haier electronics group co., ltd. 海爾電器集團 · pdf filedefinitions — 1 —...

CONTENTS

— i —

Page

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Letter from ICEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Appendix I — Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Appendix II — Financial information of the Target Group . . . . . . . . . . . . . . . . . . . . . 147

Appendix III — Pro Forma Financial information of the Enlarged Group . . . . . . . 200

Appendix IV — General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

Notice of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

DEFINITIONS

— 1 —

In this circular, the following expressions have the meanings set out below unless the context

requires otherwise.

“A-Share Company” 青島海爾股份有限公司 (Qingdao Haier Co., Ltd.), a

joint stock company established in the PRC and the shares

of which are listed on the Shanghai Stock Exchange

(stock code: 600690) and in which Haier Corp and Haier

Electric International are holding approximately 10.54%

and 26.30% of its shareholding interests respectively

“A-Share Interest” approximately 10.54% and 26.30% equity interests in

the A-Share Company owned by Haier Corp and Haier

Electric International respectively

“Agreements” the Asset Injection Agreement and the Continuing

Connected Transaction Agreements

“Announcement” an announcement of the Company dated 21 April 2006

in respect of, inter alia, a major and connected transaction

involving the disposal of mobile handset business which

was completed in June 2006

“Asset Injection” the proposed asset injection of the Target Group into the

Company pursuant to the Asset Injection Agreement

“Asset Injection Agreement” an asset injection agreement dated 18 August 2006

entered into between Haier BVI and the Company

pursuant to which Haier BVI agreed to procure the Haier

Group to sell and the Company agreed to acquire the

Target Interests

“associate” has the same meaning ascribed to it in the Listing Rules

“Board” the board of directors of the Company

“Business Day” a day on which banks are open for business in Hong

Kong (excluding Saturday)

“Cap Amount(s)” each of the General Services Cap, the Financial Service

Cap, the Export Cap, the Materials Procurement Cap,

the Promotion Cap, the Gift Products Procurement and

Products Sales Cap and the Consignment Sale Cap

DEFINITIONS

— 2 —

“Chongqing Water Heater” 重慶海爾熱水器有限公司 (Chongqing Haier Water

Heater Co., Ltd.), a company established in the PRC

which is held as to 90% by Qingdao Water Heater and

10% by Wuhan Water Heater

“Circular” a circular of the Company dated 15 May 2006 in respect

of, inter alia, a major and connected transaction involving

the disposal of mobile handset business which was

completed in June 2006

“Company” Haier Electronics Group Co., Ltd., an exempted company

incorporated in Bermuda and the shares of which are

listed on the main board of the Stock Exchange

“Completion” completion of the Asset Injection Agreement

“Completion Date” the completion date of the Asset Injection Agreement,

which will be within five Business Days following the

date on which all conditions of the Asset Injection

Agreement are being fulfilled or waived (where

applicable) or such other date as the parties thereto may

mutually agree in writing

“Consideration” the consideration of HK$900,000,000 payable by the

Company under the Asset Injection Agreement

“Consideration Shares” the aggregate of 1,000,000,000 Shares to be issued by

the Company, credited as fully paid, to Haier BVI (or its

(nominee(s)) at the price of HK$0.24 per Share as part

of the Consideration

“Consignment Sale Agreement” the consignment sale agreement dated 18 August 2006

entered into between the Company on one part and Haier

Corp and Haier Investment on the other, pursuant to

which the Company agreed to procure members of the

Group to distribute and sell the outstanding inventories

of front loading washing machines and water heaters

owned by the Haier Group on a consignment basis

“Consignment Sale Cap” the amount as set out under the sub-paragraph headed

“Proposed caps and rationale” in the paragraph headed

“Consignment Sale Agreement” under Part II headed

“Continuing Connected Transactions” of the Letter from

the Board of this circular

DEFINITIONS

— 3 —

“Continuing Connected the continuing connected transactions contemplated under

Transactions” the Services Agreement, the Export Agreement, the

Materials Procurement Agreement, the Promotion

Agreement, the Gift Products Procurement and Products

Sales Agreement and the Consignment Sale Agreement

“Continuing Connected the Services Agreement, the Export Agreement, the

Transactions Agreements” Materials Procurement Agreement, the Promotion

Agreement, the Gift Products Procurement and Products

Sales Agreement and the Consignment Sale Agreement

“Deferred Consideration” the balance of the Consideration after (i) offsetting the

outstanding principal amount of the Promissory Note and

interests accrued thereon up to the Completion Date; (ii)

deducting the issue amount of the Consideration Shares;

and (iii) offsetting the Receivable, and which accrues

interest at the rate of 4% per annum, payable by the

Company up to one year from the Completion Date

“Deutsche Bank” Deutsche Bank AG, Hong Kong Branch, which is

registered under the transitional arrangement of the SFO

for type 1 (dealing in securities), type 4 (advising on

securities), type 6 (advising on corporate finance), type

7 (providing automated trading services) and type 9 (asset

management) regulated activities and a substantial

shareholder of the Company

“Directors” the directors of the Company

“Enlarged Group” the Group as combined with the Target Group upon

completion of the Asset Injection

“Existing Convertible Notes” the existing convertible notes issued by the Company on

28 January 2005 in favour of Haier BVI with an

outstanding principal amount of HK$170,000,000

“Export Agreement” the products export agreement dated 18 August 2006

entered into between the Company and Haier Electrical,

pursuant to which the Company agreed to procure

members of the Group to sell the Products to Haier

Electrical as distributor for export

DEFINITIONS

— 4 —

“Export Cap” the respective amount as set out under the sub-paragraph

headed “Proposed annual caps and rationale” in the

paragraph headed “Export Agreement” under Part II

headed “Continuing Connected Transactions” of the

Letter from the Board of this circular

“Financial Service Cap” the respective amount as set out under the sub-paragraph


paragraph headed “Services Agreement” under Part II



“Financial Services” the financial services of the acceptance of deposit and

provision of loans provided to the Group by Haier

Finance pursuant to the Services Agreement

“General Service Cap” the respective amount as set out under the sub-paragraph


paragraph headed “Services Agreement” under Part II



“General Services” the general services provided by the members of the

Haier Group to the Group pursuant to the Services

Agreement, including:

(i) logistics services relating to the Products of the

Group;

(ii) utilities services, such as the supply of water and

electricity, energy supply supporting services,

namely, the supply of compressed air and steam,

sewage treatment services;

(iii) legal consultancy and documentary services;

(iv) conferencing, catering and travel agency services;

(v) product certification services for procuring

certification of the Group’s products by the China

Quality Certification Centre;

DEFINITIONS

— 5 —

(vi) repair and maintenance services of all kinds of

production-related equipment;

(vii) security and guarding services;

(viii) human resources services;

(ix) software services; and

(x) other services as may be required by the Group

from time to time in the future

“Gift Products Procurement the gift products procurement and products sales

and Products Sales Agreement” agreement dated 18 August 2006 entered into between

Haier Corp and Haier Investment on the one part and the

Company on the other, pursuant to which the Company

agreed to procure members of the Group to purchase the

Gift Products manufactured by the Haier Group, and

Haier Corp and Haier Investment agreed to procure

members of the Haier Group to purchase the Products

manufactured by the Group

“Gift Products Procurement the respective amount as set out in the columns titled

and Products Sales Cap” “Gift Products Procurement Cap” and “Products Sales

Cap” under the paragraph headed “Proposed annual caps

and rationale” in the paragraph headed “Gift Products

Procurement and Products Sales Agreement” under Part

II headed “Continuing Connected Transactions” of the


“Gift Products” the products manufactured by the Haier Group such as

home electrical appliances, robotic toys, and other

electrical accessories which the Group may distribute to

its customers as gifts in connection with its promotion

initiatives from time to time

“Group” the Company and its subsidiaries and associates

“Haier BVI” Qingdao Haier Group Holdings (BVI) Limited, a

substantial shareholder of the Company and the shares

of which are held as to 91.4% by Haier Corp and 8.6%

by Haier Investment

DEFINITIONS

— 6 —

“Haier Corp” 海爾集團公司 (Haier Group Corporation), a company

established in the PRC which is acting in concert with

Haier Investment and a substantial shareholder of the

Company

“Haier Electric International” 海爾電器國際股份有限公司 (Haier Electric Appliances

International Co., Ltd.), a company established in the

PRC and a 93.44% subsidiary of Haier Corp

“Haier Electrical” 海爾集團電器產業有限公司 (Haier Electrical

Appliances Co., Ltd.), a company established in the PRC

and a 70% subsidiary of Haier Investment

“Haier Finance” 海爾集團財務有限責任公司 (Haier Group Finance Co.,

Ltd.), a company established in the PRC in which Haier

Corp has a 61.15% indirect equity interest and Haier

Investment has a 20.75% indirect equity interest and a

financial institution approved by 中國人民銀行 (the

People’s Bank of China)

“Haier Group” Haier Corp and Haier Investment together with their

respective subsidiaries and associates but excluding the

Group, where appropriate

“Haier Indesit Electrical 海爾盈德喜（青島）電器有限公司 (Haier Indesit

Appliance” (Qingdao) Electrical Appliance Co., Ltd.), a company

established in the PRC which is beneficially owned as to

70% by the Haier Group, 15% by Indesit Company SpA

(盈德喜家用電器股份有限公司 ) and 15% by Indesit

Ariston International S.A. (盈德喜國際公司 )

“Haier Indesit Washing Machine” 海爾盈德喜（青島）洗衣機有限公司 (Haier Indesit

(Qingdao) Washing Machine Co., Ltd.), a company

established in the PRC which is held as to 70% by the

Haier Group and 30% by Indesit Company SpA (盈德喜家用電器股份有限公司 )

“Haier Investment” 青島海爾投資發展有限公司 (Qingdao Haier Investment

and Development Co., Ltd.), a company established in

the PRC, a substantial shareholder of the Company and

a party acting in concert with Haier Corp

DEFINITIONS

— 7 —

“Haier SPV” a special purpose vehicle company incorporated in the

BVI which will be the holding company of the Target

Group

“HK$” Hong Kong dollars, the lawful currency of Hong Kong

“HKFRSs” The Hong Kong Financial Reporting Standards issued

by the Hong Kong Institute of Certified Public

Accountants

“Hong Kong” the Hong Kong Special Administrative Region of the

PRC

“ICEA” ICEA Capital Limited, a corporation registered under

the transitional arrangement to carry out type 1 (dealing

in securities) and type 6 (advising on corporate finance)

regulated activities under the SFO

“Independent Board Committee” an independent board committee of the Company,

comprising Messrs. Lam Kin Kau, Mark, Fung Hoi Wing,

Henry and Wu Yinong, the independent non-executive

Directors, formed for the purpose of advising the

Independent Shareholders in respect of the Agreements

and the Cap Amounts

“Independent Shareholders” the shareholders of the Company other than the Haier

Group, Deutsche Bank and their respective associates

who are required to abstain from voting on a resolution

to approve the Agreements, the Transactions and the Cap

Amounts at the SGM pursuant to the Listing Rules

“Latest Practicable Date” 21 September 2006, being the latest practicable date prior

to the printing of this circular for the purpose of

ascertaining certain information in this circular

“Listing Rules” the Rules Governing the Listing of Securities on the

Stock Exchange

“Long Stop Date” 31 December 2006

DEFINITIONS

— 8 —

“Materials Procurement Agreement” the materials procurement agreement dated 18 August

2006 entered into between the Company and Haier Corp

and Haier Investment, pursuant to which Haier Corp and

Haier Investment agreed to procure members of the Haier

Group to sell the Materials to the Group

“Materials Procurement Cap” the respective amount as set out under the sub-paragraph


paragraph headed “Materials Procurement Agreement”

under Par t I I headed “Continuing Connected

Transactions” of the Letter from the Board of this circular

“Materials” the materials and parts (including without limitation,

moulds and printing and packaging materials) required

in the production of the Products

“Possible A-Share Interest the possible injection of the A-Share Interest from the

Injection” Haier Group into the Company

“PRC” the People’s Republic of China and, for the purposes of

this circular, excluding Hong Kong, the Macau Special

Administrative Region and Taiwan region

“Products” the front loading washing machines and water heaters

and the related components manufactured by the Target

Business

“Promissory Note” the promissory note for a principal amount of

HK$419,954,099 carrying interest at the rate of 5.2%

per annum issued by Haier BVI to the Company upon

completion of the disposal of the Company’s mobile

handset business to Haier BVI in June 2006

“Promotion Agreement” the promotion agreement dated 18 August 2006 entered

into between Haier Corp and Haier Investment on the

one part and the Company on the other, pursuant to which

Haier Corp and Haier Investment agreed to procure

members of the Haier Group to provide the Promotion

Services for the Products to members of the Group and

the Company agreed to procure members of the Group

to accept the Promotion Services on a non-exclusive basis

DEFINITIONS

— 9 —

“Promotion Cap” the respective amount as set out under the sub-paragraph


paragraph headed “Promotion Agreement” under Part II



“Promotion Services” the advertising, promotional and marketing services in

respect of the Products under the collective promotional

campaigns of the Haier Group and separate from the

advertising, promotional and marketing activities

currently organised by the Group itself

“Qingdao Water Heater” 青島經濟技術開發區海爾熱水器有限公司 (Qingdao

Economy and Technology Development Zone Haier

Water Heater Co., Ltd.), a company established in the

PRC and 100% owned by the Haier Group

“Receivable” a non-interests bearing accounts receivable in the amount

of approximately RMB61,667,000 currently due from the

Haier Group to the Target Business which will become

due from the Haier Group to the Company on the

Completion Date pursuant to the Asset Injection

Agreement

“RMB” Renminbi, the lawful currency of the PRC

“Sales Company” 青島海爾電器銷售有限公司 (Qingdao Haier Electronics

Sales Co., Ltd.), a company established in the PRC which

is held as to 50% by the Company and as to 50% by 佛山市順德海爾電器有限公司 (Foshan Shunde Haier

Electric Co., Ltd.), a 60% non-wholly owned subsidiary

of the Company

“Services” the General Services and the Financial Services

“Services Agreement” the services agreement dated 18 August 2006 entered

into between the Company, Haier Corp and Haier

Investment, pursuant to which Haier Corp and Haier

Investment agreed to procure members of the Haier

Group to provide the Services to the Group

DEFINITIONS

— 10 —

“SFO” the Securities and Futures Ordinance, Cap 571 of the

Laws of Hong Kong

“SGM” a special general meeting of the Company to be convened

on 23 October 2006 (Monday) for, among other things,

considering, and, if thought fit, approving the Agreements

and the Cap Amounts

“Share Options” the outstanding share options granted by the Company

pursuant to the existing share option scheme adopted by

the Company on 28 February 2002

“Shareholder(s)” holder(s) of the Share(s)

“Share(s)” ordinary share(s) of HK$0.10 each in the capital of the

Company

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“subsidiary” has the same meaning ascribed to it in the Listing Rules

“substantial shareholder(s)” has the same meaning ascribed to it in the Listing Rules

“Target Business” the business of research, development, production and

sale of front loading washing machines and water heaters

undertaken by the Target Group

“Target Group” the group of companies comprising Haier SPV and its

subsidiaries, including Haier Indesit Washing Machine,

Haier Indesit Electrical Appliance, Qingdao Water

Heater, Wuhan Water Heater and Chongqing Water

Heater

“Target Interests” the 70% equity interests in each of Haier Indesit Washing

Machine and Haier Indesit Electrical Appliance and the

entire equity interest in each of Qingdao Water Heater,

Wuhan Water Heater and Chongqing Water Heater

“Transactions” the transactions contemplated under the Asset Injection

Agreement and the Continuing Connected Transaction

Agreements

DEFINITIONS

— 11 —

“White Goods” the various household electrical appliances of the Haier

Group, including but not limited to washing machines,

water heaters, refrigerators and air-conditioners which

are usually white in colour

“White Goods Assets” the companies, production facilities and machineries of

the Haier Group which are involved in the research,

development, production and sale of the White Goods

“Wuhan Water Heater” 武漢海爾熱水器有限公司 . (Wuhan Haier Water Heater

Co., Ltd.), a company established in the PRC and 100%

owned by Haier Group

“US$” United States dollars, the lawful currency of the United

States of America

In this circular, the exchange rates of RMB1.025 to HK$1 and US$1 to HK$7.8 for illustrative

purpose only are used.

LETTER FROM THE BOARD

— 12 —

HAIER ELECTRONICS GROUP CO., LTD.海爾電器集團有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 1169)

Executive Directors: Registered office:

Ms. Yang Mian Mian (Chairman) Clarendon House

Mr. Wu Ke Song (Deputy Chairman) 2 Church Street

Mr. Chai Yong Sen Hamilton HM11

Mr. Liang Hai Shan Bermuda

Mr. Cao Chun Hua

Mr. Cui Shao Hua Head office and principal place of

Mr. Song Chun Guang business in Hong Kong:

Unit 3513

Independent non-executive Directors: 35/F., The Center

Mr. Lam Kin Kau, Mark 99 Queen’s Road Central

Mr. Fung Hoi Wing, Henry Hong Kong

Mr. Wu Yinong

25 September 2006

To the Shareholders, and, for information only,

the holders of the Share Options

Dear Sir/Madam,

MAJOR AND CONNECTED TRANSACTIONINVOLVING PROPOSED ASSET INJECTION

ANDCONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

References are made to the Announcement, the Circular and the announcement of the Company

dated 25 August 2006.

Asset Injection

The Company announced that on 18 August 2006, as a further step to transform the Group

into the listed flagship of the White Goods businesses of the Haier Group, Haier BVI and the

* for identification purposes only


— 13 —

Company entered into the Asset Injection Agreement pursuant to which Haier BVI agreed to

procure the Haier Group to sell and the Company agreed to acquire the Target Interests for a

total consideration of HK$900,000,000.

As Haier BVI is a substantial shareholder of the Company holding approximately 26.14%

equity interest in the Company as at the Latest Practicable Date, the Asset Injection Agreement

constitutes a major and connected transaction of the Company and is subject to and conditional

upon the Independent Shareholders’ approval at the SGM under the Listing Rules.

Upon completion of the Asset Injection, in addition to the existing top loading washing

machine business currently undertaken by the Group, the Enlarged Group will also be engaged

in the businesses of research, development, production and sale of front loading washing

machines and water heaters.

Continuing Connected Transactions

In addition, it is expected that after completion of the Asset Injection, certain transactions of a

continuing nature between the Target Business (which is under the Haier Group prior to but

which would form part of the Enlarged Group after completion of the Asset Injection) on the

one hand, and other members of the Haier Group on the other hand, would continue. On 18

August 2006, the Company on the one part and Haier Corp and Haier Investment on the other

entered into the Continuing Connected Transaction Agreements (except for the Export

Agreement which was entered into between the Company and Haier Electrical) which set out

the key terms and conditions and the general pricing principles of the continuing connected

transactions between members of the Haier Group and members of the Enlarged Group. The

Continuing Connected Transaction Agreements would be applicable to the Enlarged Group

after completion of the Asset Injection. Conditional upon the approval of the Independent

Shareholders being obtained at the SGM, the Continuing Connected Transaction Agreements

will take effect upon Completion (when members of the Target Group will become subsidiaries

of the Enlarged Group) and will expire on 31 December 2008 (except for the Consignment

Sale Agreement which would be for a fixed term of eight months and which could be extended

up to twelve months after Completion at the discretion of the Company). All Continuing

Connected Transaction Agreements will run in parallel with the existing continuing connected

transaction agreements entered into between the Company and the Haier Group in August

2005 as detailed in the announcement and circular of the Company dated 22 August 2005 and

4 October 2005 respectively which only covered the existing top loading washing machines

business of the Group.

As each of Haier Corp and Haier Investment is a substantial shareholder and connected person

of the Company and Haier Electrical, a 70% subsidiary of Haier Investment, is an associate of

Haier Investment thus also a connected person of the Company, the transactions contemplated

under each of the Continuing Connected Transaction Agreements constitute continuing

connected transactions of the Company under the Listing Rules.


— 14 —

Each of the relevant percentage ratios (except for the profits ratio which is not applicable) for

each of the Continuing Connected Transactions (other than the Gift Products Procurement and

Products Sales Agreement) is expected to be higher than 25% on an annual basis, or, where a

relevant applicable percentage ratio is higher than 2.5% but less than 25% on an annual basis,

it is expected to have an annual consideration of higher than HK$10,000,000. Notwithstanding

that each of the applicable percentage ratios for the transaction amounts under the Gift Products

Procurement and Products Sales Agreement is expected to be, on an annual basis, less than

2.5% on an annual basis for each of the three consecutive financial years ending 31 December

2008, such transactions would be aggregated with the transactions contemplated under the

other Continuing Connected Transaction Agreements and subject to the independent

shareholders’ approval requirement under the Listing Rules. In addition, notwithstanding that

each of the applicable percentage ratios for the transaction amount under the Consignment

Sale Agreement is expected to be less than 2.5%, such transactions would be aggregated with

the transactions contemplated under the other Continuing Connected Transaction Agreements

and subject to the Independent Shareholders’ approval requirement under the Listing Rules.

Accordingly, each of the Continuing Connected Transactions would be subject to the reporting,

announcement and independent shareholders’ approval requirements under the Listing Rules.

The Continuing Connected Transactions and the relevant Cap Amounts would be subject to

the approval of Independent Shareholders at the SGM. Haier Corp, Haier Investment, Deutsche

Bank and their respective associates are required to abstain from voting on the resolution

relating to, among other things, the approval of the Continuing Connected Transactions

Agreements at the SGM.

Independent Board Committee

The Independent Board Committee comprising all three independent non-executive Directors

has been formed to consider (a) the terms of the Asset Injection Agreement; (b) the terms of

the Continuing Connected Transaction Agreements; and (c) the respective Cap Amounts for

transactions contemplated under the Continuing Connected Transaction Agreements so far as

the interests of the Company and the Independent Shareholders are concerned as a whole.

ICEA has been appointed as the independent financial adviser to advise the Independent

Board Committee and the Independent Shareholders on the same.

The purpose of this circular is:

1. to provide you with the details of the Agreements and the Cap Amounts;

2. to set out the advice of ICEA to the Independent Board Committee and the Independent

Shareholders in respect of (a) the terms of the Asset Injection Agreement; (b) the terms

of the Continuing Connected Transaction Agreements; and (c) the respective Cap

Amounts for transactions contemplated under the Continuing Connected Transaction

Agreements;


— 15 —

3. to set out the recommendation of the Independent Board Committee in respect of items

2(a) to 2(c) above; and

4. to give you notice of the SGM at which an ordinary resolution will be proposed for the

Independent Shareholders to consider, and if thought fit, to approve the Agreements

and the Cap Amounts.

BACKGROUND

References are made to the Announcement and Circular regarding, inter alia, (a) the disposal

of mobile handset business of the Group to Haier BVI which was completed in June 2006; and

(b) the Possible Asset Injections from the Haier Group as specified therein.

Disposal of Mobile Handset Business of the Group in June 2006

As disclosed in the Announcement and the Circular, the Company and Haier BVI have entered

into the Pegasus Sale and Purchase Agreements (as defined in the Announcement and the

Circular) pursuant to which the Company agreed to sell and Haier BVI agreed to purchase the

mobile handset business of the Group for an aggregate consideration of HK$419,954,099

which was satisfied by issuance of the Promissory Note. The disposal was completed in June

2006.

Part of the Consideration for the Asset Injection will be paid by way of offsetting the outstanding

principal amount under the Promissory Note together with interest accrued thereon up to the

Completion Date or assignment of the same to the order of Haier BVI. The balance of the

Consideration will be satisfied by other means as set out below.

I. THE ASSET INJECTION

As a further step to transform the Group into the listed flagship of the White Goods

businesses of the Haier Group, on 18 August 2006, Haier BVI and the Company entered

into the Asset Injection Agreement pursuant to which Haier BVI agreed to procure the

Haier Group to sell and the Company agreed to acquire the Target Interests for a total

consideration of HK$900,000,000. Haier BVI is a substantial shareholder holding

approximately 26.14% equity interest in the Company. The performance of Haier BVI’s

obligations under the Asset Injection Agreement is guaranteed by the Haier Corp and

Haier Investment. A summary of the major terms of the Asset Injection Agreement is

set out below:

Subject matter of the Asset Injection:

The Target Interests


— 16 —

Consideration:

The Consideration for the Asset Injection is HK$900,000,000 to be satisfied by the

Company to Haier BVI (or its nominees) on the Completion Date by:

(a) offsetting the outstanding principal amount under the Promissory Note (being

HK$419,954,099 as at the Latest Practicable Date) together with interest accrued

thereon up to the Completion Date or assignment of the same to the order of

Haier BVI. For illustration purpose only, assuming that Completion will take

place between (i) 31 October 2006 and (ii) the Long Stop Date, such interest

would amount to between approximately (i) HK$7,538,000 and (ii) HK$11,188,000

respectively;

(b) the issue of the Consideration Shares to Haier BVI (or its nominee(s));

(c) offsetting the Receivable; and

(d) the balance to be paid by way of the Deferred Consideration. For illustration

purpose only, assuming that Completion will take place between (i) 31 October

2006 and (ii) the Long Stop Date, the Deferred Consideration would amount to

approximately between (i) HK$172,345,000 and (ii) HK$168,695,000.

The Consideration was negotiated on an arm’s length basis and was agreed between the

parties to the Asset Injection Agreement on normal commercial terms by reference to,

among other things, the recent operating and financial performance of the Target

Business, the recent operating and financial performance and valuation of other companies

engaged in similar types of businesses with operations in the PRC and their future

prospects.

The Consideration Shares

The key information of the Consideration Shares is as follows:

Issue amount: HK$240,000,000

Issue price: HK$0.240 per Consideration Share

Shares to be issued: 1,000,000,000 new Shares credited as fully paid

Ranking and rights: upon issue, shall (1) rank pari passu with all existing

Shares including entitlement to any dividend and

distributions declared on or after the date of issue; and

(2) be free of all liens, pledges, encumbrances or any

other third party rights


— 17 —

Listing: an application will be made to the Stock Exchange for

the listing of, and permission to deal in, the Consideration

Shares

The issue of the Consideration Shares will be subject to Independent Shareholders’

approval at the SGM but such issue will not result in a change of control of the

Company.

Comparison of Share Prices with the Issue Price of the Consideration Shares

The Consideration Shares will be issued at HK$0.240 per Share, which represents:

(a) the closing price of HK$0.240 per Share as quoted on the Stock Exchange on the

Latest Practicable Date;

(b) a premium of approximately 1.3% to the average closing price of HK$0.237 per

Share as quoted on the Stock Exchange for the last five trading days prior to and

including the Latest Practicable Date;

(c) a discount of approximately 0.4% to the closing price of HK$0.241 per Share as

quoted on the Stock Exchange on 18 August 2006, being the last trading day (the

“Last Trading Date”) immediately before the date of issue of the announcement

of the Company dated 25 August 2006 in respect of, among other things, the

Agreements;

(d) a premium of approximately 3.4% to the average closing price of HK$0.232 per

Share as quoted on the Stock Exchange for the last five trading days prior to and

including the Last Trading Day; and

(e) a premium of approximately 531.6% to the audited consolidated net assets of the

Company of HK$0.038 per Share as at 31 December 2005, being the date of the

latest published audited accounts of the Company.

Shareholding Percentages

The Consideration Shares represent approximately 5.78% and 5.46% of the Company’s

existing and enlarged (by the issue of the Consideration Shares) issued share capital

respectively. The issue of the Consideration Shares will not cause the public float of the

Company to fall below the minimum of 25% as required under the Listing Rules.


— 18 —

The Deferred Consideration

The key information of the Deferred Consideration is as follows:

Debtor: The Company

Creditor: Haier BVI (or its nominee(s))

Principal amount: The balance of the Consideration after deduction of (a)

the outstanding principal amount of the Promissory Note

and interests accrued thereon up to the Completion Date;

(b) the issue amount of the Consideration Shares; and

(c) the Receivable

Interest payable: 4% per annum

Due date for payment: Unless otherwise agreed between the relevant parties,

one year from the Completion Date but the Company

may, at its absolute discretion, pay all or any part of the

Deferred Consideration at any time during such period

Method of payment: It is expected that the Deferred Consideration would be

paid by cash

Expected source of funding: It is the intention of the Company that payment of the

Deferred Consideration would be funded by internal

resources and/or various external channels such as (but

not limited to) bank loans, capital market financing, or a

combination of any or all of such methods

Conditions

Completion of the Asset Injection Agreement is conditional on, among other things, the

satisfaction (or, where applicable, waiver) of the following conditions:

(a) the representations and warranties given by Haier BVI in the Asset Injection

Agreement remaining complete, true and accurate in all material aspects up to

and as at the Completion Date by reference to the facts and circumstances then

subsisting;


— 19 —

(b) the receipt by the Company of legal opinions from lawyers in the PRC and the

BVI, regarding, among other things, the legality and enforceability of the Asset

Injection Agreement, the good standing and regulatory compliance of each member

of the Target Group, as the case may be (such legal opinions to be in form and

substance reasonably acceptable to the Company);

(c) (if required) the approval of the Bermuda Monetary Authority in respect of the

issue of the Consideration Shares;

(d) the passing by the Independent Shareholders (by way of poll) of resolution at the

SGM approving, among other things, the Asset Injection Agreement, the

Continuing Connected Transactions Agreements, the respective Cap Amounts

(where Independent Shareholders’ approval is required) together with the

transactions contemplated thereunder in accordance with the requirements of the

Listing Rules;

(e) the Listing Committee of the Stock Exchange approving (subject to allotment)

the listing of, and permission to deal in, the Consideration Shares; and

(f) all necessary waivers, consents and approvals being granted by related third parties

(including governmental or regulatory authorities) to implement the Asset Injection

and no statute, regulation or decision which would prohibit, restrict or materially

delay the Asset Injection having been proposed, enacted or taken by any

governmental or regulatory authority.

The Company may waive any of the conditions above (except for items (c) to (f) above)

and Haier BVI may not waive any of the conditions above. In the event that any of the

conditions shall not have been fulfilled or waived on or before the Long Stop Date (or

such later date as both parties may agree in writing), the Company shall not be bound to

proceed with the Asset Injection and the Asset Injection Agreement shall cease to be of

any effect.

Completion

Completion would take place on the Completion Date, which is currently expected to be

between 1 October 2006 and the Long Stop Date.


— 20 —

Changes in Shareholding Structures

A. Simplified shareholding structure of the Target Group immediately prior to

Completion

Haier SPV

(BVI)

Haier Indesit Washing Machine

(PRC)

100%100%70%70%

100%

10% 90%

Haier Indesit Electrical Appliance

(PRC)

Qingdao Water Heater

(PRC)

Wuhan Water Heater

(PRC)

Chongqing Water Heater

(PRC)

Haier Group

(Note)

B. Simplified shareholding structure of the Target Group immediately after

Completion

Haier SPV

(BVI)

Haier Indesit Washing Machine

(PRC)

100%100%70%70%

100%

10% 90%

Haier Indesit Electrical Appliance

(PRC)

Qingdao Water Heater Wuhan Water Heater

(PRC) (PRC)

Chongqing Water Heater

(PRC)

the Company(Bermuda)

(Note)

Note: The Target Interests will be indirectly held by Haier SPV immediately before and after

Completion.


— 21 —

C. Shareholding structure of the Company immediately before and after Completion

Immediately before Immediately afterCompletion Completion (Note 1)

Shares Percentage Shares Percentage

Haier Group 8,719,206,667 50.36% 9,719,206,667 53.07%

Deutsche Bank 3,926,774,819 22.68% 3,926,774,819 21.44%

Public Shareholders 4,669,253,126 26.96% 4,669,253,126 25.49%

Total 17,315,234,612 100% 18,315,234,612 100%

Notes:

1. Assuming no conversion of Shares under the Existing Convertible Notes will take place,

none of the Share Options will be exercised and no further Shares will be issued prior to

Completion.

2. As at the Latest Practicable Date, the authorised share capital of the Company is

HK$3,000,000,000 divided into 30,000,000,000 Shares of HK$0.10 each.

Implications under the Listing Rules

The Asset Injection Agreement constitutes a major transaction of the Company pursuant

to the Listing Rules. In addition, as the total consideration payable under the Asset

Injection Agreement is greater than HK$10,000,000 and the relevant applicable

percentage ratios are each more than 2.5%, and Haier BVI is a substantial shareholder

and therefore a connected person of the Company, the Asset Injection Agreement

constitutes a connected transaction of the Company subject to and conditional upon

Independent Shareholders’ approval at the SGM under the Listing Rules.

Information on the Target Business

General

The principal business activities of the Target Business include the research, development,

production and sale of front loading washing machines and water heaters, which are

carried on primarily by Haier Indesit Washing Machine, Haier Indesit Electrical

Appliance, Qingdao Water Heater, Wuhan Water Heater and Chongqing Water Heater.

The Target Group is a leading player in the domestic front loading washing machines

market and water heaters market in the PRC.


— 22 —

Registered Capital

Haier Indesit Washing Machine was established in the PRC and is currently held as to

70% by the Haier Group and 30% by Indesit Company SpA (盈德喜家用電器股份有限公司 ), which, together with its ultimate beneficial owner(s), are third parties

independent of the Company and connected persons of the Company. The registered

capital of Haier Indesit Washing Machine amounts to US$24,000,000 (equivalent to

approximately HK$187,200,000).

Haier Indesit Electrical Appliance was established in the PRC and is currently held as

to 70% by the Haier Group, 15% by Indesit Company SpA (盈德喜家用電器股份有限公司) and 15% by Indesit Ariston International S.A. (盈德喜國際公司), which, together

with their respective ultimate beneficial owner(s), are third parties independent of the

Company and connected persons of the Company. The registered capital of Haier Indesit

Electrical Appliance amounts to US$12,000,000 (equivalent to approximately

HK$93,600,000).

Qingdao Water Heater was established in the PRC and is currently held as to 100% by

the Haier Group. The registered capital of Qingdao Water Heater amounts to

RMB120,000,000 (equivalent to approximately HK$117,073,000).

Wuhan Water Heater was established in the PRC and is currently held as to 100% by

the Haier Group. The registered capital of Wuhan Water Heater amounts to

RMB50,000,000 (equivalent to approximately HK$48,780,000).

Chongqing Water Heater is a company newly established in the PRC in March 2006 and

is currently held as to 90% and 10% by Qingdao Water Heater and Wuhan Water

Heater respectively. It is currently expected that Chongqing Water Heater will commence

production in the fourth quarter of 2006. The registered capital of Chongqing Water

Heater amounts to RMB10,000,000 (equivalent to approximately HK$9,756,000).

Products

Front Loading Washing Machines

Front loading washing machines are distinct from the top loading washing machines

currently manufactured by the Group in respect of working mechanism and market.

Front loading washing machines are mainly used in Europe and work by tumbling

clothes in a tub that rotates on a horizontal axis (滾筒式 ). The tubs of front loading

washing machines are partially filled with water and spin sideways so that cleaning

takes place as clothes are tumbled through a small pool of water at the bottom of the

tub. Top loading washing machines, on the other hand, are the predominant configuration


— 23 —

used in Asia, the United States, Australia and certain parts of Europe and wash clothes

in a cylinder, or drum, with a propeller (the “cylindrical tub style”) (波輪式 ) or an

agitator (the “agitatory style”) (攪拌式 ) that turns on a vertical axis. Top loading

washing machines suspend clothes in a tub of water and clean clothes by relying on the

central propeller or agitator to swirl them vigorously back and forth in the water. Front

loading washing machines’ unique benefits include water and electricity efficiency and

better cleaning and anti-bacteria capability. Generally speaking, front loading washing

machines target customers towards the higher-end of the market.

Comparing to top loading washing machines, front loading washing machines have only

been introduced to the PRC market for a relatively shorter period. According to China

Market Monitor, an independent market consultant, as of 2005, front loading washing

machines accounted for around 12% of the total number of units of washing machines

sold in the PRC. It is expected that as a result of urbanization, rising income and

improving living standards, the front loading washing machines industry in the PRC

will continue to grow, which means significant market potential for the front loading

washing machines business of the Target Group in the future.

