Haier Electronics Group Co., Ltd. · PDF fileHaier Electronics Group Co., ... as a result of...

股份代號: 1169

(Incorporated in Bermuda with limited liability)（於百慕達註冊成立之有限公司 )

For identification purpose only

僅供識別*

Haier Electronics Group Co., Ltd.海爾電器集團有限公司 *

annual report 2005 Haier Electronics Group Co., Ltd. 1

Mission and Corporate Development 2Corporate Information 3Chairman’s Letter 5Directors and Senior Management 9Financial Review 12Corporate Governance Report 16Report of the Directors 21Report of the Auditors 29Consolidated Income Statement 30Consolidated Balance Sheet 31Consolidated Statement of Changes in Equity 32Consolidated Cash Flow Statement 33Balance Sheet 35Notes to Financial Statements 36Five Year Financial Summary 83Notice of Annual General Meeting 84

Table of Contents

Haier Electronics Group Co., Ltd. annual report 20052

Pegasus Telecom(Qingdao)Co., Ltd.

Foshan ShundeHaier Electric

Co., Ltd.

Pegasus Electronic(Qingdao)Co., Ltd.

Mobile HandsetBusiness

Washing MachineBusiness

Haier Electronics Group Co., Ltd.

93.44%80% 60% 100% 100%

80%

Mission and Corporate Development

MISSIONHaier Electronics aims to become the listed flagship of the white goods business of the

Haier Group and to be a global top 3 white goods manufacturer.

CORPORATE STRUCTUREAfter the injection of the top loading washing machine business and the remaining 35.5%

interest in Pegasus Telecom (Qingdao) Co., Ltd. from the Haier Group in January 2005

(“Asset Injection”) as well as the establishment of a new plant in Jiaonan, Qingdao, our

simplified corporate structure is as follows:

Qingdao JiaonanHaier Washing

Machine Co., Ltd.

Qingdao HaierWashing Machine

Co., Ltd.

Hefei HaierWashing Machine

Co., Ltd.

20%

20%

The completion of the Asset Injection during the year has built up a solid foundation for usto proceed to the next stage of our transformation through both internal growth as well aspotential further asset injection from the Haier Group.

We are confident that we will succeed in achieving our mission to become a global top 3white goods manufacturer.


Chairman’s Letter

OVERVIEW

With an overhaul in the corporate structure and direction of the Group, the year 2005 will

be remembered as a year of historical milestone of the Group. On 28 January 2005, the

Group completed the acquisition of the top loading washing machine business and

remaining 35.5% equity interest in Pegasus Telecom (Qingdao) Co., Ltd. (the “Asset

Injection”) from Haier Group Corporation and Qingdao Haier Investment and Development

Co., Ltd. (together with their respective subsidiaries, excluding the Group, the “Haier Group”).

As the Asset Injection was mainly satisfied by the issue of new shares, the Haier Group has

thereby become the controlling shareholder of the Group and the name of the Company

was also changed from Haier-CCT Holdings Limited to Haier Electronics Group Co., Ltd.

with effect from 31 January 2005.

This is expected to be the first in a series of steps being undertaken by the Haier Group to

position the Company as the listed flagship of the Haier Group’s white goods business. Our

long term goal is to become a global top 3 white goods manufacturer and we believe that

the Asset Injection has built up a solid foundation for the Group to achieve such mission.


Chairman’s Letter (cont’d)

GROUP RESULTS

Turnover in 2005 amounted to HK$4,940 million, representing a decrease of approximately

16% from HK$5,894 million in 2004. The washing machine business continued to exhibit

strong growth in turnover of approximately 20% to HK$3,312 million in fiscal 2005. However,

the Group’s turnover has been adversely affected by a drop in turnover of the mobile

handset business of approximately 48% to HK$1,629 million in the year 2005.

Loss attributable to shareholders amounted to HK$433 million for the year ended 31

December 2005, against a profit attributable to shareholders of HK$119 million in 2004.

The loss was mainly due to the performance of the mobile handset business, which recorded

an operating loss of HK$139 million in fiscal 2005, and the impairment loss of HK$322

million in relation to goodwill attributable to the Group’s acquired interest in the mobile

handset business. The loss has substantially narrowed from HK$397 million in the first

half of 2005 to HK$36 million in the second half of 2005, despite the continued loss of

the mobile handset business, as a result of the strong performance of the washing machine

business which recorded a strong operating profit of HK$73 million in the second half of

the year.

Despite a loss being reported, since impairment loss on goodwill is a non-cash item and

coupled with contribution from the washing machine business, the Group continues to

maintain a very strong cash flow position, with a net cash inflow from operating activities

of HK$350 million in fiscal 2005.

OUTLOOK

The Board expects the operating environment in the mobile handset market in the PRC to

remain difficult in the foreseeable future. To improve the performance of the Group, the

Group is devoting more resources on the profit making washing machine business, whose

contribution to Group turnover was substantially up from 47% in 2004 to 67% in 2005. As

mentioned in our announcement dated 12 April 2006, we are also in negotiation and

discussion with the Haier Group in relation to a possible disposal of the mobile handset

business to the Haier Group. The Company will make appropriate announcement as required

by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong

Limited (“Listing Rules”) in the event that the possible disposal materialises.


It is Haier Group’s intention to turn the Company into the listed flagship of its white goods

business and in ultimately become a global top 3 white goods manufacturer. We are exploring

further asset injection opportunities from the Haier Group subject to, among other things,

the satisfactory completion of due diligence on their financial and operating performance,

the negotiation of a legally binding agreement and receipt of all applicable governmental,

regulatory and shareholders’ approval. At present, the Company has not entered into any

agreement in respect of further asset injections. The Group will make appropriate

announcement on further developments in accordance with the requirements of the Listing

Rules.

APPRECIATION

I would like to take this opportunity to thank all my fellow directors and staff members for

their dedicated services, contributions and support during the year.

By Order of the Board

Yang Mian Mian

Chairman

Hong Kong, 19 April 2006


Chairman’s Letter (cont’d)

Haier’s Dual Drive Washing MachineGold medal in the 95th Concours Lépine International France

annual report 2005 Haier Electronics Group Co., Ltd.. 9

Directors and Senior Management

The Directors of the Company and senior management of the Group as at 19 April 2006, the date of the Report of the Directors, are asfollows:

EXECUTIVE DIRECTORSMs. YANG Mian Mian, aged 64, has served as the Chairman and an Executive Director of the Company since January 2005. She isresponsible for determining corporate strategies and overall management of the Group. She graduated from Shandong Industrial Institute,which is now known as Shandong University, the People’s Republic of China (the “PRC”) in 1963. As one of the founders of the HaierGroup, she has been in charge of the overall management of the white goods business since 1984. She is currently the President of HaierGroup Corporation (“Haier Corp”) and the Chairman of Qingdao Haier Co., Ltd. (a company listed on the Shanghai Stock Exchange (the“A Share Company”)).

Mr. WU Ke Song, aged 55, has served as the Deputy Chairman and an Executive Director of the Company since December 2001 and isalso a member of the remuneration committee of the Company. He is responsible for worldwide business development of the Group andliaison with relevant government officials. He graduated from Shandong Industrial Institute which is now known as Shandong University,the PRC in 1974 and joined the Haier Group in 1984. He is also a Vice Chairman of the Board of Directors of Haier Corp.

Mr. CHAI Yong Sen*, aged 43, has served as an Executive Director of the Company since December 2001. He has been the GeneralManager of the Group’s mobile handset business since 2000. He graduated from Shanghai Mechanical Institute, the PRC in 1984 andhas a Master’s degree of Management. He joined the Haier Group in 1984 and has extensive experience in both washing machinebusiness and mobile handset business, in particular in the sales and procurement functions. He is also a Vice President of Haier Corp.

The appointment of Mr. Chai will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance withthe bye-laws (“Bye-laws”) of the Company. Mr. Chai is not entitled to any fixed remuneration but is entitled to payment of discretionarybonus to be determined by the Board. As at 19 April 2006, being the latest practicable date (“Latest Practicable Date”) prior to theprinting of this annual report for the purpose of ascertaining certain information herein, Mr. Chai is holding 10,000,000 options tosubscribe for 10,000,000 shares in the Company at an exercise price of HK$0.150 per share. The options were granted on 19 November2002 and are exercisable at any time between 19 November 2003 and 18 November 2007. Save as disclosed above, he does not haveany other interests in the shares of the Company within Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of HongKong) (the “SFO”). Mr. Chai does not have any relationship with any directors, senior management or substantial or controlling shareholdersof the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Rules Governing the Listing ofSecurities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and save as disclosed above, there are no other matters thatneed to be brought to the attention of shareholders.

Mr. Liang Hai Shan, aged 39, has served as an Executive Director of the Company since December 2001. He is mainly responsible forstrategic procurement and overall quality control of products of the Group. He received a Bachelor’s degree of Industry from the XianJiaotong University, the PRC and has 17 years of experience in the manufacture of household electrical appliances, in particular in rawmaterial procurement function and white goods business. He is also a Vice President of Haier Corp.

Mr. CAO Chun Hua, aged 37, has served as an Executive Director of the Company since January 2005. He is currently the GeneralManager of the Group’s washing machine business. He graduated from Hangzhou Electronic Industry College, the PRC with a Bachelor’sdegree in 1991. He joined the Haier Group in 1995 and has since held a number of senior positions in the washing machine business.He is also a Vice President of Haier Corp.

Haier Electronics Group Co., Ltd.. annual report 200510

Directors and Senior Management (cont’d)

EXECUTIVE DIRECTORS (cont’d)Mr. CUI Shao Hua*, aged 48, has served as an Executive Director of the Company since November 2002 and is a member of theremuneration committee of the Company. He is responsible for the Group’s corporate finance function. He graduated from Jilin Instituteof Finance and Commerce, the PRC in 1982. He joined the Haier Group in 1993 and has over 20 years of experience in financialmanagement and listed companies’ operations. He is also a Deputy Chairman of the A Share Company.

The appointment of Mr. Cui will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance withthe Bye-laws. Mr. Cui is not entitled to any fixed remunerations but is entitled to payment of discretionary bonus to be determined by theBoard. As at the Latest Practicable Date, Mr. Cui is holding 10,000,000 options to subscribe for 10,000,000 shares in the Company atan exercise price of HK$0.150 per share. The options were granted on 19 November 2002 and are exercisable at any time between 19November 2003 and 18 November 2007. Save as disclosed above, he does not have any other interests in the shares of the Companywithin Part XV of the SFO. Mr. Cui does not have any relationship with any directors, senior management or substantial or controllingshareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and saveas disclosed above, there are no other matters that need to be brought to the attention of shareholders.

Mr. SONG Chun Guang, aged 41, has served as an Executive Director of the Company since January 2005. He is now a Deputy GeneralManager and the Sales Director of the Group’s mobile handset business. He obtained a Bachelor’s degree of Engineering from TianjinIndustrial and Engineering College, the PRC in 1988. He joined the Haier Group in 1995 and has extensive experience in both washingmachine business and mobile handset business.

INDEPENDENT NON-EXECUTIVE DIRECTORSMr. LAM Kin Kau, Mark*, aged 51, has served as an Independent Non-executive Director of the Company since April 2000 and is amember of both the audit committee and the remuneration committee of the Company. He is a fellow of the Association of CharteredCertified Accountants and a member of the Hong Kong Institute of Certified Public Accountants, the Institute of Chartered Accountants inEngland and Wales and the Institute of Chartered Secretaries and Administrators. He has been a practising accountant for over 20 yearsand is a director of various private companies.

The appointment of Mr. Lam will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance withthe Bye-laws. The emolument of Mr. Lam comprise a basic director’s fee of HK$20,000 per month and a discretionary bonus to bedetermined by the Board which is determined by taking into account the experience of Mr. Lam and by reference to market range of thedirectors’ fee of independent non-executive directors for other listed companies of comparable size. As at the latest practicable date, Mr.Lam is holding 2,500,000 options to subscribe for 2,500,000 shares in the Company at an exercise price of HK$0.156 per share. Theoptions were granted on 16 August 2002 and are exercisable at any time between 16 August 2003 and 15 August 2007. Save asdisclosed above, he does not have any other interests in the shares of the Company within Part XV of the SFO. Mr. Lam does not have anyrelationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information tobe disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and save as disclosed above, there are no other matters thatneed to be brought to the attention of shareholders.


Financial Review

BUSINESS REVIEWWashing Machine BusinessThe Group continues to be the leader in the washing machine market in the PRC. Sales ofwashing machines amounted to HK$3,312 million in fiscal 2005, up by approximately20% from the year 2004. In view of the growth in sales, a new factory with an annualproduction capacity of approximately 1 million units of washing machines has beenestablished in Jiaonan, Shandong Province, the PRC in the fourth quarter of 2005 with afocus on manufacturing products for exports. The new factory has boasted our total annualproduction capacity to more than 6 million units. To cater for further increase in demand,the Group is planning to set up another production base in Chongqing, the PRC which willadd a further annual production capacity of 1 million units of washing machines in thesecond half of 2006.

Operating profit of the washing machine business amounted to HK$95 million in fiscal2005, representing a decrease of 25% as compared to HK$128 million in 2004. Thedecline was mainly due to substantial expenditure incurred in developing new products inthe first half of 2005. The new products were launched in the second half of the year, andhave since been providing substantial contribution to operating profit. Operating profit inthe second half of 2005 amounted to HK$73 million, up substantially from HK$22 millionin the first half of the year, and up by about 1.3% from the corresponding period in 2004notwithstanding the rise in the cost of certain raw materials such as plastic and steelplates.

The Board is optimistic on the performance of the washing machine business in 2006. Ournew models are expected to continue to provide substantial contribution in 2006. TheGroup is also focusing on higher end products with higher profit margins, such as dualdrive washing machines, which already resulted in a substantial increase in operatingprofit in the second half of the year. We are also seeing signs that the cost of certain rawmaterials, such as steel plates, are stabilizing or dropping.

We see ourselves as a pioneer in the industry with a strong research and developmentcapability. Our new models of environmentally friendly dual drive washing machines, whichdo not require the use of washing powder and use far less water and electricity thanindustry standards, have obtained more than 70 patents and was awarded the NationalTechnology Advance Second-class Award by State Council of the PRC. The products arealso well-received in overseas markets and won a gold medal in the 95th Concours LépineInternational France and have been recommended by international organizations as areference for new international standards. As our consumers are becoming increasinglyenvironmentally conscious, we are committed to developing innovative and environmentallyfriendly products to satisfy their needs. We are confident in our ability to remain as aleader in the industry and a pioneer in technology innovation.


Mobile Handset BusinessFor the year ended 31 December 2005, turnover of the mobile handset business amountedto HK$1,629 million, representing a decrease of 48% from the year 2004. Competitionremained intensive due to over capacity in the industry, price cutting strategy adopted byforeign branded manufacturers and the flood of illegal handsets into the PRC market whichforced a majority of the domestic branded manufacturers to clear their inventories bycutting prices. These had adversely impacted the Group, and lead to a drop in volume andincrease in provisions for doubtful debts and inventories. These resulted in an operatingloss of HK$139 million in 2005, as compared to an operating profit of HK$47 million inthe year 2004.

In view of the intense competition in the mobile handset market in the PRC, during theyear, the Board had conducted a review and decided to write off the entire amount ofgoodwill attributable to the Group’s acquired interest in the mobile handset business,which resulted in an impairment loss of HK$322 million in 2005. The impairment loss hadalready been included in the Group’s interim results for the six months ended 30 June2005 announced on 23 September 2005.

LIQUIDITY AND FINANCIAL RESOURCESThe Group has maintained a healthy financial and liquidity position with a current ratio of116% at 31 December 2005 (2004: 119%). As at 31 December 2005, the Group had acash balance of HK$560 million (2004: HK$243 million), total bank and other loans ofapproximately HK$125 million (2004: HK$147 million) and zero-coupon 3-year convertiblenotes (“Convertible Notes”) with a face value of HK$233 million and a liability element ofHK$212 million (2004: Nil). The Convertible Notes were issued to the Haier Group as partconsideration for the Asset Injection, and are convertible into ordinary shares of the Companyat HK$0.18 per share. During the year, 150,000,000 new shares were issued upon partconversion of the Convertible Notes. All the other borrowings of the Group were arrangedon a short-term basis for working capital purposes, and were denominated in Renminbi,repayable within one year and bore interest at floating rates.

Due to our focus on cash flow management, the Group has been able to generate a netcash inflow from operating activities of HK$350 million in 2005 despite a substantial lossbeing reported. The Group also has a very healthy cash position with a net cash balance(cash balance less borrowings) of HK$224 million as at 31 December 2005.

There is no material effect of seasonality on the Group’s borrowing requirements.

The Group had contracted capital commitments amounting to HK$3 million as at 31December 2005, which were mainly related to purchase of machinery for the expansion inproduction capacity of the Group’s washing machines business.


Financial Review (cont’d)

CAPITAL STRUCTURE AND GEARING RATIOAs at 31 December 2005, the Group maintained a comfortable gearing ratio (totalborrowings over shareholders’ equity) of 53% (2004: 29%), or 20% if the ConvertibleNotes are excluded.

TREASURY POLICIESThe Group employs a conservative approach to cash management and risk controls. Mostof the Group’s receipts and payments are in Renminbi and Hong Kong dollars. Cash isgenerally placed in short term deposits denominated either in Renminbi or Hong Kongdollars. As at 31 December 2005, apart from the Convertible Notes which are denominatedin Hong Kong dollars, most of the Group’s outstanding borrowings were denominated inRenminbi and were principally made on a floating rate basis. Foreign currency risk is notsignificant as liabilities in Renminbi will be matched by the Group’s earnings, most ofwhich are also denominated in Renminbi. The Group does not have any significant interestrate risk, as the current interest rate in the PRC stays at low level and is relatively stable.The Group does not have any financial instruments for hedging purposes.

