provided the Site January 9, 2007 Guojin Securities Company research the Site Everbright January 19, 2007 Company research Securities the Site February 8, 2007 CITIC Securities Company research Development trend of E-Fund, Huabao the domestic luxury the Site March 7, 2007 Fund, Dacheng goods sector, some Company research Fund measures concerning the Site the Company’s strategic April 3, 2007 Orient Securities development, brand Company research Commuicati construction, terminal Head management in the past on on the Office of three years. Provision April 3, 2007 equity Dacheng Fund Dacheng of the Company’s reform Fund promotion brochures Commuicati Head on on the April 5, 2007 Office of equity E-Fund E-Fund reform the Site Martin Currie June 16, 2007 Company research Fund Development trend of the Site the domestic luxury June 29, 2007 Guodu Securities Company research goods sector, some No 1 Shanghai measures concerning Securities Co., the Company’s strategic the Site Ltd., Hongjing development, brand July 6,2007 Company research Consulting construction, terminal (Shenzhen) Co., management in the past Ltd. three years. Provision the Site Naito Securities of 2006 Annual Report August 9, 2007 Company research Co., Ltd. and the Company’s the Site Guojin Securities promotion brochures August 30, 2007 Company research Co., Ltd. Zhang Shuo and Inquiry about valuable Zhang Houliang, consideration in the Written two shareholders October 10, 2007 Nil Company’s equity consulting from Huaihua, reform. Hunan Inquiry about valuable Zeng Daoyuan, a Written consideration in the December 4, 2007 Nil shareholder from consulting Company’s equity Zhejiang reform. Development trend of China the domestic luxury International goods sector, some Financial Co., measures concerning Site December 19, 2007 Company Ltd. and Xingye the Company’s strategic Research Fund development, brand Management construction, terminal Co., Ltd. management in the past three years. Provision 43 of 2006 Annual Report and the Company’s promotion brochures IX. Penalties to and the Remedies from the Company, the Board of Directors and Directors In the report year, there existed no such event resulted in inspection, administrative penalties or circulating notice of criticism from China Securities Regulatory Commission or public blame from the Stock Exchange against the Company, the Board of Directors or any directors or independent directors. X. Reform for Equity Separation 1. On November 27, 2006, the Company announced the Memorandum on Reform for Equity Separation of Shenzhen FIYTA Holdings Limited and started the scond equity separation reform. However, due to the procedures for review and approval of the equity separation reform plan, the Company issued the Announcement of Postponing the Equity Record Date and Postponing the Shareholders’ Meeting on the Equipty Separation Reform on December 21, 2006. The work of the equity reform was thus postponed. 2. On March 30, 2007, the Company issued the Announcement on Determination of the Equity Record Date and Holding the Shareholders’ Meeting on the Equipty Separation Reform and restarted the equity reform; the valuable consideration for the equity reform remained unchanged, namely, shareholders of A shares would be entitled to obtain 3.1 shares for every 10 negotiable shares they held from the shareholders of non-negotiable shares. On April 16, 2007, th Company held the shareholders’ meeting to review the equity separation reform proposal. The proposal was not eventually approved by the shareholders with 88.73% of the whole shareholders and 52.31% of the shareholders of negotiable shares in favor of the proposal. The relevant announcement was published on Securities Times and http://www.cninfo.com.cn. 3. On July 14, 2007, the Company announced the Memorandum on Reform for Equity Separation of Shenzhen FIYTA Holdings Limited and started the third equity separation reform. The proposal for valuable consideration for the equity reform remained unchanged, namely, shareholders of A shares would be entitled to obtain 3.1 shares for every 10 negotiable shares they held from the shareholders of non-negotiable shares. On August 21, 2007, th Company held the shareholders’ meeting to review the equity separation reform proposal. The proposal was not eventually approved by the shareholders with 89.24% of the whole shareholders and 53.91% of the shareholders of negotiable shares in favor of the proposal. The relevant announcement was published on Securities Times and http://www.cninfo.com.cn. 4. On September 28, 2007, the Company announced the Memorandum on Reform for Equity Separation of Shenzhen FIYTA Holdings Limited and started the fourth equity separation reform. The proposal for valuable consideration for the equity reform remained unchanged, namely, shareholders of A shares would be entitled to obtain 3.1 shares for every 10 negotiable shares they held from the shareholders of non-negotiable shares. The commitment of the shareholder of non-negotiable shares was added: (1) Shenzhen CATIC Group committed that upon completion of FIYTA equity separation reform, the non-negotiable shares held by Shenzhen CATIC Group would not be listed with the trading system of Shenzhen Stock Exchange for sale within 36 months commencing from the date when such shares got approval for listing; (2) Within 24 months after the 3-year sales restriction term expires, in case Shenzhen CATIC Group would sell the non-negotiable FIYTA shares it was holding through listing with Shenzhen Stock Exchange, the sales price must not be lower than RMB 25.00 per share. On October 26, 2007, th Company held the shareholders’ meeting to review the equity separation reform proposal. The proposal was eventually approved by the shareholders with 99.50% of the whole shareholders and 97.49% of the shareholders of negotiable shares in favor of the proposal. The relevant announcement was published on Securities Times and http://www.cninfo.com.cn. 44 XI. Implementation of the Social Responsibilities of the Company in the Report Period The Company paid close attention to the demands and equity of the employees, customers, cooperation partners, shareholders, environment, society, other parties, scrupulously abided by credibility and commitment, insisted on harmony and coexistance of different parties, implemented the law and principles, enhanced the communication and coordination with relevant interested parties, positively assumed the social responsibility of enterprise, and devoted efforts for sustainable development of the society and environment. (For the detail, refer to the Report on Social Responsibility of the Company issued by the Company.) XII. Index of Provisional Announcement Information Disclosed in the Report Period Presses Announc Announcement where the Websites for information ement Description Date information disclosure No. is disclosed Resolution of the Securities Extraordinary Times and 2007-001 March 13, 2007 Meeting of the Fifth Hong Kong http://www.cninfo.com.cn Board of Directors Commercial Public Notice Daily Announcement on Determining Equity Record Day and Holding the Securities 2007-002 March 30, 2007 http://www.cninfo.com.cn Shareholders’ Times Meeting concerning the Equity Separation Reform Announcement on the Approval of the Equity Separation 2007-003 March 30, 2007 Reform Proposal by Securities http://www.cninfo.com.cn the State-Owned Times Assets Supervision and Administration Commission Announcement of the Progress of the Securities 2007-004 April 2, 2007 http://www.cninfo.com.cn Equity Separation Times Reform Work The 1st Indicative Announcement on Holding the Securities 2007-005 April 7, 2007 Shareholders’ http://www.cninfo.com.cn Times Meeting concerning the Equity Separation Refrom Announcement of the Progress of the Securities 2007-006 April 9, 2007 http://www.cninfo.com.cn Equity Separation Times Reform Work The 2nd Indicative Announcement on Holding the Securities 2007-007 April 12, 2007 http://www.cninfo.com.cn Shareholders’ Times Meeting concerning the Equity 45 Separation Refrom Announcement on Securities the Performance Times and 2007-008 April 12, 2007 Growth Forecast of Hong Kong http://www.cninfo.com.cn the 1st Quarter of Commercial 2007 Daily Announcement of the Progress of the Securities 2007-009 April 16, 2007 http://www.cninfo.com.cn Equity Separation Times Reform Work Announcement on the Voting Result of the the Securities 2007-010 April 17, 2007 Shareholders’ http://www.cninfo.com.cn Times Meeting concerning the Equity Separation Refrom Risk Indicative Announcement of Securities 2007-011 April 23, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Announcement on Securities Resolutions of the Times and 2007-012 April 26, 2007 4th Meeting of the Hong Kong http://www.cninfo.com.cn Fifth Board of Commercial Directors Daily Announcement on Securities Resolutions of the Times and 2007-013 April 26, 2007 4th Meeting of the Hong Kong http://www.cninfo.com.cn Fifth Supervisory Commercial Committee Daily Securities Times and 2007-014 April 26, 2007 Notice on holding Hong Kong http://www.cninfo.com.cn 2006 Shareholders’ Commercial General Meeting Daily Implementation of Regular Related Securities Transactions in Times and 2007-015 April 26, 2007 2006 and Prediction Hong Kong http://www.cninfo.com.cn