Longcheer Holdings Limited 2007 Annual Report

Transcription

1 2007 Annual Report

2 Our success is because of our process. Our process is because of our expertise. Our expertise is for our customers....we MAKE SURE WE MAKE IT HAPPEN

3 Contents 02 Our Business 03 Corporate Profile 06 Chairman s Statement 10 CEO s Statement 18 Board of Directors 22 Corporate Information 23 Financial Highlights 24 Financial Contents

4 Our Business HARDWARE DESIGN PCB design, Selection of Chipsets, Antenna, USB, Flash memory, Camera, Software protocol Display SOFTWARE DESIGN Operation system, MMI, SMS, Games, Java, WAP, T9, MP3, MPEG4 Continuous INVESTMENT in R&D Paving the way for GREATER SUCCESS TEST SYSTEM Software and hardware testing, Production system development, Technical support EXTERIOR DESIGN Industry design, Mechanical design, Mock-up 02

5 Corporate Profi le is the top mobile handset design house in China. Listed on the Singapore Exchange since May 2005, the Shanghai-based company has a market capitalization of approximately S$300 million as at the end of June The Group offers comprehensive expertise across the domains of handset hardware, software and exterior designs. It also provides project management services in handset testing and assembly. With a strong portfolio of clients in the mid and low-segment of the Chinese telecommunications market, Longcheer is committed to providing feature-rich, rapid time-to-market solutions and comprehensive support to its customers. Led by a dynamic management team, Longcheer has expanded rapidly into a company with over 1,300 dedicated employees in Greater China, over 60% of whom are engaged in research and development ( R&D ) work. In 2006, Longcheer was ranked 10th in the Technology Fast 50 China Ranking and 39th in the Technology Fast 500 Asia Pacific Ranking by Deloitte. An expert in mobile handset design, Longcheer has consistently been able to meet the rapidly changing preferences and demands of consumers. Besides engaging in extensive product R&D, Longcheer has also managed to establish strategic relationships with major industry players so as to develop new wireless communications solutions and products. Guided by its corporate values of integrity, enterprise and professionalism, Longcheer endeavours to sustain the strong momentum that has fuelled its growth in the last few years, so as to continue creating exceptional value for our shareholders, customers and partners. More info: 03

6 ...WE DEVELOP WE INNOVATE Conceptualization. Our innovative telecommunications solutions enhance our customers growing need to connect with the World. Instant connection right at your fingertips! 04

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8 Chairman s Statement Longcheer s revenue grew more than 20% to RMB 2.4 billion in FY2007 while gross profit increased to RMB million over the comparative periods. Dear Shareholders It is my pleasure to present the annual report of Longcheer Holdings Limited ( Longcheer or the Group ) for the financial year ended 30 June 2007 ( FY2007 ). FY2007 was a challenging year for Longcheer. Despite stiff competition in a thriving market with new entrants eyeing a slice of China s fast-growing telecommunications sector, the Group achieved sturdy performance and sustained profitability. Our commitment to invest in research and development ( R&D ) and expand market share in domestic and overseas markets also saw us through another healthy year and pushed us ahead of the competition. Longcheer s revenue grew more than 20% to RMB 2.4 billion in FY2007 from RMB 2.0 billion in FY2006 while gross profit increased 1% to RMB million from RMB million over the comparative periods. Total shipment rose 56% to 8.9 million units in FY2007 compared to 5.7 million units in FY2006. Longcheer s net profit attributable to shareholders for FY2007 declined 16% to RMB million from RMB million in FY2006. However, this lower bottom-line performance has to be seen against a backdrop of higher cost of sales that is in line with higher revenue and a 43% increase in operating expenses as we increased marketing and R&D efforts. We see these marketing and R&D efforts as important investments to build a stronger foundation for future growth so that we can tap the potential that lies ahead of us in this exciting sector and deliver sustained shareholder value. Earnings per share on a weighted average of 396,664,100 shares for FY2007 declined to RMB cents from RMB cents in FY2006. Net asset value per ordinary share based on 396,664,100 shares increased to RMB cents as at 30 June 2007 from RMB cents as at 30 June To demonstrate Longcheer s firm commitment to deliver enhanced value and sound returns for our shareholders, I am pleased to announce that the Board of Directors is proposing a tax-exempt final dividend of 1.60 Singapore cents per ordinary share for FY2007 in addition to an interim dividend of 1.60 Singapore cents per ordinary share which was paid earlier. This amounts to a total dividend payout of S$12.7 million (approximately RMB 63.9million), or 34% of FY2007 net profit. We are riding on an unprecedented expansion of China s mobile telecommunications sector, with the number of mobile phone users in the country crossing the 500-million mark in July In the coming year, we aim to capitalize on this and the expected increase in telecommunications demand ahead of the Beijing 2008 Olympics. To entice the market, we will put out new products based on new platforms such as W-CDMA, TD-SCDMA and MDTV. We will also continue to develop our overseas markets in which we have stepped up marketing efforts. Led by our dedicated Management team and our commitment to focus on R&D to position Longcheer as a leading mobile handset design house, I am confident that Longcheer is well-poised for future growth. Finally, on behalf of the Board, I would like to thank our shareholders, customers and business partners for their enduring support. To the Management and staff, I would also like to express my heartfelt appreciation for their hard work and dedication throughout this year. I look forward to your continued support in achieving more milestones for Longcheer in the coming year. Tao Qiang Chairman and Non-Executive Director 06

9 Chairman s Statement 尊敬的各位股东 我很荣幸地呈交龙旗控股 ( 下称 龙旗 或 集团 ) 截至 2007 年 6 月 30 日之年终业绩报告 对龙旗来说,2007 财年充满挑战 在竞争日益激烈和许多新竞争者进入中国快速增长的电讯市场的情况下, 集团仍然运作良好和持续盈利 这归功于集团一直致力于投资研发领域, 和行之有效的国内外商业扩张策略, 以确保龙旗超越其他竞争者, 稳定健康发展 龙旗在 2007 财年的营业额, 从 2006 财年的人民币 20 亿元增长超过 20%, 达到人民币 24 亿元 毛利润从 2006 财年的人民币 3.32 亿元增长了 1%, 达到人民币 3.35 亿元 2007 财年的出货量从 2006 财年的 570 万套增长了 56%, 达到 890 万套 集团在 2007 财年的净利润下降了 16%, 从 2006 财年的人民币 2.25 亿元跌至 2007 财年的人民币 1.88 亿元 其中, 每股净利润下跌的原因包括高营业额也同时带来较高销售成本, 和投资于营销与研发带来的经营费用有 43% 的上涨 对龙旗来说, 注重于营销和研发投资, 能建立更强大的企业基础, 为集团在未来中国电讯市场带来更大的发展潜能, 为股东创造更大的价值 以平均 396,664,100 股计算, 龙旗每股盈利由 2006 财年的人民币 分下降至 2007 财年的人民币 分, 每股净资产值由 2006 财年的人民币 分增加到 2007 财年的人民币 分 为了回馈集团忠诚的股东, 集团董事局建议在 2007 财年已派发中期红利每股新币 1.60 分的基础上, 再派发年终分红每股新币 1.60 分, 总红利派发达新币 1270 万元 ( 约人民币 6390 万元 ), 占 2007 财年集团净利润的 34% 我们处于中国这个快速发展的移动通讯市场中, 截至 2007 年 7 月底, 国内手机用户已超过 5 亿位 放眼 2008 北京奥运会, 在未来一年内, 国内的电信需求量会持续上涨 有鉴与此, 我们将会推出基于新平台, 如 W-CDMA,TD-SCDMA 和 MDTV 的新产品 为了继续发展我们的海外市场, 我们也会加强营销工作 以龙旗的专门管理团队和强劲的研发实力, 我们相信龙旗将来在国内外手机设计企业不仅首屈一指的, 还会拥有丰富的增长潜力 我谨借此机会代表集团董事局, 向龙旗的股东, 客户和业务伙伴长期的支持致以诚挚的谢意 我也感谢集团管理团队及所有员工在这一年的辛勤工作和奉献精神 希望大家在未来的一年, 能一如既往的支持和协助龙旗 陶强董事长兼非执行董事 In the coming year, we aim to capitalise on the expected increase in telecommunications demand ahead of the Beijing 2008 Olympics with new products based on new platforms such as W-CDMA, TD-SCDMA and MDTV to be launched and on the continued development of our overseas markets in which we have stepped up our marketing efforts. 07

10 Research. Our commitment in the area of R&D has provided us with an edge over our competitors. At Longcheer, we consistently work towards adding value to our products and to enhance our customers telecommunications experience. 08

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12 CEO s Statement FY2007 was a year of progress and challenges for Longcheer. It was a year in which we achieved new highs in sales and shipments, which was attributable directly to the effective implementation of our marketing strategy and enhanced R&D and production capabilities. DEAR SHAREHOLDERS I take great pleasure in presenting the review of Longcheer s developments in FY2007. OPERATIONS REVIEW FY2007 was a year of progress and challenges for Longcheer. It was a year in which we achieved new highs in sales and shipments, which were attributable directly to the effective implementation of our marketing strategy and enhanced R&D and production capabilities. China s mobile telecommunications industry has become increasingly competitive with many new entrants. It is essential for Longcheer to develop and introduce feature rich and value-for-money design solutions over a range of technical platforms to meet changing market demands in form and function. To accommodate the increase in the scale of our product development and our marketing efforts, our staff strength has increased from over 700 in FY2006 to over 1,300 in FY2007; of these, more than 60% are R&D professionals. The Group remains one of the leading mobile phone design houses in the country, staying ahead of competition and technology innovation. To maintain and strengthen our leading position in the industry, the Group has invested heavily in resources to conduct R&D activities on the new technology of 3G, Mobile Digital TV, etc. The first batch of TD-SCDMA single mode handsets rolled out in August 2006 to China Mobile, with us being one of the first 11 vendors approved by Ministry of Information Industry. W-CDMA handsets using Qualcomm solutions are already in testing phase. We believe the existing 3G partnerships with Datang Mobile and Qualcomm will intensify and contribute to our future product development. Maintaining a strong and sustainable financial performance has always been our business goal. Longcheer s total shipment volume rose 56% from 5.7 million units in FY2006 to 8.9 million units in

