ST华发Ｂ(200020)2008年年度报告（英文版）

深圳中恒华发股份有限公司 Shenzhen Zhongheng Huafa Co., Ltd. Annual Report 2008 Short Form of the Stock: ST HUAFA-A, ST HUAFA-B Stock Code: 000020, 200020 Annual Report 2008 Important Notice The Board of Directors and the Supervisory Committee of Shenzhen Zhongheng Huafa Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives hereby confirm that there are no any fictitious statements, misleading statements, or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. No director supervisor and senior executive stated that they couldn’t ensure the correctness, accuracy and completeness of the contents of the Annual Report or have objection for this report. Chair man of the Board Mr. Li Zhongqiu was not able to present at the meeting for being overseas, and he entrusted director Mr. Chen Zhigang to vote on his behalf. Other directors all attended the Board meeing. Mr. Li Zhongqiu, Chairman of Board; Mr. Fu Yanhua, Deputy General Manager of the Company,, and Mr. Sun Wei, Person in Charge of Accounting Organ hereby confirm that the Financial Report of Annual Report 2008 is true and complete. Shinewing Certified Public Accountants audited the 2008 Financial Report of the Company and issued the standard unqualified Auditors’ Report. The Board of Directors of Shenzhen Zhongheng Huafa Co., Ltd. Contents Ⅰ. Company Profile-------------------------------------------------------------------------------------2 Ⅱ. Summary of Financial Highlight and Business Highlight---------------------------------------3 Ⅲ. Changes in Capital Shares and Particulars about Shareholders--------------------------------6 Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees----------------10 Ⅴ. Administrative Structure-----------------------------------------------------------------------------15 Ⅵ. Brief Introduction to the Shareholders’ General Meeting ---------------------------------------21 Ⅶ. Report of the Board of Directors ----------------------------------- --------------------------------22 Ⅷ. Report of the Supervisory Committee--------------------------------------------------------------32 Ⅸ. Significant Events-------------------------------------------------------------------------------------34 Ⅹ. Financial Report---------------------------------------------------------------------------------------43 Ⅺ. Documents for Reference----------------------------------------------------------------------------143 1 Annual Report 2008 I. Company Profile 1. Name of the Company In Chinese: 深圳中恒华发股份有限公司 In English: SHENZHEN ZHONGHENG HUAFA CO., LTD. 2. Legal Representative: Li Zhongqiu 3. Agent Secretary of the Board: Fu Yanhua (held the post since Feb. 6, 2009) Securities Affairs Representative: Weng Xiaojue Contact Address: 6/F, East Tower of 411 Bldg., Huafa Road (N), Futian District, Shenzhen.Tel: Tel: (86) 755-83352206 Fax: (86) 755-83323160 E-mail: hwafainvestor@163.com 4. Registered Address: 411 Bldg., Huafa North Road, Futian District, Shenzhen Office Address: 6/F, East Tower of 411 Bldg., Huafa Road (N), Futian District, Shenzhen. Post Code: 518031 Company’s Internet Website: http://www.hwafa.com 5. Newspapers for Disclosing the Information of the Company: China Securities Journal, Securities Times and Hong Kong Wen Wei Po Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Office of Board of Directors of Shenzhen Huafa Electronics Co., Ltd. 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: ST HUAFA-A, ST HUAFA- B Stock Code: 000020, 200020 7. Other Relevant Information of the Company Initial registered date and place or changed registered date and place: Registered date: May 1992 Registered place: 411 Bldg., Huafa North Road, Futian District, Shenzhen Registered number of enterprise legal person’s business license: 100296 Registered number of tax: 113260 Name and office address of Certified Public Accountants engaged by the Company: Name: Shinewing Certified Public Accountants Address: 9/F, Block A, Fu Hua Mansion No.8 Chaoyang Men, Bei da jie, Dong Cheng District, Beijing, P.R.China 2 Annual Report 2008 II. Financial Highlights and Business Highlights (I) Major profit index as of the year 2008 Unit: RMB Items Amount Operating profit 1516630.79 Total profit 4914587.51 Net profit attributable to shareholders of the listed 7567912.54 company Net profit attributable to shareholders of the listed 1817162.61 company after deducting non-recurring gains and losses Net cash flow arising from operating activities -18616487.18 Items of non-recurring gains and losses deducted and its revolved amount Items Amount Gains and losses obtained from disposal of non-current assets -69313.15 Government subsidies which are included in the current profits and losses (except for the governmental subsidies enjoyed, in fixed amount and quantity according to certain standard, 400000.00 closely concerning to normal operation business, and according with regulations of national policy) Influence on current gains and losses after once adjustment in current gains and losses according to tax and accounting laws 2776601.27 and regulations Other non-operating income and expenditure except for the 3067269.87 aforesaid items Affected amount of income tax -423808.06 Total 5750749.93 CAS IAS Net profit 7567912.54 7567912.54 Net asset 247809266.16 247809266.16 3 Annual Report 2008 (II) Major accounting data and financial indexes over the past three years ended by the report year 1. Main accounting data Unit: RMB Increase/decrease this year 2008 2007 compared with that last 2006 year Operating income 189401245.08 193244882.85 -1.99% 201883363.71 Total profit 4914587.51 21365133.68 -77.00% -23262805.55 Net profit attributable to 7567912.54 22065920.97 -65.70% -23262805.55 shareholders of the listed company Net profit attributable to shareholders of the listed company 1817162.61 -1813318.27 - -23319385.48 after deducting non-recurring gains and losses Net cash flow arising from -18616487.18 14843814.16 -225.42% 26649992.33 operating activities Increase/decrease at the At the end of At the end of end of this year compared At the end of 2008 2007 with that at the end of last 2006 year Total assets 446670716.88 373957038.94 19.44% 376031844.21 Owners’ equity(or Shareholders’ 247809266.16 242200200.60 2.32% 220134279.63 equity) Share capital 283161227.00 283161227.00 0 283161227.00 2. Main financial indexes Unit: RMB Increase/decrease this year 2008 2007 2006 compared with that last year Basic earnings per share 0.0267 0.0779 -65.73% -0.08 (RMB/Share) Diluted earnings per 0.0267 0.0779 -65.73% -0.08 share (RMB/Share) Basic earnings per share after deducting 0.0064 -0.0064 200% -0.0082 non-recurring gains and losses (RMB/Share) Fully diluted return on Decrease 6.06 percenta 3.05% 9.11% -10.57% equity (%) ge point Weighted average return 3.08% 9.55% Decrease 6.47 percenta -10.24% 4 Annual Report 2008 on equity (%) ge point Fully diluted return on equity after deducting Increase 1.48 percentag 0.73% -0.75% -10.58% non-recurring gains and e point losses (%) Weighted average return on equity after deducting Increase 1.52 percentage 0.74% -0.78% -10.26% non-recurring gains and point losses (%) Net cash flow per share arising from operating -0.07 0.05 -240% 0.09 activities (RMB/Share) Increase/decrease at the end At the end of of this year compared with At the end of 2007 At the end of 2006 2008 that at the end of last year (%) Net asset per share attributable to shareholders 0.88 0.86 2.33% 0.78 of listed company (RMB/Share) Item Return on equity Earnings per share Weighted Basic earnings per Diluted earnings per Fully diluted (%) average (%) share(RMB) share(RMB) Net profit attributable to shareholders of the listed 3.05% 3.08% 0.0267 0.0267 company Net profit attributable to shareholders of the listed company after deducting 0.73% 0.74% 0.0064 0.0064 non-recurring gains and losses 5 Annual Report 2008 III. Changes in Capital Shares and Particulars about Shareholders (I) Particulars about the changes in share capital Before the change Increase or decrease of this time (+) After the change New Conversion Bonus Amount Proportion shares of public Amount Proportion Others Subtotal (Share) (%) shares (Share) (%) issued reserve I. Restricted shares 116,516,142 41.15 -26,248 -26,248 116,489,894 41.14 1. State-owned shares 2. State-owned legal person’s shares 3. Other domestic shares 116,516,142 41.15 -26,248 -26,248 116,489,894 41.14 Including: Domestic non-state-owned legal person’s 116,489,894 41.14 0 0 116,489,894 41.14 shares Domestic natural person’s 26,248 0.01 -26,248 -26,248 0 0 shares 4. Foreign shares Including: Foreign legal person’s shares Foreign natural person’s shares II. Unrestricted shares 166,645,085 58.85 +26,248 +26,248 166,671,333 58.86 1. RMB Ordinary shares 64,649,249 22.83 +26,248 +26,248 64,675,497 22.84 2. Domestically listed foreign 101,995,836 36.02 0 0 101,995,836 36.02 shares 3. Overseas listed foreign shares 4. Others III. Total shares 283,161,227 100 0 0 283,161,227 100 Note: In accordance with the relevant regulations, directors, supervisor and senior executives of the listed company could apply to release the sale restriction of shares held by them after leaving the positions 6 months later. Ended Jan. 17, 2008, the original chairman of supervisor committee of the Company Mr. Ye Daming leaved his position for 6 months long, with the application to China Securities Depository and Clearing Corporation Limited Shenzhen Branch, his held 26,248 shares of the Company have all been released sales restrictions. (II) The amount of shares held by the top ten restricted shareholders and restricted condition 6 Annual Report 2008 Amount of newly Amount of Name of restricted Date of being listed for added shares being restricted shares Restriction condition shareholders transactions listed for held transactions Promising that the non-tradable shares Wuhan Zhongheng of the Company held New Science & by it will not be Technology 116,489,894 May 18, 2010 0 listed for transaction Industrial Group within 36 months Co., Ltd. since the date of acquiring circulating right. (III) Issuance and listing of shares (1) The previous three year ended the period-end; the Company has no issurance of shares or listing such as additionally offering new share nor allotment of shares. (2) There existed no inner employees’ shares in the Company. (IV) About shareholders (ended Dec. 31, 2008) 1. The number of shareholders and particulars about the shares held by them Unit: Share Total shareholders 23,992 Particulars about shares held by the top ten shareholders Proportion Amount of Nature of Amount of Shares pledged Names of shareholders of share restricted shares shareholder share held or frozen held held Domestic Wuhan Zhongheng New Science & non-state-owned 41.14% 116,489,894 116,489,894 0 Technology Industrial Group Co., Ltd. legal person shares Foreign legal SEG (HONG KONG) CO., LTD. 5.85% 16,569,560 0 Unknown person Foreign legal GOOD HOPE CORNER 4.91% 13,900,000 0 Unknown INVESTMENTS LTD person Domestic HE HUAN HAO 0.43% 1,221,300 0 Unknown natural person Foreign natural WANG ZHI YONG 0.33% 935,100 0 Unknown person Foreign natural BINGHUA LIU 0.31% 876,213 0 Unknown person Domestic WU WEI MIN 0.31% 870,500 0 Unknown natural person 7 Annual Report 2008 Foreign natural LUO YA 0.27% 756,620 0 Unknown person Foreign natural LIU LIAO YUAN 0.26% 734,200 0 Unknown person Domestic LU JUN TONG 0.26% 723,900 0 Unknown natural person Particulars about shares held by the top ten unrestricted shareholders Name of shareholder Amount of unrestricted shares held Type of share Domestically listed foreign SEG (HONG KONG) CO., LTD. 16,569,560 share Domestically listed foreign GOOD HOPE CORNER INVESTMENTS LTD 13,900,000 share HE HUAN HAO 1,221,300 RMB common share Domestically listed foreign WANG ZHI YONG 935,100 share Domestically listed foreign BINGHUA LIU 876,213 share WU WEI MIN 870,500 RMB common share Domestically listed foreign LUO YA 756,620 share Domestically listed foreign LIU LIAO YUAN 734,200 share LU JUN TONG 723,900 RMB common share Domestically listed foreign XIAO GENG NING 720,669 share Among the top ten shareholders, Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. neither bears associated relationship with other shareholders, nor belongs to the consistent actor that are prescribed in Measures for the Administration of Disclosure of Explanation on associated relationship among the Shareholder Equity Changes of Listed Companies. aforesaid shareholders or consistent action The Company neither knew whether there exists associated relationship among the other shareholders, nor they belong to consistent actors that are prescribed in Measures for the Administration of Disclosure of Shareholder Equity Changes of Listed Companies. (V) Particulars about the controlling shareholder and actual controller of the Company (1) Change of the controlling shareholder of the Company The controlling shareholder of the Company did not have changes in year 2008. (2) Introduction to the controlling shareholder of the Company Name of the controlling shareholder: Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. Legal representative: Li Zhongqiu Date of foundation: Mar. 21, 1996 Registered capital: RMB 138,000,000 Business scope: Production; sales of computers, TV set, display, other hardware and computer 8 Annual Report 2008 software; development of internal data communication network, building of packing materials and light weight building material for packaging; hardware metal product, plastic product; acoustic product and electronic equipment; fabrics and garments; sales of building materials; management of exports business for the own products and technologies for the Company and member enterprise; management of export business on raw material, apparatus and instrument, machinery equipments, spare parts and technologies (barring those limited on operations or forbidden products or techniques of export and import by nation), development of real-estate and sales of commercial housings. (3) Introduction to the actual controller of the Company Name of the actual controller was Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd with legal representative of Mr. Li Zhongqiu( for the resume, please refers to the IV. Particulars about directors, supervisors, senior executives and employees) Li Zhongqiu 98.4% Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. 41.14% Shenzhen Zhongheng Huafa Co., Ltd. 9 Annual Report 2008 Iv. Particulars about Directors, Supervisors and Senior Executives (I) Particulars about the directors, supervisors and senior executives of the Company 1. Basic information (1) Basic information about the directors, supervisors and senior executives (Ended as Dec. 31, 2008) Shares Shares Drawing Reason remuneration held at held at Name Title Sex Age Office term for from year-be year change shareholders’ gin -end units or other Chairman, 2007.7.18－ Li Zhongqiu Male 46 0 0 Naught Yes GM 2010.7.18 Vice 2007.7.18－ Tang Chongyin Male 48 0 0 Naught Yes Chairman 2010.7.18 2007.7.18－ Chen Zhigang Director Male 35 0 0 Naught Yes 2010.7.18 Director, 2007.7.18－ Shi Cheng Male 45 0 0 Naught No Deputy GM 2009.2.23 Independent 2008.6.28－ Li Ding’an Male 63 0 0 Naught No Director 2010.7.18 Independent 2008.9.4－ Yang Junyuan Female 46 0 0 Naught No Director 2010.7.18 Independent 2008.9.4－ Zhang Yi Male 39 0 0 Naught No Director 2010.7.18 Chairman of 2007.7.18－ Cao Li Supervisory Female 38 0 0 Naught No Committee 2010.7.18 2007.7.18－ Tang Ganyu Supervisor Female 31 0 0 Naught Yes 2010.7.18 2007.7.18－ Weng Xiaojue Supervisor Female 28 0 0 Naught No 2010.7.18 (2) Presences at the meetings of the Board by the directors In the report period, the Company totally held 9 meetings of the Board, including 6 site meetings and 3 meetings held by way of communication; the presences by the directors were as followings: Due Attending the Whether Presence in meeting in way Entrusted attending the Name of the person of presence Absence meeting in Positions Presence communication directors (times) person in (times) (times) successive two (times) (times) times or not Chairman, Li Zhongqiu 9 6 3 0 0 No GM Vice Tang Chongyin 9 6 2 0 1 No Chairman 10 Annual Report 2008 Chen Zhigang Director 9 6 3 0 0 No Director, Shi Cheng 9 5 3 1 0 No Deputy GM Independent Li Ding’an 5 2 3 0 0 No Director Independent Yang Junyuan 1 0 0 1 0 No Director Independent Zhang Yi 1 1 0 0 0 No Director 2. Major business experience of directors, supervisors and senior executives in recent 5 years. (1) Member of the Board of Directors Li Zhongqiu: Male, was born in 1962 with Master of Engineering. He is representative to the NPC (the tenth) of Hubei Province, Wuyi labor medalist of Wuhan. He is Chairman of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. from 1996 till now. From July, 2007 till now, he works as Chairman and the General Manager of the Company. Tang Chongyin: Male, was born in 1960. He is a Doctor of Laws. He worked as Chief of the law office in Shenzhen SEG Group Co., Ltd. from November 1998 to April 2004, and chief of the audit office of Shenzhen SEG Group Co., Ltd. from May 2000 to April 2003. Moreover, he has been chief legal adviser of Shenzhen SEG Group Co., Ltd. from July 2000 to June 2008; Manager of the Assets Department of Shenzhen SEG Group Co., Ltd. from April 2003 to June 2008; Minister of Property Rights Operation and Management Department of Shenzhen SEG Group Co., Ltd. since June 2008; since July 2007, he held the position of Vice-chairman of the Company. At the same time, he was concurrently the Independent Director of Nanning Chemical Industry Co, Ltd.(stock code: 600301),Independent Director of Wuhan Yintai Technology Power Supply Co., Ltd. and Chairman of Shenzhen Daming Electronics Co., Ltd. Chen Zhigang: Male, born in 1973, Master of Business Administration. From 2002 to 2005, he was supervisor, investment manager, securities representative of Wuhan Huaxin Hi-Tech Co., Ltd. He is CFO and secretary of the board of directors of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. from June 2005 to Aug. 2008, the Executive Deputy General Manager of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. since Aug. 2008, and he works as Director of the Company since July 2007. Shi Cheng: Male, was born in 1965, Master Degree. He was deputy general manager of International Business Department of Wuhan Huaxia Bank from 2000 to 2002 and worked as Vice president of Wuhan Huaxia Bank Qingshan Branch from 2003 to 2005. He was general manager of International Business Department of Wuhan Huaxia Bank from 2005 to May 2007, and Special Assistant to General Manager of the Company from May to July of 2007. He works as Director and Deputy General Manager of the Company from July 2007 to Feb. 2009, and the Secretary of the Board of the Company from June 2008 to Feb. 2009. Li Ding’an: Male, was born in 1945, Professor, Ph D Graduate Intutor, the first Chinese Certified 11 Annual Report 2008 Accountant. He was the Standing Deputy Dean of South China University of Technology School of International Trade and Economics; member of the 8th , 9th and 10th Standing Committee of Political Consultative Conference of Guangdong Province and member of The China Democratic National Construction Association. He was the Professor in Accounting Department of School of Management of South China University of Technology since May 2001; and was transferred to School of International Trade and Economics of South China University of Technology as Standing Deputy Dean. Now, he is the member of the 10th Standing Committee of Political Consultative Conference of Guangdong Province; member of China Accounting Society; member of China Society of Accountants; Standing Director of Guangdong International Tax Association; Researcher of China Beijing Center for Asia-Pacific Finance & Accounting Research; part-time Professor of Management School, Jinan University; part-time Professor of Macau University of Science and Technology; Independent Director of Suntek Technology Co., Ltd.(short code: 600728); Independent Director of Anhui Huafu Top Dyed Melange Yarn Co., Ltd. (short code: 002042); Independent Director of Shenzhen Gem High-Tech Co., Ltd.; Independent Director of Guangzhou Port Group; and Independent Director of the Company since June 2008. Yang Junyuan: Male, was born in 1963, Doctor in Accounting, Senior Accountant of Professor Class. He was the Vice-president of Great Wall Securities Co., Ltd. from year 2002 to year 2005; Chairman and General Manager of Shenzhen Right-Sun Investment Holding Co., Ltd. since year 2005; and and Independent Director of the Company since Sep. 2008. Zhang Yi: Male, was born in 1970, Master Degree. He worked as the Lawyer in Shenzhen Haibu Law Firm from year 2000 to year 2003; Co-partner and Lawyer of Guangdong Junyan Law Firm since year 2003; meanwhile, he was the Independent Director of Shan Xi Coking Co., Ltd.(short code: 600740), Perennial Law Consultant of Shenzhen Manzhe Technology Co., Ltd.; and Independent Director of the Company since Sep. 2008. (2) Member of the Supervisory Committee: Cao Li: Female, was born in 1970, graduated from Junior College, Intermediate Accountant. She was CFO of Wuhan Zhongheng New Science & Technology Industrial Group Co., Ltd. from 2000 to May 2005, was a member of transition period workgroup of the Company from June 2005 to June 2006. She worked as Assistant General Manger from July 2006 to October 2007 and Secretary of the Board of Directors from October 2006 to July 2007. She worked as General Manager of Purchasing Center from May to October 2007. Since July 2007, she works as Chairman of the Chariman of the Supervisory Committee of the Company. Tang Ganyu: Female, was born in 1977, holding bachelor. She was assistant to Plant Manager of Wuhan Hengsheng Photoelectrical Industry Co., Ltd. from August 2003 to July 2005 and Engineering Manager from August 2005 to July 2006. She became of Special Project Manager in office of deputy general manager, and production manager since August 2006. She is Supervisor of the Company since July 2007. Weng Xiaojue: Female, was born in 1980. She graduated from Zhongshan University. She was engaging in securities work in the office of board of directors of Guangzhou Friendship Co., Ltd. from July 2002 to August 2006 and became Representative for Securities Affairs of the Company since January 2007. She is Supervisor and Vice Chairman of Labor Union of the Company since July 2007. 12 Annual Report 2008 3. Particulars about the annual remuneration i. The decision-making processes of annual remuneration held by directors, supervisors and senior executives The remunerations of directors and supervisors of the Company are decided by the shareholders’ general meeting, the remuneration of senior executives is confirmed by the board of directors in accordance with the general remuneration management system of the Company and the actual achievements of operations targets. ii. The annual remuneration of directors, supervisors and senior executives Total 3 director, supervisor and senior executive drew remunerations from the Company and the total annual remuneration was RMB 587,000 (excluded the allowance of independent director) Total amount of annual remuneration Names Title (Jan. 2008-Dec. 2008) Shi Cheng Director, GM 265,470 Chairman of Supervisory Cao Li 220,198 Committee Weng Xiaojue Supervisor 101,373 iii.The allowance for independent director: 36,000/person/year(befor tax) from Jan. to June of year 2008, and 60,000/person/year(befor tax) from July 2008 after adjustment. 4. Changes on directors, supervisors and senior executives in the report period In June 2008, with the nomination in the 3rd Extraordinary Meeting of 2008 of the Board of Directors of the Company and with the approval in 2007 Annual Shareholders’ General Meeting, Mr. Li Ding’an was supplemented to be the Independent Director of the 6th Board of Directors of the Company. In Aug. 2008, Independent Director Ms. Song Pingping did not held the post of Independent Director of the Company due to work reason. Mr. Yan Haizhong is the authoritative expert in PCB Industry (printed circuit board), and the Company planed to engage him as the senior consultant for the business of circuit board. The two aforementioned brought forward to resign the posts of Independent Directors. With the nomination in the 6th Extraordinary Meeting of 2008 of the Board of Directors of the Company held on Aug. 18, 2008 and with the election in the 1st Extraordinary Shareholders’ General Meeting of 2008 held on Sep. 4, 2008, Mr. Yang Junyuan and Mr. Zhang Yi was supplemented to be the Independent Directors of the 6th Board of Directors of the Company. Events after the report period: In Feb. 2009, Mr. Shi Cheng put forward to resign his posts of Director, Deputy General Manager, Secretary of the Board of the Company due to personal reason. In Feb. 2009, with the suggestion from the Nomination Committee of the Board and nomination of the General Manger of the Company, the Board of Director engaged Mr. Fu Yanhua as the Deputy General Manager of the Company; with the With the suggestion from the Nomination Committee of the Board and nomination of the Chairman of the Company, he Board of Director engaged Mr. Fu Yanhua as the Secretary of the Baord of the Company; with the nomination of the Board and election in the 1st Extraordinary Shareholders’ General Meeting of 2009, Mr. Fu Yanhua was 13 Annual Report 2008 supplemented to be the Director of the 6th Board of Directors of the Company. (II) About Employees At the end of report period, the Company had on-the-job staff of 1,493; the Company did not have retiree to bear the expenses. The structure of the employee is as follows: Profession constitution Production personnel 1,195 80.04% Salesperson 35 2.34% Technicians 55 3.68% Financial personnel 20 1.34% Administrative personnel 88 5.89% Other 100 6.70% Education background Master and On-the -job master 3 0.20% Bachelor degree 43 2.88% 3-years regular college graduate 86 5.76% Other 1,361 91.16% 14 Annual Report 2008 Ⅴ. Administrative Structure I. General Situation of the Cooperation Governance In strict accordance with Cooperation Law, Stock Act, Code of Corporate Governance for Listed Companies in China and Shenzhen Stock Exchange Listing Rules, our cooperation has always been striving to establish and improve administration system, continue perfecting Corporate Governance Structure, standardize the operation. As a result, we have shaped up a decision-making and management system characterized by check and balances, mainly consisting of the following division, namely, general meeting of stockholders, board of directors, board of supervisors and management level. The current status of cooperate governance basically comply with the requirement of Code of Corporate Governance for Listed Companies in China. The specific situations within the statement period are as follows: (1) We have elected to supplement the Independent Directors of accounting so that the membership structure of the board of directors is further improved and the decision-making power of finance was effectively enhanced; we have actively promoted directors’ involvement into the training program of laws and regulations offered by supervision department to deepen their understanding of standardized operation and elevate the level of decision-making; we strictly follow the legal procedures to implement the work including the notice of meetings such as general meeting of stockholders, board of directors, board of supervisors, the disclosure of decision and information, so that all levels can reasonably perform its own function in respective extents. (2) The internal control system has been effectively implemented through formulating some sub-branch governance system such as finance, personnel and archives; in line with Annual Report Regulation of Auditing Committee of the Board, Annual Report System of the Independent Directors, we standardized the auditing procedure of the annual statement, consolidated the basis of information disclosure; meanwhile, in order to further standardize the related party transaction and eliminate the fund embezzlement behavior by large shareholder and related party, we have formulated Regulations on Preventing Major Stockholder and Affiliated Party from Embezzling Corporate Fund in accordance with Notice about Preventing the Recurrence of Major Stockholder Embezzling Corporate Fund ([2008]101 ) issued by The China Securities Regulatory Commission so as to regulate the operation of the cooperation. (3) In line with the requirement of announcement [2008]27 by The China Securities Regulatory Commission and Notice about Further Promoting Special Event Management Work [2008]62 issued by Shenzhen SRC, the board has reviewed the problems arising out of the 2007 Cooperation Governance Special Campaign, further carried out the introspection and tracked the rectification efforts to ensure all the problems are solved, and worked out an improvement plan for next step.(To see the details, refer to the cooperation’s announcement of July, 19, 2008 ); according to the Notice about Enhancing Continual Supervision, Preventing the Recurrence of Fund Embezzlement (〔2008〕118 ) issued by The China Securities Regulatory Commission, we have had a introspection of the fund transfer between shareholders and other related parties and we didn’t find any cases of occupation of corporate funds or other forms of occupation through unfair related party transaction. (4) There is no occurrence of regulatory or irregulatory notice of undisclosed information to large shareholders or the actual controller. We haven’t found any cases in which the corporate or its affiliated sectors deposit in large stockholder’s financial institutions. II. Statement on the work of the Independent Directors 1. The structure of the Independent Directors 15 Annual Report 2008 Required times to Attend in Name of independent Commission attend the board person Absent(times) directors (times) meeting (times) Li Ding’an 5 5 0 0 Yang Junyuan 1 0 1 0 Zhang Yi 1 1 0 0 2. Within the statement period, each independent directors has actively participate in decision-making work; perform duties according to laws, regulations and Corporate Charter; carefully consider every proposal to make objective remark; make independent and impartial judgment based on profession knowledge to earnestly guarantee the interest of small and medium-sized shareholders. Within the statement period, we didn’t raise objection against the proposal by the board or other motions. III. On the relationship between the corporate and majority shareholders The majority shareholders exercise the right of investors according to law, and didn’t interfere with the decision-making as well as production and operation activities. The corporate is totally independent from the majority shareholders in these aspects including business, institution, personnel, assets and accounting. The board of meetings, board of supervisors and other internal sectors are all working independently. IV. On the establishment and implement of evaluation and motivation system of senior executives The corporate has set up Official Rank and Salary System of the Staff, according to which the salary of senior executives is determined by the actual business condition and individual performance. The salary is floating, meaning that there is a rise or fall in salary level based on annual evaluation to establish a primary incentive and restraint mechanism. The corporate will vigorously improve the system concerning salary and evaluation to stimulate the enthusiasm and creativity of senior executives of the corporate, with an aim to create harmonious corporate culture for a long-term growth of the corporate. V. On the internal control system of the corporate In view of the Primary Regulations Inside the Enterprise issued by Ministry of Finance and The China Securities Regulatory Commission and the Guidance to Internal Control of Listed Corporate issued by Shenzhen Stock Exchange, in order to standardize development, to control risk, to ensure the normal business operation and to protect legitimate rights of shareholders, the corporate has framed up a fairly complete internal controlling system of modern enterprise management and kept enriching and modifying it in practice. With these efforts, the internal control system like financial management, personnel management and internal audit can be perfected constantly. 1. An overview of the internal control system (1) Management Control The corporate has established a Corporate Governance System mainly composed of general meeting of stockholders, board of directors, board of supervisors and management level. We have set up four professional committee under the board of directors (namely, Strategic Committee, Nominating Committee, Auditing Committee, Salary Management & Employee Evaluation Committee) and two standing executive department (namely, Auditing Department and Board of Directors Office), to effectively ensure the decision-making power, the supervision power and the executive power of the general meeting of stockholders, board of directors, board of supervisors and further formulate a clear division of duty and check-and-balance system. In a word, the internal control system was 16 Annual Report 2008 made up of a series of regulations under the Corporate Charter, covering divisions including production and operation, personnel management, financial management, internal auditing and information transmission control. General Meeting of Shareholders Board of Directors Board of Supervisors Auditi Board Office General Manager General Management Dept. Business Center Circuit Board Printing Branch Financial Dept. Video Branch Wuhan Branch Shenzhen Zhongheng Huafa Property Ltd. Wuhan Hengfa Techonology Ltd Planning Dept. Shenzhen Injetion Molding Branch (2) Production Operation Control According to ISO9001:2000 Quality Management System Certification and ISO14001:2004 Environment Management System Certification, the corporate has set up a Quality and Environment management system, mapped out a programmatic document Quality and Environment Handbook to govern the management of quality and environment as well as management regulations, procedure document, operating instructions guiding various matters, all of which have play a significant role in directing and controlling the daily operation of the corporate. (3) Financial Management Control The corporate worked out the accounting system, financial management system, operation procedure of accounting, and Workbook of Accounting, in accordance with relevant laws and regulations such as Accounting Law, Accounting Postulate, Finance General, Job Specification for Accounting. In this way, we specify the responsibility of each accountant and establish a controlling system consisting of evaluation system, audit of financial avenue and expenditures, seal use management, budgeting management, assets management, physical assets stock count, accounting computerization management, etc. (4) Information Disclosure Control In line with laws and regulations like Regulation on the Information Disclosure of Listed Corporate, Shenzhen Stock Exchange Stock Listing Rules, the corporate worked out the Management System of Information Disclosure, specifying the details of information announcement and main points, standardize the statement, transfer, review and announcement of the information disclosure procedure, stipulating in detail the integrity of content of major transaction. With these efforts, we 17 Annual Report 2008 ensure that every investor can have access to information about the corporate. 