Water Heaters

There are three types of water heaters categorised mainly with respect to the sources of

energy used for heating water with different working principles, namely electrical water

heaters, gas water heaters and solar power water heaters. Electrical water heaters heat

water in a tank with electrical elements that are controlled by thermostats; gas water

heaters heat water by burning fuel of natural gas or coal gas; and solar power water

heaters heat water with solar power. The three types of water heaters target different

market needs: electrical water heaters are mainly sold to regional markets where

electricity price is relatively low, gas water heaters are more popular in regions where

gas supply is relatively abundant and gas consumption is more economical while solar

power water heaters are mainly sold to regional markets where solar power can be used

as a reliable and cost efficient energy source.

According to China Market Monitor, currently, electrical water heaters and gas water

heaters are the predominant types of water heaters sold in the PRC whilst the market

share of solar power water heaters is relatively insignificant. It is expected that while

the demand for electrical water heaters is expected to maintain a stable growth, the

market potential of gas water heaters and solar power water heaters will be significant

in the foreseeable future due to their benefits of, among other things, energy efficiency

and environmental friendliness.


— 24 —

Production facilities

The production facilities of Haier Indesit Washing Machine and Haier Indesit Electrical

Appliance consist mainly of factories and ancillary premises located at Haier Industrial

Park, Hi-new Technology Development Zone, Qingdao, Shandong Province, the PRC.

The production facilities of Qingdao Water Heater consist mainly of factories and

ancillary premises located at Qingdao Economic and Technology Development Zone,

Qingdao, Shandong Province, PRC.

The production facilities of Wuhan Water Heater consist mainly of factories and ancillary

premises located in Hi-tech Industrial Park, Wuhan Economic and Technology

Development Zone, Wuhan, Hubei Province, the PRC.

It is expected that production for Chongqing Water Heater will commence in the second

half of 2006. The production facilities of Chongqing Water Heater will consist mainly

of factories and ancillary premises located at Jiang Bei District, Chongqing, the PRC.


— 25 —

Financial Information

The net asset value after minority interests (as adjusted pursuant to HKFRSs) of the

Target Group as at 31 December 2005 and 31 March 2006 were approximately

RMB326,712,000 and RMB297,860,000 respectively. The results (as adjusted pursuant

to HKFRSs) of the Target Group for the three financial years ended 31 December 2005

and the three months ended 31 March 2005 and 2006 are set out below:

For the financial year For the three monthsended 31 December ended 31 March

2003 2004 2005 2005 2006RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Revenue 1,338,323 1,897,542 2,318,672 540,303 576,705

% increase 41.8% 22.2% 6.7%

Costs of sales (961,452) (1,447,123) (1,771,359) (421,764) (427,345)

Gross profit 376,871 450,419 547,313 118,539 149,360

Gross profit margin (%) 28.2% 23.7% 23.6% 21.9% 25.9%

Other income and gains 1,218 2,078 3,006 239 1,427

Operating expenses (290,132) (398,492) (435,054) (98,259) (119,573)

Operating profit 87,957 54,005 115,265 20,519 31,214

Operating profit margin (%) 6.6% 2.8% 5.0% 3.8% 5.4%

Finance costs (14,416) (6,575) (6,542) (1,530) (1,258)

Net profit before taxation,

extraordinary items and

minority interests 73,541 47,430 108,723 18,989 29,956

Taxation (16,090) (8,045) (14,754) (1,315) (3,586)

Effective tax rate (%) 21.9% 17.0% 13.6% 6.9% 12.0%

Profits after tax 57,451 39,385 93,969 17,674 26,370

Profit margin after tax (%) 4.3% 2.1% 4.1% 3.3% 4.6%

Minority interests (8,262) (9,545) (21,988) (6,957) (4,980)

Net profit after taxation,

extraordinary items and

minority interests 49,189 29,840 71,981 10,717 21,390


— 26 —

Management Discussion and Analysis of the performance of the Target Group

Overview

The Target Group is principally engaged in the research, development, production and

sale of front loading washing machines and water heaters. It principally operates in the

PRC. The Target Group’s products have been sold both domestically within the PRC,

and exported via Haier Electrical leveraging on the Haier Group’s established overseas

distribution network.

The Target Group’s financial results for the three years ended 31 December 2005 and

for each of the three months period ended 31 March 2005 and 2006 are set out in the

section headed “Financial Information” above.

The Target Group reports its business segment by its two major product categories,

namely: front loading washing machines and water heaters. The revenue of the two

business segments for the three years ended 31 December 2005, and for each of the

three months period ended 31 March 2005 and 2006 are as follows:

Figures in RMB’000

Three monthsYear ended 31 December ended 31 March

2003 2004 2005 2005 2006

Front loading washing machines 730,524 1,055,887 1,212,726 339,362 293,667

% of total 54.6% 55.6% 52.3% 62.8% 50.9%

% change 44.5% 14.9% (13.5%)

Water heaters 607,799 841,655 1,105,946 200,941 283,038

% of total 45.4% 44.4% 47.7% 37.2% 49.1%

% change 38.5% 31.4% 40.9%

Total 1,338,323 1,897,542 2,318,672 540,303 576,705

The Target Group derives its entire revenue from the sale of front loading washing

machines and water heaters. Historically, the sale of front loading washing machines

has contributed a higher portion to the Target Group’s overall revenue, though the sale

of water heaters has made almost equal contribution to the Target Group’s revenue in

the first quarter of 2006 as a result of this segment’s consistent high growth.


— 27 —

While the Target Group’s water heater products have been sold mostly domestically, its

front loading washing machine products have been sold both domestically in the PRC,

and exported via Haier Electrical. The breakdown of historical domestic and export

sales of the Target Group are summarized as follows:



2003 2004 2005 2005 2006

Front loading washingmachinesDomestic sales 649,855 89% 810,401 77% 874,071 72% 247,514 73% 215,008 73%Export (via

Haier Electrical) 80,669 11% 245,486 23% 338,655 28% 91,848 27% 78,659 27%

Subtotal 730,524 100% 1,055,887 100% 1,212,726 100% 339,362 100% 293,667 100%

Water heatersDomestic sales 607,726 100% 841,655 100% 1,105,769 100% 200,941 100% 282,737 100%Export (via

Haier Electrical) 73 0% — 0% 177 0% — 0% 301 0%

Subtotal 607,799 100% 841,655 100% 1,105,946 100% 200,941 100% 283,038 100%

Total domestic sales 1,257,581 94% 1,652,056 87% 1,979,840 85% 448,455 83% 497,745 86%Total export (via

Haier Electrical) 80,742 6% 245,486 13% 338,832 15% 91,848 17% 78,960 14%

Total revenue 1,338,323 100% 1,897,542 100% 2,318,672 100% 540,303 100% 576,705 100%

The export of front loading washing machines has enjoyed a compound annual growth

rate of 105% for the three years ended 31 December 2005, and represents approximately

27% of the Target Group’s total sales of front loading washing machines for the three

months ended 31 March 2006. The Target Group will continuously expand its export

sales of front loading washing machines and actively develop similar overseas customer

base for water heaters through Haier Electrical after Completion of the Asset Injection.

Cost of Sales

Cost of sales are mainly comprised of cost of raw materials, utility expenses, labour

costs, depreciation and research and development costs. Of these, the costs of raw

material account for the most significant portion of total costs. The Target Group utilises

the centralised procurement platform of the Haier Group to purchase raw materials

which benefited from economies of scale.


— 28 —

Operating Expenses

Operating expenses are mainly comprised of selling and distribution expenses, which

account for the most significant portion, and administrative expenses. Selling and

distribution expenses include product warranty and installation services provisions,

transportation costs and marketing expenses. Administrative expenses primarily comprise

staff costs and other general corporate expenses.



2003 2004 2005 2005 2006

Selling and distribution 239,812 336,653 357,509 81,335 98,992

% of total 82.7% 84.5% 82.2% 82.8% 82.8%

% change 40.4% 6.2% 21.7%

Administrative 50,191 61,839 77,472 16,924 20,581

% of total 17.3% 15.5% 17.8% 17.2% 17.2%

% change 23.2% 25.3% 21.6%

Other 129 — 73 — —

Total 290,132 398,492 435,054 98,259 119,573

% of revenue 21.7% 21.0% 18.8% 18.2% 20.7%

% change 37.3% 9.2% 21.7%

Finance Costs

Finance costs mainly relate to interest on the Target Group’s interest-bearing borrowings

from related parties and fees and charges in relation to the Target’s Group’s financing

activities. All the borrowings bear interest at floating interest rates, which are determined

by reference to the standard rates published by the People’s Bank of China. As the

Target Group has continuously reduced its level of interest-bearing borrowings, its

finance costs have also declined in recent years.


— 29 —



2003 2004 2005 2005 2006

Interest-bearing borrowings 154,000 135,000 123,000 128,000 78,000

Finance costs 14,416 6,575 6,542 1,530 1,258

Taxation

The statutory corporate income tax rate of the PRC is 33%. However, as several of the

Target Group’s operating subsidiaries have been and are currently enjoying tax holidays,

the Target Group’s effective tax rate has typically been well below the statutory rate.

Two of the water heater operating subsidiaries are located in economic development

zones and recognised as advanced technology enterprises by their respective local

government authorities. These entities have been entitled to a preferential tax rate of

15% since 2005. The two front loading washing machine operating subsidiaries are

foreign invested enterprises and are classified as high technology enterprises located in

a high technology development zone. These entities qualify for the preferential tax rate

of 15%. One of the entities was entitled to a further 5% reduction in the tax rate for the

financial year ended 31 December 2003, while the other was entitled to a full exemption

from corporate income tax for two financial years commencing from its first profit-

making year from 1 January 2003 to 31 December 2004, and a 50% reduction in

corporate income tax for the subsequent three years from 1 January 2005 to 31 December

2007.

Comparison of results between the three months ended 31 March 2006 and thethree months ended 31 March 2005

Revenue

Revenue increased by 6.7% from RMB540 million in the three months ended 31 March

2005 to RMB577 million in the three months ended 31 March 2006. This increase

primarily reflected the strong growth in the sale of water heaters, with its revenue grew

by 40.9% from RMB201 million to RMB283 million. This was mainly driven by increase

in sales volume after the commencement of production of Wuhan Water Heater in early

2005, which facilitates the regional sales in Southern China. The sale of front loading

washing machines declined by 13.5% from RMB339 million to RMB294 million,

primarily attributable to a strategic change of sales focus from large volumes of mid to

low-end products towards more high-end and higher-margin products.


— 30 —

Gross profit

Gross profit increased by 26.0% from RMB119 million for the three months ended 31

March 2005 to RMB149 million for the three months ended 31 March 2006. This

increase primarily reflected the growth in revenue and the improvement in gross profit

margin from 21.9% for the three months ended 31 March 2005 to 25.9% for the three

months ended 31 March 2006. The improvement in gross profit margin primarily reflected

the increased selling prices of front loading washing machines and improvement in

production efficiency of water heaters, in particular, the smooth running of Wuhan

Water Heater one year after its commencement of production in 2005.

Operating profit

Operating profit increased by 52.1% from RMB21 million for the three months ended

31 March 2005 to RMB31 million for the three months ended 31 March 2006. This

increase primarily reflected the growth in revenue and the improvement in gross profit

margin, which was partially offset by the increase in operating expenses which rose by

21.7% from RMB98 million for the three months ended 31 March 2005 to RMB120

million for the three months ended 31 March 2006.

The rise in operating expenses can be attributed to a 21.7% increase in selling and

distribution expenses from RMB81 million to RMB99 million, and a 21.6% increase in

administrative expenses from RMB17 million to RMB21 million.

Profit after tax

Profit after tax increased by 49.2% from RMB18 million for the three months ended 31

March 2005 to RMB26 million for the three months ended 31 March 2006. This increase

primarily reflected the strong growth in operating profit, a slight decrease in finance

costs as a result of lower borrowing, partially offset by an increase in the effective tax

rate from 6.9% for the three months ended 31 March 2005 to 12.0% for the three

months ended 31 March 2006.

Profit attributable to the equity shareholders of the Target Group increased by 99.6%

from RMB11 million for the three-months ended 31 March 2005 to RMB21 million for

the three-months ended 31 March 2006. This increase primarily reflected the strong

recovery in the operating results of the water heaters business.


— 31 —

Comparison of results between the year ended 31 December 2005 and the yearended 31 December 2004

Revenue

Revenue increased by 22.2% from RMB1,898 million in the year ended 31 December

2004 to RMB2,319 million in the year ended 31 December 2005. This increase primarily

reflected the strong growth both in the sale of water heaters, with revenue grew by

31.4% from RMB842 million to RMB1,106 million, and in the sale of front loading

washing machines, with revenue grew by 14.9% from RMB1,056 million to RMB1,213

million. The growth in the sale of water heaters and front loading washing machines

was driven by increase in sales volume and rise in average selling prices.

Gross profit

Gross profit increased by 21.5% from RMB450 million for the year ended 31 December

2004 to RMB547 million for the year ended 31 December 2005. This increase primarily

reflected the growth in revenue. Gross profit margin declined slightly, from 23.7% for

the year ended 31 December 2004 to 23.6% for the year ended 31 December 2005.

Operating profit

Operating profit increased by 113.4% from RMB54 million for the year ended 31

December 2004 to RMB115 million for the year ended 31 December 2005. This increase

primarily reflected the growth in revenue and improvement in operating efficiency,

resulting in an improvement in operating profit margin from 2.8% for the year ended 31

December 2004 to 5.0% for the year ended 31 December 2005. Operating expenses

grew by 9.2% compared to a 22.2% growth in revenue. Selling and distribution expenses

increased by 6.2% from RMB337 million to RMB358 million, while administrative

expenses rose by 25.3% from RMB62 million to RMB77 million.

Profit after tax

Profit after tax increased by 138.6% from RMB39 million for the year ended 31 December


reflected the strong growth in revenue, the improvement in the operating profit margin

and a decrease in the effective tax rate from 17.0% for the year ended 31 December

2004 to 13.6% for the year ended 31 December 2005.

Profit attributable to the equity shareholders of the Target Group increased by 141.2%

from RMB30 million for the year ended 31 December 2004 to RMB72 million for the

year ended 31 December 2005.


— 32 —

Comparison of results between the year ended 31 December 2004 and the yearended 31 December 2003

Revenue

Revenue increased by 41.8% from RMB1,338 million in the year ended 31 December

2003 to RMB1,898 million in the year ended 31 December 2004. This increase primarily

reflected the strong growth in the sale of both front loading washing machines , with

revenue grew by 44.5% from RMB731 million to RMB1,056 million, and water heaters,

with revenue grew by 38.5% from RMB608 million to RMB842 million. The growth

was mainly driven by increase in sales volume of both front loading washing machines

and water heaters as well as the successful promotion of the patented “earth leakage

protection” (防電牆 ) technology used in the manufacturing of water heaters since 2003.

Gross profit

Gross profit increased by 19.5% from RMB377 million for the year ended 31 December


reflected the growth in revenue, partially offset by a decrease in gross profit margin

from 28.2% for the year ended 31 December 2003 to 23.7% for the year ended 31

December 2004. The lower gross margin in 2004 was due to the Target Group adopting

a competitive pricing strategy in expanding market share, in particular in the sale of

water heaters.

Operating profit

Operating profit decreased by 38.6% from RMB88 million for the year ended 31

December 2003 to RMB54 million for the year ended 31 December 2004. This decrease

primarily reflected the decline in gross margin and a 37.3% rise in operating expenses.

Selling and distribution expenses increased by 40.4% from RMB240 million to RMB337

million, while administrative expenses rose by 23.2% from RMB50 million to RMB62

million. The substantial increase in selling and distribution expenses was primarily a

result of the Target Group’s increase in marketing spending to gain market share and

the increase in product warranty and installation services provisions and transportation

expenses as a result of increase in sales.

Profit after tax

Profit after tax decreased by 31.4% from RMB57 million for the year ended 31 December

2003 to RMB39 million for the year ended 31 December 2004. This decrease primarily

reflected the decline in the gross margin and the rise in operating expenses, partially

offset by a decrease in the effective tax rate from 21.9% for the year ended 31 December

2003 to 17.0% for the year ended 31 December 2004.


— 33 —

Profit attributable to the equity shareholders of the Target Group decreased by 39.3%

from RMB49 million for the year ended 31 December 2003 to RMB30 million for the

year ended 31 December 2004.

Liquidity, financial resources and capital structure

The Target Group generally finances its operations by internally generated cashflow

and borrowings from the Haier Group on a short terms basis for working capital purpose.

The Target Group regularly reviews its major funding positions to ensure it has adequate

financial resources to meet its financial obligations.

As at 31 March 2006, total interest-bearing borrowings of the Target Group amounted

to RMB78 million, all are short term banking facilities extended to the Target Group by

Haier Finance, a subsidiary of Haier Corp and a financial institution approved by the

People’s Bank of China. The loans, all in RMB, are guaranteed to the full amount by

Haier Corp and carry floating interest rates which are determined with reference to the

standard rates published by the People’s Bank of China, and generally have been in the

range of 4% to 6% per annum. The loans are unsecured and are repayable within one

year.

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

The Target Group maintained a comfortable gearing ratio of 26%, which represents

total borrowings over shareholders’ equity, as at 31 March 2006.

Funding and treasury policy

The Target Group employs a conservative approach to cash management and risk controls.

The majority of the Target Group’s operations are in the PRC, and the majority of the

assets and liabilities of the Target Group are denominated in RMB. Therefore, the

Target Group has limited exposure to foreign exchange fluctuations.

The Target Group does not have any significant interest rate risk, as the current interest

rate in the PRC stays at low level and is relatively stable.

As at 31 March 2006, the Target Group did not hold or issue any financial investments,

financial derivatives for trading purposes nor used any derivatives or other instruments

for hedging purposes. It is the Target Group’s policy that no trading in financial

instruments shall be undertaken.


— 34 —

Capital commitments

The Target Group leases certain of its properties and machinery under operating lease

arrangements. As of 31 March 2006, The Target Group had total future minimum lease

payments under non-cancellable operating leases of RMB775,000, out of which

RMB773,000 would be due within 1 year while the remaining would be due in the

second to fifth years, inclusive.

The Target Group also had additional capital commitments of RMB70.4 million as of

31 March 2006 which were comprised of commitments of RMB6.9 million for machinery

contracted but not provided for and RMB63.5 million for land, buildings and machinery

authorised but not contracted for.

Significant investments

The Target Group did not hold any significant investment as at 31 March 2006.

Charge on assets

As at 31 March 2006, there was no charge over the Target Group’s assets.

Material transactions

The Target Group had no material acquisitions or disposals of subsidiaries and associate

companies during the period of three years ended 31 December 2005 and the three

months ended 31 March 2006.

Contingent liabilities

The Target Group had no significant contingent liabilities as at 31 March 2006.

Employees and remuneration policies

The total number of employees of the Target Group as at 31 March 2006 was

approximately 2,590. The Target Group endeavours to ensure that the remuneration

packages for its employees are competitive and employees are generally remunerated

with a fixed monthly income, which is normally reviewed on an annual basis, plus

discretionary performance related bonus. Employees are also provided with benefits

including provident funds and medical insurance.


— 35 —

Financial Effects of the Asset Injection

Net asset value

Based on the unaudited pro forma statement of assets and liabilities of the Enlarged

Group as set out in Appendix III to this circular, the Group has audited consolidated net

assets after minority interests of approximately HK$633 million as at 31 December

2005 and unaudited pro forma net assets after minority interests of approximately HK$292

million after Completion.

The gearing ratio of the Group at 31 December 2005 was 53% which is calculated by

dividing the total borrowings by shareholders’ equity. Based on the unaudited pro forma

statement of assets and liabilities of the Enlarged Group as at 31 December 2005, the

gearing ratio of the Enlarged Group before taking into account the financial effect on

disposal of the mobile handset business is 157% which is calculated by dividing the

total borrowings by the shareholders’ equity of the Enlarged Group.

Upon Completion, each of Qingdao Water Heater, Wuhan Water Heater and Chongqing

Water Heater will become indirect wholly-owned subsidiaries of the Company and each

of Haier Indesit Washing Machine and Haier Indesit Electrical Appliance will become

70% indirect non-wholly owned subsidiaries of the Company. Accordingly, their financial

statements will be consolidated into the financial statements of the Company.

Earnings

As set out in Appendix II to this circular, the Target Group recorded net profit attributable

to equity holders of approximately RMB49 million, RMB30 million and RMB72 million

for each of the three years ended 31 December 2005 respectively, it is expected that the

Asset Injection will significantly improve the financial performance of the Enlarged

Group.

Future Prospects

Upon completion of the Asset Injection, in addition to the existing top loading washing

machine business undertaken by the Group, the Enlarged Group will also be engaged in

the research, development, production and sale of front loading washing machines and

water heaters.


— 36 —

It is the Haier Group’s intention to turn the Group into the listed flagship of its White

Goods business and ultimately become a global top 3 white goods manufacturer. The

Haier Group has so far adopted a prudent strategy in bringing its quality White Goods

Assets to the international capital markets by injecting the same into the Group, as

evident from its step-by-step approach in its injection of certain White Goods Assets

into and divestment of the mobile handset business from the Group. Going forward, the

Haier Group intends to adopt a similar strategy in the injection of other potential White

Goods Assets into the Group at such time as it considers appropriate, depending on a

number of factors including, among others, the quality and trading prospects of such

assets, the prevailing market conditions, satisfactory completion of due diligence by the

Company on such assets and the obtaining of all necessary approvals from the relevant

authorities.

Possible A-Share Interest Injection from the Haier Group into the Group

As disclosed in the Announcement and the Circular, to further the Group’s strategy of

transforming itself into the listed flagship of the White Goods business of the Haier

Group, the Company has also been in discussion with the Haier Group in respect of the

Possible A-Share Interest Injection, which is independent from and not inter-conditional

with the Asset Injection Agreement. The A-Share Company is currently undergoing a

restructuring which includes a possible injection of certain businesses currently operated

by the Haier Group that are in competition with the A-Share Company. The A-Share

Company is also exploring ways to rationalise and minimise the connected transactions

between the A-Share Company and the Haier Group.

The injection of the A-Share Interests is subject to, among other things, (1) the completion

of the aforesaid A-Share Company’s restructuring; (2) the completion of due diligence

on the A-Share Company which is satisfactory and acceptable to the Group; (3) agreement

with the Haier Group on the terms of such injection on arm’s length basis being reached;

(4) all necessary approvals and consents from relevant regulatory authorities being

obtained; and (5) relevant requirements under the Listing Rules and the listing rules of

the Shanghai Stock Exchange (being the stock exchange on which the A-Share Company

is listed) being fulfilled. The Group is still in the process of evaluating the Possible A-

Share Interest Injection and no agreements have been reached as at the Latest Practicable

Date. The Group will make appropriate announcement on further developments of the

Possible A-Share Interest Injection in accordance with the requirements of the Listing

Rules.

No definite time schedule has been set and no agreements have been signed regardingthe Possible A-Share Interest Injection as at the Latest Practicable Date. ThePossible A-Share Interest Injection may or may not proceed. Shareholders andpotential investors of the Company should exercise caution when dealing in theShares.


— 37 —

Reasons for and Benefits of the Asset Injection

The Directors believe that the reasons and benefits of the Asset Injection for the Group

are compelling and far-reaching, including:

(1) Diversifying business risk and generating more operating leverage

For the year ended 31 December 2005, the Group has suffered a net loss (before

impairment of goodwill) of approximately HK$111 million. In contrast, the Target

Group generated a net profit of approximately RMB72 million (equivalent to

approximately HK$70 million) for the same period. It is therefore expected that

the Asset Injection will substantially improve the financial performance of the

Enlarged Group.

Moreover, the Directors consider that the products of the Target Business,

especially the front loading washing machines, and the current business of the

Group, namely the research, development, production and sale of top loading

washing machines, have similar and complementary marketing strategies. The

Directors believe that the Asset Injection will create synergies and increase the

value for the Group as a whole.

In view of the above, the Directors believe that the Asset Injection will enable the

Company to expand its product categories and broaden the revenue base of the

Group so as to minimise the Group’s business risk and to generate more operating

leverage.

(2) Consolidation of washing machines business under the Group

The Group is currently only engaged in the top loading washing machines business

under the “Haier” brand. Upon completion of the Asset Injection, the Group will

also be engaged in the research, development, production and sale of front loading

washing machines and water heaters. In other words, all washing machines

businesses of the Haier Group will be consolidated into the Group. The Directors

believe such consolidation will enhance the overall competitiveness of the washing

machines business of the Group by improving management efficiency, research

and development capability and marketing capability while eliminating potential

competition and conflict of interests between the Group and the Haier Group on

the management of the washing machines business.


— 38 —

(3) Capitalising on Haier’s brand value

The Directors believe that the successful integration of additional leading “Haier”

branded businesses and products in the PRC into the Company will not only

solidify Haier’s brand name in the international capital markets, but also enhance

the Company’s profile internationally as well as its shareholder value.

(4) Facilitating access to capital markets

The Directors expect that the sustaining expansion of the Group in terms of asset

base, profitability and growth prospects would provide the Company with better

investors’ awareness, access to the international capital markets for potential

fund raising activities, which may also result in, among other benefits, lower

funding cost for the Company.

Taking into account of the reasons as stated above, the Directors consider that the

terms of the Asset Injection Agreement to be on normal commercial terms, which

were arrived at after arm’s length negotiations and are fair and reasonable and are

in the interests of the Company and the Shareholders as a whole.

II. CONTINUING CONNECTED TRANSACTIONS

It is expected that after completion of the Asset Injection, certain transactions of a

continuing nature between the Target Business (which is under Haier Group prior to but

which would form part of the Enlarged Group after completion of the Asset Injection)

on one hand and other members of the Haier Group on the other, would continue . On

18 August 2006, the Company on the one part and Haier Corp and Haier Investment on

the other have entered into the Continuing Connected Transaction Agreements (except

for the Export Agreement which was entered into between the Company and Haier

Electrical) which set out the key terms and conditions and the general pricing principles

of the continuing connected transactions between members of the Haier Group and

members of the Enlarged Group. The Continuing Connected Transaction Agreements

would be applicable to the Enlarged Group after completion of the Asset Injection.

Conditional upon the approval of the Independent Shareholders being obtained at the

SGM, the Continuing Connected Transaction Agreements will take effect upon

Completion (when members of the Target Group will become subsidiaries of the Enlarged

Group) and will expire on 31 December 2008 (except for the Consignment Sale

Agreement which would be for a fixed term of eight months and which could be

extended up to twelve months after Completion at the discretion of the Company). All

Continuing Connected Transaction Agreements will run parallel with the existing

continuing connected transaction agreements entered into between the Company and the

Haier Group in August 2005 as detailed in the announcement and circular of the Company

dated 22 August 2005 and 4 October 2005 respectively which only covered the existing

top loading washing machines business of the Group.


— 39 —

As each of Haier Corp and Haier Investment is a substantial shareholder and connected

person of the Company and Haier Electrical, a 70% subsidiary of Haier Investment, is

an associate of Haier Investment thus also a connected person of the Company, the

transactions contemplated under each of the Continuing Connected Transaction

Agreements constitute continuing connected transactions of the Company under the

Listing Rules.

Each of the applicable percentage ratios (except for the profits ratio which is not

applicable) for each of the Continuing Connected Transactions (other than the Gift

Products Procurement and Products Sales Agreement) is expected to be higher than

25% on an annual basis, or, where a relevant applicable percentage ratio is higher than

2.5% but less than 25% on an annual basis, it is expected to have an annual consideration

of higher than HK$10,000,000. Notwithstanding that each of the applicable percentage

ratios for the transaction amounts under the Gift Products Procurement and Products

Sales Agreement is expected to be, on an annual basis, less than 2.5% on an annual

basis for each of the three consecutive financial years ending 31 December 2008, taking

into account the surrounding circumstances, the Directors consider that it is appropriate

for such transactions to be also subject to the independent shareholders’ approval

requirement under the Listing Rules. In addition, notwithstanding that each of the

applicable percentage ratios for the transaction amount under the Consignment Sale

Agreement is expected to be less than 2.5%, such transactions would be aggregated

with the transactions under the other Continuing Connected Transaction Agreements

and subject to the independent shareholders’ approval requirement under the Listing

Rules.

Accordingly, each of the Continuing Connected Transactions Agreements would be

subject to the reporting, announcement and independent shareholders’ approval

requirements under the Listing Rules. The Continuing Connected Transactions and the

relevant Cap Amounts are subject to the approval of Independent Shareholders at the

SGM. Haier Corp, Haier Investment, Deutsche Bank and their respective associates are

required to abstain from voting on the resolution relating to, among other things, the

approval of the Continuing Connected Transactions Agreements at the SGM.

The terms of each of the above agreements are described in detail below.

(A) Services Agreement

Date of the Services Agreement

18 August 2006

Parties

(i) the Company; and

(ii) Haier Corp and Haier Investment


— 40 —

Principal terms

Pursuant to the Services Agreement, Haier Corp and Haier Investment will procure

members of the Haier Group, which is either a subsidiary or an associate of Haier

Corp or Haier Investment and a connected person of the Company, to provide the

Services to the Enlarged Group on a non-exclusive basis.

Members of the Enlarged Group may use the services provided by third parties

not being a member of the Haier Group and not being a connected person to the

Group as it thinks fit if the terms offered by such third parties are no less

favourable.

The consideration payable under the Services Agreement will be paid by cash.

Pricing principles

Pursuant to the Services Agreement, the Group will pay a service fee in accordance

with the following pricing principles and manner:

Item Types of services Pricing principles

A. General Services

fees to be negotiated on an arm’s

length basis and, for services of the

same quali ty, on terms no less

favourable than those offered by

independent third parties

fees to be charged based on state-

prescr ibed pr ices p lus ac tua l

administrative costs that the Haier

Group incurs for the provision of the

relevant services (if any)

each legal entity receiving such

services wil l be charged a fee

calculated with reference to price

indices then prevailing in the PRC

market for the same type of services

and the costs for provision of such

service

1. Logistics services

2. Utilities services (including

s u p p l y o f w a t e r a n d

electricity, energy supply

support ing and sewage

treatment services)

3. Legal consul tancy and

documentary services

(a) G e n e r a l l e g a l

consultancy services

including reviewing of

contracts, training and

general consultations


— 41 —


A. General Services

fee to be calculated with reference to

price indexes then prevailing in the

PRC market for the same type of

services and the actual costs for

provision of the same thereof,

currently fixed at 11% of the disputed

amount. For cases where the fee

calculated on the above basis will be

less than RMB30,000 (equivalent to

approximately HK$29,000), then the

fees are to be agreed between the

parties on the basis of the actual costs

incurred

at a standard fee to be reviewed

between the parties from time to time

which must not be higher then the fees

charged by independent third parties

to the Group

fees are to be charged on an actual

cost basis with handling charge of not

more than 10%

fees are to be charged on an actual

cost basis, including the cost for

product testing and professional fees

incurred in the certification process

at the cost of the relevant personnel

assigned to provide such service to

the Group



the Group



the Group

(b) Litigation services

(including criminal

cases)

(c) Other legal services

4. Conferencing, catering and

travel agency services

5. Product certification services

6. Equ ipmen t r epa i r and

maintenance services

7. Security services

8. Human resources services


— 42 —


A. General Services

9. Software services

(a) Opera t ion sys temd e v e l o p m e n t a n dmaintenance services

(b) O t h e r s o f t w a r eservices

10. Any other General Services

B. Financial Services

11. Deposits with Haier Finance

12. Loans from Haier Finance

at the cost of the relevant technicianassigned to provide such services tothe Group

at a fee determined with reference to,among other factors, the price indicesthen prevailing in the PRC market forthe same type of services and theactual costs for provision of the samethereof, which shall be no lessfavourable than terms offered byindependent third parties to the Group

at a fee determined by reference to,among other factors, the price indicesthen prevailing in the PRC market forthe same type of services and theactual costs incurred in the provisionof such services, which shall be noless favourable than terms offered byindependent third parties to the Group

the interest receivable from HaierFinance will be at a rate determinedby reference to the standard ratespublished by the People’s Bank ofChina from time to time and on termsno less favourable than those offeredby any independent third parties to theGroup

the interest payable to Haier Financewill be at a rate determined byreference to the standard ratespublished by the People’s Bank ofChina from time to time and on termsno less favourable than those offeredby any independent third parties to theGroup


— 43 —

Proposed annual caps and rationale

Pursuant to the Services Agreement, unless agreed otherwise between the relevant

parties and conditional upon the approval by the Independent Shareholders at the

SGM being obtained, the aggregate amount of the service fees for the General

Services payable by the Group and the maximum outstanding balance of deposits

placed by the Group and the maximum outstanding loans owing by the Group to

Haier Finance at any time during the life of the Services Agreement shall not

exceed the General Services Cap and the Financial Services Cap respectively as

summarised below:

Cap amounts for the financial year ending 31 DecemberTypes of Caps 2006 (Note) 2007 2008

RMB HK$ RMB HK$ RMB HK$

(’000,000) (’000,000) (’000,000) (’000,000) (’000,000) (’000,000)

General Services Cap 53 52 200 195 260 254

Financial Services Cap

(a) Deposits placed 400 390 400 390 400 390

by the Group

(b) Loans owing 300 293 300 293 300 293

by the Group

Note: The Cap Amount for 2006 is determined by reference to, among other things, the expected

Completion Date and other factors (such as seasonal factor) which may affect the transaction

amount.

The General Services Cap is determined principally by reference to (i) the historical

figures of the transactions between the Haier Group and the Target Business

during the three financial years ended 31 December 2005; and (ii) the anticipated

increase in the requirement of the General Services by the Group, which in turn is

determined by reference to the potential growth of the Target Business. In

determining the General Services Cap, the Directors have taken into account a

projected average growth rate of around 30% in the sales of the Target Business

for the three years ending 31 December 2008, which is attributable to, among

other factors, the following:

(a) the Group is reasonably optimistic about the future growth prospects of the

Target Business, in particular in relation to overseas sales and intends to

put more effort on overseas sales in the coming few years; and

(b) the Group is actively increasing its production capacity in view of the

anticipated possible increase in sales of the Target Business. Accordingly,

the demand for the General Services is expected to increase.


— 44 —

The Directors believe that the Group will benefit from the Financial Services as

they provide added financing flexibility to the Group and the Financial Services

will be provided on terms no less favourable than those offered by independent

third parties.

Historical figures

The total service fees paid by the Target Group to the Haier Group for the

General Services for the three years ended 31 December 2005 and the maximum

amount of loans due to and deposits with Haier Finance under the Financial

Services at any time during the three years ended 31 December 2005 were as

follows:

For the financial year ended 31 DecemberTypes of services 2003 2004 2005


(’000,000) (’000,000) (’000,000) (’000,000) (’000,000) (’000,000)

General Services 87 85 113 110 122 119

Finance Services

(a) Deposits placed 158 154 207 202 104 101

by the Group

(b) Loans owing 227 221 141 138 125 122

by the Group

The loans provided by Haier Finance to the Target Business were unsecured. In

future, if the Company provides any guarantee and/or security in respect of any

future loans to be provided by Haier Finance to members of the Group, it will

comply with the then applicable requirements under the Listing Rules.


— 45 —

(B) Export Agreement

Date of the Export Agreement

18 August 2006

Parties


(ii) Haier Electrical

Haier Electrical is a subsidiary of Haier Investment thus a connected person of

the Company but is not a shareholder of the Company.

Principal terms

Pursuant to the Export Agreement, the Company has agreed to procure members

of the Enlarged Group to sell the Products to Haier Electrical for export on a non-

exclusive basis. Members of the Enlarged Group can also sell the Products to

third parties not being a member of the Haier Group and not a connected person

to the Enlarged Group as it thinks fit if the terms offered by such third parties are

no less favourable.

The consideration payable under the Export Agreement will be paid by cash.

Pricing principles

The Company will procure members of the Group to sell the Products to Haier

Electrical at a price representing the difference between the selling price of the

Products to be mutually agreed and the selling expenses of Haier Electrical which

shall not exceed 2.5% of the selling price of the Products. The selling expense of

Haier Electrical was determined based on the historical selling expenses incurred

by Haier Electrical and taking into account the management’s estimation and

assumption of the selling expenses going forward.