EMPLOYEES AND REMUNERATION POLICYThe total number of employees of the Group as at 31 December 2005 was approximately5,600, representing an increase of approximately 25% as compared to 31 December2004.

The Group ensures that the remuneration packages for its employees are competitive andemployees are generally remunerated with a fixed monthly income, which is normallyreviewed on an annual basis, plus discretionary performance related bonuses. Employeesare also provided with benefits including provident fund and medical insurance. The Groupmaintains a share option scheme as an incentive to attract and retain talented employees.As at 31 December 2005, there were outstanding share options entitling the grantees tosubscribe for approximately 607.5 million new shares of the Company.

MATERIAL ACQUISITION AND DISPOSAL OF SUBSIDIARIES ANDASSOCIATESPlease refer to note 2.1 to the consolidated financial statements below for details ofmaterial acquisition of subsidiaries during the year.


CHARGE OF ASSETSAs 31 December 2005, bank deposits of approximately HK$70,000 were pledged to securegeneral banking facilities granted to a subsidiary of the Group.


Corporate Governance Report

The board (the “Board”) of directors (the “Directors”) and the management (the “Management”) of Haier Electronics Group Co., Ltd. (the“Company”) recognise that sound corporate practices are crucial to the efficient operation of the Company and its subsidiaries (collectivelythe “Group”) and the safeguarding of our shareholders’ interests. In this regard, the Board attaches great priority to reinforce the Company’scorporate governance standards with emphasis on transparency, accountability and independence in order to enhance our long-termshareholders’ value.

The Company has, throughout the year ended 31 December 2005, complied with most of the applicable code provisions (the “CodeProvision(s)”) and principles under the Code on Corporate Governance Practices (the “CG Code”) as set out in Appendix 14 to the RulesGoverning the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) except forcertain deviations as described below. This report describes the Company’s corporate governance practices, explains its applications ofand deviations from the CG Code, together with considered reasons for such deviations.

BOARD OF DIRECTORSCompositionThe Board currently comprises seven executive Directors and four independent non-executive Directors (the “INED(s)”). The Directors arewell-versed in respective areas such as legal, accounting and finance, business management and industry knowledge and the Board asa whole has achieved an appropriate balance of skills and experience. The Directors’ biographical information is set out on pages 9 to 11under the section headed “Directors and Senior Management”.

To the best of the Company’s knowledge, there is no financial or family relationship among the Board members. All of them are free toexercise their independent judgment on all matters concerning the Company.

Delegation by the BoardThe Directors are collectively responsible for setting the Group’s strategies, providing leadership and guidance to put them into effect,reviewing and monitoring the performance of the Group and are accountable to the Company’s shareholders. To maximise the effectivenessof the Group’s operations, the Board has delegated management and administration of the Group’s daily operations to the executiveDirectors and the Management while reserving several important matters for its approval. To this end, the Board has adopted writtenguidelines (the “Guidelines”) laying down the division of functions between the Board and the Management (including the executiveDirectors for the purpose of the Guidelines).

Pursuant to the Guidelines, the major functions of the Board and the Management are summarized as follows:

The Board is principally responsible for:

1. determining the overall strategy and approving annual operating budget of the Group;

2. reviewing all significant policies of the Group;

3. monitoring the performance of the Management to ensure that the business operations of the Group are properly planned andundertaken;

4. approving interim and annual results of the Group based on recommendations made by the audit committee of the Company;

5. approving material contracts and transactions for which the Management is required to obtain the Board’s prior approval; and

6. subject to the requirements of the Listing Rules, approving transactions in which connected person(s) (as defined in the ListingRules) of the Group is/are considered having a material conflict of interests.


BOARD OF DIRECTORS (cont’d)Delegation by the Board (cont’d)The Management is principally responsible for:

1. exercising all such other powers and perform all such other acts as may be exercised and performed by the Directors, save andexcept for those that may specifically be reserved by the Board/or the committees set up by the Board for decision and implementation;or those that may only be exercised by the Board pursuant to The Companies Act of Bermuda, the Bye-laws of the Company, theListing Rules and/or the Hong Kong Codes on Takeovers and Mergers and Share Repurchases;

2. formulating and implementing policies for business activities, internal controls and administration of the Company;

3. planning and deciding the Company’s strategies on its business activities; and

4. keeping proper written records of its decisions taken which may be inspected by any members of the Board or the Board committeesupon request.

The Board will review those arrangements and the Guidelines on a periodic basis to ensure that they remain appropriate to the needs ofthe Group.

Chairman and Chief Executive Officer (“CEO”)Under the Code Provision A.2.1, the roles of chairman and CEO should be separate and should not be performed by the same individual.Currently, the Company does not comply with such Code Provision since the Company does not have any person holding the title of CEO.Ms. Yang Mian Mian is the Chairman of the Board and is also performing the functions of CEO. The Board meets regularly to considermajor matters affecting the business and operations of the Group. The Board considers that this structure will not impair the balance ofpower and authority between the Board and the Management and believes that this structure enables the Group to make and implementdecision promptly and efficiently.

INEDsThe INEDs have the same duties of care and skill and fiduciary duties as the executive Directors. They are expressly identified as such inall corporate communications that disclose the names of the Directors.

The INEDs are experienced professionals with expertise in respective areas of legal, accounting and finance. With their professionalknowledge and experience, the INEDs advised the Company on its operation and management; provided independent opinion on theCompany’s connected transactions; participated in the Company’s audit committee meetings and remuneration committee meetings. TheINEDs have contributed to provide adequate checks and balance to protect the interests of the Company and the Company’s shareholdersas a whole, and to promote the development of the Company.

The Company has received an annual confirmation of independence from each of the INEDs pursuant to Rule 3.13 of the Listing Rulesand considers that all INEDs to be independent as at the date of this report.

Under the Code Provision A.4.1, non-executive directors should be appointed for specific terms, subject to re-election. Currently, allINEDs are not appointed for a specific term but are subject to retirement by rotation and re-election at the annual general meeting of theCompany in accordance with the Company’s Bye-laws. As such, the Board considers that sufficient measures have been taken to ensurethat the Company’s corporate governance practices are no less exacting than those in the CG Code.

Supply of and access to informationNewly appointed Directors will receive induction packages containing the duties and responsibilities of directors under the Listing Rulesand other applicable rules and regulations.

Each of the Directors is briefed and updated from time to time on the latest legislative and regulatory developments to ensure that he/sheis fully aware of his/her responsibilities under the Listing Rules, applicable legal and regulatory requirements.

In order to ensure that their duties can be properly discharged, the Directors are entitled to seek advice from independent professionaladvisers whenever deemed necessary by them at the Company’s expense.


Corporate Governance Report (cont’d)

BOARD OF DIRECTORS (cont’d)Board MeetingsApart from consents obtained through circulation of written resolutions of all the Board members, the Board met 29 times during the yearended 31 December 2005 to review and approve, among other things, the 2004 annual results and 2005 interim results, the documentsrelating to corporate governance practices, continuing connected transactions and other operational issues of the Group. The Company’sboard meetings (the “Board Meeting(s)”) are permitted to be held by means of telephone or other means of electronic communicationunder the Bye-laws of the Company.

Reasonable notices are served and comprehensive information is provided to the Board members in advance of all the Board Meetingsin order to enable them to make informed decisions on all matters transacted at the Board Meetings.

The proceedings of the Board Meetings are normally conducted by the Chairman of the Company who ensures that sufficient time isallowed for discussion among the Directors and equal opportunities are being given to the Directors to express their views and share theirconcerns.

The Company Secretary/Qualified Accountant attends the Board Meetings to advise Directors on corporate governance practices, andstatutory compliance, accounting and financial matters whenever deemed necessary by the Board.

The Company Secretary is responsible for preparing minutes recording all matters transacted and resolved at the Board Meetings. All theBoard Minutes are kept by the Company Secretary and are open for inspection by the Directors.

The following table shows the attendance of the Directors at the Board Meetings during the year ended 31 December 2005:

No. of the Board Meetings attended/held

Executive Directors:Ms. Yang Mian Mian (Chairman)* 18/20Mr. Wu Ke Song (Deputy Chairman) 4/29Mr. Chai Yong Sen 5/29Mr. Liang Hai Shan 5/29Mr. Cao Chun Hua* 4/20Mr. Cui Shao Hua 27/29Mr. Song Chun Guang* 2/20Mr. Mak Shiu Tong, Clement# 9/9Mr. Tam Ngai Hung, Terry# 9/9Mr. Man Wei Dong# 0/9

INEDs:Mr. Lam Kin Kau, Mark 17/29Mr. Fung Hoi Wing, Henry 17/29Mr. Lau Ho Wai, Lucas 17/29Mr. Wu Yinong* 10/20

* appointed on 28 January 2005# resigned on 28 January 2005

It is challenging to arrange the Board Meeting that fits in with the tight and busy schedules of all the Directors. In particular, as certain ofthe executive Directors devote considerable time and efforts to the management and operation of the Group’s business, they were onlyable to attend some of the Board Meetings in person and their attendance rate at the Board Meetings are relatively low during the fiscalyear of 2005. To enable all the Directors to keep abreast of the Company’s latest development and to discharge their duties properly, theCompany Secretary will brief the Directors on those matters transacted at the Board Meetings that they were unable to attend. In addition,draft and final versions of board minutes will be sent to all Directors for their comments and records.


BOARD OF DIRECTORS (cont’d)Model Code for Securities Transactions by DirectorsThe Company has adopted a model code (the “Haier Electronics Model Code”) for securities transactions by Directors on no less exactingterms than the Model Code for Securities Transactions by Directors of Listed Issuers as set out Appendix 10 to the Listing Rules. Havingmade specific enquiry of all the Directors, the Company confirmed that all the Directors have complied with the required standard as setout in the Haier Electronics Model Code throughout the year ended 31 December 2005.

In addition, the Board has adopted written guidelines (the “Employees’ Guidelines for Securities Transactions”) for securities transactionsby employees (the “Relevant Employees”) who are likely to be in possession of unpublished price sensitive information of the Company onno less exacting terms than the Haier Electronics Model Code. Having made specific enquiry of all the Relevant Employees, the Companyconfirmed that all the Relevant Employees have complied with the required standard as set out in the Employees’ Guidelines for SecuritiesTransactions throughout the year ended 31 December 2005.

Board CommitteesThe Board has established an Audit Committee (the “Audit Committee”) and a Remuneration Committee (the “Remuneration Committee”)(collectively the “Committees”) to oversee particular aspects of the Company’s affairs. To reinforce independence, the chairman of boththe Committees is an INED. The Committees report to the full Board regularly. Each of the Committees has adopted specific terms ofreference covering its duties, powers and functions which will be reviewed by the Board from time to time. The Company Secretary alsoacts as secretary of the Committees. The Committees adopt as far as practicable, the procedures and arrangement of the Board Meetingin relation to conduct of meetings, notice of meetings and recording of minutes. Further particulars of each of the Committees is set outbelow:

(1) Audit CommitteeThe Audit Committee currently comprises all four INEDs and is chaired by Mr. Lam Kin Kau, Mark. Mr. Lam is a professionalaccountant and has been a practicing accountant for over 20 years. The primary duties of the Audit Committee are to ensure theobjectivity and credibility of financial reporting, to make recommendation to the Board on the appointment, reappointment andremoval of the Group’s external auditors and to review of the Company’s financial controls, internal control and risk managementsystems.

During the year ended 31 December 2005, the Audit Committee met twice with an attendance rate of 100% to review the managementand accounting principles and practices adopted by the Group and to discuss internal controls and financial reporting mattersincluding the review of 2004 annual results and 2005 interim results of the Group. Each member of the Audit Committee hasunrestricted access to the Group’s external auditors and the Management.

(2) Remuneration CommitteeThe Remuneration Committee currently comprises six members including two executive Directors, namely, Mr. Wu Ke Song and Mr.Cui Shao Hua and all four INEDs. The Remuneration Committee is chaired by Mr. Fung Hoi Wing, Henry, an INED. The primary dutiesof the Remuneration Committee are to make recommendations to the Board on policy and structure of all remuneration of theDirectors. Each of the Directors has not involved in the determination of his/her own remuneration. The Remuneration Committeemeets at least once a year. During the year under review, the Remuneration Committee Meeting has held one meeting in September2005 with an attendance rate of 100%. At the meeting, members of the Remuneration Committee reviewed the remunerationpackages and overall benefits of the Directors by taking into account factors such as remuneration packages and benefits offeredby comparable companies, the respective contribution of each of the Directors to the Group and the business objectives of theGroup.

InsuranceThe Group has arranged appropriate directors’ and officers’ liability insurance to indemnify the Directors and senior staff of the Group forthe potential liabilities incurred by them in discharging their duties. The Group reviews the insurance coverage for the Directors and theGroup’s senior staff on an annual basis.


Corporate Governance Report (cont’d)

ACCOUNTABILITY AND AUDITThe Directors acknowledge their responsibility for preparing financial statements of the Group in accordance with relevant statutoryrequirements and generally accepted accounting principles in Hong Kong and ensuring that the financial statements give a true and fairview of the Group’s financial position. In preparing the financial statements of the Group for the year ended 31 December 2005, theDirectors have adopted suitable accounting policies and applied them consistently; made judgments and estimates that are prudent andreasonable; and prepared the financial statements on a going concern basis.

The Board aims to present a comprehensive, balanced and understandable assessment of the Group’s development and prospects in allcorporate communications, including but not limited to annual and interim reports, any price-sensitive announcements and financialdisclosures required under the Listing Rules, any reports to regulators as well as to information required to be disclosed pursuant to otherstatutory requirements.

INTERNAL CONTROL AND RISK MANAGEMENTThe Group is committed to implementing effective internal controls and risk management procedures to identify and manage the risks thatmay be faced by the Group, as well as to safeguard the interests of the Group and the Company’s shareholders as a whole.

The Board is responsible for maintaining adequate internal controls and risk management procedures in the Group, and for reviewing itseffectiveness through the Audit Committee on an on-going basis. The Board has delegated to the Management the implementation of theGroup’s internal controls covering financial, operational and compliance aspects, as well as risk management procedures.

The Board has reviewed the overall effectiveness of the internal control system of the Group during the year ended 31 December 2005,and based on the assessment and recommendations made by the Audit Committee, is satisfied that during the year ended 31 December2005, the Group has implemented adequate internal controls and risk management procedures. No significant areas of concern whichmight affect the Group’s operation and the interests of the Company’s shareholders were identified.

REMUNERATION OF EXTERNAL AUDITORSThe Group’s independent external auditors are Ernst & Young, Certified Public Accountants. The remuneration for the audit and non-auditservices provided by Ernst & Young to the Group during the year ended 31 December 2005 was as follows:

Type of services AmountHK$’000

Audit 6,000Non-audit services

Taxation 188Other services 625

6,813

By Order of the BoardYip Wai MingCompany Secretary



Report of the Directors

The directors (“Directors”) of Haier Electronics Group Co., Ltd. (“Company”) present their report and the audited financial statements ofthe Company and its subsidiaries (collectively the “Group”) for the year ended 31 December 2005.

PRINCIPAL ACTIVITIESThe principal activity of the Company is investment holding. The principal activities of its subsidiaries are (i) the manufacture and sale ofmobile handsets; and (ii) the manufacture and sale of washing machines.

RESULTS AND DIVIDENDSThe Group’s loss for the year ended 31 December 2005 and the state of affairs of the Company and the Group at that date are set out inthe financial statements on pages 30 to 82.

The directors do not recommend the payment of any dividends in respect of the year.

SUMMARY FINANCIAL INFORMATIONA summary of the financial results and assets, liabilities and minority interests of the Group for the last five financial years, as extractedfrom the financial statements and restated as appropriate, is set out on page 83. This summary does not form part of the auditedfinancial statements.

PROPERTY, PLANT AND EQUIPMENTDetails of movements in the property, plant and equipment of the Group during the year are set out in note 16 to the financial statements.

SHARE CAPITAL, SHARE OPTIONS, WARRANTS AND CONVERTIBLE NOTESDetails of movements in the Company’s share capital, share options, warrants and convertible notes during the year, are set out in notes31, 32 and 28 to the financial statements.

PRE-EMPTIVE RIGHTSThere are no provisions for pre-emptive rights under the Company’s bye-laws or the laws of Bermuda which would oblige the Company tooffer new shares on a pro rata basis to existing shareholders.

PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANYNeither the Company, nor any of its subsidiaries purchased, sold or redeemed any of the listed securities of the Company during the year.

RESERVESDetails of movements in the reserves of the Company and the Group during the year are set out in note 33(b) to the financial statementsand in the consolidated statement of changes in equity, respectively.

DISTRIBUTABLE RESERVESAt 31 December 2005, the Company had no reserve (2004: HK$120,691,000) available for distribution in accordance with the provisionsof the Companies Act 1981 of Bermuda (as amended).


Report of the Directors (cont’d)

MAJOR CUSTOMERS AND SUPPLIERSThe information in respect of the Group’s sales and purchases attributable to the major customers and suppliers, respectively, during theyear is as follows:

Percentage of the Group’s totalSales Purchases

2005 2004 2005 2004% % % %

The largest customer 32 87 – –Five largest customers in aggregate 55 98 – –The largest supplier – – 50 55Five largest suppliers in aggregate – – 78 74

During the year, Haier Group Corporation (“Haier Corp”) and Qingdao Haier Investment and Development Co., Ltd. (“Haier Investment”)(collectively referred to as “Haier Group”), the substantial shareholders of the Company, had beneficial interest in two of the five largestcustomers and four of the five largest suppliers of the Group, respectively.