2. Major Items of Internal Control (1) Control of Branch Office and share-controlled Branch Corporate At present, the corporate has two wholly-owned branch corporate (namely, Shenzhen Zhongheng Huafa Property Ltd. and Wuhan Hengfa Techonology ) and a branch office in Wuhan. The corporate outlined a controlling approach on the basis of Corporate Charter as well as the requirement of listed companies. The corporate appoint directors, supervisors and other important managerial staff, specifying the rights and responsibility of Branch Corporate, standardize the management of personnel, fund and assets by the branch office and share-controlled branch corporate through setting up proper institution; strengthen professional guidance and inspection; paying special attention to major business matters like Between Funds, transaction and investment abroad; convey and communicate the corporate policy, institution and management information through regular meetings to ensure the headquarter can have an accurate and timely mastery of the operating and major incidents of the Branch Office and share-controlled Branch Corporate. (2) Control over Connected Transaction The corporate drew up the Management System of Connected Transaction, which put forward a norm for the recognition of affiliated party, the transaction type, and the approval procedures of the connected transaction as well as the disclosure of the connected transaction. It stipulates that for potential connected transaction, the corporate should firstly ask independent directors’ comment and submit it to the board meeting or meeting of shareholder for approval. In the voting, the relevant director and shareholders should act up to the system of withdrawal, the transaction between corporate and majority stockholder with its subsidiary should be market-oriented, transparent and standardized. The rights and obligation of each party should be defined by the contract so that it will not damage the interest of small and medium-sized shareholders. (3) Control over provision of guaranty to any other party Based on the articles on guaranty of Corporate Charter, the corporate manages the business of guaranty; standardize provision of guaranty to other parties, to protect the legitimate interest of the corporate and investors. Within the statement period, there is no case of provision of guaranty to other parties. (4) Control over use of fund-raised The corporate formulated Management System of Fund-raising to set up detailed prescription for the storage of fund, the auditing procedure, the use, the alteration, supervision and responsibility investigation. Within the statement period, there is no case of embezzlement of fund-raised. (5) Control over Major Investment The decision of major investment should be made in view of principle of legitimacy, safety, caution, efficiency, controlling investment risk, emphasizing investment efficiency. Corporate Charter clearly defined the approval authority and examination and approval procedures of major investment and financing project to ensure that the investment decision is reasonable and complying with regulations. 3. Overview of Internal Audit Work Within the statement period, under the leadership of the board, the audit sector audits the business performance of every business unit (including branches), strengthening efforts into investigation into leftover problems, tracking the receivables and payables specially, establishing a database of clients’ information, get debts paid in various means; having a check and inspection of internal system, program and regulations; strictly supervising the budget and execution of internal control of business unit, issuing audit opinion independently. 4. Problems in internal control and rectification plan In 2008, the corporate was under the impact of global economic recession, so the orders, gross profit rate are both on the decline. The corporate has established the market development strategy 18 Annual Report 2008 oriented towards the market, but in the aspects of customer crediting rating and selection of suppliers, there are still some defects, which may lead to appearance of new bad debt or poor quality in raw materials. Secondly, in settling the payment questions left behind by the history, enterprises face possibilities of legal actions for economic disputes, which is because that the data for the transitional shareholder-changing period is incomplete; secondly, the staff of public institution changes too fast, which makes the the continuity of business even more challenging. The corporate with strengthen the control over clients’ credit, shortening the period of settlement to recoup funds rapidly; tighten control over the quality of goods by suppliers and establish files of suppliers concerning quality of goods and pay more attention to quality restriction at the contract signing procedure; enhance work in checking account and negotiation with suppliers, sort out the internal archives; stabilize staff, speed up creating enterprise culture, increase staff’s acceptance and sense of belonging to the corporate. 5. Overall rating of the internal control work In line with Company Law, Stock Act, Guidance to Internal Control of Listed Corporate,Corporate Charter, and the practical situation of the corporate, the corporate managing level has carried out unremitting investigation of internal control. It has formulated various internal control system to set up an effective internal control mechanism characterized by power and responsibility being clearly defined, authorizing from high level to low level, mutual checking and balance, and strictly supervision. The internal control system cover all business of the corporate, all units, all staff, the whole process of decision-making, implementation, supervision and feedback procedure, including precaution, while-supervision and post-evaluation. The board believes that there is no major defect in internal control system, nor is there a serious mistake in execution. Generally, the internal control system is effective, if we can discover problems timely and correct them in time to eliminate hidden dangers, we would further guarantee the standard operation of the corporate. 6. Self-assessment of the internal control system by the board of supervisors The self-assessment statemented over the internal control in 2008 thoroughly reflected the present situation of internal management, objectively commented the effect of internal control, honestly revealed the problems existing in the internal control, and sketch a practical rectification statement which is also a truthful reflection of the situation of the corporate; the internal control system worked normally and there is no severe problem that negatively influencing internal control system. 7. Self-assessment of the internal control system by the independent directors The internal control system is suitable for the management and development of the corporate. The major work of internal control was carried out in line with internal control system, and the control over finance, connected transaction, Provision of Security to Foreign Parties, major investment, disclosure of information has been strict and effective, ensuring the order of operation, reducing the operation risk, protecting the interest of all the shareholders; the self-assessment of the internal control truly reflected the status quo of the internal management. VI. Annual statement by the board of directors and audit committee 1. Members of audit committee should study carefully the files about annual statement outlined by China's Securities Regulatory Commission and Shenzhen stock exchange. In the process of drawing up and announcement of annual statement, perform duty earnestly, work diligently and guarantee the overall interest of the corporate. 2. The audit time of annual finance statement will be determined through negotiation between audit committee and accounting firm in charge of annual audit of the corporate. 3. Audit committee should finish auditing the finance statement before the entry of annual auditing accountant and form a written opinion. 4. Audit committee should urge the accounting firm to submit financial audit report, and record the means of supervision, times and results in written form, and it should be signed by relevant person in charge. 19 Annual Report 2008 5. After the entry of annual auditing chartered accountant, the audit committee should strengthen communication with the chartered accountant, and review the financial audit report after the CA’s evaluation and finally form a written opinion 6. After the audit report was finished, the audit committee should vote for the report and submits the final report to the board of directors for deliberation and approval. 7. While submitting finance auditing report to the board, the audit committee should also submit the final report by the accounting firm of the last year and decisions concerning continuing working with or changing the accounting firm. 8. Head of corporate finance is responsible for communication with accounting firm, creating necessary conditions to help the audit committee to fulfill above mentioned task. 9. During the time when the annual report is being drawn and audited, members of the audit committee should keep secret. They must not reveal information before the disclosure of the report, to prevent illegal acts like insider trading. 10. Affairs not covered in these rules, the audit committee should implement according to relevant laws, administrative regulations, department regulations, regulatory document and articles in the company’s charters. 11. This regulation can only be revised and explained by the board of directors. 12. This regulation takes effect from the day of approval by the board of directors. 20 Annual Report 2008 VI. Brief Introduction to the Shareholders’ General Meeting In the report period, the Company held two Shareholders’ General Meetings, the followings were the details: 1. On Jun. 27, 2008, the 2007 Annual Shareholders’ General Meeting was held on spot; 2. On Sep. 4, 2008, the 1st Extraordinary Shareholders’ General Meeting 2008 was held on spot; Notices on resolutions of the aforesaid Shareholders’ General Meetings were respectively published on China Securities Journal, Securities Times, Hong Kong Wen Wei Po and Juchao website (http://www.cninfo.com.cn.) dated Jun. 28, 2008 and Sep. 5, 2008. 21 Annual Report 2008 VII. Report of the Board of Directors I. Review on the operation of the Company in the report period (I) Overall operation of the Company In 2008, the company actively responded to multiple challenges. On the one hand, due to the strong impact on the global economy by the international financial tsunami occurring in the second half of 2008, the world's major emerging economies have been exposed to the most serious economic crisis since the Great Depression during the 1930s; owing to a late start and the lack of the core capability of independent innovation, Chinese electronic industry has been placed at the lower reach of the global electronic manufacturing industry chain for a long time and concentrated at processing trade in the international trade, with a poor capacity of price negotiation and a declining profitability; since the company has always maintained a business cooperative relationship with international companies such as AOC and FOXCONN in recent years as well as some of the company's upstream suppliers and downstream customers also have international economic operations, the company's day-to-day operation has inevitably been affected by the international economic crisis directly or indirectly, in particular, the reduction of printed circuit board business orders, extension of account settlement and narrowing of profitability space. On the other hand, the company has experienced a major institutional change of state-owned shareholders move-out and private shareholders move-in, resulting in some historical burden and onerous internal integration tasks. As the major industrial assets under the controlling shareholder WUHAN ZHONGHENG GROUP came into the listed company in succession, a complete and thorough LCD industry china has taken its initial shape in the production of Styrofoam and plastic injection parts as well as the assembly of whole-set LCD monitors; the newly-input Wuhan industrial assets have gradually become a bright spot in the earnings from main business; during the reporting period, the company has achieved total net profit of 7.57 million Yuan, with a net profit of 1.82 million Yuan excluding non-recurring gains and losses; compared with the operating loss during the same period last year, the overall operation in 2008 has gradually tended to a good condition and the industrial integration has borne fruit, including: • For Wuhan plastic injection business acquired from the controlling shareholder in the mid-year of 2008, the company has created a profit of 4.61 million Yuan only for a short period of 7 months; during the reporting period, the company actively expands its business and increases its market share, developing new customers such as QINGDAO HAIER and WUHAN YINTAI TECHNOLOGY based on a long-term cooperation with Taiwan AOC; at the same time, the company, on the one hand, focuses on strict control of product quality, still maintaining a good record of delivery even in the case that the brand customers are particular about product quality, and on the other hand, pays close attention to energy saving and consumption reduction and of raw materials, implementing work order management policy for requisition of the major production materials such as raw materials and paints, adhering to the shopping around principle of “comparison of prices for the goods with same quality and comparison of services for the goods with same prices” in procurement of materials, and making full use of the existing resources to reduce inventory and eliminate waste; • For Styrofoam business, the company has developed new customers such as BLUE RIBBON BEER and SUPOR while striving for more orders from the existing customers; with respect to product structure, the company has increased the production of small pieces based on the original model of large pieces as a backbone and small pieces as a supplement, building a new workshop for 22 Annual Report 2008 production of No. 2 small pieces and acquiring several new equipment for production of small pieces; in addition, owing to a sharp rises in production costs of this business in the second half of 2008 as a result of the impact of the financial tsunami and the “Coal to Gas Project”, the company controls the costs of labor, raw materials and business development and has achieved some fruits, with a full-year profit of 1.55 million yuan in 2008; • For whole-set LCD monitor business, during the reporting period, the company has successfully obtained the cooperative support from big customers such as Taiwan AOC and FOXCONN; compared to the same period last year, the company has achieved a sharp rise in orders, a large increase in operating revenue, a gradual emergence in size effect and a profit of 2.7 million Yuan during the reporting period; • For printed circuit board business, the production and management has been in a difficult state in recent years; as a result of the impact of international financial tsunami, the degree of boom of the domestic circuit board manufacturing industry has greatly declined and in addition, the company's own product structure focused on single panels and dual panels lacks market competitiveness and is at the bottom of the entire market competition framework, so that the business orders plummeted and the profitability continued to decline, resulting in a serious loss of 16.82 million Yuan in 2008, which has become a heavy burden on the development of the company; • For property leasing business, the operation continued to be stable; as a result of the impact of external economic situation, the requests for rent reduction or return by tenants have gradually increased since the second half of 2008, which has brought a lot of difficulties to the company's leasing business and rent collection; in order to stabilize the tenants and reduce property vacancy rate, the company strengthens communication with tenants, provides good services in accordance with their practical needs and takes a flexible and diverse way of lease to actively bring in new tenants by making use of the chance that some tenants have to re-choose their operation locations owing to road closure for subway construction nearby, achieving a property occupancy rate of 98% throughout the year, as well as a rental income of 35.42 million Yuan and a rental profit of 31.03 million Yuan recognized through audit by ShineWing Certified Public Accountant. With respect to the management, the company is still in an adjustment period, with higher staff mobility, lack of implementation of part work and difficulty in strict implementation of rules and regulations, resulting in some difficulties in internal control. The company, on the one hand, adjusts the organizational structure, clarifies departmental functions and responds to high staff mobility by multi-posts, and on the other hand, makes more efforts to collect historical accounts receivable, rationalize warehouse management and negotiate with suppliers to reduce procurement costs. At the same time, the company's management has, through a variety of efforts, cleaned up the small loans of several banks and strived for a larger credit limit from the bank compared to previous years in the way of applying to a bank for a loan secured by major high-quality assets, which has greatly ease the day-to-day working capital pressure. (II) Main business and operation of the Company The main operation of the Company is focused on the industry of electronic products, including production and sales of circuit boards, foam parts and plastic injection hardware, and LCD whole machine business. The sales of products of the Company focus on the area of South China and Hong Kong. Details could be available in the following table: Unit: RMB Gross Increase/decrease Increase/decrease Increase/decrease Income from Cost of profit in income from in cost of in gross profit Industry operations operations ratio operations over operations over ratio over the last (%) the last year (%) the last year (%) year (%) Plastic Decrease 14.29 11,232,421.98 11,745,915.79 -4.57% -29.13% -17.91% injection percentage point 23 Annual Report 2008 hardware Circuit Decrease 12.3 52,714,033.72 60,052,553.59 -13.92% -18.46% -8.59% boards percentage point Increase 7.56 LCD 67,855,548.92 62,664,194.14 7.65% 15.40% 6.67% percentage point Foam parts 16,414,466.23 16,080,400.12 2.04% —— —— —— Increase/decrease in income from operations Area Income from operation over the last year (%) South China 5236.70 -59.21% Hong Kong 6145.20 121.77% Southwest 1798.34 124.89% Middle China 1641.40 —— (III) Customers of purchase and sales The total amount of purchase from the top five suppliers was RMB 73,929,700, taking 46.56% of the total amount of purchase. The total amount of sales to the top five customers was RMB 63,986,600, taking 34.66% of the total amount of sales. (IV) Constitution of assets Proportion Increase/decrease Increase/decrease Amount for Amount for Item in the total amount over the proportion over 2008 2007 assets last year the last year Account receivable 22.02% 57,501,749.38 40895501.62 71.12% 98,397,251.00 Inventory 50460254.12 11.30% 32,595,773.55 17864480.57 54.81% Other account 15576239.03 3.49% 17,885,097.37 -2308858.34 -12.91% receivable Investing property 42938764.28 9.61% 45,819,394.37 -2880630.09 -6.29% Fixed assets 194494830.65 43.54% 187,238,973.29 7255857.36 3.88% Short-term loans 94000000.00 21.04% 60,400,000.00 33600000.00 55.63% Account payable 49895119.48 11.17% 42,777,941.82 7117177.66 16.64% Other account 45523634.74 10.19% 22,199,987.43 23323647.31 105.06% payable Total assets 446670716.88 100% 373,957,038.94 72713677.94 19.44% Reason for change: 1. Account receivable increased greatly over the same period of last year, mainly due to that business of LCD increased and customers extended period of account. 2. Inventory increased greatly over the same period of last year, mainly due to reserve of liquid crystal screen. 24 Annual Report 2008 3. Short-term loans increased due to increase of bank loans with one year term. 4. Other account payable as of year-end increased RMB 23,323,647.31 over year-begin, with an increase rate of 105.06%, which was mainly due to that: the Company purchased plastic injection business from Wuhan Zhongheng this year, with payment amounting to RMB 27 million. Till Dec 31st of 2008, RMB 19 million has not been paid yet. (V) Change in items of gains and losses in the report period Increase/decrease Increase/decrease Amount for Amount for Item amount over the proportion over 2008 2007 last year the last year Operating expenses 3588602.84 3,733,724.38 -145121.54 -3.89% Administrative expenses 23824246.71 17,100,889.55 6723357.16 39.32% Financial expenses 6527280.66 4,227,096.85 2300183.81 54.42% Asset impairment loss 2015771.14 2,062,177.47 -46406.33 -2.25 Non-operating 4714051.25 24,122,046.44 -19407995.19 -80.46% income Operating profit 1516630.79 -2,514,105.56 4030736.35 -160.32% Total profit 4914587.51 21,365,133.68 -16450546.17 -77.00% Net profit 7567912.54 22,065,920.97 -14498008.43 -65.70% 1. Administrative expense increased by RMB 6,723,357.16 over last year, mainly due to increase of RMB 1.8 million and RMB 2.56 respectively paid for salary and depreciation. 2. Financial expense increased by RMB 2,300,183.81 over last year, mainly originating from the interest expenditure arising from short-term loans amounting to RMB 33.6 million. 3. Non-operating income decreased by RMB 19,407,995.19 over last year, mainly due to that Wuhan Zhongheng Group gave EPS and LCD whole-machine installation assets to the Company amounting to RMB 19,554,224.24 in 2007, and no such income was given for 2008. 4. Operating profit increased by RMB 4,030,736.35 over last year, mainly due to that income occurred in the assets donated by Wuhan Zhongheng and loss-reduction of the Company have obtained initial effect. 5. Total profit and net profit all decreased by 77% over last year, mainly due to that assets were donated to the Company by controlling shareholder in 2007, while no such proceeding happened in 2008. (VI) Constitution of cash flow Ratio of Increase 2008 2007 Increase or decrease or decrease Cash flow arising from -18616487.18 14,843,814.16 -33460301.34 -225.42% operating activities Cash flow arising from -11452486.17 -6,401,787.21 -5050698.96 78.90% investment activities Cash flow arising from 27387109.29 -11,371,829.59 38758938.88 340.83% financing activities Net increase of cash -2921882.52 -3,337,702.59 415820.07 12.46% and cash equivalent Reason for change: 25 Annual Report 2008 1. Cash flow arising from operating activities decreased greatly over the same period of last year, mainly due to that overdue payments were made to suppliers concerning business of circuit board and plastic injection, and also due to big purchase of liquid crystal panel. 2. Cash flow arising from investment activities decreased greatly over the same period of last year, mainly due to purchase of plastic injection business from Wuhan Zhongheng Group. 3. Cash flow arising from financing activities increased greatly over the same period of last year, mainly due to that more short-term loans amounting to RMB 33.6 million has been borrowed in 2008 than 2007. (VII) Operation of main controlling and share-holding companies 1. Shenzhen Huafa Property Tenancy and Management Co., Ltd: is mainly engaged in lease surrogate and management of property owned by the Company, with registered capital of RMB 1 million. Its 60% equity is held by the Company. The company stopped operation in the second half year of 2008. The Company reinvested and established another wholly-owned subsidiary-Shenzhen Zhongheng Huafa Property Co., Ltd. to continue to carry out the aforesaid tenancy and management of property owned by it. Income of RMB 1.86 million has been received from the property management business for 2008, with loss of RMB 74,200. 2. Wuhan Hengfa Science and Technology Co., Ltd.: a whole-owned subsidiary of the Company set in Wuhan in September 2008, with registered capital of RMB 27.5 million, mainly engaging in production and process for plastic injection products. Because the Company entrusted Wuhan Zhongheng Group to operate and manage plastic injection business in Wuhan since June to December of 2008, Wuhan Hengfa Science and Technology Co., Ltd, which was in charge of undertaking the assets relevant to the aforesaid business, conducted no operation activity in the report period. II. Prospect for future development of the Company (I) Development of the Industry and analysis to the market In 2009, the Company is going to face challenge and opportunity in the industry. The global market is not optimistic, which may bring continuous decline in export growth; domestic policy environment gets unceasingly improved, so promotion by domestic demand will gradually appear. In 2008, the statistic communiqué of electronic information industry predicted that growth of global IT expenditure would not exceed 3% in 2009, and growth of shipment quantity of LCD products was predicted to be almost 4%; while, income of domestic electronic information industry would increase with 12% approximately. In particular, as our country practices implementation of policy of enlarging domestic demand and layout for industry adjustment and revitalization, rare opportunity also exists for industry development. (II)Operation plan for the coming year In 2009, the Company plans to realize operation income of RMB 660 million, RMB 560 million for operation cost, RMB 5.2 million for sales expense, RMB 29.5 million for administration expense and RMB 13.2 million for financial expense. 1. Peeling off sources which cause loss to advance profit-making ability of the Company Printed circuit board business keeps the Company from development for a long time. Loss of RMB 16,823,300 was continuously made by this business in 2008, so this business had become a comparatively heavy burden for the Company’s development. The Company planned to peel off printed circuit board business through assets replacement with its controlling shareholders in recent times, in order to operate with light burden and thus to strengthen entire profit-making ability. 26 Annual Report 2008 2. Integrating industry chain and centralizing resources in advanced fields The Company focused on development for LCD whole machine assembling and plastic injection business, meanwhile, cooperated with EPS business. The Company would further offer input and support for significant market; upgrade products, the various business departments would assort with production reform and develop new products according to customers’ requests on function and quality of products. The Company adjusted craftwork and procedure, arranged periodic trainings for employees, improved production efficiency, perfected quality-management system, improved quality of products, consolidated fundamental works and strived for victory by excellent quality. At the same time, it strengthened management and control on cost and implemented detailed management. Target management was promoted. The Company had signed target responsibility paper with various departments. Working target for a whole year was divided to monthly targets, such as saving energy, reducing consumption and level-appraisal for quality. Detailed index was definite and specified people were regulated to be responsible for the target, and their individual income depended on performance of the department. The original market share was consolidated and also the Company was steadily expanding market share. 3. Optimizing commercial leasers structure and steadily improving property operation Property tenancy mainly referred to Huafa Building. The Company would make unified programming for property tenancy of Huafa Building, management commercial leasers in category, advance communication between the leasers and make new opportunity for the Company to make profit. Meanwhile, diversified external cooperation methods would be adopted to raise tenancy rate and perfect property management. Diversified channels will be tried to develop customer resources and the Company tries to make steady growth in tenancy rate, dig potential of property to increase benefit, seek for new measures to make profit, increase income and save expenditure, actively make income; enhance management in property service, consolidate and advance satisfaction of customers. 4. Optimizing management system and strengthening sustainable development The Company would continue to optimize management system; check leak and supply the lack aiming at those leaks which could be easily ignored in management; according to new situation, make corresponding adjustment to management system, reinforce execution of management system, and establish relevant supervision and examination mechanism. Concerning the key taches such as exchange of significant business, significant investment project and related transaction, the Company strengthens audit and daily supervision for operation procedure, strengthens efforts in self-check and self-correction, internal-audit and internal-correction, finds bugs in control and leak in management in time and proposes practical solving measures and improvement suggestions, standardizes operation procedure, improves responsibility-ask and performance-ask mechanism, solves problems and perfects works in internal, has examination, result and reform for supervision, and gradually forms the internal control management system with definite divisions, detailed responsibility and supervision in every tache. The following chaos phenomenons are prevented: break of discipline and regulations, loss, waste and unavailable management. In aspect of production and operation, the Company will promote factory modern management for various business departments, make renovation and dig potential of enterprise, improve labor production rate and increase economic benefit. Taking reference of management of Japanese enterprises, the Company is strict in control of production procedure, and improves production management pattern. Seniors’ meeting is held periodically for exchange of management experience. In aspect of human resource, on the basis of doing well daily works, the Company would make training plan for employees according to their working nature across a whole year, improve their working ability, develop their innovation thought, advance communication, establish perfect 27 Annual Report 2008 promotion system, meanwhile, actively strengthen communication with other human resource departments in the same industry for exchange of recruitment information and increase of personnel reserve of the Company. (III)Demand, application plan and source of capital As the Company gradually switches to liquid crystal industry, it needs more capital for its business. The Company will continue to keep cooperation with financial institutions such as banks, to fulfill capital demand for operation and production by main financing method-bank loans. At the same time, the Company pours much effort in finance management and conducts strict hold on direction of capital flow. According to actual condition, the Company promptly adjusts financial budget and capital attemper for 2009. According to the present supply and sale situation offered by suppliers and customers, the Company makes progress in clearing accounts receivable and payable. Business structure is optimized, marketing strategy is adjusted and payment for goods is called back with acceleration; supply and sale harmony is strengthened, velocity of capital is improved; the Company organizes production in strict accordance to benefit principle, reducing capital occupancy by inventory. Annual capital need is predicted to be RMB 300 million, and RMB 230 million has been already obtained through loan in Shenzhen Branch of China Construction Bank. (IV)Risks faced by the Company in production and operation for 2009 and the measures the Company plans to take 1. Market risk: influenced by international financial crisis, the Company received a decreased demand for its products from international market, so risk became larger. Measures the Company plans to take: (1)The Company establishes strategic cooperation partnership with significant customers, and improves service. (2)The Company actively develops domestic market and increases market share. (3) The Company strengthens investigation research on factors which influence market environment and make market forecast. The Company appraises credit of customers, to avoid risk of bad debt. 2. Risk of rising cost: mainly comes from two aspects: one side, price of raw materials is still going to rise, which brings rising cost in production; secondly, strain of power supply leads to rising cost. Measures the Company plans to take: (1)The Company pays attention to digging internal potential, comprehensively takes use of resources, increases income and reduces expenditure. (2)The Company continues to establish strategic cooperation partnership with suppliers of raw materials, conducts strategic purchase to ensure supply of raw materials. (3)The Company actively harmonizes and improves power supply and organizes rational production. 3. Financial risk: due to that the Company has bank loans with big amount. Measures the Company plans to take: (1)The Company optimizes business structure, adjusts marketing strategy and speeds up calling back payment for goods. (2)The Company strengthens balance between supply and sale, to improve velocity of capital. (3)The Company organizes production in strict accordance to benefit principle, and reduces capital occupancy by inventory. 28 Annual Report 2008 III. Investment in the report period (I) Application of raised proceeds In the report period, there were no events of raising funds or previously raised funds used till the report period. (II) Significant investing projects with non-raised funds Details are available in IX-“Significant Events” (III) “Purchase, sale of significant assets, and assets reorganization” in this report. IV. Audit In the report period, ShineWing Certified Public Accountant issued standard unqualified auditor’s report for the Company. V. Change in accounting policy, accounting estimation and accounting errors correction No change in accounting policy and accounting estimation, accounting errors correction have happened to the Company in the report period. VI. Routine work of the Board of Directors (I) Meetings of the Board of Directors in the report period The Board totally held 9 meetings in the report period, with the following details: 1. On Apr 11th of 2008, the 1st extraordinary meeting of the Board for 2008 was held by way of spot. Details could be available in the public notice of the Company dated Apr 12th of 2008. 