— 46 —


Pursuant to the Export Agreement, unless agreed otherwise between the parties

and conditional upon the approval by the Independent Shareholders being obtained,

the aggregate amount of sales by the Group to Haier Electrical shall not exceed

the Export Cap, which is set out as follows:

Export Cap amounts for the financial year ending 31 December2006 (Note) 2007 2008RMB HK$ RMB HK$ RMB HK$

(’000,000) (’000,000) (’000,000) (’000,000) (’000,000) (’000,000)

167 163 800 780 1,100 1,073



amount.

The Export Cap is determined by reference to the historical export data during

the period of three years ended 31 December 2005 and the expected growth in

exports.

Currently, export sales of the Products constitute only a relatively small portion

of the total sales of the Target Business. As such, the Directors consider that

whilst the room for expansion of the Target Business’ export sales is relatively

large, the volume of export sales of the Products do not justify the setting up of a

separate overseas distribution arm, thus the arrangement with Haier Electrical

will enable the Group to benefit from the established overseas distribution network

of Haier Electrical.

The Group is actively expanding its overseas sales and it is currently expected

that the growth in export sales of the Target Business in the coming years will

largely depend on, among other things, (i) the ability of the Target Business to

market and launch new and innovative products in a timely manner to meet

demand and preference of consumers in the overseas market; and (ii) the increasing

recognition of the “Haier” brand in overseas markets. On the assumption that

such overseas expansion meets with good market reception, the Directors expect

that exports of the Products may increase significantly in the next few years.

Such expected increase in export sales is merely assumed for the purpose of

determining the Export Cap and shall not be regarded as any indication directly

or indirectly as to the Group’s revenue, profitability or trading prospects.


— 47 —

Historical figures

The total amount of export sales of the Products by the Target Business to Haier

Electrical for the three years ended 31 December 2005 was approximately RMB81

million (equivalent to approximately HK$79 million), RMB245 million (equivalent

to approximately HK$239 million) and RMB339 million (equivalent to

approximately HK$331 million), respectively.

(C) Materials Procurement Agreement

Date of the Materials Procurement Agreement

18 August 2006

Parties



Principal terms

Pursuant to the Materials Procurement Agreement, Haier Corp and Haier

Investment will procure members of the Haier Group to sell the Materials to the

Enlarged Group from time to time.

The Enlarged Group will purchase the Materials from the Haier Group on a non-

exclusive basis. The Enlarged Group can also source the Materials from third

parties not being a member of the Haier Group and not a connected person to the

Enlarged Group as it thinks fit if the terms offered by such third parties are no

less favourable.

The consideration payable under the Materials Procurement Agreement will be

paid by cash.


— 48 —

1. Moulds

2. Printing and packaging materials

(including materials such as

papers, films and other special

materials)

3. All other Materials

fees to be charged at a price with

reference to the average market tender

and bidding price plus the actual

adminis t ra t ive cos t s ( such as

management fees and after-sale

services) of the Haier Group

fees to be charged on an actual cost

basis plus a processing fee of not

h igher than those charged by

independent third part ies with

reference to the price indices then

prevailing in the PRC market or

equivalents for the provision of the

printing and packaging services

fees to be charged at such price to be

agreed by the parties, which shall not

be higher than the lower of:

(i) the average market price of the

Materials; or

(ii) the consolidated and integrated

tender and bidding price of the

Materials plus a commission fee

of 2.6%.

The market price range shall be

determined by taking into account the

prices of the Materials of equivalent

quality offered by independent third

parties, the average market prices with


prevailing in the PRC market or their

equivalents

Pricing principles

The Haier Group will charge the Group for the Materials on the following basis:

Item Types of Materials Pricing principles


— 49 —


Pursuant to the Materials Procurement Agreement, unless agreed otherwise between

the parties and conditional upon the approval by the Independent Shareholders at

the SGM being obtained, the aggregate values of the Materials to be provided by

the Haier Group to the Group during the life of the Materials Procurement

Agreement shall not exceed the Materials Procurement Cap, which are set out as

follows:

Materials Procurement Cap amountsfor the financial year ending 31 December

2006 (Note) 2007 2008RMB HK$ RMB HK$ RMB HK$

(’000,000) (’000,000) (’000,000) (’000,000) (’000,000) (’000,000)

667 650 2,500 2,439 3,300 3,220



amount.

The Materials Procurement Cap is determined by reference to the anticipated

increase in the requirement of the Materials by the Group, which in turn is

determined with reference to the potential growth in sales of the Target Business.

For the purposes of determining the Materials Procurement Cap only, the Directors

expect that sales of the Target Business may increase significantly attributable to

an increase of production capacity and the growth trend of its export sales. In line

with the possible surge in sales, the Group’s demand for the Materials from the

Haier Group may also increase. Such expected growth in sales is assumed solely

for the purpose of determining the Materials Procurement Cap and shall not be

regarded as any indication directly or indirectly as to the Group’s revenue,

profitability or trading prospects.

Historical figures

The total purchases of the Materials from the Haier Group by the Target Business

for the three years ended 31 December 2005 were approximately RMB850 million

(equivalent to approximately HK$829 million), RMB1,297 million (approximately

HK$1,265 million) and RMB1,523 million (equivalent to approximately HK$1,486

million) respectively.


— 50 —

(D) Promotion Agreement

Date of the Promotion Agreement

18 August 2006

Parties



Principal terms

Pursuant to the Promotion Agreement, Haier Corp and Haier Investment will

procure members of the Haier Group to provide the Promotion Services to the

Enlarged Group for the Products under the Haier Group’s collective promotional

campaigns.

The Enlarged Group will engage the Promotion Services provided by the Haier

Group on an non-exclusive basis. The Enlarged Group can also use the Promotion

Services provided by third parties not being a member of the Haier Group and not

a connected person to the Enlarged Group as it thinks fit if the terms offered by

such third parties are no less favourable.

The consideration payable under the Promotion Agreement will be paid by cash.

Pricing principle

The Promotion Services will be charged at 1.2% of the PRC domestic sales of the

Target Business.


— 51 —


Pursuant to the Promotion Agreement, unless agreed otherwise between the parties

and conditional upon the approval by the Independent Shareholders at the SGM

being obtained, the aggregate amount of service fees payable by the Group during

the life of the Promotion Agreement to the Haier Group shall not exceed Promotion

Cap, which is set out as follows:

Promotion Cap amounts for the financial year ending 31 December2006 (Note) 2007 2008RMB HK$ RMB HK$ RMB HK$

(’000,000) (’000,000) (’000,000) (’000,000) (’000,000) (’000,000)

10 10 40 39 50 49



amount.

As the Haier Group has been marketing the majority of the products under the

collective promotional campaigns efficiently and effectively, the Directors are of

the view that the Target Business will benefit from participating in such collective

promotional campaigns. As the Promotional Services will be provided in the

PRC, the Directors consider that the Promotion Services fees should be proportional

to the PRC domestic sales of the Target Business thus only the PRC domestic

sales of the Target Business are taken into account.

There are no historical figures for the transactions contemplated under the

Promotion Agreement as the relevant expenses for historical transactions were

booked under the centralised sales platform of the Haier Group which did not

attribute such expenses to the Target Business specifically. The Promotion Cap is

determined, among other factors, by reference to the overall promotion plans and

strategies of the Target Business and of the Haier Group and the proposed budget

for organising promotional activities for the Target Business (including the

anticipated possible scale and frequencies of the collective promotional campaigns)

together with the anticipated increase in the promotional expenditure of the Group

in line with the potential growth in sales of the Target Business. Such projections

are assumed solely for the purpose of determining the Promotion Cap and shall

not be regarded as any indication directly or indirectly as to the Group’s revenue,

profitability or trading prospects.


— 52 —

Furthermore, each of Haier Corp and Haier Investment has undertaken to the

Company that, if the service charge of the Promotion Services charged by the

Haier Group is greater than the amount of actual costs assessed to be incurred by

the Haier Group in providing the Promotional Services to the Target Business,

the difference will be refunded to the Group. In calculating the amount of refund,

the Haier Group will allocate such amount of actual costs incurred to the Group

by reference to the proportion of historical revenue generated from the Products

as compared to the historical revenue generated from the other products of the

Haier Group involved in the promotion services provided by the Haier Group.

(E) Gift Products Procurement and Products Sales Agreement

The Haier Group manufactures a wide variety of household appliances and

consumer goods, while the Group will be principally engaged in the research,

development, production and sale of, among other things, the Products upon

Completion. On 18 August 2006 Haier Corp and Haier Investment on the one part

and the Company on the other entered into the Gift Products Procurement and

Products Sales Agreement pursuant to which:

(i) Haier Corp and Haier Investment agreed to procure members of the Haier

Group to purchase the Products manufactured by the Enlarged Group; and

(ii) the Company agreed to procure members of the Enlarged Group to purchase

the Gift Products manufactured by the Haier Group,

for use in their respective sales promotion initiatives.

Date of the Gift Products Procurement and Products Sales Agreement

18 August 2006

Parties




— 53 —

Principal terms

Pursuant to the Gift Products Procurement and Products Sales Agreement:

(i) Haier Corp and Haier Investment will procure members of the Haier Group

to purchase the Products manufactured by the Group; and

(ii) the Company will procure members of the Group to purchase the Gift

Products manufactured by the Haier Group,

for use in their respective sales promotion initiatives such as lucky draw or be

given out as complimentary gifts to customers who made purchase reaching a

specified amount.

The Group will purchase the Gift Products manufactured by the Haier Group and

the Haier Group will purchase the Products manufactured by the Group on a non-

exclusive basis. The Group can source the Gift Products from third parties not

being a member of the Haier Group and not a connected person to the Group as it

thinks fit if the terms offered by such third parties are no less favourable.

The consideration payable under the Gift Products Procurement and Products

Sales Agreement will be paid by cash.

Pricing principles

The Gift Products manufactured by the Haier Group will be sold to the Group at

their respective market price prevailing in the PRC market for the products of the

same type and quality but shall not be higher than sold by the Haier Group to

independent third parties. The Products manufactured by the Group will be sold

to the Haier Group at their respective market price prevailing in the PRC market

for the products of the same type and quality but shall not be less than that sold

by the Group to independent third parties.


The Directors expect that, pursuant to the Gift Products Procurement and Products

Sales Agreement, for the period from Completion up to 31 December 2006 and

the two financial years ending 31 December 2008, the aggregate purchase amount

of the Gift Products of the Group from the Haier Group shall not exceed the Gift

Products Procurement Cap and the aggregate sale amount of the Products from


— 54 —

the Group to the Haier Group shall not exceed the Products Sales Cap as

summarised below:

Types of Caps Cap amounts for the financial year ending 31 December2006 (Note) 2007 2008


(’000,000) (’000,000) (’000,000) (’000,000) (’000,000) (’000,000)

Gift Products 1 1 4 3.9 5 4.9

Procurement Cap

Products Sales Cap 1 1 4 3.9 5 4.9



amount.

There are no historical figures for the transactions contemplated under the Gift

Products Procurement and Products Sales Agreement as such transactions are

new channels of promotion for the Target Business and the Target Business did

not have similar transactions with the Haier Group before. The Gift Products

Procurement Cap and Products Sales Cap are determined by reference to the

anticipated increase in the sales of the Target Business and of the Haier Group

respectively. In line with the possible increase in sales, it is expected that both

the Group and the Haier Group will also increase the scale and frequency of their

respective promotional activities and sales initiatives such as lucky draw or as

gifts to customers purchasing certain goods or making purchase reaching a

particular amount, leading to a higher demand for the Gift Products and the

Products. Such projection is assumed solely for the purpose of determining the

Gift Products Procurement Cap and Products Sales Cap and shall not be regarded

as any indication directly or indirectly as to the respective revenue, profitability

or trading prospects of the Group and of the Haier Group.

(F) Consignment Sale Agreement

Historically, the front loading washing machines and water heaters manufactured

by the Target Business were sold to the Haier Group for onward distribution.

Upon completion of the Asset Injection, the PRC domestic sales of the front

loading washing machines and the water heaters previously undertaken by the

Haier Group will be handled by the Group via the Sales Company (subject to the

Sales Company obtaining all necessary approvals such as expansion of scope of

business). On 18 August 2006, the Company on one part and Haier Corp and

Haier Investment on the other entered into the Consignment Sale Agreement

pursuant to which the Company agreed to, among other things, distribute and sell

the outstanding front loading washing machines and water heaters owned by the

Haier Group on a consignment basis.


— 55 —

Date of the Consignment Sale Agreement

18 August 2006

Parties



Principal terms

Pursuant to the Consignment Sale Agreement, the Company agreed to, among

other things, procure members of the Group to distribute and sell the outstanding

inventories of front loading washing machines and water heaters owned by the

Haier Group on a consignment basis. The Consignment Sale Agreement will be

for a fixed term of eight months and which could be extended up to twelve

months after Completion at the discretion of the Company.

The consideration payable under the Consignment Sale Agreement will be paid

by cash.

Pricing principles

The Group will receive a commission of 2% of the turnover of the sales of the

outstanding inventories pursuant to the Consignment Sale Agreement. The amount

of commission payable to the Group would be dependent upon certain variables

including the quantity and value of the inventories entrusted to the Enlarged

Group for sales at Completion and the level of sales generated.

Proposed caps and rationale

Whilst the completion date of the Asset Injection could not be determined as at

the Latest Practicable Date, according to information presently available to the

Directors, on the assumption that the level of inventories to be entrusted to the

Enlarged Group for sales would be similar to the current level of inventories and

that all such inventories would be sold by the Enlarged Group, it is expected that

the amount of the commission that the Group will receive during the term of the

Consignment Sale Agreement (being a fixed term of eight months and which

could be extended up to twelve months after Completion at the discretion of the

Company) pursuant to the Consignment Sale Agreement will not exceed RMB6

million (equivalent to approximately HK$5.9 million).


— 56 —

There are no historical figures for the transactions contemplated under the

Consignment Sale Agreement as all Products manufactured by the Target Business

prior to completion of the Asset Injection were and would continue to be sold to

the Haier Group after Completion.

The Directors consider that there are no significant issues of competition between

the Group and the Haier Group under the Consignment Sale Agreement in view

that:

(a) whilst it was a commercial arrangement between the parties that the Haier

Group shall retain ownership of the outstanding inventories, in order to

avoid direct competition between the parties, the Haier Group has also

agreed not to sell the same by itself but rather entrusted the Group to

conduct such sales on a consignment basis pursuant to the Consignment

Sale Agreement. Comparing to otherwise allowing the Haier Group to

directly conduct the sales of the outstanding inventories by itself, the

Directors consider the current arrangement is preferable;

(b) the Group is not required to achieve any prescribed level of sales under the

Consignment Sale Agreement and the sales of the outstanding inventories

will not be given any priority over the goods manufactured by the Enlarged

Group after Completion. In other words, the Group will not be put under

pressure to push the sales of the outstanding inventories ahead of the

products manufactured by the Enlarged Group; and

(c) the Company will give priority to the sales of the products of the Enlarged

Group over the outstanding inventories.

Independent Shareholders’ Approval

Each of the applicable percentage ratios (except for the profits ratio which is not

applicable) for each of the Continuing Connected Transactions in paragraphs (A)

to (D) above is expected to be higher than 25% on an annual basis, or, where the

relevant applicable percentage ratios is higher than 2.5% but less than 25% on an

annual basis, is expected to have an annual consideration of higher than

HK$10,000,000. Notwithstanding that each of the applicable percentage ratios

for the transaction amounts contemplated under the Gift Products Procurement

and Products Sales Agreement in paragraph (E) above is expected to be, on an

annual basis, less than 2.5% on an annual basis for each of the three consecutive

financial years ending 31 December 2008, such transactions would be aggregated

with the transactions contemplated under the other Continuing Connected

Transaction Agreements and subject to the independent shareholders’ approval

requirement under the Listing Rules. In addition, notwithstanding that each of the


— 57 —

applicable percentage ratios for the transaction amounts under the Consignment

Sale Agreement referred to in paragraph (F) above is expected to be less than

2.5%, such transactions would be aggregated with the transactions under the

other Continuing Connected Transaction Agreements and subject to the independent

shareholders’ approval requirement under the Listing Rules.

Accordingly, each of the Continuing Connected Transactions would be subject to

the reporting, announcement and independent shareholders’ approval requirements

under the Listing Rules. The Continuing Connected Transactions Agreements and

the relevant Cap Amounts would be subject to the approval of Independent

Shareholders at the SGM. Haier Corp, Haier Investment, Deutsche Bank and their

respective associates are required to abstain from voting on the resolution relating

to, among other things, the approval of the Continuing Connected Transactions

Agreements and the Cap Amounts at the SGM.

TERMS COMMON TO ALL CONTINUING CONNECTED TRANSACTIONAGREEMENTS (EXCEPT FOR THE CONSIGNMENT SALE AGREEMENT)

The terms of the Continuing Connected Transactions and the respective underlying agreements

have been, and will be negotiated and conducted on an arm’s length basis and on normal

commercial terms between the parties involved.

Duration

Except that the term of the Consignment Sale Agreement would be for a fixed term of eight

months after Completion and which could be extended up to twelve months after Completion

at the discretion of the Company, each of the other Continuing Connected Transaction

Agreements (conditional upon the approval of the Independent Shareholders being obtained

where required) will take effect as upon Completion (when members of the Target Group will

become subsidiaries of the Enlarged Group) and will expire on 31 December 2008.

Except for the Consignment Sale Agreement, pursuant to the terms of the other Continuing

Connected Transaction Agreements, the Group has an option, in its entire discretion, to request

the counterparty(ies) to renew the relevant Continuing Connected Transaction Agreement(s)

upon expiry (subject to adjustment of fees where necessary) for terms of three years each

successively up to a total period of 15 years, i.e. 31 December 2020. The Haier Group does

not have reciprocal rights under these Continuing Connected Transaction Agreements. The

exercise of such option will be subject to the then applicable requirements governing continuing

connected transactions under the Listing Rules, including but not limited to the approval by

the independent shareholders.


— 58 —

Termination

Haier Corp and Haier Investment cannot terminate the Continuing Connected Transaction

Agreements except in the following situations:

(i) any members of the Group has committed a material breach of any terms of any of the

Continuing Connected Transaction Agreements (including but not limited to the non-

payment of any service fee/price of the Materials/fee for the Promotion Services due);

or

(ii) Haier Corp and Haier Investment collectively cease to be the single largest controlling

shareholder of the Company.

Upon the occurrence of item (i) above, Haier Corp and Haier Investment can only terminate

the transactions with the defaulting member(s) of the Group under the relevant Continuing

Connected Transaction Agreements(s) by serving not less than six months’ written notice to

such defaulting member(s) of the Group but the transactions between the Haier Group and

other members of the Group shall not be affected and shall continue. Upon the occurrence of

item (ii) above, Haier Corp and Haier Investment may terminate the Continuing Connected

Transaction Agreements by serving not less than six months’ written notice to the Company.

The Company may terminate the Continuing Connected Transaction Agreements by serving

Haier Corp and Haier Investment not less than six months’ written notice. However, if the

Company decides to terminate the Continuing Connected Transaction Agreements or not to

renew the same upon expiry, such decision shall be approved by the independent non-executive

Directors and shall be announced by the Company.

REASONS FOR, BENEFITS AND ADVANTAGES OF THE CONTINUINGCONNECTED TRANSACTIONS

The Directors consider that the Continuing Connected Transactions will allow the Group to

leverage on the Haier Group’s experience in procurement, production management and overseas

distribution and enjoy economies of scale, which will benefit the ongoing operation of the

Group’s business and facilitate future growth.

Specifically, the Services Agreement will enable the Enlarged Group to take advantage of the

comprehensive services offered by the Haier Group, the Export Agreement will allow the

Enlarged Group to utilise the overseas sales network for export sales, whilst the Materials

Procurement Agreement will allow the Enlarged Group to utilise the procurement platform of

the Haier Group in the PRC. In addition, through the Promotion Agreement, the Group can

benefit from participating in the concerted marketing and promotion effort of the Haier Group

in promoting the Products under the collective promotional campaign organised by the Haier

Group, including (i) various promotion events with Haier Group’s other home electrical

appliances products; (ii) marketing exhibitions in various cities in the PRC.


— 59 —

The Directors (including the independent non-executive Directors who have taken into account

the advice and recommendation of ICEA) are of the view that the Continuing Connected

Transactions, the Cap Amounts and the respective underlying agreements are entered into in

the ordinary course of business, on normal commercial terms, which were arrived at after

arm’s length negotiations and are fair and reasonable and in the best interests of the Company

and the Shareholders as a whole.

CONDITIONS OF THE CONTINUING CONNECTED TRANSACTIONS

The Continuing Connected Transactions will be conducted in the ordinary and usual course of

business of the Group on normal commercial terms for the period from Completion up to 31

December 2006 and two financial years ending 31 December 2008 and subject to the following

conditions under the Listing Rules:

(1) The total annual revenue and expenditure in respect of each category of the Continuing

Connected Transactions will not exceed the Cap Amounts as follows:

(a) in relation to the General Services contemplated under the Services Agreement,

the fee payable to the Haier Group for the period from Completion up to 31

December 2006 and each of the two financial years ending 31 December 2008

will not exceed RMB53 million (equivalent to approximately HK$52 million),

RMB200 million (equivalent to approximately HK$195 million) and RMB260

million (equivalent to approximately HK$254 million) respectively;

(b) in relation to the Financial Services contemplated under the Services Agreement,

the maximum outstanding balance of deposits placed with Haier Finance (including

interest received in respect of such deposits) for the period from Completion up

to 31 December 2006 and each of the two financial years ending 31 December

2008 will not exceed RMB400 million (equivalent to approximately HK$390

million). The maximum outstanding loans (including interest accrued in respect

of such loans) for each of the three years ending 31 December 2008 will not

exceed RMB300 million (equivalent to approximately HK$293 million);

(c) in relation to the transactions contemplated under the Export Agreement, the

amount of the sales of the Products to Haier Electrical for the period from

Completion up to 31 December 2006 and each of the two financial years ending

31 December 2008 will not exceed RMB167 million (equivalent to approximately

HK$163 million), RMB800 million (equivalent to approximately HK$780 million),

and RMB1,100 million (equivalent to approximately HK$1,073 million)

respectively;


— 60 —

(d) in relation to the transactions contemplated under the Materials Procurement

Agreement, the amount of the purchases of the Materials from the Haier Group

for the period from Completion up to 31 December 2006 and each of the two

financial years ending 31 December 2008 will not exceed RMB667 million

(equivalent to approximately HK$650 million), RMB2,500 million (equivalent to

approximately HK$2,439 million), and RMB3,300 million (equivalent to

approximately HK$3,220 million), respectively;

(e) in relation to the transactions contemplated under the Promotion Agreement, the

fee payable for the Promotional Services to the Haier Group for the period from



HK$10 million), RMB40 million (equivalent to approximately HK$39 million),

and RMB50 million (equivalent to approximately HK$49 million) respectively;

(f) the maximum amount of purchases of Gift Products from the Haier Group

contemplated under the Gift Products Procurement and Products Sales Cap, for

the period from Completion up to 31 December 2006 and each of the two financial

years ending 31 December 2008 will not exceed RMB1 million (equivalent to

approximately HK$1 million), RMB4 million (equivalent to approximately HK$3.9

million), and RMB5 million (equivalent to approximately HK$4.9 million)

respectively;

(g) the maximum amount of sale of Products to the Haier Group contemplated under

the Gift Products Procurement and Products Sales Cap, for the period from



HK$1 million), RMB4 million (equivalent to approximately HK$3.9 million),

and RMB5 million (equivalent to approximately HK$4.9 million) respectively;

and

(h) the maximum amount of commission payable to the Company contemplated under

the Consignment Sale Cap for a fixed term of eight months and which could be

extended up to twelve months after Completion at the discretion of the Company

will not exceed RMB6 million (equivalent to approximately HK$5.9 million).

(2) The Company will comply with the requirements under Chapter 14A of the Listing

Rules for each of the Continuing Connected Transactions.


— 61 —

SGM AND INDEPENDENT SHAREHOLDERS’ APPROVAL

A notice convening the SGM to be held at JW Marriott Ballroom (Level 3), JW Marriott Hotel

Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 23 October 2006 (Monday) at 10:00

a.m. is set out on pages 213 to 215 of this circular at which an ordinary resolution will be

proposed for the Independent Shareholders to consider, and, if thought fit, to approve the

Agreements and the Cap Amounts. Voting at the SGM will be conducted by way of poll

pursuant to the Listing Rules. Haier Corp, Haier Investment, Deutsche Bank and their respective

associates are required to abstain from voting on the resolution approving the Asset Injection

Agreement, the Continuing Connected Transactions Agreements and the respective Cap

Amounts at the SGM under the Listing Rules.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee comprising all three independent non-executive Directors

has been formed to consider (a) the terms of the Asset Injection Agreement; (b) the terms of

the Continuing Connected Transaction Agreements; and (c) the respective Cap Amounts for

transaction contemplated under the Continuing Connected Transaction Agreements so far as

the Company and the Independent Shareholders are concerned as a whole. ICEA has been

appointed as the independent financial adviser to advise the Independent Board Committee

and the Independent Shareholders on the same.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee as set out on

pages 63 to 64 of this circular which contains its recommendation to the Independent

Shareholders as to voting at the SGM.

Your attention is also drawn to the letter from ICEA, the independent financial adviser to the

Independent Board Committee and the Independent Shareholders set out on pages 65 to 93 of

this circular, which contains its advice to the Independent Board Committee and the Independent

Shareholders in relation to the Agreements.

The Independent Board Committee, having taken into account the advice and recommendation

of ICEA, is of the view that the Agreements and the Cap Amounts are in the interests of the

Company and the Shareholders as a whole and the terms of the Agreements are fair and

reasonable so far as the interests of the Independent Shareholders are concerned. Accordingly,

the Independent Board Committee recommends the Independent Shareholders to vote in favour

of the resolution to be proposed at the SGM to approve the Agreements and the Cap Amounts.


— 62 —

GENERAL

The Group is engaged in the research, development, production and sale of top loading washing

machines. The principal business activities of the Company is investment holding.

The Haier Group is a leading manufacturer of and is engaged in the research, development,

production and sale of a wide variety of household appliances (including the White Goods)

and consumer goods in the PRC. The principal business of each of Haier Corp, Haier Investment

and Haier BVI is investment holding. Haier Electrical is principally engaged in import and

export trade and manufacture and sales of household electrical appliances.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular.

Yours faithfully,

For and on behalf of the Board of

HAIER ELECTRONICS GROUP CO., LTD.Yang Mian Mian

Chairman

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

— 63 —



(Stock Code: 1169)

25 September 2006

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONINVOLVING PROPOSED ASSET INJECTION

ANDCONTINUING CONNECTED TRANSACTIONS

We refer to the circular dated 25 September 2006 (the “Circular”) of the Company of which

this letter forms part. Terms defined in the Circular shall have the same meanings when used

herein unless the context requires otherwise.

Under the Listing Rules, the Agreements all dated 18 August 2006 and the relevant Cap

Amounts are conditional and shall only be effective upon the passing of an ordinary resolution

by the Independent Shareholders at the SGM approving the terms thereof. We, being the

independent non-executive Directors constituting the Independent Board Committee, are writing

to advise you as a shareholder, whether in the views of the Independent Board Committee, the

terms of the Agreements and the relevant Cap Amounts are fair and reasonable and in the

interests of the Independent Shareholders as a whole.

We wish to draw your attention to the letter from the Board as set out on pages 12 to 62 of the

Circular and the letter from ICEA as set out on pages 65 to 93 of the Circular which contains,

inter alia, its advice and recommendation to us regarding the terms of the Agreements and the

relevant Cap Amounts with the principal factors and reasons for its advice and recommendation.


LETTER FROM THE INDEPENDENT BOARD COMMITTEE

— 64 —

RECOMMENDATION

Having taken into account the advice and recommendation of ICEA, we are of the view that

the Agreements and the relevant Cap Amounts are in the interests of the Company and the

Shareholders as a whole, and are fair and reasonable so far as the interests of the Independent

Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to

vote in favour of the ordinary resolution to be proposed at the SGM to approve the Agreements

and the relevant Cap Amounts.

Yours faithfully,

For and on behalf of

the Independent Board Committee of

HAIER ELECTRONICS GROUP CO., LTD.Lam Kin Kau, Mark Fung Hoi Wing, Henry Wu Yinong

Independent non-executive Directors

LETTER FROM ICEA

— 65 —

The following is the text of the letter of advice to the Independent Board Committee and the

Independent Shareholders from ICEA in relation to the major and connected transaction and

the continuing connected transactions for the purpose of incorporation in this circular.

LETTER FROM ICEA

— 66 —

In addition, as stated in the Letter from the Board in the Circular, on 18 August 2006, the

Company on the one part and Haier Corp and Haier Investment on the other entered into the

Continuing Connected Transactions Agreements (except for the Export Agreement which was

entered into between the Company and Haier Electrical) which set out the key terms and

conditions and the general pricing principles of the continuing connected transactions between

members of the Haier Group and members of the Enlarged Group. As each of Haier Corp and

Haier Investment is a substantial Shareholder and connected person of the Company and,

Haier Electrical, a 70% subsidiary of Haier Investment, is an associate of Haier Investment

thus also a connected person of the Company, transactions contemplated under each of the

Continuing Connected Transactions Agreements constitute continuing connected transactions

of the Company under the Listing Rules.

Each of the relevant percentage ratios (except for the profits ratio which is not applicable) for

each of the Continuing Connected Transactions (other than the Gift Products Procurement and

Products Sales Agreement) is expected to be higher than 25% on an annual basis, or, where a

relevant applicable percentage ratios is higher than 2.5% but less than 25% on an annual

basis, it is expected to have an annual consideration of higher than HK$10,000,000.

Notwithstanding that each of the applicable percentage ratios for the transaction amounts

under the Gift Products Procurement and Products Sales Agreement is expected to be less

than 2.5% on an annual basis for each of the three consecutive financial years ending 31

December 2008, such transactions would be aggregated with the transactions contemplated

under the other Continuing Connected Transactions Agreements and subject to the Independent

Shareholders’ approval requirement under the Listing Rules. In addition, whilst each of the

applicable percentage ratios for the transaction amount under the Consignment Sale Agreement

is expected to be less than 2.5%, such transactions would be aggregated with the transactions

under the other Continuing Connected Transactions Agreements and subject to the Independent

Shareholders’ approval requirement under the Listing Rules. Haier Corp, Haier Investment,

Deutsche Bank and their respective associates are required to abstain from voting on the

resolution relating to, among other things, the approval of the Continuing Connected

Transactions at the SGM.

We, ICEA, have been engaged as the independent financial adviser to advise the Independent

Board Committee and the Independent Shareholders as to whether the terms of the Asset

Injection Agreement, the terms of the Continuing Connected Transaction Agreements and the

respective Cap Amounts for transactions contemplated under the Continuing Connected

Transactions Agreements are on normal commercial terms, in the ordinary and usual course of

business and fair and reasonable so far as the Company and the Shareholders are concerned.

LETTER FROM ICEA

— 67 —

In formulating our recommendation, we have relied, without assuming any responsibility for

independent verification, on the information, opinions and facts supplied and representations

made to us by the Directors, who have assumed full responsibility for the accuracy of the

information contained in the Circular, and that any information and representations made to

us are true, accurate and complete in all material respects as at the date hereof and that they

may be relied upon. We have no reason to doubt the truth, accuracy and completeness of the

information and representation provided to us by the Company. We have discussed with the

management of the Company regarding their plans and prospects of the Company. We have

also relied on certain information available to the public and have assumed such information

to be accurate and reliable, and we have not independently verified the accuracy of such

information. We have also assumed that statements and representations made or referred to in

the Circular were accurate at the time they were made and continue to be accurate at the date

of the Circular.

We consider that we have reviewed sufficient information to reach an informed view in order

to provide a reasonable basis for our advice. We have not, however, conducted any form of

independent in-depth investigation into the business affairs or assets and liabilities of the

Company, Haier BVI, the Target Group, or any of their respective subsidiaries or associated

companies. Additionally, we did not conduct any physical inspection of the properties or

facilities of the Company, Haier BVI, the Target Group, or any of their respective subsidiaries

or associated companies. It is not within our terms of engagement to comment on the

commercial feasibility of the Asset Injection Agreement and the Continuing Connected

Transactions Agreements, which remains the responsibility of the Directors. As the independent

financial adviser to the Independent Board Committee and the Independent Shareholders, we

have not been involved in the negotiations in respect of the terms of the Asset Injection

Agreement and the Continuing Connected Transactions Agreements. Our opinion with regard

to the terms thereof has been made on the assumption that all obligations to be performed by

each of the parties to the Asset Injection Agreement and the Continuing Connected Transactions

Agreements will be fully performed in accordance with the terms thereof.

Our opinion is necessarily based upon the financial, economic, market, regulatory, and other

conditions as they exist on, and the facts, information, and opinions made available to us as of

the date of this letter. We have no obligation to update this opinion to take into account events

occurring after the date that this opinion is delivered to the Independent Board Committee and

the Independent Shareholders. This letter is for the information of the Independent Board

Committee and the Independent Shareholders solely in connection with their consideration of

the Asset Injection, the Continuing Connected Transactions Agreements and the Cap Amounts,

and, except for its inclusion in the Circular, is not to be quoted or referred to, in whole or in

part, nor shall this letter be used for any other purpose, without our prior written consent.

LETTER FROM ICEA

— 68 —

PRINCIPAL FACTORS CONSIDERED

In arriving at our opinion, we have taken into consideration the principal factors and reasons

set out below. In reaching our conclusion, we have considered the results of the analyses in

light of each other and ultimately reached our opinion based on the results of all analyses

taken as a whole.

A. Asset Injection

1. Reasons for and benefits of the Asset Injection

Currently, the Group is only engaged in research, development, production and

sale of top loading washing machines under the Haier brand. The principal business

activities of the Target Group include the research, development, production and

sale of front loading washing machines and water heaters. The Target Group is a

leading player in the domestic front loading washing machine market and water

heater market in the PRC. The Directors consider that the products of the Target

Business, especially the front loading washing machines business, and the current

top loading washing machines business of the Group have similar and

complementary marketing strategies and that the Asset Injection may create

synergies and increase the value of the Group as a whole. In addition, the Asset

Injection will enable the Company to expand its product categories and broaden

the revenue base of the Group. In particular, the Directors consider that the Asset

Injection will enhance the overall competitiveness of the washing machine business

of the Group by improving management efficiency, research and development

capability and marketing capacity while eliminating potential competition and

conflict of interests between the Group and the Haier Group on the management

of the washing machine business.

The Directors also consider that the Asset Injection may also generate other

intangible benefits such as enhancement of the Company’s profile by leveraging

on Haier brand and facilitating the Group’s access to the capital markets. For

more details of the reasons for and benefits of the Asset Injection, please refer to

the Letter from the Board in the Circular.

We noted that the Target Group recorded a profit attributable to its equity holders

(as stated in Appendix II to the Circular) of approximately RMB49.2 million,

RMB29.8 million and RMB72.0 million for each of the three years ended 31

December 2005 respectively. As at 31 December 2005, the net asset value

(excluding minority interests) (as stated in Appendix II to the Circular) of the

Target Group was approximately RMB326.7 million.

LETTER FROM ICEA

— 69 —

Due to the above and in view of the Group’s audited loss attributable to its equity

holders of approximately HK$433.0 million for the year ended 31 December

2005, we are of the view that the Asset Injection may enhance the profitability of

the Group, and hence is in the interests of the Company and the Shareholders as a

whole.

2. Terms of the Asset Injection Agreement

The total consideration for the Asset Injection was HK$900,000,000.

(a) Valuation of the Consideration

The total consideration of HK$900,000,000, represents:

(i) a historical price earning ratio (“PE ratio”) of approximately 12.8

times for the year ended 31 December 2005; and

(ii) approximately 2.8 times to the net asset value (excluding minority

interests) (as stated in Appendix II to the Circular) of the Target

Group as at 31 December 2005.

We noted that the Company has taken into consideration the advice,

including information on market comparables, from Deutsche Bank.

In assessing the reasonableness of the valuation of the consideration, we

have reviewed the PE ratio and price to net asset value ratio (“NAV ratio”)

of other listed companies which manufacture washing machines and/or water

heaters (the “Comparables”).