Save as disclosed above, none of the directors or any of their associates or any shareholders of the Company (which, to the bestknowledge of the directors, owns more than 5% of the Company’s issued share capital) had any beneficial interest in the Group’s fivelargest customers or suppliers.

DIRECTORSThe directors of the Company during the year and up to the date of this report were as follows:

Executive directors:Yang Mian Mian (appointed on 28 January 2005)Wu Ke SongChai Yong SenLiang Hai ShanCao Chun Hua (appointed on 28 January 2005)Cui Shao HuaSong Chun Guang (appointed on 28 January 2005)Mak Shiu Tong, Clement (resigned on 28 January 2005)Tam Ngai Hung, Terry (resigned on 28 January 2005)Man Wei Dong (resigned on 28 January 2005)

Independent non-executive directors:Lam Kin Kau, MarkFung Hoi Wing, HenryLau Ho Wai, LucasWu Yinong (appointed on 28 January 2005)

In accordance with the bye-laws of the Company, Chai Yong Sen, Cui Shao Hua, Lam Kin Kau, Mark and Fung Hoi Wing, Henry will retireand, being eligible, will offer themselves for re-election at the forthcoming annual general meeting of the Company.

The independent non-executive directors of the Company are not appointed for any specific terms and are subject to retirement byrotation and re-election at the annual general meeting of the Company in accordance with the bye-laws of the Company.

The Company has received annual confirmations of independence from each of Lam Kin Kau, Mark, Fung Hoi Wing, Henry, Lau Ho Wai,Lucas and Wu Yinong, and, on the basis on such confirmations, still considers them to be independent as at the date of this report.


DIRECTORS’ AND SENIOR MANAGEMENT’S BIOGRAPHIESBiographical details of the directors of the Company and the senior management of the Group are set out on pages 9 to 11 of this annualreport.

DIRECTORS’ SERVICE CONTRACTSDuring the year, no director had a service contract with the Company which is not determinable by the Company within one year withoutpayment of compensation, other than statutory compensation.

DIRECTORS’ INTERESTS IN CONTRACTSNo director had a material interest, either directly or indirectly, in any contract of significance to the business of the Group to which theCompany, or its holding company, or any of its subsidiaries or fellow subsidiaries was a party during the year.

DIRECTORS’ INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARESAt 31 December 2005, except for the interests in share options of the Company as disclosed in note 32 to the financial statements, noneof the Directors has any interests and short positions in the ordinary share(s) (“Share(s)”) or underlying shares of the Company or itsassociated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the registerrequired to be kept by the Company pursuant to Section 352 of the SFO, or as otherwise notified to the Company and The Stock Exchangeof Hong Kong Limited (the “Stock Exchange”) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as setout in Appendix 10 of the Listing Rules.

DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES IN THE COMPANYSave as disclosed in note 32 to the financial statements regarding the share option scheme of the Company, at no time during the yearwere rights to acquire benefits by means of the acquisition of Shares in or debentures of the Company granted to any director of theCompany or their respective spouse or minor children, or were any such rights exercised by them; or was the Company, its holdingcompany, or any of its subsidiaries or fellow subsidiaries a party to any arrangement to enable the directors of the Company to acquiresuch rights in any other body corporate.

SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARESAs at 31 December 2005, the following shareholders interested in 5% or more of the issued shares and/or underlying shares of theCompany were recorded in the register of substantial shareholders required to be kept by the Company pursuant to Section 336 of theSFO:

Long positions in Shares:

ApproximateNumber of Total percentage of

Number of Shares number of the Company’sShares under equity Shares issued

Name Notes interested derivatives Nature of interests interested share capital

Qingdao Haier Group 1 4,176,706,667 1,294,444,444 Beneficial owner 9,441,445,930 56.63Holdings (BVI) Limited

3,970,294,819 – Interests of partiesacting in concert

Haier Group Corporation 2 9,441,445,930 – Interests of controlled 13,633,945,930 81.78corporation




SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARES (cont’d)Long positions in Shares: (cont’d)




Qingdao Haier Investment 3 3,366,000,000 – Beneficial owner 13,633,945,930 81.78and Development Co., Ltd.

826,500,000 – Interests of controlledcorporation


Qingdao Haier Collective 4 13,633,945,930 – Interests of controlled 13,633,945,930 81.78Asset Management corporationAssociation

Deutsche Bank AG 5 3,970,294,819 – Beneficial owner 12,189,501,486 73.12


Greatway International Corp. 6 880,172,486 – Beneficial owner 880,172,486 5.28

Soaring Profit Holdings Limited 7 3,926,774,819 – Interests of controlled 3,926,774,819 23.55corporation

CCT Telecom Holdings Limited 8 3,926,774,819 – Interests of controlled 3,926,774,819 23.55corporation

Short positions in Shares:




Deutsche Bank AG 5 – 3,926,774,819 Beneficial owner 3,926,774,819 23.55

CCT Telecom Holdings 8 3,926,774,819 – Interests of controlled 3,926,774,819 23.55Limited corporation


SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARES (cont’d)Notes:

1. Qingdao Haier Group Holdings (BVI) Limited (“Haier BVI”) held 4,176,706,667 Shares. Haier BVI was also interested in 1,294,444,444 underlying Sharesunder the convertible notes (“Convertible Notes”) issued to it as part of the consideration pursuant to an agreement dated 5 March 2004 entered intobetween Haier Group Corporation (“Haier Corp”), Qingdao Haier Investment and Development Co., Ltd. (“Haier Investment”) and the Company.

In addition, Haier BVI was acting in concert with Deutsche Bank AG (“Deutsche Bank”) pursuant to an undertaking letter (“Undertaking Letter”) dated5 January 2006 executed by Haier BVI and Deutsche Bank, pursuant to which Deutsche Bank agreed that, unless otherwise agreed and subject to theexceptions set out therein, Deutsche Bank will not sell or dispose of any of the 3,926,774,819 Shares acquired by Deutsche Bank pursuant to an agreement(“Sale and Purchase Agreement”) dated 16 November 2005 entered into between Deutsche Bank and CCT Telecom Holdings Limited (“CCT”). Furthermore,Deutsche Bank held another 43,520,000 Shares. Accordingly, Haier BVI was deemed to be interested in the said 3,926,774,819 Shares and43,520,000 shares held by Deutsche Bank pursuant to the SFO.

2. Haier Corp was interested in 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to innote (1) in which Haier BVI were interested. Haier BVI is a non-wholly owned subsidiary of Haier Corp. In addition, Haier Corp was taken to be interested in43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO as stated innote (1).

Furthermore, Haier Corp was acting in concert with Haier Investment. As Haier Investment held 3,366,000,000 Shares and was interested in 826,500,000Shares held by its non-wholly owned subsidiary as stated in note (3), Haier Corp was also taken to be interested in the 3,366,000,000 Shares held by HaierInvestment and the 826,500,000 Shares which Haier Investment was taken to be interested.

3. Haier Investment held 3,366,000,000 Shares and was interested in (i) 826,500,000 Shares held by an indirect non-wholly owned subsidiary; and, byreason of its acting in concert with Haier Corp as set out in note (2), the following Shares in which Haier Corp were deemed to be interested pursuant to theSFO: (ii) the 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in whichHaier BVI was interested; and (iii) the 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interestedpursuant to the SFO as stated in note (1).

4. Qingdao Haier Collective Asset Management Association was interested in (i) 3,366,000,000 Shares held by its non-wholly owned subsidiary, HaierInvestment; (ii) 826,500,000 Shares held by Haier Investment’s indirect non-wholly owned subsidiary as stated in note (3); (iii) 4,176,706,667 Shares heldby Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI were interested; and (iv)43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO.

5. Deutsche Bank held 43,520,000 Shares. In addition, it held another 3,926,774,819 Shares acquired pursuant to the Sale and Purchase Agreementreferred to in note (1). Furthermore, Deutsche Bank was acting in concert with Haier BVI pursuant to the Undertaking Letter referred to in note (1) above andis deemed to be interested in the 8,219,206,667 Shares in which Haier BVI was interested.

Pursuant to a subscription agreement dated 16 November 2005 entered into between Deutsche Bank and Haier BVI, Haier BVI agreed to issue and DeutscheBank agreed to subscribe for put warrants (the “Warrant(s)”) in respect of 3,926,774,819 Shares at an issue price of HK$0.03 per Warrant. Upon exercise,the holders of the Warrants are entitled to put the Shares to Haier BVI. The exercise price of the Warrants is fixed at HK$0.1975 per Warrant. The number ofShares under the Warrants is equal to the number of Shares acquired by Deutsche Bank from CCT pursuant to the Sale and Purchase Agreement referred toin note (1) above.

6. Greatway International Corp. (“Greatway”) held 880,172,486 Shares.

7. Soaring Profit Holdings Limited (“Soaring Profit”) was interested in 479,002,333 Shares held by Info-net International Corp. (“Info-net”), 880,172,486Shares held by Greatway, 810,000,000 Shares held by Clear Access Agents Limited (“Clear Access”), 733,600,000 Shares held by Super Control InvestmentsLimited (“Super Control”), 700,000,000 Shares held by Invest Paradise Group Limited (“Invest Paradise”) and 324,000,000 Shares held by Full Elite AssetsLimited (“Full Elite”). Info-net, Clear Access, Super Control, Invest Paradise and Full Elite were wholly-owned subsidiaries of Soaring Profit Holdings Limited(“Soaring Profit”).

Pursuant to the Sale and Purchase Agreement referred to in note (1), CCT is under an obligation to deliver 3,926,774,819 Shares (including the 479,002,333Shares held by Info-net, the 880,172,486 Shares held by Greatway, 810,000,000 Shares held by Clear Access, 733,600,000 Shares held by SuperControl, 700,000,000 Shares held by Invest Paradise and 324,000,000 Shares held by Full Elite) to Deutsche Bank upon completion of the Sale andPurchase Agreement.

8. CCT was interested in 3,926,774,819 Shares in which Soaring Profit were taken to be interested through the subsidiaries as disclosed in note (7). SoaringProfit is a wholly-owned subsidiary of CCT.



SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARES (cont’d)Subsequent to the balance sheet date, on 5 January 2006, CCT and its subsidiaries disposed of their 3,926,774,819 Shares to DeutscheBank, details of which were set out in the Company's announcements dated 22 November 2005 and 5 January 2006.

Save as disclosed above, as at 31 December 2005, no other person, other than the directors of the Company, whose interests are set outin the section headed “Directors’ interests and short positions in shares and underlying shares” above, had registered an interest or shortposition in the Shares or underlying shares of the Company that was required to be recorded pursuant to Section 336 of the SFO.

CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS(a) During the year, the Company’s subsidiary, Pegasus Telecom (Qingdao) Co., Ltd. (“Pegasus Qingdao”), had the following continuing

connected transactions with Haier Corp, Haier Investment, their subsidiaries and associates:

Group2005 2004

Notes HK$’000 HK$’000

Sales of mobile handset products (i) 1,523,428 2,747,869Purchases of materials (ii) 606,607 1,786,847Utility service fee expenses (iii) 5,745 4,657Interest expenses (iv) 3,594 3,442Interest income (iv) 165 143Other service fee expenses (v) 1,286 174

Notes:

(i) For the year ended 31 December 2005, the sales of mobile handset products were made at selling prices based on the costs of raw materials plusa processing fee which is not less than the industry standard.

For the year ended 31 December 2004, the sales of mobile phones were made at selling prices based on the cost of materials plus processing feesranging from 5% to 40% of the purchase price of the materials.

(ii) The purchases were charged no more than the average market price or the consolidated and integrated tender and bidding price plus a 2.6%commission.

(iii) Utility service fee expenses were charged based on the state-prescribed prices plus actual administrative costs.

(iv) Interest expenses/income was determined with reference to the standard rates published by the People’s Bank of China.

(v) Other service fee expenses included legal consulting service fee, general security service fee, human resources service fee which were determinedwith reference to actual costs incurred.


CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS (cont’d)(a) (cont’d)

Since Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde Haier Electric Co., Ltd. and Hefei Haier Washing Machine Co., Ltd.have become the Company’s subsidiaries on 28 January 2005, they, together with Qingdao Jiaonan Haier Washing Machine Co.,Ltd. and Qingdao Haier Electronics Sales Co., Ltd., had the following continuing connected transactions with Haier Corp, HaierInvestment, their subsidiaries and associates:

GroupFrom 28 January 2005to 31 December 2005

Notes HK$’000

Sales of washing machines (vi) 310,782Purchases of materials (vii) 2,405,228Printing and packaging fee expenses (viii) 1,730Mould charges (ix) 57,719Utility service fee expenses (x) 10,776Logistics charges (xi) 112,042Promotion fee expenses (xii) 19,231Other service fee expenses (xiii) 13,845Interest income (xiv) 525Trademark licence fee expenses (xv) 23,847

Notes:

(vi) The sales of washing machines were made to Haier Electrical Appliances Co., Ltd. (“Haier Electrical”), a subsidiary of Haier Investment, at sellingprices representing differences between the selling prices of washing machines mutually agreed and the selling expenses of Haier Electrical notexceeding 2.5% of the selling prices of washing machines.

(vii) The purchases of materials were determined based on the lower of the average market price or the consolidated and integrated tender and biddingprice plus 2.6% commission.

(viii) Printing and packaging fee expenses were charged on an actual cost basis plus a processing fee of not higher than those charged by independentthird parties.

(ix) Moulds were charged with reference to the average market tender and bidding price plus actual administrative costs.

(x) Utility service fee expenses were charged based on the state-prescribed prices plus actual administrative costs.

(xi) Logistics charges were charged based on an actual costs basis and on terms more favourable than those offered by independent third parties.

(xii) Promotion fee expenses were determined at the lower of 1.2% of the domestic sales of washing machines and RMB20 million (equivalent toHK$19,231,000).

(xiii) Other service fee expenses included legal consulting service fee, catering and travel agency service fee, human resources service fee, general securityservice fee, product certification service fee and equipment repair and maintenance service fee which were determined with reference to actual costsincurred.

(xiv) Interest income was determined with reference to the standard rates published by the People’s Bank of China.

(xv) Trademark licence fee expenses were charged at a rate of 0.8% (2004: 0.5%) of certain sales made by Qingdao Haier Washing Machine Co., Ltd.,Foshan Shunde Haier Electric Co., Ltd., Hefei Haier Washing Machine Co., Ltd. and Qingdao Jiaonan Haier Washing Machine Co., Ltd..

Except for the trademark licence fee expenses, the above transactions were defined as MH Continuing Connected Transactions andNon-exempt Continuing Connected Transactions in the circulars to the shareholders of the Company dated 17 December 2004 and4 October 2005, respectively, and were approved by the shareholders at special general meetings of the Company on 4 January2005 and 24 October 2005, respectively.



CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS (cont’d)(a) (cont’d)

The Stock Exchange has granted conditional waivers to the Company from strict compliance with the connected transactionsrequirements as set out in the Listing Rules for the three financial years ended 31 December 2007.

The independent non-executive directors of the Company have reviewed MH Continuing Connected Transactions and Non-exemptContinuing Connected Transactions set out above and have confirmed that they were:

(i) less than the cap amounts which were set out in the relevant agreements;

(ii) entered into the usual and ordinary course of business of the Group;

(iii) entered into either on normal commercial terms or, if there is not sufficient comparable transactions to judge whether they areon normal commercial terms, on terms no less favourable to the Group than terms available to or from (as appropriate)independent third parties; and

(iv) entered into in accordance with the relevant agreements governing them on terms that were fair and reasonable and in theinterest of the Group’s shareholders as a whole.

(b) On 25 June 2005, Haier Corp provided a corporate guarantee of RMB70,000,000 (equivalent to HK$67,308,000) to Haier GroupFinance Co., Ltd. (“Haier Finance”), a subsidiary of Haier Corp and a financial institution approved by the People’s Bank of China,as a security for banking facilities granted to Pegasus Qingdao for the period from 25 June 2005 to 24 June 2006. As at 31December 2005, Pegasus Qingdao has utilised all of the above banking facilities.

(c) On 30 December 2005, Haier Corp provided a corporate guarantee of RMB30,000,000 (equivalent to HK$28,846,000) to HaierFinance as a security for banking facilities granted to Qingdao Jiaonan Haier Washing Machine Co., Ltd. (“Jiaonan Washing Machine”)for the period from 30 December 2005 to 29 December 2006. As at 31 December 2005, Jiaonan Washing Machine has utilisedRMB15,000,000 of the above banking facilities.

SUFFICIENCY OF PUBLIC FLOATBased on information that is publicly available to the Company and within the knowledge of the directors, at least 25% of the Company’stotal issued share capital was held by the public as at the date of this report.

AUDITORSErnst & Young will retire and a resolution for their reappointment as auditors of the Company will be proposed at the forthcoming annualgeneral meeting of the Company.

ON BEHALF OF THE BOARD

Yang Mian MianChairman

Hong Kong19 April 2006


Report of the Auditors

To the membersHaier Electronics Group Co., Ltd.(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 30 to 82 which have been prepared in accordance with accounting principlesgenerally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORSThe Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financialstatements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solelyto you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assumeresponsibility towards or accept liability to any other person for the contents of this report.