2. On Apr 27th of 2008, the 3rd meeting of the 6th Board of Directors was held by way of spot. Details could be available in the public notice of the Company dated Apr 29th of 2008. 3. On May 25th of 2008, the 2nd extraordinary meeting of the Board for 2008 was held by way of spot. Details could be available in the public notice of the Company dated May 27th of 2008. 4. On Jun 5th of 2008, the 3rd extraordinary meeting of the Board for 2008 was held by way of spot. Details could be available in the public notice of the Company dated Jun 7th of 2008. 5. On Jul 18th of 2008, the 4th extraordinary meeting of the Board for 2008 was held by way of communications. Details could be available in the public notice of the Company dated Jul 19th of 2008. 6. On Jul 31st of 2008, the 5th extraordinary meeting of the Board for 2008 was held by way of communications. Details could be available in the public notice of the Company dated Aug 1st of 2008. 7. On Aug 18th of 2008, the 6th extraordinary meeting of the Board for 2008 was held by way of communications. Details could be available in the public notice of the Company dated Aug 20th of 2008. 8. On Aug 27th of 2008, the 4th meeting of the 6th Board of Directors was held by way of spot. Details could be available in the public notice of the Company dated Aug 29th of 2008. 9. On Oct 24th of 2008, the 5th meeting of the 6th Board of Directors was held by way of spot. Details could be available in the public notice of the Company dated Oct 28th of 2008. (II)Implementation of resolutions of Shareholders’ General Meeting by the Board In the report period, the board of directors of the Company strictly implemented resolutions of Shareholders’ General Meeting; earnestly performed its duty in right limit regulated by Articles of Association, and successfully accomplished various tasks confirmed by resolutions of Shareholders’ General Meeting. Here come the details: 1. Net profit realized by the Company in 2007 would be all used to make up the losses of previous years, so the Company would conduct no profit distribution nor share capital conversion from public reserve; 29 Annual Report 2008 2. The Company continues to engage Shinewing Certified Public Accountant as the audit institution for 2008, with annual audit charge of RMB 300,000; 3. Allowance for each independent director of the Company was adjusted to be RMB 60,000 (tax included) per year; 4. Three independent directors were added into board of directors of the Company; 5. With authorization from Shareholders’ General Meeting, the Board could choose banks with its own will for loans, according to demand for production and operation; according to loan condition, the Board then decided to conduct financing proceedings such as loans, open of letter of credit and bank acceptance, as well as relevant assets mortgage (impawn) for loan financing; loans from banks could not exceed RMB 200 million. In 2008, the Company actually borrowed bank loans amounting to RMB 110 million. (III)Summary report on duty performance of the Audit Committee The Audit Committee of the Board consists of 2 independent directors and 1 director, and professional accounting person takes post of the director commissioner. The Committee is responsible for quality and procedure supervision of the financial report; makes appraisal on working efficiency and quality offered by annual audit institution, and presents opinion on engagement; supervises significant investment and transaction, proposes consultation opinion and suggestion, and promotes construction and perfection of internal control system of the Company. According to the No.48 document (2008) issued by CSRC, and relevant demands of Notice on Doing well Annual Report Works of Listed Company issued by Shenzhen Stock Exchange, the Committee carried out a series of works during the 2008 annual audit period, with details as follows: 1. Before the certified public accountants entered for annual audit, the Audit Committee held a field communication meeting with the CPAs. At this meeting, time schedule, personnel constitution of the audit team, audit plan, risk judgment, test and appraisal method for risks and embezzlement, as well as audit focus were confirmed for financial report audit for 2008. Meanwhile, the Committee got well known of year-end check of the Company participated by the certified public accountants and the pre-audit made by them. During the audit, the Committee kept prompt communication with the certified public accountants, urged the accountants to hand in audit report in promised time, so as to promote and accomplish the annual audit works as scheduled, with the premise that audit quality was guaranteed. 2. Opinions issued by the Audit Committee on financial statement prepared by the Company before the entrance of certified public accountants According to relevant regulations of CSRC and Shenzhen Stock Exchange, also to working procedure of the Audit Committee for annual report, the Committee heard report on 2008 financial status and operation achievement of the Company from persons in charge of accounting of the Company, before the certified public accountants entered. Meanwhile, according to requirements of Accounting Standard for Enterprise-Basic Standard and other 37 detailed standards, and relevant regulation of accounting system and financial management method of the Company, the Committee earnestly examined the financial report of 2008, focusing on that whether application of accounting policy and accounting estimation was reasonable, truthfulness and completeness of accounting data and whether new accounting standard for enterprise was strictly implemented. After that, the Committee believed that: the Company and its subsidiaries chose adequate accounting policy and applied reasonable accounting estimation and no significant wrong statement and omit had been found; no capital occupation by large shareholders had been found; no external guarantee breaking laws and abnormal related transaction had been found; financial statement prepared by the Company basically reflected financial condition as of Dec 31st of 2008 and operation achievement made in 2008. The Committee agreed to take this financial statement as basis to carry out financial 30 Annual Report 2008 audit of the Company for 2008. 3. Opinions issued by the Audit Committee on financial statement prepared by the Company after the certified public accountants issued initial audit opinion According to audit plan for 2008 financial statement, Shinewing Certified Public Accountant Co., Ltd.- the audit institution of the Company for 2008, finished field affairs relevant to annual audit as scheduled. The Audit Committee examined the 2008 financial statement which the certified public accountants issued initial audit opinion for, and held that: the audit work conducted by certified public accountants for 2008 financial statement of the Company was in strict accordance to relevant criterion of audit business; when preparing the annual report, the Committee made effective communication with the accountants; the financial statement with audit opinion issued by certified public accountants fairly reflected financial condition as of Dec 31st of 2008 and operation achievement made in 2008. 4. Summary on audit works offered by CPAs for 2008 ShineWing Certified Public Accountant Co., Ltd. has already provided audit service for the Company for successive 3 years, is quite known on the financial condition and business operation of the Company, actively promoted works according to audit plan and accomplished audit work for 2008 financial statement of the Company. (IV)Performance of the Remuneration and Examination Committee The Remuneration and Examination Committee examined remuneration summary of the directors, supervisors and senior executives for 2008 handed in by Human Resource Department of the Company, and believed that: remuneration of directors, supervisors and senior executives disclosed in annual report was real and accurate, according with remuneration policy and examination standard, and the Committee agreed the remuneration disclosed in the 2008 Annual Report. VII The preplan of profit distribution and converting capital public reserve into share capital (I) Particulars about the bonus dividends of the Company in the previous three years. Year Net profit(RMB) Plan on distributio No distribution and no Year 2005 6,622,306.73 conversion No distribution and no Year 2006 -23,262,805.55 conversion No distribution and no Year 2007 22,065,920.97 conversion (II) The preplan of 2008 annual profit distribution and converting capital public reserve into share capital With the confirmation by the audit of Shinewing Certified Public Accountants based on the Chinese Accounting Standard, the net profit realized by the Company in 2008 was RMB 7,567,912.54. The accumulative undistributed profit of the Company at the end of year 2007 was RMB -224,384,793.57, in accordance with the principle of profit distribution, after offsetting the losses in previous years and withdrawing the statutory surplus reserve RMB 0, the profit available for distribution for shareholders was RMB -216,816,881.03. According to the aforementioned financial positions and actual operations of the Company, the preplan on profit distribution of the Company in year 2008 was: the Company didn’t conduct profit distribution and converting capital public reserve into share capital. VIII Other information disclosure events: In the report period, the newspapers for publicly disclosing engaged by the Company were China 31 Annual Report 2008 Securities Journal, Securities Times and Hong Kong Wen Wei Po, and no alteration of information disclosure newspaper occurred. Juchao information website http://www.cninfo.com.cn is the appointed website for information disclosure. VIII. Report of the Supervisory Committee (I) Working of the Supervisory Committee The Supervisory Committee held 7 meetings, and details are as follows: 1. On April 11, 2008, the 3rd extraordinary meeting of the 6th Supervisory Committee was held on spot, and details of the meeting can be seen in the notice of the Company dated on April 12, 2008. 2. On April 27, 2008, the 3rd meeting of the 6th Supervisory Committee was held on spot, and details of the meeting can be seen in the notice of the Company dated on April 29, 2008. 3. On May 25, 2008, the 4th extraordinary meeting of the 6th Supervisory Committee was held on spot，and details of the meeting can be seen in the notice of the Company dated on May 27, 2008. 4. On June 5, 2008, the 5th extraordinary meeting of the 6th Supervisory Committee was held on spot，and details of the meeting can be seen in the notice of the Company dated on June 7, 2008. 5. On July 31, 2008, the 6th extraordinary meeting of the 6th Supervisory Committee was held by way of communication，and details of the meeting can be seen in the notice of the Company dated on August 1, 2008. 6. On August 27, 2008, the 4th meeting of the 6th Supervisory Committee was held on spot，and details of the meeting can be seen in the notice of the Company dated on August 29, 2008. 7. On Oct. 24, 2008, the 5th meeting of the 6th Supervisory Committee was held on spot, in which the 3rd Quarterly Report 2008 was examined and approved. (II) Independent opinions of the Supervisory Committee on operation of the Company In the report period, members of the Supervisory Committee attended all the Board meeting and Sharehodlers’ General Meeting of the Company as observers, they performed the duties on supervising implementation of the contents of Articles of Association and procedure by the Board of Directors, and supervising the implementation on the resolutions the board meeting by the management group. 1. The Company’s operation according to laws In the report period, in accordance with the regulations on Company Law, Securities Law, Listing Rules For Stock and Articles of Association, the Board of Directors of the Company managed and operated and made decision legally, established and perfected the internal control system. The holding and convening of the Shareholders’ General Meeting and Board of Directors conformed to the relevant regulations. While performing their duties, the largest shareholder, directors and senior executives of the Company had no deeds against the laws or regulations, or done harm to the interest of the Company. 2. Inspection of the financial status of the Company In the report period, Shinewing Certified Public Accountants audited the finance of the Company regularly and issued standard unqualified Auditors’ Report for 2008 Financial Report of the Company; they thought 2008 Annual Financial Report had truly, accurately and completely reflected the financial status and operation achievements of the Company. During the period, the Supervisory Committee checked the financial system and financial status of the Company replying on the internal audit department, they did not find the implementation of accounting standards and 32 Annual Report 2008 financial system invalid which caused the assets of the Company have big losses. 3. Particulars about assets purchase In the report period, the pricing of the Company’s asset purchase was fair and reasonable and the relevant procedure conformed to regulations, and transaction price was identified by agency’s asset assessing. and no inside transaction and hurt behavior to the Company and interests of its shareholders has been found. 4. Particulars about related transaction In the report period, the related transaction of the Company conformed to the regulations of Company Law, Articles of Association and relevant laws and regulations. The content of transaction accorded with the demands of business development and normal operation of the Company; the transaction behaviors abided by the marketing principles; no inside transaction and hurt behavior to the Company and interests of its shareholders has been found. At the same time, the Supervisory Committee also checked the Self-report on Matters on Funds Occupation by Controlling Shareholders and Related Parties, they thought the Report truly reflected the current of funds between the Company and controlling shareholders and related parties; the Company did not have such situations: largest shareholder and its related parties occupied the funds of listed companies non-operationally and occupied the funds of listed companies in disguise through unfair related transactions. 33 Annual Report 2008 IX. Significant Events I. Significant lawsuit and arbitration There was no significant lawsuit or arbitration in the report period. II. Security investment In the report period, the Company hasn’t carried on security investment, nor held equity of other listed company, non-listed financial enterprise or company that planned to be listed. III. Significant asset purchase, sales and restructure No significant asset purchase, sales and enterprise merger concerning non related transaction happened in this report period, nor did them happened in previous period but lasted to this report period. IV. Significant related transaction (I) On Jun. 5, 2008, the Board held the 3rd extraordinary meeting for 2008 in which resolution on related transaction that Purchasing Relevant Assets for Plastic Injection Business from Controlling Shareholders was examined and approved. It was agreed that the Company took cash to purchase the relevant assets for plastic injection business from its controlling shareholder-Wuhan Zhongheng Group. Hubei Zhonglian Assets Estimation Co., Ltd. issued Asset Estimation Report (EZLPBZ No.054 (2008)), taking Mar. 31, 2008 as basis day of estimation. The estimated net value for the transacted assets amounted RMB 27,201,600. With negotiation between the Company and Wuhan Zhongheng Group, the general price for the objected assets amounted to RMB 27 million. After this purchase, due to that Wuhan Zhongheng Group had not transferred the relevant land-using right and workshop to the Company, the Company had to use the land-using right and workshop by leasing and accept relevant comprehensive service provided by Wuhan Zhongheng Group; besides, due to that the Company still hadn’t got qualification attestation as supplier from main customers of plastic injection business, and qualification license from superintended customs for processing trade, so a transition period did exist for this asset transfer. In order to ensure normal operation and production of plastic injection business, the Company entrusted Wuhan Zhongheng Group to operate and manage the relevant assets for plastic injection business during the transition period. The entrusted operation term started from the date of asset transfer to Dec. 31, 2008. If the Company acquired qualification attestation as supplier from main customers of plastic injection business, and qualification license from superintended customs for processing trade in advance during the entrusted operation term, then the entrusted operation term should end; if it didn’t required the aforesaid license in that term, then the Board of the Company would decide whether to postpone the entrusted operation term according to situation. For the aforesaid entrusted operation was just arrangement in transition period for asset transfer, Wuhan Zhongheng Group agreed to take no fee for this trusteeship from the Company. For details, please refer to the Company’s notice dated Jun. 7, 2008. On Jun. 5, 2008, Agree of Asset Transfer, Agreement on Comprehensive Service, and Agreement on Entrusted Operation were reached between the Company and Wuhan Zhongheng Group; the two 34 Annual Report 2008 parties accomplished procedure for hand-over-and-take-over of the aforesaid assets according to regulation of the agreements dated Jun, 12, 2008. Till Dec.31, 2008, the Company had received qualification attestation as supplier from main customers of Wuhan plastic injection business, and qualification license from superintended customs for processing trade, the transition of the aforesaid operation of purchasing assets was successfully completed, and since Jan. 1, 2009, the Company formally carried on the operation management of relevant assets of Wuhan plastic injection business. After the entrusted operation time of Wuhan plastic injection business, according to the Entrusted Operation Agreement signed by the two parties, the Company engaged agency to made special audit for Wuhan plastic injection business as scheduled, and Shinewing Certified Public Accountants provided standard unqualified special audit report for the aforesaid business (XYZH/2008SZATS020-2). The accumulated net profit of the aforesaid assets in entrusted operation period was about 4.61 million (from June to December of 2008). Besides, according to Comprehensive Service Agreement signed by the two parties, Wuhan Zhongheng Group provided comprehensive service such as workshop rent: from June to December of 2008, the Company actually rent workshop of 11,449.90 square meters from Wuhan Zhongheng Group, with rent amount of totally about RMB 640,000; rent of employees’ dormitory about RMB 210,000. Net profit Net profit contributed contributed Relevant Relevant The to the to the assets credit or The Related Explanation transaction Purchase Purchase Company Company property is liability is purchased transaction of Relationship party or date price from the from the totally totally assets or not price-setting controller purchase year-begin transferred transferred date to the to the or not or not year-end year-end Take the Relevant estimated assets of Wuhan net value of producing Jun.5, RMB 27 RMB 4.61 RMB 4.61 Holding Zhongheng Yes transaction Yes No plastic 2008 million million million shareholder Group bidding injection asset as the products basis (II) due to the production business of the Company and holding shareholder – Wuhan Zhongheng Group is in the upstream and down stream of LCD industry chain, in order to promoting rapid development of the Company in LCD field, the Company continued to develop daily related transaction with the holding shareholder – Wuhan Zhongheng Group or its underling holding subsidiary - Wuhan Hengsheng Optoelectronic Industry Co., Ltd., and purchase raw material LCD needed in production from then. The 4th Extraordinary Shareholders’ General Meeting 2007 held on Jan. 3, 2008 discussed and approved Proposal on Prediction of Daily Related Transaction of Video in 2008, and the price-setting principle was that the transaction price was 1% less than the current average market price. Details could be found in notice on Dec. 15, 2007. Due to constant rising price of LCD, great demand from Januray to April in 2008, supply shortage of the aforesaid upstream raw material and shortage of LCD products which was difficult to satisfied, therefore, in 2008, the Company only signed one related transaction agreement with related party to purchase LCD, with the transaction amount of USD 222,700. (III) Related transaction related with daily operation Related parties Selling products and providing labor service to Purchasing products and receiving labor 35 Annual Report 2008 related parties service from related parties Transaction Proportion in the same Transaction Proportion in the amount transaction amount amount same transaction amount Wuhan Zhongheng 51.28 0.27% —— —— Group Co., Ltd. Wuhan Hengsheng Optoelectronic —— —— 120.89 0.78% Industry Co., Ltd. (IV) Credit and liability intercourse of the Company and related parties Capital provided for related parties Capital provided for the Company Related parties Current amount Balance Current amount Balance Wuhan Zhongheng New Science and 0.00 0.00 3405.59 3587.45 Technology Industry Group Co., Ltd. Wuhan Hengsheng Optoelectronic Industry, 37.65 80.37 0.00 0.00 Co., Ltd. Total 37.65 80.37 3405.59 3,587.45 36 Annual Report 2008 Special Explanation on Non-operational Capital Occupancy and Other Related Capital Intercourse of Shenzhen Zhongheng Huafa Co., Ltd. in 2008 XYZH/2008SZATS020-1 The Board of Directors of Shenzhen Zhongheng Huafa Co., Ltd., Receiving your entrust, we audited the consolidated financial statements of Shenzhen Zhongheng Huafa Co., Ltd. (hereinafter referred to as the Company) and financial statements of its parent company, according to audit standard for Chinese certified public accountant. The audited statement included: balance sheet as of Dec 31st of 2008, profit statement of 2008, cash flow statement of 2008, equity change table of shareholders and annotation of financial report (hereinafter refered to as financial report), and issued standard unqualified audit report with No. XYZH/2008SZATS020. According to the regulations of Notice on Matters Concerning Standardizing Capital Intercourse of Listed Company ans Related Parties and External Guarantee of Listed Company (ZJF [2003] No. 56) issued by CSRC and State-owned Assets Supervision and Administration Commission of the State Council, and Notice on Standardizing External Guarantee of Listed Company (ZJF [2005] No. 120) issued by CSRC and China Banking Regulatory Commisson, the Company compiled Summary Statement of Non-operational Capital Occupancy and Other Related Capital Intercourse of Listed Company in 2008 (hereinafter refer to as Summary Statement) attached after Special Explanation Compiling and disclosing Summary Statement and ensuring its authenticity, validity and integrality are the responsibility of the Company. We checked the information of Summary Statement, accounting information checked when we audited the Financial Report in 2008 of the Company and relevant contents of audited Financial Report and did not find any disagreement or discrepancy in all significant aspects. Except relevant audit procedure transaction with related parties in auditing the Financial Report in 2008, we did not implement any other audit or procedure to the information of Summary Statement. In order to better understand non-operational capital occupancy and other related capital intercourse of the Company for 2008, the consolidation table is suggested to be read together with the audited financial statements. This special explanation is only available for the Company to report its Annual report to CSRC and Stock Exchange. Without written agreement from the CPAs, this explanation is forbidden to vend or publically refer by any means, and also not available for other purpose. Affix I: Statement of Non-operational Capital Occupancy and Other Related Capital Intercourse of Listed Company in 2008 Shinewing Certified Public Accountants Beijing P.R.China April 23, 2009 37 Summary Statement of Non-operational Capital Occupancy and Other Related Capital Intercours Name of listed company: Shenzhen Zhongheng Huafa Co., Ltd. Un Annual Repo 39 Annual Repo Notes: 1.Operational occupation: refers to intercourse account occurred in related transactions concerning purch providing labor force; 2. Non-operational occupation: refers to creditors’ right relationship formed from activities concerning pro returning bank debt and making investment for related parties or on behalf of them. 40 Annual Report 2008 V. Significant contracts and their implementations (I)It was planned in the share merger reform of the Company that: the controlling shareholder-Wuhan Zhongheng Group made consideration arrangement with the commitment that it restructured the Company’s assets and delivered shares to the shareholders holding circulating shares of the Company; the main content of asset restructure was Wuhan Zhongheng Group donated relevant asset concerning EPS and entire machine assemble business to the Company, meanwhile, made business conformity to the Company. According to the commitment of Wuhan Zhongheng Group, relevant asset concerning EPS business had been already transferred to the Company in August of 2007. The Company decided to set Wuhan Branch to operate and manage these assets. However, due to the complicated procedure for transacting operation license, Wuhan Branch was not founded in August of 2007 as scheduled. Besides, those long-term cooperated clients in business concerning relevant assets of EPS would have a qualification attestation lasting for 3 months. Taking consideration of the special situation happened during the transition period for this assets transfer, the Company entrusted Wuhan Zhongheng Group to operate and manage the relevant assets concerning EPS business from Aug. 1, 2007 to Jun. 30, 2008, to assure a lasting asset operation and realization of a smooth transition of operation. The net value of the assets operated by entrustment amounted to RMB 15,893,600. Because the aforesaid entrustment operation was just an arrangement in the transition period, Wuhan Zhongheng Group agreed to take no fee for this trusteeship from the Company. Till Jun. 30, 2008, those long-term cooperated clients in business concerning relevant assets of EPS have finished qualification attestation as supplier; Wuhan Branch also accomplished its industrial and commercial registration procedure dated Dec. 27, 2007; business operation for the donated assets has successfully experienced the transition, thus, the Company has officially took charge in operating and managing relevant assets of EPS Business from Jul. 1, 2008. After the entrusted operation term of EPS business, the Company engaged agency to carry out special audit according to Agreement on Entrusted Operation reached by the two involved parties. Shinewing Certified Public Accountant issued special audit report (XYZH/2008SZATS001) with standard unqualified opinion. During the entrusted operation period (from Aug. 1, 2007 to Jun. 30, 2008), the aforesaid assets brought accumulative net profit of RMB 1.55 million. (II) The board of directors of the Company examined and passed asset selling proposal at the 2nd extraordinary shareholders’ general meeting dated May 20, 2005, which agreed to sell the No.1 factory and its accessory buildings in Shangbu Industry District to the underling subsidiary of Zhenghua Electronic Group Co., Ltd. (hereinafter refer to as Zhenghua Group) Zhenghua Group Shenzhen Electronic Co., Ltd with RMB 12.8 million. The above asset assessing was made on August 23, 2004, and board of director required property transferring procedure should be finished before April 30, 2006. However, the actual transferring procedure finished in Nov. of 2006, and Zhenhua Group has paid RMB 12.8 million. Considering the above period was delayed, the board of directors held the 1st extraordinary meeting of 2007 and the 2nd extraordinary meeting of 2007 respectively on March 14, 2007 and April 3, 2007 to reexamine above transferring issue. The Company negotiated with Zhenhua Group that the above property rent from Nov. 1, 2006 to August 31, 2008 about RMB 7.31 million belonged to the Company, and details refer to the Company notice dated on May 24, 2005 and April 6, 2007. In August of 2008, when transferring the aforesaid assets, the Company and Zhenghua Group had doubt on whether the establishment of building such as power supply and fire fighting system belong to the target, through friendly negotiation of the two parties, the transferring date changed from Aug. 31, 2008 to Oct.31, 2008, the whole income of the target building produced in September and October totally about RMB 670,000 was possessed by the Company as compensation of controversial transferring power supply and fire fighting system. Since Nov. 1, 2008, the aforesaid 41 Annual Report 2008 assets were totally carried on by Zhenghua Group, and relevant item of the contract was completed. (III) In 2001, the Company signed Building Leasing Contract of first to forth floor of Huafa building with Shenzhen Wanshang Friendship Department Store Co., Ltd. and China Resources Vanguard Co., Ltd., with total leasing area amounting to 22,241.7 square meters with ten years leasing period, established “CR Vanguard Department Store” etc. emporium. In the report period, this contract is performed well. (IV) The Company hasn’t any significant guarantee contract occurred in the report period or occurred in previous period but lasted to the report period. (V) The Company hasn’t any significant entrusting event of others to manage assets of the Company occurred in the report period or previous period but lasted to the report period; neither has other entrusted financing events. VI. Special Explanation of independent directors on external guarantee of the Company According to the spirit of Guiding Opinions on Establishing Independent Directors System in Listed Company, Notice on Matters Concerning Standardizing Capital Intercourse between Listed Company and Related Parties and External Guarantee of Listed Company (ZJF [2003] No.56), Notice on Standardizing External Guarantee of Listed Company (ZJF [2005] No.120) and relevant regulations, with the principle of being practical and realistic, independent directors made a serious check of external guarantee of the Company, and thought that: the Company did not provide guarantee for holding shareholders, actual controllers, other related parties, any entity without legal personality or individuals in 2008; holding shareholders, actual controllers and other related parties did not enforce the Company to provide guarantee of others; till Dec.31, 2008, the Company had no any external guarantee or accumulated guarantee. VII. Particulars about engagement of certified public accountant Examined and passed by the Annual Shareholders’ General Meeting 2007, the Company continued to engage Shinewing Certified Public Accountants for its 2008 annual auditing organization to be responsible for domestic auditing with annual auditing expense of RMB 300,000. Till the end of the report period, Shinewing Certified Public Accountants has provided audit service for the Company for successively 3 years. VIII. Commitments (I) Commitments that probably have significant influence on operational result and financial status of the Company occurred in the report period or previous period but lasted to the report period made by the Company or shareholders holding over 5% (including 5%) of the Company. Name of shareholder Commitment Performance of commitment 42 Annual Report 2008 1. Wuhan Zhongheng Group didn’t finish the assets injection within the commitment term; 2. On Jun. 5, 2008, with examination and approval from the 3rd temporary meeting of the Board for 2008, the Company took cash Planed to put related RMB 27 million buying relevant assets concerning production of capital of plastic injection injection products from Wuhan Zhongheng Group, and thus part Wuhan Zhongheng business and its owned commitment had been finished; New Science & 70% HSGD equity into the 3. In the first 10 days of May, 2008, the Company officially started Technology Company within 1 year off the significant asset restructure work of purchasing the 70% Industrial Group after equity ownership equities of Wuhan Hengsheng Photoelectricity Industry Co., Ltd.; Co., Ltd. transfer of the purchase engaged financial consultant and law consultant to carry out was accomplished. earnest investigation on the restructure assets that may be involved, and negotiated with relevant departments which were in charge of this. However, due to that relevant condition was not mature, there were obstacles in material asset restructure and paused the planning in short-time. (II) Commitments in the Company’s Share Merger Reform of holding shareholders Name of shareholder Special commitment Performance of commitment Wuhan Zhongheng Promised that the holding non-circulating shares New Science & of the Company won’t be traded on the market Under implementation Technology Industrial within 36 months since they acquired listed Group Co., Ltd. trading right. IX. Other significant events (I) In the report period, the Company, as well as its directors, supervisors, senior executives, controlling shareholders and actual controllers haven’t received any inspection, administrative penalty, forbiddance to enter securities market and pointed as inappropriate person by CSRC; received other penalty from administrative departments and public condemn from Shenzhen Stock Exchange. (II) In the report period, the Company hasn’t had any reception or research, communication, interview etc. activities from the special objects indicated by Guiding Rules for Fair Information Disclosure of Listed Company. (III) In the report period, the Company and its staffs actively joined fighting against earthquake and rescue activity for Wenchuan Heavy Earthquake. RMB 771,506 has been totally collected from the Company and the Company offered our efforts for social commonweal. 