LETTER FROM ICEA

— 70 —

The respective PE ratio and NAV ratio of the Comparables as at the Last

Trading Day are summarized in the table below.

Listing PE NAVCompany name Business place ratio ratio

times times

Whirlpool Corporation Manufacture of major home appliances such USA 11.1 2.1

as laundry appliances, refrigeration and

room air conditioning equipment, cooking

appliances, dishwashers, and mixers and

other small household appliances.

Electrolux AB Manufacture of appliances and outdoor Sweden 36.0 1.8

products including refrigerators, cookers,

washing machines, vacuum cleaners, chain

saws, lawn mowers and garden tractors.

Indesit Company SpA Manufacture of a variety of household Italy 19.7 2.0

appliances such as ovens, refrigerators

and dishwashers, laundry machines and

provision of customer services.

De’Longhi S.p.A. Manufacture of air conditioning, heating, Italy 16.4 0.7

cooking and other domestic appliances.

Schulthess Group AG Manufacture of household appliances and Switzerland 37.0 6.5

heating equipment including washing

machines, dryers, tumblers and heat pumps.

Arcelik A.S. Manufacture of refrigerators, washing Turkey 10.3 1.8

machines, cooking appliances, vacuum

cleaners, refrigeration compressors, electric

motors and consumer electronics products.

Noritz Corporation Manufacture of gas-fired bathes and hot Japan 44.3 1.2

water heaters, system kitchen & bath,

air-conditioning equipment, heaters and

other bath-related products.

LETTER FROM ICEA

— 71 —

Listing PE NAVCompany name Business place ratio ratio

times times

Corona Corporation Manufacture of air-conditioners, heaters, Japan 18.1 1.0

household equipment, oil-heating units,

air purifiers, humidifiers and water heaters.

Fujimak Corporation Manufacture of commercial kitchen facilities Japan 17.4 0.6

and equipment including large sized systems

for hotels, heating equipment, cooling

equipment, washing and sterilizing

equipment and dispensers.

Shinil Industrial Manufacture of electric fans, ovens, rice pots, South Korea 12.7 1.3

Co., Ltd. small refrigerators, pagers, electric heaters,

and other household appliances.

Teco Electric & Manufacture of household appliances, Taiwan n.a. 0.6

Machinery Co., Ltd. industrial motors, smart cards, air

conditioners, refrigerators, washing

machines, television, dryers, motors,

inverters, rotary compressors and generators.

Sampo Corporation Manufacture of electronic products, Taiwan n.a. 0.6

communication equipment and home

appliances such as television sets,

multimedia monitors, digital video discs,

flyback transformers, washing machines,

air conditioners, refrigerators, fax machines

and cordless phones.

Range 10.3 0.6

to to

44.3 6.5

Average 22.3 1.7

Target Group 12.8 2.8

Source: Bloomberg

Note: The NAV ratio for the Comparables refer to Price/Book as set out in Bloomberg.

LETTER FROM ICEA

— 72 —

The above PE ratios and NAV ratios of the Comparables illustrate the

consideration the investors willing to pay and actually paid for acquiring

the shares of the Comparables, and hence, representing the market value

for shares of the Comparables as compared to their respective earnings and

net asset value. Given that the historical PE ratio of the Target Group is

near the lower end of the range of the Comparables while its NAV ratio is

within the range of the Comparables based on the consideration of

HK$900,000,000, we consider that the valuation of the consideration is fair

and reasonable so far as the Independent Shareholders are concerned.

(b) Terms of Consideration

The total consideration for the Asset Injection of HK$900,000,000 will be

satisfied by the Company to Haier BVI (or its nominees) on the Completion

Date by:

(i) offsetting the outstanding principal amount under the Promissory Note

(being HK$419,954,099 as at the Latest Practicable Date) together

with interest accrued thereon up to the Completion Date or assignment

of the same to the order of Haier BVI;

(ii) the issue of the Consideration Shares to Haier BVI (or its nominee(s));

(iii) offsetting the Receivable; and

(iv) the balance to be paid by way of the Deferred Consideration.

We noted that no payment of cash is involved for satisfaction of the

Consideration, implying no adverse impact on the financial position of the

Group. Given that the net current assets and the cash and cash equivalent

position of the Group were approximately HK$246.5 million and HK$560.3

million respectively as at 31 December 2005 and taking into account the

payment method of the Consideration, we consider that the terms of the

Consideration are in the interest of the Company and the Independent

Shareholders.

LETTER FROM ICEA

— 73 —

(c) Consideration Shares

The issue price per Consideration Share is HK$0.24, representing:

(i) a discount of approximately 0.4% to the closing price per Share as

quoted on the Stock Exchange as at the Last Trading Date; and

(ii) a premium of approximately 3.4% to the average closing price per

Share as quoted on the Stock Exchange for the last 5 trading day

including the Last Trading Date.

The Consideration Shares represent approximately 5.78% of the Company’s

existing issued share capital and approximately 5.46% of the Company’s

issued share capital as enlarged by the issue of the Consideration Shares.

In assessing the reasonableness of the price per Consideration Share, we

have reviewed (i) the issue of new shares as consideration for acquisition;

and (ii) issue of new shares for cash (which also dilutes the shareholding of

existing shareholders in a similar way as issue of consideration shares

does) for listed companies in Hong Kong from mid July 2006 (approximately

one month prior to the Last Trading Day) up to 25 August 2006, the date of

the announcement of the Company regarding the Asset Injection (the “New

Issue Comparables”).

The premium or discount of price of new shares to their respective closing

price immediately prior to the announcement for the New Issue Comparables

is summarized in the table below.

Premium/(Discount)of price of

Closing price new sharesimmediately to previous

Stock Date of prior to the Price per closing Nature ofCode Company Name announcement announcement new share price transaction

HK$ HK$

439 Climax International 17 July 2006 0.225 0.210 (6.70%) Placing

Company Limited

8251 Shanghai Donghua 18 July 2006 2.225 1.100 (50.60%) Placing

Petrochemical

Co., Ltd.

LETTER FROM ICEA

— 74 —




HK$ HK$

535 Frasers Property 20 July 2006 0.198 0.120 (39.39%) Rights issue

(China) Limited

632 China Merchants 20 July 2006 4.175 3.900 (6.60%) Acquisition

Dichain (Asia)

Limited

8080 North Asia Strategic 26 July 2006 0.450 0.157 (65.20%) Issue of

Holdings Limited preference

shares

131 Cheuk Nang (Holdings) 28 July 2006 4.450 4.000 (10.11%) Placing

Limited

305 Magnum International 28 July 2006 0.129 0.032 (75.54%) Rights issue

Holdings Limited

2028 Jolimark Holdings 31 July 2006 1.360 1.340 (1.47%) Placing and

Limited Acquisition

555 REXCAPITAL Financial 31 July 2006 0.375 0.370 (1.33%) Acquisition

Holdings Limited

989 China Motion Telecom 1 August 2006 0.236 0.189 (19.92%) Placing

International Limited

1226 Garron International 2 August 2006 0.370 0.350 (5.41%) Placing

Limited

632 China Merchants Dichain 2 August 2006 4.100 4.000 (2.40%) Acquisition

(Asia) Limited

8068 New Universe International 3 August 2006 0.290 0.100 (65.50%) Rights issue

Group Limited

LETTER FROM ICEA

— 75 —




HK$ HK$

555 REXCAPITAL Financial 3 August 2006 0.375 0.350 (6.67%) Placing

Holdings Limited

690 Uni-Bio Science Group 4 August 2006 2.990 2.500 (16.38%) Placing

Limited

185 China Credit Holdings 7 August 2006 0.160 0.170 6.30% Issue of

Limited warrant

217 China Chengtong 8 August 2006 0.335 0.300 (10.45%) Placing

Development Group

Limited

603 Nippon Asia Investments 8 August 2006 0.060 0.060 — Acquisition

Holdings Limited

2324 Sino Katalytics 9 August 2006 0.430 0.400 (6.98%) Placing

Investment Corporation

340 Innomaxx Biotechnology 10 August 2006 0.680 0.400 (41.18%) Acquisition

Group Limited

901 Radford Capital 14 August 2006 0.095 0.093 (2.11%) Placing

Investment Limited

382 Hualing Holdings Limited 15 August 2006 0.142 0.130 (8.45%) Placing

346 Sino Union Petroleum & 16 August 2006 0.210 0.230 8.70% Placing

Chemical International

Limited

1141 Xin Corporation Limited 17 August 2006 0.209 0.120 (42.60%) Open offer

8017 Long Success International 21 August 2006 1.100 1.100 — Acquisition

(Holdings) Limited

LETTER FROM ICEA

— 76 —




HK$ HK$

164 Premium Land Limited 21 August 2006 0.220 0.198 (10.00%) Placing

385 Chinney Alliance Group 21 August 2006 0.240 0.250 4.20% Open offer

Limited

1217 Sino Technology 23 August 2006 0.080 0.040 (50.00%) Rights issue

Investments Company

Limited

Maximum 8.70%

Minimum (75.54%)

The Company 0.241 0.240 (0.41%)

Among the New Issue Comparables, the premium/discount of price of new

shares to their respective previous closing prices for the New Issue

Comparables ranges from a discount of approximately 75.54% to a premium

of approximately 8.70%.

Given that the new shares for 23 out of the 28 New Issue Comparables

were or will be issued at discount to their respective previous closing

prices and there is only a slight discount to the closing price of the Shares,

we are of the view that the price of the Consideration Shares is fair and

reasonable so far as the Independent Shareholders are concerned.

(d) Deferred Consideration

Less than 20% of the consideration will be settled by the Deferred

Consideration which is interest-bearing at 4% per annum and with a term

of one year from the Completion Date. The Company may, at its absolute

discretion, pay all or any part of the Deferred Consideration before due

date while Haier BVI (or its nominee(s)) can only demand for payment

with the consents of the Company.

LETTER FROM ICEA

— 77 —

We understand from the management of the Company that if the balance of

the Consideration is settled by bank borrowings from a Hong Kong financial

institution instead of by way of the Deferred Consideration, (1) the interest

rates charged by Hong Kong financial institutions would be around 6% per

annum; (2) there would be a penalty charged for early repayment before

due date; and (3) the Company may require to repay all or any part of the

existing bank loans or overdrafts on demand of the respective Hong Kong

financial institutions.

In view of the above, we are of the view that the terms of the Deferred

Consideration are in favour of the Company and are in the interest of the

Company and the Independent Shareholders.

B. Continuing Connected Transactions

1. Reasons for and benefits of the Continuing Connected Transactions

It is expected that after completion of the Asset Injection, certain transactions of

a continuing nature between the Target Business (which would form part of the

Enlarged Group after completion of the Asset Injection) and other members of

the Haier Group would continue. Upon Completion, such transactions will

constitute continuing connected transactions of the Company under the Listing

Rules.

As stated in the Letter from the Board in the Circular, on 18 August 2006, the

Company on one part and Haier Corp and Haier Investment on the other entered

into the Continuing Connected Transactions Agreements (except for the Export

Agreement which was entered into between the Company and Haier Electrical)

which set out the key terms and conditions and the general pricing principles of

the continuing connected transactions between members of the Haier Group and

members of the Enlarged Group.

The Continuing Connected Transactions refer to transactions contemplated under

the following agreements:

(A) the Services Agreement;

(B) the Export Agreement;

(C) the Materials Procurement Agreement;

(D) the Promotion Agreement;

LETTER FROM ICEA

— 78 —

(E) the Gift Products Procurement and Products Sales Agreement; and

(F) the Consignment Sale Agreement.

Details of the principal terms of the above agreements are set out in the Letter

from the Board in the Circular.

In view of the long-term relationship between the Group and the Haier Group, the

Directors consider that it is beneficial for the Group to leverage on the Haier

Group’s experience in procurement, production management and distribution and

enjoy economies of scale, benefiting the ongoing operation of the Group’s business

and facilitating future growth.

The Directors are of the view that the Continuing Connected Transactions and the

respective underlying agreements are entered into in the ordinary course of business

and on normal commercial terms.

Given that (i) Haier Group is a leading white goods manufacturer in the PRC and

a vertically integrated manufacturer of household and consumer goods; (ii) there

is economies of scale resulting from centralizing a number of its key services;

(iii) it has a long-developed overseas sales network and substantial experience in

export sales, the Directors consider that entering into the Continuing Connected

Transactions Agreements with Haier Group is in the interest of the Company and

the Shareholders.

2. Terms of the Continuing Connected Transactions

2.1 Pricing basis of the Continuing Connected Transactions

The pricing basis of the Continuing Connected Transactions are summarized

as below:

Item Type of services Pricing principle

A. Services Agreement

I. General Services

A.1 — logistics services fees to be negotiated on an arm’s

length basis and, for services of the

same quali ty, on terms no less

favourable than those offered by

independent third parties for services.

LETTER FROM ICEA

— 79 —


A.2 — utilities services

A.3 — legal consultancy anddocumentary services

(a) general legal

consultancy

services

(b) litigation services

(c) other legal services

A.4 — conferencing,catering and travelagency services

A.5 — product certificateservices

fees to be charged based on the state-

prescr ibed pr ices p lus ac tua l

administrative costs that Haier Group

incurs for the provision of the relevant

services (if any).

each legal entity receiving such

services wil l be charged a fee

calculated with reference to the price

indices then prevailing in the PRC

market for same type of services and

the costs for provision of such service.

fees to be calculated with reference

to the price indices then prevailing in

the PRC market for same type of

services and the actual costs for

provision of the same thereof,

currently fixed at 11% of the disputed

amount. For cases where the fee

calculated on the above basis will be

less than RMB30,000, the fees are to

be agreed between the parties on the

basis of the actual costs incurred.

a standard fee to be reviewed between

the parties from time to time which

must not be higher than the fees

charged by independent third parties

of the Group.


basis with handling charge of not

more than 10%.


basis, including the cost for product

testing and professional fees incurred

in the certification process.

LETTER FROM ICEA

— 80 —


A.6 — equipment repair andmaintenance services

A.7 — security services

A.8 — human resourcesservices

A.9 — for software services

(a) operation system

development and

maintenance

services

(b) other software

services

A.10 — any other GeneralServices

fees to be charged at the cost of the

relevant personnel assigned to provide

such services to the Group.








relevant technician assigned to

provide such services to the Group.

fees to be charged at a fee determined

with reference to, among other factors,

the price indices then prevailing in the


services and the actual cost for

provision of the same thereof, which

shall be no less favourable than terms

offered by independent third parties

to the Group.

fees to be charged at a fee determined

with reference to, among other factors,

the price indices then prevailing in the


services and the actual costs incurred

in the provision of such services,

which will be no less favourable than

terms offered by independent third

parties to the Group.

LETTER FROM ICEA

— 81 —


II. Financial Services

A.11 — deposits with HaierFinance

A.12 — loans from HaierFinance

the interest receivable from Haier

Finance will be at a rate determined

by reference to the standard rates

published by the People’s Bank of

China from time to time and on terms

no less favourable than those offered

by any independent third parties to the

Group.

the interest payable to Haier Finance

will be at a rate determined by

reference to the standard rates

published by the People’s Bank of

China from time to time and on terms

no less favourable than those offered

by any independent third parties to the

Group.

B. Export Agreement

B.1

C. Materials Procurement Agreement

C.1 — for moulds

the Products will be sold to Haier

Electrical at a price representing the

difference between the selling price

of the Products to be mutually agreed

and the selling expenses of Haier

Electrical which shall not exceed 2.5%

of the selling price of the Products.

fees to be charged at a price with

reference to the average market tender

and bidding price of such moulds plus

the actual administrative costs of the

Haier Group.

LETTER FROM ICEA

— 82 —


C.2 — for printing andpackaging materials

C.3 — for all otherMaterials

D. Promotion Agreement

D.1


basis plus a processing fee of not

h igher than those charged by

independent third part ies with


prevailing in the PRC market or

equivalents for the provision of the

printing and packaging services.

fees to be charged at a price to be

agreed by the parties, which shall not

be higher than the lower of (i) the

average market price of the Materials;

or (ii) the consolidated and integrated

tender and bidding price of the

Materials plus a commission fee of

2.6%.

fees to be charged at 1.2% of the PRC

domestic sales of the Target Business.

E. Gift Products Procurement and Products Sales Agreement

E.1 — Gift Products ofHaier Group to besold to the Group

E.2 — Products of theGroup to be sold tothe Haier Group

at their respective market price

prevailing in the PRC market for the

products of the same type and quality

but shall not be higher than that sold

by the Haier Group to independent

third parties.

at their respective market price

prevailing in the PRC market for the

products of the same type and quality

but shall not be less than that sold by

the Group to independent third parties.

LETTER FROM ICEA

— 83 —


F. Consignment Sale Agreement

a commission of 2% of the turnover

of the sales of the outstanding

i n v e n t o r i e s p u r s u a n t t o t h e

Consignment Sale Agreement.

The Company explained that the pricing basis was determined on an arm

length basis and with reference to the existing pricing basis that Haier

Group charges to other members of the Haier Group and independent third

parties (if applicable).

2.1.A.I General Services under Services Agreement

The pricing basis for general services can be broadly categorized

into:

(1) actual cost basis (for services referred as A.5, A.6, A.7,

A.8, A.9(a) above);

(2) actual cost basis plus a commission rate (for services referred

as A.4 above);

(3) based on state-prescribed prices plus actual administrative

cost (for services referred as A.2 above);

(4) with reference to prevailing market rate and cost for the

services of the same quality (for services referred as A.1,

A.3(a), A.3(b), A.9(b), A.10 above); and

(5) at a fixed rate/amount (for services referred as A.3(c) above).

We have examined several transactions between the Haier Group

and the Target Group transacted and noted that (i) the proposed

pricing basis is similar to the existing pricing basis; (ii) the actual

charges for such transactions paid by the Target Group were lower

than that quoted by independent third parties (if available).

F.1

LETTER FROM ICEA

— 84 —

2.1.A.II Financial Services under Services Agreement

The interest payable/charged for Financial Services is at a rate

determined by reference to the standard rates published by the

People’s Bank of China from time to time.

Given that the standard rate published by People’s Bank of China

from time to time ranged from 1.98% to 2.25% per annum for 1-

year savings and from 5.31% to 5.58% per annum for 1-year

loans during 2003 to 2005, we noted that interest rate offered by

Haier Finance to the Target Group was in line with the standard

rate published by People’s Bank of China.

2.1.B Export Agreement

The pricing basis for export services is the difference between the

selling price of the Products to be mutually agreed and the selling

expenses of Haier Electrical which shall not exceed 2.5% of the

selling price of the Products.

The Company explained that the selling expenses of Haier

Electrical includes agency fee, salary and benefits (such as housing

allowances and labour insurance) of overseas staff, operational

expenses (including rent) of overseas offices and traveling

expenses.

2.1.C Materials Procurement Agreement

The pricing basis for materials procurement services can be broadly

categorized into (1) actual cost basis plus a processing rate; and

(2) with reference to prevailing market rate and cost.

We have examined several transactions between the Target Group

transacted and noted that the actual charges for such transactions

paid by the Target Group to Haier Group were lower than that

quoted by independent third parties (if available).

2.1.D Promotion Agreement

The pricing basis for promotion services is 1.2% of the PRC

domestic sales of the Target Business.

LETTER FROM ICEA

— 85 —

The Company explained that the promotion activities include media

advertising for Haier Group, promotion of Haier brand and

sponsorship.

2.1.E Gift Products Procurement and Products Sales Agreement

The Gift Products sold by the Haier Group to the Group and the

Products sold by the Group to Haier Group will be priced at their

respective market price prevailing in the PRC market.

The Company explained that both the Gift Products and the

Products are for the use in sales promotion initiatives such as

lucky draws or as complimentary gifts to customers.

2.1.F Consignment Sale Agreement

The Group will receive a commission of 2% of the turnover of the

sales of the outstanding inventories pursuant to the Consignment

Sale Agreement.

The Company explained that the outstanding inventories will be

orders for front loading washing machines and water heaters

undertaken by the Haier Group prior to the Completion but yet to

be delivered.

Since there will be a time gap between the Completion and the

front loading washing machines and the water heaters being firstly

manufactured by the Target Group for sales, the Consignment

Sale Agreement not only enables the outstanding inventories to

fill up the gap and provide stocks for sales for the Target Group

before the first batch of products manufactured by the Target

Group for sales, but also generates income from the Target

Business immediately upon the Completion. As such, we consider

that the Consignment Sale Agreement is in the interest of the

Company and Independent Shareholders as a whole.

In addition, we understand from the Company that to ensure their offering of

most competitive price to its members, members of Haier Group providing the

above services would, from time to time, compare the terms offered by them to

other members within the Haier Group and by independent third parties.

LETTER FROM ICEA

— 86 —

2.2 Other terms of the Continuing Connected Transactions

2.2.a Non-exclusive clause

We noted that the above agreements are on a non-exclusive basis,

allowing the Group to engage independent third parties as it thinks

fits if the terms are more favourable to the Group.

2.2.b Duration

Except that the term of the Consignment Sale Agreement would be

for a fixed term of eight months (but extendable up to twelve months)

after Completion, each of the other Continuing Connected

Transactions Agreements will take effect as upon Completion and

will expire on 31 December 2008.

2.2.c Termination

Haier Corp and Haier Investment cannot terminate the Continuing

Connected Transactions Agreements except under certain situations

stated in the Letter from the Board in this Circular.

On contrast, the Company may, with the approval of independent

non-executive Directors, terminate the Continuing Connected

Transactions Agreements by serving a written notice of not less than

six months.

Based on the above and our discussion with the Company, we are of the

opinion that the terms of the Continuing Connected Transactions Agreements

are fair and reasonable so far as the interests of the Company and the

Shareholders are concerned as a whole.

LETTER FROM ICEA

— 87 —

3. Proposed Cap Amounts

The historical amounts and the proposed Cap Amounts of the Continuing

Connected Transactions for each of the three years ending 31 December 2008 are

summarized as below:

Estimatedtransaction Proposed

Historical figures amounts Cap AmountsFor year ended For year ending For year ending

31 December 31 December 31 December2003 2004 2005 2006 2006 2007 2008

(note 1) (note 2)(RMB (RMB (RMB (RMB (RMB (RMB (RMB

million) million) million) million) million) million) million)

A. Services Agreement— general services 87 113 122 160 53 200 260— deposits 158 207 104 400 400 400 400— loans 227 141 125 300 300 300 300

B. Export Agreement 81 245 339 500 167 800 1,100

C. Materials ProcurementAgreement 850 1,297 1,523 2,000 667 2,500 3,300

D. Promotion Agreement n.a. n.a. n.a. 30 10 40 50

E. Gift ProductsProcurement andProducts SalesAgreement— Gift Products sold

to the Group n.a. n.a. n.a. 3 1 4 5— Products sold

by the Group n.a. n.a. n.a. 3 1 4 5

F. Consignment Sale n.a. n.a. n.a. 6 6 6 n.a.Agreement (note 3) (note 3) (note 3)

Notes:

1. The figures represent the estimated transaction amounts for the whole year of 2006 and are

for illustrative purpose only.

2. The Cap Amounts for 2006, which are subject to the Independent Shareholders’ approval at

the SGM, is the proposed maximum aggregate transaction amounts between the Completion

Date and 31 December 2006 and is determined by reference to, among other things, the

estimated transaction amounts for the whole year of 2006, the expected Completion Date

(which is expected to be as early as October 2006) and other factors (such as seasonal

factor) which may affect the transaction amount.

3. It is expected that the total amount of commission the Group will receive during the entire

term of the Consignment Sale Agreement will not exceed RMB6 million.

LETTER FROM ICEA

— 88 —

3.1 Home appliance industry in PRC

According to the China Statistical Yearbook 2005 complied by National

Bureau of Statistics of China, both the annual disposable income per capita

of urban and rural households have increased dramatically since 1989. The

annual disposable income per capita of urban and rural households were

approximately RMB9,422 and RMB2,936 respectively in 2004, representing

an annual compound growth rate of approximately 13.7% and approximately

11.1% respectively as compared to that in 1989.

With more disposable income, it is anticipated that PRC households may

consume more durable consumer goods. The China Statistical Yearbook

2005 shows that there were increasing trend of number of major durable

consumer good owned by urban households and rural households since

2000. In particular, at the year end of 2004, per 100 urban households

owned approximately 95.9 washing machines, 90.2 refrigerators, 133.4 color

television sets and 69.4 water heaters; per 100 rural households owned

approximately 37.3 washing machines, 17.8 refrigerators and 75.1 color

television sets.

The above statistics demonstrates the strong demand in the home appliances

industry in the PRC.

3.2 Analysis of the Cap Amounts

The basis of the determination and the analysis of the proposed Cap Amounts

are summarized below:

3.2.1 Services Agreement — General Services and Materials Procurement

Agreement

As discussed with the Company, the proposed Cap Amounts for the

Continuing Connected Transactions in respect of the Services

Agreement for General Services and Materials Procurement

Agreement are determined by reference to, among other things,

— the historical growth rate of the turnover of the Target Group;

— the historical figures for transactions between the Target Group

and the Haier Group; and

— the future prospects of the Target Business.

LETTER FROM ICEA

— 89 —

We noted that the annual compound growth rate of the revenue of

the Target Group is approximately 31.6% for 2003 to 2005; and the

annual compound growth rates of the estimated transaction amounts

for general services and materials procurement are expected to be

approximately 28.7% and 29.4% respectively from 2005 to 2008.

Given that (a) the production capacity of Chongqing Water Heater is

expected to increase due to the commencement of its commercial

production of the new production facilities; (b) expansion of export

sales of front loading washing machines is one of the future business

strategies of the Group; and (c) the Target Group, the high-quality

products of which are sold under the well-known brand name of

Haier, is expected to be benefited from the general increasing trend

for demand of high-end products in PRC resulting from the strong

economy of PRC, the growth in the Target Business is reasonably

expected to substantiate in the near future. If the growth of the Target

Group realizes as expected, the number and/or quantity of transactions

will increase, and hence the annual caps for the Continuing Connected

Transactions for the three years ending 31 December 2008.

Based on (i) our discussion with the Company in respect of the

above, (ii) the historical figures for transactions between the Target

Group and the Haier Group (including the figures for the first quarter

of 2005 and 2006), and (iii) the anticipated business growth of the

Target Group, we are of the view that the proposed Cap Amounts for

the Continuing Connected Transactions in respect of the Services

Agreement for General Services and Materials Procurement

Agreement are fairly and reasonably determined.

3.2.2 Services Agreement — Financial Services (Deposits and Loans)


Continuing Connected Transactions in respect of the Services

Agreement for Financial Services are mainly determined by taking

into account, among other things, the future working capital position

of the Target Group by reference to (i) the historical working capital

position of the Target Group; and (ii) the anticipated future working

capital position of the Target Group with consideration of the Asset

Injection.

We noted that the Target Group recorded a profit attributable to its

equity holders (as stated in Appendix II to the Circular) of

approximately RMB49.2 million, RMB29.8 million and RMB72.0

million for each of the three years ended 31 December 2005

LETTER FROM ICEA

— 90 —

respectively. As at 31 December 2005, the net asset value (excluding

minority interests) (as stated in Appendix II to the Circular) of the

Target Group was approximately RMB326.7 million. Based on (a)

the historical proven track record of the Target Group; (b) the expected

increase in the production capacity of Chongqing Water Heater

following the commencement of its commercial production of the

new production facilities; (c) the expected expansion of export sales

of front loading washing machines of the Target Group; and (d) the

general increasing trend for demand of high-end products in the PRC

resulting from the strong economy of the PRC, it is reasonably

expected that the business operation of the Group may grow

significantly after the Asset Injection and, in turn, the gross cashflow

(including both inflow and outflow of cash) as well as the amount

regarding future deposits to and loans from Haier Group will be

increased for the Target Group. As such and with reference to the

proposed cap amounts for the deposits from and loans to the top

loading washing machines business of the Group of RMB500 million

and RMB200 million for each of the three years ending 31 December

2007 as approved by the Independent Shareholders previously, we

are of the view that the proposed Cap Amounts for the Continuing

Connected Transactions in respect of the Services Agreement for

Financial Services are fairly and reasonably determined.

3.2.3 Export Agreement

We understand from the Company that the proposed Cap Amounts

for the Continuing Connected Transactions in respect of the Export

Agreement are mainly determined by taking into account, among

other things, (i) the historical export sales of the Target Group; and

(ii) the anticipated growth in the export sales of the Target Group as

a result of the Asset Injection. Before the Asset Injection, the Group

is engaged in the research and development, production and sale of

top loading washing machines whilst the Group will also engage in

the research and development, production and sales of front loading

washing machines and water heaters after the Asset Injection. In this

connection, it is expected that export sales would be increased with

regard to the anticipated growth in business operation of the Enlarged

Group as a result of diversification in product range through the

Asset Injection.

In consideration of (i) the anticipated continuous increase in export

sales of the Target Group as a result of the business growth of the

Enlarged Group after the Asset Injection: (ii) the historical growth in

the export sales of the Target Group at an annual compound growth

LETTER FROM ICEA

— 91 —

rate of approximately 104.6% for 2003 to 2005; and (iii) the estimated

growth in the export sales of the Target Group at an annual compound

growth rate of approximately 48.0% from 2005 to 2008, we are of

the view that the proposed Cap Amounts for the Continuing Connected

Transactions in respect of the Export Agreement are fairly and

reasonably determined.

3.2.4 Promotion Agreement and Gift Products Procurement And Products

Sales Agreement


Continuing Connected Transactions in respect of the Promotion

Agreement and Gift Products Procurement And Products Sales

Agreement are determined by reference to, among other things, the

future prospects of the Target Business and the proposed cap amounts

for the similar services to the top loading washing machines business

of the Group for each of the three years ending 31 December 2007 as

approved by the Independent Shareholders previously.

As explained above in paragraph 3.2.1, the growth in the Target

Business is reasonably expected to substantiate in the near future.

We note that the transaction amounts under the Promotion Agreement

and Gift Products Procurement And Products Sales Agreement

represent less than 2% of the estimated revenue for 2006 to 2008.

Taking into consideration of the amounts involved and the fact that

such level of spending on marketing is not oppressive, we consider

that the proposed Cap Amounts for the Continuing Connected

Transactions in respect of the Promotion Agreement and Gift Products

Procurement And Products Sales Agreement are fairly and reasonably

determined.

3.2.5 Consignment Sale Agreement

The proposed Cap Amounts for the Consignment Sale Agreement

represents the commission for consignment sales of the anticipated

outstanding inventories of front loading washing machines and the

water heaters undertaken by the Haier Group but not yet delivered as

at the Completion. The Company estimated that the monetary amount

for the said outstanding inventories, with reference to the historical

month-end inventory level of the Target Group, would not exceed

RMB300 million. As such, the aggregate commission payable to the

Group for consignment sales would not exceed RMB6 million. Since

it is uncertain (i) when the Completion Date will take place (which

LETTER FROM ICEA

— 92 —

can be between October 2006 and 31 December 2006); and (ii) how

long all the outstanding inventories under the consignment sales will

be sold out (which can be between 3 to 12 months), the Company

sets the proposed Cap Amounts under the Consignment Sale

Agreement at the maximum level for both 2006 and 2007 for prudent

sake.

Based on our discussion with the management of the Company on

the basis of the determination of the Cap Amounts and the review of

the recent historical figures of the inventory level of the Target Group,

we are of the view that the proposed Cap Amounts are fairly and

reasonably determined.

3.2.6 Proposed Cap Amounts for 2006

Save for the proposed Cap Amounts for the Services Agreement for

Financial Services and the Consignment Sale Agreement, the other

proposed Cap Amounts for 2006 (the “2006 Caps”) represent the

proposed maximum aggregate values for the Continuing Connected

Transactions to be contemplated by the Target Group upon the

Completion Date and up to 31 December 2006.

The Company originally estimated that the earliest possible

Completion Date is early October 2006. As such, the Company

determined the 2006 Caps by reference to, among other things, the

estimated transaction amounts for the whole year of 2006, the expected

Completion Date (which is expected to be as early as October 2006)

and other factors (such as seasonal factor) which may affect the

transaction amounts.

We noted that the 2006 Caps represents approximately one third of

the estimated annual transaction amounts for the whole year of 2006.

Based on our discussion with the management of the Company on

the basis of the determination of the 2006 Caps and the review of the

historical sales of the Target Group, we are of the view that the

proposed Cap Amounts are fairly and reasonably determined.

4. Monitoring of the Continuing Connected Transactions

We have discussed with the Company, noting that the Company will comply with

the annual review requirements of Rule 14A.37 to Rule 14A.41 of the Listing

Rules, in particular, the restriction of the value of the Continuing Connected

Transactions by way of annual Cap Amounts for each of the three years ending

LETTER FROM ICEA

— 93 —

31 December 2008, and the annual review by independent non-executive Directors

of the terms of the transactions contemplated under such agreements, and the

relevant Cap Amounts being not exceeded. Such details must be included in the

Company’s annual reports and accounts. In addition, auditors of the Company

must provide a letter to the Board confirming, among other things, that the

Continuing Connected Transactions are carried out in accordance with the pricing

policies of the relevant agreement(s), and that the respective Cap Amounts being

not exceeded. The Company will comply with the applicable provisions of the

Listing Rules, in the event that the transaction values contemplated under the

Continuing Connected Transactions Agreements exceed the relevant annual Cap

Amounts, or that there is any material amendments to the terms of the Continuing

Connected Transactions Agreements.

Based on the above, we are of the view that there will be sufficient procedures

and arrangements in place to ensure the Continuing Connected Transactions will

be conducted on terms that are fair and reasonable so far as the Company and the

Shareholders are concerned as a whole.

5. Recommendation

Having considered the above principal factors and reasons, we consider that (i)

the terms of the Asset Injection Agreement are in the interest of the Company and

the Shareholders as a whole, (ii) the terms for the Continuing Connected

Transactions contained under the Continuing Connected Transaction Agreements

are on normal commercial terms, fair and reasonable and, in the interests of

Company and the Shareholders as a whole; and (iii) the proposed Cap Amounts

are fairly and reasonably determined. As such, we recommend the Independent

Board Committee to advise the Independent Shareholders to vote in favour of the

relevant ordinary resolution to be proposed at the SGM.

Yours faithfully,

For and on behalf of

ICEA Capital LimitedFabian Shin

Executive Director

APPENDIX I FINANCIAL INFORMATION OF THE GROUP

— 94 —

FINANCIAL SUMMARY

The following is a summary of the financial results and of the assets, liabilities and minority

interests of the Group for each of the three financial years ended 31 December 2005, as

extracted from the audited accounts of the Group for the respective periods.

Year ended 31 DecemberRESULTS 2005 2004 2003

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

REVENUE 4,940,474 5,893,839 3,751,640Cost of sales (4,292,093) (5,277,340) (3,229,896)

Gross profit 648,381 616,499 521,744

Other income and gains, net 16,355 17,698 9,165Selling and distribution costs (460,826) (332,460) (246,706)Administrative expenses (222,463) (123,909) (115,807)Other expenses (40,250) (30) (6,324)Finance costs (20,232) (12,152) (19,852)Impairment of goodwill (321,947) — —

PROFIT/(LOSS) BEFORE TAX (400,982) 165,646 142,220Tax (16,855) (17,018) (31,453)

PROFIT/(LOSS) FOR THE YEAR (417,837) 148,628 110,767

Attributable to:Equity holders of the parent (432,964) 119,479 107,595Minority interests 15,127 29,149 3,172

(417,837) 148,628 110,767

As at 31 December2005 2004 2003

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

ASSETS, LIABILITIES ANDMINORITY INTERESTS

Total assets 2,498,768 2,196,067 2,154,945Total liabilities (1,794,657) (1,506,512) (1,599,838)Minority interests (71,341) (180,376) (156,899)

632,770 509,179 398,208


— 95 —

The information set out below was extracted from the annual report of the Group for the year

ended 31 December 2005.