BASIS OF OPINIONWe conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified PublicAccountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financialstatements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of thefinancial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistentlyapplied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order toprovide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement.In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believethat our audit provides a reasonable basis for our opinion.

OPINIONIn our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December2005 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with thedisclosure requirements of the Hong Kong Companies Ordinance.

Ernst & YoungCertified Public AccountantsHong Kong19 April 2006


Consolidated Income Statement (year ended 31 December 2005)

2005 2004Notes HK$’000 HK$’000

(Restated)

REVENUE 6 4,940,474 5,893,839

Cost of sales (4,292,093) (5,277,340)

Gross profit 648,381 616,499

Other income and gains, net 6 16,355 17,698Selling and distribution costs (460,826) (332,460)Administrative expenses (222,463) (123,909)Other expenses (40,250) (30)Finance costs 8 (20,232) (12,152)Impairment of goodwill (321,947) –

PROFIT/(LOSS) BEFORE TAX 7 (400,982) 165,646

Tax 11 (16,855) (17,018)

PROFIT/(LOSS) FOR THE YEAR (417,837) 148,628

Attributable to:Equity holders of the parent 12 (432,964) 119,479Minority interests 15,127 29,149

(417,837) 148,628

DIVIDEND 13 – 8,508

EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TOORDINARY EQUITY HOLDERS OF THE PARENT 14

Basic (2.77) cents 1.88 cents

Diluted N/A N/A


Consolidated Balance Sheet (31 December 2005)

2005 2004Notes HK$’000 HK$’000

(Restated)

NON-CURRENT ASSETSProperty, plant and equipment 16 636,288 367,705Prepaid land premiums 17 25,462 11,885Intangible assets 18 3,437 3,922Goodwill 19 – –Deferred tax assets 30 12,736 21,527

Total non-current assets 677,923 405,039

CURRENT ASSETSInventories 21 433,645 436,939Trade and bills receivables 22 677,510 972,171Prepayments, deposits and other receivables 23 145,941 131,736Tax recoverable 3,342 4,940Pledged deposits 24 70 2,501Cash and cash equivalents 24 560,337 242,741

Total current assets 1,820,845 1,791,028

CURRENT LIABILITIESTrade and bills payables 25 972,116 1,136,940Tax payable 5,030 825Other payables and accruals 26 452,186 200,610Provisions 29 20,184 16,499Interest-bearing bank and other borrowings 27 124,807 147,044

Total current liabilities 1,574,323 1,501,918

NET CURRENT ASSETS 246,522 289,110

TOTAL ASSETS LESS CURRENT LIABILITIES 924,445 694,149

NON-CURRENT LIABILITIESConvertible notes 28 211,528 –Provisions 29 8,806 3,988Deferred tax liabilities 30 – 606

Total non-current liabilities 220,334 4,594

Net assets 704,111 689,555

EQUITYEquity attributable to equity holders of the parentIssued equity 31 854,159 352,324Equity component of convertible notes 28 30,281 –Reserves 33(a) (251,670) 156,855

632,770 509,179

Minority interests 71,341 180,376

Total equity 704,111 689,555

Yang Mian Mian Cui Shao HuaChairman Director


Consolidated Statement of Changes in Equity (year ended 31 December 2005)

Attributable to equity holders of the parent

Equity Retainedcomponent profits/ Exchange

of Reserve (accumulated fluctuationIssued convertible fund losses) reserve Minority Totalequity notes (note) (note) (note) Total interests equity

Notes HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2004 (as restated) 352,324 – 15,697 30,187 – 398,208 156,899 555,107Net profit for the year (as restated) – – – 119,479 – 119,479 29,149 148,628Transfer to reserves (as restated) – – 13,715 (13,715) – – – –Dividend (as restated) 13 – – – (8,508) – (8,508) (5,672) (14,180)

At 31 December 2004 and1 January 2005 (as restated) 352,324 – 29,412 127,443 – 509,179 180,376 689,555

Net loss for the year – – – (432,964) – (432,964) 15,127 (417,837)Transfer from retained profits – – 29,848 (29,848) – – – –Exchange realignment – – – – 24,439 24,439 1,754 26,193Dividend – – – – – – (6,303) (6,303)Acquisition of subsidiaries 34 445,307 – – – – 445,307 (119,613) 325,694Issue of convertible notes 28 – 33,790 – – – 33,790 – 33,790Conversion of convertible notes 28 27,926 (3,509) – – – 24,417 – 24,417Exercise of share options 31 28,602 – – – – 28,602 – 28,602

At 31 December 2005 854,159 30,281 59,260 (335,369) 24,439 632,770 71,341 704,111

Note: These reserve accounts comprise the consolidated reserves in the consolidated balance sheet.


Consolidated Cash Flow Statement (year ended 31 December 2005)

2005 2004Notes HK$’000 HK$’000

(Restated)

CASH FLOWS FROM OPERATING ACTIVITIESProfit/(loss) before tax (400,982) 165,646Adjustments for:

Finance costs 8 20,232 12,152Interest income 6 (3,329) (3,069)Depreciation 7 69,602 41,508Amortisation of prepaid land premiums 7 510 262Amortisation of intangible assets 7 598 581Provision for bad and doubtful debts 7 35,663 –Provision for obsolete and slow-moving inventories 7 53,831 18,430Loss on disposal of items of property, plant and equipment 7 4,587 –Impairment of goodwill 7 321,947 –

Operating profit before working capital changes 102,659 235,510Increase in inventories (50,537) (78,291)Decrease in trade and bills receivables 260,358 790Decrease in prepayments, deposits and other receivables 15,528 9,681Increase/(decrease) in trade and bills payables (164,958) 279,109Increase/(decrease) in other payables and accruals 176,440 (1,248)Increase in provisions 7,912 56,405Effect of foreign exchange rate changes, net 1,538 –

Cash generated from operations 348,940 501,956Interest received 3,329 3,069Mainland China corporate income tax paid (2,265) (45,935)

Net cash inflow from operating activities 350,004 459,090


Consolidated Cash Flow Statement (cont’d) (year ended 31 December 2005)

2005 2004Notes HK$’000 HK$’000

(Restated)

Net cash inflow from operating activities 350,004 459,090

CASH FLOWS FROM INVESTING ACTIVITIESPurchases of items of property, plant and equipment (104,428) (43,519)Prepayment for land premiums (14,025) (6,859)Proceeds from disposal of items of property, plant and equipment 6,858 1,089Acquisition of subsidiaries 34 80,189 –Decrease/(increase) in pledged deposits 2,431 (2,501)

Net cash outflow from investing activities (28,975) (51,790)

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issue of shares upon exercise of share options 31 28,602 –Interest paid (10,497) (12,152)Dividends paid to minority interests (6,303) (5,672)Dividends paid – (8,508)New bank loans 81,731 181,495Repayment of bank loans (65,421) (559,252)Net repayment of trust receipts (38,547) (24,127)

Net cash outflow from financing activities (10,435) (428,216)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 310,594 (20,916)

Cash and cash equivalents at beginning of year 242,741 263,657Effect of foreign exchange rate changes, net 7,002 –

CASH AND CASH EQUIVALENTS AT END OF YEAR 560,337 242,741

ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTSCash and bank balances 532,975 242,741Time deposits with original maturity of less than three months when acquired 24 27,362 –

560,337 242,741


Balance Sheet (31 December 2005)

2005 2004Notes HK$’000 HK$’000

NON-CURRENT ASSETSInterests in subsidiaries 20 1,383,506 1,051,471

CURRENT ASSETSPrepayments, deposits and other receivables 23 2 23,134Cash and cash equivalents 24 51,268 114,830

Total current assets 51,270 137,964

CURRENT LIABILITIESOther payables and accruals 26 6,071 2,162

NET CURRENT ASSETS 45,199 135,802

TOTAL ASSETS LESS CURRENT LIABILITIES 1,428,705 1,187,273

NON-CURRENT LIABILITIESConvertible notes 28 211,528 –

Net assets 1,217,177 1,187,273

EQUITYIssued capital 31 1,667,073 996,403Equity component of convertible notes 28 30,281 –Reserves 33(b) (480,177) 190,870

Total equity 1,217,177 1,187,273

Yang Mian Mian Cui Shao HuaChairman Director


3.1 BASIS OF PREPARATIONThese financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (whichalso include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by Hong Kong Institute of Certified PublicAccountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong CompaniesOrdinance. They have been prepared under the historical cost convention. These financial statements are presented in Hong Kongdollars (HK$) and all values are rounded to the nearest thousand except when otherwise indicated.

Basis of consolidationThe consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended31 December 2005. The results of subsidiaries acquired are consolidated from the date of acquisition, being the date on which theGroup obtains control, and continue to be consolidated until the date that such control ceases. All significant intercompany transactionsand balances within the Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDSThe following new and revised HKFRSs affect the Group and are adopted for the first time for the current year’s financial statements:

HKAS 1 Presentation of Financial StatementsHKAS 2 InventoriesHKAS 7 Cash Flow StatementsHKAS 8 Accounting Policies, Changes in Accounting Estimates and ErrorsHKAS 10 Events after the Balance Sheet DateHKAS 11 Construction ContractsHKAS 12 Income TaxesHKAS 14 Segment ReportingHKAS 16 Property, Plant and EquipmentHKAS 17 LeasesHKAS 18 RevenueHKAS 19 Employee BenefitsHKAS 20 Accounting for Government Grants and Disclosure of Government AssistanceHKAS 21 The Effects of Changes in Foreign Exchange RatesHKAS 23 Borrowing CostsHKAS 24 Related Party DisclosuresHKAS 27 Consolidated and Separate Financial StatementsHKAS 28 Investments in AssociatesHKAS 31 Interests in Joint VenturesHKAS 32 Financial Instruments: Disclosure and PresentationHKAS 33 Earnings per ShareHKAS 36 Impairment of AssetsHKAS 37 Provisions, Contingent Liabilities and Contingent AssetsHKAS 38 Intangible AssetsHKAS 39 Financial Instruments: Recognition and MeasurementHKAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial LiabilitiesHKAS 40 Investment PropertyHKFRS 2 Share-based PaymentHKFRS 3 Business CombinationsHKFRS 5 Non-current Assets Held for Sale and Discontinued OperationsHK(SIC)-Int 21 Income Taxes – Recovery of Revalued Non-depreciable AssetsHK-Int 4 Lease – Determination of the Length of Lease Term in respect of Hong Kong Land Leases


Notes to Financial Statements (cont’d) (31 December 2005)

3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (cont’d)The adoption of HKASs 2, 7, 8, 10, 11, 12, 14, 16, 18, 19, 20, 21, 23, 27, 28, 31, 32, 33, 37, 38, 39 and 40 and HKFRS 2 and 5,HK(SIC)-Int 21 and HK-Int 4 has had no material impact on the accounting policies of the Group and the Company and the methodsof computation in the Group’s and the Company’s financial statements.

HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated incomestatement, consolidated statement of changes in equity and other disclosures.

HKAS 21 had no material impact on the Group. In respect of acquisitions subsequent to 1 January 2005, any goodwill arising onthe acquisition of a foreign operation and any fair value adjustments to the carrying amounts of the assets and liabilities are treatedas assets and liabilities of the foreign operation and are translated at the closing rate in accordance with HKAS 21.

HKAS 24 has expanded the definition of related parties and affected the Group’s related party disclosures.

The impact of adopting the other HKFRSs is summarised as follows:

(a) HKAS 17 – LeasesIn prior years, leasehold land and buildings held for own use were stated at cost less accumulated depreciation and anyimpairment losses.

Upon the adoption of HKAS 17, the Group’s leasehold interest in land and buildings is separated into leasehold land andbuildings. The Group’s leasehold land is classified as an operating lease, because the title of the land is not expected to passto the Group by the end of the lease term, and is reclassified from property, plant and equipment to prepaid land premiums,while buildings continue to be classified as part of property, plant and equipment. Prepaid land premiums for land leasepayments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over thelease term. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire leasepayments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

This change in accounting policy has had no effect on the consolidated income statement and retained profits. The comparativeamounts in the consolidated balance sheet for the year ended 31 December 2004 have been restated to reflect thereclassification of the leasehold land.

(b) HKFRS 2 – Share-based PaymentIn prior years, no recognition and measurement of share-based payment transactions in which employees (including directors)were granted share options over shares in the Company were required until such options were exercised by employees, atwhich time the share capital and share premium were credited with the proceeds received.

Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments(“equity-settled transactions”), the cost of the equity-settled transactions with employees is measured by reference to the fairvalue at the date at which the instruments are granted.

The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry toequity for employee share options. The revised accounting policy for share-based payment transactions is described in moredetail in note 3.5 “Summary of significant accounting policies” below.

The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not beenapplied to (i) options granted to employees on or before 7 November 2002; and (ii) options granted to employees after7 November 2002 but which had vested before 1 January 2005.

As the Group did not have any employee share options which were granted during the period from 7 November 2002 to31 December 2004 but had not yet vested as at 1 January 2005, the adoption of HKFRS 2 has had no impact on the retainedprofits as at 31 December 2003 and at 31 December 2004.


3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (cont’d)(c) HKFRS 3 – Business Combinations and HKAS 36 – Impairment of Assets

In prior years, goodwill arising on acquisitions on or after 1 January 2001 was capitalised and amortised on the straight-linebasis over its estimated useful life and was subject to impairment testing when there was any indication of impairment.

The adoption of HKFRS 3 and HKAS 36 has resulted in the Group ceasing annual goodwill amortisation and commencingtesting for impairment at the cash-generating unit level annually (or more frequently if events or changes in circumstancesindicate that the carrying value may be impaired).

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets and liabilities over the cost ofacquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in theincome statement.

During the year, the Company has adopted HKFRS 3 and the Asset Injection and the Call Option Exercise have been accountedfor using reverse acquisition accounting, details of which are set out in note 2.2 to the financial statements.

3.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDSThe Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financialstatements. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January 2006:

HKAS 1 Amendment Capital DisclosuresHKAS 19 Amendment Actuarial Gains and Losses, Group Plans and DisclosuresHKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup TransactionsHKAS 39 Amendment The Fair Value OptionHKAS 39 & HKFRS 4 Financial Guarantee Contracts

AmendmentsHKFRSs 1 & 6 Amendments First-time Adoption of Hong Kong Financial Reporting Standards and Exploration for and Evaluation

of Mineral ResourcesHKFRS 6 Exploration for and Evaluation of Mineral ResourcesHKFRS 7 Financial Instruments: DisclosuresHKFRS-Int 4 Determining whether an Arrangement contains a LeaseHKFRS-Int 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation

FundsHK(IFRIC)-Int 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January 2007. The revised standard will affectthe disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitativedata about what the Company regards as capital; and compliance with any capital requirements and the consequences of anynon-compliance.

HKFRS 7 corporates the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied forannual periods beginning on or after 1 January 2007.

In accordance with the amendments to HKAS 39 regarding financial guarantee contracts, financial guarantee contracts are initiallyrecognised at fair value and are subsequently measured at the higher of (i) the amount determined in accordance with HKAS 37and (ii) the amount initially recognised, less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18.

The HKAS 19 Amendment, HKAS 39 Amendment regarding cash flow hedge accounting of forecast intragroup transactions, HKFRSs 1and 6 Amendments, HKFRS 6, HKFRS-Int 5 and HK(IFRIC)-Int 6 do not apply to the activities of the Group. HK(IFRIC)-Int 6 shall beapplied for annual periods beginning on or after 1 December 2005.

Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significantimpact on the Group’s financial statements in the period of initial application.



3.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIESEffect on the consolidated balance sheet


3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Goodwill on acquisition for which the agreement date is on or after 1 January 2005 (cont’d)For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to eachof the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of thecombination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unitor group of units to which the goodwill is so allocated:

• represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and

• is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined inaccordance with HKAS 14 “Segment Reporting”.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) towhich the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less thanthe carrying amount, an impairment loss is recognised.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit isdisposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation whendetermining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on therelative values of the operation disposed of and the portion of the cash-generating unit retained.

An impairment loss recognised for goodwill is not reversed in a subsequent period.

Excess over the cost of business combinations (applicable to business combinations for which the agreement date is on or after 1January 2005)Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets and liabilities over the cost of theacquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in theincome statement.

Impairment of assetsWhere an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories,deferred tax assets, financial assets and goodwill), the asset’s recoverable amount is estimated. An asset’s recoverable amount iscalculated as the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determinedfor an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets orgroups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use,the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statementin the period in which it arises.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment loss mayno longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognisedimpairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine therecoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (netof any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of an impairmentloss is credited to the income statement in the period in which it arises.



3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Related partiesA party is considered to be related to the Group if:

(a) directly or indirectly through one or more intermediaries, the party (i) controls, is controlled by, or is under common controlwith, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control overthe Group;

(b) the party is an associate;

(c) the party is a jointly-controlled entity;

(d) the party is a member of the key management personnel of the Group or its parent;

(e) the party is a close member of the family of any individual referred to in (a) or (d); or

(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power insuch entity resides with, directly or indirectly, any individual referred to in (d) or (e).

Property, plant and equipment and depreciationProperty, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and anyimpairment losses. When an item of property, plant and machinery is classified as held for sale or when it is part of a disposal groupclassified as held for sale, it is not depreciated. The cost of an item of property, plant and equipment comprises its purchase priceand any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditureincurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normallycharged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that theexpenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property,plant and equipment and the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of thatasset or as a replacement.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to itsresidual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Buildings 2% to 10%Plant and machinery 5% to 19%Tools, furniture and fixtures 10% to 33%Motor vehicles 9% to 20%

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on areasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from itsuse or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognisedis the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents a building under construction and equipment pending installation. It is stated at cost less anyimpairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction.Construction in progress is reclassified to the appropriate category of the property, plant and equipment when completed and readyfor use.