43 Annual Report 2008 X. Financial Report Auditors’ report XYZH/2008SZATS020-2 To the shareholders of Shenzhen Zhongheng Huafa Co., Ltd. We have audited the accompanying financial statements of Shenzhen Zhongheng Huafa Co., Ltd. (“the Company”), including balance sheet of 31 December 2008, and profit statement, and cash flow statement and statement on changes of shareholders’ equity for the year ended, and notes to the financial statements and consolidated notes to the financial statements for the year ended. I. Management's responsibility for the financial statements The Company's management is responsible for the preparation and fair presentation of the financial statements in accordance with the Enterprises Accounting Standards and Enterprises Accounting System. The responsibility includes: (1) designing, performing and maintaining internal control related to the preparation and fair presentation of the financial statements, which are free from material misstatements whether due to frauds or errors; (2) choosing and applying right accounting policies; (3) making reasonable accounting estimates. II. Auditor's responsibility Our responsibility is to express an audit opinion on these financial statements based on our audit. We performed our audit in accordance with Chinese Certified Public Accountants' Auditing Standards. Those standards require us to comply with professional ethics, and to plan and perform our audit so as to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures of the financial statements. The selective audit procedures depend on auditor's judgment, including the evaluation of the risk of material misstatement of the consolidated financial statements due to frauds or errors. When evaluating risk, we consider internal control related to financial statements, in order to design auditing procedures, but not for the purpose of expressing an opinion on the internal control's effectiveness. An audit also includes assessing the appropriateness of the accounting policies adopted and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that we have obtained sufficient and appropriate audit evidences to provide a basis for our audit opinion. III. Auditing opinion In our opinion, the Company’s financial statements have been prepared in accordance with the Enterprises Accounting Standards and Enterprises Accounting System, and they fairly present, in all material respects, the financial position of the Company as of December 31, 2008, and its operation results and cash flows for the year ended. Shinewing Certified Public Accountants China Accountant: Guo Jinlong China Accountant: Wang Ruixia Beijing, P.R.C April 23, 2009 44 Annual Report 2008 Accounting statements: Consolidated Balance Sheet Dec. 31, 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount at year-end Amount at year-begin Current assets: Monetary funds VIII.1 24,314,654.56 18,308,223.25 Settlement provisions - - Capital lent - - Transaction finance asset - - Notes receivable VIII.2 6,767,862.01 3,949,751.05 Accounts receivable VIII.3 98,397,251.00 57,501,749.38 Accounts paid in advance VIII.4 2,046,277.06 2,469,127.52 Insurance receivable - - Reinsurance receivables - - Contract reserve of reinsurance receivable - - Interest receivable - - Dividend receivable - - Other receivables VIII.5 15,576,239.03 17,885,097.37 Purchase restituted finance asset - - Inventories VIII.6 50,460,254.12 32,595,773.55 Non-current asset due within one year - - Other current assets - - Total current assets 197,562,537.78 132,709,722.12 Non-current assets: Granted loans and advances - - Finance asset available for sales - - Held-to-maturity securities - - Long-term account receivable - - Long-term equity investment - - Investment property VIII.7 42,938,764.28 45,819,394.37 Fixed assets: VIII.8 194,494,830.65 187,238,973.29 Construction in progress VIII.9 1,624,882.03 1,036,612.52 Engineering material - - 45 Annual Report 2008 Disposal of fixed asset - - Productive biological asset - - Oil and gas asset - - Intangible assets VIII.10 6,253,073.63 6,451,549.35 Expense on Research and Development - - Goodwill - - Long-term expenses to be apportioned - - Deferred income tax asset VIII.11 3,796,628.51 700,787.29 Other non-current asset - - Total non-current asset 249,108,179.10 241,247,316.82 Total assets 446,670,716.88 373,957,038.94 Consolidated Balance Sheet (Con.) Dec. 31, 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount at Year-end Amount at year-begin Current liabilities: Short-term loans VIII.13 94,000,000.00 60,400,000.00 Loan from central bank - - Absorbing deposit and interbank deposit - - Capital borrowed - - Transaction financial liabilities - - Notes payable VIII.14 3,429,765.26 2,812,914.35 Accounts payable VIII.15 49,895,119.48 42,777,941.82 Accounts received in advance VIII.16 1,962,952.11 666,261.81 Selling financial asset of repurchase - - Commission charge and commission payable - - Wage payable VIII.17 908,291.64 1,028,977.77 Taxes payable VIII.18 2,766,213.08 1,870,755.16 Interest payable - - Dividend payable - - Other accounts payable VIII.19 45,523,634.74 22,199,987.43 Reinsurance payables - - Insurance contract reserve - - Security trading of agency - - 46 Annual Report 2008 Security sales of agency - - Non-current liabilities due within 1 year - - Other current liabilities - - Total current liabilities 198,485,976.31 131,756,838.34 Non-current liabilities: Long-term loans - - Bonds payable - - Long-term account payable - - Special accounts payable - - Projected liabilities VIII.20 175,474.41 - Deferred income tax liabilities - - Other non-current liabilities VIII.21 200,000.00 - Total non-current liabilities 375,474.41 - Total liabilities 198,861,450.72 131,756,838.34 Owner’s equity (or shareholders’ equity): Paid-in capital (or share capital) VIII.22 283,161,227.00 283,161,227.00 Capital public reserve VIII.23 104,073,326.94 106,032,173.92 Less: Inventory shares - - Surplus public reserve VIII.24 77,391,593.25 77,391,593.25 Provision of general risk - - Retained profit VIII.25 -216,816,881.03 -224,384,793.57 Balance difference of foreign currency translation - - Total owner’s equity attributable to parent company 247,809,266.16 242,200,200.60 Minority interests - - Total owner’s equity 247,809,266.16 242,200,200.60 Total liabilities and owner’s equity 446,670,716.88 373,957,038.94 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 47 Annual Report 2008 Consolidated Profit Statement 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount in this year Amount in last year I. Total operating income 189,401,245.08 193,244,882.85 Including: Operating income VIII.26 189,401,245.08 193,244,882.85 Interest income - - Insurance gained - - Commission charge and commission income - - II. Total operating cost 193,957,378.65 195,884,373.91 Including: Operating cost VIII.26 155,172,877.06 167,135,398.03 Interest expense - - Commission charge and commission expense - - Cash surrender value - - Net amount of expense of compensation - - Net amount of withdrawal of - - insurance contract reserve Bonus expense of guarantee slip - - Reinsurance expense - - Operating tax and extras VIII.27 2,828,600.24 1,625,087.63 Sales expenses 3,588,602.84 3,733,724.38 Administration expenses VIII.28 23,824,246.71 17,100,889.55 Financial expenses VIII.29 6,527,280.66 4,227,096.85 Losses of devaluation of asset VIII.30 2,015,771.14 2,062,177.47 Add: Changing income of fair value - - (Loss is listed with “-”) Investment income (Loss is listed with “-”) - 32,045.04 Including: Investment income on - - affiliated company and joint venture Income from entrusted operation VIII.31 6,072,764.36 93,340.46 Exchange income (Loss is listed with “-”) - - III. Operating profit (Loss is listed with “-”) 1,516,630.79 -2,514,105.56 48 Annual Report 2008 Add: Non-operating income VIII.32 4,714,051.25 24,122,046.44 Less: Non-operating expense VIII.33 1,316,094.53 242,807.20 Including: Disposal loss of non-current asset 113,375.29 58,846.35 IV. Total Profit (Loss is listed with “-”) 4,914,587.51 21,365,133.68 Less: Income tax VIII.34 -2,653,325.03 -700,787.29 V. Net profit (Net loss is listed with “-”) 7,567,912.54 22,065,920.97 Net profit attributable to owner’s equity 7,567,912.54 22,065,920.97 of parent company Minority shareholders’ gains and losses - - VI. Earnings per share i. Basic earnings per share VIII.35 0.0267 0.0779 ii. Diluted earnings per share VIII.35 0.0267 0.0779 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 49 Annual Report 2008 Consolidated Cash Flow Statement 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Amount in this Amount in last Items Notes report year report year I. Cash flows arising from operating activities: Cash received from selling commodities and providing 151,814,732.65 271,575,256.33 labor services Net increase of customer deposit and interbank deposit - - Net increase of loan from central bank - - Net increase of capital borrowed from other financial - - institution Cash received from original insurance contract fee - - Net cash received from reinsurance business - - Insured savings and net increase of investment - - Net increase of disposal of transaction financial asset - - Cash received from interest, commission charge and - - commission Net increase of capital borrowed - - Net increase of returned business capital - - Write-back of tax received - 126,229.25 Other cash received concerning operating activities VIII.36 19,584,561.45 15,142,720.30 Subtotal of cash inflow arising from operating 171,399,294.10 286,844,205.88 activities Cash paid for purchasing commodities and receiving 127,614,973.67 215,292,129.67 labor service Net increase of customer loans and advances - - Net increase of deposits in central bank and interbank - - Cash paid for original insurance contract compensation - - Cash paid for interest, commission charge and - - commission Cash paid for bonus of guarantee slip - - Cash paid to/for staff and workers 26,800,658.16 26,819,335.17 Taxes paid 5,026,292.23 5,628,339.10 Other cash paid concerning operating activities VIII.36 30,573,857.22 24,260,587.78 Subtotal of cash outflow arising from operating 190,015,781.28 272,000,391.72 activities Net cash flows arising from operating activities -18,616,487.18 14,843,814.16 II. Cash flows arising from investing activities: Cash received from recovering investment - 2,500,000.00 50 Annual Report 2008 Cash received from investment income - 32,045.04 Net cash received from disposal of fixed, intangible 885,000.00 358,200.00 and other long-term assets Net cash received from disposal of subsidiaries and - - other units Other cash received concerning investing activities - - Subtotal of cash inflow from investing activities 885,000.00 2,890,245.04 Cash paid for purchasing fixed, intangible and other 12,337,486.17 6,792,032.25 long-term assets Cash paid for investment - 2,500,000.00 Net increase of mortgaged loans - - Net cash received from subsidiaries and other units - - Other cash paid concerning investing activities - - Subtotal of cash outflow from investing activities 12,337,486.17 9,292,032.25 Net cash flows arising from investing activities -11,452,486.17 -6,401,787.21 III. Cash flows arising from financing activities Cash received from absorbing investment - - Including: Cash received from absorbing minority - - shareholders’ investment by subsidiaries Cash received from loans 104,405,800.00 71,000,000.00 Cash received from issuing bonds - - Other cash received concerning financing activities - - Subtotal of cash inflow from financing activities 104,405,800.00 71,000,000.00 Cash paid for settling debts 70,805,800.00 77,900,000.00 Cash paid for dividend and profit distributing or 6,212,890.71 4,471,829.59 interest paying Including: Dividend and profit of minority shareholder - - paid by subsidiaries Other cash paid concerning financing activities - - Subtotal of cash outflow from financing activities 77,018,690.71 82,371,829.59 Net cash flows arising from financing activities 27,387,109.29 -11,371,829.59 IV. Influence on cash due to fluctuation in exchange rate -240,018.46 -407,899.95 V. Net increase of cash and cash equivalents -2,921,882.52 -3,337,702.59 Add: Balance of cash and cash equivalents at the 16,272,633.42 19,610,336.01 period -begin VI. Balance of cash and cash equivalents at the period -end 13,350,750.90 16,272,633.42 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 51 Annual Report 2008 Balance Sheet of Parent Company Dec. 31, 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount at year-end Amount at year-begin Current assets: Monetary funds 23,236,402.77 17,175,103.18 Transaction finance asset - - Notes receivable 6,767,862.01 3,949,751.05 Accounts receivable IX.1 98,372,655.00 57,474,744.38 Accounts paid in advance 1,966,277.06 2,469,127.52 Interest receivable - - Dividend receivable - - Other receivables IX.2 15,883,360.82 20,338,083.04 Inventories 50,350,104.12 32,595,773.55 Non-current asset due within one year - - Other current assets - - Total current assets 196,576,661.78 134,002,582.72 Non-current assets: Finance asset available for sales - - Held-to-maturity securities - - Long-term account receivable - - Long-term equity investment IX.3 30,465,789.00 - Investment property 42,938,764.28 45,819,394.37 Fixed assets 176,935,860.29 187,148,677.44 Construction in progress 1,135,030.03 1,036,612.52 Engineering material - - 52 Annual Report 2008 Disposal of fixed asset - - Productive biological asset - - Oil and gas asset - - Intangible assets 6,253,073.63 6,451,549.35 Expense on Research and Development - - Goodwill - - Long-term expenses to be apportioned - - Deferred income tax asset 4,813,975.21 - Other non-current asset - - Total non-current asset 262,542,492.44 240,456,233.68 Total assets 459,119,154.22 374,458,816.40 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 53 Annual Report 2008 Balance Sheet of Parent Company (Con.) Dec. 31, 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount at year-end Amount at year-begin Current liabilities: Short-term loans 94,000,000.00 60,400,000.00 Transaction financial liabilities - - Notes payable 3,429,765.26 2,812,914.35 Accounts payable 49,732,770.38 42,668,092.72 Accounts received in advance 1,962,952.11 655,415.81 Wage payable 844,458.29 974,636.79 Taxes payable 2,678,179.46 1,836,152.65 Interest payable - - Dividend payable - - Other accounts payable 53,272,582.46 22,911,403.48 Non-current liabilities due within 1 year - - Other current liabilities - - Total current liabilities 205,920,707.96 132,258,615.80 Non-current liabilities: Long-term loans - - Bonds payable - - Long-term account payable - - Special accounts payable - - Projected liabilities 175,474.41 - Deferred income tax liabilities - - 54 Annual Report 2008 Deferred liabilities 200,000.00 - Total non-current liabilities 375,474.41 - Total liabilities 206,296,182.37 132,258,615.80 Shareholders’ equity: Share capital 283,161,227.00 283,161,227.00 Capital public reserve 104,073,326.94 106,032,173.92 Less: Inventory shares - - Surplus public reserve 77,391,593.25 77,391,593.25 Retained profit -211,803,175.34 -224,384,793.57 Total shareholders’ equity 252,822,971.85 242,200,200.60 Total liabilities and shareholders ’ equity 459,119,154.22 374,458,816.40 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 55 Annual Report 2008 Profit Statement of Parent Company 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount in this report year Amount in last report year I. Operating income IX.4 187,541,881.58 191,291,959.85 Less: Operating cost IX.4 155,172,877.06 167,135,398.03 Business taxes and surtax 2,731,913.34 1,522,922.00 Sales expenses 3,588,602.84 3,733,724.38 Administration expenses 21,986,826.76 16,348,632.48 Financial expenses 6,528,609.55 4,235,993.77 Losses of devaluation of asset 1,506,119.24 253,547.46 Add: Changing income of fair value(Loss is listed with “-”) - - Investment income (Loss is listed with “-”) - 32,045.04 Including: Investment income on affiliated company and - - joint venture Income from entrusted operation IX.5 6,072,764.36 93,340.46 II. Operating profit (Loss is listed with “-”) 2,099,697.15 -1,812,872.77 Add: Non-operating income 7,352,625.61 24,121,600.94 Less: Non-operating expense 1,313,946.63 242,807.20 Including: Disposal loss of non-current asset 113,375.29 58,846.35 56 Annual Report 2008 III. Total Profit (Loss is listed with “-”) 8,138,376.13 22,065,920.97 Less: Income tax -4,443,242.10 IV. Net profit (Net loss is listed with “-”) 12,581,618.23 22,065,920.97 VI. Earnings per share i. Basic earnings per share 0.0444 0.0779 ii. Diluted earnings per share 0.0444 0.0779 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 57 Annual Report 2008 Cash Flow Statement of Parent Company 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Unit: RMB Items Notes Amount in this report year Amount in last report year I. Cash flows arising from operating activities: Cash received from selling commodities and 154,867,049.64 269,907,729.33 providing labor services Write-back of tax received - 126,229.25 Other cash received concerning operating activities 25,605,486.43 14,934,496.20 Subtotal of cash inflow arising from operating activities 180,472,536.07 284,968,454.78 Cash paid for purchasing commodities and receiving labor service 127,504,823.67 215,292,129.67 Cash paid to/for staff and workers 26,427,418.00 26,292,033.39 Taxes paid 4,902,398.55 5,526,173.47 Other cash paid concerning operating activities 31,250,549.87 22,116,616.34 Subtotal of cash outflow arising from operating activities 190,085,190.09 269,226,952.87 Net cash flows arising from operating activities -9,612,654.02 15,741,501.91 II. Cash flows arising from investing activities: Cash received from recovering investment - 2,500,000.00 Cash received from investment income - 32,045.04 Net cash received from disposal of fixed, 885,000.00 358,200.00 intangible and other long-term assets Net cash received from disposal of subsidiaries and other units - - Other cash received concerning investing activities - - Subtotal of cash inflow from investing activities 885,000.00 2,890,245.04 Cash paid for purchasing fixed, intangible 11,786,856.17 6,792,032.25 and other long-term assets Cash paid for investment - 2,500,000.00 Net cash paid for subsidiaries and other units 9,500,000.00 - Other cash paid concerning investing activities - - Subtotal of cash outflow from investing activities 21,286,856.17 9,292,032.25 Net cash flows arising from investing activities -20,401,856.17 -6,401,787.21 III. Cash flows arising from financing activities Cash received from absorbing investment - - Cash received from loans 104,405,800.00 71,000,000.00 Other cash received concerning financing activities - - Subtotal of cash inflow from financing activities 104,405,800.00 71,000,000.00 Cash paid for settling debts 70,805,800.00 77,900,000.00 Cash paid for dividend and profit distributing or interest paying 6,212,890.71 4,471,829.59 Other cash paid concerning financing activities - - Subtotal of cash outflow from financing activities 77,018,690.71 82,371,829.59 Net cash flows arising from financing activities 27,387,109.29 -11,371,829.59 IV. Influence on cash due to fluctuation in exchange rate -239,613.34 -407,899.95 58 Annual Report 2008 V. Net increase of cash and cash equivalents -2,867,014.24 -2,440,014.84 Add: Balance of cash and cash equivalents at the period -begin 15,139,513.35 17,579,528.19 VI. Balance of cash and cash equivalents at the period–end 12,272,499.11 15,139,513.35 Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person in Charge of Accounting Organ: Sun Wei 59 Consolidated Statement on Changes of Shareholders' Equity 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Amount in this report year shareholders' equity attributable to the parent company Items Less: Surplus Capital Share capital Treasury General risk R reserves Stock provision reserves I. Balance at the end of the last year 283,161,227.00 106,032,173.92 - 77,391,593.25 - Add: Changes of accounting policy - - - - - Error correction of the last period - - - - - II. Balance at the beginning of this year 283,161,227.00 106,032,173.92 - 77,391,593.25 - III. Increase/ Decrease in this year - -1,958,846.98 - - - (Decrease is listed with'"-")） (I) Net profit (II) Profits and losses - -1,958,846.98 - - - calculating into shareholders’ equity 1. Net changing amount of fair value of financial assets available for sale 2. Effect of changes of other shareholders’ equity of invested units under equity method 3. Effect of income tax related to shareholders’ equity 4. Others -1,958,846.98 Total of (I)and (II) - -1,958,846.98 - - - 1. Shareholders’ devoted capital - - - - - 2. Amount calculated into shareholders’ equity paid in shares 3. Others 60 (IV) Profit distribution 1. Withdrawal of surplus reserves - - - - - 2. Withdrawal of general risk provisions 3. Distribution for shareholders 1. Shareholders’ devoted capital 4. Others (V) Carrying forward - - - - - internal shareholders’ equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with profit surplus 4. Others IV. Balance at the end of the report year 283,161,227.00 104,073,326.94 - 77,391,593.25 - Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person i 61 Consolidated Statement on Changes of Shareholders’ Equity 2007 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Amount in last report year Shareholders’ equity attributable to the parent company Items Less: Surplus Capital Share capital Treasury General risk Reta reserves Stock provision reserves I. Balance at the end of the last year 283,161,227.00 106,032,173.92 77,391,593.25 -24 Add: Changes of accounting policy Error correction of the last period II. Balance at the 283,161,227.00 106,032,173.92 - 77,391,593.25 - -24 beginning of this year III. Increase/ Decrease - - - - - 2 in this year (Decrease is listed with'"-") (I) Net profit 2 (II) Profits and losses - - - - - calculating into shareholders’ equity 1. Net changing amount of fair value of financial assets available for sale 2. Effect of changes of other shareholders’ equity of invested units under equity method 3. Effect of income tax related to shareholders’ equity 4. Others Total of (I)and (II) - - - - - 2 (III) Shareholders’ devoted and decreased capital - - - - - 1. Shareholders’ devoted capital 62 2. Amount calculated into shareholders’ equity paid in shares 3. Others (IV) Profit distribution - - - - - 1. Withdrawal of surplus reserves 2. Withdrawal of general risk provisions 3. Distribution for shareholders 4. Others (V) Carrying forward internal shareholders’ equity - - - - - 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with profit surplus 4. Others IV. Balance at the end of 283,161,227.00 106,032,173.92 - 77,391,593.25 - -22 the report year Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person i 63 Statement on Changes of Shareholders’ Equity of Parent Compan 2008 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Amount this year Items Capital S Share capital Less: Treasury Stock reserves r I. Balance at the end of the last year 283,161,227.00 106,032,173.92 - Add: Changes of accounting policy - - - Error correction of the last period - - - II. Balance at the beginning of this year 283,161,227.00 106,032,173.92 - III. Increase/ Decrease in this year (Decrease is listed with'"-") - -1,958,846.98 - (I) Net profit (II) Profits and losses - -1,958,846.98 - calculating into shareholders’ equity 1. Net changing amount of fair value of financial assets available for sale 2. Effect of changes of other shareholders’ equity of invested units under equity method 3. Effect of income tax related to shareholders’ equity 4. Others -1,958,846.98 Total of (I)and (II) - -1,958,846.98 - (III) Shareholders’ devoted and decreased capital - - - 1. Shareholders’ devoted capital 2. Amount calculated into shareholders’ equity paid in shares 3. Others 64 (IV) Profit distribution - - - 1. Withdrawal of surplus reserves 2. Distribution for shareholders 3. Others (V) Carrying forward internal shareholders’ equity - - - 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with profit surplus 4. Others IV. Balance at the end of the report year 283,161,227.00 104,073,326.94 - Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person i 65 Statement on Changes of Shareholders’ Equity of Parent Compan 2007 Prepared by Shenzhen Zhongheng Huafa Co., Ltd. Amount last year Items Capital Sur Share capital Less: Treasury Stock reserves rese I. Balance at the end of the last year 283,161,227.00 106,032,173.92 77, Add: Changes of accounting policy Error correction of the last period II. Balance at the beginning of this year 283,161,227.00 106,032,173.92 - 77, III. Increase/ Decrease in this year (Decrease is listed with'"-") - - - (I) Net profit (II) Profits and losses calculating into shareholders’ equity - - - 1. Net changing amount of fair value of financial assets available for sale 2. Effect of changes of other shareholders’ equity of invested units under equity method 3. Effect of income tax related to shareholders’ equity 4. Others Total of (I)and (II) - - - (III) Shareholders’ devoted and decreased capital - - - 1. Shareholders’ devoted capital 2. Amount calculated into shareholders’ equity paid in shares 3. Others 66 (IV) Profit distribution - - - 1. Withdrawal of surplus reserves 2. Distribution for shareholders 3. Others (V) Carrying forward internal shareholders’ equity - - - 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with profit surplus 4. Others IV. Balance at the end of the report year 283,161,227.00 106,032,173.92 - 77, Principal of the Company: Li Zhongqiu Charger of Accounting Works: Fu Yanhua Person i 67 Annual Report 2008 Notes to Finanical Statements I、 Company Profile Shenzhen Zhongheng Hwafa Co., Ltd. (“the Company” for short, but “the Company (or ‘the Group’)” when including subsidiaries, previously known as Shenzhen Huafa Electronics Co., Ltd. ), is a Sino-foreign joint venture jointly invested and incorporated by such three legal persons as Shenzhen Electronics Group Co., Ltd. (“SEG” for short), China Zhenhua Electronics Group Co., Ltd. (“Zhenhua Group” for short) and Luks Industrial (Group) Limited (“Luks Group” for short) on December 08,1981. In 1991, the Company was reorganized as a company of limited liabilities by stocks, and the registered number of the License for a Corporation Legal Person was 440301501120670. It made its IPO in the same year, issuing 53,130,000 shares of RMB common stock with par value 1 Yuan per share, including 29,630,000 shares of A shares and 23,500,000 shares of B shares. In 1992, the Company launched it’s A shares and B shares in Shenzhen Stock Exchange, 53,130,000 shares were tradable and 159,203,000 shares remaining unlisted. In November 1996, Luks Group assigned 12% of its shares in the Company, totaling 25,500,000 shares, to SEG through agreement, which was approved in the reply of Shenzhen Stock Regulatory Office and ceded on March 05, 1997. After such assignment, Luks Group held 25,796,663 shares of the Company, accounting for 12.16% of the total shares capital, and SEG held 25,500,000 shares of the Company, accounting for 12% of the total shares capital. In December 1997, the Company conducted shares allotment program, issuing extra 63,699,895 shares to all shareholders by the ratio of 10:3 against the total 212,332,989 shares before the allotment, among which, 30,777,997 shares were alloted to domestic corporate shareholders and 3,600,000 shares were subscribed, with the remaining 27,177,997 shares assigned to public shareholders on paid basis, 15,388,998 shares were allotted to foreign corporate shareholders and 1,800,000 shares were subscribed with 13,588,998 shares abandoned, and also 9,777,900 shares allotted to public shareholders and 7,755,000 shares to domestic-listed foreign shareholders. In January 1998, the Company carried out the capital reserve-to-capital program for year 1996, i.e. based on the total 212,332,989 shares ended 1996, 2 shares will be increased to per 10 shares for all shareholders, and based on the total 240,701,488 shares ended 1997 after allotation, 1.764 shares will be increased to each 10 shares for all shareholders. On January 05, 2001, upon ratification, the increased shares of the Company, totaling 6,394,438 shares, went public in Shenzhen Stock Exchange. On May 29, 2001, upon the approval of CSRC, the non-listed foreign capital totaling 62,462,914 shares 68 Annual Report 2008 of the Company were transferred as listed circulating stock, marking the irculation of entire foreign capital. On November 30, 2001 and 07 December 2001, Luks Group reduced the B-share of the Company, totaling 14,158,000 shares and 14,159,000 shares respectively. As of December 17, 2001, SEG had aggregately reduced B-share of the Company totaling 14,487,400 shares, accounting for 5.12% of total shares capital of the Company. On June 06, 2005, the Company bulletined that original shareholder SEG and Zhenhua Group assigned the state-owned corporate capital they held in the Company totaling 124,920,000 shares to Wuhan Zhongheng New Tech Industry Group Co., Ltd. (“Wuhan Zhongheng” for short), which was ratified by the State-owned Assets Committee, the State Ministry of Commerce and CSRC with relevant assignment procedures completed on April 11, 2007. On November13, 2006, the Board of Shareholders of the Company passed the Equity Division Reform Program of Shenzhen Huafa Electronics Co., Ltd.. In line the program, Wuhan Zhongheng carried out assets reorganization to the Company, including bestowing assets and integrating industries covered by the Company, also paying 1.5 shares as consideration for per 10 shares to all A-share shareholders enrolled as at the equity registration day for the program, totaling 8,435,934 shares which may be tradable since the first business day after the implementation of the program. On May 17, 2007, the Company had completed the equity division reform program, and the consideration shares had been at market to circulate on May 18, 2007. The Company also had completed the equity division reform program with ceding procedures for bestowed assets completed in 2007. As of December 31, 2008, the aggregate shares of the Company are 28,316,000 shares, among which, restricted shares total to 116,489,894 shares, accounting for 41.14% of total shares, and unrestricted shares total to 166,671,333 shares, accounting for 58.86% of total shares. Among the unrestricted shares, there are 64,675,497 A shares and 101,995,836 B shares, accounting for 22.84% and 36.02% of total shares respectively. The business scope: manufacturing & operating each kind of color TV, LCD monitor, LCD screen (subject to branch offices), hi-fi equipment, digital watch, TV game player and computer as well as auxiliary circuit boards, precise injection moulding ware, light packing materials (manufacturing & operting in Wuhan), hardware (including molds), electroplate and solder stick, real estate development and operation (ref. S.F.D.C.No. 7226760), property management. Establishing affiliatd companies in Wuhan and Jilin, branch offices in each capital city (excluding Lhasa) and cities directly under jurisdiction of the Central Government. Its major business is manufacturing and sales of circult board, processing of precise injection moulding ware, hardware (including molds); property lease and processing and sales of LCD displayer and color TV. 69 Annual Report 2008 The Company is registered at Block 411, Huafabei Road, Futian District, Shenzhen Cty; legal representative is Li Zhongqiu. The parent company of the Company is Wuhan Zhongheng, and the shareholders meeting is its angecy of power, which execuates the decision right on material matter such as operation guildlines, funding, investment and profit distribution. Board of directors shall answer for shareholders meeting, which implements operation and decision right of the company according to laws; Managers take charge for organizing and executing the decisions made in shareholders meeting and board of directors meeting, as well as presiding the production and operation management work of the company. The functional management departments include Enterprise Planning Department, Financial Department, Comperhensive Management Department, Business Center, Video Business Department, Circuit Panel Business Department, Plastic Injection Business Department, Auditing Department, Office of Borad of Directors etc., the branches include Wuhan branch etc., and subsidiaries mainly include Shenzhen Huafa Property Lease Management Co., Ltd., Shenzhen Zhongheng Huafa Property Management Co., Ltd., and Wuhan Hengfa Scientific and Technology Co., Ltd. etc. II、 Basis of Preparation of Financial Statements This Financial Statement is prepared on the basis of continual operation of the Company. III、 Statement regarding Following Business Accounting Standards The Financial Statement prepared by the Group complies with the requirements of Business Accounting Standards, and reflect such information regarding enterprise financial situation, operation result and cash flows, etc. on the factual and complete basis. IV、 Change of Accounting Policy and Estimate and Correction of Key Errors of Prior Period 1. Change of accounting policy and its effect: Na 2. Change of accouting estimate and its effect: Na 3. Correction of key errors of prior period and its effect: Na V、 Key Accounting Policies, Accounting Estimate and Preparation Method of Consolidated Financial Statement 1. Accounting Period The accounting period of the Group is from each 01 January to 31 December in the Gregorian calendar. 2. Standard Currency RMB is adopted as standard currency by the Group. 70 Annual Report 2008 3. Recording Basis and Pricing Principles Accrual system is adopted as recording basis of the Group. Except for tradable financial assets, financial assets for sales and those measured by fair value, history cost is adopted as pricing principle. 4. Cash & Cash Equivalents The cash referred to in the Cash Flow Statement of the Group means stocked cash and deposit available for payment at any time. The cash equivalents therein refer to investment due within 3 months since purchasing day, strong fluidity, small risk in value variation and easy to converted into cash of predictable sum. 5. Translation of Foreign Currency The transactions in foreign currencies of the Group are recorded after translating into RMB at fixed exchange rate. At the reporting day of Balance Sheet, the monetary assets in foreign currencies are translated at the instant exchange rate of the reporting day of Balance sheet. As to the exchange loss and profit occurred, except for that of special loan for the purchase or production of assets which meet the coditions of capitalization, which shall be treated according to the principles of capitalization, others shall be accurred into loss and profit in current term. Those non-monetary assets measured by fair value are translated into RMB at the instant exchange rate of the recognizing day of fair value, with translation different occurred accured into loss and profit in current term as change of fair value. Those non-monetary foreign assets measured by history cost, shall still be translated at the instant exchange rate of the day when business occurred, and shall not change the amount of RMB. The cash flows in foreign currencies are translated at the instant exchange rate on the occurring day of cash flows, with sum affected by exchange rate separately presented in the Cash Flow Statement. 