of Regular Related Commercial Transactions in Daily 2007 Securities Times and 2007-016 April 26, 2007 Hong Kong http://www.cninfo.com.cn 2006 Annual Report Commercial Summary Daily Securities Times and 2007-017 April 26, 2007 Hong Kong http://www.cninfo.com.cn 2007 1st Quarterly Commercial Report. Daily 46 Securities Announcement on Times and 2007-018 April 26, 2007 the Semi-Annual Hong Kong http://www.cninfo.com.cn Performance Growth Commercial Forecast of 2007 Daily Risk Indicative Announcement of Securities 2007-019 April 30, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Risk Indicative Announcement of Securities 2007-020 May 14, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Securities Announcement on Times and 2007-021 May 14, 2007 Abnormal Hong Kong http://www.cninfo.com.cn Fluctuation in Stock Commercial Trading Daily Risk Indicative Announcement of Securities 2007-022 May 21, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Risk Indicative Announcement of Securities 2007-023 May 28, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Announcement on Securities Resolutions of 2006 Times and 2007-024 June 1, 2007 Annual Hong Kong http://www.cninfo.com.cn Shareholders’ Commercial General Meeting Daily Risk Indicative Announcement of Securities 2007-025 June 4, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Securities Announcement on Times and 2007-026 June 6, 2007 Abnormal Hong Kong http://www.cninfo.com.cn Fluctuation in Stock Commercial Trading Daily Risk Indicative Announcement of Securities 2007-027 June 11, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Risk Indicative Announcement of Securities 2007-028 June 18, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Risk Indicative Securities 2007-029 June 25, 2007 http://www.cninfo.com.cn Announcement of Times 47 the Progress of the Equity Separation Reform Work Risk Indicative Announcement of Securities 2007-030 July 2, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Risk Indicative Announcement of Securities 2007-031 July 9, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Announcement on Holding Shareholders’ Securities 2007-032 July 14, 2007 http://www.cninfo.com.cn Meeting concerning Times Equity Separation Reform Letter of Voting Securities 2007-033 July 14, 2007 Proxy of the Board http://www.cninfo.com.cn Times of Directors Announcement on the Communication and Consultation of Securities 2007-034 July 21, 2007 http://www.cninfo.com.cn the Equity Times Separation Reform Plan Announcement on Abnormal Securities 2007-035 July 26, 2007 http://www.cninfo.com.cn Fluctuation in Stock Times Trading Announcement on Securities Resolutions of the Times and 2007-036 August 2, 2007 5th Meeting of the Hong Kong http://www.cninfo.com.cn Fifth Board of Commercial Directors Daily Securities Announcement on Times and 2007-037 August 10, 2007 Abnormal Hong Kong http://www.cninfo.com.cn Fluctuation in Stock Commercial Trading Daily The 1st Indicative Announcement on Holding the Securities 2007-038 August 11, 2007 Shareholders’ http://www.cninfo.com.cn Times Meeting concerning the Equity Separation Refrom The 2nd Indicative Announcement on Holding the Securities 2007-039 August 17, 2007 Shareholders’ http://www.cninfo.com.cn Times Meeting concerning the Equity Separation Refrom 48 Securities Times and 2007-040 August 20, 2007 Hong Kong http://www.cninfo.com.cn 2007 Semi-Annual Commercial Report Summary Daily Announcement on Securities the Performance Times and 2007-041 August 20, 2007 Growth Forecast of Hong Kong http://www.cninfo.com.cn January to Commercial September 2007 Daily Announcement on the Voting Result of the the Securities 2007-042 August 22, 2007 Shareholders’ http://www.cninfo.com.cn Times Meeting concerning the Equity Separation Refrom Announcement on Securities 2007-043 August 22, 2007 Notice to the Equity http://www.cninfo.com.cn Times Separation Reform Risk Indicative Announcement of Securities 2007-044 August 27, 2007 the Progress of the http://www.cninfo.com.cn Times Equity Separation Reform Work Securities Announcement on Times and 2007-045 August 28, 2007 Abnormal Hong Kong http://www.cninfo.com.cn Fluctuation in Stock Commercial Trading Daily Risk Indicative Announcement of September 3, Securities 2007-046 the Progress of the http://www.cninfo.com.cn 2007 Times Equity Separation Reform Work Risk Indicative Announcement of September 10 , Securities 2007-047 the Progress of the http://www.cninfo.com.cn 2007 Times Equity Separation Reform Work Securities Times and September 11, 2007-048 Hong Kong http://www.cninfo.com.cn 2007 Announcement on Commercial Newly Added Loan Daily Risk Indicative Announcement of September 17, Securities 2007-049 the Progress of the http://www.cninfo.com.cn 2007 Times Equity Separation Reform Work Risk Indicative Announcement of September 24, Securities 2007-050 the Progress of the http://www.cninfo.com.cn 2007 Times Equity Separation Reform Work September 28, Announcement on Securities 2007-051 http://www.cninfo.com.cn 2007 Holding Times 49 Shareholders’ Meeting concerning Equity Separation Reform Letter of Voting September 28, Securities 2007-052 Proxy of the Board http://www.cninfo.com.cn 2007 Times of Directors Securities Times and 2007-053 October 9, 2007 Announcement on Hong Kong http://www.cninfo.com.cn Change of the Commercial Biggest Shareholder Daily Announcement on Securities the Performance Times and October 10, 2007-054 Growth Forecast of Hong Kong http://www.cninfo.com.cn 2007 the 3rd Quarter of Commercial 2007 Daily Announcement on the Result of October 13, Securities 2007-055 Communication on http://www.cninfo.com.cn 2007 Times the Equity Reform Proposal The 1st Indicative Announcement on Holding the October 20, Securities 2007-056 Shareholders’ http://www.cninfo.com.cn 2007 Times Meeting concerning the Equity Separation Refrom Announcement on Securities Resolutions of the Times and October 20, 2007-057 7th Meeting of the Hong Kong http://www.cninfo.com.cn 2007 Fifth Board of Commercial Directors Daily Securities Times and October 20, 2007-058 Hong Kong http://www.cninfo.com.cn 2007 Announcement on Commercial Acquisition of Assets Daily Announcement on Securities 2007 1st Times and October 20, 2007-059 Extraordinary Hong Kong http://www.cninfo.com.cn 2007 Shareholders’ Commercial Meeting Daily The 2nd Indicative Announcement on Holding the October 24, Securities 2007-060 Shareholders’ http://www.cninfo.com.cn 2007 Times Meeting concerning the Equity Separation Refrom Securities Times and October 24, 2007-061 Hong Kong http://www.cninfo.com.cn 2007 2007 3rd Quarterly Commercial Report Daily 50 Securities Announcement on Times and October 24, 2007-062 the Annual Hong Kong http://www.cninfo.com.cn 2007 Performance Growth Commercial Forecast of 2007 Daily Announcement on the Voting Result of the the October 26, Securities 2007-063 Shareholders’ http://www.cninfo.com.cn 2007 Times Meeting concerning the Equity Separation Refrom Announcement on Securities Resolutions of the Times and October 31, 2007-064 9th Meeting of the Hong Kong http://www.cninfo.com.cn 2007 Fifth Board of Commercial Directors Daily Announcement on Securities 2007 2nd Times and October 31, 2007-065 Extraordinary Hong Kong http://www.cninfo.com.cn 2007 Shareholders’ Commercial Meeting Daily Securities Times and October 31, 2007-066 Corporate Hong Kong http://www.cninfo.com.cn 2007 Governance Report Commercial Daily Announcement on Securities Resolutions of the Times and October 31, 2007-067 9th Meeting of the Hong Kong http://www.cninfo.com.cn 2007 Fifth Supervisory Commercial Committee Daily Announcement on November 5, Implementation fo Securities 2007-068 http://www.cninfo.com.cn 2007 Equity Separation Times Reform Plan Securities Resolution of 2007 Times and November 8, 2007-069 1st Extraordinary Hong Kong http://www.cninfo.com.cn 2007 Shareholders’ Commercial Meeting Daily Announcement on November 9, Securities 2007-070 Change of the Short http://www.cninfo.com.cn 2007 Times Form of Stock Name Announcement on November 9, Securities 2007-071 Change of Stock http://www.cninfo.com.cn 2007 Times Structure Securities Times and November 12, 2007-072 Hong Kong http://www.cninfo.com.cn 2007 Announcement on Commercial Newly Added Loan Daily Securities Resolution of 2007 Times and November 17, 2007-073 2nd Extraordinary Hong Kong http://www.cninfo.com.cn 2007 Shareholders’ Commercial Meeting Daily 51 Chapter 10 Financial Report (Refer to Pages 54 to 155) 52 Chapter 11 Documents Available for Inspection I. Financial Statements signed by and under the seal of the legal representative, chief accountant and person in charge of accounting. II. Original of the Audit Report under the seal of the accounting firm and signed by and under the seals of certified public accountants. III. Originals of all documents and manuscripts of announcements of the Company disclosed in Securities Times and Hong Kong Commercial Daily as designated by China Securities Regulatory Commission. SHENZHEN FIYTA HOLDINGS LTD. Board of Directors April 11, 2008 53 SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Report and Financial Statements For the year ended December 31, 2007 56 SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007 CONTENTS PAGE(S) INDEPENDENT AUDITOR’S REPORT 1 CONSOLIDATED INCOME STATEMENT 