3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Intangible assets (other than goodwill)The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortisedover the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may beimpaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at leastat each balance sheet date.

Patents and licencePurchased patents and licences are stated at cost less any impairment losses and are amortised on the straight-line basis over theirestimated useful lives of 10 years.

Research and development costsAll research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate thetechnical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and itsability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete theproject and the ability to measure reliably the expenditure during the development. Product development expenditure which doesnot meet these criteria is expensed when incurred.

Deferred development costs are stated at cost less any impairment losses and are amortised using the straight-line basis over thecommercial lives of the underlying products, commencing from the date when the products are put into commercial production.

LeasesLeases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operatingleases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets, andrentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms.Where the Group is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-linebasis over the lease terms.

Prepaid land premiums under operating leases are initially stated at cost and subsequently recognised on the straight-line basisover the lease terms.

Investments and other financial assets (applicable to the year ended 31 December 2005)Financial assets in the scope of HKAS 39 are classified as either financial assets at fair value through profit or loss, loans andreceivables, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measuredat fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Groupdetermines the classification of its financial assets, after initial recognition and, where allowed and appropriate, re-evaluates thisdesignation at the balance sheet date.

All regular way purchases and sales of financial assets are recognised on the trade date, i.e., the date that the Group commits topurchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets withinthe period generally established by regulation or convention in the marketplace.

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an activemarket. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in theincome statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.



3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Impairment of financial assets (applicable to the year ended 31 December 2005)The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financialassets is impaired.

Assets carried at amortised costIf there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, theamount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated futurecash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interestrate (i.e., the effect interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly orthrough the use of an allowance account. The amount of the impairment loss is recognised in profit or loss.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individuallysignificant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objectiveevidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in agroup of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets thatare individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in acollective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an eventoccurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal ofan impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed itsamortised cost at the reversal date.

Derecognition of financial assets (applicable to the year ended 31 December 2005)A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognisedwhere:

• the rights to receive cash flows from the asset have expired;

• the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full withoutmaterial delay to a third party under a “pass-through” arrangement; or

• the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all therisks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset,but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantiallyall the risk and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’scontinuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset ismeasured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group couldbe required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similarprovision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that theGroup may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on anasset measured at fair value, the extent of the Group’s continuing involvement is limited to the fair value of the transferred asset andthe option exercise price.


3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Interest-bearing loans and borrowingsAll loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transactioncosts.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effectiveinterest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisationprocess.

Convertible notesThe component of convertible notes that exhibits characteristics of a liability is recognised as a liability in the balance sheet, net oftransaction costs. On issuance of convertible notes, the fair value of the liability component is determined using a market rate foran equivalent non-convertible note; and this amount is carried as a long term liability on the amortised cost basis until extinguishedon conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognised and includedin shareholders’ equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequentyears.

Transaction costs are apportioned between the liability and equity components of the convertible notes based on the allocation ofproceeds to the liability and equity components when the instruments are first recognised.

Derecognition of financial liabilities (applicable to the year ended 31 December 2005)A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of anexisting liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liabilityand the recognition of a new liability, and the difference between the respective carrying amounts is recognised in profit or loss.

InventoriesInventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and, in thecase of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads.Net realisable value is based on the estimated selling prices less any estimated costs to be incurred to completion and disposal.

Cash and cash equivalentsFor the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits,and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to aninsignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdraftswhich are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits,which are not restricted as to use.

ProvisionA provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probablethat a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of theamount of the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date ofthe future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arisingfrom the passage of time is included in finance costs in the income statement.

Provisions for installation services and product warranties granted by the Group on certain products are recognised based on salesvolume and past experience of the level of installation service rendered, repairs or returns, discounted to their present values asappropriate.



3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Income taxIncome tax comprises current and deferred tax. Income tax is recognised in the income statement or in equity if it relates to itemsthat are recognised in the same or a different period directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paidto the tax authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax basesof assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

• where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is nota business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with interests in subsidiaries, where the timing of the reversal of thetemporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeablefuture.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused taxlosses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, andthe carryforward of unused tax credits and unused tax losses can be utilised except:

• where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset orliability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accountingprofit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with interests in subsidiaries, deferred tax assets are only recognisedto the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will beavailable against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longerprobable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely,previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it isprobable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realisedor the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheetdate.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets againstcurrent tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Government grantsGovernment grants are recognised at their fair value where there is reasonable assurance that the grant will be received and allattaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periodsnecessary to match the grant on a systematic basis to costs that it is intended to compensate. Where the grant relates to an asset,the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of therelevant asset by equal annual instalments.


3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Revenue recognitionRevenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measuredreliably, on the following bases:

(a) income from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer,provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, noreffective control over the goods sold;

(b) rental income, on a time proportion basis over the lease terms; and

(c) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimatedfuture cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset.

Employee benefitsShare-based payment transactionsThe Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants whocontribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the formof share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settledtransactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they aregranted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked tothe price of the shares of the Company (“market conditions”), if applicable.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which theperformance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled tothe award (the “vesting date”). The cumulative expense recognised for equity-settled transactions at each balance sheet date untilthe vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equityinstruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in thecumulative expense recognised as at the beginning and the end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a marketcondition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all otherperformance conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not beenmodified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-basedpayment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yetrecognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designatedas a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification ofthe original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings/(loss) per share.

The Group has adopted the transitional provisions of HKFRS 2 in respect of equity-settled awards and has applied HKFRS 2 only toequity-settled awards granted after 7 November 2002 that had not vested on 1 January 2005 and to those granted on or after 1January 2005.



3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Employee benefits (cont’d)Paid leave carried forwardThe Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certaincircumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised bythe respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of suchpaid leave earned during the year by the employees and carried forward.

Employment Ordinance long service paymentsCertain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible forlong service payments under the Hong Kong Employment Ordinance in the event of the termination of their employment. The Groupis liable to make such payments in the event that such a termination of employment meets the circumstances specified in theEmployment Ordinance.

Pension schemesThe Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under theMandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributionsare made based on a percentage of the employees’ basic salaries and are charged to the income statement as they becomepayable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of theGroup in an independently administrated fund. The Group’s employer voluntary contributions, which are refunded to the Group whenthe employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Scheme.

In addition to the MPF Scheme, the Group operates a separate defined contribution retirement benefits scheme for those employeeswho were eligible to participate in this scheme. This scheme operates in a similar way to the MPF Scheme, except that when anemployee leaves this scheme before his/her interest in the Group’s employer contributions vest fully, the ongoing contributionspayable by the Group are reduced by the relevant amount of the forfeited employer contributions.

The employees of the Group’s subsidiaries in Mainland China are required to participate in central pension scheme operated by thelocal municipal government. These subsidiaries are required to contribute a certain percentage of its payroll costs to the centralpension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules ofthe central pension scheme.

DividendsFinal dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of thebalance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approvedby the shareholders and declared, they are recognised as a liability.

Interim dividends are simultaneously proposed and declared, because the Company’s bye-laws grant the directors the authority todeclare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed anddeclared.

Foreign currenciesThese financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Eachentity in the Group determines its own functional currency and items included in the financial statements of each entity aremeasured using that functional currency. Foreign currency transactions are initially recorded using the functional currency ratesruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at thefunctional currency rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetaryitems that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of theinitial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at thedate when the fair value was determined.


3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)Foreign currencies (cont’d)The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar. As at the balance sheetdate, the assets and liabilities of these entities are translated into the presentation currency of the Company at exchange ratesruling at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted averageexchange rates for the year. The resulting exchange differences are included in a separate component of equity as the exchangefluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particularforeign operation is recognised in the income statement.

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kongdollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries whicharise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATESJudgementsIn the process of applying the Group’s accounting policies, management has made the following judgements, apart from thoseinvolving estimations, which have the most significant effect on the amounts recognised in the financial statements:

Operating lease commitments – Group as lessorThe Group has entered into commercial property leases on its property portfolio. The Group has determined that it retains all thesignificant risks and rewards of ownership of these properties which are leased out on operating leases.

Classification between investment properties and owner-occupied propertiesThe Group determines whether a property qualifies as an investment property and has developed criteria in making that judgement.Investment property is a property held to earn rentals or for capital appreciation or both. Therefore, the Group considers whether aproperty generates cash flows largely independently of the other assets held by the Group.

Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for usein the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leasedout separately under a finance lease), the Group accounts for the portions separately. If the portions could not be sold separately,the property is an investment property only if an insignificant portion is held for use in the production or supply of goods or servicesor for administrative purposes.

Judgement is made on an individual property basis to determine whether ancillary services are so significant that a property doesnot qualify as investment property.

Estimation uncertaintyThe key assumption concerning the future and other key sources of estimation uncertainty at the balance sheet date, that has asignificant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year isdiscussed below.

Impairment of goodwillThe Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of thecash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of theexpected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate thepresent value of those cash flows. The goodwill arising from the Asset Injection and Call Option Exercise amounting toHK$321,947,000 was impaired during the year. Further details are set out in note 19 to the financial statements.



5. SEGMENT INFORMATIONSegment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment;and (ii) on a secondary segment reporting basis, by geographical segment.

The Group’s operating businesses are structured and managed separately according to the nature of their operations and theproducts and services they provide. Each of the Group’s business segments represents a strategic business unit that offers productsand services which are subject to risks and returns that are different from those of the other business segments. Summary detailsof the business segments are as follows:

(a) the mobile handset business segment manufactures and sells mobile phones;

(b) the washing machine business segment manufactures and sells washing machine; and

(c) the corporate and others segment includes general corporate income and expense items.

In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers,and assets are attributed to the segments based on the location of the assets.

(a) Business segmentsThe following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’sbusiness segments for the year ended 31 December 2005 and 2004.

Mobile handset Washing machinebusiness business Corporate and others Consolidated

2005 2004 2005 2004 2005 2004 2005 2004HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

(Restated) (Restated) (Restated) (Restated)

Segment revenue:Sales to external

customers 1,628,830 3,143,385 3,311,644 2,750,454 – – 4,940,474 5,893,839Other revenue 8,346 8,842 4,680 5,787 – – 13,026 14,629

Total 1,637,176 3,152,227 3,316,324 2,756,241 – – 4,953,500 5,908,468

Segment results (139,002) 47,006 95,206 127,723 (18,336) – (62,132) 174,729Interest income 3,329 3,069Finance costs (20,232) (12,152)Impairment of goodwill (321,947) –

Profit/(loss) before tax (400,982) 165,646Tax (16,855) (17,018)

Profit/(loss) for the year (417,837) 148,628


5. SEGMENT INFORMATION (cont’d)(a) Business segments (cont’d)

Mobile handset Washing machinebusiness business Corporate and others Eliminations Consolidated

2005 2004 2005 2004 2005 2004 2005 2004 2005 2004HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Restated) (Restated) (Restated) (Restated) (Restated)

Assets and liabilities:Segment assets 1,099,562 1,121,903 821,219 802,455 8,931 – (7,429 ) – 1,922,283 1,924,358Deferred tax assets 12,736 21,527Tax recoverable 3,342 4,940Pledged deposits 70 2,501Cash and cash equivalents 560,337 242,741

Total assets 2,498,768 2,196,067

Segment liabilities 700,440 764,900 754,055 593,137 6,226 – (7,429 ) – 1,453,292 1,358,037Tax payable 5,030 825Interest-bearing bank

and other borrowings 124,807 147,044Convertible notes 211,528 –Deferred tax liabilities – 606

Total liabilities 1,794,657 1,506,512

Other segment information:Depreciation and amortisation 50,076 22,153 20,418 20,198 216 – – – 70,710 42,351Capital expenditure 4,717 30,923 113,551 19,455 185 – – – 118,453 50,378Provision for obsolete and

slow-moving inventories 53,148 18,430 683 – – – – – 53,831 18,430Provision for bad and

doubtful debts 34,303 – 1,360 – – – – – 36,663 –Product warranty and

installation provision – – 108,272 83,513 – – – – 108,272 83,513



5. SEGMENT INFORMATION (cont’d)(b) Geographical segments

The following table presents revenue information for the Group’s geographical segments for the year ended 31 December2005 and 2004.

Elsewherein the People’s

Republic ofHong Kong China (the “PRC”) European Union Others Consolidated

2005 2004 2005 2004 2005 2004 2005 2004 2005 2004HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

(Restated) (Restated) (Restated) (Restated) (Restated)

Segment revenue:Sales to external customers 47,095 154,457 4,893,379 5,626,353 – 75,137 – 37,892 4,940,474 5,893,839Other revenue – – 13,026 14,629 – – – – 13,026 14,629

Total revenue 47,095 154,457 4,906,405 5,640,982 – 75,137 – 37,892 4,953,500 5,908,468

No further geographical segment information is presented as over 90% of the Group’s assets are located in Mainland China.

6. REVENUE, OTHER INCOME AND GAINSRevenue, which is also the Group’s turnover, represents the net invoiced value of goods sold, net of value-added tax and afterallowances for returns and trade discounts.

An analysis of revenue, other income and gains is as follow:

Group 2005 2004HK$’000 HK$’000

(Restated)

RevenueSale of washing machines 3,311,644 2,750,454Sale of mobile phones 1,628,830 3,143,385

4,940,474 5,893,839

Other income and gains, netCompensation received from suppliers 4,575 –Interest income 3,329 3,069Sale of scrap materials 2,739 3,000Government subsidies (note) 2,121 4,963Gross rental income in respect of:

Land and buildings 1,548 1,892Plant and machinery – 4,401

1,548 6,293

Others 2,043 373

16,355 17,698

Note: During the year, two of the Group’s subsidiaries in Mainland China received subsidies from the relevant authorities of Qingdao Municipality andShunde Municipality as an encouragement for advanced research and development.


7. PROFIT/(LOSS) BEFORE TAXThe Group’s profit/(loss) before tax is arrived at after charging/(crediting):

2005 2004Notes HK$’000 HK$’000

(Restated)

Cost of inventories sold 4,205,871 5,182,772Depreciation 16 69,602 41,508Amortisation for prepaid land premiums 17 510 262Amortisation of intangible assets* 18 598 581Research and development costs* 94,611 75,557Auditors’ remuneration 6,000 2,100

Staff costs (including directors’ remuneration – note 9):Wages and salaries 133,922 65,191Net pension scheme contributions 22,964 17,936

Total staff costs 156,886 83,127

Minimum lease payments under operating leasesin respect of land and buildings 8,676 3,522

Provision for obsolete and slow-moving inventories* 53,831 18,430Provision for bad and doubtful debts**:

Trade receivables 34,303 –Other receivables 1,360 –

35,663 –

Product warranty and installation provision 108,272 83,513Impairment of goodwill*** 321,947 –Loss on disposal of items of property, plant and equipment** 4,587 –Foreign exchange differences, net (3,686) 1,072

* The amortisation of intangible assets, research and development costs and provision for obsolete and slow-moving inventories for the year areincluded in “Cost of sales” on the face of the consolidated income statement.

** The loss on disposal of items of property, plant and equipment and provision for bad and doubtful debts are included in “Other expenses” on the faceof the consolidated income statement.

*** The impairment of goodwill is disclosed on the face of the consolidated income statement.



8. FINANCE COSTS

Group 2005 2004HK$’000 HK$’000

(Restated)

Interest on bank and other loans wholly repayable within five years 10,497 12,152Interest on convertible notes (note 28) 9,735 –

20,232 12,152

9. DIRECTORS’ REMUNERATIONDirectors’ remuneration for the year, disclosed pursuant to the Rules Governing the Listing of Securities on The Stock Exchange ofHong Kong Limited (the “Listing Rules”) and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Group 2005HK$’000

Fees 943

Other emoluments:Salaries, allowances and benefits in kind –Performance related bonuses –Employee share option benefits –Pension scheme contributions –

943

There was no remuneration paid by the Group to the Company’s directors in the prior year as the Company was not yet consolidatedinto the Group in the prior year.

(a) Independent non-executive directors:

The fees paid to independent non-executive directors during the year were as follows:

2005HK$’000

Lam Kin Kau, Mark 240Fung Hoi Wing, Henry 240Lau Ho Wai, Lucas 240Wu Yinong 223

943

There was no other emolument payable to the independent non-executive directors during the year.


9. DIRECTORS’ REMUNERATION(b) Executive directors:

Salaries, Employeeallowances Performance share Pension

and benefits related option schemeFees in kind bonuses benefits contributions Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

2005

Yang Mian Mian – – – – – –Wu Ke Song – – – – – –Chai Yong Sen – – – – – –Liang Hai Shan – – – – – –Cao Chun Hua – – – – – –Cui Shao Hua – – – – – –Song Chun Guang – – – – – –Mak Shiu Tong, Clement* – – – – – –Tam Ngai Hung, Terry* – – – – – –Man Wei Dong* – – – – – –

– – – – – –

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

* Mak Shiu Tong, Clement, Tam Ngai Hung, Terry and Man Wei Dong resigned as directors of the Company on 28 January 2005.