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 SHAREATTRIBUTABLE TO ORDINARY EQUITYHOLDERS OF THE PARENT 14

Basic (2.77) cents 1.88 cents

Diluted N/A N/A


— 96 —

CONSOLIDATED BALANCE SHEET(31 December 2005)

2005 2004Notes HK$’000 HK$’000

(Restated)

NON-CURRENT ASSETS

Property, plant and equipment 16 636,288 367,705

Prepaid land premiums 17 25,462 11,885

Intangible assets 18 3,437 3,922

Goodwill 19 — —

Deferred tax assets 29 12,736 21,527

Total non-current assets 677,923 405,039

CURRENT ASSETS

Inventories 20 433,645 436,939

Trade and bills receivables 21 677,510 972,171

Prepayments, deposits and other receivables 22 145,941 131,736

Tax recoverable 3,342 4,940

Pledged deposits 23 70 2,501

Cash and cash equivalents 23 560,337 242,741

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

CURRENT LIABILITIES

Trade and bills payables 24 972,116 1,136,940

Tax payable 5,030 825

Other payables and accruals 25 452,186 200,610

Provisions 28 20,184 16,499

Interest-bearing bank and other borrowings 26 124,807 147,044

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


— 97 —

2005 2004Notes HK$’000 HK$’000

(Restated)

NON-CURRENT LIABILITIES

Convertible notes 27 211,528 —

Provisions 28 8,806 3,988

Deferred tax liabilities 29 — 606

Total non-current liabilities 220,334 4,594

Net assets 704,111 689,555

EQUITY

Equity attributable to equity holders

of the parent

Issued equity 30 854,159 352,324

Equity component of convertible notes 27 30,281 —

Reserves 32 (251,670) 156,855

632,770 509,179

Minority interests 71,341 180,376

Total equity 704,111 689,555


— 98 —

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 — 398,208 156,899 555,107

Net profit for the year (as restated) — — — 119,479 — 119,479 29,149 148,628

Transfer to reserves (as restated) — — 13,715 (13,715) — — — —

Dividend (as restated) 13 — — — (8,508) — (8,508) (5,672) (14,180)

At 31 December 2004 and

1 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 26,193

Dividend — — — — — — (6,303) (6,303)

Acquisition of subsidiaries 33 445,307 — — — — 445,307 (119,613) 325,694

Issue of convertible notes 27 — 33,790 — — — 33,790 — 33,790

Conversion of convertible notes 27 27,926 (3,509) — — — 24,417 — 24,417

Exercise of share options 30 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.


— 99 —

CONSOLIDATED CASH FLOW STATEMENT(year ended 31 December 2005)

2005 2004Notes HK$’000 HK$’000

(Restated)

CASH FLOWS FROM OPERATING

ACTIVITIES

Profit/(loss) before tax (400,982) 165,646

Adjustments for:

Finance costs 8 20,232 12,152

Interest income 6 (3,329) (3,069)

Depreciation 7 69,602 41,508

Amortisation of prepaid land premiums 7 510 262

Amortisation of intangible assets 7 598 581

Provision for bad and doubtful debts 7 35,663 —

Provision for obsolete and slow-moving

inventories 7 53,831 18,430

Loss on disposal of items of property,

plant and equipment 7 4,587 —

Impairment of goodwill 7 321,947 —

Operating profit before working capital

changes 102,659 235,510

Increase in inventories (50,537) (78,291)

Decrease in trade and bills receivables 260,358 790

Decrease in prepayments, deposits and

other receivables 15,528 9,681

Increase/(decrease) in trade and bills

payables (164,958) 279,109

Increase/(decrease) in other payables

and accruals 176,440 (1,248)

Increase in provisions 7,912 56,405

Effect of foreign exchange rate changes, net 1,538 —

Cash generated from operations 348,940 501,956

Interest received 3,329 3,069

Mainland China corporate income tax paid (2,265) (45,935)

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


— 100 —

2005 2004Notes HK$’000 HK$’000

(Restated)

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

CASH FLOWS FROM INVESTINGACTIVITIES

Purchases of items of property, plant andequipment (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 33 80,189 —Decrease/(increase) in pledged deposits 2,431 (2,501)

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

CASH FLOWS FROM FINANCINGACTIVITIES

Proceeds from issue of shares upon exerciseof share options 30 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 CASHAND 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 ATEND OF YEAR 560,337 242,741

ANALYSIS OF BALANCES OF CASH ANDCASH EQUIVALENTS

Cash and bank balances 532,975 242,741Time deposits with original maturity of less

than three months when acquired 23 27,362 —

560,337 242,741


— 101 —

NOTES TO FINANCIAL STATEMENTS(year ended 31 December 2005)

1. CORPORATE INFORMATION

Haier Electronics Group Co., Ltd. is a limited liability company incorporated in Bermuda. The registered

office of the Company is located at Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.

During the year, the principal activities of the Group comprised the manufacture and sale of mobile phones

and washing machines.

2.1 GROUP REORGANISATION

On 28 January 2005, the Company acquired from Haier Group Corporation (“Haier Corp”) and Qingdao

Haier Investment and Development Co., Ltd. (“Haier Investment”) (collectively “Haier Group”) their entire

100% interest in Haier Holdings (BVI) Limited and Qingdao Haier Investment and Development Holdings

(BVI) Limited (collectively “Haier BVI”), for an aggregate consideration of RMB1,100 million (equivalent

to approximately HK$1,035 million) (the “Asset Injection”). The total consideration was satisfied as to

HK$725 million by the issuance of 4,027 million ordinary shares of the Company at HK$0.18 each,

HK$260 million by the issuance of convertible notes of the Company and HK$50 million in cash.

On the same date, the Company exercised its call option to acquire from Haier Investment its entire 35.5%

interest in Pegasus Telecom (Qingdao) Co., Ltd. (“Pegasus Qingdao”) for a consideration of HK$468.6

million (the “Call Option Exercise”). The consideration was satisfied by the issuance of 2,343 million

ordinary shares of the Company at HK$0.20 each.

Upon completion of the Asset Injection and Call Option Exercise, Haier Group’s interest in the Company

collectively increased to 50.2% (2004: 29.9%) and Haier Group became the controlling shareholder of the

Company.

2.2 REVERSE ACQUISITION

Under Hong Kong Financial Reporting Standard (“HKFRS”) 3 “Business Combinations”, the Asset Injection

and Call Option Exercise have been accounted for as a reverse acquisition since the issuance of the

consideration shares resulted in Haier Group becoming the controlling shareholder of the Company. For

accounting purpose, Haier Group’s interest in Haier BVI and Pegasus Qingdao (collectively “Haier

Businesses”) is treated as the acquirer while the Company and its relevant interest in the then subsidiaries

(collectively the “Former Group”) is deemed to have been acquired by Haier Businesses on 28 January

2005. These consolidated financial statements have been prepared as a continuation of the Haier Businesses

and accordingly.

(i) the assets and liabilities of Haier Businesses are recognised and measured at the date of acquisition

at their historical carrying values prior to the Asset Injection and Call Option Exercise;

(ii) the retained profits and other equity balances recognised in the consolidated financial statements

are the retained profits and other equity balances of Haier Businesses;

(iii) the amount recognised as issued equity in the consolidated financial statements, comprising share

capital, contributed surplus and share premium, has been determined by adding to the issued equity

of Haier Businesses immediately before the Asset Injection and Call Option Exercise the cost of

acquisition of the Former Group. However, the equity structure in the consolidated financial

statements (i.e. the number and type of shares issued) reflects the equity structure of the Company,

including the shares issued by the Company to effect the Asset Injection and Call Option Exercise;

and


— 102 —

(iv) comparative information presented in the consolidated financial statements is that of Haier Businesses

for the year ended 31 December 2004 and as at 31 December 2004.

In preparing these consolidated financial statements, Haier Businesses has applied the purchase method to

account for the acquisition of the Former Group. In applying the purchase method, the identifiable assets

and liabilities of the Former Group were recorded in the consolidated balance sheet at their fair values at

the date of completion of the acquisition on 28 January 2005.

3.1 BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards

(“HKFRSs”) (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued

by Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong

Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared

under the historical cost convention. These financial statements are presented in Hong Kong dollars (HK$)

and all values are rounded to the nearest thousand except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries

for the year ended 31 December 2005. The results of subsidiaries acquired are consolidated from the date

of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the

date that such control ceases. All significant intercompany transactions and 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 STANDARDS

The 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 Statements

HKAS 2 Inventories

HKAS 7 Cash Flow Statements

HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

HKAS 10 Events after the Balance Sheet Date

HKAS 11 Construction Contracts

HKAS 12 Income Taxes

HKAS 14 Segment Reporting

HKAS 16 Property, Plant and Equipment

HKAS 17 Leases

HKAS 18 Revenue

HKAS 19 Employee Benefits

HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance

HKAS 21 The Effects of Changes in Foreign Exchange Rates

HKAS 23 Borrowing Costs

HKAS 24 Related Party Disclosures

HKAS 27 Consolidated and Separate Financial Statements

HKAS 28 Investments in Associates

HKAS 31 Interests in Joint Ventures

HKAS 32 Financial Instruments: Disclosure and Presentation

HKAS 33 Earnings per Share


— 103 —

HKAS 36 Impairment of Assets

HKAS 37 Provisions, Contingent Liabilities and Contingent Assets

HKAS 38 Intangible Assets

HKAS 39 Financial Instruments: Recognition and Measurement

HKAS 39 Amendment Transition and Initial Recognition of Financial Assets and Financial Liabilities

HKAS 40 Investment Property

HKFRS 2 Share-based Payment

HKFRS 3 Business Combinations

HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations

HK(SIC)-Int 21 Income Taxes — Recovery of Revalued Non-depreciable Assets

HK-Int 4 Lease — Determination of the Length of Lease Term in respect of Hong Kong

Land Leases

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 methods of 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 income statement, 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 on the acquisition of a foreign operation and any fair value adjustments to the

carrying amounts of the assets and liabilities are treated as 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 — Leases

In prior years, leasehold land and buildings held for own use were stated at cost less accumulated

depreciation and any impairment losses.

Upon the adoption of HKAS 17, the Group’s leasehold interest in land and buildings is separated

into leasehold land and buildings. The Group’s leasehold land is classified as an operating lease,

because the title of the land is not expected to pass to 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 lease

payments under operating leases are initially stated at cost and subsequently amortised on the

straight-line basis over the lease term. When the lease payments cannot be allocated reliably between

the land and buildings elements, the entire lease payments 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 comparative amounts in the consolidated balance sheet for the year ended 31

December 2004 have been restated to reflect the reclassification of the leasehold land.


— 104 —

(b) HKFRS 2 — Share-based Payment

In 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, at which 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 fair value 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 to equity for employee share options. The revised accounting policy for share-

based payment transactions is described in more detail 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 been applied to (i) options granted to employees on or before 7 November 2002;

and (ii) options granted to employees after 7 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 to 31 December 2004 but had not yet vested as at 1 January 2005, the adoption of

HKFRS 2 has had no impact on the retained profits as at 31 December 2003 and at 31 December

2004.

(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-line basis 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 commencing testing for impairment at the cash-generating unit level annually (or

more frequently if events or changes in circumstances indicate 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 of acquisition of subsidiaries (previously referred to as negative goodwill),

after reassessment, is recognised immediately in the income statement.

During the year, the Company has adopted HKFRS 3 and the Asset Injection and the Call Option

Exercise have been accounted for using reverse acquisition accounting, details of which are set out

in note 2.2 to the financial statements.


— 105 —

3.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTINGSTANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet

effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for annual

periods beginning on or after 1 January 2006:

HKAS 1 Amendment Capital Disclosures

HKAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures

HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions

HKAS 39 Amendment The Fair Value Option

HKAS 39 & HKFRS 4 Financial Guarantee Contracts

Amendments

HKFRSs 1 & 6 Amendments First-time Adoption of Hong Kong Financial Reporting Standards and

Exploration for and Evaluation of Mineral Resources

HKFRS 6 Exploration for and Evaluation of Mineral Resources

HKFRS 7 Financial Instruments: Disclosures

HKFRS-Int 4 Determining whether an Arrangement contains a Lease

HKFRS-Int 5 Rights to Interests arising from Decommissioning, Restoration and

Environmental Rehabilitation Funds

HK(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 affect the disclosures about qualitative information about the Group’s objective,

policies and processes for managing capital; quantitative data about what the Company regards as capital;

and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 corporates the disclosure requirements of HKAS 32 relating to financial instruments. This

HKFRS shall be applied for annual periods beginning on or after 1 January 2007.

In accordance with the amendments to HKAS 39 regarding financial guarantee contracts, financial guarantee

contracts are initially recognised at fair value and are subsequently measured at the higher of (i) the

amount determined in accordance with HKAS 37 and (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 1 and 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 be applied 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 significant impact on the Group’s financial statements in the period of initial application.


— 106 —

3.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

Effect on the consolidated balance sheet

Effect of adoptingHKAS 17 #

Prepaid land premiums31 December 1 January

Increase/(decrease) 2005 2005HK$’000 HK$’000

Property, plant and equipment (26,015) (12,150)

Prepaid land premiums 25,462 11,885

Prepayments, deposits and other receivables 553 265

— —

# Adjustments/presentation taken effect retrospectively

3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly,

so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s income statement to the extent of dividends

received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment

losses.

Goodwill

Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the business

combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired and

liabilities assumed as at the date of acquisition.

Goodwill on acquisition for which the agreement date is on or after 1 January 2005

Goodwill arising on acquisition is initially recognised in the consolidated balance sheet as an asset initially

measured at cost and subsequently at cost less any accumulated impairment losses.

The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or

changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition

date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are

expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities

of the Group are assigned to those units or groups of units. Each unit or 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


— 107 —

• is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting

format determined in accordance with HKAS 14 “Segment Reporting”.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-

generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit

(group of cash-generating units) is less than the 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 is disposed of, the goodwill associated with the operation disposed of is included

in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

Goodwill disposed of in this circumstance is measured based on the relative 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 1 January 2005)

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets and liabilities

over the cost of the acquisition of subsidiaries (previously referred to as negative goodwill), after

reassessment, is recognised immediately in the income statement.

Impairment of assets

Where 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 is calculated 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 determined for an individual asset, unless the asset

does not generate cash inflows that are largely independent of those from other assets or groups 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 market assessments of the time value of money and the risks specific

to the asset. An impairment loss is charged to the income statement in 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 may no longer exist or may have decreased. If such indication exists, the recoverable

amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed

only if there has been a change in the estimates used to determine the recoverable amount of that asset,

however not to an amount higher than the carrying amount that would have been determined (net of any

depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal

of an impairment loss is credited to the income statement in the period in which it arises.

Related parties

A 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 control with, the Group; (ii) has an interest in the Group that gives it significant

influence over the Group; or (iii) has joint control over the Group;

(b) the party is an associate;


— 108 —

(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 in such entity resides with, directly or indirectly, any individual referred

to in (d) or (e).

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated

depreciation and any impairment losses. When an item of property, plant and machinery is classified as

held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated. The cost

of an item of property, plant and equipment comprises its purchase price and any directly attributable costs

of bringing the asset to its working condition and location for its intended use. Expenditure incurred after

items of property, plant and equipment have been put into operation, such as repairs and maintenance, is

normally charged to the income statement in the period in which it is incurred. In situations where it can be

clearly demonstrated that the expenditure 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 that asset 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 its residual 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 a reasonable 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 its use or disposal. Any gain or loss on disposal or retirement recognised in the

income statement in the year the asset is derecognised is 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 any impairment 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 ready for use.

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 amortised over the useful economic life and assessed for impairment whenever there is an

indication that the intangible asset may be impaired. The amortisation period and the amortisation method

for an intangible asset with a finite useful life are reviewed at least at each balance sheet date.


— 109 —

Patents and licence

Purchased patents and licences are stated at cost less any impairment losses and are amortised on the

straight-line basis over their estimated useful lives of 10 years.

Research and development costs

All 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 the technical feasibility of completing the intangible asset so that it will be available for

use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate

future economic benefits, the availability of resources to complete the project and the ability to measure

reliably the expenditure during the development. Product development expenditure which does not 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 the commercial lives of the underlying products, commencing from the date when

the products are put into commercial production.

Leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are

accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating

leases are included in non-current assets, and rentals 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-line basis over the

lease terms.

Prepaid land premiums under operating leases are initially stated at cost and subsequently recognised on

the straight-line basis over 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 and receivables, and available-for-sale financial assets, as appropriate. When financial assets

are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value

through profit or loss, directly attributable transaction costs. The Group determines the classification of its

financial assets, after initial recognition and, where allowed and appropriate, re-evaluates this designation

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 to purchase the asset. Regular way purchases or sales are purchases or sales of financial

assets that require delivery of assets within the period generally established by regulation or convention in

the marketplace.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not

quoted in an active market. Such assets are carried at amortised cost using the effective interest method.

Gains and losses are recognised in the income statement when the loans and receivables are derecognised

or impaired, as well as through the amortisation process.


— 110 —

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 financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has

been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount

and the present value of estimated future cash flows (excluding future credit losses that have not been

incurred) discounted at the financial asset’s original effective interest rate (i.e., the effect interest rate

computed at initial recognition). The carrying amount of the asset is reduced either directly or through 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


— 111 —

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly

attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised

cost using the effective interest method.

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

the amortisation process.

Convertible notes

The component of convertible notes that exhibits characteristics of a liability is recognised as a liability in

the balance sheet, net of transaction costs. On issuance of convertible notes, the fair value of the liability

component is determined using a market rate for an equivalent non-convertible note; and this amount is

carried as a long term liability on the amortised cost basis until extinguished on conversion or redemption.

The remainder of the proceeds is allocated to the conversion option that is recognised and included in

shareholders’ equity, net of transaction costs. The carrying amount of the conversion option is not remeasured

in subsequent years.

Transaction costs are apportioned between the liability and equity components of the convertible notes

based on the allocation of proceeds 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 an existing liability are substantially modified, such an exchange or modification is

treated as a derecognition of the original liability and the recognition of a new liability, and the difference

between the respective carrying amounts is recognised in profit or loss.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted

average basis and, in the case 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 equivalents

For 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 an insignificant risk of changes in value, and have a short

maturity of generally within three months when acquired, less bank overdrafts which 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.


— 112 —

Provision

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past

event and it is probable that a future outflow of resources will be required to settle the obligation, provided

that a reliable estimate can be made of the amount 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 of the future expenditures expected to be required to settle the obligation. The increase

in the discounted present value amount arising from 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 sales volume and past experience of the level of installation service rendered, repairs

or returns, discounted to their present values as appropriate.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the income statement or in

equity if it relates to items that 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 paid to the tax authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date

between the tax bases of 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 not a 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 the temporary differences can be controlled and it is probable that the

temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax

credits and unused tax losses, to the extent that it is probable that taxable profit will be available against

which the deductible temporary differences, and the 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 or liability in a transaction that is not a business combination and, at the

time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with interests in subsidiaries, deferred tax

assets are only recognised to the extent that it is probable that the temporary differences will

reverse in the foreseeable future and taxable profit will be available 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 longer probable 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 is probable that sufficient taxable profit will

be available to allow all or part of the deferred tax asset to be utilised.


— 113 —

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period

when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted

or substantively enacted at the balance sheet date.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off

current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and

the same taxation authority.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will

be received and all attaching conditions will be complied with. When the grant relates to an expense item,

it is recognised as income over the periods necessary 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 the relevant asset

by equal annual instalments.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the

revenue can be measured reliably, 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, nor effective 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 estimated future cash receipts through the expected life of the financial instrument to

the net carrying amount of the financial asset.

Employee benefits

Share-based payment transactions

The Company operates a share option scheme for the purpose of providing incentives and rewards to

eligible participants who contribute to the success of the Group’s operations. Employees (including directors)

of the Group receive remuneration in the form of share-based payment transactions, whereby employees

render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date

at which they are granted. In valuing equity-settled transactions, no account is taken of any performance

conditions, other than conditions linked to the 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 the performance and/or service conditions are fulfilled, ending on the date on which the

relevant employees become fully entitled to the award (the “vesting date”). The cumulative expense

recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the

extent to which the vesting period has expired and the Group’s best estimate of the number of equity

instruments that will ultimately vest. The charge or credit to the income statement for a period represents

the movement in the cumulative expense recognised as at the beginning and the end of that period.


— 114 —

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is

conditional upon a market condition, which are treated as vesting irrespective of whether or not the market

condition is satisfied, provided that all other performance 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 been modified. In addition, an expense is recognised for any modification, which increases

the total fair value of the share-based payment 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 yet recognised for the award is recognised immediately. However, if a new award is

substituted for the cancelled award, and designated as a replacement award on the date that it is granted,

the cancelled and new awards are treated as if they were a modification of the 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 to equity-settled awards granted after 7 November 2002 that had not vested on 1

January 2005 and to those granted on or after 1 January 2005.

Paid leave carried forward

The Group provides paid annual leave to its employees under their employment contracts on a calendar

year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is

permitted to be carried forward and utilised by the respective employees in the following year. An accrual

is made at the balance sheet date for the expected future cost of such paid leave earned during the year by

the employees and carried forward.

Employment Ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in

order to be eligible for long service payments under the Hong Kong Employment Ordinance in the event of

the termination of their employment. The Group is liable to make such payments in the event that such a

termination of employment meets the circumstances specified in the Employment Ordinance.

Pension schemes

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the

“MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are

eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’

basic salaries and are charged to the income statement as they become payable in accordance with the rules

of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an

independently administrated fund. The Group’s employer voluntary contributions, which are refunded to

the Group when the 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 employees who were eligible to participate in this scheme. This scheme operates in a

similar way to the MPF Scheme, except that when an employee leaves this scheme before his/her interest in

the Group’s employer contributions vest fully, the ongoing contributions payable by the Group are reduced

by the relevant amount of the forfeited employer contributions.


— 115 —

The employees of the Group’s subsidiaries in Mainland China are required to participate in central pension

scheme operated by the local municipal government. These subsidiaries are required to contribute a certain

percentage of its payroll costs to the central pension scheme. The contributions are charged to the income

statement as they become payable in accordance with the rules of the central pension scheme.

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained profits within

the equity section of the balance sheet, until they have been approved by the shareholders in a general

meeting. When these dividends have been approved by 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 to declare interim dividends. Consequently, interim dividends are recognised

immediately as a liability when they are proposed and declared.

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and

presentation currency. Each entity in the Group determines its own functional currency and items included

in the financial statements of each entity are measured using that functional currency. Foreign currency

transactions are initially recorded using the functional currency rates ruling at the date of the transactions.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency

rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetary

items that are measured in terms of historical cost in a foreign currency are translated using the exchange

rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign

currency are translated using the exchange rates at the date when the fair value was determined.

The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar.

As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation

currency of the Company at exchange rates ruling at the balance sheet date and, their income statements are

translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting

exchange differences are included in a separate component of equity as the exchange fluctuation reserve.

On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that

particular foreign 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 Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently

recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Hong

Kong dollars at the weighted average exchange rates for the year.

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements,

apart from those involving estimations, which have the most significant effect on the amounts recognised

in the financial statements:

Operating lease commitments – Group as lessor

The Group has entered into commercial property leases on its property portfolio. The Group has determined

that it retains all the significant risks and rewards of ownership of these properties which are leased out on

operating leases.


— 116 —

Classification between investment properties and owner-occupied properties

The 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 a property 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 use in the production or supply of goods or services or for administrative purposes.

If these portions could be sold separately (or leased out 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

services or for administrative purposes.

Judgement is made on an individual property basis to determine whether ancillary services are so significant

that a property does not qualify as investment property.

Estimation uncertainty

The key assumption concerning the future and other key sources of estimation uncertainty at the balance

sheet date, that has a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year is discussed below.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation

of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in

use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit

and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The

goodwill arising from the Asset Injection and Call Option Exercise amounting to HK$321,947,000 was

impaired during the year. Further details are set out in note 19 to the financial statements.

5. SEGMENT INFORMATION

Segment 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 the products and services they provide. Each of the Group’s business segments represents a

strategic business unit that offers products and services which are subject to risks and returns that are

different from those of the other business segments. Summary details of 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.


— 117 —

(a) Business segments

The following tables present revenue, profit/(loss) and certain asset, liability and expenditure

information for the Group’s business segments for the year ended 31 December 2005 and 2004.

Mobile handset Washing machine Corporatebusiness business 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 5,893,839

Other 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) 174,729

Interest income 3,329 3,069

Finance costs (20,232) (12,152 )

Impairment of goodwill (321,947) —

Profit/(loss) before tax (400,982) 165,646

Tax (16,855) (17,018 )

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


— 118 —

Mobile handset Washing machine Corporatebusiness business 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 1,924,358

Deferred tax assets 12,736 21,527

Tax recoverable 3,342 4,940

Pledged deposits 70 2,501

Cash 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 1,358,037

Tax payable 5,030 825

Interest-bearing bank

and other borrowings 124,807 147,044

Convertible 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 42,351

Capital expenditure 4,717 30,923 113,551 19,455 185 — — — 118,453 50,378

Provision for obsolete and

slow-moving inventories 53,148 18,430 683 — — — — — 53,831 18,430

Provision for bad and

doubtful debts 34,303 — 1,360 — — — — — 36,663 —

Product warranty and

installation provision — — 108,272 83,513 — — — — 108,272 83,513

(b) Geographical segments

The following table presents revenue information for the Group’s geographical segments for the

year ended 31 December 2005 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 5,893,839

Other 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.


— 119 —

6. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover, represents the net invoiced value of goods sold, net of value-

added tax and after allowances 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 2,750,454

Sale 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 3,069

Sale of scrap materials 2,739 3,000

Government subsidies (note) 2,121 4,963

Gross rental income in respect of:

Land and buildings 1,548 1,892

Plant 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 and Shunde Municipality as an encouragement for

advanced research and development.


— 120 —

7. PROFIT/(LOSS) BEFORE TAX

The 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 5,182,772

Depreciation 16 69,602 41,508

Amortisation for prepaid land premiums 17 510 262

Amortisation of intangible assets* 18 598 581

Research and development costs* 94,611 75,557

Auditors’ remuneration 6,000 2,100

Staff costs (including directors’ remuneration — note 9):

Wages and salaries 133,922 65,191

Net pension scheme contributions 22,964 17,936

Total staff costs 156,886 83,127

Minimum lease payments under operating leases

in respect of land and buildings 8,676 3,522

Provision for obsolete and slow-moving inventories* 53,831 18,430

Provision for bad and doubtful debts**:

Trade receivables 34,303 —

Other receivables 1,360 —

35,663 —

Product warranty and installation provision 108,272 83,513

Impairment 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 are included 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 face of the consolidated income statement.

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


— 121 —

8. FINANCE COSTS

Group2005 2004

HK$’000 HK$’000

(Restated)

Interest on bank and other loans wholly repayable

within five years 10,497 12,152

Interest on convertible notes (note 27) 9,735 —

20,232 12,152

9. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Rules Governing the Listing of Securities on

The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and Section 161 of the Hong Kong

Companies Ordinance, is as follows:

Group2005

HK$’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 consolidated into 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 240

Fung Hoi Wing, Henry 240

Lau Ho Wai, Lucas 240

Wu Yinong 223

943

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


— 122 —

(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 EMPLOYEES

The five highest paid employees during the year did not include any director (2004: Nil), details of whose

remuneration are set out in note 9 above. Details of the remuneration of the five (2004: five) non-director,

highest paid employees for the year are as follows:

Group2005 2004

HK$’000 HK$’000

(Restated)

Salaries, allowances and benefits in kind 4,124 4,153

Performance related bonuses — —

Employee share option benefits — —

Pension scheme contributions 34 14

4,158 4,167

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 4

HK$1,500,001 to HK$2,000,000 2 —

HK$2,000,001 to HK$2,500,000 — 1

5 5


— 123 —

11. TAX

No provision for Hong Kong profits tax has been made as the Group did not generate any assessable profits

arising in Hong Kong during 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 are wholly-foreign owned enterprises and the remaining one is a limited liability

company. Except for the limited liability company and one Sino-foreign equity joint venture, all subsidiaries

are entitled to preferential tax treatments including reduction of PRC corporate income tax (“CIT”) and full

exemption from CIT tax for two years starting from its first profit-making year following by a 50%

reduction for the next consecutive three years.

2005 2004HK$’000 HK$’000

(Restated)

Group:

Current — Mainland China:

Charge for the year 8,068 18,617

Overprovision in prior years — (1,860)

Deferred (note 29) 8,787 261

Tax charge for the year 16,855 17,018

A reconciliation of the tax charge/(credit) applicable to profit/(loss) before tax using the statutory or

applicable rates for the locations in which the Company and its subsidiaries are domiciled to the tax

charge/(credit) at the effective tax rates, and a reconciliation 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 or

applicable 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) 0.4

Expenses 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’s

effective rate — — 16,855 (27.6) 16,855 (4.2)


— 124 —

Group — 2004

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

Profit before tax — — 165,646 — 165,646 —

Tax at the statutory or

applicable tax rates — — 54,663 33.0 54,663 33.0

Expenses not deductible for tax — — 2,601 1.6 2,601 1.6

Overprovision 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’s

effective rate — — 17,018 10.3 17,018 10.3

12. NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERSOF THE PARENT

The net loss from ordinary activities attributable to equity holders of the parent for the year ended 31

December 2005 dealt with in the financial statements of the Company, was HK$1,250,311,000.

13. DIVIDEND

No 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 earnings to the relevant statutory reserves in accordance with the

rules and regulations applicable in the PRC and its article of association.

14. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THEPARENT

Under reverse acquisition accounting method (note 2.2), the 6,369,706,667 ordinary shares issued by the

Company for the purposes of the Asset Injection and the Call Option Exercise (note 2.1) are deemed to be

issued on 1 January 2004 for the purposes 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 ordinary equity 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 convertible notes 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 existed during that year.


— 125 —

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

2005 2004HK$’000 HK$’000

(Restated)

Earnings

Net 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)

Shares

Weighted 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, 21, 22, 23, 24, 25, 26, and 27 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 that have 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 2,747,869

Purchases of materials (ii) 606,607 1,786,847

Utility service fee expenses (iii) 5,745 4,657

Interest expenses (iv) 3,594 3,442

Interest income (iv) 165 143

Other 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 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 plus processing fees ranging from 5% to

40% of the purchase price of the materials.


— 126 —

(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 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 were determined with reference to

actual costs incurred.

(ii) The Company’s subsidiaries, Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde

Haier Electric Co., Ltd., Hefei Haier Washing Machine Co., Ltd., Qingdao Jiaonan Haier

Washing Machine Co., Ltd. (collectively the “Washing Machine Companies”) and Qingdao

Haier Electronics Sales Co., Ltd. had the following material transactions with Haier Corp,

Haier Investment, their subsidiaries and associates.

Group2005 2004

Notes HK$’000 HK$’000

Sales of washing machines

— before 28 January 2005 (vi) 287,492 2,750,454

— on or after 28 January 2005 (vii) 310,782 —

Purchases of materials (viii) 2,680,706 2,089,496

Printing and packaging fee expenses (ix) 1,985 315

Mould charges (x) 60,880 48,598

Utility service fee expenses (xi) 11,783 9,471

Logistics charges (xii) 128,684 112,424

Promotion fee expenses (xiii) 19,231 —

Other service fee expenses (xiv) 14,572 12,235

Interest income (xv) 572 879

Trademark licence fee expenses (xvi) 26,226 6,720

Notes:

(vi) The sales of washing machines before 28 January 2005 comprised domestic sales

made to subsidiaries and fellow subsidiaries of Haier Investment and export sales

made to Haier Electrical Appliances Co., Ltd. (“Haier Electrical”), a subsidiary of

Haier Investment.

The domestic sales of washing machines were made at selling prices quoted by the

subsidiaries and fellow subsidiaries of Haier Investment to third party distributors

less discounts ranging from 10.5% to 17.5%. The export sales of washing machines

were made at selling prices representing differences between the selling prices of

washing machines mutually agreed and the selling expenses of Haier Electrical not

exceeding 2.5% of the selling prices of washing machines.

(vii) The sales of washing machines on or after 28 January 2005 were made to Haier

Electrical at selling prices representing differences between the selling prices of

washing machines mutually agreed and the selling expenses of Haier Electrical not

exceeding 2.5% of the selling prices of washing machines.


— 127 —

Subsequent to 28 January 2005, all domestic sales of washing machines are directly

made to third party customers and are no longer transacted through the related

companies.

(viii) The purchases of materials were determined based on the lower of the average

market price or the consolidated and integrated tender and bidding price plus 2.6%

commission.

(ix) Printing and packaging fee expenses were determined with reference to actual costs

incurred.

(x) Moulds were charged with reference to the average market tender and bidding price.

(xi) Utility service fee expenses were charged with reference to the state-prescribed

prices.

(xii) Logistics charges were determined with reference to actual costs incurred.

(xiii) Promotion fee expenses were determined at the lower of 1.2% of the domestic sales

of washing machines and RMB20 million (equivalent to HK$19,231,000) for the

year ended 2005.

(xiv) Other service fee expenses included legal consulting service fee, catering and travel

agency service fee, human resources service fee, general security service fee, product

certification service fee and equipment repair and maintenance service fee which

were determined with reference to actual costs incurred.

(xv) Interest income was determined with reference to the standard rates published by

the People’s Bank of China.

(xvi) Trademark licence fee expenses were charged at a rate of 0.8% (2004: 0.5%) of

certain sales made by the Washing Machine Companies.

(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’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 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) to Haier Finance 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 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, details of 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 or connected transactions as defined in Chapter 14A of the Listing Rules.


— 128 —

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 2005At 31 December 2004 and

1 January 2005 (as restated):

Cost 181,441 353,221 56,568 5,089 475 596,794

Accumulated 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 of

accumulated depreciation

and impairment 135,444 189,266 41,674 846 475 367,705

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

Acquisition of subsidiaries

(note 33) 80,439 120,339 27,038 207 — 228,023

Disposals — (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 of


and impairment 265,145 308,415 61,329 1,203 196 636,288

At 31 December 2005:

Cost 323,737 475,120 92,947 5,967 196 897,967


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


— 129 —

GroupTools,

furniturePlant and and Motor Construction

Buildings 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 2,951 559,846


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 of


and impairment 141,612 200,129 21,366 725 2,951 366,783

Additions 101 16,587 24,956 353 1,522 43,519

Disposals — (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 of


and impairment 135,444 189,266 41,674 846 475 367,705


Cost 181,441 353,221 56,568 5,089 475 596,794


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

As at 31 December 2005, four of the Group’s buildings situated in Qingdao or Shunde, the PRC, did not

have building ownership certificates registered under the name of the respective subsidiaries of the Company.

The carrying amounts of those buildings situated at Qingdao and Shunde at 31 December 2005 were

HK$164,745,000 and HK$53,885,000 respectively. In addition, two of the aforementioned buildings in

Qingdao did not have land use right certificates registered under the name of the respective subsidiaries 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 other suitable properties to the Group to ensure the continuing operations of the respective

subsidiaries of the Company operating in Qingdao. That undertaking also indemnifies the Group to bear

any losses arising from the above defective land use right and property title issues in Qingdao and for any

moving cost/loss incurred, if, for any reason, the respective subsidiaries were not able to 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 the building ownership certificates have not yet been completed.


— 130 —

17. PREPAID LAND PREMIUMS

Group

2005 2004HK$’000 HK$’000

(Restated)

Carrying amount at 1 January

As previously reported — —

Effect of adopting HKAS 17 (note 3.4) 12,150 5,553

As restated 12,150 5,553

Additions 14,025 6,859

Exchange realignment 350 —

Recognised during the year (510) (262)

Carrying amount at 31 December 26,015 12,150

Current 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 acquired by and registered under the name of the respective subsidiaries of the Company,

details of which are set out in note 16 to the financial statements.

During the year, one of the Group’s subsidiaries in Jiaonan, the PRC, acquired a parcel of land for a cash

consideration of HK$3,538,000. The respective land use right certificate was obtained by that subsidiary on

6 January 2006.


— 131 —

18. INTANGIBLE ASSETS

Group

Patents andlicenses

HK$’000

31 December 2005

At 1 January 2005:

Cost 5,810

Accumulated amortisation (1,888)

Net carrying amount 3,922

Cost at 1 January 2005, net of accumulated amortisation 3,922

Amortisation provided during the year (598)

Exchange realignment 113

At 31 December 2005 3,437


Cost 5,978



31 December 2004

At 1 January 2004:

Cost 5,810



Cost at 1 January 2004, net of accumulated amortisation 4,503

Amortisation provided during the year (581)

At 31 December 2004 3,922


Cost 5,810




— 132 —

19. GOODWILL

Group

HK$’000

31 December 2005

Cost at 1 January 2005 (as restated) —

Acquisition of subsidiaries (note 33) 321,947

Impairment 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 goodwill

Goodwill acquired through business combination has been allocated to the mobile handset business cash-

generating unit, which is a reportable segment, for impairment testing.