2 CONSOLIDATED BALANCE SHEET 3–4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 5 CONSOLIDATED CASH FLOW STATEMENT 6–7 NOTES TO THE FINANCIAL STATEMENTS 8 – 47 57 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飛亞達(集團)股份有限公司 (Incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated financial statements of Shenzhen Fiyta Holdings Limited (the “Company”) and its subsidiaries (the “Group”) set out on pages 2 to 47, which comprise the consolidated balance sheet as at December 31, 2007, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and the summary of significant accounting policies and other explanatory notes. DIRECTORS’ RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation and the true and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the consolidated 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 the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group as of December 31, 2007, and of the Group’s profit and cash flows for the year then ended in accordance with International Financial Reporting Standards. YUEHUA CPA LIMITED Certified Public Accountants Hong Kong: April 9, 2008 - 58 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2007 2006 Notes RMB RMB (restated) Turnover 7 797,457,310 487,241,213 Cost of sales (526,041,672) (313,689,463) Gross profit 271,415,638 173,551,750 Other revenue 7 12,846,294 6,848,775 Selling expenses (105,946,362) (78,501,217) Administrative expenses (82,229,299) (58,244,296) Other operating expenses (9,118,626) (3,825,861) Profit from operations 8 86,967,645 39,829,151 Finance costs 10 ) ) Profit before taxation 71,491,256 34,846,010 Income tax 12 ) ) - 59 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Profit for the year Attributable to: Equity holders of the parent Minority interests Earnings per share - 60 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Basic 13 - 61 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2007 2007 2006 Notes RMB RMB (restated) ASSETS Non-currents assets Property, plant and equipment 14 65,674,730 62,883,291 Investment properties 15 182,709,230 188,871,227 Construction in progress 16 407,761 151,261 Prepaid lease payments 17 13,096,772 11,358,458 Available-for-sale financial assets 18 Deferred tax assets 19 9,195,483 7,474,231 Intangible assets 20 19,738,959 18,220,325 309,709,457 295,603,793 Current assets Inventories 21 Trade receivables 22 - 62 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Other receivables and prepayments 23 Tax recoverable Financial assets at fair value through profit or loss 24 - Amounts due from related companies 25 195,747 312,412 Bank balances and cash 34 84,043,522 60,379,839 754,821,896 497,290,118 Total assets 1,064,531,353 792,893,911 - 63 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 CONSOLIDATED BALANCE SHEET – (continued) AT DECEMBER 31, 2007 2007 2006 Notes RMB RMB (restated) EQUITY AND LIABILITIES CAPITAL AND RESERVES Registered capital 26 249,317,999 249,317,999 Reserves 27 305,845,631 292,548,933 Retained earnings 28 86,960,798 29,969,452 Equity attributable to equity 642,124,428 571,836,384 holders of the parent Minority interests 29 8,468,329 7,601,106 Total equity 650,592,757 579,437,490 Non-current liabilities Loan from a related company 30 5,000,000 5,000,000 Deferred government grants 3,000,000 3,000,000 Deferred tax liabilities 19 2,577,823 311,253 Trade payables 31 50,000 - 10,627,823 8,311,253 Current liabilities Trade payables 31 56,312,773 39,403,460 Staff welfare payable 7,187,227 4,838,676 Other payables and accruals 32 29,607,416 20,475,847 Amounts due to related companies 25 Bank loans – secured 33 310,000,000 140,000,000 403,310,773 205,145,168 - 64 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Total liabilities Total equity and liabilities 1,064,531,353 792,893,911 Approved by the Board of Directors on April 9, 2008 DIRECTOR DIRECTOR - 65 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2007 Attributable to Share Retained equity holders capital Reserves earnings of the parents RMB RMB RMB RMB Balance at December 31, 2005 249,317,999 273,814,266 10,594,842 533,727,107 Net profit for the year Transfer of reserve 2,826,697 (2,826,697) Balance at December 31, 2006, as previously reported 249,317,999 276,640,963 33,938,020 559,896,982 Prior year adjustments (note 43) - 15,907,970 (3,968,568) 11,939,402 Balance at December 31, 2006, as restated 249,317,999 292,548,933 29,969,452 571,836,384 Net profit for the year 60,876,913 60,876,913 Fair value adjustments of available-for-sale financial assets - 10,844,363 - 10,844,363 Deferred tax liabilities arising from fair value changes of available-for-sale financial assets (1,119,463) (1,119,463) - 66 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Exchange differences arising on translation of foreign operation - (313,769) - (313,769) Transfer of reserve 3,885,567 (3,885,567) Balance at December 31, 2007 249,317,999 305,845,631 86,960,798 642,124,428 - 67 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2007 2006 RMB RMB (restated) Cash flows from operating activities Profit before taxation 71,491,256 34,846,010 Adjustments for: Amortisation of prepaid lease payments 345,239 421,436 Amortisation of intangible assets 14,074,885 12,499,733 Depreciation of investment properties 6,161,997 6,952,709 Depreciation of property, plant and equipment 6,962,877 15,320,000 Gain on disposal of property, plant and equipment - (934,000) Loss on property, plant and equipment written off 1,244,150 21,366,133 Loss on intangible assets written off - 49,000 Gain on disposal of financial assets at fair value through profit or loss (1,872,229) (1,017,261) Fair value gain on financial assets at fair value through profit or loss - (340,000) Interest expenses 15,476,389 4,983,141 Interest income (1,176,602) (648,130) Impairment loss on available-for-sale financial assets Reversal of provision for obsolescent inventory ) ) Reversal of provision for doubtful debts ) ) - 68 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Provision for doubtful debts Operating profit before working capital changes 90,554,894 82,933,971 Increase in inventories (124,138,708) (128,568,916) Increase in trade receivables (7,378,506) (2,956,599) Decrease in bills receivable 550,000 (Increase)/Decrease in other receivables and prepayments (81,094,675) 24,621,379 Decrease/(Increase) in amounts due from related companies ) (Decrease)/Increase in amounts due to related companies ) Increase in trade payables 16,959,313 10,410,992 Increase/(Decrease) in staff welfare payable 2,348,551 (13,981,358) Increase/(Decrease) in other payables and accruals 9,131,569 (4,165,203) Decrease in amount due to an invested company ) Cash used in operations (93,724,725) (43,566,272) Tax paid (10,546,022) (12,235,764) Net cash used in operating activities (104,270,747) (55,802,036) - 69 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 CONSOLIDATED CASH FLOW STATEMENT – (continued) FOR THE YEAR ENDED DECEMBER 31, 2007 2007 2006 RMB RMB (restated) Cash flows from investing activities Proceeds on disposal of property, plant and equipment - 1,390,000 Purchase of property, plant and equipment (10,884,466) (24,330,000) Purchase for intangible assets (15,593,519) (29,215,132) Payments for construction in progress (370,500) (3,507,500) Payments for prepaid lease payments ) (698,769) Acquisition of available-for-sale financial assets (2,516,622) - Proceeds on disposal of financial assets at fair value through profit or loss 4,168,081 Net cash used in investing activities (27,452,014) (52,193,320) Cash flows from financing activities Proceeds from loan from a related company - 5,000,000 Proceeds from bank loans 310,000,000 140,000,000 Repayments of bank loans (140,000,000) (20,000,000) Interest paid (14,299,787) (4,335,011) Net cash from financing activities 155,700,213 120,664,989 Net increase in cash and cash equivalents 23,977,452 12,669,633 Cash and cash equivalents at the beginning of the year 60,379,839 47,710,206 Effect of foreign exchange rate changes (313,769) - Cash and cash equivalents at the end of the year 84,043,522 60,379,839 Analysis of cash and cash equivalents at the end of the year - 70 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 Bank balances and cash 84,043,522 60,379,839 - 71 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 1. GENERAL INFORMATION Shenzhen Fiyta Holdings Limited (the “Company”) was established in the People’s Republic of China (the “PRC”) as a joint stock limited company a reorganisation of its predecessor company, Shenzhen Fiyta Timing Industry Company, in December 1992. The Company’s Renminbi Ordinary Shares (“A Shares”) and Domestically Listed Foreign Shares (“B Shares”) were listed on the Shenzhen Stock Exchange in March 1993. The Company’s holding company is CATIC Shenzhen Holdings Limited (“CATIC”) which holds 52.24% of its equity interest. CATIC’s H Shares were listed on The Stock Exchange of Hong Kong in September 1997. The Company and its subsidiaries (the “Group”) are principally engaged in the design, manufacture, assembly and sale of quartz analog watches, clocks, watch casings and property management. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of preparation In the current year, the Group has applied, for the first time, the following new standard, amendment and interpretations (“new IFRSs”) issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB which are effective for the Group’s financial year beginning January 1, 2007. IAS 1 (Amendment) Capital disclosures IFRS 7 Financial instruments: Disclosures IFRIC 7 Applying the restatement approach under IAS 29 Financial reporting in hyperinflationary economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of embedded derivatives IFRIC 10 Interim financial reporting and impairment The application of the new IFRSs had no material effect on how the results and the financial position for the current or prior periods have been prepared and presented. Accordingly, no prior period adjustment has been required. The Group has applied the disclosure requirements under IAS 1 (Amendment) and IFRS 7 retrospectively. Certain information based on the requirements of IAS 32 has been removed and the relevant comparative information based on the requirements of IAS 1 (Amendment) and IFRS 7 has been presented for the first time in the current year. The Group has not early applied the following new and revised standards, interpretations and amendment that have been issued but not yet effective. The directors of the Company anticipate that the application of these standards, interpretations or amendments will have no material impact on the results and the financial position of the Group. - 72 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Basis of preparation - (continued) IAS 1 (Revised) Presentation of financial statements1 IAS 23 (Revised) Borrowing costs1 IAS 27 (Revised) Consolidated and separate financial statements5 IAS 32 & 1 (Amendments) Puttable instruments and obligations arising on liquidation1 IFRS 2 (Amendments) Vesting conditions and cancellations1 IFRS 3 (Revised) Business combinations5 IFRS 8 Operating segments1 IFRIC 11 IFRS 2: Group and treasury share transactions2 IFRIC 12 Service concession arrangements3 IFRIC 13 Customer loyalty programmes4 IFRIC 14 IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction3 1 Effective for annual periods beginning on or after January 1, 2009. 2 Effective for annual periods beginning on or after March 1, 2007. 3 Effective for annual periods beginning on or after January 1, 2008. 4 Effective for annual periods beginning on or after July 1, 2008. 5 Effective for annual periods beginning on or after July 1, 2009. Statement of compliance The consolidated financial statements have been prepared in accordance with IFRSs issued by the IASB and the IFRIC. The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair values, as explained in the principal accounting policies set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. - 73 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Basis of consolidation – (continued) Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Business combinations The acquisition of businesses is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in consolidated income statement. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold in the normal course of business, net of discounts and sales related taxes. Revenue from sales of goods are recognised when goods are delivered and title has passed. - 74 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Revenue recognition – (continued) Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Rental income from investment properties is recognised on a straight-line basis over the terms of the relevant lease. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. (a) The Group as lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. (b) The Group as lessee Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. - 75 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Foreign currencies In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations (including comparatives) are expressed in Renminbi using exchange rates prevailing on the balance sheet date. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised in profit and loss in the period in which the foreign operation is disposed of. Borrowings Borrowings are recognised in profit or loss in the period in which they are incurred. Employee benefits The Group’s contributions to defined contribution retirement plans administrated by the PRC government are recognized as an expense when incurred according to the contribution defined by the plans. Deferred government grants Government grants are recognised as income over the periods necessary to match them with the related costs. Grants related to expense items are recognised in the same period as those expenses are charged in the consolidated income statement and are deducted in reporting the related expenses. - 76 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Property, plant and equipment Property, plant and equipment are stated at cost or valuation less accumulated depreciation and accumulated impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Independent valuations are performed periodically. In the intervening period, the directors review the carrying value of the property, plant and equipment and adjustment is made where in the director’s opinion there has been a material change in value. Increases in valuation are credited to revaluation reserve. Decreases in valuation are first offset against increases on earlier valuations in respect of the same property, plant and equipment and are thereafter debited to operating profit. Any subsequent increases are credited to operating profit up to the amount previously debited. Depreciation is calculated using the straight-line method to write off the cost of each asset, or its revalued amount, to its estimated residual value over its estimated useful life as follows: Buildings 18 - 35 years Equipment and machinery 5 - 10 years Leasehold improvements are depreciated over the remaining period of the lease or beneficial period. Where the carrying amount of a property, plant and equipment is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Investment properties Investment properties are properties held to earn rentals and/or for capital appreciation. On initial recognition, investment properties are measured at cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are stated at cost less subsequent accumulated depreciation and any accumulated impairment losses. Depreciation is provided using the straight-line method to write off the cost of the investment properties over their estimated useful lives which are between 20 and 35 years, after deducting the estimated residual value. Where the carrying amount of an investment property is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. - 77 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Investment properties – (continued) The cost of maintenance, repairs and minor equipment is charged to the income statement as incurred; the cost of major renovations and improvements is capitalised when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. The gain or loss on disposal of an investment property is recognised with reference to its carrying value. Construction in progress Construction in progress represents properties under construction and plant and equipment under installation or testing, is stated at cost, which includes the costs of construction, the costs of buildings, machinery and equipment and interest charges arising from borrowings used to finance these assets during the period of construction or installation and testing. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated above. Prepaid lease payments Prepaid lease payments relating to buildings of the Group are stated at cost and are amortised over the year of the lease on the straight-line basis to the profit and loss account. Prepaid lease payments relating to investment properties and properties developed for sale are not amortised and included as part of the cost of such properties. Intangible assets Intangible assets acquired separately and with finite useful lives are carried at costs less accumulated amortization and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives. Alternatively, intangible assets with indefinite useful lives are carried at cost less any subsequent accumulated impairment losses. Gains or losses arising from derecognition of an intangible asset are measured at the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised. - 78 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Impairment of assets Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually by comparing their carrying amounts with their recoverable amounts, irrespective of whether there is any indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Intangible assets with finite useful lives are tested for impairment when there is an indication that an asset may be impaired (see the accounting policies in respect of impairment losses for tangible and intangible assets below). Inventories Inventories are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, costs of conversion and other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average basis method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Financial assets Investments are recognised and derecognised on trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. Financial assets are classified into the following specified categories: ‘financial assets at fair value through profit or loss’ (FVTPL), ‘available-for-sale (AFS) financial assets’ and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. - 79 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Financial assets at fair value through profit or loss Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: • it has been acquired principally for the purpose of selling in the near future; or • it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and effective as a hedging instrument. At each balance sheet date subsequent to initial recognition, financial assets at FVTPL are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss excludes any dividend or interest earned on the financial assets. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated or not classified as financial assets at fair value through profit or loss and loans and receivables. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in equity, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognized in profit or loss (see accounting policy on impairment of financial assets below). For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, they are measured at cost less any identified impairment losses at each balance sheet date subsequent to initial recognition (see accounting policy on impairment loss on financial assets below). Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade receivables, other receivables, amounts due from related companies and bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment of financial assets below). - 80 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Impairment of financial assets Financial assets other than those at FVTPL are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been impacted. For the Group’s financial assets, objective evidence of impairment could include: • significant financial difficulty of the issuer or counterparty; or • default or delinquency in interest or principal payments; or • it becoming probable that the borrower will enter bankruptcy or financial re-organisation. For certain categories of financial asset, such as trade and other receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a trade receivable or other receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss. For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. - 81 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Financial liabilities and equity Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group’s financial liabilities are generally classified as other financial liabilities. Other financial liabilities Other financial liabilities including loan from a related company, deferred government grants, trade payables, staff welfare payable, other payables and accruals, amounts due to related companies and bank loan are subsequently measured at amortised cost, using the effective interest method. Derecognition Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss. Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income and expense that are taxable or deductible in other years, and it further excludes income statement items that are never taxable and deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. - 82 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Taxation – (continued) Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Impairment losses (other than goodwill and intangible assets with indefinite useful lives) At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately. Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. - 83 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. 3. CAPITAL MANAGEMENTS The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year. The capital structure of the Group consists of equity attributable to equity holders of the Company, comprising issued share capital and reserves including accumulated profits. The directors of the Company review the capital structure on an annual basis. As part of this review, the directors consider the cost of capital and the risks associates with the capital. Based on recommendations of the directors of the Company, the Group will balance its overall capital structure through the payment of dividends. - 84 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 4. FINANCIAL INSTRUMENTS (a) Summary of financial assets and liabilities The carrying amounts of the Group’s financial assets and liabilities recognised as at December 31, 2007 are as follows. 2007 2006 RMB RMB Financial assets Available-for-sale financial assets Trade receivables Financial assets included in other receivables and prepayments 19,438,262 Financial assets at fair value through profit or loss - 85 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Amounts due from related companies 195,747 312,412 Bank balances and cash 84,043,522 60,379,839 Financial liabilities Loan from a related company 5,000,000 5,000,000 Deferred government grants 3,000,000 3,000,000 Trade payables 56,362,773 39,403,460 Staff welfare payable 7,187,227 4,838,676 Other payables and accruals 29,607,416 20,475,847 Amounts due to related companies Bank loan - secured 310,000,000 140,000,000 (b) Financial risk management objectives and policies The Group’s major financial instruments include trade receivables, other receivables, amounts due from related companies, bank balances and cash, loan from a related company, deferred government grants, trade payables, staff welfare payable, other payables and accruals, amounts due to related companies and bank loan. Details of the financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (foreign currency risk and fair value interest rate risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. Foreign exchange risk The directors consider the foreign exchange risk is not significant as the operating income and expenses are denominated in RMB. - 86 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 4. FINANCIAL INSTRUMENTS – (continued) (b) Financial risk management objectives and policies – (continued) Interest rate risk As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from bank loans. The interest rates and repayment terms of bank loans are disclosed in note 33. Bank loans issued at variable rates expose the Group to Cash flow interest rate risk. Bank loans issued at fixed rates expose the Group to fair value interest rate risk. The Group has not hedged its cash flow and fair value interest rate risk. Credit risk The carrying amount of cash and cash equivalents and receivables represented the Group’s maximum exposure to credit risk in relation to financial assets. Cash is deposited with registered banks in the PRC. Majority of the Group’s receivables relate to sales of goods to third parties in the PRC. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on receivables. The Group maintains a provision for doubtful debts. No other financial assets carry a significant to credit risk. Liquidity risk The Group ensures that it maintains sufficient cash and credit lines to meet its liquidity requirements. (c) Fair value of financial instruments The fair value of financial assets and financial liabilities are determined as follows: • the fair value of financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and • the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices or rates from observable current market transactions as input. The directors of the Company consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost approximate their fair values. - 87 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Useful lives of property, plant and equipment The Group’s management determines the estimated useful lives for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. (b) Impairment of receivables The Group’s management determines the provision for impairment of trade and other receivables. This estimate is based on the credit history of its customers and the current market condition. Management reassesses the provision on each of the balance sheet date. (c) Impairment of property, plant and equipment and available-for-sale financial assets Property, plant and equipment and available-for-sale financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts of property, plant and equipment and available-for-sale financial assets have been determined based on value-in-use calculations. These calculation and valuations require the use of judgment and estimates. - 88 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS – (continued) (d) Current taxation and deferred taxation The Group is subject to taxation in the PRC. Significant judgment is required in determining the amount of the provision for taxation and the timing of payment of the related taxations. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the periods in which such determination are made. 6. BUSINESS SEGMENTS INFORMATION OF THE GROUP For management purposes, the Group is organized into two major operating divisions – clocks and watches and property rental. These divisions are the basis on which the Group reports its primary segment information. Principal activities are as follows: Clocks and watches – design, manufacture, assembly and sale of quartz analog watches, clocks, watch casings. Property rental – the leasing of investment properties to generate rental income. - 89 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 6. BUSINESS SEGMENTS INFORMATION OF THE GROUP – (continued) Segment information about these businesses for the year ended December 31, 2007 is presented below. Clocks and Property watches rental Total RMB RMB RMB Turnover Segment results Unallocated expense (179,851,100) Operating profits Finance costs ) - 90 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Profit before taxation Taxation ) Profit after taxation Minority interest ) Net profit - 91 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Segment assets Unallocated assets Total assets Segment liabilities - 92 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Unallocated liabilities Total liabilities Depreciation and amortization: - property, plant and equipment - investment properties - prepaid lease payments - 93 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 - 94 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 6. BUSINESS SEGMENTS INFORMATION OF THE GROUP – (continued) For the year ended December 31, 2006 Clocks and Property watches rental Total RMB RMB RMB Turnover Segment results Unallocated expense (138,795,200) Operating profits Finance costs ) - 95 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Profit before taxation Taxation ) Profit after taxation Minority interest ) Net profit - 96 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Segment assets 776,636,280 Unallocated assets Total assets Segment liabilities 73,145,168 - Unallocated liabilities - 97 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Total liabilities Depreciation and amortization: - property, plant and equipment - investment properties - prepaid lease payments There are no sales or other transactions between the business segments. Segment assets - 98 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 comprise operating assets and mainly exclude deferred tax assets, available-for-sale financial assets and financial assets at fair value through profit or loss. Segment liabilities comprise operating liabilities and mainly exclude deferred tax liabilities and bank loans. All assets and operations of the Group are located in the PRC. - 99 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 7. TURNOVER AND REVENUE The Group is engaged in the design, manufacture, assembly and sale of quartz analog watches, clocks, watch casings and property rental. Revenue recognised during the year is as follows: 2007 2006 RMB RMB Turnover Rental income 56,626,075 45,767,511 Sales of goods 740,831,235 441,473,702 797,457,310 487,241,213 Other revenue Bank interest income 1,176,602 648,130 Government grants Compensation income 673,078 27,190 Gain on disposal of financial assets at fair value through profit or loss 1,872,229 1,017,261 Fair value gain on financial assets at fair value through profit or loss - 340,000 Others 8,018,585 4,816,194 12,846,294 6,848,775 Total revenue 810,303,604 494,089,988 - 100 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 8. PROFIT FROM OPERATIONS Profit from operations had been arrived at: 2007 2006 RMB RMB After charging: Amortisation of prepaid lease payments 345,239 421,436 Amortisation of intangible assets 14,074,885 12,499,733 Depreciation of investment properties 6,161,997 6,952,709 Depreciation of property, plant and equipment 6,962,877 15,320,000 Net exchange loss Staff costs (including directors’ remuneration – note 11) 50,070,614 72,733,942 Loss on property, plant and equipment written off 1,244,150 21,366,133 Loss on intangible assets written off - 49,000 Provision for impairment loss on available-for-sale financial assets Provision for doubtful debts And after crediting: Gain on disposal of property, plant and equipment - 934,000 Gain on disposal of financial assets at fair value through profit or loss 1,872,229 1,017,261 - 101 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Fair value gain on financial assets at fair value through profit or loss - 340,000 Reversal of provision for obsolescent inventory Reversal of provision for doubtful debts 9. STAFF COSTS 2007 2006 RMB RMB Wages and salaries Staff welfare - 102 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Social insurance expenses 4,718,551 7,255,365 50,070,614 72,733,942 - 103 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 10. FINANCE COSTS 2007 2006 RMB RMB Interest on bank loans and overdrafts 15,476,389 4,983,141 11. DIRECTORS’ REMUNERATION Particulars of the emoluments of the directors for the year were as follows: 2007 2006 RMB RMB Fees - - Other emoluments 5,682,300 3,435,900 5,682,300 3,435,900 12. INCOME TAX 2007 2006 RMB RMB Current tax - PRC Enterprise income tax 11,411,901 5,511,268 Deferred tax (note 19) - Current year (1,664,781) (1,259,356) 9,747,120 4,251,912 Pursuant to the relevant income tax laws of the PRC, group companies established in the Shenzhen Special Economic Zone are subject to income tax at a rate of 15% while those established in other areas are subject to income tax at a rate of 33%. In addition, as approved by the Local Tax Bureau, a subsidiary is entitled to full exemption from PRC income tax for two years starting from the first profit making year and a 50% reduction in the next three years. - 104 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 12. INCOME TAX – (continued) The charge for the year can be reconciled to the profit per the income statement as follows: 2007 2006 RMB RMB Profit before taxation 71,491,256 34,846,010 Tax at the applicable income tax rate (15%) 10,723,688 5,226,901 Tax effect of expenses not deductible and income not taxable for tax purposes 688,213 284,367 Deferred taxation (1,664,781) (1,259,356) Taxation charge 9,747,120 4,251,912 13. EARNINGS PER SHARE 2007 2006 RMB RMB Basic earnings per share The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: 2007 2006 RMB RMB Profit for the year attributable to equity holders of the parent 30,509,476 - 105 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2007 2006 Weighted average number of ordinary shares for the purpose of basic earnings per share (all measures) 249,317,999 249,317,999 - 106 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 14. PROPERTY, PLANT AND EQUIPMENT Equipment and Leasehold Buildings machinery improvements Total RMB RMB RMB RMB COST OR VALUATION At January 1, 2006 Additions 7,359,000 Transferred from construction in progress (note 16) - - Written off - Disposals (425,000) - - 107 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 At January 1, 2007, as previously reported 68,767,000 31,886,000 39,987,000 Prior year adjustments (21,923,304) (27,481,624 At January 1, 2007, as restated 46,843,696 12,505,376 Additions 1,519,982 3,380,878 Transferred from construction in - 108 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 progress (note 16) - Written off - (83,800 At December 31, 2007 48,363,678 15,916,454 ACCUMULATED DEPRECIATION AND IMPAIRMENT At January 1, 2006 13,788,000 Charge for the year 1,092,000 - 109 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Eliminated on written off - Eliminated on disposals (62,000) At January 1, 2007, as previously reported 14,818,000 19,289,000 21,555,296 Prior year adjustments (10,709,296) (13,887,213 At January 1, 2007, as restated 4,108,704 - 110 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Charge for the year 1,179,949 246,375 Eliminated on written off - At December 31, 2007 5,288,653 7,914,458 NET BOOK VALUE At December 31, 2007 43,075,025 8,001,996 At December 31, 2006 42,734,992 4,837,293 - 111 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 The Group is in the process of applying for property certificates in respect of buildings with a net book value amounting to RMB7,083,927 at December 31, 2007 (2006: RMB7,383,405). - 112 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 14. PROPERTY, PLANT AND EQUIPMENT – (continued) At December 31, 2007, the Company’s future aggregate minimum lease rental receivables under non-cancellable leases are as follows: 2007 2006 RMB RMB Within one year 57,264,158 56,000,000 15. INVESTMENT PROPERTIES 2007 2006 RMB RMB Carrying amount at the beginning of the year Transfer from construction in progress (note 16) Transfer from prepaid lease payments (note 17) - 113 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Charge for the year ) ) Carrying amount at the end of the year, as previously reported Prior year adjustments Carrying amount at the end of the year, as restated - 114 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Directors’ valuation - including prepaid lease payments The investment properties of the Group are situated in the PRC. The related leasehold land was granted by Town Planning and Land Administration Bureau of Shenzhen for a period of 50 years. The valuation for the investment properties at December 31, 2007 and December 31, 2006 were determined by the directors on an open market value basis. 