10. FIVE HIGHEST PAID EMPLOYEESThe five highest paid employees during the year did not include any director (2004: Nil), details of whose remuneration are set outin note 9 above. Details of the remuneration of the five (2004: five) non-director, highest paid employees for the year are as follows:

Group 2005 2004HK$’000 HK$’000

(Restated)

Salaries, allowances and benefits in kind 4,124 4,153Performance related bonuses – –Employee share option benefits – –Pension scheme contributions 34 14

4,158 4,167



10. FIVE HIGHEST PAID EMPLOYEES (cont’d)The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows:

Number of employees2005 2004

Nil to HK$1,000,000 3 4HK$1,500,001 to HK$2,000,000 2 –HK$2,000,001 to HK$2,500,000 – 1

5 5

11. TAXNo provision for Hong Kong profits tax has been made as the Group did not generate any assessable profits arising in Hong Kongduring the year (2004: Nil).

The Group has seven subsidiaries established in the PRC, four of which are Sino-foreign equity joint ventures, two of which arewholly-foreign owned enterprises and the remaining one is a limited liability company. Except for the limited liability company andone Sino-foreign equity joint venture, all subsidiaries are entitled to preferential tax treatments including reduction of PRC corporateincome tax (“CIT”) and full exemption from CIT tax for two years starting from its first profit-making year following by a 50% reductionfor the next consecutive three years.

2005 2004HK$’000 HK$’000

(Restated)

Group:Current – Mainland China:

Charge for the year 8,068 18,617Overprovision in prior years – (1,860)

Deferred (note 30) 8,787 261

Tax charge for the year 16,855 17,018


11. TAX (cont’d)A reconciliation of the tax charge/(credit) applicable to profit/(loss) before tax using the statutory or applicable rates for thelocations in which the Company and its subsidiaries are domiciled to the tax charge/(credit) at the effective tax rates, and areconciliation of the statutory or applicable rates to the effective tax rates, are as follows:

Group – 2005

Hong Kong PRC TotalHK$’000 % HK$’000 % HK$’000 %

Loss before tax (339,816) (61,166) (400,982)

Tax at the statutory orapplicable tax rates (59,468) 17.5 (20,185) 33.0 (79,653) 19.9

Income not subject to tax (1,742) 0.5 – – (1,742) 0.4Expenses not deductible for tax 56,350 (16.5) – – 56,350 (14.1)Tax losses not recognised 4,860 (1.5) 45,350 (74.1) 50,210 (12.5)Temporary differences not

recognised – – 21,182 (34.7) 21,182 (5.3)Tax exemption – – (29,492) 48.2 (29,492) 7.4

Tax charge at the Group’seffective rate – – 16,855 (27.6) 16,855 (4.2)

Group – 2004

Hong Kong PRC TotalHK$’000 % HK$’000 % HK$’000 %

Profit before tax – – 165,646 – 165,646 –

Tax at the statutory orapplicable tax rates – – 54,663 33.0 54,663 33.0

Expenses not deductible for tax – – 2,601 1.6 2,601 1.6Overprovision in prior years – – (1,860) (1.1) (1,860) (1.1)Tax exemption – – (38,386) (23.2) (38,386) (23.2)

Tax charge at the Group’seffective rate – – 17,018 10.3 17,018 10.3

12. NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENTThe net loss from ordinary activities attributable to equity holders of the parent for the year ended 31 December 2005 dealt with inthe financial statements of the Company, was HK$1,250,311,000 (note 33(b)).

13. DIVIDENDNo dividend has been paid or declared by the Company during the year (2004: Nil).

The dividend disclosed for the year ended 31 December 2004 represented dividend declared by a subsidiary of Haier Holdings(BVI) Limited to its previous owner, Haier Corp, out of its retained profits after setting aside a required percentage of its net earningsto the relevant statutory reserves in accordance with the rules and regulations applicable in the PRC and its article of associ



14. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENTUnder reverse acquisition accounting method (note 2.2), the 6,369,706,667 ordinary shares issued by the Company for thepurposes of the Asset Injection and the Call Option Exercise (note 2.1) are deemed to be issued on 1 January 2004 for thepurposes of calculating earnings/(loss) per share.

The calculation of basic earnings/(loss) per share amounts is based on the net profit/(loss) for the year attributable to ordinaryequity holders of the parent, and the weighted average number of ordinary shares in issue during the year.

A diluted loss per share amount for the year ended 31 December 2005 has not been disclosed as share options and convertiblenotes outstanding during the year had anti-dilutive effects on the basic loss per share amount for the year.

A diluted earnings per share amount for the year ended 31 December 2004 has not been disclosed as no diluting events existedduring that year.

The calculations of basic earnings/(loss) per share is based on:

2005 2004HK$’000 HK$’000

(Restated)

EarningsNet profit/(loss) attributable to ordinary equity holders of the

parent, used in the basic earnings/(loss) per share calculation (432,964) 119,479

Number of shares2005 2004

(Restated)

SharesWeighted average number of ordinary shares in issue during

the year used in the basic earnings/(loss) per share calculation 15,620,283,153 6,369,706,667


15. RELATED PARTY TRANSACTIONS(a) In addition to the related party transactions detailed in notes 16, 22, 23, 24, 25, 26, 27, and 28 to the financial statements,

the Group had the following material transactions with related parties during the year.

(i) The Company’s subsidiary, Pegasus Qingdao, had the following material transactions with Haier Corp, Haier Investment,their subsidiaries and associates. Haier Corp, Haier Investment, their subsidiaries and associates are companies thathave certain key management personnel in common with the Company.

Group2005 2004

Notes HK$’000 HK$’000

Sales of mobile handset products (i) 1,523,428 2,747,869Purchases of materials (ii) 606,607 1,786,847Utility service fee expenses (iii) 5,745 4,657Interest expenses (iv) 3,594 3,442Interest income (iv) 165 143Other service fee expenses (v) 1,286 174

Notes:

(i) For the year ended 31 December 2005, the sales of mobile handset products were made at selling prices based on the costs of rawmaterials plus a processing fee which is not less than the industry standard.

For the year ended 31 December 2004, the sales of mobile phones were made at selling prices based on the cost of materials plusprocessing fees ranging from 5% to 40% of the purchase price of the materials.

(ii) The purchases were charged no more than the average market price or the consolidated and integrated tender and bidding price plusa 2.6% commission.

(iii) Utility service fee expenses were charged with reference to the state-prescribed prices.

(iv) Interest expenses/income was determined with reference to the standard rates published by the People’s Bank of China.

(v) Other service fee expenses included legal consulting service fee, general security service fee, human resources service fee which weredetermined with reference to actual costs incurred.



15. RELATED PARTY TRANSACTIONS (cont’d)


15. RELATED PARTY TRANSACTIONS (cont’d)(b) On 25 June 2005, Haier Corp provided a corporate guarantee of RMB70,000,000 (equivalent to HK$67,308,000) to Haier

Group Finance Co., Ltd. (“Haier Finance”), a subsidiary of Haier Corp and a financial institution approved by the People’sBank of China, as a security for banking facilities granted to Pegasus Qingdao for the period from 25 June 2005 to 24 June2006. As at 31 December 2005, Pegasus Qingdao utilised all of the above banking facilities.

(c) On 30 December 2005, Haier Corp provided a corporate guarantee of RMB30,000,000 (equivalent to HK$28,846,000) toHaier Finance as a security for banking facilities granted to Qingdao Jiaonan Haier Washing Machine Co., Ltd. (“JiaonanWashing Machine”) for the period from 30 December 2005 to 29 December 2006. As at 31 December 2005, JiaonanWashing Machine utilised RMB15,000,000 of the above banking facilities.

(d) During the year, the remuneration paid or payable to the Company’s directors by the Group amounted to HK$943,000, detailsof which are set out in note 9 to the financial statements.

The related party transactions in respect of items (a), (b) and (c) above also constitute continuing connected transactions orconnected transactions as defined in Chapter 14A of the Listing Rules.

16. PROPERTY, PLANT AND EQUIPMENT

Group Tools,furniture

Plant and and Motor ConstructionBuildings machinery fixtures vehicles in progress TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

31 December 2005

At 31 December 2004 and1 January 2005 (as restated):Cost 181,441 353,221 56,568 5,089 475 596,794Accumulated depreciation

and impairment (45,997) (163,955) (14,894) (4,243) – (229,089)

Net carrying amount 135,444 189,266 41,674 846 475 367,705

At 1 January 2005, net ofaccumulated depreciationand impairment 135,444 189,266 41,674 846 475 367,705

Additions 53,618 38,689 6,011 528 5,582 104,428Acquisition of subsidiaries

(note 34) 80,439 120,339 27,038 207 – 228,023Disposals – (11,445) – – – (11,445)Depreciation provided

during the year (11,266) (41,637) (16,296) (403) – (69,602)Transfers 682 4,273 920 – (5,875) –Exchange realignment 6,228 8,930 1,982 25 14 17,179

At 31 December 2005, net ofaccumulated depreciationand impairment 265,145 308,415 61,329 1,203 196 636,288

At 31 December 2005:Cost 323,737 475,120 92,947 5,967 196 897,967Accumulated depreciation

and impairment (58,592) (166,705) (31,618) (4,764) – (261,679)

Net carrying amount 265,145 308,415 61,329 1,203 196 636,288



16. PROPERTY, PLANT AND EQUIPMENT (cont’d)

Group Tools,furniture

Plant and and Motor ConstructionBuildings machinery fixtures vehicles in progress TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

31 December 2004 (as restated)

At 1 January 2004:Cost 181,340 339,591 31,136 4,828 2,951 559,846Accumulated depreciation

and impairment (39,728) (139,462) (9,770) (4,103) – (193,063)

Net carrying amount 141,612 200,129 21,366 725 2,951 366,783

At 1 January 2004, net ofaccumulated depreciationand impairment 141,612 200,129 21,366 725 2,951 366,783

Additions 101 16,587 24,956 353 1,522 43,519Disposals – (1,055) – (34) – (1,089)Depreciation provided

during the year (6,269) (29,501) (5,540) (198) – (41,508)Transfers – 3,106 892 – (3,998) –

At 31 December 2004, net ofaccumulated depreciationand impairment 135,444 189,266 41,674 846 475 367,705

At 31 December 2004:Cost 181,441 353,221 56,568 5,089 475 596,794Accumulated depreciation

and impairment (45,997) (163,955) (14,894) (4,243) – (229,089)

Net carrying amount 135,444 189,266 41,674 846 475 367,705


16. PROPERTY, PLANT AND EQUIPMENT (cont’d)As at 31 December 2005, four of the Group’s buildings situated in Qingdao or Shunde, the PRC, did not have building ownershipcertificates registered under the name of the respective subsidiaries of the Company. The carrying amounts of those buildingssituated at Qingdao and Shunde at 31 December 2005 were HK$164,745,000 and HK$53,885,000 respectively. In addition, twoof the aforementioned buildings in Qingdao did not have land use right certificates registered under the name of the respectivesubsidiaries of the Company at 31 December 2005.

On 24 February 2005, Haier Corp issued an undertaking to the Company pursuant to which Haier Corp agreed to provide othersuitable properties to the Group to ensure the continuing operations of the respective subsidiaries of the Company operating inQingdao. That undertaking also indemnifies the Group to bear any losses arising from the above defective land use right andproperty title issues in Qingdao and for any moving cost/loss incurred, if, for any reason, the respective subsidiaries were not ableto continue using the buildings before the related acquisition and registration procedures are completed.

In the opinion of the directors, the Group is entitled to lawfully and validly occupy and use the buildings for its daily operations,notwithstanding the fact that the related land use right certificates have not yet obtained and the application procedures for thebuilding ownership certificates have not yet been completed.

17. PREPAID LAND PREMIUMS

Group 2005 2004HK$’000 HK$’000

(Restated)

Carrying amount at 1 JanuaryAs previously reported – –Effect of adopting HKAS 17 (note 3.4) 12,150 5,553

As restated 12,150 5,553Additions 14,025 6,859Exchange realignment 350 –Recognised during the year (510) (262)

Carrying amount at 31 December 26,015 12,150Current portion included in prepayments, deposits and other receivables (553) (265)

Non-current portion 25,462 11,885

The Group’s leasehold land is held under a medium term lease and is situated in Mainland China.

As at 31 December 2005, the land use rights of two parcels of land occupied by the Group in Qingdao, the PRC, were not acquiredby and registered under the name of the respective subsidiaries of the Company, details of which are set out in note 16 to thefinancial statements.

During the year, one of the Group’s subsidiaries in Jiaonan, the PRC, acquired a parcel of land for a cash consideration ofHK$3,538,000. The respective land use right certificate was obtained by that subsidiary on 6 January 2006.



18. INTANGIBLE ASSETS

Group Patents andlicensesHK$’000

31 December 2005

At 1 January 2005:Cost 5,810Accumulated amortisation (1,888)

Net carrying amount 3,922

Cost at 1 January 2005, net of accumulated amortisation 3,922Amortisation provided during the year (598)Exchange realignment 113

At 31 December 2005 3,437

At 31 December 2005:Cost 5,978Accumulated amortisation (2,541)


31 December 2004

At 1 January 2004:Cost 5,810Accumulated amortisation (1,307)


Cost at 1 January 2004, net of accumulated amortisation 4,503Amortisation provided during the year (581)

At 31 December 2004 3,922

At 31 December 2004:Cost 5,810Accumulated amortisation (1,888)



19. GOODWILL

Group HK$’000

31 December 2005

Cost at 1 January 2005 (as restated) –Acquisition of subsidiaries (note 34) 321,947Impairment during the year (321,947)

Cost and net carrying amount at 31 December 2005 –

31 December 2004

Cost and net carrying amount at 1 January and 31 December 2004 (as restated) –

Impairment testing of goodwillGoodwill acquired through business combination has been allocated to the mobile handset business cash-generating unit, which isa reportable segment, for impairment testing.

Mobile handset business cash-generating unitThe recoverable amount of the mobile handset business cash-generating unit has been determined based on a value in usecalculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. Thediscount rate applied to cash flow projections is 17.2% and cash flows beyond the five-year period are extrapolated using a growthrate of 3% which is determined with reference to the prevailing inflation rate in Mainland China. Senior management estimated thebudgeted gross margin based on past performance and their expectations for market development. The discount rate used is beforetax and reflects specific risks relating to the mobile handset business cash-generating units.

During the year, due to intensifying competition and price reduction of mobile phones in the mobile phone market in MainlandChina, the Group recognised a goodwill impairment loss of HK$321,947,000 for its mobile handset business. The goodwill impairmentloss is determined with reference to the recoverable amount of the Group’s mobile handset business.

20. INTERESTS IN SUBSIDIARIES

Company 2005 2004HK$’000 HK$’000

Unlisted investments, at cost 3,517,747 1,963,638Due from subsidiaries 2,360 608Due to a subsidiary (8,894) (8,747)

3,511,213 1,955,499Impairment (2,127,707) (904,028)

1,383,506 1,051,471



20. INTERESTS IN SUBSIDIARIES (cont’d)During the year, due to intensifying competition and price reduction of mobile phones in the Mainland China market, the Companyrecognised an impairment loss of investment costs of HK$1,223,679,000 for its subsidiaries engaging in the mobile phone business.The impairment loss is determined with reference to the recoverable amount of the subsidiaries.

The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

Particulars of the principal subsidiaries are as follows:

PercentagePlace of Nominal value of equityregistration and of registered attributable to Principal

Name operations capital the Company activitiesDirect Indirect

Pegasus Telecom (Qingdao) PRC US$12,000,000 100 – ManufactureCo., Ltd* and sale of

mobile phones

Pegasus Electronic (Qingdao) PRC US$29,980,000 100 – ManufactureCo., Ltd.* and sale of

mobile phones

Qingdao Haier Washing Machine PRC RMB150,000,000 – 93.44 ManufactureCo., Ltd.** and sale of

washing machines

Foshan Shunde Haier Electric PRC RMB48,000,000 – 60 ManufactureCo., Ltd.** and sale of

washing machines

Hefei Haier Washing Machine PRC RMB12,000,000 – 98.69 ManufactureCo., Ltd.** and sale of

washing machines

Qingdao Jiaonan Haier Washing PRC RMB10,000,000 – 94.49 ManufactureMachine Co., Ltd.*** and sale of

washing machines

Qingdao Haier Electronics Sales PRC RMB5,000,000 50 30# Sale of washingCo., Ltd.** machines

* Registered as a wholly-foreign-owned enterprise under the PRC law.** Registered as a Sino-foreign equity joint venture enterprise under PRC Law.*** Registered as a limited liability company under the PRC law.# Interest held through Foshan Shunde Haier Electric Co., Ltd., a 60% indirectly owned subsidiary of the Company.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for theyear or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of thedirectors, result in particulars of excessive length.


21. INVENTORIES

Group 2005 2004HK$’000 HK$’000

(Restated)

Raw materials 113,927 224,735Work in progress 68,993 123,212Finished goods 250,725 88,992

433,645 436,939

22. TRADE AND BILLS RECEIVABLESThe Group normally allows an average credit period of 30 to 90 days to its trade customers. Trade receivables are non-interest-bearing.

An aged analysis of the trade and bills receivables as at the balance sheet date, based on the invoice date and net of provisions,is as follows:

Group 2005 2004HK$’000 HK$’000

(Restated)

Trade receivablesWithin 1 month 310,244 605,3701 to 2 months 114,645 233,7152 to 3 months 77,899 10,037Over 3 months 33,803 47,002

536,591 896,124Bills receivable 140,919 76,047

677,510 972,171

Included in the Group’s trade and bills receivables are amounts due from subsidiaries and associates of Haier Corp and HaierInvestment of HK$485,608,000 (2004: HK$847,738,000 (as restated)), which are repayable on similar credit terms to thoseoffered to the major customers of the Group. Further details in respect of the sales to these related parties are set out in note 15 tothe financial statements.



23. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Group Company2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000(Restated)

Prepayments 55,052 54,394 2 23,134Deposits and other receivables 90,889 77,342 – –

145,941 131,736 2 23,134

Included in prepayments are amounts advanced to subsidiaries and associates of Haier Corp and Haier Investment of HK$49,228,000(2004: HK$48,411,000) (as restated)) for the purchases of moulds and materials. The amount are unsecured, interest free andare repayable on demand.

24. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

Group Company2005 2004 2005 2004


Cash and bank balances 533,045 245,242 23,906 1,168Time deposits 27,362 – 27,362 113,662

560,407 245,242 51,268 114,830Less: Pledged deposits (70) (2,501) – –

Cash and cash equivalents 560,337 242,741 51,268 114,830

At the balance sheet date, the cash and bank balances and time deposits of the Group denominated in Renminbi (“RMB”)amounted to HK$432,514,000 (2004: HK$242,741,000 (as restated)). The RMB is not freely convertible into other currencies,however, under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of ForeignExchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreignexchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varyingperiods of between one day and one month depending on the immediate cash requirement of the Group, and earn interest at therespective short term time deposit rates. The carrying amounts of the cash and cash equivalents and the pledged deposits approximateto their fair values.

Included in the Group’s cash and cash equivalents are deposits of approximately HK$260,133,000 (2004: HK$59,524,000 (asrestated)) placed with Haier Finance, a financial institution approved by the People’s Bank of China. The interest rate on thesedeposits was 0.72% per annum.

Further details of the interest income attributable to the deposits placed with Haier Finance are set out in note 15 to the financialstatements.


25. TRADE AND BILLS PAYABLESAn aged analysis of the trade payables as at the balance sheet date, based on the invoice date, is as follows:

Group 2005 2004HK$’000 HK$’000

(Restated)

Trade payablesWithin 1 month 445,144 618,2151 to 2 months 129,504 104,0332 to 3 months 119,850 91,458Over 3 months 181,473 323,234

875,971 1,136,940Bills payable 96,145 –

972,116 1,136,940

Included in the Group’s trade payables are amounts due to subsidiaries of Haier Corp and Haier Investment of HK$756,040,000(2004: HK$793,724,000 (as restated)) which are repayable on similar credit terms to those offered by the major suppliers of theGroup. Further details of the purchases from these related parties are set out in note 15 to the financial statements.

The trade payables are non-interest-bearing and are normally settled on credit terms ranging from 30 to 60 days.

26. OTHER PAYABLES AND ACCRUALS

Group Company2005 2004 2005 2004


Other payables 301,086 124,955 – –Accruals 151,100 75,655 6,071 2,162

452,186 200,610 6,071 2,162

Included in the Group’s other payables are amounts due to subsidiaries of Haier Corp and Haier investment of HK$57,638,000(2004: HK$73,446,000 (as restated)) which are unsecured, interest-free and are repayable on demand.



27. INTEREST-BEARING BANK AND OTHER BORROWINGS

Effective Group Companyinterest 2005 2004 2005 2004rate (%) Maturity HK$’000 HK$’000 HK$’000 HK$’000

(Restated)

CurrentOther loans, unsecured (note) 4 - 6 2006 or on demand 81,731 65,421 – –Trust receipts, unsecured 3 - 5 2006 or on demand 43,076 81,623 – –

124,807 147,044 – –

Non-currentConvertible notes (note 28) 4.75 2008 211,528 – 211,528 –

336,335 147,044 211,528 –

Group Company2005 2004 2005 2004


Analysed into:

Bank loans repayable:Within one year or on demand 43,076 81,623 – –

Other borrowings repayable:Within one year or on demand 81,731 65,421 – –In the second year – – – –In the third to fifth year, inclusive 211,528 – 211,528 –

293,259 65,421 211,528 –

336,335 147,044 211,528 –

Note: Other loans comprised two loans borrowed from Haier Finance, which are guaranteed by Haier Corp, bear interest at a rate of approximately 5% perannum and are repayable within one year. Further details of the interest expense attributable to the loans borrowed from Haier Finance are set out innote 15 to the financial statements.

The Group’s other loans are denominated in RMB and the convertible notes are denominated in Hong Kong Dollars. The Group’strust receipts are denominated in either United States Dollars or Japanese Yen.

Except for the convertible notes, all other borrowings of the Group bear interest at floating interest rates.

The directors consider that the carrying amounts of the Group’s current borrowings approximate to their fair values. The fair value ofthe liability portion of the convertible notes is estimated at approximately HK$200 million, which is calculated by discounting theexpected future cash flows at the prevailing interest rates.


28. CONVERTIBLE NOTESOn 28 January 2005, the Company issued convertible notes with an aggregate principal amount of HK$260 million to a subsidiaryof Haier Group, Qingdao Haier Group Holdings (BVI) Ltd., as part of the purchase consideration for the Asset Injection. Furtherdetails are set out in note 2.1 to the financial statements.

The convertible notes have a three-year term and are non-interest-bearing. Each note is convertible at any time prior to the fifthbusiness days before 27 January 2008, at the note holder’s option, into the Company’s ordinary shares at a conversion price ofHK$0.18 per share. When the notes were issued, the prevailing market interest rate for similar notes without the conversion optionwas higher than the interest rate at which the notes were issued.

The fair value of the liability component of the convertible notes was determined at the issuance date, using the prevailing marketinterest rate for similar debt without a conversion option of 4.75% and is carried as a long term liability. The remaining portion wasallocated to the conversion option that was recognised and included in shareholders’ equity.

The net proceeds received from the issue of the convertible notes have been split between the liability and the equity components,as follows:

Group and Company 2005 2004HK$’000 HK$’000

Nominal value of convertible notes issued during the year 260,000 –Equity component (33,790) –

Liability component at the issuance date 226,210 –Interest expense (note 8) 9,735 –Conversion of convertible notes (note) (24,417) –

Liability component at 31 December (note 27) 211,528 –

Note: During the year, convertible notes with face value of HK$ 27,000,000 were converted into 150,000,000 ordinary shares of the Company. Accordingly,the equity component and liability component of the convertible notes were reduced by HK$3,509,000 and HK$24,417,000, respectively.

Subsequent to the balance sheet date, on 3 January 2006 and 8 February 2006, 350,000,000 ordinary shares of the Companywere issued upon conversion of the convertible notes with face value of HK$63,000,000 at a conversion price of HK$0.18 per share.



29. PROVISIONS

Group Product warrantiesand installation

2005 2004HK$’000 HK$’000

(Restated)

At beginning of year (as restated) 20,487 21,735Additional provision 108,272 83,513Amounts utilised during the year (100,360) (84,761)Exchange realignment 591 –

At 31 December 28,990 20,487

Portion classified as current liabilities (20,184) (16,499)

Non-current portion 8,806 3,988

The Group provides installation services and three-year warranties to its customers on washing machines, under which faultyproducts are repaired or replaced. The amount of provisions is estimated based on sales volume and past experience of the level ofinstallation service rendered, repairs or returns. The estimation basis is reviewed on an ongoing basis and revised where appropriate.

30. DEFERRED TAXThe movements in deferred tax assets and liabilities (representing the provision for obsolete and slow-moving inventories, accrualsand provisions) during the year are as follows:

Deferred tax assets 2005 2004HK$’000 HK$’000

(Restated)

Group

At 1 January (as restated) 21,527 23,260Deferred tax charged to the income statement during the year (note 11) (9,410) (1,733)Exchange realignment 619 –

At 31 December 12,736 21,527

Deferred tax liabilities 2005 2004HK$’000 HK$’000

(Restated)

Group

At 1 January (as restated) 606 2,078Deferred tax credited to the income statement during the year (note 11) (623) (1,472)Exchange realignment 17 –

At 31 December – 606


30. DEFERRED TAX (cont’d)The Group has tax losses arising in Hong Kong of HK$35,702,000 (2004: HK$40,419,000 (as restated)) that are availableindefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have notbeen recognised in respect of these losses as they have arisen in the Company and subsidiaries that have been loss-making forsome time.

At 31 December 2005, there is no significant unrecognised deferred tax liability (2004: Nil) for taxes that would be payable on theunremitted earnings of certain of the Group’s subsidiaries as the Group has no liability to additional tax should such amounts beremitted.

There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders.

31. ISSUED EQUITY

Group Issued equityHK$’000

At 1 January 2004 and 2005 352,324Acquisition of subsidiaries (note (i)) 445,307Conversion of convertible notes (note 28) 27,926Exercise of share options (note (ii)) 28,602

At 31 December 2005 854,159

Due to the use of reverse acquisition accounting (note 2.2), the amount of issued equity, comprising share capital, contributedsurplus and share premium in the consolidated balance sheet, represents the amount of issued equity of legal subsidiaries, theHaier Businesses. The equity structure (i.e. the number and type of shares) reflects the equity structure of the legal parent, HaierElectronics Group Co., Ltd.

Company 2005 2004HK$’000 HK$’000

Authorised:30,000,000,000 (2004: 30,000,000,000) shares of HK$0.10 each 3,000,000 3,000,000

Issued and fully paid:16,670,734,612 (2004: 9,964,027,945) shares of HK$0.10 each 1,667,073 996,403



31. ISSUED EQUITY (cont’d)A summary of the transactions involving the Company’s share capital during the year is as follows:

ShareNumber of Issued premium

shares in issue capital account TotalHK$’000 HK$’000 HK$’000

At 1 January 2004 9,964,016,574 996,402 70,174 1,066,576Warrants exercised 11,371 1 5 6

At 31 December 2004 andbeginning of year 9,964,027,945 996,403 70,179 1,066,582

Transfer of share premium account andcontributed surplus to set off againstaccumulated losses (note (iii)) – – (70,179) (70,179)

Issue of shares on the Asset Injection (note 2.1) 4,026,706,667 402,670 322,136 724,806Issue of shares on the Call Option

Exercise (note 2.1) 2,343,000,000 234,300 234,300 468,600Conversion of convertible notes (note 28) 150,000,000 15,000 12,926 27,926Exercise of share options (note (ii)) 187,000,000 18,700 9,902 28,602

At 31 December 2005 16,670,734,612 1,667,073 579,264 2,246,337

Notes:

(i) The deemed consideration in respect of the acquisition of subsidiaries amounted to HK$755,307,000 (note 34). The convertiblenotes of HK$260,000,000 and cash consideration of HK$50,000,000 satisfied by the Company in respect of the acquisitionof subsidiaries (note 2.1) are regarded as deemed distributions to Haier Group.

(ii) Details of the Company’s share option schemes and the share options issued under the schemes are included in note 32 tothe financial statements.

(iii) Pursuant to a special resolution passed at the annual general meeting of the Company held on 25 May 2005, the Companycarried out the following capital reorganisations:

(a) the credit balance of share premium account amounted to HK$70,179,000 was reduced and applied to offset anequivalent amount of the accumulated losses of the Company as at 31 December 2004; and

(b) the credit balance of contribution surplus amounted to HK$844,286,000 was reduced and applied to offset an equivalentamount of the accumulated losses of the Company as at 31 December 2004.

WarrantsOn 22 February 2002, the Company made a bonus issue of warrants to the shareholders whose names appeared on the register ofmembers of the Company on 22 February 2002, on the basis of one unit of warrant for every ten shares of HK$0.10 each in theshare capital of the Company held on that date. As a result, 893,876,600 units of warrants (the “2004 warrants”) in the amount ofHK$464,815,832 were issued pursuant to the bonus issue.

11,371 warrants were exercised for 11,371 shares at HK$0.52 per share in 2004. On 26 February 2004, all outstanding 2004warrants were expired and the subscription rights attaching to the 2004 warrants which have not been exercised by 26 February2004 were expired and lapsed.


32. SHARE OPTION SCHEMESThe share option scheme adopted by the Company on 24 November 1997 and subsequently amended on 4 December 1997 (the“Old Share Option Scheme”) was terminated and a new share option scheme (the “New Share Option Scheme”) was adopted bythe Company on 28 February 2002 to comply with the new amendments to the Listing Rules in respect of the share option schemesof a listed company. As a result, the Company may no longer grant further options under the Old Share Option Scheme. However, alloptions granted prior to the termination of the Old Share Option Scheme will remain in full force and effect. Unless otherwisecancelled or amended, the New Share Option Scheme will remain in force for 10 years from the date of adoption. The share optionsgranted under the Old Share Option Scheme were fully exercised during the year. As at 31 December 2005, there were 607,500,000share options outstanding under the New Share Option Scheme.

The purpose of the New Share Option Scheme is to provide incentives and rewards to the eligible participants who contribute to thesuccess of the operations of the Group. Eligible participants of the New Share Option Scheme include any employee, executive orofficer of the Group (including executive and non-executive directors of the Company) and any supplier, consultant, agent, adviser,shareholder, customer, partner and business associate who, in the sole discretion of the board of directors of the Company (the“Board”), has contributed to the Group.

Pursuant to the New Share Option Scheme, the maximum number of shares in respect of which options may be granted under theNew Share Option Scheme is such number of shares, when aggregated with shares subject to any other share option scheme(s) ofthe Company (which, for this purpose, excludes the Old Share Option Scheme), must not exceed 10% of the issued share capital ofthe Company as at the date of adoption of the New Share Option Scheme. The maximum number of shares issuable upon exerciseof the options granted under the New Share Option Scheme and any other share option scheme(s) of the Company (includingexercised, cancelled and outstanding options) to each eligible participant in any 12-month period is limited to 1% of the shares ofthe Company in issue as at the date of grant. Any further grant of share options in excess of this 1% limit shall be subject to the issueof a circular by the Company (and if required, the holding company) and the shareholders’ approval of the Company (and ifrequired, the approval of the shareholders of the holding company) at a general meeting.

Share options granted to a director or substantial shareholder of the Company, or to any of their respective associates, are subjectto the approval in advance by the independent non-executive directors of the Company (and if required, the independent non-executive directors of the holding company), excluding the independent non-executive director(s) of the Company and the holdingcompany who is/are the grantee(s) of the options. In addition, any share option granted to a substantial shareholder or an independentnon-executive director of the Company, or to any of their respective associates, in excess of 0.1% of the shares of the Company inissue as at the date of grant or with an aggregate value (based on the closing price of the shares of the Company as at the date ofgrant) in excess of HK$5 million, within any 12-month period, are subject to the issue of a circular by the Company (and if required,the holding company) and the shareholders’ approval of the Company (and if required, the approval of the shareholders of theholding company) in advance at a general meeting.

The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon payment of a nominalconsideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the Board, andcommences on a specified date and ends on a date which is no later than 10 years from the date of grant of the share options orthe expiry date of the New Share Option Scheme, whichever is earlier.

The exercise price of the share options is determinable by the Board, but may not be less than the highest of (i) the closing price ofthe shares of the Company as stated in the daily quotation sheet of the Stock Exchange on the date of grant, which must be atrading day; (ii) the average closing price of the shares of the Company as stated in the Stock Exchange’s daily quotation sheets forthe five trading days immediately preceding the date of grant; and (iii) the nominal value of the shares of the Company.



32. SHARE OPTION SCHEMES (cont’d)Details of the movements of share options under the Old Share Option Scheme during the year were as follows:

Number of share options Date ofOutstanding Lapsed/ Outstanding grant of Exercise

as at Exercised cancelled as at share Exercise price perCategory 1 January during during 31 December options period of shareof participant 2005 the year the year 2005 (Note 1) share options (Note 2)

HK$

EMPLOYEES

In aggregate 3,000,000 (3,000,000) – – 13/7/2001 13/1/2002– 0.19012/7/2006*

Notes:

1. The vesting period of the share options is from the date of grant until the commencement of the exercise period.

2. The exercise price of the share options is subject to adjustment(s) in the case of rights or bonus share issues, or other similar changes in the sharecapital of the Company.

* The date of expiry has been extended one year from the original date of expiry of 12 July 2005 to 12 July 2006 pursuant to the Board resolution ofthe Company passed on 30 June 2005.