13 CEO s Statement Longcheer also launched several new products in 2007, such as low cost phones, navigation phones and phones with longer battery life, which were well-received by the market. These designs featured offered a myriad of technical, functional and fashionable options at competitive prices. Apart from complete-knockdown and semi-knockdown, we will increasingly provide integrated solutions in the form of complete handsets, so as to meet the varied preferences of our customers. During the year, we have been active on the investment front with the incorporation of new subsidiaries to lay the foundation for Longcheer s future growth and expansion. We incorporated two subsidiaries Shanghai QL Telecommunications Co., Limited to undertake the sales and distribution of complete mobile handsets, and Longconn Electronics (Shenzhen) Co., Ltd. to focus on the assembly of complete mobile handsets. We also invested in a bluetooth chipset designer, Orisil Technology Inc. during the year. Subsequent to the financial year, the Group entered into a joint-venture agreement with China Seven Star Shipping Limited a leading television shopping enterprise in China to enhance the Group s mobile handset marketing capability and diversify distribution channels in the domestic market. FINANCIAL REVIEW Maintaining a strong and sustainable financial performance has always been our business goal. Longcheer s total shipment volume rose 56% from 5.7 million units in FY2006 to 8.9 million units in FY2007. Despite a RMB 31 drop in average selling prices during the year to RMB 260 per unit, FY2007 revenue rose more than 20% to RMB 2.4 billion from RMB 2.0 billion in FY2006. With higher shipment volume and revenue, Longcheer s cost of sales increased 24% to RMB 2.1 billion in FY2007, compared to RMB 1.7 billion in FY2006. Increased investments in marketing and R&D to lay the foundation for the Group s future growth resulted in operating expense (which mainly includes staff costs, depreciation of property, plant and equipment and amortization of intangible assets) increasing by RMB 43.7 million. Couple with higher taxes paid during the year, Longcheer s net profit attributable to shareholders decreased 16% from RMB million in FY2006 to RMB million in FY2007. Longcheer closed the year on a stronger financial position. Our total assets increased 33% to RMB1.0 billion as at 30 June 2007 compared to a year earlier. Of this, 55% was accounted for in cash and cash equivalents. Net asset value per ordinary shared increased to RMB cents as at 30 June 2007 from RMB cents as at 30 June 2006 based on a weighted average of 396,664,100 shares. Longcheer Annual Holdings Report Limited

14 CEO s Statement Through our prudent cash management, Longcheer further strengthened its financial position in the last year. As at 30 June 2007, the Group had RMB million in cash and cash equivalent, a 23% increase from FY The increase was mainly attributable to cash generated from operations of RMB million for FY2007. This was offset by RMB 36.1 million used in investment activities and RMB 63.1 million of dividends paid. Total shareholders equity rose to RMB million as at 30 June 2007 from RMB million as at 30 June OUTLOOK AND PROSPECTS Given that the PRC has only a 36% penetration rate in terms of mobile subscription, we are optimistic of our prospects for FY Being part of one of the world s fastest growing economy, the fast-growing affluence of PRC consumers will translate into higher consumer spending. According to statistics from the PRC s Ministry of Information Industry, there is an average of 6.8 million new mobile subscribers every month since the beginning of In July 2007, mobile subscriptions in the PRC crossed the 500 million mark. To capitalise on these positive developments, Longcheer will continue to monitor and respond quickly to changing trends and consumer preferences in the mobile telecommunications market, improve our design capabilities, so as to continue maintaining our competitive edge in the handset design industry. As several new technologies become more established, the market will start to accept their popular use, thereby leading to future growth in the industry. These technologies include 3G; mobile handsets with TV function (which allows for digital multimedia Longcheer closed the year on a stronger financial position. Our total assets increased 33% to RMB1.0 billion as at 30 June 2007 compared to a year earlier. Of this, 55% was accounted for in cash and cash equivalents. 12

15 CEO s Statement broadcasting), etc. FY2008 should see us capitalizing on the impending opening of high-growth markets in TD-SCDMA phones, dual-mode handset solutions and other high end solutions. We believe these innovative products will take the business to new heights and we look forward to another promising year ahead. To further enhance our wide range of products, we aim to expand Longcheer s market share of complete handsets that will provide us with an edge over our competitors and new market entrants. On top of our many exciting activities, the Group also initiated expansion into new geographical regions such as India, Latin America and South East Asia. The global expansion will strengthen the Group s presence and secure new accounts. Coupled with our ability to develop a clear corporate strategy, we are poised to push the Group s leading market position up another notch. The international market will further enhance Longcheer s position at the forefront of competition and the contributions from this expansion will be significant. We believe these efforts will help us deliver on our commitment to enhancing shareholder value. The telecommunications industry in China continues to be challenging but there is still room for Longcheer s growth and expansion. Longcheer will continue to capitalize on our expertise and strong R&D capabilities to develop and offer more comprehensive solutions to meet rapidly changing consumer preferences in a global market. We expect demand for our products to remain robust and are confident of maintaining our reputation for stringent product quality which has already given us an edge over our competitors. Du Junhong Executive Director and Chief Executive Officer Longcheer Annual Holdings Report Limited

16 CEO s Statement 尊贵的各位股东 我很荣幸向你们汇报龙旗在 2007 财年的营运发展报告 业绩回顾 2007 财年对龙旗而言, 是取得较大发展和充满挑战的一年 在这一年中, 公司有效得执行市场战略, 不断加强研发能力, 使销售收入和出货量再创历史新高 随着新参与者的不断增加, 中国移动通讯市场的竞争日益激烈 为了使各技术平台能够迎合市场对设计和功能的多变需求, 龙旗开发引进了多款功能强大并具有价格优势的手机 随着市场份额的不断扩大及项目数量的不断增加, 龙旗员工总数已从 06 财年的 700 人增加至 07 财年的 1300 人, 其中专业研发人员超过 60% 在过去的一年中, 龙旗依靠稳固的经营战略, 在竞争中不断进步, 凭借强大的研发实力, 始终站在科技的前沿, 保持了行业的领先地位 为了使龙旗能够持续维持技术优势, 公司在 3G 数字移动电视等领域都投入了大量的研发资源 作为第一批通过信息产业部认证的供应商之一, 龙旗第一批 TD-SCDMA 单模手机已于 06 年 8 月向中国移动供货 ; 而利用美国高通方案设计的 W-CDMA 手机已进入测试运行阶段 因此, 我们有理由相信, 与大唐 美国高通等跨国公司的合作, 将给龙旗未来的发展提供新的机遇 2007 年, 公司推出的一系列新产品, 如 : 低价手机 带导航功能的手机和超长待机等 这些手机功能独特, 设计新颖并且有价格优势, 受到了市场的一致追捧 另外, 龙旗也采用了灵活的供货方式, 除了 CKD 和 SKD 主板外, 我们也开始向部分客户提供整机, 来滿足客户不同的需求 过去一年, 龙旗活跃于相关业务的投资, 成立了几家新的子公司, 为龙旗未来的发展计划打下了坚实的基础 龙旗成立了上海其乐通讯科技有限公司 ( 上海其乐 ) 和龙康电子 ( 深圳 ) 有限公司 ( 龙康 ) 其中, 上海其乐负责移动手机的销售与分销, 龙康负责手机的原始组装 同年, 博讯微电子科技有限公司成为龙旗的合作伙伴, 共同开发和设计蓝牙芯片组等相关产品 另外, 龙旗再次携手中国最大的电视销售公司之一中国七星购物有限公司 ( 七星购物 ), 通过电视购物这一新的销售渠道, 增强手机的营销能力和销售渠道的竞争力 财务回顾 一直以来, 龙旗以保持财务状况的强健和稳定的发展为目标 07 财年, 公司出货量超过 890 万台, 较去年增长 56% 尽管单位平均销售价格较 06 财年下降 31 人民币至 260 元人民币 / 套 ; 公司的总销售收入较去年仍然上涨了超过 20%, 总销售额达 24 亿人民币 07 财年由于出货量和销售额不断上涨, 较一年前相比, 龙旗的销售成本在 2007 财政年增加至人民币 21.0 亿元, 较去年同期 17 亿人民币相比, 上涨 24% 市场营销和研发实力的投资不断增加, 为公司的长足发展打下了坚实的基础 运营费用, 包括人员费用 固定资产折旧和无形资产费用分摊较去年上涨 4370 万人民币 ; 同时, 税收交纳比例较去年也有明显的涨幅 因此,07 财年龙旗可归于全体股东的净利润从 06 财年的 2.25 亿人民币下跌至 07 财年的 1.88 亿人民币, 跌幅为 16% 14