Mobile handset business cash-generating unit

The recoverable amount of the mobile handset business cash-generating unit has been determined based on

a value in use calculation using cash flow projections based on financial budgets approved by senior

management covering a five-year period. The discount rate applied to cash flow projections is 17.2% and

cash flows beyond the five-year period are extrapolated using a growth rate of 3% which is determined

with reference to the prevailing inflation rate in Mainland China. Senior management estimated the budgeted

gross margin based on past performance and their expectations for market development. The discount rate

used is before tax 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 Mainland China, the Group recognised a goodwill impairment loss of HK$321,947,000 for its

mobile handset business. The goodwill impairment loss is determined with reference to the recoverable

amount of the Group’s mobile handset business.

20. INVENTORIES

Group

2005 2004HK$’000 HK$’000

(Restated)

Raw materials 113,927 224,735

Work in progress 68,993 123,212

Finished goods 250,725 88,992

433,645 436,939


— 133 —

21. TRADE AND BILLS RECEIVABLES

The 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:

Group2005 2004

HK$’000 HK$’000

(Restated)

Trade receivables

Within 1 month 310,244 605,370

1 to 2 months 114,645 233,715

2 to 3 months 77,899 10,037

Over 3 months 33,803 47,002

536,591 896,124

Bills 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 Haier Investment of HK$485,608,000 (2004: HK$847,738,000 (as restated)), which are

repayable on similar credit terms to those offered to the major customers of the Group. Further details in

respect of the sales to these related parties are set out in note 15 to the financial statements.

22. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Group2005 2004

HK$’000 HK$’000

(Restated)

Prepayments 55,052 54,394

Deposits and other receivables 90,889 77,342

145,941 131,736

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 and are repayable on demand.


— 134 —

23. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

Group

2005 2004HK$’000 HK$’000

(Restated)

Cash and bank balances 533,045 245,242

Time deposits 27,362 —

560,407 245,242

Less: Pledged deposits (70) (2,501)

Cash and cash equivalents 560,337 242,741

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 Foreign Exchange Regulations, the Group is permitted

to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are

made for varying periods of between one day and one month depending on the immediate cash requirement

of the Group, and earn interest at the respective short term time deposit rates. The carrying amounts of the

cash and cash equivalents and the pledged deposits approximate to 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 (as restated)) placed with Haier Finance, a financial institution approved by the People’s

Bank of China. The interest rate on these deposits 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 financial statements.


— 135 —

24. TRADE AND BILLS PAYABLES

An aged analysis of the trade payables as at the balance sheet date, based on the invoice date, is as follows:

Group2005 2004

HK$’000 HK$’000

(Restated)

Trade payables

Within 1 month 445,144 618,215

1 to 2 months 129,504 104,033

2 to 3 months 119,850 91,458

Over 3 months 181,473 323,234

875,971 1,136,940

Bills 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 the Group. 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.

25. OTHER PAYABLES AND ACCRUALS

Group2005 2004

HK$’000 HK$’000

(Restated)

Other payables 301,086 124,955

Accruals 151,100 75,655

452,186 200,610

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.


— 136 —

26. INTEREST-BEARING BANK AND OTHER BORROWINGS

Effective Groupinterest 2005 2004

rate (%) Maturity HK$’000 HK$’000

(Restated)

Current

Other 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-current

Convertible notes (note 27) 4.75 2008 211,528 —

336,335 147,044

Group2005 2004

HK$’000 HK$’000

(Restated)

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 —

293,259 65,421

336,335 147,044

Note: Other loans comprised two loans borrowed from Haier Finance, which are guaranteed by Haier

Corp, bear interest at a rate of approximately 5% per annum and are repayable within one year.

Further details of the interest expense attributable to the loans borrowed from Haier Finance are set

out in note 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’s trust 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 of the liability portion of the convertible notes is estimated at approximately

HK$200 million, which is calculated by discounting the expected future cash flows at the prevailing

interest rates.


— 137 —

27. CONVERTIBLE NOTES

On 28 January 2005, the Company issued convertible notes with an aggregate principal amount of HK$260

million to a subsidiary of Haier Group, Qingdao Haier Group Holdings (BVI) Ltd., as part of the purchase

consideration for the Asset Injection. Further details 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 fifth business days before 27 January 2008, at the note holder’s option, into the Company’s

ordinary shares at a conversion price of HK$0.18 per share. When the notes were issued, the prevailing

market interest rate for similar notes without the conversion option was 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 market interest rate for similar debt without a conversion option of 4.75% and is

carried as a long term liability. The remaining portion was allocated 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

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 26) 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 Company were 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.


— 138 —

28. PROVISIONS

GroupProduct warranties

and installation2005 2004

HK$’000 HK$’000

(Restated)

At beginning of year (as restated) 20,487 21,735

Additional provision 108,272 83,513

Amounts utilised during the year (100,360) (84,761)


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 faulty products are repaired or replaced. The amount of provisions is estimated based on sales

volume and past experience of the level of installation service rendered, repairs or returns. The estimation

basis is reviewed on an ongoing basis and revised where appropriate.

29. DEFERRED TAX

The movements in deferred tax assets and liabilities (representing the provision for obsolete and slow-

moving inventories, accruals and provisions) during the year are as follows:

Deferred tax assets2005 2004

HK$’000 HK$’000

(Restated)

Group

At 1 January (as restated) 21,527 23,260

Deferred tax charged to the income statement

during the year (note 11) (9,410) (1,733)


At 31 December 12,736 21,527


— 139 —

Deferred tax liabilities

2005 2004HK$’000 HK$’000

(Restated)

Group

At 1 January (as restated) 606 2,078

Deferred tax credited to the income statement

during the year (note 11) (623) (1,472)


At 31 December — 606

The Group has tax losses arising in Hong Kong of HK$35,702,000 (2004: HK$40,419,000 (as restated))

that are available indefinitely for offsetting against future taxable profits of the companies in which the

losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in

the Company and subsidiaries that have been loss-making for some time.

At 31 December 2005, there is no significant unrecognised deferred tax liability (2004: Nil) for taxes that

would be payable on the unremitted earnings of certain of the Group’s subsidiaries as the Group has no

liability to additional tax should such amounts be remitted.

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

shareholders.

30. ISSUED EQUITY

Group

Issued equityHK$’000

At 1 January 2004 and 2005 352,324

Acquisition of subsidiaries (note (i)) 445,307

Conversion of convertible notes (note 27) 27,926

Exercise 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, contributed surplus and share premium in the consolidated balance sheet, represents the amount of

issued equity of legal subsidiaries, the Haier Businesses. The equity structure (i.e. the number and type of

shares) reflects the equity structure of the legal parent, Haier Electronics Group Co., Ltd.


— 140 —

31. SHARE OPTION SCHEMES

The 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 by the Company on 28 February 2002 to comply with the new

amendments to the Listing Rules in respect of the share option schemes of a listed company. As a result,

the Company may no longer grant further options under the Old Share Option Scheme. However, all

options granted prior to the termination of the Old Share Option Scheme will remain in full force and

effect. Unless otherwise cancelled or amended, the New Share Option Scheme will remain in force for 10

years from the date of adoption. The share options granted under the Old Share Option Scheme were fully

exercised during the year. As at 31 December 2005, there were 607,500,000 share 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 the success of the operations of the Group. Eligible participants of the New Share Option

Scheme include any employee, executive or officer 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 the New Share Option Scheme is such number of shares, when aggregated with

shares subject to any other share option scheme(s) of the Company (which, for this purpose, excludes the

Old Share Option Scheme), must not exceed 10% of the issued share capital of the Company as at the date

of adoption of the New Share Option Scheme. The maximum number of shares issuable upon exercise of

the options granted under the New Share Option Scheme and any other share option scheme(s) of the

Company (including exercised, cancelled and outstanding options) to each eligible participant in any 12-

month period is limited to 1% of the shares of the 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 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 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 subject to 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 holding company who is/are the grantee(s) of the options.

In addition, any share option granted to a substantial shareholder or an independent non-executive director

of the Company, or to any of their respective associates, in excess of 0.1% of the shares of the Company in

issue 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 of grant) 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 the holding 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 nominal consideration of HK$1 in total by the grantee. The exercise period of the share

options granted is determinable by the Board, and commences 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 or the 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 of the shares of the Company as stated in the daily quotation sheet of the Stock

Exchange on the date of grant, which must be a trading day; (ii) the average closing price of the shares of

the Company as stated in the Stock Exchange’s daily quotation sheets for the five trading days immediately

preceding the date of grant; and (iii) the nominal value of the shares of the Company.


— 141 —

Details of the movements of share options under the Old Share Option Scheme during the year were as

follows:

Number of share options Date of

Outstanding Lapsed/ Outstanding grant of Exerciseas at Exercised cancelled as at share Exercise price per

Category 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 – 0.190

12/7/2006*

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 share capital 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 of the 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

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

Name or as at Exercised cancelled other category as at grant of period price per Immediately At exercisecategory 1 January during during during 31 December share options of share share before the date ofof 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 0.21418/11/2007

Chai Yong Sen 89,000,000 (27,000,000) — — 62,000,000 19/11/2002 19/11/2003 - 0.150 0.219 0.21618/11/2007

Liang Hai Shan 89,000,000 (29,000,000) — — 60,000,000 19/11/2002 19/11/2003 - 0.150 0.217 0.21518/11/2007

Cui Shao Hua 89,000,000 (29,000,000) — — 60,000,000 19/11/2002 19/11/2003 - 0.150 0.218 0.21618/11/2007

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

15/08/2007Tam 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


— 142 —

Number of share options Price of Company’s shares

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

Name or as at Exercised cancelled other category as at grant of period price per Immediately At exercisecategory 1 January during during during 31 December share options of share share before the date ofof participant 2005 the year the year the year 2005 (Note 1) options (Note 2) exercise date option

HK$ HK$ HK$

Independent non–executivedirectors

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 share capital 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, which represented a total of approximately 3.64% of the Company’s shares in issue as at

that date. The exercise in full of these remaining share options would, under the present capital structure of

the Company, result in the issue of 607,500,000 additional ordinary shares of the Company and additional

share capital of HK$60,750,000 and share premium of HK$32,556,000 (before issue expenses).

Subsequent to the balance sheet date, certain directors exercised in aggregate 206,500,000 share options

(52,000,000 share options each for Wu Ke Song and Chai Yong Sen, 50,000,000 share options each for

Liang Hai Shan and Cui Shao Hua and 2,500,000 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.


— 143 —

32. RESERVES

The amounts of the Group’s reserves and the movements therein for the current and prior years are

presented in the consolidated statement of changes in equity on page 98 of the Circular.

In accordance with the relevant PRC laws and regulations applicable to sino-foreign venture enterprises

and wholly-owned enterprises, certain subsidiaries of the Company in the PRC are required to transfer a

certain percentage of their net profit for the year to reserve funds. These funds are non-distributable. For

the purpose of determining the appropriations to these funds, the net profit is determined in accordance

with the applicable financial rules and regulations in the PRC.

33. BUSINESS COMBINATION

On 28 January 2005, the Company acquired Haier Businesses, which are treated as the acquirer for accounting

purpose in the business 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 significant differences 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 30 445,307 —

Convertible notes* 260,000 —

Cash* 50,000 —

755,307 —

* regarded as deemed distributions to Haier Group (note 30)


— 144 —

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’s consolidated 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 at the beginning of the year.

34. CONTINGENT LIABILITIES

At the balance sheet date, the Group did not has any significant contingent liabilities.

35. 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 twelve months.

At the balance sheet date, the Group had total future minimum lease receivables under the non-

cancellable operating lease with its tenants falling due as follows:

Group2005 2004

HK$’000 HK$’000

Within one year 1,356 1,646

In the second to fifth year, inclusive — 721

1,356 2,367

(b) As leasee

The Group leases certain of its buildings under operating lease arrangement. Leases for the buildings

are negotiated for terms ranging from one to ten years.


— 145 —

At the balance sheet date, the Group had total future minimum lease payments under non-cancellable

operating lease falling due as follows:

Group2005 2004

HK$’000 HK$’000

Within one year 1,908 2,341

In the second to fifth year, inclusive 5,213 5,604

After five years — 1,136

7,121 9,081

36. COMMITMENTS

In addition to the operating lease commitments detailed in note 35(b) above, the Group had the following

commitments at the balance sheet date:

Group2005 2004

HK$’000 HK$’000

Contracted, but not provided for:

Acquisition of fixed assets 2,982 13,764


Capital contribution payable to a wholly-owned

subsidiary in the PRC — —

2,982 13,764

37. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments, comprise convertible notes, other interest-bearing loans and

cash and short term deposits. The main purpose of these financial instruments is to raise finance for the

Group’s operations. The Group has various other financial 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 and liquidity risk. The Board reviews and agrees policies for managing each of

these risks and they are summarised below.

Cash flow interest rate risk

The Group’s exposure to the risk of changes in market interest rates related primarily to the Group’s short

term debt obligations with a floating interest rate. The Group’s policy is to manage its interest cost using

an appropriate mix of fixed and variable rate borrowings.


— 146 —

Foreign currency risk

The Group has transactional currency exposures. Such exposures arise from sales or purchases by operating

units in currencies other than the units’ functional currency. Foreign currency risk is not considered

significant because most of the Group’s sales and purchases are denominated in RMB.

Credit risk

The Group trades only with recognised and creditworthy customers. It is the Group’s policy that all

customers who wish to trade on credit terms are subject to credit verification procedures. In addition,

receivable balances are monitored on an ongoing basis and the 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, the Group’s exposure to credit risk arises from default of the counterparty, with a

maximum exposure equal to the carrying amount of these financial assets.

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

collateral.

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the

use of bank loans and other borrowings. 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.

38. COMPARATIVE AMOUNTS

As further explained in notes 2.1, 2.2, 3.2 and 3.4 to the financial statements, due to the application of

reverse acquisition accounting and adoption of new and revised HKFRSs during the current year, the

comparative amounts and presentation of certain items and balances in the financial statements have been

reclassified and restated to comply with the current year’s presentation and accounting treatment.

39. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 19 April

2006.

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

— 147 —

18th Floor

Two International Finance Centre

8 Finance Street

Central

Hong Kong

25 September 2006

The Directors

Haier Electronics Group Co., Ltd.

Haier Electrical Appliances Fourth Holdings (BVI) Limited

Dear Sirs,

We set out below our report on the financial information regarding Haier Electrical Appliances

Fourth Holdings (BVI) Limited (“Haier SPV”) and its subsidiaries (collectively the “Target

Group”) for each of the three years ended 31 December 2003, 2004 and 2005 and the three

months ended 31 March 2006 (the “Relevant Periods”) and the three months ended 31 March

2005, prepared on the basis set out in Section 2 below, for inclusion in the circular of Haier

Electronics Group Co., Ltd. dated 25 September 2006 (the “Circular”).

Haier SPV was incorporated with limited liability in the British Virgin Islands on 27 June

2006, for the purpose of acting as a holding company of the principal subsidiaries set out in

Section 2 below. Haier SPV has not carried out any business since the date of its incorporation

save for the establishment of two wholly-owned subsidiaries namely, Haier Washing Machines

Holdings (BVI) Limited and Haier Water Heaters Holdings (BVI) Limited (collectively the

“BVI Companies”).

The principal activity of the BVI Companies is investment holding. The principal activities of

the subsidiaries (the “Target Companies”) of the BVI Companies group are the manufacture

and sale of front-loading washing machines and water heaters, further details of which are set

out in Section 2 below.

All companies comprising the Target Group have adopted 31 December as their financial year

end date. As at the date of this report, no statutory financial statements have been prepared for

Haier SPV and the BVI Companies since their respective dates of incorporation because they

were newly incorporated in 2006. We have, however, performed our own independent review

of all relevant transactions of Haier SPV and of the BVI Companies since their respective

dates of incorporation.

The statutory financial statements and management accounts of the Target Companies were

prepared in accordance with applicable accounting principles generally accepted in the People’s

Republic of China (the “PRC”). For the purpose of this report, we have undertaken an

independent examination on the audited financial statements or, where appropriate, management


— 148 —

accounts of the Target Companies for each of the Relevant Periods in accordance with Hong

Kong Standards on Auditing and have carried out such additional procedures as we considered

necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting

Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the

“HKICPA”).

We have reviewed the financial information of the Target Group for the three months ended

31 March 2005 in accordance with the Statements of Auditing Standards 700 “Engagements

to Review Interim Financial Reports” issued by the HKICPA. A review consists principally of

making enquiries of management and applying analytical procedures to the financial information

and, based thereon, assessing whether the accounting policies and presentation have been

consistently applied unless otherwise disclosed. A review excludes audit procedures such as

test of controls and verification of assets and liabilities and transactions. It is substantially

less in scope and provides a lower level of assurance than an audit. Accordingly, we do not

express an audit opinion on the financial information of the Target Group for the three months

ended 31 March 2005.

The combined results, combined statements of changes in equity and combined cash flow

statements of the Target Group for the Relevant Periods and the three months ended 31 March

2005 and the combined balance sheets of the Target Group as at 31 December 2003, 2004,

2005 and 31 March 2006, together with the notes thereto set out in this report (collectively the

“Financial Information”), have been prepared based on the audited financial statements or,

where appropriate, management accounts of the Target Companies for the Relevant Periods,

or since their respective dates of establishment, where it is a shorter period, and the three

months ended 31 March 2005 (if applicable), on the basis set out in Section 2 below, after

making such adjustments as considered appropriate.

The directors of Haier SPV are responsible for the preparation of the Financial Information

which gives a true and fair view. The directors of the companies now comprising the Target

Group are responsible for the preparation of the respective statutory financial statements or,

where appropriate, management accounts which give a true and fair view. It is our responsibility

to form an independent opinion and a review conclusion on the financial information of the

Target Group in respect of the Relevant Periods and for the three months ended 31 March

2005, and to report our independent opinion and review conclusion to you.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair

view of the combined results and combined cash flows of the Target Group for each of the

Relevant Periods and of the state of affairs of the Target Group as at 31 December 2003, 2004

and 2005 and as at 31 March 2006.

On the basis of our review, for the purpose of this report, we are not aware of any material

modification that should be made to the combined results and combined cash flows of the

Target Group for the three months ended 31 March 2005.


— 149 —

1. REORGANISATION

Haier SPV was incorporated with limited liability in the British Virgin Islands on 27

June 2006. As at the date of this report, Haier SPV is owned indirectly as to 75% and

25% by Haier Group Corporation (“Haier Corp”) and Qingdao Haier Investment and

Development Co., Ltd. (“Haier Investment”), respectively.

Prior to the establishment of Haier SPV and the BVI Companies, the manufacture and

sale of front-loading washing machines and water heaters were carried out by the Target

Companies which were controlled by Haier Corp. Pursuant to the group restructuring

(the “Reorganisation”), Haier Corp, Haier Investment and Qingdao Haier Collective

Asset Management Association (“Haier Association”, the holding company of Haier

Investment) undertook certain reorganisation measures to reorganise their direct/indirect

interests in the Target Companies into Haier SPV. Haier Corp, Haier Investment and

Haier Association are ultimately owned by the workers of Haier Corp and are collectively

referred to as the “Haier Group”.

2. BASIS OF PREPARATION

As Haier Group controlled the Target Companies that were transferred to Haier SPV

before the Reorganisation and continues to have control over the Target Group after the

Reorganisation, the Reorganisation is considered as a business combination under

common control. As a result, the Financial Information has been prepared under the

basis as if the Target Companies had been transferred to the Target Group at the

beginning of the Relevant Periods. Accordingly, the assets and liabilities transferred to

the Target Group have been stated at historical carrying amounts.

The details of Haier SPV’s principal subsidiaries as at the date of this report are as

follows:

Percentage ofPlace and date Paid-up/ equity interestsof establishment registered attributable to Principal

Company name Notes and operations capital the Target Group activities

Haier Indesit (Qingdao) (a) PRC USD24,000,000 70% Manufacture

Washing Machine Co., Ltd. 6 September 1995 and sale of

(“Haier Indesit Washing Machine”) washing

海爾盈德喜（青島）洗衣機 machines

有限公司


— 150 —

Percentage ofPlace and date Paid-up/ equity interestsof establishment registered attributable to Principal

Company name Notes and operations capital the Target Group activities

Haier Indesit (Qingdao) (a) PRC USD12,000,000 70% Manufacture

Electrical Appliance Co., Ltd. 11 September and sale of

(“Haier Indesit Appliance”) 1998 washing

海爾盈德喜（青島）電器 machines

有限公司

Qingdao Economy and Technology (b) PRC RMB120,000,000 100% Manufacture

Development Zone Haier Water 28 September and sale of

Heater Co., Ltd. 1999 water heaters

(“Qingdao Water Heater”)

青島經濟技術開發區海爾熱水器有限公司

Wuhan Haier Water Heater (c) PRC RMB50,000,000 100% Manufacture

Co., Ltd. 20 August and sale of

(“Wuhan Water Heater”) 2004 water heaters

武漢海爾熱水器有限公司

Chongqing Haier Water Heater (d) PRC RMB10,000,000 100% Not yet

Co., Ltd. 10 March 2006 commenced

(“Chongqing Water Heater”) its commercial

重慶海爾熱水器有限公司 operations

Notes:

(a) The statutory financial statements for the three years ended 31 December 2005 were audited by

Shandong Huide Certified Public Accountants, certified public accountants registered in the PRC.

(b) The statutory financial statements for the three years ended 31 December 2005 were audited by

Shandong Desheng Certified Public Accountants, certified public accountants registered in the

PRC.

(c) The statutory financial statements for the year ended 31 December 2005 were audited by Qingdao

Xinyongda Certified Public Accountants Co., Ltd., certified public accountants registered in the

PRC.

(d) No statutory financial statements have been prepared since its date of establishment because it was

newly established in 2006.

The Financial Information has been prepared under the going concern basis because

Haier Corp and Haier Investment have agreed to provide adequate funds for the Target

Companies to meet their liabilities as and when they fall due.


— 151 —

The Financial Information has been prepared in accordance with Hong Kong Financial

Reporting Standards (“HKFRSs”) (which also include Hong Kong Accounting Standards

(“HKASs”) and Interpretations) issued by HKICPA and accounting principles generally

accepted in Hong Kong. The Financial Information has been prepared under the historical

cost convention. The Financial Information is presented in Renminbi (“RMB”) and all

values are rounded to nearest thousand except when otherwise indicated.

3.1 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIALREPORTING STANDARDS

The Target Group has not applied the following new and revised HKFRSs, that have

been issued but are not yet effective, in the Financial Information.

HKAS 1 Amendment Capital Disclosures

HKFRS 7 Financial Instruments: Disclosures

HK(IFRIC)-Int 8 Scope of HKFRS 2

HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1

January 2007. The revised standard will affect the disclosures about qualitative

information about the Target Group’s objective, policies and processes for managing

capital; quantitative data about what Haier SPV regards as capital; and compliance with

any capital requirements and the consequences of any non-compliance.

HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS

32 relating to financial instruments. This HKFRS shall be applied for annual periods

beginning on or after 1 January 2007.

HK(IFRIC)-Int 8 and HK(IFRIC)-Int 9 shall be applied for annual periods beginning on

or after 1 May 2006 and 1 June 2006, respectively. The Target Group expects that the

adoption of these new HKFRSs will not have any material impact on the Financial

Information in the period of initial application.

3.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of combination

The Financial Information includes the financial statements of Haier SPV and its

subsidiaries for the Relevant Periods. The results of the companies now comprising the

Target Group were presented on a merger basis as described in Section 2 above.

All significant intercompany transactions and balances, and any unrealised gains arising

from intercompany transactions, have been eliminated on combination.


— 152 —

Minority interests at the balance sheet date, being the portion of the net assets of

subsidiaries attributable to equity interests that are not owned by the Target Group,

whether directly or indirectly through subsidiaries, are presented in the combined balance

sheets within equity, separately from shareholders’ equity of Haier SPV. Minority

interests in the results of the Target Group are also separately disclosed in the combined

results.

Subsidiaries

A subsidiary is an entity whose financial and operating policies Haier SPV controls,

directly or indirectly, so as to obtain benefits from its activities.

Related parties

A party is considered to be related to the Target Group if:

(a) the party directly, or indirectly through one or more intermediaries, (i) controls,

is controlled by, or is under common control with, the Target Group; (ii) has an

interest in the Target Group that gives it significant influence over the Target

Group; or (iii) has joint control over the Target 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 Target 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 in such entity resides with, directly or

indirectly, any individual referred to in (d) or (e).

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an

asset is required, the asset’s recoverable amount is estimated. An asset’s recoverable

amount is calculated 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 determined for an individual asset, unless the

asset does not generate cash inflows that are largely independent of those from other

assets or groups of assets, in which case, the recoverable amount is determined for the

cash-generating unit to which the asset belongs.


— 153 —

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

market assessments of the time value of money and the risks specific to the asset. An

impairment loss is charged to the income statement in 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 losses may no longer exist or may have decreased. If

such indication exists, the recoverable amount is estimated.

A previously recognised impairment loss of an asset other than goodwill is reversed

only if there has been a change in the estimates used to determine the recoverable

amount of that asset, however not to an amount higher than the carrying amount that

would have been determined (net of any depreciation/amortisation), had no impairment

loss been recognised for the asset in prior years. A reversal of an impairment loss is

credited to the income statement in the period in which it arises.

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost

less accumulated depreciation and any impairment losses. The cost of an item of property,

plant and equipment comprises its purchase price and any directly attributable costs of

bringing the asset to its working condition and location for its intended use. Expenditure

incurred after items of property, plant and equipment have been put into operation, such

as repairs and maintenance, is normally charged to the income statement in the period

in which it is incurred. In situations where it can be clearly demonstrated that the

expenditure 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 where the cost

of the item can be measured reliably, the expenditure is capitalised as an additional cost

of that asset 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 its residual value over its estimated useful life. The

principal annual rates used for this purpose are as follows:

Buildings 4.5% - 9%

Machinery 6.4% - 18%

Furniture, fixtures and office equipment 18%

Motor vehicles 18%

Where parts of an item of property, plant and equipment have different useful lives, the

cost of that item is allocated on a reasonable basis among the parts and each part is

depreciated separately.


— 154 —

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 its use or disposal. Any gain or loss on

disposal or retirement recognised in the income statement in the year the asset is

derecognised is 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 any impairment losses, and is not depreciated. Cost

comprises the direct cost 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 ready for use.

Leases

Leases where substantially all the rewards and risks of ownership of assets remain with

the lessor are accounted for as operating leases. Where the Target Group is the lessor,

assets leased by the Target Group under operating leases are included in non-current

assets, and rentals receivable under the operating leases are credited to the income

statement on the straight-line basis over the lease terms. Where the Target Group is the

lessee, rentals payable under the operating leases are charged to the income statement

on the straight-line basis over the lease terms.

Prepaid land premiums under operating leases are initially stated at cost and subsequently

recognised on the straight-line basis over the lease terms.

Intangible assets

Intangible assets with finite lives are amortised over the useful economic life and

assessed for impairment whenever there is an indication that the intangible asset may be

impaired. The amortisation period and the amortisation method for an intangible asset

with a finite useful life are reviewed at least at each balance sheet date.

Patents and licenses

Purchased patents and licenses are stated at cost less any impairment losses and are

amortised on the straight-line basis over their estimated useful lives of seven years.


— 155 —

Research and development costs

All 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 Target Group can demonstrate the technical feasibility of completing the

intangible asset so that it will be available for use or sale, its intention to complete and

its ability to use or sell the asset, how the asset will generate future economic benefits,

the availability of resources to complete the project and the ability to measure reliably

the expenditure during the development. Product development expenditure which does

not 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 the commercial lives of the underlying

products, commencing from the date when the products are put into commercial

production.

Investments and other financial assets

Financial assets in the scope of HKAS 39 are classified as financial assets at fair value

through profit or loss, loans and receivables or available-for-sale financial assets, as

appropriate. When financial assets are recognised initially, they are measured at fair

value, plus, in the case of investments not at fair value through profit or loss, directly

attributable transaction costs. The Target Group determines the classification of its

financial assets after initial recognition and, where allowed and appropriate, re-evaluates

this designation 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 Target Group commits to purchase the asset. Regular way purchases

or sales are purchases or sales of financial assets that require delivery of assets within

the period generally established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category “financial

assets at fair value through profit or loss”. Financial assets are classified as held for

trading if they are acquired for the purpose of sale in the near term. Gains or losses on

investments held for trading are recognised in the income statement.


— 156 —

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable

payments that are not quoted in an active market. Such assets are carried at amortised

cost using the effective interest method. Gains and losses are recognised in the income

statement when the loans and receivables are derecognised or impaired, as well as

through the amortisation process.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets in listed and unlisted

equity securities that are designated as available for sale or are not classified in any of

the other two categories. After initial recognition, available-for-sale financial assets are

measured at fair value, with gains or losses recognised as a separate component of

equity until the investment is derecognised or until the investment is determined to be

impaired, at which time the cumulative gain or loss previously reported in equity is

included in the income statement.

When the fair value of unlisted equity securities cannot be reliably measured because

(a) the variability in the range of reasonable fair value estimates is significant for the

investment or (b) the probabilities of the various estimates within the range cannot be

reliably assessed and used in estimating fair value, such securities are stated at cost less

impairment losses.

Fair value

The fair value of investments that are actively traded in an organised financial market is

determined by reference to quoted market bid prices at the close of business at the

balance sheet date. For investments where there is no active market, fair value is

determined using valuation techniques. Such techniques include using recent arm’s

length market transactions; reference to the current market value of another instrument

which is substantially the same; a discounted cash flow analysis; and option pricing

models.

Impairment of financial assets

The Target Group assesses at each balance sheet date whether there is any objective

evidence that a financial asset or a group of financial assets is impaired.


— 157 —

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at

amortised cost has been incurred, the amount of the loss is measured as the difference

between the asset’s carrying amount and the present value of estimated future cash

flows (excluding future credit losses that have not been incurred) discounted at the

financial asset’s original effective interest rate (i.e., the effective interest rate computed

at initial recognition). The carrying amount of the asset is reduced either directly or

through the use of an allowance account. The amount of the impairment loss is recognised

in profit or loss.

The Target Group first assesses whether objective evidence of impairment exists

individually for financial assets that are individually significant, and individually or

collectively for financial assets that are not individually significant. If it is determined

that no objective evidence of impairment exists for an individually assessed financial

asset, whether significant or not, the asset is included in a group of financial assets with

similar credit risk characteristics and that group is collectively assessed for impairment.

Assets that are individually assessed for impairment and for which an impairment loss

is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease

can be related objectively to an event occurring after the impairment was recognised,

the previously recognised impairment loss is reversed. Any subsequent reversal of an

impairment loss is recognised in the income statement, to the extent that the carrying

value of the asset does not exceed its amortised cost at the reversal date.

Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument

that is not carried at fair value because its fair value cannot be reliably measured has

been incurred, the amount of the loss is measured as the difference between the asset’s

carrying amount and the present value of estimated future cash flows discounted at the

current market rate of return for a similar financial assets. Impairment losses on these

assets are not reversed.

Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between

its cost (net of any principal payment and amortisation) and its current fair value, less

any impairment loss previously recognised in profit or loss, is transferred from equity

to the income statement. Impairment losses on equity instruments classified as available

for sale are not reversed through profit or loss.


— 158 —

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of

similar financial assets) is derecognised where:

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

• the Target Group retains the rights to receive cash flows from the asset, but has

assumed an obligation to pay them in full without material delay to a third party

under a “pass-through” arrangement; or

• the Target Group has transferred its rights to receive cash flows from the asset

and either (a) has transferred substantially all the risks 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 Target Group has transferred its rights to receive cash flows from an asset

and has neither transferred nor retained substantially all the risk and rewards of the

asset nor transferred control of the asset, the asset is recognised to the extent of the

Target Group’s continuing involvement in the asset. Continuing involvement that takes

the form of a guarantee over the transferred asset is measured at the lower of the

original carrying amount of the asset and the maximum amount of consideration that

the Target Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option

(including a cash-settled option or similar provision) on the transferred asset, the extent

of the Target Group’s continuing involvement is the amount of the transferred asset that

the Target Group may repurchase, except that in the case of a written put option (including

a cash-settled option or similar provision) on an asset measured at fair value, the extent

of the Target Group’s continuing involvement is limited to the fair value of the transferred

asset and the option exercise price.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration

received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured

at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised

as well as through the amortisation process.


— 159 —

Derecognition of financial liabilities

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 an existing liability are substantially

modified, such an exchange or modification is treated as a derecognition of the original

liability and the recognition of a new liability, and the difference in the respective

carrying amounts is recognised in profit or loss.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined

on the weighted average basis and, in the case of work in progress and finished goods,

comprises direct materials, direct labour and an appropriate proportion of overheads.

Net realisable value is based on estimated selling prices less any estimated costs to be

incurred to completion and disposal.


For the purpose of the combined cash flow statements, 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 an insignificant

risk of changes in value, and have a short maturity of generally within three months

when acquired, less bank overdrafts which are repayable on demand and form an integral

part of the Target Group’s cash management.

For the purpose of the combined balance sheets, cash and cash equivalents comprise

cash on hand and at banks, including term deposits, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as

a result of a past event and it is probable that a future outflow of resources will be

required to settle the obligation, provided that a reliable estimate can be made of the

amount 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 of the future expenditures expected to be required

to settle the obligation. The increase in the discounted present value amount arising

from the passage of time is included in finance costs in the income statement.


— 160 —

Provisions for installation services and product warranties granted by the Target Group

on certain products are recognised based on sales volume and past experience of the

level of repairs and returns, discounted to their present values as appropriate.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the income

statements or in equity if it relates to items that 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 paid to the taxation authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the

balance sheet date between the tax bases of 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 the initial recognition of an asset or

liability in a transaction that is not a 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 investments in

subsidiaries, where the timing of the reversal of the temporary differences can be

controlled and it is probable that the temporary differences will not reverse in the

foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward

of unused tax credits and unused tax losses, to the extent that it is probable that taxable

profit will be available against which the deductible temporary differences, and the

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 or liability in a transaction that is

not a business combination and, at the time of the transaction, affects neither the

accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in

subsidiaries, deferred tax assets are only recognised to the extent that the temporary

differences will reverse in the foreseeable future and taxable profit will be available

against which the temporary differences can be utilised.


— 161 —

The carrying amount of deferred tax assets is reviewed at each balance sheet date and

reduced to the extent that it is no longer probable that sufficient taxable 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 is probable 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 realised or the liability is settled, based on tax

rates (and tax laws) that have been enacted or substantively enacted at the balance sheet

date.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right

exists to set off current tax assets against current tax liabilities and the deferred taxes

related to the same taxable entity and the same taxation authority.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the

Target Group and when the revenue can be measured reliably, on the following bases:

(a) from the sale of goods, when the significant risks and rewards of ownership have

been transferred to the buyer, provided that the Target Group maintains neither

managerial involvement to the degree usually associated with ownership, nor

effective 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 rate method by

applying the rate that discounts the estimated future cash receipts through the

expected life of the financial instrument to the net carrying amount of the financial

asset.

Employee benefits

Pension schemes

The employees of the Target Group’s subsidiaries which operate in Mainland China are

required to participate in central pension schemes operated by the relevant government

authorities. These subsidiaries are required to contribute a certain percentage of their

payroll cost to the central pension schemes. The contributions are charged to the income

statement as they become payable in accordance with the rules of the central pension

schemes. The assets of the schemes are held separately from those of the Target Group

in independently administered funds.


— 162 —

Dividends

Final dividends proposed by the directors are classified as a separate allocation of

retained profits within the equity section of the balance sheet, until they have been

approved by the shareholders in a general meeting. When these dividends have been

approved by the shareholders and declared, they are recognised as a liability.

Interim dividends are simultaneously proposed and declared. Consequently, interim

dividends are recognised immediately as a liability when they are proposed and declared.