Details of the movements of share options under the New Share Option Scheme during the year were as follows:

Number of share options Price of Company’s shares

Transfer

Outstanding Lapsed/ from/(to) Outstanding Date of Exercise Exercise

as at Exercised cancelled other category as at grant of period price per Immediately At exercise

1 January during during during 31 December share options of share share before the date of

Name or category of participant 2005 the year the year the year 2005 (Note 1) options (Note 2) exercise date option

HK$ HK$ HK$

Executive directors

Wu Ke Song 89,000,000 (27,000,000 ) – – 62,000,000 19/11/2002 19/11/2003 – 0.150 0.217 0.214

18/11/2007

Chai Yong Sen 89,000,000 (27,000,000 ) – – 62,000,000 19/11/2002 19/11/2003 – 0.150 0.219 0.216

18/11/2007

Liang Hai Shan 89,000,000 (29,000,000 ) – – 60,000,000 19/11/2002 19/11/2003 – 0.150 0.217 0.215

18/11/2007

Cui Shao Hua 89,000,000 (29,000,000 ) – – 60,000,000 19/11/2002 19/11/2003 – 0.150 0.218 0.216

18/11/2007

Mak Shiu Tong, Clement (Note 3) 89,000,000 – – (89,000,000 ) – 16/8/2002 16/08/2003 – 0.156 – –

15/08/2007

Tam Ngai Hung, Terry (Note 3) 89,000,000 – – (89,000,000 ) – 16/8/2002 16/08/2003 – 0.156 – –

15/08/2007

Man Wei Dong (Note 3) 89,000,000 – (89,000,000 ) – – 19/11/2002 19/11/2003 – 0.150 – –

18/11/2007

623,000,000 (112,000,000 ) (89,000,000 ) (178,000,000 ) 244,000,000


32. SHARE OPTION SCHEMES (cont’d)Details of the movements of share options under the New Share Option Scheme during the year were as follows: (cont’d)

Number of share options Price of Company’s shares

TransferOutstanding Lapsed/ from/(to) Outstanding Date of Exercise Exercise

as at Exercised cancelled other category as at grant of period price per Immediately At exercise1 January during during during 31 December share options of share share before the date of

Name or category of participant 2005 the year the year the year 2005 (Note 1) options (Note 2) exercise date optionHK$ HK$ HK$

Independent non–executive directors

Lam Kin Kau, Mark 5,000,000 – – – 5,000,000 16/8/2002 16/8/2003 – 0.156 – –15/8/2007

Fung Hoi Wing, Henry 5,000,000 (3,000,000 ) – – 2,000,000 16/8/2002 16/8/2003 – 0.156 0.207 0.20515/8/2007

10,000,000 (3,000,000 ) – – 7,000,000

Other employees

In aggregate 247,500,000 – – (247,500,000 ) – 16/8/2002 16/8/2003 – 0.156 – –15/8/2007

Other participants

In aggregate – (69,000,000 ) – 425,500,000 356,500,000 16/8/2002 16/8/2003 – 0.156 0.222 0.21715/8/2007

880,500,000 (184,000,000 ) (89,000,000 ) – 607,500,000

Notes:

1. The vesting period of the share options is from the date of grant until the commencement of the exercise period.

2. The exercise price of the share options is subject to adjustment(s) in the case of rights or bonus share issues, or other similar changes in the sharecapital of the Company.

3. Mak Shiu Tong, Clement, Tam Ngai Hung, Terry, and Man Wei Dong resigned as directors of the Company on 28 January 2005.

At the balance sheet date, the Company had 607,500,000 share options outstanding under the New Share Option Scheme, whichrepresented a total of approximately 3.64% of the Company’s shares in issue as at that date. The exercise in full of these remainingshare options would, under the present capital structure of the Company, result in the issue of 607,500,000 additional ordinaryshares of the Company and additional share capital of HK$60,750,000 and share premium of HK$32,556,000 (before issueexpenses).

Subsequent to the balance sheet date, certain directors exercised in aggregate 206,500,000 share options (52,000,000 shareoptions each for Wu Ke Song and Chai Yong Sen, 50,000,000 share options each for Liang Hai Shan and Cui Shao Hua and2,500,000 share options for Lam Kin Kau, Mark) and certain other participants exercised 51,000,000 share options. In addition,an employee was granted 5,000,000 share options subsequent to the balance sheet date.



33. RESERVES(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidatedstatement of changes in equity on page 32 the financial statements.

In accordance with the relevant PRC laws and regulations applicable to sino-foreign venture enterprises and wholly-ownedenterprises, certain subsidiaries of the Company in the PRC are required to transfer a certain percentage of their net profit forthe year to reserve funds. These funds are non-distributable. For the purpose of determining the appropriations to thesefunds, the net profit is determined in accordance with the applicable financial rules and regulations in the PRC.

(b) Company

Sharepremium Contributed Accumulatedaccount surplus losses TotalHK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2004 70,174 1,035,156 (870,038) 235,292Exercise of warrants 5 – – 5Net loss for the year – – (44,427) (44,427)

At 31 December 2004 and beginning of the year 70,179 1,035,156 (914,465) 190,870Transfer of share premium account

and contributed surplus to set off againstaccumulated loss (note 31(iii)) (70,179) (844,286) 914,465 –

Issue of shares on the Asset Injection (note 2.1) 322,136 – – 322,136Issue of shares on the Call Option Exercise (note 2.1) 234,300 – – 234,300Conversion of convertible notes (note 28) 12,926 – – 12,926Exercise of share options (note 31(ii)) 9,902 – – 9,902Net loss for the year – – (1,250,311) (1,250,311)

At 31 December 2005 579,264 190,870 (1,250,311) (480,177)

Note: The contributed surplus of the Company represents the excess of the fair value of the shares of the subsidiaries acquired, over the nominalvalue of the Company’s shares issued in exchange therefor. Under the Companies Act 1981 of Bermuda (as amended), the contributedsurplus is distributable to shareholders in certain circumstances.


34. BUSINESS COMBINATIONOn 28 January 2005, the Company acquired Haier Businesses, which are treated as the acquirer for accounting purpose in thebusiness combination under HKFRS 3, details of which are set out in note 2.2 to the financial statements.

The fair values of the identifiable assets and liabilities of the Former Group as at the date of acquisition, which have no significantdifferences from their carrying amounts immediately before the acquisition were as follows:

2005 2004Notes HK$’000 HK$’000

Property, plant and equipment 228,023 –Cash and bank balances 130,189 –Prepayments and other receivables 30,805 –Trade payables (134) –Accruals and other payables (75,136) –Minority interests 119,613 –

433,360 –Goodwill 19 321,947 –

755,307 –

Consideration satisfied by:Issued equity 31 445,307 –Convertible notes* 260,000 –Cash* 50,000 –

755,307 –

* regarded as deemed distributions to Haier Group (note 31)

An analysis of the net inflow of cash and cash equivalents in respect of the acquisition is as follows:

2005 2004HK$’000 HK$’000

Cash and bank balances acquired 130,189 –Cash consideration (50,000) –

Net inflow of cash and cash equivalents in respect of the acquisition 80,189 –

The Former Group had no post-acquisition contribution to the Group’s turnover and contributed HK$114,687,000 to the Group’sconsolidated loss for the year ended 31 December 2005.

There would have been no significant differences to the Group’s consolidated loss for the year had the combination taken place atthe beginning of the year.



35. CONTINGENT LIABILITIESAt the balance sheet date, neither the Group nor the Company had any significant contingent liabilities.

36. OPERATING LEASE ARRANGEMENTS(a) As lessor

The Group leases part of its buildings under an operating lease arrangement, with the lease negotiated for a term of twelvemonths.

At the balance sheet date, the Group had total future minimum lease receivables under the non-cancellable operating leasewith its tenants falling due as follows:

Group2005 2004

HK$’000 HK$’000

Within one year 1,356 1,646In the second to fifth year, inclusive – 721

1,356 2,367

(b) As leaseeThe Group leases certain of its buildings under operating lease arrangement. Leases for the buildings are negotiated for termsranging from one to ten years.

At the balance sheet date, the Group had total future minimum lease payments under non-cancellable operating lease fallingdue as follows:

Group2005 2004

HK$’000 HK$’000

Within one year 1,908 2,341In the second to fifth year, inclusive 5,213 5,604After five years – 1,136

7,121 9,081


37. COMMITMENTSIn addition to the operating lease commitments detailed in note 36(b) above, the Group and the Company had the followingcommitments at the balance sheet date:

Group Company2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Contracted, but not provided for:Acquisition of fixed assets 2,982 13,764 – –

Contracted, but not provided for:Capital contribution payable to

a wholly-owned subsidiary in the PRC – – – 14,153

2,982 13,764 – 14,153

38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIESThe Group’s principal financial instruments, comprise convertible notes, other interest-bearing loans and cash and short termdeposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various otherfinancial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

It is, and has been, throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are cash flow interest rate risk, foreign currency risk, credit risk andliquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

Cash flow interest rate riskThe Group’s exposure to the risk of changes in market interest rates related primarily to the Group’s short term debt obligations witha floating interest rate. The Group’s policy is to manage its interest cost using an appropriate mix of fixed and variable rateborrowings.

Foreign currency riskThe Group has transactional currency exposures. Such exposures arise from sales or purchases by operating units in currenciesother than the units’ functional currency. Foreign currency risk is not considered significant because most of the Group’s sales andpurchases are denominated in RMB.

Credit riskThe Group trades only with recognised and creditworthy customers. It is the Group’s policy that all customers who wish to trade oncredit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis andthe Group’s exposure to bad debts is not significant.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, theGroup’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount ofthese financial assets.

Since the Group trade only with recognised and creditworthy customers, there is no requirement for collateral.



38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d)Liquidity riskThe Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and otherborrowings. As the Group’s major operations are in Mainland China, all of the Group’s borrowings (except for the convertible notes)are borrowed from Haier finance or major local banks in Mainland China, on a short term basis for working capital purpose.

39. COMPARATIVE AMOUNTSAs further explained in notes 2.1, 2.2, 3.2 and 3.4 to the financial statements, due to the application of reverse acquisitionaccounting and adoption of new and revised HKFRSs during the current year, the comparative amounts and presentation of certainitems and balances in the financial statements have been reclassified and restated to comply with the current year’s presentationand accounting treatment.

40. APPROVAL OF THE FINANCIAL STATEMENTSThe financial statements were approved and authorised for issue by the board of directors on 19 April 2006.

Five Year Financial Summary


A summary of the financial results and of the assets, liabilities and minority interests of the Group for the last five financial years, asextracted from financial statements and reclassified as appropriate, is set out below.

Year ended 31 DecemberRESULTS 2005 2004 2003 2002 2001

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000(Restated) (Restated) (Restated) (Restated)

REVENUE 4,940,474 5,893,839 3,751,640 2,794,422 2,333,026

Cost of sales (4,292,093) (5,277,340) (3,229,896) (2,350,569) (1,997,811)

Gross profit 648,381 616,499 521,744 443,853 335,215

Other income and gains, net 16,355 17,698 9,165 10,094 34,537Selling and distribution costs (460,826) (332,460) (246,706) (300,394) (220,003)Administrative expenses (222,463) (123,909) (115,807) (94,075) (89,266)Other expenses (40,250) (30) (6,324) (896) –Finance costs (20,232) (12,152) (19,852) (13,158) (7,256)Impairment of goodwill (321,947) – – – –

PROFIT/(LOSS) BEFORE TAX (400,982) 165,646 142,220 45,424 53,227Tax (16,855) (17,018) (31,453) (10,227) (9,711)

PROFIT/(LOSS) FOR THE YEAR (417,837) 148,628 110,767 35,197 43,516

Attributable to:Equity holders of the parent (432,964) 119,479 107,595 27,365 26,852Minority interests 15,127 29,149 3,172 7,832 16,664

(417,837) 148,628 110,767 35,197 43,516

ASSETS, LIABILITIES AND MINORITY INTERESTS

Total assets 2,498,768 2,196,067 2,154,945 1,782,565 1,432,815Total liabilities (1,794,657) (1,506,512) (1,599,838) (1,256,360) (899,763)Minority interests (71,341) (180,376) (156,899) (163,259) (151,263)

632,770 509,179 398,208 362,946 381,789


Notice of Annual General Meeting

NOTICE IS HEREBY GIVEN that the annual general meeting (the “Meeting”) of Haier Electronics Group Co., Ltd. (the “Company”) will beheld at Victoria Room I, Level 2, Four Seasons Hotel Hong Kong, 8 Finance Street, Central, Hong Kong on Monday, 22 May 2006 at3:00 p.m. for the following purposes:

AS ORDINARY BUSINESS:

1. To receive and consider the audited financial statements and the reports of the directors (the “Directors”) and auditors (the“Auditors”) of the Company for the year ended 31 December 2005.

2. To re-elect the retiring Directors and to authorise the board (the “Board”) of Directors to determine the remuneration of the Directors.

3. To re-appoint the Auditors and to authorise the Board to determine the remuneration of the Auditors.

AS SPECIAL BUSINESS, to consider and, if thought fit, to pass, with or without amendments, the following Resolution nos. 4, 5, 6 and 7as Ordinary Resolutions of the Company and Resolution no. 8 as Special Resolution of the Company:

ORDINARY RESOLUTIONS

4. “THAT subject to and conditional upon the listing committee (the “Listing Committee”) of The Stock Exchange of Hong Kong Limited(the “Stock Exchange”) granting the listing of, and permission to deal in, the shares (the “Shares”) of HK$0.10 each in the sharecapital of the Company to be issued pursuant to the exercise of share options which may be granted under the New Scheme Limit(as defined below), the refreshment of the existing limit in respect of the granting of share options under the Company’s shareoption scheme adopted on 28 February 2002, up to 10 per cent. of the number of the Shares in issue (the “New Scheme Limit”)as at the date of passing of this Resolution be and is hereby approved and the Directors be and are hereby authorized to do suchacts and execute such documents to effect the New Scheme Limit and to exercise all powers of the Company to allot, issue and dealwith the Shares to be issued pursuant to the exercise of such options.”

5. “THAT:

(a) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all thepowers of the Company to repurchase issued Shares, subject to and in accordance with all applicable laws and the requirementsof the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange be and is hereby generally andunconditionally approved;

(b) the approval in paragraph (a) above shall authorise the Directors on behalf of the Company during the Relevant Period (ashereinafter defined) to procure the Company to repurchase the Shares at a price determined by the Directors;

(c) the aggregate nominal amount of the Shares which are authorised to be repurchased by the Directors pursuant to theapproval in paragraph (a) above shall not exceed 10 per cent. of the aggregate nominal amount of the share capital of theCompany in issue as at the date of passing of this Resolution, and the said approval shall be limited accordingly; and


(d) For the purpose of this Resolution, “Relevant Period” means the period from the date of passing of this Resolution untilwhichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;

(ii) the expiration of the period within which the next annual general meeting of the Company is required by the bye-laws ofthe Company (the “Bye-laws”) or any applicable laws to be held; or

(iii) the date upon which the authority set out in this Resolution is revoked or varied by way of an ordinary resolution of theshareholders of the Company in general meeting.”

6. “THAT:

(a) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all thepowers of the Company to allot, issue and deal with additional Shares and to make or grant offers, agreements, options andrights of exchange or conversion which might require the exercise of such powers be and is hereby generally and unconditionallyapproved;

(b) the approval in paragraph (a) above shall authorise the Directors on behalf of the Company during the Relevant Period (ashereinafter defined) to make or grant offers, agreements, options and rights of exchange or conversion which would or mightrequire the exercise of such powers after the end of the Relevant Period (as hereinafter defined);

(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted or issued(whether pursuant to an option or otherwise) by the Directors pursuant to the approval granted in paragraph (a) above,otherwise than pursuant to (i) a Rights Issue (as hereinafter defined); or (ii) any option scheme or similar arrangement of theCompany for the granting or issuance of Shares or rights to acquire Shares; or (iii) the exercise of rights of subscription orconversion under the terms of any warrants issued or to be issued by the Company or any securities which are convertible intoShares; or (iv) any scrip dividend or similar arrangement providing for the allotment of Shares in lieu of the whole or part of adividend on Shares in accordance with the Bye-laws from time to time, shall not exceed 20 per cent. of the aggregate nominalamount of the issued share capital of the Company as at the date of passing of this Resolution, and the said approval shallbe limited accordingly; and

(d) for the purposes of this Resolution:

“Relevant Period” shall have the same meaning as that ascribed to it under the Resolution no. 5; and “Rights Issue” means anoffer of shares open for a period fixed by the Directors to the holders of shares of the Company on the register on a fixedrecord date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as theDirectors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions orobligations under the laws of any relevant jurisdiction, or the requirements of any recognised regulatory body or any stockexchange, in any territory outside Hong Kong).”


Notice of Annual General Meeting (cont’d)

7. “THAT conditional upon the passing of the Resolutions nos. 5 and 6 above, the general mandate granted to the Directors to allot,issue and deal with additional Shares pursuant to the Resolution no. 6 be and is hereby extended by the addition thereto of anamount representing the aggregate nominal amount of share capital of the Company repurchased by the Company under theauthority granted pursuant to the Resolution no. 5 as set out in the notice convening the Meeting, provided that such amount shallnot exceed 10 per cent. of the aggregate nominal amount of the issued share capital of the Company as at the date of passing ofthis Resolution”

SPECIAL RESOLUTION

8. “THAT the existing Bye-laws be and are hereby amended in the following manner:

By replacing the word “Special” by “Ordinary” where it appears in the existing Bye-laws 97.A(vi) and 104 and related side-note(s).”

By Order of the Board ofHAIER ELECTRONICS GROUP CO., LTD.

Yang Mian MianChairman


Notes:

1. The Register of Members of the Company will be closed from Thursday, 18 May 2006 to Monday, 22 May 2006 (both days inclusive) during which period notransfer of the Shares will be registered.

2. A shareholder entitled to attend and vote at the Meeting is entitled to appoint one or more proxies to attend and to vote in his stead. A proxy need not be ashareholder of the Company.

3. In case of the joint registered holders of any Shares, any one of such persons may vote at any meeting, either in person or by proxy; but if more than one ofsuch joint holders be present at any meeting in person or by proxy, the said person whose name stands first on the Register of Members of the Company shallalone be entitled to vote in respect thereof.

4. To be valid, a form of proxy in the prescribed form together with the power of attorney or other authority (if any) under which it is signed, or a certified copyof such power or authority, must be lodged with the branch share registrar and transfer office of the Company in Hong Kong, Tengis Limited at 26/F, TesburyCentre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time fixed for holding the Meeting.

5. With respect to the Resolution no. 2 as set out in this notice, Messrs. Chai Yong Sen, Cui Shao Hua, Lam Kin Kau, Mark and Fung Hoi Wing, Henry will retireupon the conclusion of the Meeting and, being eligible, will offer themselves for re-election. The profiles of the above Directors have been set out in the 2005Annual Report of the Company.

6. A circular containing details of the Meeting and the accompanying proxy form have been sent to the shareholders of the Company together with the 2005Annual Report of the Company.

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