17 CEO s Statement 总体而言,07 财年龙旗的财务状况较去年同期更为稳健 截至到 2007 年 6 月 30 日, 公司净资产总额达 10 亿人民币, 较年初上涨 33%, 其中超过 55% 为现金及现金等价物 每股净资产, 基于平均 396,664,100 股从 2006 年 6 月 30 日底的人民币 分增加至 2007 年 6 月 30 日的人民币 分 在过去一年中, 管理层采用了相对比较谨慎的现金管理方法来加强财务状况 截至到 2007 年 6 月 30 日, 集团现金及现金等价物较上一财年上涨 23% 达 5.55 亿人民币, 主要归功于 07 财年经营活动所产生的现金流 2.09 亿人民币 本财年用于投资行为的现金流出为 3610 万人民币, 用于股息分红的现金流出为 6310 万人民币用 股东权益由 2006 财年的 4.24 亿人民币升至 2007 财年的 5.42 亿人民币 业务展望 截至到 07 年 7 月, 中国的手机用户已超过 5 亿, 但 36% 的手机使用率仍然大大落后于其他发达国家, 因此对于 08 财年的发展, 我们仍表示乐观 随着中国经济的迅速发展, 人们对于高档消费品的需求也越来越多 根据国家信息产业部发布的数据, 从 07 年初开始, 每月平均新增手机用户为 680 万 面对飞速增长的市场需求, 龙旗将一如既往的着力于新手机的研发与设计, 以灵活的营销策略来应对市场的迅速变化, 以求在竞争中立于不败之地 随着新技术的不断成熟, 市场已经做好充分的准备来迎接新产品的到来 这些新产品包括 :3G 手机 通过广播网络来接收信号的电视手机等 同时, 在未来的一年里, 龙旗将会受益于许多新兴市场的崛起, 如 TD-SCDMA 手机 双卡双待手机和其他高端手机等 这些新产品的问世, 将会使龙旗的业务发展至一个新的高度, 我们将期待着一个新时代的到来 面对国内市场传统的竞争对手和众多新参与者, 龙旗已逐步将焦点转移至整机上, 利用更多元化的产品来获得更多的市场份额 除中国以外, 印度 拉丁美洲和东南亚等海外市场, 将会是龙旗加强市场占有率和发展更多新客户的工作重点 清晰的战略目标, 将会使公司的业绩达到一个崭新的高度 ; 国际市场的开拓不仅稳固了龙旗在行业中的领导地位, 更为公司的业绩做出重要贡献 我们相信, 龙旗的发展将会实现我们对股东的承诺, 提升股东的价值 在未来的一年, 中国移动通信市场仍然充满了挑战 但庞大的市场依旧给龙旗带来了许多发展的机会 我们将会继续加强研发设计的能力, 争取向国内外的客户提供更多功能强大且具有价格优势的产品来滿足消费者对手机需求的迅速变化 我们相信, 良好的客户关系和严格的质量控制, 将是公司长足发展的关键 在未来激烈的市场竞争中, 龙旗将秉着乐观与希望, 争取获得长期的 稳定的成长 杜军红执行董事兼首席执行官 Longcheer Annual Holdings Report Limited

18 Commercialization. We work tirelessly to introduce our excellent products and services to more markets and customers. With further market development and growth, we will be able to deliver enhanced value and sound returns to our valued shareholders. 16

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20 Board of Directors Mr. Tao Qiang Dr. Du Junhong Mr. Deng Hua Mr. Tang Jiping Mr. Tao Qiang, Chairman Mr. Tao Qiang is our Chairman and Non-Executive Director. He is a founder of our Group and was appointed to the Board on 20 August Mr Tao graduated from Nanjing Polytechnic College, where he majored in auditing. Between 1990 to 1995, Mr Tao was with the auditing department of Nanjing Vessel Radio Research Institute, where he was last an assistant accountant. Subsequently, Mr Tao ventured into business, and is now a legal representative as well as shareholder of Nanjing Hai Zhi Yuan Yu Le Co., Ltd, amongst others. Dr. Du Junhong, Executive Director and Chief Executive Officer Dr. Du Junhong is our Executive Director and Chief Executive Officer. He is also a founder of our Group. Dr Du was appointed to the Board on 20 August He is responsible for the overall operations, corporate policies, business development and investment strategy of our Group. Prior to founding our Group in July 2002, Dr Du was with ZTE Corporation, one of the largest listed telecommunications equipment providers in the PRC, where he organised and led various research and development projects and product development. After graduating from Zhejiang University, he joined ZTE Corporation in June 1999 as a mobile handset engineer, and was subsequently promoted through the ranks to project manager and the head of department of the systems division. He obtained his Bachelors, Masters and Doctoral degree in Electrical Engineering from Zhejiang University, PRC. Mr. Deng Hua, Executive Director and Vice-President of Operations Mr. Deng Hua is our Executive Director and Vice-President of Operations. He is also a founder of our Group. Mr Deng was appointed to the Board on 1 February He is responsible for the day-to-day operations of our Group. Prior to this, Mr Deng was with Nanjing CRT Factory as section head of the production planning division from August 1992 to July Thereafter, he joined San Neng Electronic Instruments Co., Ltd as head of the manufacturing division, before leaving in March 1997 to join the quality assurance division of Nanjing Huapu Electronics Co., Ltd.(which manufactures cathode-ray-tubes used in television sets and computers), where he was responsible for quality management and after-sales support. In March 1999, he was appointed head of the planning division, mobile phone department, of ZTE Corporation. Mr Deng has a Bachelors of Engineering from the Technology and Physics Faculty of Xi Dian University, PRC. He is currently attending a EMBA programme with China Europe International Business School. Mr. Tang Jiping, Executive Director and Vice-President of Research and Development Mr. Tang Jiping is our Executive Director and Vice-President of Research and Development. He was appointed to our Board on 1 February Mr Tang is also a founder of our Group. Prior to joining us in August 2002, Mr Tang was a radio frequency engineer involved in the research and development of microwave circuits with Hebei Semiconductor Research Institute from August 1988 to April Thereafter, he joined ZTE Corporation, first as a radio frequency engineer before being promoted to division head in May Mr Tang has a total of 15 years experience in research and development of which 11 years involved microwave circuits and the remaining 4 years involved radio frequency circuits. Mr Tang has a Bachelors degree in Information Engineering from Xi Dian University, PRC. 18

21 Board of Directors Mr. Li Jinliang Dr. Ow Chin Hock Ms. Yeo Mui Sung Mr. Li Jinliang, Independent Director Mr. Li Jinliang was appointed to our board as an Independent Director on 1 February He was a general engineer with Number Seven Research Institute of Ministry of Information Industry ( MII ) and is currently the general editor of its Mobile Telecommunication magazine. He is also a senior engineer and a part-time professor with Shanghai Jiaotong University where he supervises masters students of the mobile engineering communications faculty. Mr Li has worked in the tactical telecommunication and mobile communication system research section of MII for more than 50 years and was responsible for managing and developing the first aircraft-borne and ship-borne stations. He also participated in the development of certain models of the first, the second and the three generation division tactical radio. He has published approximately 70 research reports and papers. He has also individually published or jointly published several books relating to mobile communications and info communications such as the Dictionary of Mobile Communication in 1996, Personal Communication in 1999, the English-Chinese Mobile Communication Dictionary in 2000, the New Type GSM Mobile Telephone in 2000, the Cordless Telephone in 2001 and the Dictionary of Information Network in Mr Li is a member of the Electronic Science and Technology Committee of MII, fellow of the China Institute of Communication and a standing director of the China Mobile Communication Association. Mr Li is recognized as a senior professor by the PRC government and has won several awards for his developments, including the first prize of the PRC Ministry of Science & Technology Advancement and the second prize of the PRC National Science & Technology Advancement. He graduated with a major in telecommunication from the electrical engineering faculty of Tsinghua University in Dr. Ow Chin Hock, Independent Director Dr. Ow Chin Hock was appointed to our board as an Independent Director on 1 February He also sits on the Boards of Singapore Airport Terminal Services and People s Food Holdings Ltd. Dr Ow obtained a Bachelor of Art (Honours) in Economics from the University of Singapore in He was awarded Fulbright Grant and Ford Economic Fellowship to do graduate studies in USA in He obtained his Master of Arts (Economic Development) and PhD (Economics) from the Vanderbilt University, USA in 1968 and 1972 respectively. He held the posts of lecturer, senior lecturer and associate professor with the National University of Singapore from 1972 to Concurrently, he was member of the Board of Trustees, Chairman of Audit Committee, and Deputy Chairman (BOT) of the Institute of Southeast Asian Studies, 1981 to He joined Pan-United Corporation Ltd from 1993 to 1997 as its Executive Chairman, and was appointed Chairman of its all three joint ventures in China. Dr Ow was elected as a Member of Parliament from 1976 to During his six terms as MP, he was appointed Parliamentary Secretary for the Ministry of Culture and subsequently, the Ministry of Education from 1976 to 1981, and served as Chairman of three town councils from 1988 to He was also appointed as Minister of State in the Ministry of Foreign Affairs and Mayor of the Tanjong Paper Community Development Council from 1997 to He was an ambassador-at-large from 2002 to He was adjunct professor with Nanyang Technological University from 2004 to Ms. Yeo Mui Sung, Independent Director Ms Yeo Mui Sung has joined MediaCorp Pte Ltd as Chief Financial Officer from Sept Prior to joining MediaCorp Pte Ltd, she has been with United Test & Assembly Center Ltd ( UTAC ) as Group Chief Financial Officer for 8 years since its inception in She saw the company from start-up to its public listing in 2004, and expansion through the various cross-border acquisitions and integrations to date. Ms Yeo is responsible for the financial management, planning, fund raising, as well as financial standards and regulatory compliance. Ms Yeo has 25 years of extensive financial and management experience including substantial cross-border and international financial and business experience with local and multi-national companies. She previously held key senior financial and management positions at F&N Coca-Cola, Baxter Healthcare, Archive and Texas Instruments. Prior to joining UTAC, Ms Yeo was the Corporate Controller for F&N Coca-Cola Pte. Ltd., responsible for its regional financial management and planning, covering Singapore, Malaysia, Vietnam, Nepal, Sri Lanka and Pakistan. Before F&N, besides being the financial controller of Baxter Healthcare Singapore, she also served on its board and on the Baxter Quality Board of Examiners. While at Archive, Ms Yeo championed the financial integration of the newly acquired companies. She started her career with Texas Instruments and during her 10 years there, she was also posted to their headquarters in Dallas for 2 years. Ms Yeo graduated magna cum laude with a Bachelor of Science degree, majoring in Accounting from University of San Francisco, U.S.A. 19