6. Financial Assets and Debts （1） Financial Assets The group divides its controlling financial assets in 4 types according to investment purpose and economic property: fair value through profit or loss, held to maturity investments, receivables and for sale assets. 1） Fair value through profit or loss refers to those financial statements to be sold within short term which are measured by fair value with any change accrued into current loss and profit, presented as “Tradable Financial Assets” in the Balance Sheet. 71 Annual Report 2008 2） Held to maturity investments refer to those non-derived financial assets which have fixed due date and fixed or affirmable recovered sum and reflect the clear intention and capacity of the management to hold till maturity. 3） Receivables refer to non-derived financial assets which have fixed or assured recovered sum without quotation in an acitive market, including note receivable, account receivable, interest receivable, dividends receivable and other receivables, etc.. 4） For sale assets include those non-derived financial assets appointed as sellable assets at initial recognition and those are not classified as other types. Financial assets are initially recognized by fair value. For fair value through profit or loss, the relevant trade expenses at acquisition are directly accrued into current loss and profit. The relevant trading expenses of other types of financial assets are accrued into initial recognized sum. When the rights as set out in a contract to receive cash flow of a certain kind of financial assets have expired, or when almost all the risk and reward of the ownership of such financial assets have been transferred to the transferee, recognition of such financial assets will be terminated. Fair value through profit or loss and for sale assets shall be subsequently measured as per fair value; the moneys receivable and investment holding till maturity shall be presented as per amortized cost by actual interest method. The fair value variation of the fair value through profit or loss shall be accured into loss and profit of fair value variation. The interests or cash dividends obtained during holding the investment will be recognized as investment yield. During processing, the difference between its fair value and initial amount entered into the account will be recognized as investment loss and profit, and the loss and profit of fair value variation will be adjusted at the same time. The fair value variation of for sale assets shall be accrued into shareholders’ equity, and interests calculated against actual interest method durng holding the investment will be accured into investment yield. The cash dividends of investment through equity tools for sales will be accrued into investment yield when the invested unit announced to issue dividends. Durng processing, after deducting the accumulated sum of fair value variation that are directly accrued into shareholders’ equity, the remaining of payment and book value will be accrued into investment yield and loss. Other than the fair value through profit or loss, the Company has checked the book value of the financial assets as at the reporting date of the Balance Sheet: if there is any objective evidence showing impairment has occurred to certain kind of financial assets, a provision for impairment shall be drawn. If the fair value of for sale assets reduces largely or non-temporarily, the accumulated loss occurred due to decrease of fair value which are directly accrued into shareholders’ equity shall be accrued into impairment loss. For investment through debt tools for sales which have recognized its impairment loss, in case the fair value rises 72 Annual Report 2008 which objectively relates with matters incurred after confirming original impairment loss preceding current term, the originally recognized ipairment loss shall be carried back and accrued into current loss and profit. For investment through equity tools for sales which have recognized its impairment loss, in case the fair value rises which objectively relates with matters incurred after confirming original impairment loss preceding current term, the originally recognized impairment loss shall be carried back and accrued into shareholders’ equity, with an exception of those without quotation in an active market with fair value unable to be reliably measured. （2） Financial Liabilities As initially recognized, financial Liabilities of the Group are divided into financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period and other financial liabilities. Financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period include transactional financial liabilities and financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period when initially recognized. As to those kinds of financial liabilities, it shall make subsequent measurement according to their fair values. Profit or loss arised from the variation of fair value and the dividend and interest expenditure related to the financial liabilities shall be recorded into the loss and profits of the current period. Other financial Liabilities will be processed by actual interest method and shall be measured by amortized cost. 7. Receivables, Provisions for Bad Debts Rreceivables include account receivable and other receivables, etc. For receivables occurred to the Company through sales of goods or providing services to others, the fair value of price set out in the contract or agreement with the purchasers shall be deemed as initial recognized amount. Receivables will be processed by actual interest method and through deducting the bad debts from amortized cost. For bad debt loss possibly occurred, it shall be caculated by provision method, at the end of the year, draw provision for bad debt according to analysis method of age of account combining individually recognizing method and record into loss and profit of current period. As to account receivalbes that has objective evidence showing that it is impossible to recover, it may be regarded as loss of bad debt after being approved by the Group based on the procedure, and the provision drawn for bad debt shall be writeen off. 73 Annual Report 2008 Such receivables of the Company, if any exceeding 500,000 Yuan, are deemed as key item. If there is any objective evidence showing that the Company is predicted impossible to recover all receivables as originally agreed, an impairment test shall be conducted separately against the less part between its present value of the future cash flows and its book value so as to draw provisions for bad debts. Any single item of receivables, if involving large sum, shall be divided into several groups as per their credit risk features together with those tested unimpaired receivables, which shall then, based on the actual loss rate of receivables group with same or similar type and credit risk features in previous years and in combination with present situation, fix the provision percentage to be drawn for bad debts for each group in current term so as to determine the privisions drawable this term. The Group will regard receivalbes with authentic evidence to prove that they can not be recovered or the probility to recover is very small as certain assets profile, and draw provisions for bad debts based on total amcount. In the table below is the percentage of provisions drawn for bad debts of account receivables based on the age of account: Account Age Percent Drawn Within 1 Year 0 1-2 Year (s) 5% 2-3 Years 10% Over 3 years 30% In the table below is the percentage of provisions drawn for bad debts of other receivables based on the age of account: Account Age Percent Drawn Within 1 Year 0 1-2 Year (s) 5% 2-3 Years 10% Over 3 years 30% 8. Inventories Inventories of the Group includes raw materials, packing materials, low-value consuming product, product in progress, goods in stock, and self-manufactured semi finished prodct etc.. The perpetual inventory system is applied to inventories. Purchasing are priced at the actual cost, receiving and selling raw materials are calculated by first-in first-out method, and sales of finished products are calculated by weighted average method. Low-value consuming goods and packing materials are 74 Annual Report 2008 amortized by one-off write-off method. At the year end, the inventories at term end shall be priced at the lower one between cost and net realizable value, the provisions for inventories depreciaton shall be drawn against the predicted uncollectible cost caused by inventories damage, part or entire out-of-fashion or selling price lower than cost. The provisions depreciation of finished products and large bulk of raw materials shall be drawn against the excess prat between the cost of single inventory item and its net realizable value. The provisions depreciation of the other raw and auxiliary materials with various kinds and low unit price shall be drawn as per category. For such stocked goods directly for sales as products in stocks, products in progress and materials for sales, their net realizable value shall be recognized after deducting the estimated sales expenses and relevant taxes from estimated sales price of such inventories. For stocked materials for production use, their net realizable value shall be recognized after deducting estimated cost ocucring at completion, sales expenses and relevant tax from estimated sales price of products to be manufactured; for inventories holding for executing sales contract or labor contract, its net realizable value shall be calculated based on the price set out in relevant contracts. 9. Long-term Equity Investment Long-term equity investment mainly includes the equity investment held by the Group that may produce control, joint control or significant influence over invested entity, or the equity investment that does not have control, joint control or significant influence on the invested entiry, and has no offer in active market and its fair value cannot be reliably measured. Joint control refers to the control over an economic activitiy in accordance with contracts and agreements. The confirm basis for joint control is any joint enterprise can not control separately over the producing and operation activities of the joint enterprise; and the decision involved in the basic operating activities of the joint enterprise needs to gain consensus of each party. Significant influences refer to the power to participate in making decision on the financial and operatin policies of the invested company, but not to control or do joint control together with other parties over the formulation of these policies. The confirm basis of significant influences is when the Group directly or through its subsidiaries owns more than 20% (including) but less 50% of shares with voting rights of invested company, unless there is obvious evidence showing in this kind of situation, it can not participate in the making decision on the financial and operatin policies of the invested company, and not forming significant influences. If the long-term equity investment is acquired via business merger under the same control, it shall, on the day of merger, regard the share of the carrying amount of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. As for the long-term equity investment acquired via business meger under different control, the merger cost shall be, shall be the fair values, on the merger 75 Annual Report 2008 (acquiring) date, of the assets given, the liabilities incurred or assumed, and the equity securities issued by the acquirer, in exchange for the control of the merged (acquired) enterprise, which will be, on the merger (acquiring) date, further regarded as the initial investment cost of long-term equity investment. Apart from the aforesaid long-term equity investment acquired through business merger, those long-term equity investment, if acquiring through paying cash, shall consider its purchasing price actually paid as the initial investment cost, which includes expenses, taxes and other necessary expenditure directly related to the acquiring of the long-term equity investment; if acquired by issuing equity securities, shall consider the fair value of issing equity securities as the initial investment cost; if invested by investors, shall consider the value agreed in the investment contract or agreement as the initial investment cost; if acquiring from debt reorganization or non-monetary assets exchange, shall confirm the initial investment cost according to the regulation of relevant accounting rule. The investment of the Group to its subsidiaries shall be calculated through cost method and shall be adjusted through equity method in the Financial Statement; the investment to its associated companies shall be calculated through equity method; For the long-term equity investment without any control, joint control or serious influence for which there is no offer in the active market and of which the fair value cannot be reliably measured, the Group adopts cost method to calculate it; For the long-term equity investment without any control, joint control or serious influence for which there is offer in the active market and of which the fair value can be reliably measured, the Group shall calculate it under the entry of “Financial Assets for Sales”. The price of a long-term equity investment measured by employing the cost method shall be included at its initial investment cost. Where the investment income recognized by the investing enterprise shall be limited to the amount received from the accumulative net profits that arise after the invested entity has accepted the investment, the amount of profits or cash dividends obtained by the investing entity that exceeds the aforesaid amount shall be regarded as recovery of initial investment cost, and shall ruduce the book value of the investment. When calculated by euiqty method, the loss or profits of current period shall be the attributable or shareble the net profits or losses of the invested entity in current year. The investing enterprise shall, on the ground of the fair value of all identifiable assets of the invested entity when it obtains the investment, according to the accounting policies and period of the Group, offset the loss or profits from interal transaction with joint enterprise, and calculate the part belonging to the investing enterprise based on the shares holding ration, recognize the attributable share of the net profits and losses of the invested entity after it adjusts the net profits of the invested entity. The Group shall recognize the net losses of the invested enterprise until the book value of the long-term equity investment and other long-term equity which substantially form the net investment made to the invested entity are reduced to zero, unless the investing enterprise has the obligation to undertake extra losses. 76 Annual Report 2008 In addition to, if the Group assumes the obligation for additional loss of invested entity, it shall recognize estimated liabilities according to the assumed obligation, and record into the loss and profit of current period. If the invested entity realizes any net profits later, the Group shall, after the amount of its attributable share of profits offsets against its attributable share of the un-recognized losses, resume the recognization of its attributable share of profits. As to the long-term equity investment in joint enterprise and co-operative enterprise held before the first executing day, if there is any debit balance of equity investment, it shall recognize investment loss or profit after deducting the debit balance amortized with straight-line method on the remaining term. 10. Property of Investment Property of investment of the Group includes the right to use any land which has already been rented; The right to use any land which is held and prepared for transfer after appreciation; The right to use any building which has already been rented. Property of investment is priced as per its cost. The cost of purchased property of investment includes purchasing payment, relevant taxes and other expenditures which may be directly ascribed to such assets. The cost of building such property of investment is composed of all necessary expenditures occurred prior to that such property has reached the projected service status. The Company adopts cost mode to follow measurement of property of investment, for which, depreciation or amortization will be drawn aiming to the building and land-use right against the predictable service life and net salvage value. The following shows the net salvage value and annual depreciation (amortization) rate: Depreciation Expected Salvage Annual Depreciation Type Term (Year) Rate Rate Land-use Right 50 10% 1.80% Houses & Buildings 5--50 10% 1.80%--18.00% In case the property of investment is taken for self-use, such property shall be recorded as fixed assets or intangible assets since the date of taking. If the self-use property is taken for rent or capital appreciating, such fixed assets or intangible assets shall be recorded as property of investment since the date of taking. For such reording, the book value before it shall be taken as the recording value after that. If the property of investment is disposed of, or if it withdraws permanently from use and if no economic benefit will be obtained from the disposal, the recognition of it as property of investment shall be terminated. Such revenues of disposal of the property of investment as sales, transfer, discard, or being damaged or 77 Annual Report 2008 destroyed, after deducting the book value of such property as well as the relevant taxes, shall be accrued into the current profits and losses. 11. Fixed Assets Fixed assets of the Group refer to the tangible assets that simultaneously possess the following features (a). they are held for the sake of producing commodities, rendering labor service, renting or business management; (b). their useful life is in excess of one fiscal year; and (c) unit value has exceeded 2,000 Yuan. Fixed Assets include houses & buildings, machinery equipment, mould equipment, transport equipment, apparatus equipment, tooling equipment and office equipment. Fixed assets shall be measured at their cost, among which, the cost of a purchased fixed asset includes the purchase price, VAT, import duties and relevant taxes as well as other disbursements that bring the fixed asset to the expected conditions for use and that may be attributed to the fixed asset; the cost of self-constructed fixed assets shall be formed by the necessary disbursements incurred for bringing the asset to the expected conditions for use. The cost put into fixed assets by the investor shall be determined according to the value as stipulated in the investment contract or agreement, with the exception of those of unfair value as is stipulated in the contract or agreement. The costs of fixed assets acquired through financial leasing shall be determined at an amount equal to the the fair value of the leased asset or the present value of the minimum lease payments, whichever is lower. The subsequent disbursement relevant to fixed assets mainly composes of repair expense, renovation expense etc., where the expenses meet the condition to be recognized as fixed assets, it shall be accrued into cost of fixed assets; for the substituted part, its book value shall be terminating from recognition; where it does not meet the condition to be recognized as fixed assets, it shall be accrued into current loss and profit at occurring. The Group shall draw privisions for all fixed assets except for those having fully drawn provisions and under normal service as well as the land recorded separately. It adopts compstie life method to draw depreciation and is included in the cost of the relevant assets or in the expenses in current term in accordance with the purposes of the fixed assets. The estimated residue rate, depreciation years in different types and the dereciation rate of fixed assets in our Group are as follows: Type Depreciation Term Annual (Year) Estimated Residue Depreciation No. Rate (%) Rate (%) 1 houses & buildings 20—50 Years 10% 1.80-4.50% 2 machinery equipment 10 Years 10% 9.00% 3 mould equipment 3 Years 10% 30.00% 4 transport equipment 5 Years 10% 18.00% 78 Annual Report 2008 5 apparatus equipment 5 Years 10% 18.00% 6 tooling equipment 5 Years 10% 18.00% 7 office equipment 5 Years 10% 18.00% The Group will, at the end of each year, have a check on the useful life, estimated net residue value, and the depreciation method of the fixed assets, and if there is any change, it will be treated as the change of accouting estimation. Where the fixed asset is in a state of disposal or unable to generate any economic benefits through use or disposal as expected, the recognition of it as a fixed asset shall be terminated. When an enterprise sells, transfers or discards any fixed asset, or when any fixed asset of an enterprise is damaged or destroyed, the Company shall deduct the book value and relevant taxes from the disposal income through disposal, transfer, discard or being damaged or destroyed, and then include the remaining in the current profits and losses. 12. Project in Process Project in process shall be measured at the actual cost. The self-operating project shall be measued in line with direct materials, direct salary and direct construction expenses, etc.. The out-contracted project shall be measued in line with project price payable, etc.. Equipment installation project shall determine its cost as per the occurring disbursements as equipment value, installation charge and project trial running, etc.. The cost of project in progress also includes borrowing costs to be capitalized and exchange loss and profit. Since the day when project in process reaching the expected service status, carry over the estimated value of the project to fixed assets in line with project budget, constrtuction cost or actual cost, etc. with depreciation drawn since the preceding month. After the completion procedures have been completed, an adjustment shall be made to the difference of original fixed assets value. 13. Borrowing Costs The borrowing costs shall include interest on borrowings, amortization of discounts or premiums on borrowings, ancillary expenses, and exchange balance on foreign currency borrowings. The borrowing costs incurred to an enterprise that can be directly attributable to the acquisition and construction or production of assets eligible for capitalization, shall be capitalized after the asset disbursements have already incurred, the borrowing costs have already incurred, and the acquisition and construction or production activities which are necessary to prepare the asset for its intended use or sale have already started; When the qualified asset under acquisition and construction or production is ready for the intended use or sale, the capitalization of the borrowing costs shall be ceased. The remaining borrowing costs shall be recognized as expenses. As for specifically borrowed loans, the to-be-capitalized amount of interests shall be determined in light of the actual cost incurred of the specially borrowed loan at the present period minus the income of interests 79 Annual Report 2008 earned on the unused borrowing loans as a deposit in the bank or as a temporary investment. As for the general borrowing, it calculate and determine the to-be-capitalized amount of interests on the general borrowing by multiplying the weighted average asset disbursement of the part of the accumulative asset disbursements minus the general borrowing by the capitalization rate of the general borrowing used. Asset qualified for the capitalization conditions refers to the fixed assets, property of investment and inventory which must spend long term (usally above 1 year) to purchase, build or produce before reaching expected service or sales status. Where the acquisition or construction of assets that meet the capitalization conditions is interrupted abnormally for more than 3 consecutive months, such borrowing costs shall be suspended capitalizing till the acquisition or construction of the asset restarts. 14. Intangible Assets The major intangible assets of the Group include land-use right, patented technologies and non-patented technologies, etc.. , and shall be measured according to the actual cost when acquired. The acquired intangible assets shall be recorded as per actual price and relevant other disbursements. The intangible assets invested by investors shall be priced as per the value agreed in investment contract or agreement, with the exception of those of unfair value as is stipulated in such contract or agreement. The land-use right shall be averagely amortized based on its useful years since the beginning date of use; the patented technologies, non-patented technologies and other intangible assets will be averagely amortized by installments depending the shortest one among predicted service years, benefiting years set out in the contract and legal effective years. The amortized amount shall be accrured into relevant assets cost and current loss and profit as per their beneficiary objects. The Group shall, at the end of each year, check the service life and the amortization method of intangible assets with limited service life and adjust where appropriate. It shall also check the service life of intangible assets with uncertain service life during each accounting period, where there are evidences to prove the intangible assets have limited service life, it shall be estimated of its service life, and be amortized within such estimiated life. 15. Research & Development The expenditures for its internal research and development projects of the Company shall be classified into research expenditures and development expenditures depending on the project property and the degree of uncertainty of the intangible assets finally brought out. 80 Annual Report 2008 The research disbursements for the internal research and development project shall be recorded in the profits and losses of the current period; its development disbursements may be recognized as intangible asset if meeting the following conditions simultaneously: (1) In respect of the technology, it is feasible to finish the intangible asset for use or sale; (2) It is intended to finish and use or sell the intangible asset; (3) There is a potential market for the products manufactured by applying this intangible asset or that there is a potential market for the intangible asset itself; (4) With the support of sufficient technologies, financial resources and other resources, it is able to finish the development of the intangible asset, and it is able to use or sell the intangible asset; and (5) The disbursements attributable to the development of the intangible asset can be reliably measured. The development disbursement not meeting the above conditions will be accured into current loss and profit at occurring. The development disbursement accrued into loss and profit in previous term will not be recognized as assets as term thereafter. The development disbursement capitalized will be presented as “Development Disburesement” in the Balance Sheet and then be brough forward to intangible assets since such project has reached the expected service status. 16. Non-financial Asset Impairment The Group has, on each reporting day of Balance Sheet, checked the long-term equity investment, fixed assets, project in progress and intangible assets, etc.. In case of any of the following circumstances, possible impairment has occurred to assets. We will conduct impairment test at each year end over good will and those intangible assets without fixed beneficiary term. If difficult to test the recoverable amount of a single asset item, the test may be applied to the asset group or combined asset group containing such asset. After an impairment test to an asset, if the book value of such asset exceeds its recoverable amount, the positive difference shall be recognized as impairment loss. The impairment loss of abovesaid assets shall not be reversed in later accounting period after being recognized.The recoverable amount shall be determined according to the net amount of the fair value of an asset minus the disposal expenses, and the current value of the expected future cash flow of the asset, whichever is higher. The following circumstances may constitute a sign of possible asset impairment: (1) The current market price of an asset declines drastically, and the price drop is obviously higher than the expected drop over time or due to the normal use; 81 Annual Report 2008 (2) The economic, technological or legal environment in which the enterprise conducts its business operations, or the market where an asset is situated has or will have any significant change in the current period or in the near future, and thus has or will have an adverse impact on the enterprise; (3) The market interest rate or any other market investment return rate has risen in the current period, and the enterprise' calculation of capitalization rate of the current value of the expected future cash flow of the asset is affected and thus leads to a big fall in the recoverable amount of asset; (4) Any evidence shows that an asset has become obsolete or it has been damaged substantially; (5) An asset has been or will be left unused, or the use of an asset has been or will be terminated, or an asset has been or will be disposed of ahead of schedule; (6) Any evidence in the internal report of the enterprise shows that the economic performances of an asset has been or will be lower than the expected performances, for example, the net cash flow created by an asset or business profit (or loss) realized (incurred) an asset is lower (higher) than the excepted amount, etc.; and (7) Other evidence that indicates that an asset impairment has probably occurred. 17. Good Will Good will refers to the positive difference between the equity investment cost or business merger cost under different control and the fair value of the identifiable net assets of the invested unit or the acquiree which the Company is entitled to or obtains through business merger on the obtaining date or acquiring date. The good will in relation to its subsidiaries is separately presented in the consolidated financial statement, while that in relation to the assoiated enterprises and joint enterprises are included in the book value of long-term equity investment. 18. Long-term Deferred Expneses Long-term deferred expenses of the Group refers to the expenses that have been expended, and shall be amortized during current period and each period afterwards with amortizing term beyond 1 year (excluding 1 year). Those expenses shall be amortized evenly in its benefited periods. Where the long-term deferred expenses will not benefit the later accounting period, the remaining amount to-be-mortized shall be recorded into the loss or profits of current period. 19. Wages and Salaries of Employees 82 Annual Report 2008 During the accounting periods of the employees' rendering services to the Company, the Company shall recognize the payable salaries and wages as liabilities, which shall, according to beneficiaries of the services offered by employee, be accrued into relevant asset cost and expense. The compensations for the cancellation of the labor relationship with an employee will be accrued into current loss and profit. The employees' wages and salaries include: the employees' wages, bonuses, allowances and subsidies, welfare expenses, social insurance expenses, housing accumulation funds, operating funds for labor unions and the operating funds for the education of employees and other relevant disbursements for obtaining employees' services. If the Group cancels the labor relationship with any employee prior to the expiration of the relevant labor contract or brings forward any compensation proposal for the purpose of encouraging the employee to accept a layoff, where the Group has formulated a formal plan on the cancellation of labor relationship or has brought forward a proposal on voluntary layoff and will execute it soon, and at the same time, the Group is unable to unilaterally withdraw the plan on the cancellation of labor relationship or the layoff proposal, the Group shall recognize the expected liabilities incurred due to the compensation for the cancellation of the labor relationship with the employee, and shall simultaneously record them into the profit or loss for the current period. As for the internal retirement plan, it will be treated complying with the same principles as the layoff. The Group shall, in line with the regulations of such plan, recognize the salary and social insurance premium to be paid to such retired employees during the date of terminating service and their normal retirement date as predictable liabilities when it meets to the conditions, then accrure it into loss or profit of current term 20. Share-based Payments Share-based payments refer to a transaction in which an enterprise grants equity instruments or undertakes equity-instrument-based liabilities in return for services from employee or other parties. The share-based payments shall consist of equity-settled share-based payments and cash-settled share-based payments. The equity-settled share-based payment in return for employee services shall be measured at the fair value of the equity instruments granted to the employees. As to a equity-settled share-based payment in return for employee services, if the right cannot be exercised until the vesting period comes to an end or until the prescribed performance conditions are met, then on each balance sheet date within the vesting period, the services obtained in the current period shall, based on the best estimate of the number of vested equity instruments, be included in the relevant costs or expenses using straight-line method ,and the capital reserves shallbe increased accordingly. A cash-settled share-based payment shall be measured in accordance with the fair value of liability 83 Annual Report 2008 calculated and confirmed based on the shares or other equity instruments undertaken by the Company; If the right may be exercised immediately after the grant, the fair value of the liability undertaken by the Company shall, on the date of the grant, be included in the relevant costs or expenses, and the liabilities shall be increased accordingly; If the right may not be exercised until the vesting period comes to an end or until the specified performance conditions are met, on each balance sheet date within the vesting period, the services obtained in the current period shall, based on the best estimate of the information about the exercisable right, be included in the relevant costs or expenses and the corresponding liabilities at the fair value of the liability undertaken by the Company. On each balance sheet date and on each account date prior to the settlement of the relevant liabilities, it shall re-measure the fair values of the liabilities and include the changes in the profits or losses of current period. 