16. CONSTRUCTION IN PROGRESS 2007 2006 RMB RMB Net book value at the beginning of the year 151,261 134,775 Additions 370,500 3,507,500 Transfer to property, plant and equipment (note14) Transfer to investment properties (note 15) - 115 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Net book value at the end of the year - 116 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 17. PREPAID LEASE PAYMENTS 2007 2006 RMB RMB COST At January 1 15,487,350 20,037,811 Additions 2,097,536 - Transfer to investment properties (note 15) - (5,249,230) At December 31, as previously reported 17,584,886 14,788,581 Prior year adjustments - 698,769 At December 31, as restated 17,584,886 15,487,350 ACCUMULATED AMORTISATION At January 1 3,784,818 4,494,612 Charge for the year 345,239 421,856 Transfer to investment properties (note 15) - (1,131,230) At December 31, as previously reported 4,130,057 3,785,238 Prior year adjustments - (420) At December 31, as restated 4,130,057 3,784,818 NET BOOK VALUE At December 31, as previously reported 13,454,829 11,003,343 Prior year adjustments - 699,189 At December 31, as restated 13,454,829 11,702,532 Current portion included in other receivables and prepayments (358,057) (344,074) Non-current portion 13,096,772 11,358,458 The leasehold lands situated in People’s Republic of China are held under long term lease. They were granted by Town Planning and Land Administration Bureau of Shenzhen. For the leasehold land situated in Hong Kong, it is held under short term lease. - 117 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 18. AVAILABLE-FOR-SALE FINANCIAL ASSETS 2007 2006 RMB RMB Listed shares Unlisted shares 25,486,522 4,885,000 Less: impairment loss ) ) At December 31, as previously reported 18,886,522 4,585,000 Prior year adjustments - 2,060,000 At December 31, as restated 18,886,522 6,645,000 - 118 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 19. DEFERRED TAX ASSSETS/LIABILITIES Accelerated accounting depreciation RMB At January 1, 2006 15,465,855 Charge to income statement At December 31, 2006, as previously reported Prior year adjustments At December 31, 2006, as restated - 119 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Charge to income statement At December 31, 2007 2007 2006 RMB RMB Net deferred tax assets recognized on the consolidated balance sheet 9,195,483 7,474,231 Net deferred tax liabilities recognized on the consolidated balance sheet (2,577,823) (311,253) - 120 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 20. INTANGIBLE ASSETS 2007 2006 RMB RMB COST At January 1 32,965,132 3,816,000 Additions 15,593,519 113,200 Written off At December 31, as previously reported Prior year adjustments At December 31, as restated - 121 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 ACCUMULATED AMORTISATION At January 1 Charge for the year Eliminated on written off At December 31, as previously reported - 122 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Prior year adjustments At December 31, as restated NET BOOK VALUE At December 31, as previously reported Prior year adjustments - 123 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 At December 31, as restated The intangible assets included above have finite useful lives, over which the assets are amortised. 21. INVENTORIES 2007 2006 RMB RMB Raw materials Work in progress Finished goods 499,574,874 378,247,877 547,728,540 423,589,832 Less: provision for obsolescent inventories (30,029,558) (52,006,231) - 124 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 517,698,982 371,583,601 - 125 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 22. TRADE RECEIVABLES 2007 2006 RMB RMB Trade receivables Less: provision for doubtful debts ) ) Net trade receivables, as previously reported Prior year adjustments - 126 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Net trade receivables, as restated The aged analysis of trade receivables (net of impairment) at the balance sheet dates is as follows: 2007 2006 RMB RMB Within one year In the second year In the third year - 127 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 After the third year Most of the Group’s trade receivables are denominated in currency of Reminbi. Before accepting any new customer, the Group has to assess the potential customer’s credit quality and defines credit limits by customer. Limits attributed to customers are reviewed once a year. Majority of the trade receivables that are neither past due nor impaired have no default payment history. The Group has fully provided provision for all receivables over 3 years because historical experience is such that receivables that are past due beyond 3 years are generally not recoverable. Movement in the provision for doubtful debts: 2007 2006 RMB RMB At the beginning of the year - 128 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Increase in provision recognised in profit or loss At the end of the year, as previously reported Prior year adjustments ) At the end of the year, as restated - 129 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 - 130 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 22. TRADE RECEIVABLES – (continued) Included in the provision for doubtful debts are individually impaired trade receivables with an aggregate balance of RMB42,644,414 (2006: RMB42,324,274). The Group does not hold any collateral over these balances. 23. OTHER RECEIVABLES AND PREPAYMENTS 2007 2006 RMB RMB Prepayments Other receivables Less: provision for doubtful debts ) ) - 131 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Net other receivables and prepayments, as previously reported Prior year adjustments ) Net other receivables and prepayment, as restated The aged analysis of other receivables (net of impairment) at the balance sheet dates is as follows: 2007 2006 RMB RMB Within one year - 132 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 In the second year In the third year After the third year - 133 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Most of the Group’s other receivables are denominated in currency of Renminbi. - 134 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 23. OTHER RECEIVABLES AND PREPAYMENTS – (continued) Movement in the provision for doubtful debts: 2007 2006 RMB RMB At the beginning of year Decrease in provision recognised in profit or loss ) ) At the end of year, as previously reported Prior year adjustments ) - 135 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 At the end of the year, as restated Included in the provision for doubtful debts are individually impaired other receivables with an aggregate balance of RMB5,240,563 (2006: RMB5,737,098). The Group does not hold any collateral over these balances. 24. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 2007 2006 RMB RMB Market value of listed investments - equity shares The financial assets at fair value through profit or loss are traded in active markets and are valued at market prices at the close of business on December 31 by reference to Stock Exchange quoted prices. 25. AMOUNTS DUE FROM/TO RELATED COMPANIES The amounts due are unsecured, interest-free and with no fixed terms of repayment. - 136 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 - 137 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 26. SHARE CAPITAL Registered, issued and fully paid ordinary shares of RMB1 each: 2007 2006 RMB RMB Promoters’ shares A shares B shares - 138 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 27. RESERVES 2007 2006 RMB RMB Share premium 177,354,784 177,354,784 General reserve 25,229,592 15,504,692 Statutory common reserve fund 41,590,130 37,704,563 Statutory public welfare fund - - Other common reserve fund 61,984,894 61,984,894 Foreign currency translation reserve ) - 292,548,933 The transfers to statutory common reserve fund, statutory public welfare fund and other common reserve fund are based on the profit in the financial statements prepared under Chinese Accounting Standards. General reserve - 139 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 2007 2006 RMB RMB At the beginning of year 15,504,692 13,753,692 Fair value adjustments of available-for-sale financial assets 10,844,363 - Deferred tax liabilities arising from fair value changes of available-for-sale financial assets (1,119,463) - At the end of year, as previously reported 25,229,592 13,753,692 Prior year adjustments - 1,751,000 At the end of year, as restated 25,229,592 15,504,692 - 140 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 27. RESERVES – (continued) Transactions of the following nature are recorded in the general reserve: - surpluses arising from the revaluation of assets; and - any other items required by the PRC regulations to be so treated. Where a revalued financial asset is sold, the portion of the reserve that relates to that financial asset, and is effectively realized, is recognised in profit or loss. Where a revalued financial asset is impaired, the portion of the reserve that relates to that financial asset is recognised in profit or loss. Statutory common reserve fund 2007 2006 RMB RMB At the beginning of year 37,704,563 11,632,413 Transfer of reserve 3,885,567 27,863,691 At the end of year, as previously reported 41,590,130 39,496,104 Prior year adjustments - (1,791,541) At the end of year, as restated 41,590,130 37,704,563 In accordance with the Company Law of the People’s Republic of China (the “PRC”) and the respective articles of association of the Group, the Group is required to allocate 10% of the profit after tax, as determined in accordance with the PRC accounting standards and regulations applicable to the Group, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the respective company. Subject to certain restrictions