22 Technology Development. Through rigorous testing and continuous improvements of our telecommunications devices, we aspire to excel in designs highlighting enhanced technical, functional, and fashionable features. 20

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24 Corporate Information BOARD OF DIRECTORS Tao Qiang Non-Executive Chairman Du Junhong Executive Director Deng Hua Executive Director Tang Jiping Executive Director Li Jinliang Independent Director Ow Chin Hock Independent Director Yeo Mui Sung Independent Director MANAGEMENT TEAM Du Junhong Chief Executive Officer Deng Hua Vice-President of Operations Tang Jiping Vice-President of Research and Development Arthur Tan Chief Financial Officer AUDIT COMMITTEE Yeo Mui Sung Chairperson Ow Chin Hock Member Li Jinliang Member NOMINATING COMMITTEE Li Jinliang Chairperson Yeo Mui Sung Member Du Junhong Member REMUNERATION COMMITTEE Ow Chin Hock Chairperson Yeo Mui Sung Member Tao Qiang Member COMPANY SECRETARIES Yvonne Choo Hazel Chia Luang Chew REGISTERED OFFICE Clarendon House 2 Church Street Hamilton HM 11 Bermuda PRINCIPAL PLACE OF BUSINESS No. 401 Caobao Road Shanghai People s Republic of China BERMUDA SHARE REGISTRAR Codan Services Limited (Bermuda) Clarendon House 2 Church Street Hamilton HM 11 Bermuda SINGAPORE SHARE REGISTRAR & TRANSFER OFFICE Lim Associates (Pte) Ltd 3 Church Street #08-01 Samsung Hub Singapore AUDITORS Deloitte & Touche 6 Shenton Way #32-00 DBS Building Tower Two Singapore Partner-in-Charge: Ernest Kan Yaw Kiong (Appointed since financial year ended 30 June 2005) PRINCIPAL BANKERS China Merchants Bank Shanghai Minhang Sub-Branch No. 365 Xinsong Road Shanghai People s Republic of China Citibank (China) Co., Ltd. Shanghai Branch 34F Citigroup Tower No. 33 Hua Yuan Shi Qiao Road Lu Jia Zui Finance and Trade Zone Shanghai People s Republic of China 22

25 Financial Highlights PROFORMA ACTUAL FY2003 RMB 000 FY2004 RMB 000 FY2005 RMB 000 FY2006 RMB 000 FY2007 RMB 000 Revenue 82, , ,022 1,983,995 2,434,628 Profitability Gross Profit 31, , , , ,788 Profit Before Taxation 26, , , , ,100 Net Profit Attributable to Shareholders 25, , , , ,787 Return on Equity (%) 148.8% 219.7% 36.2% 52.9% 34.6% Earnings Per Ordinary Share (RMB Cents) Financial Position Total Assets 57, , , ,955 1,006,068 Total Liabilities 39,609 81, , , ,390 Shareholders Equity 17,289 46, , , ,152 Net Asset Value Per Ordinary Share (RMB Cents) Revenue (RMB Million) 2, , FY2003 FY2004 FY2005 FY2006 FY Net Profit (RMB Million) FY2003 FY2004 FY2005 FY2006 FY Shipment (Million Units) FY2003 FY2004 FY2005 FY2006 FY

26 Financial Contents 25 Corporate Governance 33 Report of the Directors 36 Independent Auditors Report 37 Balance Sheets 38 Consolidated Profit & Loss Statement 39 Statements of Changes in Equity 41 Consolidated Cash Flow Statement 42 Notes to Financial Statements 63 Statement of Directors 64 Statistics of Shareholdings 66 Notice of Annual General Meeting 24

27 Corporate Governance Report (the Company ) and its subsidiaries (collectively referred to as the Group ) is committed to maintaining good standards of corporate governance in line with the recommendations of the Code of Corporate Governance 2005 (the Code ) issued by the Council of Corporate Disclosure and Governance and has always recognized the importance of good corporate governance to promote greater transparency and to strengthen investors confi dence. This report sets out the corporate governance practices that have been adopted by the Company with specifi c reference to the principles of the Code as well as any deviation from any guideline of the Code together with an explanation for such deviation. Save for the deviations disclosed below, the Company has adhered to the principles and guidelines of the Code. BOARD MATTERS Principle 1 The Board s Conduct of its Affairs The Board of Directors (the Board ) of the Company currently comprises of seven members, three of whom are independent non-executive directors. The Board holds regular scheduled Board meetings throughout the year. Ad-hoc meetings would be convened as and when warranted by particular circumstances between the scheduled meetings. The Company s bye-laws provide for meetings to be held by telephone, electronic or other communication facilities which permit all participants to communicate with each other simultaneously and instantaneously. To facilitate effective execution of its function, the Board has delegated specifi c responsibilities to 3 subcommittees. They are namely the Audit Committee, the Nominating Committee and the Remuneration Committee. Each of the committee has its own terms of reference setting out its role and has the authority to examine particular issues and report to the Board with their recommendations. The ultimate responsibility for the fi nal decision on all matters, however, lies with the entire Board. The Board supervises the Management and corporate affairs of the Group. Apart from fulfi lling its statutory responsibilities, the Board s principal functions include: (i) (ii) (iii) (iv) (v) (vi) Approving the Group s strategic plans, key operational initiatives, major investments and divestments as well as funding requirements, and monitoring the performance of Management towards achieving adequate shareholders value. Approving the budget, reviewing the performance of the business; Approving the release of the fi nancial results of the Group to shareholders; Providing guidance in the overall management of the business and affairs of the Group; Overseeing the processes related to risk management and internal control, fi nancial reporting and compliance; and Approving the recommended framework of remuneration for the Board and key executives by the remuneration committee. The Directors also have access to the advice and services of the Company Secretary and Management, and may in appropriate circumstances, seek independent professional advice concerning the Group s affairs. Details of Directors attendance at the Board and Board Committees held for the fi nancial year 1 July 2006 to 30 June 2007 are set out in the table below: Name of Director Board Meetings Audit Committee Nominating Meetings Committee Meetings No of meetings attended / No of meetings held Remuneration Committee Meetings Tao Qiang 4/ /3 Dr. Du Junhong 4/4-2/2 - Deng Hua 4/ Tang Jiping 4/ Li Jinliang 4/4 5/5 2/2 - Dr. Ow Chin Hock 4/4 5/5-3/3 Yeo Mui Sung 4/4 5/5 2/2 3/3 25

28 Corporate Governance Report Principle 2 Board Composition and Balance The Board comprises seven Directors, three of whom are independent. Key information of the Board is found on pages of the Annual Report. The present composition of the Board complies with the Code s guidelines that independent Directors make up at least one-third of the Board of Directors. The Board is of the opinion that, given the scope and nature of the Group s operations, the present size of the Board is appropriate in facilitating effective decision-making. The Directors also bring with them a wealth of experience, extensive business networks and expertise in specialized fi elds such as accountancy, corporate fi nance and technical expertise. Accordingly, the current Board comprises persons who, as a group, have core competencies necessary to lead and manage the Group. Non-executive Directors contribute to the Board process by monitoring and reviewing Management s performance against goals and objectives. Their views and opinions provide alternative perspectives to the Group s business. When challenging Management proposals or, decisions, they bring independent judgement to bear on business activities and transactions involving confl icts of interest and other complexities. Principle 3 Chairman and Chief Executive Officer As recommended by the Code, there is a distinctive separation of responsibilities between the Chairman and the Chief Executive Offi cer ( CEO ) to ensure an appropriate balance of power, increased accountability and greater capacity of the Board for independent decision-making. The Chairman is Mr. Tao Qiang and the CEO is Dr. Du Junhong. As Chairman, Mr. Tao Qiang leads Board discussions and deliberations. The Chairman of the Board also ensures that Board meetings are held when necessary. He sets the agenda, in consultation with the CEO, and ensures that Directors are provided with complete, adequate and timely information. He also assists in ensuring compliance with the Group s guidelines on corporate governance. As CEO, Dr. Du Junhong is responsible for the day-to-day management of the Group. Together with the other executive directors, Dr. Du executes the strategic plans set out by the Board and ensures that the directors are kept updated and informed of the Group s business through management reports. Principle 4 Board Membership Nominating Committee ( NC ) The NC, regulated by a written terms of reference, comprises three members, majority of whom are independent, including the Chairman of the NC who is not associated in anyway with the substantial shareholders of the Company. The members are: Mr. Li Jinliang (Chairperson) Ms. Yeo Mui Sung Dr. Du Junhong The NC is responsible for: (i) (ii) (iii) (iv) (v) (vi) Making recommendation to the Board on all Board appointments, including the development of a set of criteria for director s appointment and re-appointment; Determining annually the independence of a Director; Ensuring that all directors submit themselves for re-nomination and re-election at least once every 3 years; In respect of a director who has multiple board representations on various companies, deciding whether or not such Director is able to and has been adequately carrying out his / her duties as Director, having regard to the competing time commitments that are faced when serving on multiple boards. Reviewing the Board s performance; and Assessing the effectiveness of the Board as a whole. 26