21. Equity Instruments Equity Instruments refer to the contract which may proves holding all remain equity of the Company after deducting all liabilities. During business combination, the transactional expenses for issuing the equity instrument by combining party offset the premium revenue of equity insutruments, if it is not enough to offset, reduce the reserve profits. Other equity instruments, the consideration received at issuing will increase shareholder’s equity after deducting transactional expenses. The consideration and transactional expenses paid for purchasing back the equity instruments will decrease shareholder’s equity. It will not recognize profits and losses when issuing, purchasing back, selling or writting off the equity instruments. The distribution (excluding dividend) to the party who owns the equity instrument by the Company shall decrease shareholder’s equity. The Company does not recognize the change of fair value of equity instruments. 22. Predictable Liabilities In case all the obligations in relation to such contingent items as external guarnaty, suspensive lawsuit or arbitration, product quality guarantee, staff cutback plan, loss contract, restructuring obligation and fixed assets discarding obligation, etc. comply with the following conditions simultaneously, the Group will recognize them as liabilities. Such obligations are constant burdened by the Group; the execution of such obligations will possibly result in the outflowing of economic benefit from the Group; the amout of such obligations can be reliably measured. The predictable liabilities shall be initially measured as per the best estimatd amount to be paid for executing relevant instant obligations in combinaion with such factors as risk, uncertanity and time value of money regarding contingent issues. If the time value of money exerts serious effect, the best estimated amount shall be determined through discounting relevant cash outflows in the future. On the date of Balance 84 Annual Report 2008 Sheet, the Company shall double check the book value of predictable liabilities and make adjustement to it so as to reflect the best estimated amount at present. 23. Principles of Revenue Recognition The business revenues of the Group are mainly composed of revenues from sales of goods revenues from providing service and revenue from abalienating the right to use assets, its recognizing pricinples are as follows: When the Group has transferred the significant risks and rewards of ownership of the goods to the buyer; the Group retains neither continuous management right that usually keeps relation with the ownership nor effective control over the sold goods; The relevant amount of revenue can be measured in a reliable way; The relevant economic benefits may flow into the enterprise; The relevant costs incurred or to be incurred can be measured in a reliable way, it may recognize the realization of revenue. When total revenue and total cost from labor service can be measured in a reliable way; the relevant economic benefits are likely to flow into the enterprise; the schedule of completion under the transaction can be confirmed in a reliable way; it may recognize the realization of revenuefrom labor service. On the date of Balance Sheet, where the result of a transaction concerning the providing of labor service can be measured in a reliably way, it shall recognize relevant revenue according to the schedule of completion; where the result of a transaction concerning the providing of labor service cannot be measured in a reliably way and the cost of labor services incurred is expected to be compensated, the revenue from the providing of labor services shall be recognized in accordance with the amount of the cost of labor services incurred, and the cost of labor services shall be carried forward at the same amount; where the result of a transaction concerning the providing of labor service cannot be measured in a reliably way and the cost of labor services incurred is not expected to compensate, the cost incurred should be included in the current profits and losses, and no revenue from the providing of labor services may be recognized. The revenue from abalienating of right to use assets may be recognized on the condition that the relevant economic benefits are likely to flow into the Company and the amount of revenues can be measured in a reliable way. 24. Construction Contracts As to fixed price contract, when the total contract revenue can be measured in a reliable way; the economic benefits pertinent to the contract will flow into the Group; the actual contract costs incurred can be clearly distinguished and can be measured in a reliable way; both the schedule of the contracted project and the contract costs to complete the contract can be measured in a reliable way; and as to a cost plus conctract, when the economic benefits pertinent to the contract will flow into the Group; the actual contract costs incurred can be clearly distinguished and measured in a reliable way, the contract revenue and contract costs 85 Annual Report 2008 shall be recognized in light of the percentage-of- completion method on the date of the balance sheet by the Group. Where the outcome of a construction contract can not be estimated in a reliable way, if the contract costs can be recovered, the contract revenue shall be acknowledged in accordance with contract costs that can be recovered and the contract costs shall be acknowledged as contract expenses in the current period they are incurred; if the contract costs cannot be recovered, these costs shall be acknowledged as contract expenses immediately when incurred and no contract revenue shall be acknowledged. The Group will check the construction contracts at the end of year, if the estimated total cost of construction contracts surpasses its total revenue, it shall draw provison against loss, and recognize the expected loss as expenses of the current period. 25. Lease The Group classifies a lease as a financing lease and an operating lease on the lease beginning date. Financing lease refers to a lease that has transferred in substance all the risks and rewards related to the ownership of an asset. On the lease beginning date, the Group as lessee shall record the lower one of the fair value of the leased asset and the present value of the minimum lease payments on the lease beginning date as the entering value in an account, recognize the amount of the minimum lease payments as the entering value in an account of long-term account payable, and treat the balance between the recorded amount of the leased asset and the long-term account payable as unrecognized financing charges. Operating lease refers to a lease other than a financing lease. Where the Group is lessee, the rents shall be recorded in the relevant asset costs or the profits and losses of the current period by using the straight-line method over each period of the lease term. Where the Group is lessor, the rents shall be recorded in the profits and losses of the current period by using the straight-line method over each period of the lease term. 26. Government Grants The government grant may be recognized on the condition that the Group complies with the conditions for the government grant and that the Group can receive the government grant. If a government grant is a monetary asset, it shall be measured on the basis of the amount received, or that receivable if such grant is appropriated as fixed quota standard. If a government grant is a non-monetary asset, it shall be measured at its fair value, or at its nominal amount (1 Yuan) if its fair value cannot be obtained reliably. A government grant pertinent to assets shall be recognized as deferred income, equally distributed within the useful lives of the relevant assets, and included in the current profits and losses. The government grant pertinent to incomes, if used for compensating the related future expenses or losses of the Company, shall be recognized as deferred income and shall included in the current profits and losses during the period 86 Annual Report 2008 when the relevant expenses are recognized; or if used for compensating the related expenses or losses incurred to the Company, shall be directly included in the current profits and losses. 27. Deferred Income Tax Assets & Deferred Income Tax Liabilities The deferred income tax assets and deferred income tax liabilities shall be priced at the difference (temporary difference) between the tax base of assets and liabilities and their book value. For any deductible loss or tax deduction that can be carried forward to the next year, the corresponding deferred income tax asset shall be determined to the extent that the amount of future taxable income to be offset by the deductible loss or tax deduction to be likely obtained. On the balance sheet date, the deferred income assets and deferred income tax liabilities shall be measured at the tax rate applicable to the period during which the assets are expected to be recovered or the liabilities are expected to be settled. The Company shall recognize the deferred income tax assets arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be deducted from the deductible temporary difference. For the determined deferred income tax assets, if it is unlikely to obtain sufficient taxable income to offset against the benefit of the deferred income tax asset, the carrying amount of the deferred income tax assets shall be written down. Any such write-down should be subsequently reversed where it becomes probable that sufficient taxable income will be available. 28. Accounting Process of Income Tax The Group adopts balance sheet debt method to calculate the income tax. Income tax expenses include income tax of current period and deferred income tax. Except for the income taxes of the current period and deferred income tax related to the transactions or events directly relevant to the shareholder's rights and interests shall be recorded into the shareholder’s rights and interests, and adjust the the carrying amount of goodwill based on the deferred income tax due to enterprise combination, all other current period and deferred income tax expenses or profit shall be recorded into the profits and losses of current period. Income tax of current period refers to the amount payable to tax department calculated by the Group according to regulation of tax agency aiming at the transaction and matter occurred in current period, also called income tax payable; deferred income tax refers to the balance between the due amount of deferred income tax assets and deferred income tax libilities at the end of year recoginized according to the libilities method of Balance Sheet and the amont originally recognized. 29. Business Combinations Business combinations refer to a transaction or event bringing together two or more separate enterprises into one reporting entity. The Group confirms the acquired assets and liabilities due to bushiness combinations on the combining date or purchasing date. Combining date refers to the date on which the combining party actually obtains control on the combined or purchased party. 87 Annual Report 2008 In a business combination under the same control, the assets and liabilities that the combining party obtains in a business combination shall be measured on the basis of their carrying amount in the combined party on the combining date. The additional paid-in capital shall be adjusted according to the balance between the carrying amount of the net assets obtained by the combining party and the carrying amount of the consideration paid by it; if the additional paid-in capital is not sufficient to be offset, the retained earnings shall be adjusted. In a business combination not under the same control, the combination costs shall be the fair values, on the acquisition date, of the assets paid, the liabilities incurred or assumed and the equity securities issued by the acquirer in exchange for the control on the acquiree. The acquirer shall recognize the positive balance between the combination costs and the fair value of the identifiable net assets it obtains from the acquiree as good will; if the combination costs are less than the fair value of the identifiable net assets it obtains from the acquiree, it shall record the balance into the profits and losses of the current period after reexamination. 30. Report from the Branch Business branch refers to the unit in the Group that is divisible and may provide single or a group of relevant products or labor service. This part assumes the risk and rewards different than that of other parts. Regional branch refers to the unit in the Group that is divisible and may provide products or labor service in certain economic environment. This part assumes the risk and rewards different than that of the part in other economic environment. 31. Discontinued Operations Discontinued Operations refer to the composing part of the Group that has been disposed or divided into available for sale, and may be distinguished separately when operate and prepare financial statements. This part will be disposed wholly or partly according to the plan of the Group. The composing part of the Group that meets the following conditions will be divided into available for sale: the Group has made decision on how to dispose this composing part, the Group has entered irrevocable transfer aggrement with transferee, and the transfer will be completed within one year. 32. Determination of Fair Value of Financial Instruments As for the financial assets for which there is an active market, the quoted prices in the active market shall be used to determine the fair values thereof. Where there is no active market for a financial instrument, the Compay shall adopt value appraisal techniques to determine its fair value. The value appraisal techniques mainly include the prices adopted by the parties, who are familiar with the condition, in the latest market transaction upon their own free will, the current fair value obtained by referring to other financial instruments of the same essential nature, the cash flow capitalization method and the option pricing model, 88 Annual Report 2008 etc.. If adopting value appraisal techniques, one shall adopt, if possible, all the market parameters and avoid adopting those parameters that relate to the Compay. 33. Preparation of Consolidated Financial Statement (1) Principles of Recognition of Scope for Consolidation The Group incorporates those subsidiaries actually controlled and objects with special purpose into the scope of the Consolidated Financial Statement. (2) Account Method Adopted in the Consolidated Accounting Statement The Group has prepared for the Consolidated Financial Statement in line with the Business Accounting Standards No.33- Consolidated Financial Statement and its relevant regulations, with all key internal trades and transactions within the scope of consolidation offset. Among the shareholders equity of subsidaries, the part that does not belong to the parent company shall be presented under shareholders equity as minority interest in the consolidated financial statement. Where the accounting policy or accounting period adopted by subsidiaries and the Company is inconsistent, it shall make necessary adjustment on subsidiaries’ financial statements according to the accounting policy or accounting period adopted by the Company when prepare consolidated financial statement. As to the subsidiary acquired through business combination not under the same control, when prepare consolidated financial statement, it shall make adjustment on individual financial statement based on the fair value of the net assets recognized on the purchasing day; As to the subsidiary acquired through business combination under the same control, it will be regarded existing since the begin of the year of the current period of combination, and its assets, liabilities, operating results and cash flows will be included into the consolidated financial statement based on its original carrying value since the begin of the year of the current period of combination. VI、 Taxes The following taxes and rate are applied to the Group: 1. Enterprise Income Tax The originally applicable enterprise income tax rate for the Company and Shenzhen Huafa Property Lease Management Co., Ltd is 15%. According to the regulation of Enterprise Income Tax Law of the People's Republic of China put in force from January 1, 2008, the enterprise income tax rate will gradually transit to 25% from 2008 to 2012, and that in this year is 18%. The applicable tax rate of enterprise income tax of the Company is 15%. 89 Annual Report 2008 The applicable tax rate of enterprise income tax of Wuhan branch of the Company, and subsidiaries Shenzhen Huafa Property Lease Management Co., Ltd and Wuhan Hengfa Scientific and Technology Co., Ltd. Is 25%. 2. VAT VAT is applied to the sales of goods of the Company, among which, the input VAT rate of domestically-sold goods is 17%. The input VAT paid for purchasing raw materials, etc. may offset against output VAT at the rate of 17%, among which, the input VAT paid for import may be refunded upon application. VAT payable refers to the balance after deduction between the output VAT and input VAT at current term. 3. Business Tax The applicable tax rate of business tax of the Company is 5%. 4. Urban Construction Tax & Educational Surcharge The urban construction tax of the Company is levied on the basis of turnover tax payable at the rate of 1%; the urban construction tax and education surcharge of our subsidiary Shenzhen Huafa Property Lease Management Co., Ltd. and Shenzhen Zhongheng Huafa Property Management Co., Ltd are both levied on the basis of turnover tax payable at the 1% and 3% respectively; the urban construction tax and education surcharge of our subsidiary Wuhan Hengfa Scientific and Technology Co., Ltd. are both levied on the basis of turnover tax payable at the 3% and 7% respectively. 5. Property Tax The Company applies 70% of original value of properties as tax basis with the rate of 1.2%. VII、 Business Merger and Consolidated Financial Stateent 1. Key Subsidiaries Registered Registered Company Name Business Nature Business Scope Address Capital Shenzhen Huafa Property Lease Property Lease and 1Million Y Management Co., Ltd Shenzhen Management management of uan self-owned property Shenzhen Zhongheng Huafa Property Lease and Shenzhen 1Million Property Management Co., Ltd management of 90 Annual Report 2008 Management Yuan self-owned property Produce packaging Wuhan Hengfa Scientific and Production 27.5 Millio Wuhan material for sale Technology Co., Ltd. and Sale n Yuan and palastic product （continue） Investment Voting Amount at Holding Statements are Company Name Right Note the end of Percentage consolidated or not Percentage the year Shenzhen Huafa Property 60% 60% Yes 600,000Yuan * Lease Management Co., Ltd Shenzhen Zhongheng Huafa 1Million 100% 100% Yes Property Management Co., Ltd Yuan Wuhan Hengfa Scientific and 29.47Million 100% 100% Yes Technology Co., Ltd. Yuan * The operating term of Shenzhen Huafa Property Lease Management Co., Ltd expires on August 20, 2008, and is dealing with the procedure of liquidation and writing off. Till the auditing report day, the procedure is still not completed. The Company establishes a wholly owned subsidiary, Shenzhen Zhongheng Huafa Property Management Co., Ltd, which continual manages Huafa building. 2. Change of the Scope of Consolidation of Consolidated Financial Statements in This Year (1) Profile of subsidiary that included in consolidation scope in during the reporting period Company Reason for Holding Total Assets Total Debt Net Assets Net Profit Name consolidation Percentage Shenzhen Zhongheng Huafa Newly-founded 100% 1Million Yuan 3,500Yuan 996,500Yuan -3,500Yuan Property subsidiary Management Co., Ltd Wuhan Newly-founded Hengfa 100% 29,136,500Yuan 352,500Yuan 28,784,000Yuan -681,800Yuan subsidiary Scientific 91 Annual Report 2008 and Technology Co., Ltd. (2) Profile of subsidiary that not included in consolidation scope during the reporting period:Na 3. Consolidation by Merge in this year (1)Merge The company completes significant transfer of share rights in 2007, the original first and second shareholder Shenzhen Electronics Group Co., Ltd. and China Zhenhua Electronics Group Co., Ltd have transferred their share rights of the Company to Wuhan Zhongheng. Based on the Wuhan Zhongheng’s plan in the Acquire Report during the transfer of share rights, it will input relevant assets in its Wuhan Plastic Injection Factory into the Company. Wuhan Zhongheng entrusts Hubei Zhonglian Assets Assement Co., Ltd to evaluate the to-be-transferred factory, and the base day for evaluation is March 31, 2008. The evaluated net value of target assets is 27,201,600 Yuan RMB, after negotiation by both parties, the target assets are priced at 27 million Yuan and are transferred on June 1, 2008. According to Enterprise Accounting Principles, the Company makes adjustment of the carrying value of acquired assets and liabilities of Plastic Injection Factory from Wuhan Zhongheng based on the accounting policies of the Company, and record by the adjusted carrying value. It also adjust Capital surplus based on the balance between the recognized recorded value of net assets and the payment paid by the Company. The detail about the above merge is presented in Notes 14.1. VIII. Note to Major Items in the Consolidated Financial Statement In the following financial statements, the “beginning of the year” refers to Jan. 1, 2008, “the end of the year” refers to Dec. 31, 2008, “this year” refers to the period between Jan. 1 to Dec. 31, 2008, the “previous year” refers to the period between Jan. 1 to Dec. 31, 2007, and monetary unit refers to RMB Yuan. 1. Monetary Fund Amount at the end of year Amount at the beginning of year Item Original Exchange Equal to Original Exchange Equal to Currency Rate RMB Currency Rate RMB 92 Annual Report 2008 Cash in 361,428.77 Treasury 195,587.28 RMB 351,349.33 1.00 351,349.33 123,970.87 1.00 123,970.87 HKD 378.93 0.88 334.94 4,801.83 0.94 4,496.34 USD 1,422.45 6.84 9,744.50 9,188.74 7.30 67,120.07 Subtotal 12,989,322.13 13,544,606.19 Bank Deposit 11,615,608.63 1.00 11,615,608.63 7,602,444.56 1.00 7,602,444.56 RMB 383,476.73 0.88 338,955.07 378,698.08 0.94 354,605.31 HKD 151,048.60 6.84 1,034,758.43 764,936.66 7.30 5,587,556.32 Other Monetary Fund 10,963,903.66 4,568,029.78 RMB 10,962,998.55 1.00 10,962,998.55 4,567,070.93 1.00 4,567,070.93 HKD 905.11 1.00 905.11 1,024.00 0.94 958.85 Total 24,314,654.56 18,308,223.25 (1) The year-end monetary fund is 6,006,431.31 yuan over the year-beginning amount, mainly because other monetary funds increased by 6,395,873.88 yuan over the year-beginning amount. The other year-end monetary fund of 10,963,903.66 Yuan was acceptance bill security money and credit securities and L/C security money. 2. Notes Receivable (1) Type of Notes Receivable Type of Notes Amount at the end of year Amount at the beginning of year Bank acceptance bill 6,767,862.01 3,949,751.05 Total 6,767,862.01 3,949,751.05 (2) Bills payable to other companies endored by the company at the year end but not due yet. Type of Notes Due Date Amount Bank acceptance bill Jan. 2009 100,000.00 Bank acceptance bill Feb. 2009 590,000.00 Bank acceptance bill Mar. 2009 1,387,000.00 Bank acceptance bill Apr. 2009 1,234,500.00 93 Annual Report 2008 Bank acceptance bill Jun. 2009 605,599.28 Total 3,917,099.28 (3) Company’s year-end discounted but undue bills Type of Notes Issuer Issuing Date Due Date Amount Qingdao Hisense Electric Bank acceptance bill Appliance Co., Ltd. 2008-7-28 2009-1-28 1,260,000.00 Nanjing Wanlida Science & Bank acceptance bill Tech Co., Ltd. 2008-10-31 2009-4-30 237,033.00 Zhejiang Gome Electric Bank acceptance bill Appliance Co., Ltd. 2008-9-19 2009-3-19 344,517.30 Xiangxiang Hengyu Bank acceptance bill Hardware,Electric and Chemical Co.,Ltd 2008-8-20 2009-2-20 200,000.00 Nanjing Wanlida Science & Bank acceptance bill Tech Co., Ltd. 2008-12-2 2009-6-2 304,541.20 Shenzhen Tongzhou Bank acceptance bill Electrics Co.,Ltd 2008-12-10 2009-3-12 150,000.00 Total 2,496,091.50 3. Notes Receivable （1） Notes Receivable Pledged Item Amount at the end of year Amount at the beginning of year Provision Provision Amount Proportion% for Bad Amount Proportion% for Bad Debts Debts Within 1year 87,761,755.23 81.19% 37,406.70 50,915,565.22 76.95% 38,256.00 1-2 year (s) 6,247,669.23 5.78% 313,217.23 3,711,061.15 5.61% 828,147.41 2-3 years 3,302,604.58 3.06% 930,416.90 1,657,910.00 2.51% 526,230.79 3-4 4.82% years 1,178,862.90 1.09% 576,517.76 3,189,707.52 1,606,473.64 4-5 years 3,304,163.43 3.06% 1,540,245.78 3,511,812.92 5.31% 2,485,199.59 94 Annual Report 2008 Over 5 years 6,293,060.47 5.82% 6,293,060.47 3,179,063.13 4.80% 3,179,063.13 Total 108,088,115.84 100.00% 9,690,864.84 66,165,119.94 100.00% 8,663,370.56 （2） Type of Risk of Accounts Receivable Amount at the end of year Item Book balance Provision for Bad Debts Amount Proportion% Amount Proportion% That with large amount in 96,973,074.40 89.72% 4,654,184.40 48.03% single item That in group with larger risk after grouping as per credit 3,372,800.12 3.12% 3,372,800.12 34.80% risk features though single item sum is small That without large 7,742,241.32 7.16% 1,663,880.32 17.17% amount in single item Total 108,088,115.84 100.00% 9,690,864.84 100.00% Amount at the beginning of year Item Book balance Provision for Bad Debts Amount Proportion% Amount Proportion% That with large amount in 52,651,517.45 79.58% 4,256,504.67 49.13% single item That in group with larger risk after grouping as per credit risk 3,106,743.57 4.69% 3,106,743.57 35.86% features though single item sum is small That without large 10,406,858.92 15.73% 1,300,122.32 15.01% amount in single item Total 66,165,119.94 100.00% 8,663,370.56 100.00% 1) That in group with larger risk after grouping as per credit risk features though single item sum is small Item Amount at the end of year Amount at the beginning of year 95 Annual Report 2008 Provision Provision Amount Proportion% for Bad Amount Proportion% for Bad Debts Debts 1-2 year (s) - - 304,542.95 9.80% 304,542.95 2-3 years 304,542.95 9.03% 304,542.95 193,000.00 6.21% 193,000.00 3-4 years 193,000.00 5.72% 193,000.00 430,857.38 13.87% 430,857.38 4-5 years 430,857.38 12.78% 430,857.38 695,404.74 22.38% 695,404.74 Over 5 years 2,444,399.79 72.47% 2,444,399.79 1,482,938.50 47.74% 1,482,938.50 Total 3,372,800.12 100.00% 3,372,800.12 3,106,743.57 100.00% 3,106,743.57 （3） Accounts receivable written off in this year Produced by Nature of Amount Cause of writing related Foreign Currency accounts written off off transaction or receivable not Original sales store of Other unit has the company Goods return 211,418.90 written off No Total 211,418.90 (4) The year-end accounts receivable increased by 41,922,995.90 Yuan over the beginning of the year, an increase of 63.36%, which is mainly because the accounts receivable of the Wuhan branch and the customer of the Video Division–H. K. Haowei Industry Co., Ltd increased by a fairly big margin. (5) The year-end accounts receivable doesn't include the arrearages at the part of shareholders holding more than 5% (including) vote in the Company (or the Group). (6) The year-end balance includes 68,351,538.41 Yuan of arrearages at the part of the first 5 arrear-ridden units, accounting for 63.24% of the total accounts receivable. (7) The year-end balance includes 189,629.17 Yuan of accounts receivable to be paid by the related part, which accounts for 0.18% of the total accounts receivable. (8) Balance of foreign currency among the accounts receivable Amount at the end of year Amount at the beginning of year Foreign Original Exchange Equal to Original Exchange Equal to Currency Currency Rate RMB Currency Rate RMB 96 Annual Report 2008 USD 6,900,478.49 6.83 47,147,957.15 1,163,327.46 7.30 8,497,641.76 HKD - - - 268,627.44 0.94 251,537.36 Total 47,147,957.15 8,749,179.12 4. Advance payment Amount at the end of year Amount at the beginning of Item year Amount Proportion% Amount Proportion% Within 1year 1,700,284.27 83.09% 2,247,164.84 91.01% 1-2 year (s) 345,992.79 16.91% 221,962.68 8.99% Total 2,046,277.06 100.00% 2,469,127.52 100.00% （1） Advance payment on the part of main units Amount Foreign Relation with this term of the Cause of the of Currency company arrearage arrearage arrearage Wuhan Hengsheng subsidiary of the Raw materials Optronics Industry controlling 614,070.84 Within 1 year purchase Co., Ltd. shareholder Total 614,070.84 （2） The year-end balance includes 1,322,501.93 Yuan of arrearage on the part of the first 5 arrearage-units, accounting for 64.62% of the total advance payment. （3） The year-end balance includes no arrearage on the part of the shareholders more than 5% (including) of vote in the Company. （4） The balance of Chinese currency in the advance payment Amount at the end of year Amount at the beginning of year Foreign Original Exchange Equal to Original Exchange Equal to Currency Currency Rate RMB Currency Rate RMB USD - - - 42,250.00 7.30 308,619.35 Total 308,619.35 5. Other Receivables 97 Annual Report 2008 （1） Account age Item Amount at the end of year Amount at the beginning of year Provision Provision for Bad Amount Proportion% for Bad Amount Proportion% Debts Debts Within 1 year 4,281,715.68 18.94% 51,595.15 8,194,519.90 33.90% 268,953.00 1-2 year (s) 4,047,420.19 17.90% 561,138.66 4,876,494.34 20.17% 1,139,726.33 2-3 years 4,720,769.26 20.88% 1,209,494.13 4,446,800.86 18.40% 2,014,698.04 Over 3 years 9,560,798.95 42.28% 5,212,237.11 6,653,261.92 27.53% 2,862,602.28 Total 22,610,704.08 100.00% 7,034,465.05 24,171,077.02 100.00% 6,285,979.65 （2） Categories of the risks of other accounts receivable Amount at the end of year Item Book balance Provision for Bad Debts Amount Proportion% Amount Proportion% That with large amount in single item 15,901,534.11 70.33% 4,442,961.24 63.16% That in group with larger risk after grouping as per credit risk 2,084,536.50 9.22% 2,084,536.50 29.63% features though single item sum is small That without large 4,624,633.47 20.45% 506,967.31 7.21% amount in single item Total 22,610,704.08 100.00% 7,034,465.05 100.00% Amount at the beginning of year Item Book balance Provision for Bad Debts Amount Proportion% Amount Proportion% That with large amount in single item 17,907,596.23 74.09% 4,385,025.71 69.76% That in group with larger risk after grouping as per credit risk 1,600,135.05 6.62% 1,600,135.05 25.45% features though single item sum is 98 Annual Report 2008 small That without large 4,663,345.74 19.29% 300,818.89 4.79% amount in single item Total 24,171,077.02 100.00% 6,285,979.65 100.00% （3） The balance of other accounts receivable decreased by 1,560,372.94 Yuan over the year-beginning amount, mainly because the year-end balance of Shenzhen Wanshang Friendship Department Store Co., Ltd. decreased by 975,681.12 Yuan over the year-beginning amount. （4） The year-end bad debts allowance increased by 748,485.40 Yuan over the year-beginning amount, mainly because bad debts allowances were provided for all the funds with an accounting age of more than 5 years. （5） The other year-end accounts receivable dosen’t include any arrearage on the part of the shareholder units with more than 5% (including) of vote in the Company (or the Group). 6. Inventories & Depreciation Provisions （1） Type of Inventories Amount at the end of year Amount at the beginning of Item year Raw Materials 24,140,700.20 13,365,662.97 Finishing Product 2,747,155.89 703,398.52 Stocked Goods 23,171,248.12 19,491,580.16 Low-value consuming products 3,140,265.57 2,913,936.62 Self-made semi-finished product 2,646,615.52 468,008.50 Delivered Goods - 961,950.84 Processed Materials upon entrustment - 48,594.56 Total 55,845,985.30 37,953,132.17 The year-end inventory balance increased by 17,892,853.13 Yuan over the year-beginning amount, with a 47.14% increase, mainly because injection moulding business was in the year purchased from Wuhan Zhongheng which had a year-end inventory balance of 23,099,248.86 Yuan. （2） Provision for Depreciation of Inventories Decrement This Term Amount at Amount Amount at Other Item the beginning Drawn This the end of Carryover Carrying of year Term year forward 99 Annual Report 2008 Raw Materials 221,480.95 404,940.05 - - 626,421.00 Finishing Product 5,135,877.67 - 610,755.48 4,525,122.19 Low-value consuming products - 142,991.83 - - 142,991.83 Self-made semi-finished - 91,196.16 - - 91,196.16 product Total 5,357,358.62 639,128.04 - 610,755.48 5,385,731.18 ① Drawing method of provision for depreciation of inventories see Note V. ② As for price drop allowance for the inventory, 610,755.48 Yuan was carried out, which was caused mainly by the sales of the circuit board for which depreciation allowances had been provided. In the year, the circuit board had a gross sales profit of -13.92%, and depreciation was confirmed according to the net year-end realizable value of the inventory. The year-beginning circuit board inventory was worth 12,168,988.44 Yuan, which had a depreciation allowance of 4,045,630.63 Yuan; The year-end circuit board inventory was worth 7,501,956.44 Yuan, which had a depreciation allowance of 3,005,235.57 Yuan. (3) The year-end monetary value of the inventory doesn't include the monetary value of the borrowings. (4) The year-end inventory had not any part mortgaged or frozen up. 7. Property of Investment （1） Property of Investment Measured by Cost Mode Amount at the Amount at the Increment Decrement beginning of end of year This Term This Term Item year Original Value 107,439,914.94 - - 107,439,914.94 houses & buildings 107,439,914.94 - - 107,439,914.94 Accumulated Depreciation & 61,620,520.57 2,880,630.09 64,501,150.66 Amortization houses & buildings 61,620,520.57 2,880,630.09 64,501,150.66 Depreciation - - - - allowance houses & buildings - - - - Book Value 45,819,394.37 - - 42,938,764.28 houses & buildings 45,819,394.37 - - 42,938,764.28 100 Annual Report 2008 (2) Among the property of investment in the form above, part of houses and buildings have been mortgaged with China Construction Bank for loans, details in Note VIII (13). 