Foreign currencies

The Financial Information is presented in RMB, which is the functional and presentation

currency of the Target Companies. Foreign currency transactions are initially recorded

using the functional currency rates ruling at the date of the transactions. Monetary

assets and liabilities denominated in foreign currencies are retranslated at the functional

currency rates of exchange ruling at the balance sheet date. All differences are taken to

profit or loss. Non-monetary items that are measured in terms of historical cost in a

foreign currency are translated using the exchange rates at the dates of the initial

transactions. Non-monetary items measured at fair value in a foreign currency are

translated using the exchange rates at the date when the fair value was determined.

3.3 SIGNIFICANT ACCOUNTING ESTIMATES

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation

uncertainty at the balance sheet date, that have a significant risk of causing a material

adjustment to the carrying amounts of assets and liabilities within the next financial

year, are discussed below.

(i) Deferred tax assets

Deferred tax assets are recognised for all deductible temporary differences,

carryforward of unused tax credits and unused tax losses, to the extent that it is

probable that taxable profit will be available against which the deductible

temporary differences, and the carryforward of unused tax credits and unused tax

losses can be utilised. Where the actual or expected tax positions of the relevant

companies of the Target Group in future are different from the original estimate,

such differences will impact the recognition of deferred tax assets and income tax

charge in the period in which such estimate has been changed.


— 163 —

(ii) Write-down of inventories to net realisable value

Write-down of inventories to net realisable value is made based on the ageing

and estimated net realisable value of inventories. The assessment of the write-

down amount required involves management’s judgements and estimates. Where

the actual outcome or expectation in future is different from the original estimate,

such differences will impact the carrying value of the inventories and the write-

down charge/reversal in the period in which such estimate has been changed.

(iii) Product warranty and installation provisions

Product warranty and installation provisions are made based on sales volume and

past experience of the level of installation service rendered, repairs and returns.

The assessment of the provision amount required involves management’s judgments

and estimates. Where the actual outcome or expectation in future is different

from the original estimate, such differences will impact the carrying amount of

the product warranty and installation provisions and the provision amount charge/

reversal in the period in which such estimate has been changed.

(iv) Useful lives of property, plant and equipment

The management determines the estimated useful lives and related depreciation

for its property, plant and equipment. This estimate is based on the historical

experience of the actual useful lives of the property, plant and equipment of

similar nature and functions. It could change significantly as a result of technical

innovations and competitor actions in response to industry cycles. Management

will increase the depreciation charge where the useful lives are less than the

previously estimated lives, or it will write off or write down obsolete or non-

strategic assets that have been abandoned or sold.


— 164 —

4. COMBINED RESULTS

The following is a summary of the combined results of the Target Group for the Relevant

Periods prepared on the basis set out in Section 2 above:

Three months endedYear ended 31 December 31 March

2003 2004 2005 2005 2006Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

(Unaudited)

REVENUE (b) 1,338,323 1,897,542 2,318,672 540,303 576,705

Cost of sales (961,452) (1,447,123) (1,771,359) (421,764) (427,345)

Gross profit 376,871 450,419 547,313 118,539 149,360

Other income and gains (b) 1,218 2,078 3,006 239 1,427

Selling and distribution costs (239,812) (336,653) (357,509) (81,335) (98,992)

Administrative expenses (50,191) (61,839) (77,472) (16,924) (20,581)

Other expenses (129) — (73) — —

Finance costs (d) (14,416) (6,575) (6,542) (1,530) (1,258)

PROFIT BEFORE TAX (c) 73,541 47,430 108,723 18,989 29,956

Tax (g) (16,090) (8,045) (14,754) (1,315) (3,586)

PROFIT FOR THE

YEAR/PERIOD 57,451 39,385 93,969 17,674 26,370

Attributable to:

Equity holders of the parent 49,189 29,840 71,981 10,717 21,390

Minority interests 8,262 9,545 21,988 6,957 4,980

57,451 39,385 93,969 17,674 26,370

DIVIDENDS (h) 18,544 9,844 37,711 9,954 50,242


— 165 —

(a) Segment information

Segment 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.

Segment information is presented by way of the Target Group’s primary segment

reporting basis, by business segment. In determining the Target 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. No further geographical segment information is presented

as over 90% of the Target Group’s revenue is derived from customers based in

Mainland China, and over 90% of the Target Group’s assets are located in Mainland

China.

The Target Group’s operating businesses are structured and managed separately,

according to the nature of their operations and the products and services they

provide. Each of the Target Group’s business segments represents a strategic

business unit that offers products and services which are subject to risks and

returns that are different from those of the other business segments.

Summary details of the business segments are as follows:

(i) the washing machine segment is engaged in the production and sale of

front-loading washing machines; and

(ii) the water heater segment is engaged in the production and sale of water

heaters.


— 166 —

Business segments

The following tables present revenue, profit and certain assets, liabilities andexpenditure information on the Target Group’s business segments for the RelevantPeriods:

Washing Watermachine heater Total

RMB’000 RMB’000 RMB’000Year ended 31 December 2003Segment revenue:

Sales to external customers 730,524 607,799 1,338,323Other income and gains 330 546 876

Total 730,854 608,345 1,339,199

Segment results 35,305 52,310 87,615

Interest income 342Finance costs (14,416)

Profit before tax 73,541Tax (16,090)

Profit for the year 57,451

Attributable to:Equity holders of the parent 49,189Minority interests 8,262

57,451

As at 31 December 2003Assets and liabilitiesSegment assets 551,673 267,681 819,354Deferred tax assets 12,785Tax recoverable 661Cash and cash equivalents 88,156

Total assets 920,956

Segment liabilities 296,067 161,691 457,758Tax payable 4,615Interest-bearing borrowings 154,000

Total liabilities 616,373

Other segment informationDepreciation and amortisation 44,510 10,479 54,989Capital expenditure — 9,000 9,000Write-off of items of property,

plant and equipment — 129 129Product warranty and installation

service provisions 29,309 48,253 77,562


— 167 —


RMB’000 RMB’000 RMB’000

Year ended 31 December 2004Segment revenue:

Sales to external customers 1,055,887 841,655 1,897,542

Other income and gains 567 937 1,504

Total 1,056,454 842,592 1,899,046

Segment results 38,581 14,850 53,431

Interest income 574

Finance costs (6,575)

Profit before tax 47,430

Tax (8,045)


Attributable to:

Equity holders of the parent 29,840

Minority interests 9,545

39,385

As at 31 December 2004Assets and liabilitiesSegment assets 485,953 317,010 802,963

Deferred tax assets 16,886

Cash and cash equivalents 60,808

Total assets 880,657

Segment liabilities 184,989 171,225 356,214

Tax payable 10,319

Interest-bearing borrowings 135,000


Other segment informationDepreciation and amortisation 46,737 11,621 58,358

Capital expenditure 7,831 36,273 44,104

Product warranty and installation



— 168 —


RMB’000 RMB’000 RMB’000Year ended 31 December 2005Segment revenue:

Sales to external customers 1,212,726 1,105,946 2,318,672Other income and gains 1,849 785 2,634

Total 1,214,575 1,106,731 2,321,306

Segment results 78,144 36,749 114,893





93,969

As at 31 December 2005Assets and liabilitiesSegment assets 572,040 437,845 1,009,885Deferred tax assets 18,812Cash and cash equivalents 33,098

Total assets 1,061,795

Segment liabilities 244,128 265,873 510,001Tax payable 7,270Interest-bearing borrowings 123,000


Other segment informationDepreciation and amortisation 45,548 15,154 60,702Capital expenditure 8,881 29,555 38,436Write-off of items of property,

plant and equipment 73 — 73Product warranty and installation



— 169 —


RMB’000 RMB’000 RMB’000(Unaudited) (Unaudited) (Unaudited)

Three months ended 31 March 2005Segment revenue:

Sales to external customers 339,362 200,941 540,303Other income and gains 8 130 138

Total 339,370 201,071 540,441

Segment results 23,941 (3,523) 20,418



Profit for the period 17,674


17,674


RMB’000 RMB’000 RMB’000

Three months ended 31 March 2006Segment revenue:

Sales to external customers 293,667 283,038 576,705Other income and gains 643 710 1,353

Total 294,310 283,748 578,058

Segment results 16,117 15,023 31,140



Profit for the period 26,370


26,370


— 170 —


RMB’000 RMB’000 RMB’000

As at 31 March 2006Assets and liabilitiesSegment assets 518,577 434,841 953,418

Deferred tax assets 19,187

Cash and cash equivalents 34,198

Total assets 1,006,803

Segment liabilities 216,012 307,193 523,205

Tax payable 7,946

Interest-bearing borrowings 78,000


Other segment informationDepreciation and amortisation 9,618 4,580 14,198

Capital expenditure 28,485 3,408 31,893

Product warranty and installation



— 171 —

(b) Revenue, other income and gains

Revenue, which is also the Target Group’s turnover, represents the net invoiced

value of goods sold, net of value-added tax, and after allowances for returns and

trade discounts.

An analysis of the Target Group’s revenue and other income and gains is as

follows:



(Unaudited)

RevenueSale of washing machines 730,524 1,055,887 1,212,726 339,362 293,667

Sale of water heaters 607,799 841,655 1,105,946 200,941 283,038

1,338,323 1,897,542 2,318,672 540,303 576,705

Other income and gainsInterest income 342 574 372 101 74

Compensation received

from suppliers 672 981 2,191 95 1,274

Gain on disposal of items of

property, plant and

equipment — 136 207 — —

Gross rental income of

land and buildings 140 140 140 35 35

Others 64 247 96 8 44

1,218 2,078 3,006 239 1,427


— 172 —

(c) Profit before tax

The Target Group’s profit before tax is arrived at after charging/(crediting):



(Unaudited)

Depreciation 54,426 57,795 59,792 16,021 13,971

Amortisation of prepaid

land premiums 563 563 563 141 141

Amortisation of

intangible assets* — — 347 86 86

Research and development

costs 10,115 12,592 18,816 4,034 4,121

Minimum lease payments under

operating leases:

Land and buildings 821 1,190 1,485 331 369

Plant and machinery — 6 166 22 54

821 1,196 1,651 353 423

Auditors’ remuneration 137 127 136 19 20

Staff costs (excluding

directors’ remuneration

— note 4(e)):

Wages and salaries 17,519 15,861 19,184 4,728 5,581

Net pension scheme

contributions 4,208 4,478 5,351 1,314 1,862

Total staff costs 21,727 20,339 24,535 6,042 7,443

Product warranty and

installation service

provisions 77,562 112,177 138,702 30,082 34,269

Write-off of items of property,

plant and equipment** 129 — 73 — —

Foreign exchange

differences, net 1 60 — (1) —

* The amortisation of intangible assets is included in “Administrative expenses” on the faceof the combined results.

** The write-off of items of property, plant and equipment is included in “Other expenses” onthe face of the combined results.


— 173 —

(d) Finance costs



(Unaudited)

Interest on other loans

wholly repayable within

five years 14,416 6,575 6,542 1,530 1,258

(e) Directors’ remuneration

Directors’ remuneration of the Target Companies for the Relevant Periods,

disclosed pursuant to The Rules Governing the Listing on Securities of The Stock

Exchange of Hong Kong Limited (the “Stock Exchange”) and Section 161 of the

Hong Kong Companies Ordinance, is as follows:



(Unaudited)

Fees — — — — —

Other emoluments:

Salaries, allowances and

benefits in kind 37 42 28 12 —

Pension scheme contributions 9 10 7 2 —

46 52 35 14 —


— 174 —

The remuneration of each of the directors of the Target Companies for the year

ended 31 December 2003 is set out below:

Salaries,allowances Pension

and benefits schemeName of director Fees in kind contributions Total

RMB’000 RMB’000 RMB’000 RMB’000

Yang Mian Mian — — — —

Liang Hai Shan — — — —

Zhou Yun Jie — — — —

Sun Jing Yan — — — —

Du Guang Lin — 37 9 46

Andrea Ojetti — — — —

Guiseppe Giacalone — — — —

— 37 9 46





RMB’000 RMB’000 RMB’000 RMB’000





Xiao Xiang Peng — — — —




— 42 10 52


— 175 —





RMB’000 RMB’000 RMB’000 RMB’000



Cao Chun Hua — — — —







— 28 7 35

The remuneration of each of the directors of the Target Companies for the three

months ended 31 March 2005 is set out below:



RMB’000 RMB’000 RMB’000 RMB’000

(Unaudited) (Unaudited) (Unaudited) (Unaudited)









— 12 2 14


— 176 —

The remuneration of each of the directors of the Target Companies for the three

months ended 31 March 2006 is set out below:



RMB’000 RMB’000 RMB’000 RMB’000



Cao Chun Hua — — — —




Shi Chun Jie — — — —



— — — —

There was no arrangement under which a director waived or agreed to waive any

remuneration during the Relevant Periods.

(f) Five highest paid employees

The five highest paid employees for the Relevant Periods did not include any

directors. Details of the remuneration of the five non-director, highest paid

employees for the Relevant Periods are as follows:



(Unaudited)

Salaries, allowances and

benefits in kind 271 260 396 75 125

Bonuses 192 213 224 18 43

Pension scheme contributions 60 80 100 21 18

523 553 720 114 186


— 177 —

The remuneration of each of the non-director, highest paid employees for the

Relevant Periods was no more than RMB1,000,000.

During the Relevant Periods, no remuneration was paid by the Target Group to

any of the five highest paid employees as an inducement to join or upon joining

the Target Group or as compensation for loss of office.

(g) Tax

No provision for Hong Kong profits tax has been made as the Target Group did

not have any assessable profits arising in Hong Kong during the Relevant Periods.

The Target Group has five subsidiaries established in Mainland China, two of

which are Sino-foreign equity joint ventures and the remaining subsidiaries are

limited liability companies. PRC corporate income tax (“CIT”) has been provided

at a rate of 33% on the taxable income during the Relevant Periods, except for

the following:

(i) Haier Indesit Appliance is entitled to a preferential tax rate of 15% because

it is qualified as a high technology enterprise located in a high technology

development zone. In addition, Haier Indesit Appliance is a Sino-foreign

equity joint venture and therefore it is also entitled to an exemption from

CIT for its first two profitable years commenced in the year ended 31

December 2003 and a 50% reduction of the CIT rate for the third to fifth

years. As a result, Haier Indesit Appliance is subject to a preferential tax

rate of 7.5% from 1 January 2005 to 31 December 2007.

(ii) Haier Indesit Washing Machine was subject to a preferential CIT rate of

10% for the year ended 31 December 2003 and thereafter 15% from 1

January 2004 onwards because it is qualified as a high technology enterprise

located in a high technology development zone.

(iii) Qingdao Water Heater was subject to a CIT rate of 33% for the period

from 1 January 2003 to 31 December 2004. From 1 January 2005 onwards,

Qingdao Water Heater is qualified as a high technology enterprise located

in a high technology development zone and is subject to a preferential CIT

rate of 15%.

(iv) Wuhan Water Heater is subject to a preferential CIT rate of 15% because it

is qualified as a high technology enterprise located in a high technology

development zone.

(v) No CIT has been provided for Chongqing Water Heater because it has not

yet commenced its operation during the Relevant Periods.


— 178 —



(Unaudited)

PRC corporate income tax:

Charge for the year/period 12,879 12,146 16,680 2,566 3,961

Deferred tax -

Section 5(c) 3,211 (4,101) (1,926) (1,251) (375)

Total tax charge for the

year/period 16,090 8,045 14,754 1,315 3,586

A reconciliation of the tax expense applicable to profit before tax using the

statutory rate of 33% to the tax expense at the effective tax rate is as follows:



(Unaudited)

Profit before tax 73,541 47,430 108,723 18,989 29,956

Tax at the statutory rate of 33% 24,269 15,652 35,879 6,266 9,885

Tax exemption (8,561) (12,810) (22,964) (4,964) (6,012)

Effect on deferred tax of

change in rates (1,500) 641 — — (520)

Temporary differences

not recognised 1,708 720 — — —

Expenses not deductible for tax 174 3,842 1,839 13 233

Tax charge at the effective rate 16,090 8,045 14,754 1,315 3,586

(h) Dividends

Haier SPV was not incorporated before 31 March 2006. Dividends disclosed were

declared by the subsidiaries of Haier SPV in the Relevant Periods to their respective

shareholders out of their retained profits determined in accordance with the

applicable financial rules and regulations of the PRC prior to the Reorganisation.


— 179 —

The dividend amounts in the Relevant Periods disclosed in the combined results

represent the Target Group’s share of dividend from the subsidiaries. The dividend

rates are not presented as such information is considered not meaningful for the

purpose of this report.

(i) Earnings per share

No basic or diluted earnings per share amount is presented as its inclusion, for

the purpose of this report, is not considered meaningful.

(j) Related party transactions

In addition to the transactions disclosed in Section 5(a), (h), (i), (j), (k), (l) and

(m) of this report, the Target Group had the following material transactions with

Haier Group and their subsidiaries, associates and/or fellow subsidiaries during

the Relevant Periods:

Three months endedYear ended 31 December 31 March2003 2004 2005 2005 2006

Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

(Unaudited)

Sale of washing machines (i) 728,909 1,054,369 1,212,621 338,436 291,027

Sale of water heaters (ii) 605,262 840,682 1,105,005 200,796 282,984

Purchase of materials (iii) 834,249 1,271,415 1,483,439 359,775 363,529

Printing and package

fee expenses (iv) 1,119 2,932 5,838 1,440 1,260

Mould charges (v) 14,542 22,989 33,261 6,935 7,939

Utility service fee expenses (vi) 21,027 27,227 30,444 7,049 10,718

Logistics charges (vii) 56,739 75,367 78,217 18,610 23,322

Other service fee expenses (viii) 9,488 10,459 13,224 3,973 3,483

Interest expenses (ix) 11,529 6,575 6,542 1,530 1,258

Interest income (ix) 337 466 264 67 49

Promotion fee expenses (x) — — — — 5,836

Sale of items of property,

plant and equipment (xi) — 2,649 1,860 — —

Rental income (xii) 140 140 140 35 35

Purchase of items of property,

plant and equipment (xiii) 2,453 18,639 3,017 2,083 —


— 180 —

Notes:

(i) The sale of washing machines comprised domestic sales made to subsidiaries of Haier

Investment and export sales made to Haier Electrical Appliances Co., Ltd. (“Haier

Electrical”), a subsidiary of Haier Investment.

The domestic sales of washing machines were made at selling prices quoted by subsidiaries

of Haier Investment to third party distributors less discounts ranging from 5% to 50%. The

export sales of washing machines were made at selling prices representing differences

between selling prices of washing machines mutually agreed and selling expenses of Haier

Electrical not exceeding 2.5% of the selling prices of washing machines.

(ii) The sale of water heaters comprised domestic sales made to subsidiaries of Haier Investment

and export sales made to Haier Electrical, a subsidiary of Haier Investment.

The domestic sales of water heaters were made at selling prices quoted by subsidiaries of

Haier Investment to third party distributors less discounts ranging from 5 % to 20%. The

export sales of water heaters were made at selling prices representing differences between

selling prices of water heaters mutually agreed and selling expenses of Haier Electrical not

exceeding 2.5% of the selling prices of water heaters.

(iii) The purchase prices of materials were determined based on the lower of the average market

price or the consolidated and integrated tender and bidding price plus a commission fee of

2.6%.

(iv) Printing and packaging fee expenses were determined with reference to actual costs plus a

mark-up of not more than 10%.

(v) Moulds were charged with reference to bidding prices plus a mark-up of not more than

10%.

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

(vii) Logistics charges were determined with reference to bidding prices offered by third parties.

(viii) Other service fee expenses included legal and financial consulting service fee, catering and

travel agency service fee, human resources service fee, general security service fee, product

certification service fee, software service fee, office consumable supplies and equipment

repair and maintenance service fee which were determined with reference to actual costs

plus mark-up of not more than 10%.

(ix) Interest expenses/income were determined with reference to the standard rates published by

the People’s Bank of China.

(x) The promotion fee expenses were determined at a rate of 1.2% of the domestic sales of

water heaters and washing machines made by subsidiaries of Haier Investment.

(xi) The selling prices of items of property, plant and equipment were determined with reference

to their respective carrying amounts.

(xii) The rental income charge was determined in accordance with terms and conditions set out

in the agreements.

(xiii) Items of property, plant and equipment were purchased at the amounts determined based on

actual costs plus a mark-up of not more than 10%.


— 181 —

(xiv) During the Relevant Periods, Haier Corp provided corporate guarantees of RMB154,000,000,

RMB125,000,000, RMB123,000,000 and RMB78,000,000 for each of the three years ended

31 December 2005 and the period ended 31 March 2006, respectively, to Haier Finance Co.,

Ltd. (“Haier Finance”), a subsidiary of Haier Corp and a financial institution approved by

the People’s Bank of China, as securities for banking facilities granted to the Target Group.

The Target Group fully utilised the above banking facilities as at 31 December 2003, 2004

and 2005 and as at 31 March 2006.

(xv) On 4 September 2002 and 10 December 2002, Haier Corp provided corporate guarantees of

RMB30,000,000 and RMB20,000,000 to Agricultural Bank of China as securities of banking

facilities for two loans granted to the Target Group for the periods from 4 September 2002

to 4 September 2003 and from 10 December 2002 to 10 December 2003, respectively. As at

31 December 2003, the corporate guarantees were fully released upon maturity of the loans.

The directors are of the opinion that the above transactions were carried out in

the ordinary course of business of the Target Group.

The remuneration of the key management personnel of the Target Group has been

disclosed in Section 4(e) above.


— 182 —

5. COMBINED BALANCE SHEETS

The following is a summary of the combined balance sheets of the Target Group as atthe end of each of the Relevant Periods prepared on the basis set out in Section 2 above:

As atAs at 31 December 31 March

2003 2004 2005 2006Notes RMB’000 RMB’000 RMB’000 RMB’000

NON-CURRENT ASSETSProperty, plant and equipment (a) 448,294 432,117 403,865 421,787Prepaid land premiums (b) 11,643 11,080 10,517 10,376Deferred tax assets (c) 12,785 16,886 18,812 19,187Intangible assets (d) — — 2,080 1,994Investments (e) — — 5,000 5,000Long term prepayments (f) — — 10,339 9,046

Total non-current assets 472,722 460,083 450,613 467,390

CURRENT ASSETSInventories (g) 66,670 31,868 55,726 43,242Trade and bills receivables (h) 260,390 277,439 423,830 381,118Prepayments, deposits and

other receivables (i) 32,357 50,459 98,528 80,855Tax recoverable 661 — — —Cash and cash equivalents (j) 88,156 60,808 33,098 34,198

Total current assets 448,234 420,574 611,182 539,413

CURRENT LIABILITIESTrade and bills payables (k) 305,817 168,670 259,219 244,995Other payables and accruals (l) 97,146 119,617 126,652 150,395Dividends payable 10,160 242 41,482 52,335Interest-bearing borrowings (m) 154,000 135,000 123,000 78,000Tax payable 4,615 10,319 7,270 7,946Provisions (n) 26,331 42,264 41,422 41,552

Total current liabilities 598,069 476,112 599,045 575,223

NET CURRENT ASSETS/(LIABILITIES) (149,835) (55,538) 12,137 (35,810)

TOTAL ASSETS LESSCURRENT LIABILITIES 322,887 404,545 462,750 431,580

NON-CURRENT LIABILITIESProvisions (n) 18,304 25,421 41,226 33,928

Total non-current liabilities 18,304 25,421 41,226 33,928

Net assets 304,583 379,124 421,524 397,652

EQUITYEquity attributable to equity

holders of the parentPaid-up capital Section 6 305,855 350,855 350,855 350,855Reserves Section 6 (78,409) (58,413) (24,143) (52,995)

227,446 292,442 326,712 297,860

Minority interests Section 6 77,137 86,682 94,812 99,792

Total equity 304,583 379,124 421,524 397,652


— 183 —

(a) Property, plant and equipment

Furniture,fixtures

and office Motor ConstructionBuildings Machinery equipment vehicles in progress TotalRMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Cost:As at 1 January 2003 152,962 522,350 716 2,023 47,139 725,190Additions 1,641 3,053 — — 4,306 9,000Transfers 6,108 45,337 — — (51,445) —Write-off — (351) — — — (351)

As at 31 December 2003and 1 January 2004 160,711 570,389 716 2,023 — 733,839

Additions 19,066 9,907 56 — 15,075 44,104Transfers 5,491 5,064 — — (10,555) —Disposals — (3,440) — — — (3,440)

As at 31 December 2004and 1 January 2005 185,268 581,920 772 2,023 4,520 774,503

Additions 942 24,821 41 — 10,205 36,009Transfers 469 12,281 — — (12,750) —Disposals — (5,435) (15) — — (5,450)Write-off — — (537) (201) — (738)

As at 31 December 2005and 1 January 2006 186,679 613,587 261 1,822 1,975 804,324

Additions 55 1,733 — — 30,105 31,893Transfers — 224 — — (224) —

As at 31 March 2006 186,734 615,544 261 1,822 31,856 836,217

Accumulated depreciation:As at 1 January 2003 30,055 198,945 520 1,821 — 231,341Provided during the year 7,364 47,014 48 — — 54,426Write-off — (222) — — — (222)


Provided during the year 7,521 50,240 34 — — 57,795Disposals — (954) — — — (954)


Provided during the year 8,601 51,150 41 — — 59,792Disposals — (1,040) (14) — — (1,054)Write-off — — (484) (181) — (665)


Provided during the period 2,226 11,739 6 — — 13,971

As at 31 March 2006 55,767 356,872 151 1,640 — 414,430

Net book value:As at 31 March 2006 130,967 258,672 110 182 31,856 421,787

As at 31 December 2005 133,138 268,454 116 182 1,975 403,865

As at 31 December 2004 140,328 286,897 170 202 4,520 432,117

As at 31 December 2003 123,292 324,652 148 202 — 448,294


— 184 —

The Target Group’s properties are all situated in Mainland China. During the

Relevant Periods, all of the Target Group’s properties do not have building

ownership certificates and relevant land use right certificates registered under the

name of the respective subsidiaries of Haier SPV.

On 20 September 2006, Haier Corp issued an undertaking to the Target Companies

pursuant to which Haier Corp agreed to provide other suitable properties to the

Target Group to ensure the continuing operations of the respective subsidiaries of

Haier SPV and indemnify the Target Group to bear any losses arising from the

above defective land use right and property title issues and for any moving cost/

loss incurred, if, for any reason, the respective subsidiaries were not able to

continue using the buildings before the related acquisition and registration

procedures have been completed.

In the opinion of the directors, the Target Group is entitled to lawfully and

validly occupy and use the properties for its daily operations, notwithstanding the

fact that the related building ownership certificates and land use right certificates

have not yet obtained.

(b) Prepaid land premiums


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

At cost:

At beginning and end of

year/period 16,900 16,900 16,900 16,900

Accumulated amortisation:

At beginning of year/period 4,131 4,694 5,257 5,820

Recognised 563 563 563 141

At end of year/period 4,694 5,257 5,820 5,961

Net book value:


Current portion included in

prepayments, deposits and

other receivables (563) (563) (563) (563)

Non-current portion 11,643 11,080 10,517 10,376


— 185 —

The Target Group’s leasehold land is held under a medium term lease and is

situated in Qingdao, the PRC. During the Relevant Periods, the land use right

certificate of this parcel of land was registered under Haier Corp, details of which

are set out in Section 5(a).

(c) Deferred tax assets

The movement of deferred tax assets (mainly resulting from accrual payments

and provisions for product warranty and installation services) during the Relevant

Periods are as follows:


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000


Deferred tax credited/(charged)

during the year/period

— Section 4(g) (3,211) 4,101 1,926 375


(d) Intangible assets


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

At cost:

At beginning of year/period — — — 2,427

Additions — — 2,427 —

At end of year/period — — 2,427 2,427

Accumulated amortisation:

At beginning of year/period — — — 347

Recognised — — 347 86

At end of year/period — — 347 433

Net book value:

At end of year/period — — 2,080 1,994


— 186 —

(e) Investments


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Unlisted equity investments,

at cost (note) — — 5,000 5,000

Note: Unlisted equity investments comprise a 25%-owned associate and a 60%-owned subsidiary

which are individually and in aggregate not material to the Target Group’s financial positions

and results of operations for all periods presented. The Target Group accounted for these

interests at cost less provision for impairment losses.

Subsequent to 31 March 2006, the above investments were disposed of to Haier

Group and its subsidiaries (excluding those subsidiaries now comprising the Target

Group) at their respective carrying amounts.

(f) Long term prepayments

During the Relevant Periods, Haier Group sponsored the Organising Committee

for the Games of the XXIX Olympiad (“OCG”) in connection with the Games of

the XXIX Olympiad to be hosted in Beijing in 2008 (the “Games”). The

sponsorship fee amounting to RMB220 million was shared as to RMB203 million

by certain of the Haier Group’s subsidiaries (excluding those subsidiaries now

comprising the Target Group) and RMB17 million by one of the Target Group’s

subsidiaries. Under the sponsorship agreement, Haier Group and/or its affiliates

are permitted to use the official logo of the Games in its products for promotion

purposes from 8 August 2005 to 31 December 2008 (the “Sponsorship Period”).

The sponsorship fee is amortised over the Sponsorship Period on the straight-line

basis.

Accordingly, a relevant portion of the sponsorship fee paid by the Target Group’s

subsidiary amounting to approximately RMB5 million has been classified as

prepayments, deposits and other receivables under current assets.


— 187 —


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Carrying amount at end

of year/period — — 15,508 14,215

Current portion included

in prepayments, deposits

and other receivables — — (5,169) (5,169)

Non-current portion — — 10,339 9,046

(g) Inventories


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Raw materials 37,274 9,645 31,232 16,857

Work in progress 3,771 4,302 11,120 15,517

Finished goods 25,625 17,921 13,374 10,868

66,670 31,868 55,726 43,242


— 188 —

(h) Trade and bills receivables

The general credit terms of the Target Group range from 30 days to 90 days. An

aged analysis of the Target Group’s trade receivables as at the balance sheet date

of each of the Relevant Periods, based on the invoice date and net of provision, is

as follows:


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Trade receivables:

Within 1 month 155,090 217,769 246,636 169,512

1 to 2 months 62,605 53,218 77,893 81,982

2 to 3 months 14,708 5,661 28,964 25,188

Over 3 months 2,840 791 3,071 6,593

235,243 277,439 356,564 283,275

Bills receivable 25,147 — 67,266 97,843

260,390 277,439 423,830 381,118

Trade receivables represented by:

Subsidiaries of Haier Group 235,243 277,274 356,488 283,199

Associate of Haier Group — 76 76 76

Others (unrelated parties) — 89 — —

235,243 277,439 356,564 283,275

The trade receivables from related companies are unsecured and interest-free.

Further details in respect of the sales to these related companies are set out in

Section 4(j).


— 189 —

(i) Prepayments, deposits and other receivables


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Prepayments 3,666 16,283 42,657 11,223

Deposits and other receivables 28,691 34,176 55,871 69,632

32,357 50,459 98,528 80,855

Represented by:

Haier Corp 25,323 28,419 51,144 61,667


Associate of Haier Group 76 260 260 260

Others (unrelated parties) 3,334 11,800 13,102 14,143

32,357 50,459 98,528 80,855

The prepayments to and amounts due from related companies are unsecured,

interest-free and have no fixed terms of repayment.

(j) Cash and cash equivalents


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Cash and bank balances 88,156 60,808 33,098 34,198

Cash at banks earns interest at floating rates based on daily bank deposit rates.

The carrying amounts of the cash and cash equivalents approximate to their fair

values.


— 190 —

Included in the Target Group’s cash and cash equivalents are deposits placed

with Haier Finance as follows:


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Haier Finance 65,712 26,804 16,914 16,959

The interest rate on the cash and bank balances with Haier Finance for the Relevant

Periods was approximately 0.72 % per annum.

Further details of the interest income attributable to the deposits placed with

Haier Finance are set out in Section 4(j).

(k) Trade and bills payables

An aged analysis of the Target Group’s trade payables as at the balance sheet

date of each of the Relevant Periods, based on the invoice date, is as follows:


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Trade payables:

Within 1 month 128,827 80,541 182,627 123,890

1 to 2 months 97,447 52,323 38,566 32,819

2 to 3 months 2,548 6,525 1,899 23,395

Over 3 months 25,732 22,535 24,109 59,026

254,554 161,924 247,201 239,130

Bills payable 51,263 6,746 12,018 5,865

305,817 168,670 259,219 244,995

The trade payables are normally settled on credit terms ranging from 30 to 60

days.

Trade payables represented by:


Associates of Haier Group 3,030 — — —


254,554 161,924 247,201 239,130


— 191 —

The trade payables to related companies are unsecured and interest-free. Further

details in respect of the purchases from these related companies are set out in

Section 4(j).

(l) Other payables and accruals


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Other payables 41,162 56,549 58,522 80,819

Accruals 55,984 63,068 68,130 69,576

97,146 119,617 126,652 150,395

Represented by:


Associates of Haier Group — — 244 244


97,146 119,617 126,652 150,395

The accruals and payables to related companies are unsecured, interest-free and

have no fixed terms of repayment.

(m) Interest-bearing borrowings

Effective As atinterest As at 31 December 31 March

rate Maturity 2003 2004 2005 2006(%) RMB’000 RMB’000 RMB’000 RMB’000

Other loans:

Haier Finance 4-6 within one year

or on demand 154,000 125,000 123,000 78,000

Haier Corp 0 within one year

or on demand — 10,000 — —

154,000 135,000 123,000 78,000


— 192 —

The loans borrowed from Haier Finance are unsecured, bear interest at floating

rates and repayable within one year. The loans borrowed from Haier Corp were

unsecured, interest-free and repayable within one year.

Haier Corp provided corporate guarantees as securities of the banking facilities

granted by Haier Finance to the Target Group. Further details of the corporate

guarantees and the interest expenses attributable to the loans borrowed from

Haier Finance are set out in Section 4(j).

The carrying amounts of all of the Target Group’s borrowings approximate to the

fair values.

(n) Provisions

Product warranty and installation servicesAs at

As at 31 December 31 March2003 2004 2005 2006

RMB’000 RMB’000 RMB’000 RMB’000


Additional provision 77,562 112,177 138,702 34,269

Amount utilised during the

year/period (85,743) (89,127) (123,739) (41,437)


Portion classified as

current liabilities (26,331) (42,264) (41,422) (41,552)

Non-current portion 18,304 25,421 41,226 33,928

The Target Group provides installation services and three-year warranties to its

customers on washing machines and water heaters, under which faulty products

are repaired or replaced. The amount of provisions is estimated based on sales

volumes and past experience of the level of installation services rendered, repairs

or returns. The estimation basis is reviewed on an ongoing basis and revised

where appropriate.


— 193 —

(o) Contingent liabilities

The Target Group did not have any material contingent liabilities at the end of

each of the Relevant Periods.

(p) Operating lease arrangements

The Target Group leases certain of its properties and machinery under operating

lease arrangements, with leases negotiated for terms ranging from one to five

years.

At the end of each of the Relevant Periods, the Target Group had total future

minimum lease payments under non-cancellable operating leases falling due as

follows:


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000

Within one year — 423 205 773

In the second to fifth years,

inclusive — — — 2

— 423 205 775

(q) Capital commitments

In addition to the operating lease commitments detailed in Section 5(p) above,

the Target Group had the following commitments as at the balance sheet dates:


2003 2004 2005 2006RMB’000 RMB’000 RMB’000 RMB’000


Machinery — 13,725 3,149 6,895

Authorised, but not contracted for:

Land and buildings — — 6,157 4,657

Machinery 4,521 — — 58,825

4,521 — 6,157 63,482

Total capital commitments 4,521 13,725 9,306 70,377


— 194 —

(r) Financial risk management objectives and policies

The Target Group’s principal financial instruments comprise cash and bank deposits

and borrowings. The main purpose of these financial instruments is to raise finance

for the Target Group’s operations. The Target Group has various other financial

assets and liabilities such as trade and bills receivables and payables, which arise

directly from its operations.

It is, and has been, throughout the Relevant Periods, the Target Group’s policy

that no trading in financial instruments shall be undertaken.