29 Corporate Governance Report The NC has reviewed the independence of the Board members and is of the opinion that Mr. Li Jinliang, Dr. Ow Chin Hock and Ms. Yeo Mui Sung are independent. During the year, the NC met two times, with full attendance of its members. In accordance with the Company s Bye-Laws, each Director is required to retire at least once in every three years by rotation and all newly appointed Directors will have to retire at the next Annual General Meeting ( AGM ) following their appointments. The retiring Directors are eligible to offer themselves for re-election. The NC has recommended the nomination of Ms. Yeo Mui Sung for re-election at the forthcoming AGM. The Board has accepted the NC s recommendation. However Ms Yeo has notifi ed the Company of her intention not to seek re-election at the forthcoming AGM. Ms Yeo has recently assumed the position of Chief Financial Offi cer at MediaCorp Pte Ltd and has indicated her desire to focus her attention on her new appointment. In addition, the Company has also received notifi cation from Mr. Li Jinliang that he intends to retire at the forthcoming AGM. Mr. Li has attained the age of 78 years and would like to devote more time to pursue his personal interests. The NC has reviewed the nomination of Mr. See Yen Tarn and Mr. David Hwang Soo Chin for appointment as Directors of the Company to fi ll the vacancies arising from the retirement of Ms. Yeo Mui Sung and Mr. Li Jinliang at the forthcoming AGM of the Company. The NC has accordingly recommended to the Board that Mr. See Yen Tarn and Mr. David Hwang Soo Chin be appointed Directors of the Company. Mr. See Yen Tarn will be a non-executive and non-independent Director. Mr. David Hwang Soo Chin will be a non-executive and independent Director. Principle 5 Board Performance The NC acknowledges the importance of a formal assessment of Board performance and has adopted a formal system of evaluating Board performance as a whole. The NC determines the criteria for evaluating the Board s performance. The performance criteria for the Board evaluation includes an evaluation of the size and composition of the Board, the Board s access to information, accountability, Board processes, Board performance in relation to discharging its principal responsibilities, communication with Management and standards of conduct of the Directors. The evaluation of the Board s performance is conducted by the means of a questionnaire to be completed by each individual Director, of which is then collated and the fi ndings analyzed and discussed with a view to implementing certain recommendations to further enhance the effectiveness of the Board. Principle 6 Access to Information The Board is provided with detailed Board papers prior to every Board meeting. These Board papers are furnished to the Board members with suffi cient time to enable the Directors to obtain additional information or explanations from the Management, if necessary. Management who have prepared the Board papers, or who can provide additional insight in the matters to be discussed, are normally invited to present the paper or attend the Board meeting. The Directors have separate and independent access to the Management and the Company Secretary on all matters whenever they deem necessary, and vice-versa. The Company Secretary, or her authorized delegates, attends meetings of the Board and Board committees, and is responsible for ensuring that Board procedures are followed and that applicable rules and regulations (in particular the SGX Listing Manual) are complied with. Where necessary, the Company will, upon the request of Directors (whether as a group or individually), provide them with independent professional advice, at the Company s expense to enable them to discharge their duties. 27

30 Corporate Governance Report REMUNERATION MATTERS Principle 7 Procedures for Developing Remuneration Policies Principle 8 Level and Mix of Remuneration The Remuneration Committee ( RC ), regulated by a written terms of reference, comprises three members, majority of whom, including the Chairman are independent. The members are: Dr. Ow Chin Hock (Chairperson) Ms. Yeo Mui Sung Mr. Tao Qiang The RC is responsible for: (i) (ii) (iii) Determining and recommending to the Board the specifi c remuneration packages and terms of employment for each of the executive Directors. During the year, the RC revised the base salaries and performance incentives of the executive directors after reviewing the existing pay scales within the Group. Reviewing and recommending to the Board, a framework of remuneration for executive Directors and key executives. In establishing the remuneration framework, the RC takes into account the performance of the Group as well as the Directors and key executives. The Group adopts an overall remuneration policy comprising of a fi xed component in the form of base salary and variable component. The variable component is in the form of a bonus that is linked to the Group s and the individual s performance. During the year, the RC reviewed and proposed to implement a Share Award Plan which is an integral part of employee incentive compensation in the Group s variable wage system. In summary, the Plan is a share-based incentive scheme and will, inter alia, (a) increase the Group s fl exibility and effectiveness in its continuing efforts to reward, retain and motivate key employees to achieve superior performance, (b) further strengthen the Group s competitiveness in attracting and retaining key employees, local and foreign key talents, (c) provide the incentives and motivation for high performing key employees and talents to excel in their performance, (d) encourage greater dedication and loyalty to the Group and (e) foster ownership culture. The Share Award Plan is tabled for shareholders approval at the Special General Meeting to be held on 22 October During the year, the RC met three times, with full attendance of its members. There is no service agreement for the non-executive Directors of the Company. The remuneration of the non-executive Directors is in the form of a fi xed fee and covers the service period of 12 months from 1 July 2006 to 30 June The RC has recommended to the Board an amount of S$188,000 as Director s fees for the non-executive Directors for the fi nancial year ended 30 June The Board will table this at the forthcoming AGM for shareholders approval. The executive Directors do not receive directors fee. All three executive Directors have entered into service agreements with the Company for a period of 3 years with effect from 1 December 2004, which shall be renewed automatically every 3 years, such renewal being subject to confi rmation of the Company. The service agreements provide for termination by either the executive Director or the Company upon giving written notice of 6 months. No Director is involved in determining his / her own remuneration. Principle 9 Disclosure on Remuneration The level of remuneration and fees payable to directors in bands of $250,000 is as follows: Number of Directors Remuneration Band Above S$500, S$250,000 to S$499, Below S$250,

31 Corporate Governance Report The mix of the remuneration payable to directors for the fi nancial year ended 30 June 2007 is as follows: Name of Director Status Fees (1) Salary Bonus Other benefits Total Tao Qiang Non-executive 100% % Dr. Du Junhong Executive - 52% 42% 6% 100% Deng Hua Executive - 51% 43% 6% 100% Tang Jiping Executive - 61% 33% 6% 100% Li Jinliang Independent 100% % Dr. Ow Chin Hock Independent 100% % Yeo Mui Sung Independent 100% % (1) Directors fees as a lump sum are subject to approval by shareholders at the FY2007 AGM. There are no employees who are immediate family members of the Directors and substantial shareholders who earn in excess of $150,000 per year. Instead of setting out the names of the top fi ve key executives who are not also Directors of the Company, the remuneration of these key executives are set out below in bands of $250,000. The Company believes that disclosure of the remuneration of individual executive is disadvantageous to its business interest, given the highly competitive industry condition where poaching of executives has become commonplace in a liberalized environment. Number of Key Executives Remuneration Band Above $500, $250,000 to $499, Below $250, ACCOUNTABILITY AND AUDIT Principle 10 Accountability Principle 11 Audit Committee Principle 12 Internal Control The Board provides the shareholders with a detailed and balanced explanation and analysis of the Company s performance, position and prospects on a quarterly basis. The Management provides the Board with appropriately detailed management accounts of the Group s performance, position and prospects on a quarterly basis. The Audit Committee ( AC ) comprises three members, all of whom are independent non-executive Directors. The members are: Ms. Yeo Mui Sung (Chairperson) Dr. Ow Chin Hock Mr. Li Jinliang The AC has a set of written terms of reference, which includes authority to investigate any matter within its terms of reference, full access to and cooperation by the Management and full discretion to invite any director or executive offi cer to attend its meetings, and reasonable resources to enable it to discharge its functions properly. 29

32 Corporate Governance Report The AC performs the following functions: (i) Reviews the quarterly, half-year and annual fi nancial statements including disclosures and accounting policies of the Company and the Group prior to their submission to the Board for adoption. (ii) Reviews with the external auditors their : (a) (b) (c) (d) annual audit plans; fi ndings and recommendations to Management as well as Management response thereto; evaluation of the system of internal accounting controls; and audit reports. (iii) (iv) (v) (vi) (vii) (viii) Reviews the assistance given by the Management to the external auditors; Since October 2006, the AC reviews the scope and results of the quarterly and half-year reviews performed based on agreed upon procedures by Nexia, Tan & Sitoh ( Nexia ), a professional accounting fi rm. Reviews the scope and results of the internal audit procedures performed; Reviews the non-audit services provided by the external auditors to ensure that provision of such services will not affect the independence of the auditors. Recommends the appointment or re-appointment of external auditors, taking into consideration the scope, results of the audit as well as the cost effectiveness and the independence and objectivity of the external auditors; and Reviews interested person transactions, if any, quarterly. Since May 2007, the Company has put in place a whistle-blowing policy (the Policy ). The AC reviews arrangements by which staff may, in confi dence, raise concerns about possible corporate improprieties in matters of fi nancial reporting or other matters. The objective of the Policy is to ensure that arrangements are in place for independent investigation of such matters and for appropriate follow-up action. During the fi nancial year, the AC met fi ve times. The AC meets with the external and internal auditors without the presence of Management, at least once during the year. In the course of their annual audit, the external auditors carry out, a review of the Group s system of internal controls to the extent of their planned reliance as laid out in their audit plan. Any material non-compliance and internal control weaknesses noted during the audit, and the auditors recommendations to address such non-compliance and weaknesses, are reported to the AC. Management follows-up and implements the external auditors recommendations. The AC has reviewed the non-audit services provided by the external auditors, Deloitte & Touche and is of the opinion that the provision of such services does not affect their independence. The AC had recommended the re-appointment of Deloitte & Touche as external auditors at the forthcoming AGM. Principle 13 Internal Audit The Board acknowledges that it is responsible for the overall internal control framework and maintains a sound system of internal controls to safeguard the shareholders investment and the Company s assets. The AC, on behalf of the Board, reviews the adequacy of the Company s internal fi nancial controls, operational and compliance controls, and risk management policies and systems established by the Management. Since October 2006, the Group has appointed Nexia to perform internal audit functions as it is more cost effective than keeping an in-house internal audit function. 30