8. Fixed Assets （1） Breakdown of Fixed Assets Item Amount at the Increment Decrement Amount at the beginning of This Term This Term end of year year Original Value 329,943,675.60 23,546,707.10 1,535,667.57 351,954,715.13 Houses & 156,259,960.38 343,807.00 - 156,603,767.38 Buildings Machinery 108,998,444.66 20,293,905.32 1,381,109.57 127,911,240.41 Equipment Mould 16,868,992.61 708,434.01 - 17,577,426.62 Equipment Transport 4,050,976.54 897,133.00 124,230.00 4,823,879.54 Equipment Apparatus 25,600,821.29 571,649.40 - 26,172,470.69 Equipment Tooling 7,680,443.09 94,566.45 - 7,775,009.54 Equipment Office 10,484,037.03 637,211.92 30,328.00 11,090,920.95 Equipment Accumulated 141,731,205.58 15,801,536.59 1,046,354.42 156,486,387.75 Depreciation Houses & 33,579,486.27 3,854,490.64 - 37,433,976.91 Buildings Machinery 58,107,363.69 8,661,924.51 908,285.84 65,861,002.36 Equipment Mould 13,131,758.21 1,519,200.69 - 14,650,958.90 Equipment Transport 2,132,052.08 405,057.70 111,807.00 2,425,302.78 Equipment Apparatus 21,288,197.89 428,441.52 - 21,716,639.41 Equipment Tooling 5,779,942.88 540,651.87 - 6,320,594.75 Equipment Office 7,712,404.56 391,769.66 26,261.58 8,077,912.64 Equipment Impairment 973,496.73 973,496.73 Provision - - Office 973,496.73 973,496.73 Equipment - - Book Value 187,238,973.29 - - 194,494,830.65 Houses & 122,680,474.11 119,169,790.47 Buildings - - 101 Annual Report 2008 Machinery 50,891,080.97 62,050,238.05 Equipment - - Mould 3,737,234.40 2,926,467.72 Equipment - - Transport 1,918,924.46 2,398,576.76 Equipment - - Apparatus 4,312,623.40 4,455,831.28 Equipment - - Tooling 1,900,500.21 1,454,414.79 Equipment - - Office 1,798,135.74 2,039,511.58 Equipment - - (2) In the year, 3,233,242.95 Yuan’s worth of projects in process was transferred into the new fixed assets, for detailed information, refer to Appendix VIII, 9; the parts transferred into the fixed assets didn’t include capitalized interest. (3) In the year, the new fixed assets included assets of the Wuhan Injection Plant the Company purchased from Wuhan Zhongheng , including 19,018,027.76 Yuan’s worth of fixed assets, where machines and equipment were worth 18,592,375.44 Yuan, transportation equipment was worth 51,471.32 Yuan, office equipment was worth 374,181.00. For detailed information, refer to the Annex XIV. (4) By the date of the Audit Report, ownership transfer had not been performed for the transportation equipment Wuhan Zhongheng presented to the Wuhan branch in the first half of the year, the original account value of which equipment was 68,500.00 Yuan, the account-carried net value of which was 45,871.29 Yuan on Dec. 31, 2008. 9. Project in Progress （1） Breakdown of Projects in Progress That Carried Year-beginning Other Year-end Increment forward as Project Name Decrement amount This Term Fixed Assets amount This Term This Term 19W Mould 201,000.00 - 201,000.00 - - 22W Mould 144,000.00 - 144,000.00 - - Renovating Project 691,612.52 422,541.03 120,095.27 756,476.22 607,500.00 Circuit board factory building - - - rehabilitation 235,709.40 235,709.40 Civil engineering of self-built wastewater - 55,409.12 55,409.12 - - plant Rail guard engineering & pipe - 48,872.00 48,872.00 - - engineering 102 Annual Report 2008 Water treatment - 211,400.00 211,400.00 - - engineering Motor-generator set - 799,714.00 799,714.00 - - rehabilitation Corrosion protection and terrace - 112,897.40 112,897.40 - - engineering Environmental - 321,983.02 - - 321,983.02 protection project Plate casting machine - 56,570.79 - - 56,570.79 construction Coal-to-gas project - 1,001,700.00 1,001,700.00 - - Hengfa assets relocation and - 489,852.00 - - 489,852.00 installation Total 1,036,612.52 3,941,607.73 3,233,242.95 120,095.27 1,624,882.03 Including: capitalized - - - - - borrowings (2) The fund used for project in process is from self-financing fund, and there is no capitalized interest occurred therein. (3) The year-end balance for the projects in process increased by 588,269.51 Yuan over the year-beginning amount, with a growth of 56.75%, mainly because the relocation and installation of the subsidiary--Wuhan Hengfa Technology Co., Ltd. Incurred a cost of 489,852.00 Yuan. 10. Intangible Assets Item Amount at the Amount at the Increment Decrement beginning of end of year This Term This Term year Original Value 6,516,471.70 - - 6,516,471.70 Land-use Right 6,353,451.70 - - 6,353,451.70 Non-patent 163,020.00 163,020.00 - - Technology Accumulated 64,922.35 198,475.72 263,398.07 - Amortization Land-use Right 60,394.02 144,945.67 - 205,339.69 Non-patent 4,528.33 53,530.05 - 58,058.38 103 Annual Report 2008 Technology Allowance for - - - - depreciation Land-use Right - - - - Non-patent - - - - Technology Book Value 6,451,549.35 - - 6,253,073.63 Land-use Right 6,293,057.68 - - 6,148,112.01 Non-patent 158,491.67 104,961.62 - - Technology 11. Deferred income tax assets and deferred income tax liabilities （1） Confirmed deferred income tax assets and deferred income tax liabilities Items Amount at the end of Amount at the year beginning of year I. deferred income tax assets Deferred income tax assets formed by bad debts allowance 2,719,482.28 525,557.89 Deferred income tax assets formed by inventory depreciation allowance 1,077,146.23 - Deferred income tax assets formed by fixed-asset 175,229.40 depreciation allowance - Total 3,796,628.51 700,787.29 （2） Temporarily different items of the deferred income tax assets confirmed at the end of the year I. Temporarily different items that can be offset Amount at the end of Amount at the year beginning of year provision for bad debt impairment 13,597,411.38 2,919,766.03 Provision for inventories impairment 5,385,731.18 - Provision for Fixed Assets Impairment - 973,496.73 Total 18,983,142.56 3,893,262.76 (1) As is mentioned in “Notes VII (1)”, the operating term of the subsidiary of the Company—Shenzhen Hwafa Property Lease & Management Co., Ltd—expires on August 20, 2008, and liquidation formalities are being processed therefor. So, in this year, 700,787.29 Yuan of deferred income tax 104 Annual Report 2008 asset confirmed for the subsidiary in the last year is carried backward. By the date of the audit report, 57,098,749.67 Yuan’s worth of assets written off for the company in the last year have not been approved by the tax bureau, and the Company purchased from Wuhan Zhongheng in this year an injection moulding plant which brought about a total income of 4,614,267.91 Yuan from the date of purchase to the end of the year. It is predicted that the Company can, in this year and in the coming 3 years, produce enough taxable amount of income to offset the temporarily different items that can be offset, so, the deferred income tax asset has been confirmed in this year. 12. Breakdown of Provision for Asset Impairment Decrement This Term Amount at Amount Amount at Other Item the beginning Drawn This the end of Carryover Carrying of year Term year forward provision for bad 14,949,350.21 1,987,398.58 - 211,418.90 16,725,329.89 debt impairment Provision for inventories - - 5,385,731.18 5,357,358.62 28,372.56 impairment provision for fixed assets - - - 973,496.73 973,496.73 impairment Total 21,280,205.56 2,015,771.14 - 211,418.90 23,084,557.80 13. Short-term Borrowings （1） Statement by Currency Currency Amount at the end of Amount at the year beginning of year RMB 94,000,000.00 60,400,000.00 Total 94,000,000.00 60,400,000.00 （2） Statement by Loan Conditions Type Amount at the end of Amount at the year beginning of year Mortgage Loan 94,000,000.00 60,400,000.00 105 Annual Report 2008 Among it: China Construction Bank Shangbu 94,000,000.00 - branch ICBC (Shenzhen) Shangbu Branch - 30,400,000.00 Shenzhen Pingan Bank Shennan branch - 20,000,000.00 Shenzhen Development Bank Zhenhua Branch - 10,000,000.00 Total 94,000,000.00 60,400,000.00 The Company borrowed a sum of short-term loan of 94 million RMB Yuan from the China Construction Bank, with the 1st, 2nd ,3rd, 4th , 5th and 6th floor of the Hwafa Mansion as collateral, where the 1st, 5th and 6th floors have an area of 15,047.03 m2, a total value of 248,593,900 Yuan and net value of 101,603,000 Yuan; the 2nd, 3rd and 4th floors have an area of 21,222.90 m2, a total value of 250,430,200 Yuan and net value of 111,319,500 Yuan. 14. Notes Payable Amount at the end of Amount at the beginning Type year of year Bank Acceptance bill 3,429,765.26 2,812,914.35 Total 3,429,765.26 2,812,914.35 15. Accounts Payable （1） Accounts Payable Amount at the end of Amount at the beginning of Type year year Total 49,895,119.48 42,777,941.82 among it： Over 1year 7,097,636.14 4,453,951.92 (2) Involved in the large-sum accounts receivable with an age more than 1 year are mainly Korea Kumho Petrochemical Co.(1,296,111.18 Yuan) and Kunshan Ritao Chemical Company (543,420.00 Yuan). By Dec. 31, 2008, the Company had made no payment temporarily. (3) Accounts payable by the shareholder units or other units related thereto with a vote of more than 5% (including) in the Company free of any arrearage. (4) Balance of foreign currency in the accounts payable Foreign Amount at the end of year Amount at the beginning of year 106 Annual Report 2008 Currency Original Exchange Equal to Original Exchange Equal to Currency Rate RMB Currency Rate RMB USD 1,500,378.12 6.84 10,266,817.75 2,619,967.73 7.30 19,137,816.28 HKD 1.00 4,151.42 0.94 3,887.31 4,151.42 4,151.42 Total 10,270,969.17 19,141,703.59 16. Advance Payment （1） Advance Payment Amount at the end of Amount at the beginning of Type year year Total 1,962,952.11 666,261.81 among it： Over 1 years 369,075.58 128,353.42 (2) The year-end advance payment doesn't include payment by the shareholder units or related parties with more than 5% (including) of vote in the Company. (3) Balance of foreign currency among the advance payment Foreign Amount at the end of year Amount at the beginning of year Currency Original Exchange Equal to Original Exchange Equal to Currency Rate RMB Currency Rate RMB USD 50,412.40 7.30 368,242.42 68,441.97 6.91 473,169.63 Total 50,412.40 7.30 368,242.42 473,169.63 17. Salary Payable to Employees Item Amount at Amount at Increment Decrement the beginning the end of This Term This Term of year year Salary (Among it bonus, allowance & subsidies) 456,573.61 22,463,469.82 22,542,590.26 377,453.17 Staff Welfare Treatment Fund - 735,743.39 735,743.39 - Social Insurance Premium - 1,710,993.80 1,703,150.40 7,843.40 among it, medical insurance premium - 153,706.53 153,706.53 - 107 Annual Report 2008 Basic retirement insurance premium - 1,387,632.87 1,379,789.47 7,843.40 Unemployment Insurance Premium - 105,173.16 105,173.16 - Industrial Injury Insurance Premium - 57,971.66 57,971.66 - Birth Insurance Premium - 6,509.58 6,509.58 - Public Housing Fund - 814.32 814.32 - Labor Union fund & staff educational fund 572,404.16 194,060.98 243,470.07 522,995.07 Non-monetary Welfare Treatment - - - - Compensation regarding Cancelling Employment Relation - 23,558.50 23,558.50 - Others - 8,832.30 8,832.30 - among it, shares paid in cash - - - - Total 1,028,977.77 25,137,473.11 25,258,159.24 908,291.64 18. Taxes Payable Tax Type Applicable Amount at the end Amount at the Tax Rate of year beginning of year VAT 17% 939,262.39 438,958.57 Business Tax 5% 1,081,136.29 1,080,982.99 Enterprise Income Tax 18%, 25% 322,784.69 -119,731.50 Personal Income Tax -31,320.70 20,817.16 Urban Maintenance & 1%, 3% 4,893.26 4,952.70 Construction Tax Property Tax 1.2% 444,954.15 444,952.95 Educational Surcharge 3%, 7% 3,922.71 -177.71 Price adjustment funds 580.29 - Total 2,766,213.08 1,870,755.16 108 Annual Report 2008 19. Other Payables （1） Other Payables Amount at the end of Amount at the beginning of Type year year Total 45,523,634.74 22,199,987.43 among it： Over 1yars 5,585,772.14 6,430,205.67 （2） Other year-end accounts payable increased by 23,323,647.31 Yuan over the year-beginning amount, registering a growth rate of 105.06%, mainly because that the Company purchased from Wuhan Zhongheng an injection moulding system totalling to 27,000,000 Yuan; by the Dec. 31, 2008, 19,000,000 Yuan had not be paid yet. For details, see the Annex XIV (1). （3） Accounts payable to the shareholder units with a vote of more than 5% (including) in the Company. Unit name Amount at the beginning Amount at the end of year of year Wuhan Zhongheng New 35,874,497.71 9,818,560.21 Technology Group Co., Ltd. Total 35,874,497.71 9,818,560.21 （4） Other year-end larg-sum accounts payable Type Amount of Account Nature of contents arrearages ageing Within 1 Payment as agent Wuhan Zhongheng New 35,874,497.71 and asset purchase Technology Group Co., Ltd. year fund Shenzhen Wanshang Friendship 3,477,008.00 Over 3 yars Lease Deposit Department Store Co., Ltd. Chen Meiyu 496,760.91 1－2 yars Lease Deposit Within 1 Zhao Baomin 334,768.00 Lease Deposit year Shenzhen Dingchang Industry Within 1 276,266.00 Lease Deposit Co., Ltd. year Total 40,459,300.62 20. Predicted liabilities 109 Annual Report 2008 Type Amount at the Increment Decrement Amount at the end beginning of year This Term This Term of year Pending legal action - 175,474.41 - 175,474.41 Total - 175,474.41 - 175,474.41 (1) For detailed information about the predicted liabilities, refer to the Annex XII (1). 21. Deferred income Type Amount at the Amount at the Increment Decrement beginning of end of year This Term This Term year Subsidies from Wuhan Financial Department - 200,000.00 - 200,000.00 for earthquake relief equipment Total - 200,000.00 - 200,000.00 (1) On June 10, 2008, the Wuhan branch of the Company received from Wuhan Financial Department a subsidy of 200,000 Yuan for purchase of earthquake-relief equipment to product earthquake-relief materials. By Dec. 31, 2008; those equipment were still in being constructed. 22. Capital Stock The par value is RMB 1 Yuan per share Shareholder Name/Type Amount at the end of year Amount at the beginning of year Restricted Shares State-owned Shares - - State-owned Corporate Shares - - Other Domestic Shares 116,489,894 116,516,142 among it, domestic corporate share 116,489,894 116,489,894 Domestic natural pers shares - 26,248 Foreign Shares among it, foreign corporate - - shares foreign natural person - - shares Total Restricted Shares 116,489,894 116,516,142 110 Annual Report 2008 Unrestricted Shares - - RMB Common Shares 64,675,497 64,649,249 Foreign Shares Listed 101,995,836 101,995,836 Domestically Foreign Shares Listed Overseas - - Others - - Total Unrestricted Shares 166,671,333 166,645,085 Total Shares 283,161,227 283,161,227 According to the related regulations, the presidents, supervisors and top executives of listed companies can apply for share defreezing 6 months after resignation from office. By Jan. 17, 2008, the former President Mr. Ye Daming had had 6 months of time after his resignation, so, after an application to the China Securities Registration and Settlement Co., Ltd. Shenzhen Branch, his 26,248 shares in the Company had been totally freed of sales restriction. 23. Capital Reserves Type Amount at the Amount at the Increment Decrement beginning of end of year This Term This Term year Shares Premium 98,460,750.00 - 1,958,846.98 96,501,903.02 Other Capital - - 7,571,423.92 7,571,423.92 Reserves Total 106,032,173.92 - 1,958,846.98 104,073,326.94 (1) Decrease in this was caused by the absorption and merger of Wuhan Zhongheng injection moulding system; for details, see the Annex XIV (1). 24. Surplus Reserves Type Amount at the Amount at the Increment Decrement beginning of end of year This Term This Term year Statutory Surplus - - 21,322,617.25 21,322,617.25 Reserves Any Surplus Reserves 56,068,976.00 - - 56,068,976.00 111 Annual Report 2008 Total 77,391,593.25 - - 77,391,593.25 (1) According to the Company Law of PR. China, the Articles of Association and the resolutions by the Board, after making up the losses in the previous year, 10% of the net profit of the year can be retained as surplus reserve; the surplus reserve can not be more than 50% of the capital stock. If approved, the statutory surplus reserve can be used for making up losses, or for increasing the stock capital. Apart from the compensation for losses, the balance of the statutory surplus reserve, after a portion of which has been deducted as additional stock capital, shall not be less than 25% of the surplus reserve before the portion for stock capital is deducted. In 2008, the Company didn’t retain any statutory surplus reserve. 25. Profit Retained Type Amount Proportion retained or distributed Amount at the beginning of year -224,384,793.57 Add: Year-beginning undistributed profit - adjustment Among it: Account policy change - Correction of early serious errors - Same control merger scope change - Amount for the beginning of the year -224,384,793.57 Add: Net profit for the year 7,567,912.54 Less: statutory surplus reserve retained - Free surplus reserves retained - Common stock dividends payable - Common Stock dividends transferred - into stock capital Amount for the end of the year -216,816,881.03 among it, monetary dividends to be - distributed 26. Business Revenues & Business Cost （1） Business Revenues Type Amount of current Amount of last year year Revenues from Major Business 148,216,470.85 141,184,217.25 112 Annual Report 2008 Revenues from Other Business 41,184,774.23 52,060,665.60 Total 189,401,245.08 193,244,882.85 Revenues from Major Business 150,543,063.64 140,005,093.93 Revenues from Other Business 4,629,813.42 27,130,304.10 Total 155,172,877.06 167,135,398.03 （2） Main Businesses –by product Amount of current year Amount of last year Products Operating Operating Operating costs Operating costs incomes incomes LCD 67,855,548.92 62,664,194.14 58,798,941.86 58,743,984.85 Displayer Circuit board 52,714,033.72 60,052,553.59 64,650,992.46 65,695,271.08 Foamed 16,414,466.23 16,080,400.12 - - pieces Injection 11,232,421.98 11,745,915.79 15,849,667.48 14,308,379.98 moulded pieces color TV - - 1,884,615.45 1,257,458.02 processing Total 148,216,470.85 150,543,063.64 141,184,217.25 140,005,093.93 （3） The Company’s total operating incomes from the first 5 customers are 65,645,592.57 Yuan, accounting for 34.66% of the whole-year total of operating incomes. (4)Cost of Revenues from Other Business—classified by types Amount of current year Amount of last year Type Revenues from Other Cost of Other Revenues from Cost of Other Business Business Other Business Business leased 35,900,627.50 12,969,103.08 37,276,934.36 2,978,009.92 property sales of 525,103.00 208,100.86 15,480,038.10 13,736,661.96 materials equipment 2,040,000.00 1,273,617.18 680,000.00 424,539.06 lease Income 869,260.05 - - - from waste materials 113 Annual Report 2008 others 473,476.82 170,085.46 - - Total 41,184,774.23 4,629,813.42 52,060,665.60 27,130,304.10 27. Business Tax & Surcharges Type Payment as a Amount of current Amount of last percentage year year Business Tax 5% 1,913,688.16 1,604,658.14 Urban Maintenance & 1%, 3% 19,075.91 17,482.38 Construction Tax 1%, 7% 19,894.91 Educational Surcharge 2,947.11 Property Tax 0.12% 451,327.35 - Land use tax 411,813.00 - Price adjustment fund 12,800.91 - Total 2,828,600.24 1,625,087.63 28. Management costs Type Amount of current Amount of last year year Payrolls 6,573,035.22 4,766,270.50 Depreciation costs 5,034,487.49 2,468,806.62 Social securities 1,629,405.20 1,589,781.79 Real property tax 1,449,395.84 801,186.00 Consulting fees 1,159,555.23 207,443.90 Worker’s welfare 719,149.59 468,998.08 Office costs 695,305.44 264,564.33 Auditing costs 607,000.00 450,000.00 Business trip costs 590,628.95 829,315.01 Social contact fees 652,021.45 601,749.80 Transportation fees 512,318.33 472,002.02 Environmental protection fees 494,506.00 227,909.00 Legal action costs 384,262.30 273,084.09 Repair costs 400,205.31 161,327.54 Compensation fund 293,889.86 42,213.40 Property insurance 276,125.70 96,219.57 Securities information disclosure fees 260,510.00 293,000.00 Communication fees 306,825.98 232,229.00 Amortization of low-value, perishable goods 162,681.70 213,863.25 114 Annual Report 2008 Employee education and trade union fees 145,817.89 584,767.05 Amortization of intangible assets 131,302.88 171,430.33 Costs for Board of Directions 128,613.32 1,033,691.90 Inventory shortage 111,242.24 - Land use tax 100,652.86 19,764.56 Others 1,005,307.93 831,271.81 Total 23,824,246.71 17,100,889.55 29. Financial Expenses Type Amount of current Amount of last year year Interest Expenditures 6,640,338.70 4,542,309.59 less: interest return 854,764.54 151,487.28 add: exchange loss 693,991.93 221,998.64 add: other expenditures 47,714.57 -385,724.10 Total 6,527,280.66 4,227,096.85 30. Assets Impairment Loss Type Amount of current Amount of last year year Bad Debts Loss 1,987,398.58 1,865,786.21 Loss of Depreciation of Inventories 28,372.56 196,391.26 Total 2,015,771.14 2,062,177.47 31. Return from Entrusted Operation Source of the income Amount of current Amount of last year year Return from Entrusted Operation –Wuhan branch 1,458,496.45 93,340.46 Return from Entrusted Operation –Wuhan injection 4,614,267.91 - molding plant Total 6,072,764.36 93,340.46 （1） For details of the income from agency services, see the Annex XIV (2). 32. Non-business Revenues （1） Non-business Revenues Type Amount of current Amount of last year 115 Annual Report 2008 year Gains of Disposal of non-current assets 44,062.14 - Among it: income from fixed assets 44,062.14 - disposition Donations received - 19,554,224.24 Government subsidies 400,000.00 - Gains from Inventory Profit 5,244.00 - Moneys unable to pay 296,808.76 1,009,706.51 Others 3,967,936.35 3,558,115.69 Total 4,714,051.25 24,122,046.44 （2） Government subsidies Type Amount of Amount of Source and basis current year last year Government subsidies for Wuhan Subsidies from Wuhan branch’s switch from coal fuel to 400,000.00 - Environmental gas fuel Protection Bureau Total 400,000.00 - (3) Non-operating income—others, are mainly the rental income, 3,045,420.03 Yuan, from the Hwafa Yard whose ownership had been assigned. In line with the Assets Assignment Agreement the Company signed with original shareholder Zhenhua Group on 06 April 2007, since the assignment of Huafa Court till 31 August 2008, its rentals will be owned by the Company, while the Company shall be responsible for relevant fees and daily management of such object asset as well as each kind of taxes arising from obtaining the rentals; besides, the Company shall also be responsible for guaranteeing the intact status of the object asset. In November 2008, Zhenhua Group signed the Additional Agreements on Assets Transfer with the Company, according to which the assets are to be managed by the Company until Oct. 31, 2008. The ceding procedures for such asset were completed in November 2006. In respect of the rentals gained from such asset in November and December 2006, after deducting relevant cost-related expense, the remaining 570,923.45 Yuan was recorded into capital reserve- price difference of associated transaction in 2006. While the rentals gained in 2007, after deducting relevant cost-related expense, the remaining 3,523,045.69 Yuan was recorded into non-business revenues. After deducted of the related costs, the rental income from the assets (3,045,420.03 Yuan) by Oct. 31, 2008 was accounted as non-operating income. 33. Non-business Expenditures Type Amount of current Amount of last year year 116 Annual Report 2008 Loss of Disposal of Non-current Assets 113,375.29 58,846.35 Among it: Loss from fixed-assets 113,375.29 58,846.35 disposition Penalties Expenditures* 310,000.00 130,304.40 Donations to outside 771,506.00 - Inventory shortage 5,149.75 - Others 116,063.49 53,656.45 Total 1,316,094.53 242,807.20 * 310,000.00 Yuan was paid as fine, imposed as administrative penalty by the Shenzhen Environmental Protection Bureau. For details, see the Annex X(4). ** The donation of 771,506.00 Yuan was made for the Wenchuan Earthquake. 34. Expenses of Income Tax Type Amount of current Amount of last year year Expenses of Income Tax This Term 442,516.19 - Deferred Income Tax Expenses -3,095,841.22 -700,787.29 Total -2,653,325.03 -700,787.29 (1) Deferred income tax in this year was -3,095,841.22 Yuan, for details, see the Annex VIII (11). 35. Calculation Process of Basic Earning per Share and Diluted Earning per Share Type Amount of Amount of No. current year last year Net profit ascribed to 1 7,567,912.54 22,065,920.97 mother company Incidental loss & profit ascribed to mother 2 5,750,749.93 23,879,239.24 company Net profit ascribed to shareholder of mother 3=1-2 1,817,162.61 -1,813,318.27 company after deducting incidental loss & profit Total shares at term beginning 4 283,161,227.00 283,161,227.00 shares increased through 5 - - 117 Annual Report 2008 capital reserve-to-shares or dividends distribution (I) shares increased through issuing new shares or 6 - - debt-to-stock (II) number of months since next month after shares 7 - - increasing (II) till term end of reporting period Shares decreased due to counter purchased or 8 - - share shrinking number of months since next month after shares 9 - - decreasing till term end of reporting period number of months 10 during reporting period 12 12 Averagely weighted 11=4+5+6×7÷10 283,161,227.00 283,161,227.00 common shares issued -8×9÷10 Basic earning per share 0.0267 (I) 12=1÷11 0.0779 Basic earning per share 0.0064 (II) 13=3÷11 -0.0064 diluted potential common stock interest switch expenses which 14 - - are recognized as expenses Replacement expenses 15 - - income tax rate 16 - - shares increased through stock warrant & 17 - - exercising option Diluted earning per 18=[1+(14-15)×(1-16)]÷(11+17) 0.0267 share (I) 0.0779 118 Annual Report 2008 Diluted earning per 19=[3+(14-15)×(1-16)]÷(11+17) 0.0064 share (II) -0.0064 36. Cash Flow Statement （1） Cash and cash equivalent presented in the cash flow statement include: Type Amount of current Amount of last year year Cash 13,350,750.90 16,272,633.42 Among it, ready money 361,428.77 195,587.28 Bank deposit available for 12,989,322.13 13,544,606.19 payment anytime Other monetary fund available - 2,532,439.95 for payment anytime Cash Equivalents 13,350,750.90 16,272,633.42 Among it, investment on bonds due within - - 3 months Balance of Cash & Cash Equivalents at 13,350,750.90 16,272,633.42 Term End Among it, cash and cash equivalents which are restricted to the use of mother - - company or subsidiaries of the group （2） Other Cash Received/Paid Related to Operation Activities 1) Other Cash Received Related to Operation Activities Item Amount of current Amount of last year year Rentals, utility bills, etc. collected as agent 14,965,975.07 11,934,019.07 Repayment for reserves 1,637,218.43 124,183.48 Business Transaction Payment 1,046,191.04 232,560.00 Rental security money 702,490.59 2,141,406.30 Interest Return 854,764.54 151,487.28 Insurance compensation 297,663.03 - 119 Annual Report 2008 All fines 17,174.86 12,690.00 Telephone bills collected as agent 6,406.92 241,743.14 Transport Charge - 192,187.49 Others 56,676.97 112,443.54 Total 19,584,561.45 15,142,720.30 2) Other Cash Paid Related to Operation Activities Power & water bill paid for others 13,418,042.24 13,303,742.25 Borrowings from reserves 2,630,538.25 2,832,026.85 auditing, advise & checking charge 2,128,632.63 1,313,256.90 Transport charge 2,087,941.88 953,254.78 Office expenses, etc. 1,016,045.36 661,916.35 Business travel expenses, etc. 922,563.37 563,974.52 Lease management fees 787,077.80 1,043,584.26 Return of the lease security money 777,672.69 640,196.00 Disaster-relief donations 772,656.00 - Transportation fees 724,549.80 472,002.02 Hospitality expenses 706,361.40 601,749.80 Repair costs 562,894.89 144,173.40 Environmental protection and sanitary fees 559,237.00 227,909.00 Customs clearance, commodity inspection, examination fees, etc. 450,597.36 88,060.00 Bank processing fee 372,091.89 152,430.72 Property insurance premium 346,630.71 121,651.00 Revealing charge for stock information 260,510.00 293,000.00 Communication fees 259,452.19 232,229.00 Legal action and attorney fees 241,427.53 272,584.09 Others 1,548,934.23 342,846.84 Total 30,573,857.22 24,260,587.78 （3） Supplementary Materials to Consolidated Cash Flow Statement Item Amount of Amount of last current year year 1. Convert net profit to cash flow from operating activities: 120 Annual Report 2008 Net Profit 7,567,912.54 22,065,920.97 Add: provision drawn for assets impairment 2,015,771.14 2,062,177.47 Fixed assets depreciation 18,682,166.68 23,990,813.16 Amortization of Intangible Assets 198,475.72 64,922.35 Amortization of Long-term Expenses to be - - Apportioned Loss from Disposal of Fixed Assets, Intangible Assets & Other Long-term Assets (Proceeds 69,313.15 58,846.35 indicated by “-”) Loss from Discard of Fixed Assets (Proceeds - - indicated by “-”) Gains and losses from fair value variation - - (Proceeds indicated by “-”) Financial Expenses (Proceeds indicated by “-”) 6,452,909.17 4,879,729.54 Investment Loss (Proceeds indicated by “-”) - -32,045.04 Decrement of Deferred Income Tax Assets -3,095,841.22 -700,787.29 (Addition indicated by “-”) Increment of Deferred Income Tax Liabilities - - (Decrease indicated by “-”) Decrement of Inventories (Addition indicated by -17,892,853.13 -18,391,840.17 “-”) Decrement of Operative Receivbles (Addition -51,897,616.19 19,039,321.89 indicated by “-”) Increment of Operative Payables (Decrease 19,283,274.96 indicated by “-”) -20,019,613.97 Others - -18,173,631.10 Net Cash Flow Provided by Operating Activities -18,616,487.18 14,843,814.16 2. Important investment and fund raising activities involving no cash turn debts into capital - - Convertible corporate debt mature within 1 year - - Fixed assets financed by leasing - - 3. Net Variation of Cash and Cash Equivalent Year-end balance of cash 13,350,750.90 16,272,633.42 Less: year-beginning balance of cash 16,272,633.42 19,610,336.01 Add: year-end balance of cash equivalent - - 121 Annual Report 2008 Less: year-beginning balance of cash equivalent - - Net increase of cash and cash equivalent -2,921,882.52 -3,337,702.59 IX.Remark for Major Items of Financial Statement of Mother Company 1. Accounts Receivable （1） Account Age of Account Receivable Item Amount at the end of year Amount at the beginning of year Provision for Provision Amount Proportion Bad Debts Amount Proportion for Bad Debts Within 1year 87,762,929.23 83.39% 37,406.70 50,877,309.22 80.35% - 1-2 year (s) 6,210,353.23 5.90% 275,901.23 3,711,061.15 5.86% 828,147.41 2-3 years 3,302,604.58 3.14% 930,416.90 1,657,572.00 2.61% 526,196.99 3-4 years 1,178,819.90 1.12% 576,504.86 3,151,563.52 4.98% 1,595,030.44 4-5 years 3,266,019.43 3.10% 1,527,841.68 2,172,540.05 3.43% 1,145,926.72 Over 5 years 3,528,129.85 3.35% 3,528,129.85 1,753,405.38 2.77% 1,753,405.38 Total 105,248,856.22 100.00% 6,876,201.22 63,323,451.32 100.00% 5,848,706.94 （2） Type of Risk of Accounts Receivable Amount at the end of year Item Book balance Provision for Bad Debts Amount Proportion Amount Proportion That with large amount in single 94,417,699.65 89.71% 2,098,809.65 30.52% item That in group with larger risk after grouping as per credit risk features 3,372,800.12 3.20% 3,372,800.12 49.06% though single item sum is small That without large amount in 7,458,356.45 7.09% 1,404,591.45 20.42% 122 Annual Report 2008 single item Total 105,248,856.22 100.00% 6,876,201.22 100.00% Amount at the beginning of year Item Book balance Provision for Bad Debts Amount Proportion Amount Proportion That with large amount in single item 50,096,142.70 79.11% 1,701,129.92 29.09% That in group with larger risk after grouping as per credit risk features 2,858,931.70 4.52% 2,858,931.70 48.88% though single item sum is small That without large amount in single 10,368,376.92 16.37% 1,288,645.32 22.03% item Total 63,323,451.32 100% 5,848,706.94 100.00% 1) That in group with larger risk after grouping as per credit risk features though single item sum is small Amount at the end of year Amount at the beginning of year Provision Provision Item Amount Proportion for Bad Amount Proportion for Bad Debts Debts 1-2 year (s) - - - 304,542.95 10.65% 304,542.95 2-3 years 304,542.95 9.03% 304,542.95 193,000.00 6.75% 193,000.00 3-4 years 193,000.00 5.72% 193,000.00 430,857.38 15.07% 430,857.38 4-5 years 430,857.38 12.78% 430,857.38 447,592.87 15.66% 447,592.87 Over 5 years 2,444,399.79 72.47% 2,444,399.79 1,482,938.50 51.87% 1,482,938.50 Total 3,372,800.12 100.00% 3,372,800.12 2,858,931.70 100.00% 2,858,931.70 （3） Accounts receivable written off this year Produced by Nature of the Amount Cause of Unit name correlated receivable canceled cancellation transaction or 123 Annual Report 2008 not Former sales department payment for The other side has of the Company goods 211,418.90 written off NO Total 211,418.90 （4） In this year, the accounts receivable increased by 41,925,404.90 over the year-beginning amount, registering a 66.21% increase, mainly because the year-end accounts receivable of the Wuhan branch and the customer of the Video Division–H. K. Haowei Industry Co., Ltd went up by a fairly large margin. （5） The year-end accounts receivable doesn't include arrearages on the part of the shareholder units with more than 5% (including) of the vote in the Company (Group). （6） The year-end balance includes 68,351,538.41 Yuan of arrearages at the part of the first 5 arrear-ridden units, accounting for 64.94% of the total accounts receivable. （7） The year-end balance include 189,629.17 Yuan of accounts receivable to be paid by the related part Wuhan Hengsheng Photoelectric Industry Co., Ltd., which accounts for 0.18% of the total accounts receivable. （8） Balance of foreign currency in accounts receivable Amount at the end of year Amount at the beginning of year Foreign Original Exchange Amount in Original Exchange Amount in currency currency rate RMB currency rate RMB USD 6,900,478.49 6.83 47,147,957.15 1,163,327.46 7.30 8,497,641.76 HKD - - - 268,627.44 0.94 251,537.36 Total 47,147,957.15 8,749,179.12 2. Other Receivables （1） Account Age of Account Receivable Amount at the end of year Amount at the beginning of year Item Provision for Provision for Amount Proportion Amount Proportion Bad Debts Bad Debts Within 4,584,114.25 16.92% 51,595.15 9,247,136.82 29.54% 268,953.00 1year 1-2 year 4,045,572.90 14.93% 550,755.50 4,871,994.34 15.56% 1,139,501.33 (s) 124 Annual Report 2008 2-3 4,719,869.26 17.42% 1,209,404.13 4,442,511.36 14.19% 2,014,269.09 years Over 3 13,741,748.08 50.73% 9,396,188.89 12,745,550.69 40.71% 7,546,386.75 years Total 27,091,304.49 100.00% 11,207,943.67 31,307,193.21 100.00% 10,969,110.17 （2） Categories of the risks of other accounts receivable Amount at the end of year Item Book balance Provision for Bad Debts Amount Proportion Amount Proportion That with large amount in single item 20,388,267.62 75.26% 8,929,694.75 79.67% That in group with larger risk after grouping as per credit risk 2,084,536.50 7.70% 2,084,536.50 18.60% features though single item sum is small That without large amount in 4,618,500.37 17.04% 193,712.42 1.73% single item Total 27,091,304.49 100.00% 11,207,943.67 100.00% Amount at the beginning of year Item Book balance Provision for Bad Debts Amount Proportion Amount Proportion That with large amount in single item 25,365,925.99 81.02% 9,173,258.64 83.63% That in group with larger risk after grouping as per credit risk features 1,600,135.05 5.11% 1,600,135.05 14.59% though single item sum is small That without large amount in 4,341,132.17 13.87% 195,716.48 1.78% single item Total 31,307,193.21 100.00% 10,969,110.17 100.00% （3） Other year-end accounts receivable decreased by 4,215,888.72 Yuan over the year-beginning amount, 13.47% down from the previous year, mainly because that the year-end balance of the subsidiary 125 Annual Report 2008 Shenzhen Hwafa Property Lease & Management Co., Ltd. Decreased by 1,877,818.98 Yuan, and that the year-end balance of the Shenzhen Wanshang Friendship Department Store Co., Ltd. Decreased by 975,681.12 Yuan over the year-beginning amount. （4） The year-end bad debts allowance increased by 238,833.50 Yuan over the year-beginning amount, mainly