set out in the Company Law of the PRC and the respective articles of association of the Group, part of the statutory surplus reserve may be converted to increase the respective Group’ capital. Statutory public welfare fund 2007 2006 RMB RMB At the beginning of year - 25,036,994 Transfer of reserve (25,036,994) At the end of year - - - 141 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 27. RESERVES – (continued) In prior years, in accordance with the Company Law of the PRC, the Group is required to transfer 5% to 10% of the profit after tax, as determined in accordance with the PRC accounting standards and regulations applicable to the Group, to the statutory public welfare fund, which is non-distributable except in the event of the liquidation of the Group. The statutory public welfare fund must be used for capital expenditure on staff welfare facilities and these facilities remain property of the Group. Under the amended Company Law of the PRC effective January 1, 2006, the Group is no longer required to make appropriation to the statutory public welfare fund. Pursuant to a circular on enterprise financial treatments following the implementation of the amended Company law of the PRC issued by the ministry of Finance (Cai Qi [2007] No. 67), the Group transferred the balance of the statutory public welfare fund started from January 1, 2006 amounting to RMR25,036,994 to the statutory common reserve fund. Other common reserve fund 2007 2006 RMB RMB At the beginning of year and at the end of year, as previously reported 61,984,894 46,036,383 Prior year adjustments - 15,948,511 At the end of year, as restated 61,984,894 61,984,894 Pursuant to the Articles, the Group shall make allocation from its profit after taxation and appropriations to the other common reserve fund at the rate decided by the shareholders annually. In normal circumstances, the other common reserve fund shall only be used for making up losses, capitalisation into share capital and expansion of the Group’s production and operation. Foreign currency translation reserve 2007 2006 RMB RMB At the beginning of year - - Exchange differences arising on translation of foreign operations ) - 142 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 At the end of year ) - Exchange differences relating to the translation from the functional currencies of the Group’s foreign subsidiaries into Currency Units are brought to account by entries made directly to the foreign currency translation reserve. 28. RETAINED EARNINGS 2007 2006 RMB RMB At the beginning of year 29,969,452 Profit for the year attributable to equity holders of the parent 60,876,913 Transfer of reserve (3,885,567) ) - 143 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 At the end of year, as previously reported 86,960,798 33,938,020 Prior year adjustments ) At the end of the year, as restated 86,960,798 29,969,452 29. MINORITY INTERESTS 2007 2006 RMB RMB At the beginning of year 7,601,106 Share of results of subsidiaries 867,223 At the end of year, as previously reported 8,468,329 7,580,050 Prior year adjustments - 144 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 At the end of the year, as restated 8,468,329 7,601,106 30. LOAN FROM A RELATED COMPANY The loan due is unsecured, interest-free and with no fixed terms of repayment. - 145 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 31. TRADE PAYABLES The aged analysis of trade payables at the balance sheet dates is as follows: 2007 2006 RMB RMB Within one year In the second year In the third year After the third year - 146 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 56,362,773 39,403,460 Most of the Group’s trade payables are denominated in currency of Renminbi. 32. OTHER PAYABLES AND ACCRUALS 2007 2006 RMB RMB Other payables Accruals - 147 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 The aged analysis of other payables at the balance sheet dates is as follows: 2007 2006 RMB RMB Within one year In the second year In the third year After the third year - 148 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Most of the Group’s other payables are denominated in currency of Renminbi. - 149 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 33. BANK LOAN - SECURED 2007 2006 RMB RMB Repayable within one year The bank loan was interest bearing at rates ranging from 6.12% to 7.29% per annum (2006: 5.58% to 6.12% per annum) and guaranteed by the holding company, CATIC Shenzhen Holdings Limited. 34. CASH AND CASH EQUIVALENTS For the purposes of the consolidated cash flow statements, cash and cash equivalents include bank balances and cash. Cash and cash equivalents at the end of the financial year as shown in the consolidated cash flow statement can be reconciled to the related items in the consolidated balance sheet as follows: 2007 2006 RMB RMB Cash and cash equivalents: Bank balances and cash 84,043,522 60,379,839 35. CAPITAL COMMITMENTS 2007 2006 RMB RMB Contracted but not provided for - acquisition of property, plant and equipment 140,000,000 - 150 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 On October 19, 2007, the Company signed the purchase agreement for the acquisition of Xian Prince International Hotel with Xian Maike Metal International Group Company Limited. According to the agreement, the Company is required to settle 70% of the purchase price (i.e. RMB140,000,000) within one month after the transfer of the property certificate to the Company. - 151 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 36. OPERATING LEASE COMMITMENTS At December 31, 2007, the Group had total future minimum lease payments under an non-cancellable operating lease which fall due as follows: 2007 2006 RMB RMB Within one year - 7,345,000 In the second to fifth years inclusive 70,035,690 13,255,000 70,035,690 20,600,000 37. RETIREMENT BENEFIT PLANS The Group operates various defined contribution retirement benefit plans organized by Shenzhen Government for its all qualifying employees. The Group is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions. 38. RELATED PARTY TRANSACTIONS During the year, the Group had the following material transactions with related parties in normal course of its business: 2007 2006 RMB RMB Construction fee paid to: Shenzhen CATIC Property Management Co., Ltd Property management fee paid to: Shenzhen CATIC Property Management Co., Ltd 1,687,965 1,700,059 Rental income received from: - 152 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Shenzhen CATIC Property Management Co., Ltd Commission paid to: Shenzhen Rainbow Department Store Co., Ltd 4,174,066 2,667,026 39. SUBSIDIARIES At December 31, 2007, the Company had the following major subsidiaries (except Fiyta (Hong Kong) Limited which was incorporated in Hong Kong, other subsidiaries were incorporated in the PRC): Attributable equity Name of subsidiaries Registered capital Principal activities interest held Direct Indirect Shenzhen Harmony World Watch RMB123,800,000 Distribution of watches and watch 98.79% - Centre Co., Ltd. components and provision of repair services Shenzhen Fiyta Precision Timing RMB10,000,000 Design, manufacture and 90% 9.879% Manufacture Co., Ltd assembly of quartz watches and watch components Shenzhen World Famous Watch RMB2,800,000 Retailing of advanced watch, 50% - Centre Co., Ltd. (note a) glasses and jewellery Xian Haomen Food & Recreation HKD16,000,000 Ceased business 62% - City Co., Ltd. (note b) Fiyta (Hong Kong) Limited HKD10,000,000 Distribution of watches and watch 100% - components 西安城亨实业有限公司 HKD10,000,000 Catering and entertainment 100% - Shenzhen Feijing Precision RMB7,000,000 Ceased business 90% 9.879% Optical Device Manufacture Co., Ltd (note c) Note: a) The Company has obtained substantial control over the joint venture’s operation since 2003. As a result, its results and assets have been consolidated in the Group’s financial statements. - 153 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 b) This subsidiary has sold out all its assets related to catering and entertainment business and ceased its operations since 2003. c) This subsidiary has sold out all its assets related to manufacture of precision optical device and watch surfaces business and ceased its operations since 2005. - 154 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 40. ULTIMATE HOLDING COMPANY The directors regard CATIC Shenzhen Company, a company incorporated in PRC, as being the ultimate holding company. 41. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform with the current year’s presentation. 42. REPORTING CURRENCY The Group’s financial statements are expressed in Renminbi. 43. PRIOR YEAR ADJUSTMENTS The prior year adjustments represented the correction of errors for the year ended December 31, 2006 are set out below: Retained Minority Reserve earnings interests RMB RMB RMB Adjustment on deferred tax assets/liabilities ) ) (2,100,540 - Adjustment on minority interest ) - 155 - SHENZHEN FIYTA HOLDINGS LIMITED 深圳巿飞亚达(集团)股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2007 Fair value adjustments of available-for-sale financial assets Reversal of incorrect entries in prior years ) 15,948,510 (3,968,568) 44. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements were approved by the Board of Directors and authorised for issue on April 9, 2008. - 156 -