33 Corporate Governance Report Nexia performs bi-annual internal audits of the Group. The AC has reviewed the risk assessment and internal audit approach proposed by the internal auditor, who reports to the AC, and reviewed the internal audit report submitted. Nexia performs their audits according to the Standards of Professional Practice of Internal Auditing set by the Institute of Internal Auditors. COMMUNICATION WITH SHAREHOLDERS Principle 14 Communication with Shareholders Principle 15 Greater Shareholder Participation The Group is committed to providing easy access to timely and pertinent information about the Group and to continuously review ways to enhance our corporate reporting process. The Group communicates information to the shareholders and investing community on a timely basis through announcements that are released to SGX-ST via SGXNET. Such announcements include the quarterly and full year fi nancial results, material transactions, and other developments relating to the Group requiring disclosure under the corporate disclosure policy of the SGX-ST. All shareholders of the Company receive a copy of the Annual Report and notice of Annual General Meeting ( AGM ). The notice of AGM which sets out all items of business to be transacted at the AGM, is also advertised in the newspapers. The Group also maintains a website com where the public can access information on the Group. The Company s main forum for dialogue with shareholders takes place at its AGM, where members of the Board, key executives and the external auditors are in attendance. At the AGM, shareholders are given the opportunity to air their views and ask questions regarding the Group. ADDITIONAL INFORMATION Code of Business Conduct The Directors, offi cers and employees are required to observe and maintain high standards of integrity, that are in compliance with laws and regulations and Group policies. Dealings in Securities The Group has adopted an internal policy with respect to dealings in the Company s securities in compliance with Rule 710 of the Listing Manual of the SGX-ST. Directors, offi cers and staff of the Company and Group who have access to price sensitive and confi dential information are not allowed to deal in the Company s shares during the periods commencing two weeks before the announcement of the Group s quarterly results and one month before the announcement of the Group s annual results, and ending on the date of the announcement of such results, or when they are in possession of material non-public price sensitive information on the Group. The Company has complied with Rule 710 of the Listing Manual of the SGX-ST on dealings in the Company s securities in FY Interested Person Transactions and Material Contracts Transactions with the Company s interested persons (as that term defi ned in the Listing Manual of the SGX-ST) are subject to review and approval by the AC. The AC reviews the transaction to determine that it is on normal commercial terms, and hence, not prejudicial to the interests of the Company and shareholders, before making its recommendation to the Board for endorsement. There were no interested person transactions for the fi nancial year ended 30 June

34 Corporate Governance Report Material Contracts Save for the service agreements between the executive Directors and the Company (as disclosed in the Company s Prospectus dated 3 May 2005), no material contract involving the interests of any Director or controlling shareholders of the Company has been entered into by the Company or any of its subsidiaries since the end of the previous fi nancial year and no such contract subsists at the end of the fi nancial year. Risk Management The Company does not have a Risk Management Committee. However, the Management regularly reviews the Group s business and operational activities to identify areas of signifi cant business risks as well as appropriate measures to control and mitigate these risks. The Management reviews all signifi cant control policies and procedures and highlights all signifi cant matters to the Directors and the AC. 32

35 REPORT OF THE DIRECTORS The directors present their report together with the audited consolidated fi nancial statements of the Group and balance sheet and statement of changes in equity of the Company for the fi nancial year ended 30 June DIRECTORS The directors of the Company in offi ce at the date of this report are: Tao Qiang Du Junhong Deng Hua Tang Jiping Li Jinliang Ow Chin Hock Yeo Mui Sung 2 ARRANGEMENTS TO ENABLE DIRECTORS TO ACQUIRE BENEFITS BY MEANS OF THE ACQUISITION OF SHARES AND DEBENTURES Neither at the end of the fi nancial year nor at any time during the fi nancial year did there subsist any arrangement whose object is to enable the directors of the Company to acquire benefi ts by means of the acquisition of shares or debentures in the Company or any other body corporate, except for the options as described in this report. 3 DIRECTORS INTERESTS IN SHARES AND DEBENTURES The directors of the Company holding offi ce at the end of the fi nancial year had no interests in the share capital and debentures of the Company and related corporations except as follows: Shareholdings in which directors are deemed to have an interest Name of directors and companies At beginning At end in which interests are held of year of year Ordinary shares of US$0.02 each Tao Qiang 123,913,914 71,033,914 Du Junhong 89,800,321 86,920,321 Tang Jiping 98,290,494 77,410,494 Deng Hua 68,308,770 50,308,770 The directors interests in the shares of the Company at 21 July 2007 were the same at 30 June DIRECTORS RECEIPT AND ENTITLEMENT TO CONTRACTUAL BENEFITS Since the beginning of the fi nancial year, no director of the Company has received or become entitled to receive a benefi t by reason of a contract made by the Company or a related corporation with the director or with a fi rm of which he is a member, or with a company in which he has a substantial fi nancial interest except for salaries, bonuses and other benefi ts as disclosed in the fi nancial statements. 33

36 REPORT OF THE DIRECTORS 5 SHARE OPTIONS a) The Longcheer Share Option Scheme ( the Scheme ) was adopted on 25 February The Share Option Scheme is administered by the Remuneration Committee comprising Ow Chin Hock, Yeo Mui Sung and Tao Qiang. b) Under the Scheme, the aggregate number of shares that may be issued shall not exceed 5% of the issued share capital of the Company from time to time. Options entitle the option holder to subscribe for a specifi c number of new ordinary shares in the Company comprised in the option at a subscription price per share determined by reference to the daily offi cial list or other publication published by the Singapore Exchange Securities Trading Limited for a period of fi ve consecutive market days immediately preceding the relevant date of grant. The Remuneration Committee may fi x the subscription price at a discount up to 20% of the market price but not lower than the par value of the shares subject to the approval by the shareholders in a separate resolution. Options granted with the subscription price set at the market price shall only be exercised after the fi rst anniversary but before the tenth anniversary for executive directors and employees (fi fth anniversary for non-executive directors) from the date of grant. Options granted with the subscription price set at a discount to the market price shall only be exercised after the second anniversary but before the tenth anniversary for executive directors and employees (fi fth anniversary for non-executive directors) from the date of grant. No options with subscription price set at a discount to the market price will be granted to the independent directors. The shares under option may be exercised in whole or in part on the payment of the relevant subscription price. Options granted will lapse when the option holder ceases to be a full-time employee or non-executive director of the Company or any subsidiary of the Group subject to certain exceptions at the discretion of the Remuneration Committee. c) During the fi nancial year, (i) (ii) (iii) no options were granted to employees or directors of the Company, controlling shareholders or their associates; no person has received 5% or more of the total number of shares or options available under the Scheme; and no options were granted at a discount to the market price. During the fi nancial year, no option to take up unissued shares of the Company or any corporation in the Group was granted. During the fi nancial year, there were no shares of the Company or any corporation in the Group issued by virtue of the exercise of an option to take up unissued shares. At the end of the fi nancial year, there were no unissued shares of the Company or any corporation in the Group under option. 6 AUDIT COMMITTEE The Audit Committee ( AC ) of the Company is chaired by Yeo Mui Sung and includes Li Jinliang and Ow Chin Hock, all of whom are nonexecutive and independent directors. The AC performed the functions as detailed in the Group s Corporate Governance Report in its Annual Report for fi nancial year The Audit Committee has recommended to the directors the nomination of Deloitte & Touche for re-appointment as external auditors of the Group and Company at the forthcoming Annual General Meeting. 34

37 REPORT OF THE DIRECTORS 7 AUDITORS The auditors, Deloitte & Touche, have expressed their willingness to accept re-appointment. ON BEHALF OF THE DIRECTORS... Tao Qiang... Du Junhong 26 September

38 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF LONGCHEER HOLDINGS LIMITED We have audited the accompanying fi nancial statements of (the Company ), and its subsidiaries (the Group ) which comprise the balance sheets of the Group and the Company as at 30 June 2007, the profi t and loss statement, statement of changes in equity and cash fl ow statement of the Group and the statement of changes in equity of the Company for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes, as set out on pages 37 to 62. Directors Responsibility The Company s directors are responsible for the preparation and fair presentation of these fi nancial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of fi nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these fi nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the fi nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by directors as well as evaluating the overall presentation of the fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated fi nancial statements of the Group and the balance sheet and statement of changes in equity of the Company are properly drawn up in accordance with the provisions of International Financial Reporting Standards so as to give a true and fair view of the state of affairs of the Group and of the Company as at 30 June 2007 and of the results, changes in equity and cash fl ows of the Group and changes in equity of the Company for the year ended on that date. Deloitte & Touche Certifi ed Public Accountants Ernest Kan Yaw Kiong Partner Singapore 26 September

39 BALANCE SHEETS As at 30 June 2007 ASSETS GROUP COMPANY Note RMB 000 RMB 000 RMB 000 RMB 000 Current assets Cash and cash equivalents 7 554, ,656 21,619 81,523 Notes receivables 34,932 74, Trade receivables 8 122,701 41, Other receivables 9 16,219 7, ,330 83,568 Inventories , , Total current assets 923, , , ,091 Non-current assets Property, plant and equipment 11 37,725 26, Goodwill 12 5,100 1, Other intangible assets 13 24,824 26, ,948 Subsidiaries , ,290 Associates 15 14, Total non-current assets 82,544 54, , ,238 Total assets 1,006, , , ,329 LIABILITIES AND EQUITY Current liabilities Trade payables , , Other payables 17 48,811 54, , ,864 Income tax payable 24,772 19, Total current liabilities 442, , , ,864 Capital, reserves and minority interests Share capital 19 65,608 65,608 65,608 65,608 Share premium 138, , , ,818 Capital reserves 20 30,546 30, Legal reserves 20 44,723 27, Translation reserves (12,782) (6,037) (8,410) (6,927) Retained earnings 275, , ,069 79,966 Equity attributable to equity holders of the Company 542, , , ,465 Minority interests 21,526 1, Total equity 563, , , ,465 Total liabilities and equity 1,006, , , ,329 See accompanying notes to fi nancial statements. 37

40 CONSOLIDATED PROFIT AND LOSS STATEMENT Year ended 30 June 2007 GROUP Note RMB 000 RMB 000 Revenue 21 2,434,628 1,983,995 Cost of sales (2,099,840) (1,652,041) Gross profit 334, ,954 Other operating income 22 18,709 7,756 Distribution costs (15,629) (8,505) Administrative expenses (130,656) (94,096) Share of results of associates (338) - Other expenses - (11) Finance costs (774) - Profit before tax 206, ,098 Income tax expense 23 (19,369) (12,816) Profit for the year , ,282 Attributable to: Equity holders of the Company 187, ,526 Minority interests (1,056) (244) 186, ,282 Earnings per share (RMB cents) - Basic and diluted See accompanying notes to financial statements. 38