because that The year-end bad debts allowance increased by 238,833.50 Yuan over the year-beginning amount, mainly because bad debts allowances were provided for all the funds with an accounting age of more than 5 years. （5） The other year-end accounts receivable doesn’t include any arrearage on the part of the shareholder units with more than 5% (including) of vote in the Company (or the Group). （6） Part of the year-end balance payable by the related parties percentage Relationship with among other Invested Unit Amount of Arrearages the Company accounts receivable Shenzhen Huafa Property Lease Subsidiary 4,486,733.51 16.56% Management Co., Ltd. Total 4,486,733.51 16.56% 3. Long-term Equity Investment （1） Long-term Equity Investment Item Amount at the end of Amount at the beginning year of year Long-term equity investment based on cost method 31,065,789.00 600,000.00 Long-term equity investment based on equity method - - Total of Long-term equity investment 31,065,789.00 600,000.00 Less: allowance for depreciation of the long-term equity investment 600,000.00 600,000.00 Net value of long-term equity 30,465,789.00 - 126 Annual Report 2008 investment （2） Long-term Equity Investment Based on Cost Method and Equity Method Shares Vote as a Decrease Initial Year-beginning Increase Year-end Invested Unit Proportion percentage in the Sum amount in the year balance Held year Cost method Shenzhen Huafa Property Lease 60% 60% 600,000 600,000 - - 600,000 Management Co., Ltd. Shenzhen Zhongheng Hwafa 100% 100% 1,000,000 - 1,000,000 - 1,000,000 Property Service Co., Ltd. Wuhan Hengfa Technology Co., 100% 100% 29,465,789 - 29,465,789 - 29,465,789 Ltd. Total 31,065,789 600,000 30,465,789 - 31,065,789 （3） Provision for Impairment of Long-term Equity Investment Amount at Decrease in the year Amount at the Increase in Other Invested Unit the end of beginning of the year Carryover Carrying year year Forward Shenzhen Huafa Property Lease 600,000.00 - - - 600,000.00 Management Co., Ltd. Total 600,000.00 - - - 600,000.00 4. Business Revenues & Business Cost （1） Business Revenues 127 Annual Report 2008 Item Amount of current Amount of last year year Revenues from Major Business 148,216,470.85 141,184,217.25 Revenues from Other Business 39,325,410.73 50,107,742.60 Total 187,541,881.58 191,291,959.85 Cost of Major Business 150,543,063.64 140,005,093.93 Cost of Other Business 4,629,813.42 27,130,304.10 Total 155,172,877.06 167,135,398.03 （2） Main businesses—by product Amount of current year Amount of last year Product names Revenues from Cost of Major Revenues from Cost of Major Major Business Business Major Business Business LCD Displayer 67,855,548.92 62,664,194.14 58,798,941.86 58,743,984.85 Circuit board 52,714,033.72 60,052,553.59 64,650,992.46 65,695,271.08 Foamed pieces 16,414,466.23 16,080,400.12 - - injection 11,232,421.98 11,745,915.79 15,849,667.48 14,308,379.98 molding ware color TV - - 1,884,615.45 1,257,458.02 processing Total 148,216,470.85 150,543,063.64 141,184,217.25 140,005,093.93 （3） The Company’s total operating incomes from the first 5 customers are 65,645,592.57 Yuan, accounting for 35% of the whole-year total of operating incomes. （4） Other business income costs—by category Amount of current year Amount of last year Revenues Item Revenues from Cost of Other Cost of Other from Other Other Business Business Business Business leasedproperty 35,417,570.86 2,978,009.92 33,947,704.50 12,969,103.08 sales of 525,103.00 208,100.86 15,480,038.10 13,736,661.96 materials equipment 2,040,000 1,273,617.18 680,000.00 424,539.06 lease Income from 869,260.05 - - - waste materials 128 Annual Report 2008 others 473,476.82 170,085.46 - - Total 39,325,410.73 4,629,813.42 50,107,742.60 27,130,304.10 5. Return from Entrusted Operation Sources of Investent Yield Amount of current year Amount of last year Income from agency services -Wuhan branch 1,458,496.45 93,340.46 Income from agency services-Wuhan Injection 4,614,267.91 - Molding Plant Total 6,072,764.36 93,340.46 a) See Annex XIV (2) for details of agency services. X. Non-monetary assets exchange There’s no monetary assets exchange businesses in the year. XI.Relation with the associated party and the transactions （I） Relation with the associated parties 1． Parent company （1） Basic conditions of the parent company Regis Final Code Parent Code of Business of Company type tered Organiza controlling company scope Organi tion place party zation Wuhan Company of Wuha Li Productio Li Zhongqiu 711954 Zhongheng limited n Zhongqiu n and sale 601 liabilities （2） Registered capital of the parent company and its change Parent company Annual opening Original Exchange Annual closing balance Currency Rate balance Wuhan Zhongheng 138,000,000.00 - - 138,000,000.00 （3） Shares held by the parent company and its change Parent Share amount Share proportion Proportion of voting company rights 129 Annual Report 2008 Amount at the Amount at the Annual Annual Annual Annual end of year beginning of closing opening closing opening year proportion proportion proportion proportion Wuhan 116,489,894 116,489,894 Zhongheng 41.14% 41.14% 41.14% 41.14% 2． Subsidiaries （1） Basic conditions of the subsidiaries Type of Regis Lega Code of Compa l Busines Names of Subsidiary the tered Organizati ny type Repr s scope subsidiary place on esent Shenzhen Hwafa Property Holding Compan Shenz Liu Property 70843859-3 y of Lease & Management Co., subsidiary limited hen Zuod manage Shenzhen Zhongheng Hwafa Wholly Compan Shenz Li Property 68378841-4 y of Property Service Co., Ltd. owned limited hen Zhon manage subsidiary liabilitie gqiu ment s Wuhan Hengfa Technology Wholly Compan Wuha Shi y of Producti Co., Ltd. owned limited n Chen on and 67911516-1 subsidiary liabilitie g sale s （2） Registered capital of subsidiaries and the changes Amount at Original Exchan Amount at Names of Subsidiary the beginning Currency ge Rate the end of Shenzhen Hwafa Property Lease & 1,000,000.00 - - 1,000,000.00 Shenzhen Zhongheng Hwafa Property Service - 1,000,000.00 - 1,000,000.00 Wuhan Hengfa Technology Co., Ltd. - 27,500,000.00 - 27,500,000.00 （3） Share proportion of or rights to the subsidiary and the changes Share amount Share Proportion of Names of subsidiary proportion voting rights 130 Annual Report 2008 Amount at the Amount at the Annual Annu Annual Annual end of year beginning of closing al closing opening year proporti openi proport proporti on ng ion n propo rtin Shenzhen Hwafa Property Lease & 1,000,000.00 1,000,000.00 60% 60% 60% 60% Management Co., Ltd. Shenzhen Zhongheng Hwafa Property Service 1,000,000.00 - 100% - 100% - Co., Ltd. Wuhan Hengfa 27,500,000.00 - 100% - 100% - Technology Co., Ltd. 3． Other associated parties Type of Organization Name of the associated party Main transaction association-relation code Other enterprises under control of the same parent company Wuhan Hengsheng Photoelectric 73108664-5 Purchase liquid Industry Co., Ltd. crystal display Wuhan Xindongfang Real Estate 74476047-5 None Development Co., Ltd. Wuhan Zhongheng Property 75180426-1 None Service Co., Ltd. Wuhan Guanggu Display System 75510305-9 None Co., Ltd. （II） Associated Transactions 4． Associated transactions related to purchase and acception of labour service Type of the Pricing principle Amount of current year Amount of last year Name of associated for the associated Associated Party Proportion Amount Proportion Amount transaction transaction 131 Annual Report 2008 Wuhan Purchase Market price - - Zhongheng commodity 18,578,027.72 12.26% Hengsheng 0.78% Purchase Photoelectric Market price 1,208,877.50 commodity Company 30,318,120.11 20.01% 5． Associated transactions related to sale and provision of labour service Pricing Amount of current year Amount of last year Type of the principle Name of associated for the Associated Party Proportion Amount Proportion Amount transaction associated transaction Wuhan Provision of Market 512,820.51 0.27% 299,145.29 0.15% Zhongheng labour service price 6． Associated leases Please refer to Annex XIV (3) “Related Lease Information” in the report for the associated leases between the company and holding shareholders 7． Asset transfer and liability restructure of the associated party Pricing Amount of current Amount of last year principle year Name of Type of the for the Associated associated associated Proportio Amou Proportio Party transaction Amount transactio n nt n n Purchase its Wuhan Market 27,000,00 injection molding 100% - - Zhongheng price 0.00 business （III） Balance with the associated party 8． Accounts receivable of the associated party Associated party (items) Amount at the end Amount at the Other enterprises under control of the same 189,629.17 - 132 Annual Report 2008 Deducted: provisions for bad debts - - Total 189,629.17 - 9． Other accounts receivable of the associated party Associated party (items) Amount at the end Amount at the Parent company and the final controlling party - 889,889.53 Other enterprises under control of the same - 169,000.00 Deducted: provisions for bad debts - - Total - 1,058,889.53 10． Prepaid accounts of the associated party Associated party (items) Amount at the end Amount at the Other enterprises under control of the same 614,070.84 258,176.44 Deducted: provisions for bad debts - - Total 614,070.84 258,176.44 11． Other accounts payable of the associated party Associated parties Amount at the end Amount at the Parent company and the final controlling party 35,874,497.71 9,818,560.21 Total 35,874,497.71 9,818,560.21 Note: “Other enterprises under control of the same parent company” refer to Wuhan Hengsheng Photoelectric Industry Co., Ltd.;“parent company and the final controlling party” refer to Wuhan Zhongheng . XII. Contingent Affairs 1. Contigent liabilities arising from pending lawsuits or arbitraments. (1) Contract disputes The contract dispute case filed by Shaanxi Linghua Electronics Co., Ltd. (hereinafter “Shaanxi Linghua”) (2007SDDMC 2441): Shaanxi Linghua made a claim for damages to the printed circuit board with potential quality problems that were sold to it during the period May 30, 2006 to May 9, 2007. The amount at issue is RMB 3,100,773.20. The company received summons from Futian District People’s Court on Jan. 14, 2008. The first hearing was opened for cross examination of evidence on March 6, 2008. The case was not completed by the balance sheet date. The loss to the company is inpredictable. The company lodged a counter claim for the overdue freight fee and the interest accrued to Shaanxi 133 Annual Report 2008 Linghuaon November 12, 2007. The amount at issue is RMB 1,054,290.19. The first court session is on March 6, 2008 and the cross examination of evidence was completed. The case was not completed by the balance sheet date. According to the Attorney’s Instruction issued by Beijing Horizon Attorney’s Firm Shenzhen Branch on March 10, 2009, Shaanxi Linghua’s claims are very likely to be rejected and our company’s counterclaim may be supported by the court. The company has made preparations for withdrawal of bad debts reserve in line with relevant accounting policies. (2)According to the Execution Notice ((2008) SFFZZ No. 522—529) issued by Guangdong Shenzhen People’s Court, the Arbitrament No. 1069-1077, No. 1079, No. 1981 and No. 1085-1087 issued by Shenzhen Labour Dispute Arbitration Committe have legal force on the labour dispute lodged by Cai Yaoqiang and other 14 people. Our company’s Enterprise’s Basic Information and Credit Report shows the total amount at issue in the company’s unenforced labour disputes is RMB 40,560.00. It has been entered as anticipation liabilities. The amount at issue in the labour dispute case lodged by former employees Hou Minghai, Huang Zhiyuan, Yu Xiaojun, Li Guibing, Luo Huimin, Ou Xiangyu and Yang Guangze for compensation of salary, bonus, overtime pay, public reserve fund and holiday pay totals RMB 134,914.41. According to the arbitrament issued by Shenzhen Labour Dispute Arbitration Committee, it has been entered as anticipation liabilities. 2. Except the foregoing events and the notes receivable in Annex VIII.(2) that have been endorsed, transferred or discounted, no big events happened to the company by December 31, 2008. XIII. Events Occurring After the Balance Sheet Date 1. We founded Shenzhen Zhongheng Hwafa Technology Co., Ltd. on March 2, 2009, which is a wholly owned subsidiary. The initial registered capital of which is RMB 200,000.00. Its business scope is: technical development and sale of printed circuit board, real estate development (development of land with legal land-use right). It obtained Legal Person’s Business License No. 440301103863416 issued by Shenzhen Administration for Industry & Commerce. The 07/04/2009 resolution in the second interim board meeting in 2009 added RMB 105,120,000.00 to its registered capital, in which the cash replenishment is RMB 55,000,000.00 and the increase of physical contribution is RMB50,120,000.00, which is mainly in the form of fixed assets such as production enquipment for printed circuit board and the Land Lot No. A627-005 and No. A627-007 (total area 48,161. 60 meters) located in the Hwafa Electronics Town, a production base in Gongming, Shenzhen. Shenzhen Dezhengxin Assets Appraisal Co., Ltd. has conducted evaluation on the physical contribution to be contributed. The evaluation datum date is March 31, 2009. The asset evaluation report (DZX PING [2009] 005) was issued on April 3, 2009. The evaluation value for the fixed assets is RMB 31,567,750.00 and the evaluated value for the use right of the above land is 10,850,000.00. The first capital increase of RMB 86,567,750.00 was transferred to Shenzhen Zhongheng Hwafa Technology Co., Ltd. on April 7, 2009. The capital increase in cash is RMB 55,000,000.00 and the capital 134 Annual Report 2008 increase by printed circuit board is RMB 31,567,750.00. After capital increase the registered capital of the company is RMB 86,767,750.00. It was verified by Xinyongzhonghe Accountants’ Firm which issued a capital verification report (XYZH/2008SZATS038) on April 8, 2009. On April 7, 2009, the Company’s first-phase capital addition was 86,567,750.00 Yuan, which has been put in the Shenzhen Zhongheng Hwafa Technology Co., Ltd., and which includes a cash of 55,000,000.00 Yuan and such fixed assets as circuit board etc. valued at 31,567,750.00 Yuan. Thus, the registered capital changed to 86,767,750.00 Yuan. Xinyong Zhonghe Accountants’ Firm has made an appraisal of this capital addition, and, on April 8, 2009, issued an Asset Appraisal Report No. XYZH/2008SZATS038. 2. At the third session of the Company’s Board Meeting on April 22, 2009, the following resolutions were adopted: The Company puts in additional 44 million Yuan in cash to the Hengfa Technology and, therefore owes 44% (calculated on a 1:1 basis) shares of the Hengfa Technology; Wuhan Zhongheng contributes 101,693,100 Yuan’s worth of its right to the Land Lots No. 10 and 2 at the Dunkou District, Wuhan Economic and Technology Development Zone as well as the buildings on the land lots, therefore, it will hold 56% (calculated on a 1:1 basis) shares of the Hengfa Technology. The capital addition is 145,693,100.00 Yuan in all, which brings Hengfa’s registered capital up to 181,643,100.00 Yuan. 3. At the third session of the Company’s Board Meeting on April 22, 2009, the following resolutions were adopted: The Company is planned to trade in some of Wuhan Zhongheng’s industrial land in Wuhan with its circuit board printing businesses, some of the industrial land in Gongming. The Company has held the second session of the Board Meeting on April 3, 2009, where the resolutions were passed for investing the circuit board printing businesses, some of the industrial land in Gongming in the solely-funded subsidiary—Shenzhen Zhongheng Hwafa Technology Co., Ltd. (details available in XIII (1)). Wuhan Zhongheng contributes to Wuhan Hengfa Technology its right to the land lots No. 10 and 2 at the Dunkou District, Wuhan Economic and Technology Development Zone as well as the buildings on the land lots (details available in Annex XIII (2)). Then, Wuhan Zhongheng will trade its 56% shares (valued at 101,693,100 Yuan) of the Hengfa Technology with 44% of the contributions which will be traded with the 100% shares of Shenzhen Zhongheng Hwafa Technology Co., Ltd. held by the Company, the balance between them will be made good in cash. 4. On April 9, 2009, the Shenzhen Environmental Protection Bureau examined and accepted the environmental protection work by the Company, and, on April 22, 2009, issued “Shenzhen Pollutant Discharge Permit”, which is effective until July 22, 2009. 5. Since Jan. 1, 2009, the first-in first-out methods is applied instead of weighted average method for the price of the commodities leaving the factory. 6. Except the foregoing the events occurring after the balance sheet date, no major events occurred. 135 Annual Report 2008 XIV. Other Key Matters 1, Notes for purchasing Wuhan Injection Plant from the shareholder Wuhan Zhongheng This Company finished important share ownership transfer in 2007. The original first biggest shareholder Shenzhen Saige Group Co., Ltd. and second biggest shareholder China Zhenhua Electronics Group Co., Ltd. transferred their share ownerships held by them in this Company to Wuhan Zhongheng . In accordance with the plan of Wuhan Zhongheng Group in the Acquisition Report at the time of transfer, namely, assets relating to injection molding system and the related assets of Wuhan Hengsheng Photoelectric Industry Co., Ltd. that is held by Wuhan Zhongheng Group were transferred into this Company. Wuhan Zhongheng entrusted Hubei Zhonglian Assets Appraisal Co., Ltd. to conduct an evaluation on the injection molding plant to be transferred. The benchmark date for evaluation is March 31, 2008. This Company issued Assets Evaluation Report（EZLPBZ[2008]No.054）on May 28, 2008. In the Assets Transfer Agreement signed between this Company and Wuhan Zhongheng on June 5, 2008, it is specified that: in accordance with the above-mentioned Assets Evaluation Report（EZLPBZ[2008]No.054）, the evaluated net value of the underlying asset is RMB 27,201,600 yuan. Upon negotiation between both parties, it was determined that the whole evaluated value of the underlying asset is RMB 27,000,000 yuan, meanwhile, both parties have gone through the formalities for transfer of the relevant assets. Book amount on Evaluation amount Book amount on evaluation on evaluation assets hand-over Subject benchmark date benchmark date date (March 31, 2008) ( March 31, 2008) (June 1, 2008) I. Total Current Assets 42,144,974.75 42,764,359.42 47,237,733.86 Accounts Receivable 20,402,413.92 20,402,413.92 27,525,198.76 Advance Payment 12,107.00 12,107.00 12,107.00 Other Receivables 1,239,385.95 1,239,385.95 505,305.36 Inventories 20,263,673.90 20,883,058.55 19,195,122.74 Other current assets 227,393.98 227,394.00 - II. Total Non-current Assets 19,729,985.62 21,307,080.00 19,329,318.76 Fixed Assets 19,388,694.62 20,965,789.00 19,018,027.76 Project Materials 341,291.00 341,291.00 311,291.00 III. Total Assets 61,874,960.37 64,071,439.42 66,567,052.62 IV. Total Liabilities 36,869,857.35 36,869,857.35 36,442,648.53 Accounts Payable 32,888,735.79 32,888,735.79 32,527,463.32 Other Payables 7,053,291.98 7,053,291.98 6,511,048.07 136 Annual Report 2008 Book amount on Evaluation amount Book amount on evaluation on evaluation assets hand-over Subject benchmark date benchmark date date (March 31, 2008) ( March 31, 2008) (June 1, 2008) Salary of Employees Payable -88,529.4 -88,529.4 20,339.29 Taxes Payable -3,176,800.12 -3,176,800.12 -2,814,712.39 Other current liabilities 193,159.10 193,159.10 198,510.24 V. Net Assets 25,005,103.02 27,201,582.07 30,124,404.09 (1) Net book assets is increased by RMB 5,119,301.07 yuan on Hand-over Date (June 1, 2008) and Assets Evaluation Benchmark Date (March 31, 2008), in which, Wuhan Zhongheng increased the investment of the Fixed Assets RMB 36,050.00 from April to May of 2008. According to Assets Transfer Agreement, in this transition period, due to production and operation demands, the investment in the underlying asset increased by Wuhan Zhongheng should be owned by this Company free of expenses. The rest RMB 5,083,251.07 yuan should be owned by Wuhan Zhongheng according to Assets Transfer Agreement. According to the Enterprise Business Accounting Principles, on the hand-over date (June 1, 2008) for the purchased assets, this Company adjusted the book values of assets and liabilities acquired due to the purchase of business of injection molding plant from Wuhan Zhongheng according to the company's accounting policy, and then confirmed and recorded the adjusted book value into the accounting book. For the difference between the confirmed book value (RMB 25,041,153.02 yuan) of net assets and the purchase payment RMB 27,000,000.00 yuan paid by this Company, the capital reserve of RMB 1,958,846.98 yuan should be decreased. 2. Notes for earning RMB 6,072,764.36 yuan from the entrusted operation this year In this year, this Company has got earning RMB 1,458,496.45 yuan from the entrusted operation managed by Wuhan branch this year, and RMB 4,614,267.91 yuan from the entrusted operation managed by Wuhan Injection Plant. The reasons for forming the above-mentioned earning are as follows: (1) In August of 2007, according to promise of Wuhan Zhongheng in the Instruction to Share Ownership Separation Reform, Baolilong Asset RMB 15,848,145.68 yuan was donated to this Company. After relevant asset was transferred to this Company in August of 2007, this Company set up Wuhan branch to operate and manage this asset. But because Wuhan branch hasn’t finished going through registration procedure in Commerce and Industry Authority until December 27, 2007, in addition, those clients who have cooperated with Baolilong-related assets for a long time must conduct a 3-month qualification recognition on this Company, therefore, from August of 2007 to June 30 of 2008, relevant assets of Wuhan branch are still operated and managed in the name of Wuhan Zhongheng , and the relevant taxes and fees are still paid by 137 Annual Report 2008 Wuhan Zhongheng on behalf of Wuhan branch. In accordance with the Entrusting Operation Agreement signed between this Company and Wuhan Zhongheng , it is specified that: whereas special situations during asset donation transition period, in order to ensure continuation of asset operation, this Company entrusted assets relating to Baoliling business to Wuhan Zhongheng for operation and management from August 1, 2007 to June 30, 2008. This entrusting operation is a transition-based arrangement relating to asset donation, Wuhan Zhongheng agreed that it would not charge any of the entrusting expenses from this Company in any form. During the entrusting operation period, the ownership of the entrusted asset should still be owned by this Company, the operating profit arising from the entrusted business should be owned by this Company, and the losses should also be borne by this Company. Net earning arising from this denotation assets business from August 1, 2007 to December, 31, 2007 was RMB 93,340.46 yuan and was RMB 1,458,496.45 yuan from Jan. 1, 2008 to June 30, 2008. This Company counted and calculated the above-mentioned earning in the accounting item named “Earning from the entrusted operation”. (2) After this Company purchased business of Wuhan Injection Plant from Wuhan Zhongheng this year, because this Company must get client’s recognition on supplier’s qualification and the Custom Authority’s permission on the processing trade qualification relating to the production and operation of the purchased assets of plastic injection business, therefore, there is a transition period for the transfer of assets. In order to ensure normal production and operation of plastic injection business, this Company will entrust Wuhan Zhongheng to operate and manage the assets relating to injection molding system purchased this time in the transition period. The entrusting operation period is from the underlying assets transfer date to December 31, 2008. Because the above-mentioned entrusting operation is a transition-based arrangement relating to asset transfer, Wuhan Zhongheng agreed not to charge any of the entrusting expenses in any form from this Company. On June 5, 2008, this Company and Wuhan Zhongheng signed the Assets Transfer Agreement and Entrusting Operation Agreement. Therefore, from June 1, 2008 to December 31, 2008, relevant assets of Wuhan Injection Plant are still operated and managed in the name of Wuhan Zhongheng , the relevant taxes and fees are still paid by Wuhan Zhongheng on behalf of Wuhan Injection Plant . During this period, Wuhan Injection Plant obtained total net earning RMB 4,614,267.91 yuan. 3, Note for associated tenancy this year (1) Situation about Wuhan Injection Plant purchased by this Company; Tenancy situation of Wuhan Zhongheng After this Company purchased business of Wuhan Injection Plant from Wuhan Zhongheng in June of 2008, because Wuhan Zhongheng has not transferred relevant land use right and workshops into this 138 Annual Report 2008 Company, so this Company will use the relevant land use right and workshops in form of tenancy, and receive comprehensive service provided by Wuhan Zhongheng . Both parties signed Comprehensive Service Agreement on June 5, 2008. From June 1, 2008 to December 31, 2008, Wuhan Zhongheng actually provided 11,449.90m2 workshop for Wuhan Injection Plant to use. According to the agreement, rent per square meter was 8 yuan, so the total rent payable to Wuhan Zhongheng in this period was RMB 641,194.40 yuan. Wuhan Zhongheng provided accommodation service for employees of Wuhan Injection Plant purchased by this Company as follows: Dormitory 2/F—3/F is charged at RMB 3 Yuan/Person/Day, 4F is charged at RMB 6 Yuan/Person/Day, 5F is charged at RMB 10 Yuan/Person/Day. From June 1, 2008 to December 31, 2008, total rent payable to Wuhan Zhongheng was RMB 206,170.00 yuan. （2） Situation about Wuhan branch of this Company; Tenancy situation of Wuhan Zhongheng Wuhan Zhongheng donated assets relating to Wuhan Baolilong Business to this Company since August 1, 2007. This Company then set up Wuhan branch to manage it. Because Wuhan Zhongheng hasn’t transferred relevant workshops into this Company, so this Company will use relevant workshops in form of tenancy. From Jan. 1, 2008 to December 31, 2008, Wuhan Zhongheng actually provided 9,023.16m2 workshop for Wuhan branch to use. According to the agreement, rent per square meter was 8 yuan, total rent payable to Wuhan Zhongheng in this period was RMB 866,223.36 yuan. Wuhan Zhongheng provided accommodation service for employees of Wuhan branch as follows: Dormitory 2/F—3/F is charged at RMB 3 Yuan/Person/Day, 4F is charged at RMB 6 Yuan/Person/Day, 5F is charged at RMB 10 Yuan/Person/Day. From June 1, 2008 to December 31, 2008, total dormitory rent payable to Wuhan Zhongheng in this period was RMB 148,148.00 yuan. In addition, in this period, transportation bus expenses RMB 1,500.00 yuan should be paid to Wuhan Zhongheng every month, therefore, the total amount should be RMB 18,000.00 yuan. XV.Supplementary Materials 1. Non-operating Earning Statement In accordance with requirements stipulated in Announcement No.1 of information disclosures by companies that offer securities to the public------Non-recurring Profit and Loss (2008)issued by China Securities Regulatory Commission, this Group’s Non-recurring Profit and Loss is as follows: Item Amount of Amount of last current year year Profit & Loss of Disposal of Non-current Assets -69,313.15 -58,846.35 Tax rebate or derate approved by going beyond the authority. - - 139 Annual Report 2008 Tax rebate or derate without official approval document. Incidental tax rebate or derate. Government Grants Accrued into current profit & loss 400,000.00 - List into “the fund occupation expense charged on non-financial enterprise”, subordinate to the accounting item - - “Current profit & loss” Earning arising from identifiable fair value of net assets of investees, which should be enjoyed when costs (which are obtained by the enterprise) invested in subsidiary companies, - - pool companies and joint ventures, is less than the obtained investment. Non-currency asset exchange profit & loss - - Profit & loss arising from entrusting the third party to invest or - - manage assets Provision for asset impairment withdrawn due to force majeure - - (e.g. natural disaster) Profit & loss arising from debt recombination - - Expenses for enterprise recombination - - Profit & loss that exceed the fair value, arising from - - transaction with unfair transaction price. Net Profit & Loss during Term Beginning to Merger Date of the Subsidiaries Arising from Business Merger under Same - - Control Profit & loss arising from the probable events irrelevant to - - normal operating business of the company. Except effective hedging business relating to normal operation of the company, the changed profit & loss of fair value arising from holding transaction-based financial assets and liabilities. - - And the investment yield obtained by disposal of transaction-based financial assets and liabilities as well as sellable financial assets. Carry-back of impairment provision of payment receivable for - - single impairment test Profit & loss obtained from loan for outwards entrust - - 140 Annual Report 2008 Profit & loss arising from change of fair value of investment-based real estate where subsequent measurement is - - conducted by using the Fair Value Mode Impact on the current profit & loss caused by one-off adjustment conducted on the current profit & loss according to 2,776,601.27 - requirements stipulated by taxation /accounting laws and regulations * Entrusting earning arising from the entrusted operation. - - Except the above items, other non-operating earning and 3,067,269.87 23,938,085.59 expenditure Other profit & loss items confirming to the definition of - - nonrecurring profit & loss Subtotal 6,174,557.99 23,879,239.24 Affected amount of income tax 423,808.06 - Total of Net Incidental Profit & loss 5,750,749.93 23,879,239.24 Among it, that ascribed to shareholder of mother company 5,750,749.93 23,879,239.24 * As stated in Annex VIII (11) “Assets of deferred income tax and liabilities of deferred income tax” and Annex VIII (12) “Statement of Provision for Asset Impairment”, the increased amount of every asset impairment provision this year is 1,804,252.24 yuan, then this sum deducts RMB 208,152.48 yuan (which is the impairment provision withdrawn in this period by branch company “Shenzhen Hwafa Property Lease & Management Co., Ltd.” from the assets of deferred income tax that hasn’t been confirmed at the end of this year), finally, the temporary difference that can be deducted from assets of deferred income tax which is increased for confirmation purpose in this period is RMB 1,596,199.76 yuan. Expense for income tax is RMB -319,239.95 yuan formed after assets of deferred income tax is confirmed. Total expenses for income tax is RMB -3,095,841.22 yuan formed after assets of deferred income tax is confirmed in this year (see Annex VIII (33) “expenses for income tax” in this report). Therefore, the difference RMB -2,776,601.27 yuan is deemed as the impact on the current profit & loss caused by one-off adjustment conducted on the current profit & loss according to requirements stipulated by taxation /accounting laws and regulations. This difference is hence determined as nonrecurring profit & loss. 2. Return on Net Assets and Earnings Per Share In line with the requirement of the Preparation Rules of Information Revealing of a Listed Company No.9- Figuration & Revealing of Return on Net Assets and Earnings Per Share issued by CSRC, the fully 141 Annual Report 2008 diluted and averagely weighted return on net assets and earning per share of the Company are set out below: （1） Amount of current year Earning per Share Return on Net Assets Profit during Reporting Period Full Averagely Basic Earning Diluted diluted weighted Per share Earning Per share Net profit ascribed to 3.05% 3.08% 0.0267 0.0267 shareholder of mother company Net profit ascribed to shareholder of mother company 0.73% 0.74% 0.0064 0.0064 after deducting incidental profit & loss （2） Amount of last year Profit during Reporting Period Earning per Share Return on Net Assets Full Averagely Basic Earning Diluted diluted weighted Per share Earning Per share Net profit ascribed to shareholder of mother 9.11% 9.55% 0.0779 0.0779 company Net profit ascribed to shareholder of mother -0.75% -0.78% -0.0064 -0.0064 company after deducting incidental profit & loss (3) Calculation Process of Return on Net Assets Item No. Year 2008 Year 2007 Net profit ascribed to mother company 1 7,567,912.54 22,065,920.97 142 Annual Report 2008 Item No. Year 2008 Year 2007 Incidental profit & loss ascribed to mother 5,750,749.93 23,879,239.24 company 2 Net profit ascribed to shareholder of mother 3=1-2 1,817,162.61 -1,813,318.27 company after deducting incidental profit & loss Net assets at term end ascribed to shareholder of mother company 4 247,809,266.16 242,200,200.60 Fully-diluted return on net asset (I) 5=1÷4 3.05% 9.11% Fully-diluted return on net asset (II) 6=3÷4 0.73% -0.75% Net assets at term beginning ascribed to 7 242,200,200.60 220,134,279.63 shareholder of mother company Net assets ascribed to shareholder of mother company which are newly increased through 8 - - issuing new shares or debt-to-stock, etc. number of months sine next month after increasing the net assets ascribed to 9 - - shareholders of mother company till term end of reporting term Net assets ascribed to shareholders of mother company which are decreased through counter 10 - - purchasing or cash dividends number of months sine next month after decreasing the net assets ascribed to 11 - - shareholders of mother company till term end of reporting term number of months during reporting period 12 12 12 Averagely weighted net assets ascribed to 13=7+1÷②+8×9÷12 245,984,156.87 231,167,240.12 shareholder of mother company -10×11÷12 Averagely-weighted return on net asset (I) 14=1÷13 3.08% 9.55% Averagely-weighted return on net asset (II) 15=3÷13 0.74% -0.78% XVI. Approval of the Financial Report This financial report is announced upon the approval of the Board of Directors of the Company on 23 April 2009. 143 Annual Report 2008 XI. Documents Available for Reference 1. Annual Report with the signature of Chairman of the Board. 2. Accounting statements with the signatures and seals of principal of the Company, principal in charge of accounting affairs and principal in charge of accounting organ. 3. Original of all documents disclosed on China Securities Journal, Securities Times and Hong Kong Wen Wei Po in the report period. 4. Articles of Association of the Company. 5. Other relevant materials. Note: This Report is prepared respectively both in Chinese and English. Should be there any difference in interpretation of these two versions, the Chinese version shall prevail. Board of the Directors of Shenzhen Zhongheng Huafa Co., Ltd. April 27, 2009 Chairman of the Board: Li Zhongqiu 144 Annual Report 2008 145