The main risks arising from the Target Group’s financial instruments are cash

flow interest rate risk, foreign currency risk, credit risk and liquidity risk. The

Board reviews and agrees policies for managing each of these risks and they are

summarised as follows:

(i) Cash flow interest rate risk

The Target Group’s exposure to the risk of changes in market interest rates

related primarily to the Target Group’s short term debt obligations with

floating interest rates. The Target Group does not have significant exposure

to interest rate risk.

(ii) Foreign currency risk

The Target Group has transactional currency exposures. Such exposures

arise from sales or purchases by operating units in currencies other than the

units’ functional currency. Foreign currency risk is not considered significant

because most of the Target Group’s sales and purchases are denominated in

RMB.

(iii) Credit risk

The Target Group trades only with recognised and creditworthy customers.

It is the Target Group’s policy that all customers who wish to trade on

credit terms are subject to credit verification procedures. In addition,

receivable balances are monitored on an ongoing basis and the Target

Group’s exposure to bad debts is not significant.


— 195 —

With respect to credit risk arising from the other financial assets of the

Target Group, comprising cash and bank balances, the Target Group’s

exposure to credit risk arises from default of the counterparty, with a

maximum exposure being equal to the carrying amount of these assets.

Since the Target Group trades only with recognised and creditworthy

customers, there is no requirement for collateral.

(iv) Liquidity risk

The Target Group’s objective is to maintain a balance between continuity

of funding and flexibility through the use of borrowings. As the Target

Group’s major operations are in Mainland China, all of the Target Group’s

borrowings are borrowed from Haier Finance or Haier Corp, on a short

term basis for working capital purposes.


— 196 —

6. COMBINED STATEMENT OF CHANGES IN EQUITY

The following is a summary of the combined statements of changes in equity of theTarget Group for the Relevant Periods prepared on the basis set out in Section 2 above:

Paid-up Accumulated Reserve Minority Totalcapital losses funds Total interests equity

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000(note)

At 1 January 2003 190,855 (127,770) 18,716 81,801 77,330 159,131

Profit for the year — 49,189 — 49,189 8,262 57,451Dividends — (18,544) — (18,544) (8,455) (26,999)Capital contribution 115,000 — — 115,000 — 115,000Transfer to reserve funds — (3,366) 3,366 — — —

At 31 December 2003and 1 January 2004 305,855 (100,491) 22,082 227,446 77,137 304,583

Profit for the year — 29,840 — 29,840 9,545 39,385Dividends — (9,844) — (9,844) — (9,844)Capital contribution 45,000 — — 45,000 — 45,000Transfer to reserve funds — (1,757) 1,757 — — —


Profit for the year — 71,981 — 71,981 21,988 93,969Dividends — (37,711) — (37,711) (13,858) (51,569)Transfer to reserve funds — (15,984) 15,984 — — —


Dividends — (50,242) — (50,242) — (50,242)Profit for the period — 21,390 — 21,390 4,980 26,370

At 31 March 2006 350,855 (92,818) 39,823 297,860 99,792 397,652

At 1 January 2005 350,855 (82,252) 23,839 292,442 86,682 379,124

Dividends (unaudited) — (9,954) — (9,954) — (9,954)Profit for the period

(unaudited) — 10,717 — 10,717 6,957 17,674

At 31 March 2005(unaudited) 350,855 (81,489) 23,839 293,205 93,639 386,844

Note: In accordance with the relevant PRC laws and regulations applicable to Sino-foreign joint ventureenterprises, certain subsidiaries of the Target Group established in Mainland China are required totransfer a certain percentage of their net profit for the year to reserve funds. These funds are non-distributable. For the purpose of determining the appropriations to these funds, the net profit isdetermined in accordance with the applicable financial rules and regulations of the PRC.


— 197 —

7. COMBINED CASH FLOW STATEMENTS

The following is a summary of the combined cash flow statements of the Target Groupfor the Relevant Periods prepared on the basis set out in Section 2 above:

Three monthsended

Year ended 31 December 31 March2003 2004 2005 2005 2006

Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000(Unaudited)

CASH FLOWS FROM OPERATINGACTIVITIES

Profit before tax 73,541 47,430 108,723 18,989 29,956Adjustments for:Finance costs Section 4(d) 14,416 6,575 6,542 1,530 1,258Interest income Section 4(b) (342) (574) (372) (101) (74)Depreciation Section 4(c) 54,426 57,795 59,792 16,021 13,971Amortisation of prepaid

land premiums Section 4(c) 563 563 563 141 141Amortisation of intangible assets Section 4(c) — — 347 86 86Write-off of items of property,

plant and equipment Section 4(c) 129 — 73 — —Gain on disposal on items of property,

plant and equipment Section 4(b) — (136) (207) — —

Operating profit before workingcapital changes 142,733 111,653 175,461 36,666 45,338

Decrease/(increase) in long termprepayments — — (10,339) — 1,293

Decrease/(increase) in inventories 42,530 34,802 (23,858) (19,859) 12,484Decrease/(increase) in trade and

bills receivables (11,186) (17,049) (146,391) 18,077 42,712Decrease/(increase) in prepayments,

deposits and other receivables 7,728 (18,102) (48,069) (18,431) 17,673Increase/(decrease) in trade and

bills payables 1,338 (137,147) 90,549 26,129 (14,224)Increase in other payables

and accruals 6,901 22,471 7,035 5,997 23,743Increase/(decrease) in provisions (8,181) 23,050 14,963 2,310 (7,168)

Cash generated from operations 181,863 19,678 59,351 50,889 121,851PRC corporate income tax paid (7,886) (5,781) (19,729) (2,837) (3,285)Interest received 342 574 372 101 74

Net cash inflow from operatingactivities 174,319 14,471 39,994 48,153 118,640


— 198 —

Three monthsended

Year ended 31 December 31 March2003 2004 2005 2005 2006

Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

(Unaudited)

CASH FLOWS FROM INVESTING

ACTIVITIES

Purchase of items of property, plant

and equipment (9,000) (44,104) (36,009) (31,065) (31,893)

Proceeds from disposal of items of

property, plant and equipment — 2,622 4,603 — —

Additions to intangible assets — — (2,427) (2,427) —

Additions to investments — — (5,000) — —

Net cash outflow from investing activities (9,000) (41,482) (38,833) (33,492) (31,893)

CASH FLOWS FROM FINANCING

ACTIVITIES

Capital contribution 115,000 45,000 — — —

New borrowings 137,000 156,000 123,000 — —

Repayment of borrowings (350,191) (175,000) (135,000) (7,000) (45,000)

Interest paid (14,416) (6,575) (6,542) (1,530) (1,258)

Dividends paid (10,744) (19,762) (10,329) (3,332) (25,627)

Dividends paid to minority shareholders (6,095) — — — (13,762)

Net cash outflow from financing activities (129,446) (337) (28,871) (11,862) (85,647)

NET INCREASE/(DECREASE) IN

CASH AND CASH EQUIVALENTS 35,873 (27,348) (27,710) 2,799 1,100


at beginning of year 52,283 88,156 60,808 60,808 33,098

CASH AND CASH EQUIVALENTS

AT END OF YEAR 88,156 60,808 33,098 63,607 34,198

ANALYSIS OF BALANCES OF CASH

AND CASH EQUIVALENTS

Cash and bank balances Section 5(j) 88,156 60,808 33,098 63,607 34,198


— 199 —

8. SUBSEQUENT EVENTS

Subsequent to 31 March 2006, Haier SPV became the holding company of the subsidiaries

comprising the Target Group set out in Section 2 pursuant to the Reorganisation.

Save for the above, no significant events have taken place subsequent to 31 March

2006.

9. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Haier SPV, or any of the

companies now comprising the Target Group, in respect of any period subsequent to 31

March 2006.

Yours faithfully,

Ernst & YoungCertified Public Accountants

Hong Kong

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

— 200 —

18th Floor

Two International Finance Centre

8 Finance Street

Central

Hong Kong

25 September 2006

The Directors

Haier Electronics Group Co., Ltd.

Dear Sirs,

Haier Electronics Group Co., Ltd. (the “Company”) and subsidiaries (the “Group”)

We report on the unaudited pro forma financial information (the “Unaudited Pro Forma

Financial Information”) of the Group, which has been prepared by the directors for illustrative

purposes only, to provide information about how the proposed injection of Haier Electrical

Appliances Fourth Holdings (BVI) Limited and its subsidiaries might have affected the financial

information presented for inclusion as Appendix III of the circular issued by the Company

dated 25 September 2006 (the “Circular”). The basis of preparation of the Unaudited Pro

Forma Financial Information is set out on page 203 of the Circular.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS OF THE COMPANY ANDREPORTING ACCOUNTANTS

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro

Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the

Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and

with reference to AG 7 Preparation of Pro Forma Financial Information for Inclusion in

Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants.

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing

Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you.

We do not accept any responsibility for any reports previously given by us on any financial

information used in the compilation of the Unaudited Pro Forma Financial Information beyond

that owed to those to whom those reports were addressed by us at the dates of their issue.


— 201 —

BASIS OF OPINION

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular

Reporting Engagements (HKSIR) 300 “Accountants’ Reports on Pro Forma Financial

Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public

Accountants. Our work consisted primarily of comparing the unadjusted financial information

with source documents, considering the evidence supporting the adjustments and discussing

the Unaudited Pro Forma Financial Information with the directors of the Company. This

engagement did not involve independent examination of any of the underlying financial

information.

We planned and performed our work so as to obtain the information and explanations we

considered necessary in order to provide us with sufficient evidence to give reasonable assurance

that the Unaudited Pro Forma Financial Information has been properly compiled by the directors

of the Company on the basis stated, that such basis is consistent with the accounting policies

of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro

Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the

judgements and assumptions of the directors of the Company, and, because of its hypothetical

nature, does not provide any assurance or indication that any event will take place in the

future and may not be indicative of the financial position of the Group as at 31 December

2005 or any future date.

OPINION

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the

directors of the Company on the basis stated;

(b) such basis is consistent with the accounting policies of the Group; and

(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial

Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

Ernst & YoungCertified Public Accountants

Hong Kong


— 202 —

Unaudited pro forma statement of assets and liabilities of the Enlarged GroupPro forma

EnlargedThe Group Group as at

as at Pro forma 31 December31 December adjustments 2005

2005 Note 1 Note 2 Note 4HK$’000 HK$’000 HK$’000 HK$’000

NON-CURRENT ASSETSProperty, plant and equipment 636,288 394,015 1,030,303Prepaid land premiums 25,462 10,260 35,722Intangible assets 3,437 2,029 5,466Deferred tax assets 12,736 18,353 31,089Investments — 4,878 4,878Long term prepayments — 10,087 10,087

Total non-current assets 677,923 439,622 — 1,117,545

CURRENT ASSETSInventories 433,645 54,367 488,012Trade and bills receivables 677,510 413,492 1,091,002Prepayments, deposits

and other receivables 145,941 96,125 (60,163) 181,903Tax recoverable 3,342 3,342Pledged deposits 70 70Cash and cash equivalents 560,337 32,291 592,628

Total current assets 1,820,845 596,275 (60,163) 2,356,957

CURRENT LIABILITIESTrade and bills payables 972,116 252,896 1,225,012Tax payable 5,030 7,093 12,123Other payables and accruals (Note 3) 452,186 123,563 179,883 755,632Amount due to Haier BVI (Note 4) — 419,954 419,954Dividends payable — 40,470 40,470Provisions 20,184 40,412 60,596Interest-bearing bank and

other borrowings 124,807 120,000 244,807

Toal current liabilities 1,574,323 584,434 599,837 2,758,594

NET CURRENT ASSETS/(LIABILITIES) 246,522 11,841 (660,000) (401,637)

TOTAL ASSETS LESSCURRENT LIABILITIES 924,445 451,463 (660,000) 715,908

NON-CURRENT LIABILITIESConvertible notes 211,528 211,528Provisions 8,806 40,220 49,026

Total non-current liabilities 220,334 40,220 — 260,554

Net assets 704,111 411,243 (660,000) 455,354

EQUITYEquity attributable to equity

holders of the parent 632,770 318,743 (660,000) 291,513Minority interests 71,341 92,500 163,841

Total equity 704,111 411,243 (660,000) 455,354


— 203 —

Note 1: This represents the combined assets and liabilities of the Target Group at 31 December 2005, translated

into Hong Kong dollars at an exchange rate of RMB1.025 to HK$1 for illustrative purpose only, which

are to be acquired by the Company. The Asset Injection is considered as a business combination involving

entities under common control because the Company and the Target Group are controlled by Haier Corp

and Haier Investment both before and after the Asset Injection, and that control is not transitory. As a

result, the Asset Injection is to be accounted for under Accounting Guideline 5 “Merger accounting for

common control combinations”. The Group will account for the interest in the Target Group under the

same basis in the Group’s financial statements for the year ending 31 December 2006.

Accordingly, the shareholders’ equity amount of the Target Group is added to that of the Company rather

than that to be eliminated.

Note 2: The adjustment represents the non-share consideration payable by the Company in respect of the Asset

Injection. Because of the adoption of the merger accounting to account for the interest in the Target

Group (note 1), the consideration to be payable other than the issue of the Company’s shares, amounting

to HK$660 million, has been treated as a deemed distribution to the controlling shareholders of the

Company upon completion of the Asset Injection.

Note 3: The pro forma adjustment of HK$179,883,000 represents the balance of the consideration payable

(“Deferred Consideration”) after deducting the total consideration of HK$900,000,000 from the share

consideration of HK$240,000,000, the Receivable of approximately HK$60,163,000 and the principal

amount of the Promissory Note of approximately HK$419,954,000. Assuming, for illustrative purposes

only, that completion of the acquisition of the Target Group takes place between (i) 31 October 2006 and

(ii) 31 December 2006 (the “Long Stop Date”), the interest accrued on the Promissory Note (which

would be deducted from the amount of the Deferred Consideration) would amount to between

approximately (i) HK$7,538,000 and (ii) HK$11,188,000, respectively, and the Deferred Consideration

would accordingly be adjusted, for illustrative purposes only, to an amount between approximately (i)

HK$172,345,000 and (ii) HK$168,695,000, respectively.

Note 4: In June 2006, the Company disposed of its entire interest in Pegasus Telecom (Qingdao) Co., Ltd.

(“Pegasus Qingdao”) and Pegasus Electronic (Qingdao) Co., Ltd. (“Pegasus Electronic”) to Qingdao

Haier Group Holdings (BVI) Limited (“Haier BVI”) for a consideration of approximately HK$411 million

which was satisfied by a promissory note issued by Haier BVI. In addition, the Company and one of its

subsidiaries assigned amounts due from Pegasus Qingdao and Pegasus Electronic aggregating

approximately HK$9 million to Haier BVI.

Details of this disposal transaction and debt assignment are disclosed in a circular of the Company dated

15 May 2006.

Upon completion of the disposal transaction and debt assignment, Haier BVI owed the Company for

approximately HK$420 million, which is to be offset against part of the consideration payable by the

Company as set out in note 3 above.

The financial effect of the above disposal transaction and debt assignment has not been included in the

unaudited pro forma statement of assets and liabilities of the Group because it is not directly attributable

to the Asset Injection.

APPENDIX IV GENERAL INFORMATION

— 204 —

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the

purpose of giving information with regard to the Group. The Directors collectively and

individually accept full responsibility for the accuracy of the information contained in

this circular and confirm that, having made all reasonable enquiries, to the best of their

knowledge and belief:

(a) the information contained in this circular is accurate and complete in all material

respects and not misleading;

(b) there are no other matters the omission of which would make any statement in

this circular misleading; and

(c) all opinions expressed in this circular have been arrived at after due and careful

consideration and are founded on bases and assumptions that are fair and

reasonable.

2. DISCLOSURE OF INTERESTS

(i) Directors and Chief Executive of the Company

Save as disclosed below, as at the Latest Practicable Date, none of the Directors

and the chief executive of the Company and their respective associates had any

interest and short position in the shares, debentures or underlying shares of the

Company and its associated corporation (within the meaning of Part XV of the

SFO), which would have to be notified to the Company and the Stock Exchange

pursuant to Divisions 7 and 8 of Part XV of the SFO, or as recorded in the

register required to be kept under section 352 of the SFO or as otherwise required

to be notified to the Company and the Stock Exchange pursuant to Part XV of the

SFO or the Model Code for Securities Transactions by the Directors adopted by

the Company on 29 December 2004.


— 205 —

Long positions in underlying Shares of equity derivatives of the Company —

Shares Options outstanding under the share existing option scheme adopted by

the Company on 28 February 2002

NumberDate Exercisable Number of total Approximateof grant period Exercise of Share outstanding percentage

Name of of Share of Share price per Options underlying of totalDirector Options Options Share outstanding Shares shareholding

HK$ %

Mr. Wu Ke Song 19/11/2002 19/11/2003- 0.150 10,000,000 10,000,000 0.06

18/11/2007

Mr. Chai Yong Sen 19/11/2002 19/11/2003- 0.150 10,000,000 10,000,000 0.06

18/11/2007

Mr. Liang Hai Shan 19/11/2002 19/11/2003- 0.150 10,000,000 10,000,000 0.06

18/11/2007

Mr. Cui Shao Hua 19/11/2002 19/11/2003- 0.150 10,000,000 10,000,000 0.06

18/11/2007

Mr. Lam Kin Kau, Mark 16/8/2002 16/8/2003- 0.156 2,500,000 2,500,000 0.01

15/8/2007

Mr. Fung Hoi Wing, Henry 16/8/2002 16/8/2003- 0.156 2,000,000 2,000,000 0.01

15/8/2007

44,500,000 44,500,000 0.27

(ii) Substantial shareholders of the Company

Save as disclosed below, as at the Latest Practicable Date, the Directors and the

chief executive of the Company were not aware of any other shareholders interested

in 5% or more of the interests and short positions in shares and underlying shares

of the Company or any person (other than a Director or chief executive of the

Company) which would fall to be disclosed to the Company pursuant to Divisions


— 206 —

2 and 3 of Part XV of the SFO or is otherwise recorded in the register required to

be kept by the Company under section 336 of the SFO:

Long positions in Shares:

Approximatepercentage

Number of of totalName of shareholder Notes Shares held shareholding

%

Qingdao Haier Collective Asset

Management Association (1) 14,590,425,930 84.26

Haier Corp (2) 14,590,425,930 84.26

Haier Investment (3) 14,590,425,930 84.26

Haier BVI (4) 10,397,925,930 60.05

Deutsche Bank (5) 12,145,981,486 70.15

Long positions in underlying Shares of equity derivatives of the Company:

ApproximateNumber of percentageunderlying of total

Name of shareholder Note Shares held shareholding%

Haier BVI (4) 944,444,444 5.45

Short positions in underlying Shares of equity derivatives of the Company:

ApproximateNumber of percentageunderlying of total

Name of shareholder Note Shares held shareholding%

Deutsche Bank (5) 3,926,774,819 22.68


— 207 —

Notes:

1. By virtue of the SFO, Qingdao Haier Collective Asset Management Association was deemedto be interested in (i) 3,366,000,000 Shares held by its non-wholly owned subsidiary, namelyHaier Investment; (ii) 826,500,000 Shares held by Haier Investment’s indirect non-whollyowned subsidiary. In addition, as Haier Investment was acting in concert with Haier Corpand Haier BVI is a non-wholly owned subsidiary of Haier Corp, Qingdao Haier CollectiveAsset Management Association was also deemed to be interested in an aggregate of10,397,925,930 Shares held by Haier BVI as stated in note 4 below pursuant to the SFO.

Ms. Yang Mian Mian, Mr. Wu Ke Song, Mr. Chai Yong Sen and Mr. Liang Hai Shan,executive Directors, are also members of the board of management of Qingdao HaierCollective Asset Management Association.

2. As Haier BVI is a non-wholly owned subsidiary of Haier Corp, Haier Corp was deemed tobe interested in an aggregate of 10,397,925,930 Shares held by Haier BVI as stated innote 4 below pursuant to the SFO.

Furthermore, as Haier Corp was acting in concert with Haier Investment, Haier Corp wasdeemed to be interested in 3,366,000,000 Shares held by Haier Investment and 826,500,000Shares held by a non-wholly owned subsidiary of Haier Investment.

Ms. Yang Mian Mian, Mr. Wu Ke Song, Mr. Chai Yong Sen and Mr. Liang Hai Shan,executive Directors, are also members of the management committee of Haier Corp.

3. Haier Investment was holding 3,366,000,000 Shares and was deemed to be interested in826,500,000 Shares held by its indirect non-wholly owned subsidiary and an aggregate of10,397,925,930 Shares held by Haier BVI as stated in note 4 below pursuant to the SFO byreason of its acting in concert with Haier Corp.

Ms. Yang Mian Mian and Mr. Cui Shao Hua, executive Directors, are also directors ofHaier Investment.

4. Haier BVI was holding 4,526,706,667 Shares. In addition, Haier BVI was acting in concertwith Deutsche Bank pursuant to an undertaking letter dated 5 January 2006 executed byHaier BVI and Deutsche Bank, pursuant to which Deutsche Bank agreed that, unless otherwiseagreed and subject to the exceptions set out therein, Deutsche Bank will not sell or disposeany of the 3,926,774,819 DB Shares (as defined in note 5 below). Accordingly, Haier BVIis deemed to be interested in the DB Shares pursuant to the SFO.

Haier BVI was interested in 1,000,000,000 Shares to be issued by the Company to HaierBVI (or its nominee(s)) pursuant to the Asset Injection Agreement and 944,444,444underlying Shares under the convertible notes as part of the consideration pursuant to anagreement dated 5 March 2004 entered into between Haier Corp, Haier Investment and theCompany respectively.

Ms. Yang Mian Mian and Mr. Wu Ke Song, executive Directors, are also directors of HaierBVI.

5. Deutsche Bank has a long position in 12,145,981,486 Shares. In addition, it has a shortposition in the 3,926,774,819 underlying Shares (“DB Shares”) acquired pursuant to anagreement dated 16 November 2005 entered into between Deutsche Bank and CCT TelecomHoldings Limited. In addition, pursuant to a subscription agreement dated 16 November2005 entered into between Deutsche Bank and Haier BVI, Haier BVI agreed to issue andDeutsche Bank agreed to subscribe for warrants in respect of the 3,926,774,819 DB Shareswhich, upon exercise, will entitle the holders to put such Shares to Haier BVI.


— 208 —

3. PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Pursuant to Bye-law 70, every resolution submitted to a general meeting shall be

determined on a show of hands in the first instance by the Shareholders present in

person or by a duly authorised corporate representative, but a poll may be demanded

(before or on the declaration of the result of the show of hands or on the withdrawal of

any other demand for a poll) by the Chairman of the general meeting or by:

(1) at least 3 Shareholders present in person or by a duly authorised corporate

representative or by proxy for the time being entitled to vote at the meeting;

(2) any Shareholder or Shareholders present in person or by a duly authorised corporate

representative or by proxy and representing not less than one-tenth of the total

voting rights of all the Shareholders having the right to vote at the meeting; or

(3) any Shareholder or Shareholders present in person or by a duly authorised corporate

representative or by proxy and holding the Shares in the Company conferring a

right to vote at the meeting being the Shares on which an aggregate sum has been

paid up equal to not less than one-tenth of the total sum paid up on all Shares

conferring that right.

4. MATERIAL ADVERSE CHANGE

Except as disclosed in the announcement of the Company dated 21 April 2006 and the

circular of the Company dated 15 May 2006 regarding the disposal of the Group’s

mobile handset business to the Haier Group which was completed in June 2006, the

Directors are not aware of any material adverse change in the financial or trading

positions of the Group since 31 December 2005, the date to which the latest published

audited financial statements of the Group were made up.

Save as disclosed in this circular, the entry into by the Company of the Asset Injection

Agreement and the Continuing Connected Transactions Agreements will not have any

adverse effect on the operation, liquidity and financial resources, and capital structure

of the Group.

5. LITIGATION

As at the Latest Practicable Date, neither the Company nor any member of the Group

was engaged in any litigation or arbitration of material importance and no litigation or

claim of material importance was known to the Directors to be pending or threatened by

or against the Company or any member of the Group.


— 209 —

6. WORKING CAPITAL

The Directors are in the opinion that taking into account the Group’s internal resources,

available banking and other borrowing facilities, the Group has sufficient working capital

for its present requirements.

7. STATEMENT OF INDEBTEDNESS

As at 31 July 2006, being the latest practicable date for ascertaining information regarding

this indebtedness statement, the Group had total outstanding borrowings of approximately

HK$170,000,000, representing convertible notes with principal amount of

HK$170,000,000.

As at 31 July 2006, the Group did not have any significant contingent liabilities.

As at 31 July 2006, the Target Group had outstanding borrowings of approximately

HK$56,585,000, representing unsecured term loans of approximately HK$56,585,000

borrowed from Haier Finance.

As at 31 July 2006, the Target Group did not have any significant contingent liabilities.

Save as disclosed above and apart from intra-group liabilities, the Group did not have

any bank loans, bank overdrafts and liabilities under acceptances or other similar

indebtedness, debentures or other loan capital, mortgages, charges, finance leases or

hire purchase commitments, guarantees or other material contingent liabilities outstanding

as at the close of business on 31 July 2006.

8. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered or was proposing to

enter into a service contract with any member of the Group which is not determinable

by the Group within one year without payment of compensation, other than statutory

compensation.

9. COMPETING INTERESTS

None of the Directors and their respective associates (as defined in Listing Rules) has

an interest in a business, which competes or may compete with the businesses of the

Company and any other conflicts of interest which any such person has or may have

with the Company.


— 210 —

10. DIRECTORS INTERESTS’ IN ASSETS

None of the Directors had any direct or indirect interest in any assets which had been

acquired or disposed of by or leased to any member of the Group or proposed to be so

acquired, disposed of or leased since 31 December 2005, being the date to which the

latest published audited accounts of the Company were made up, and up to the Latest

Practicable Date.

11. DIRECTORS INTERESTS’ IN CONTRACTS

There is no contract or arrangement subsisting at the Latest Practicable Date in which

any of the Directors is materially interested and which is significant in relation to the

business of the Group.

12. QUALIFICATIONS OF EXPERTS

The followings are the qualifications of the experts or professional advisers who have

given opinion or advice contained in this circular:

Name Qualifications

Ernst & Young certified public accountants

ICEA a corporation registered under the transitional arrangement to

carry out type 1 (dealing in securities) and type 6 (advising on

corporate finance) regulated activities under the SFO

13. CONSENT

Each of Ernst & Young and ICEA has given and has not withdrawn its written consent

to the issue of this circular with the inclusion of its letter and references to its name in

the form and context in which it appears.

14. INTERESTS OF EXPERTS

As at the Latest Practicable Date, each of Ernst and Young and ICEA:

(a) does not have any shareholding in any member of the Group or any right (whether

legally enforceable or not) to subscribe for or to nominate persons to subscribe

for securities in any member of the Group; and


— 211 —

(b) was not interested, directly or indirectly, in any assets which have been acquired

or disposed of by or leased to the Company since 31 December 2005, being the

date to which the latest published audited accounts of the Company were made

up.

15. MATERIAL CONTRACTS

The following are the material contracts (not being contracts in the ordinary course of

business) entered into by the Group during the period of two years prior to the Latest

Practicable Date:

(a) an agreement dated 20 April 2006 made between the Company as vendor and

Haier BVI as purchaser pursuant to which Haier BVI agreed to acquire from the

Company the entire interests in 飛馬通訊（青島）有限公司 (Pegasus Telecom

(Qingdao) Co., Ltd.) for a consideration of HK$175,000,000;

(b) an agreement dated 20 April 2006 made between the Company as vendor and

Haier BVI as purchaser pursuant to which Haier BVI agreed to acquire from the

Company the entire interests in 飛馬電子（青島）有限公司 (Pegasus Electronic

(Qingdao) Co., Ltd.) for a consideration of HK$236,000,000;

(c) an agreement for assignment of indebtedness dated 20 April 2006 made between

the Company and Haier BVI pursuant to which the Company agreed to (i) procure

飛馬通訊（香港）有限公司(Pegasus Telecom (Hong Kong) Co., Limited) to assign

and Haier BVI agreed to take up an indebtedness of HK$7,414,982 owed by

Pegasus Telecom (Qingdao) Co., Ltd. to Pegasus Telecom (Hong Kong) Co.,

Limited; and (ii) assign and Haier BVI agreed to take up an indebtedness of

HK$1,539,117 owed by Pegasus Electronic (Qingdao) Co., Ltd. to the Company;

(d) the Asset Injection Agreement; and

(e) the Continuing Connected Transactions Agreements.

16. MISCELLANEOUS

(a) The registered office of the Company is located at Clarendon House, 2 Church

Street, Hamilton HM11, Bermuda and the head office and the principal place of

business of the Company in Hong Kong is located at Unit 3513, 35th Floor, The

Center, 99 Queen’s Road Central, Hong Kong.


— 212 —

(b) The branch share registrar and transfer office of the Company in Hong Kong is

Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai,

Hong Kong.

(c) The company secretary and qualified accountant of the Company is Mr. Yip Wai

Ming, who is an associate member of the Hong Kong Institute of Certified Public

Accountants and a fellow member of the Association of Chartered Certified

Accountants.

(d) The English text of this circular shall prevail over the Chinese text in case of any

inconsistency.

17. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business

hours at the offices of Mallesons Stephen Jaques, the legal adviser of the Company, at

37th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong

from the date of this circular up to and including 9 October 2006:

(a) the memorandum of association and bye-laws of the Company;

(b) the annual reports of the Company for the two financial years ended 31 December

2004 and 31 December 2005 respectively;

(c) the material contracts referred to in the section headed “Material Contracts” in

this appendix (including the Asset Injection Agreement and the Continuing

Connected Transactions Agreements);

(d) the written consents referred to under the section headed “Consent” in this

appendix;

(e) an accountants’ report from Ernst & Young on the Target Group and a letter from

Ernst and Young regarding the unaudited pro forma financial information of the

Enlarged Group, the text of which is set out in Appendix II and Appendix III to

this circular respectively;

(f) the letter of recommendation from the Independent Board Committee, the text of

which is set out on pages 63 to 64 of this circular; and

(g) the letter from ICEA, the text of which is set out on pages 65 to 93 of this

circular.

NOTICE OF THE SGM

— 213 —



(Stock Code: 1169)

NOTICE IS HEREBY GIVEN THAT the special general meeting (the “SGM”) of Haier

Electronics Group Co., Ltd. (the “Company”) will be held at JW Marriott Ballroom (Level 3),

JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 23 October 2006

(Monday) at 10:00 a.m. to consider and, if thought fit, to pass, with or without modifications,

the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“That:

(1) the Asset Injection Agreement dated 18 August 2006 entered into between the Company

and Qingdao Haier Group Holdings (BVI) Limited (“Haier BVI”) (a copy of which is

tabled at the meeting and marked “A” and initialled by the chairman of the meeting for

identification purpose) and all transactions contemplated thereunder including, inter

alia: (a) the injection of the Target Business from the Haier Group into the Company at

a total consideration of HK$900,000,000; (b) the offsetting of the outstanding principal

amount under the Promissory Note together with interest accrued thereon up to the

Completion Date or assignment of the same to the order of Haier BVI; (c) the issue and

allotment of the Consideration Shares to Haier BVI (or its nominee(s)); (d) the offsetting

of the Receivable; and (e) the payment of the balance of the consideration by way of the

Deferred Consideration, be and are hereby approved, ratified and confirmed;

(2) the Services Agreement dated 18 August 2006 entered into between the Company, 海爾集團公司 (Haier Group Corporation) (“Haier Corp”) and 青島海爾投資發展有限公司 (Qingdao Haier Investment and Development Co., Ltd.) (“Haier Investment”) (a

copy of which is tabled at the meeting and marked “B” and initialled by the chairman of

the meeting for identification purpose) and (a) the General Services Cap and Financial

Service Cap; and (b) the continuing connected transactions (as defined in the Rules

Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the

“Listing Rules”)) contemplated thereunder, be and are hereby approved, ratified and

confirmed;


NOTICE OF THE SGM

— 214 —

(3) the Export Agreement dated 18 August 2006 entered into between the Company and 海爾集團電器產業有限公司 (Haier Electrical Appliances Co., Ltd.) (a copy of which is

tabled at the meeting and marked “C” and initialled by the chairman of the meeting for

identification purpose) and (a) the Export Cap; and (b) the continuing connected

transactions (as defined in the Listing Rules) contemplated thereunder, be and are hereby

approved, ratified and confirmed;

(4) the Materials Procurement Agreement dated 18 August 2006 entered into between the

Company, Haier Corp and Haier Investment (a copy of which is tabled at the meeting

and marked “D” and initialled by the chairman of the meeting for identification purpose)

and (a) the Materials Procurement Cap; and (b) the continuing connected transactions

(as defined in the Listing Rules) contemplated thereunder, be and are hereby approved,

ratified and confirmed;

(5) the Promotion Agreement dated 18 August 2006 entered into between the Company,

Haier Corp and Haier Investment (a copy of which is tabled at the meeting and marked

“E” and initialled by the chairman of the meeting for identification purpose) and (a) the

Promotion Cap; and (b) the continuing connected transactions (as defined in the Listing

Rules) contemplated thereunder, be and are hereby approved, ratified and confirmed;

(6) the Gift Products Procurement and Products Sales Agreement dated 18 August 2006

entered into between the Company, Haier Corp and Haier Investment (a copy of which

is tabled at the meeting and marked “F” and initialled by the chairman of the meeting

for identification purpose) and (a) the Gift Products Procurement and Products Sales

Cap; and (b) the continuing connected transactions (as defined in the Listing Rules)

contemplated thereunder, be and are hereby approved, ratified and confirmed;

(7) the Consignment Sale Agreement dated 18 August 2006 entered into between the

Company, Haier Corp and Haier Investment (a copy of which is tabled at the meeting

and marked “G” and initialled by the chairman of the meeting for identification purpose)

and (a) the Consignment Sale Cap; and (b) the continuing connected transactions (as

defined in the Listing Rules) contemplated thereunder, be and are hereby approved,

ratified and confirmed; and

NOTICE OF THE SGM

— 215 —

(8) any one Director, or any two Directors or one Director and the Company Secretary if

the affixation of the common seal is necessary, be and is/are hereby authorised for an

on behalf of the Company to execute all such other documents, instruments and

agreements and to do all acts or things deemed by him/her/them to be necessary or

expedient to implement and/or give effect to the aforesaid agreements and all transactions

contemplated thereunder, and to agree to any amendment to any of the terms of such

agreements which in the opinion of the Director(s) is/are in the interests of the Company

and in accordance with the Listing Rules (where relevant).”

Yours faithfully,

For and on behalf of the Board of

HAIER ELECTRONICS GROUP CO., LTD.Yang Mian Mian

Chairman

Hong Kong, 25 September 2006

Notes:

1. Any shareholder entitled to attend and vote at the SGM is entitled to appoint another person as his/her

proxy to attend and vote on his behalf in accordance with the bye-laws of the Company. A shareholder who

is the holder of two or more shares may appoint more than one proxy to attend on the same occasion. A

proxy need not be a shareholder of the Company.

2. A form of proxy for use at the SGM is enclosed. In order to be valid, the form of proxy together with the

power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or

authority, must be lodged with the Company’s branch share registrar and transfer office in Hong Kong,

Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than

48 hours before the time appointed for holding the SGM or any adjournment thereof.

3. Where there are joint registered holders of any Share(s), any one of such joint holders may attend and vote

at the SGM, either in person or by proxy, in respect of such Share(s) as if he/she was solely entitled

thereto, but if more than one of such joint holders are present at the SGM or any adjourned meeting thereof

(as the case may be), the most senior shall alone be entitled to vote, whether in person or by proxy. For this

purpose, seniority shall be determined by the order in which the names stand in the register of members of

the Company in respect of the joint holding.

4. Completion and return of the form of proxy will not preclude a shareholder from attending and voting in

person at the SGM or any adjournment thereof if he/she so desires. If a shareholder attends and votes at the

SGM after having deposited the form of proxy, the authority of your proxy will be deemed to have been

revoked.

5. Voting of the ordinary resolution as set out in this notice will be by poll.

6. All capitalised terms used herein shall have the same meanings as those defined in the circular of the

Company dated 25 September 2006.

haier electronics group co., ltd. 海爾電器集團 · pdf filedefinitions — 1 —...

Documents