41 STATEMENTS OF CHANGES IN EQUITY Year ended 30 June 2007 Attributable to equity Share Share Capital Legal Translation Retained holders of Minority capital premium reserves reserves reserves earnings the Company interests Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Group Balance at 1 July , ,818 28, , , ,306 Acquisition of subsidiary ,326 1,326 Effects of change in capital structure of a subsidiary (Note 20) - - 1,765 27,674 - (29,439) Profit for the year , ,526 (244) 224,282 Dividends paid (Note 26) (103,586) (103,586) - (103,586) Exchange differences arising on translation (6,040) - (6,040) - (6,040) Balance at 30 June , ,818 30,546 27,674 (6,037) 167, ,206 1, ,288 Acquisition of subsidiaries ,500 21,500 Transfers to legal reserves ,049 - (17,049) Profit for the year , ,787 (1,056) 186,731 Dividends paid (Note 26) (63,096) (63,096) - (63,096) Exchange differences arising on translation (6,745) - (6,745) - (6,745) Balance at 30 June , ,818 30,546 44,723 (12,782) 275, ,152 21, ,

42 STATEMENTS OF CHANGES IN EQUITY Year ended 30 June 2007 Company Share Share Translation Retained capital premium reserves earnings Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Balance at 1 July , ,818-25, ,591 Profi t for the year , ,387 Dividends paid (Note 26) (103,586) (103,586) Exchange differences arising on translation - - (6,927) - (6,927) Balance at 30 June , ,818 (6,927) 79, ,465 Profi t for the year , ,199 Dividends paid (Note 26) (63,096) (63,096) Exchange differences arising on translation - - (1,483) - (1,483) Balance at 30 June , ,818 (8,410) 241, ,085 See accompanying notes to fi nancial statements. 40

43 CONSOLIDATED CASH FLOW STATEMENT Year ended 30 June 2007 GROUP RMB 000 RMB 000 Operating activities Profit before tax 206, ,098 Adjustments for: Interest income (14,895) (6,888) Interest expense Allowance for inventories 7,722 5,474 Amortisation of other intangible assets 8,648 4,065 Depreciation of property, plant and equipment 10,670 6,201 Impairment of goodwill 1,620 - Loss on disposal of property, plant and equipment Share of results of associates Write off of other intangible assets 7,113 - Operating cash flows before movements in working capital 228, ,991 Trade and notes receivables (42,156) (51,744) Other receivables (8,998) (5,174) Inventories (76,207) (78,426) Trade payables 113, ,030 Other payables (5,586) 35,848 Cash generated from operations 209, ,525 Interest received 14,895 6,888 Interest paid (774) - Income tax (paid) refunded (13,924) 278 Net cash from operating activities 209, ,691 Investing activities Proceeds from disposal of property, plant and equipment Purchase of property, plant and equipment (22,818) (20,318) Acquisition of subsidiaries (Note 27) 16, Acquisition of investment in associates (15,233) - Purchase of other intangible assets (15,300) (11,921) Net cash used in investing activities (36,096) (32,036) Financing activity Dividends paid (63,096) (103,586) Net cash used in financing activity (63,096) (103,586) Effect of foreign exchange rate changes (6,015) (6,521) Net increase in cash and cash equivalents 104, ,548 Cash and cash equivalents at beginning of year 450, ,108 Cash and cash equivalents at end of year 554, ,656 See accompanying notes to fi nancial statements. 41

44 NOTES TO FINANCIAL STATEMENTS 30 June GENERAL The Company (Registration No ) is incorporated in Bermuda with its principal place of business at No. 401 Caobao Road, Shanghai , People s Republic of China ( PRC ) and registered offi ce at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The Company is listed on the Singapore Exchange Securities Trading Limited. The fi nancial statements are expressed in Chinese Renminbi ( RMB ). The principal activity of the Company is that of investment holding company. The principal activities of the subsidiaries and associates are disclosed in Note 14 and 15 to the fi nancial statements respectively. The consolidated fi nancial statements of the Group and balance sheet and statement of changes in equity of the Company for the year ended 30 June 2007 were authorised for issue by the Board of Directors on 26 September ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS In the current fi nancial year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ) of the IASB that are relevant to its operations and effective for annual periods beginning on or after 1 July The adoption of these new/revised Standards and Interpretations does not result in changes to the Group s and Company s accounting policies and has no material effect on the amounts reported for the current or prior years. The application of IFRS 7 and the consequential amendments to other standards and interpretations will not affect any of the amounts recognised in the fi nancial statements, but will change the disclosures presently made in relation to the Group and Company s fi nancial instruments and the objectives, policies and processes for managing capital. Other than IFRS 7, the Group and Company are currently evaluating the provisions of the other standards and interpretations that were issued but not yet effective until future periods. Preliminary assessment by the directors indicate that the initial adoption of these standards and interpretations will have no material impact on the fi nancial statements of the Group and the Company on initial adoption. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING - The fi nancial statements are prepared in accordance with the historical cost convention, except as disclosed in the accounting policies below, and are drawn up in accordance with International Financial Reporting Standards ( IFRS ). BASIS OF CONSOLIDATION - The consolidated fi nancial statements incorporate the fi nancial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the fi nancial and operating policies of an entity so as to obtain benefi ts from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profi t and loss statement from the effective date of acquisition or to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the fi nancial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are identifi ed separately from the Group s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination (see below) and the minority s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority s interest in the subsidiary s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover its share of those losses. 42

45 NOTES TO FINANCIAL STATEMENTS 30 June SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In the Company s fi nancial statements, investments in subsidiaries are carried at cost less any impairment in net recoverable value that has been recognised in the profi t and loss statement. BUSINESS COMBINATIONS - The acquisition of subsidiaries are accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree s identifi able assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classifi ed as held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the group s interest in the net fair value of the identifi able assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group s interest in the net fair value of the acquiree s identifi able assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the consolidated profi t and loss statement. The interest of minority shareholders in the acquiree is initially measured at the minority s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. FINANCIAL INSTRUMENTS - Financial assets and fi nancial liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets Notes, trade and other receivables Notes, trade and other receivables are measured at initial recognition at fair value. Impairment of fi nancial assets Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the fi nancial asset, the estimated future cash fl ows of the investment have been impacted. For fi nancial assets carried at amortised cost, the amount of the impairment is the difference between the asset s carrying amount and the present value of estimated future cash fl ows, discounted at the original effective interest rate. The carrying amount of the fi nancial asset is reduced by the impairment loss directly for all fi nancial assets with the exception of receivables where the carrying amount is reduced through the use of an allowance account. When a receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profi t or loss. Changes in the carrying amount of the allowance account are recognised in profi t or loss. Financial liabilities and equity instruments Classifi cation as debt or equity Financial liabilities and equity instruments issued by the Group are classifi ed according to the substance of the contractual arrangements entered into and the defi nitions of a fi nancial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments are recorded at the proceeds received, net of direct issue costs. Trade and other payables Trade and other payables are initially measured at fair value net of transaction costs. 43

46 NOTES TO FINANCIAL STATEMENTS 30 June SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) LEASES - Leases are classifi ed as fi nance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classifi ed as operating leases. The group as lessee Rentals payable under operating leases are charged to the profi t and loss statement on a straight-line basis over the term of the relevant lease unless another systematic basis is more representative of the time pattern in which economic benefi ts from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. INVENTORIES - Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment held for use in the production or supply of goods or services, or for administrative purposes, are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is charged so as to write off the cost of assets less their residual values, over their estimated useful lives, using the straight-line method, on the following bases: Leasehold building - 20 years Leasehold improvements - 1 to 3 years Test equipment - 5 years Computers - 3 to 5 years Motor vehicles - 5 years Fully depreciated assets still in use are retained in the fi nancial statements. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the profi t and loss statement. GOODWILL - Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group s interest in the net fair value of the identifi able assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group s cash-generating units expected to benefi t from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated fi rst to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profi t or loss on disposal. RESEARCH AND DEVELOPMENT EXPENDITURE - Expenditure on research activities is recognised as an expense in the period in which it is incurred. 44

47 NOTES TO FINANCIAL STATEMENTS 30 June SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Expenditure incurred on projects to develop new products is capitalised as internally generated intangibles and deferred only when the projects are clearly defi ned; the expenditure is separately identifi able and can be measured reliably; there is reasonable certainty that the projects are technically feasible; and the products have commercial value. Product development expenditure which does not meet these criteria is expensed when incurred. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset fi rst meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is charged to profi t or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets (see below). INTANGIBLE ASSET - Intangible asset refers to license fee paid for use of software applications and technology platforms and is amortised using the straight-line method over its estimated useful lives of 2 to 5 years. Where an indication of impairment exists, the carrying amount of the intangible assets is assessed and written down immediately to its recoverable amount. IMPAIRMENT OF ASSETS EXCLUDING GOODWILL - At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the profi t and loss statement. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the profi t and loss statement. ASSOCIATES An associate is an entity over which the Group has signifi cant infl uence and that is neither a subsidiary nor an interest in a joint venture. Signifi cant infl uence is the power to participate in the fi nancial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these fi nancial statements using the equity method of accounting. Under the equity method, investments in associate is carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group s share of the net assets of the associate, less any impairment in the value of investments. Losses of an associate in excess of the group s interest in that associate (which includes any long-term interests that, in substance, form part of the group s net investment in the associate) are not recognised, unless the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the Group s share of the net fair value of the identifi able assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group s share of the net fair value of the identifi able assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in the consolidated profi t and loss statement. 45

48 NOTES TO FINANCIAL STATEMENTS 30 June SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In the Company s fi nancial statements, investments in associates are carried at cost less any impairment in net recoverable value that has been recognised in the profi t and loss statement. PROVISION - Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash fl ows estimated to settle the present obligation, its carrying amount is the present value of those cash fl ows. When some or all of the economic benefi ts required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. SHARE-BASED PAYMENTS - The Group has a share option scheme which allows it to issue equity-settled share-based payments to selected employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of non-transferrability, exercise restrictions and behavioural considerations. REVENUE RECOGNITION - Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Sale of goods Revenue from the sale of goods is recognised when all the following conditions are satisfi ed: the Group has transferred to the buyer the signifi cant risks and rewards of ownership of the goods; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefi ts associated with the transaction will fl ow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Rendering of services Revenue from the rendering of services that are of short duration is recognised when the services are completed. Interest income Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. VALUE ADDED TAX - Value added tax ( VAT ) refund is recognised as income when the Group s right to receive VAT refund has been established. 46

49 NOTES TO FINANCIAL STATEMENTS 30 June SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) RETIREMENT BENEFIT COSTS - Payments to defi ned contribution retirement benefi t plans are charged as an expense as they fall due. Payments made to state-managed retirement benefi t schemes are dealt with as payments to defi ned contribution plans where the Group s obligations under the plan are equivalent to those arising in a defi ned contribution retirement plan. Pursuant to the relevant regulations of the People s Republic of China ( PRC ) government, the subsidiaries operating in the PRC have participated in a local municipal government retirement benefi ts scheme, whereby the PRC subsidiaries are required to contribute a certain percentage of the basic salaries of their employees to the scheme to fund their retirement benefi ts. The local municipal government undertakes to assume the retirement benefi ts obligations of all existing and future retired employees of the PRC subsidiaries. The only obligation of the Group with respect to the scheme is to pay the ongoing required contributions under the scheme mentioned above. INCOME TAX - Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profi t for the year. Taxable profi t differs from profi t as reported in the profi t and loss statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are not taxable or tax deductible. The Group s liability for current tax is calculated using tax rates (and tax laws) that have been enacted or substantively enacted in countries where the Company and subsidiaries operate by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the fi nancial statements and the corresponding tax bases used in the computation of taxable profi t, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profi ts will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profi t nor the accounting profi t. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 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 suffi cient taxable profi ts will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on the tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax are recognised as an expense or income in the profi t and loss statement. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION - The individual fi nancial statements of each Group entity are measured and presented in the currency of the primary economic environment in which the entity operates (its functional currency). The functional currency of the Company is United States dollars. The consolidated fi nancial statements of the Group and the balance sheet and statement of changes in equity of the Company are presented in Renminbi ( RMB ) as the Group s transactions are denominated primarily in RMB. In preparing the fi nancial statements of the individual entities, transactions in currencies other than the entity s functional currency are recorded at the rate of exchange prevailing on the date of the transaction. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. 47

50 NOTES TO FINANCIAL STATEMENTS 30 June SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Exchange differences arising on the settlement of monetary items, and on retranslation of monetary items are included in profi t or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profi t or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity. For the purpose of presenting consolidated fi nancial statements, the assets and liabilities of the Group s foreign operations (including comparatives) are expressed in RMB using exchange rates prevailing on the balance sheet date. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fl uctuated signifi cantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classifi ed as equity and transferred to the Group s translation reserve. Such translation differences are recognised in profi t or loss in the period in which the foreign operation is disposed of. On consolidation, exchange differences arising from the translation of the net investment in foreign entities (including monetary items that, in substance, form part of the net investment in foreign entities), and of borrowings and other currency instruments designated as hedges of such investments, are taken to the foreign currency translation reserve. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. CASH AND CASH EQUIVALENTS - Cash and cash equivalents comprise cash on hand and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignifi cant risk of changes in value. 4 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group s accounting policies, which are described in Note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgements in applying Group s accounting policies Management is of the view that there are no judgements made that have a signifi cant effect on the amounts recognised in the fi nancial statements apart from those involving estimations, which are dealt with below. Key sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial year, are discussed below. 48

51 NOTES TO FINANCIAL STATEMENTS 30 June CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) a) Allowance for inventories At balance sheet date, the Group reviews the carrying value of their inventories to ensure that they are stated at the lower of cost and net realisable value. In assessing net realisable value of the Group s inventories, an estimation of the recoverable amount of the inventories on hand is performed based on the most reliable evidence available at the time the estimates are made. This represents the value of inventories which are expected to realise as estimated by management. These estimates take into consideration the fl uctuations of price or cost, of any inventory on hand that may not be realised, directly relating to events occurring after the end of the fi nancial year to the extent that such events confi rm conditions existing at the end of the fi nancial year. Based on the above, management has estimated an amount of approximately RMB15,499,000 (2006 : RMB7,777,000) in respect of allowance for inventories to be suffi cient as at balance sheet date. The carrying amount of the inventories as at 30 June 2007 is approximately RMB194,918,000 (2006 : approximately RMB126,433,000). b) Impairment / Write off of other intangible assets Other intangible assets acquired relate to license fees paid for the use of the core underlying technology platforms for its design solutions. These license fees are amortised over their estimated useful lives of 2 to 5 years, however its carrying amount may be impaired or written off due to rapid technology changes and market shifts. During the fi nancial year, based on a review of the future prospects for its technology portfolio, certain intangible assets were written off, resulting in a loss of approximately RMB7,113,000 (2006 : RMB Nil). Development cost capitalised is included in other intangible assets as at 30 June 2007 of approximately RMB3,171,000 (2006 : RMB Nil). The project is progressing as scheduled and the commercial feasibility of the project remains intact. This will be monitored closely and future adjustments to the assumptions may be necessary as the project progresses. The carrying amount of other intangible assets as at 30 June 2007 is approximately RMB24,824,000 (2006 : approximately RMB26,015,000 ). c) Impairment of goodwill Determining whether goodwill has been impaired requires an estimate of the future fi nancial performance of the subsidiary on which the goodwill was created, and an assessment of the recent trends in fi nancial performance. An impairment loss of approximately RMB1,620,000 (2006 : RMB Nil) was recognised during the fi nancial year. The carrying amount of goodwill as at 30 June 2007 is approximately RMB5,100,000 (2006 : approximately RMB1,620,000). 5 FINANCIAL RISKS AND MANAGEMENT The Group s overall risk management programme seeks to minimise potential adverse effects of fi nancial performance of the Group. The Group s fi nancial risk management objectives and policies are as follows: Foreign exchange risk Foreign exchange risk refers to the risk that movement in foreign currency exchange rate against the RMB will affect the Group s fi nancial results and its cash fl ows. The Group transacts mainly in Singapore dollars, Hong Kong dollars and United States dollars. To the extent possible, exposure to foreign exchange risks are managed as far as possible by natural hedges of matching assets and liabilities. Interest rate risk The Group is exposed to minimium interest rate risk as it does not carry any interest-bearing liabilities. The Group s bank balances are placed in various forms of deposits with reputable fi nancial institutions. These deposits are generally with short-term maturities to provide the Group the fl exibility to meet working capital and other investment needs. 49

52 NOTES TO FINANCIAL STATEMENTS 30 June FINANCIAL RISKS AND MANAGEMENT (continued) Credit risk The Group s credit risk is primarily attributable to its trade receivables. To manage the credit risk, the Group adopts the policy of collecting advance payments from certain customers and limits the extension of credit to certain customers after stringent credit evaluation. In most instances, customers are required to pay upon delivery. The maximum exposure to credit risk in the event that the counterparties fail to perform their obligations as at the end of the fi nancial year in relation to each class of recognised fi nancial assets is the carrying amount of those assets stated in the balance sheet. Concentrations of credit risk exist when change in economic, industry or geographic factors similarly affect groups of counterparties where aggregate credit exposure is signifi cant in relation to the Group s total credit exposure. The Group has no signifi cant concentration of credit risk with any third parties. The Group places its bank balances with reputable fi nancial institutions. Liquidity risk Liquidity risk refers to the risk in which the Group has diffi culty in meeting its short-term obligations. The Group maintains suffi cient cash and cash equivalents, and internally generated cash fl ows to fi nance their activities. Fair value of fi nancial assets and fi nancial liabilities The carrying amounts of cash and cash equivalents, trade and other receivables, trade and other payables approximate their respective fair values due to the relatively short-term maturity of these fi nancial instruments. 6 OTHER RELATED PARTY TRANSACTIONS Related parties are entities with common direct or indirect shareholders and/or directors. Parties are considered to be related if one party has the ability to control the other party or exercise signifi cant infl uence over the other party in making fi nancial and operating decisions. Some of the Group s transactions and arrangements are with related parties and the effect of these transactions on the basis determined between the parties are refl ected in these fi nancial statements. The balances are unsecured, interest-free and repayable on demand. Signifi cant related party transactions and balances are as follows: GROUP RMB 000 RMB 000 Sale of goods 85,508 23,000 Rendering of services Amount due to a related party - included in advances and deposits from customers (Note 16) 8,582 1,772 Amount due from a related party - included in trade receivables (Note 8) 10,571-50

53 NOTES TO FINANCIAL STATEMENTS 30 June OTHER RELATED PARTY TRANSACTIONS (continued) Compensation of directors and key management personnel The remuneration of directors and other members of key management during the year was as follows: GROUP RMB 000 RMB 000 Short-term benefits 13,435 20,928 Post-employment benefits The remuneration of directors and key management is determined by the remuneration committee having regard to the performance of individuals and market trends. 7 CASH AND CASH EQUIVALENTS GROUP COMPANY RMB 000 RMB 000 RMB 000 RMB 000 Cash and bank balances 142, ,061 21,619 81,523 Money market funds 411, , , ,656 21,619 81,523 Cash and cash equivalents comprise cash and bank balances and money market funds with an original maturity of 3 months or less. The carrying amounts of these assets approximate their fair values. Bank balances and money market funds bear interest rate at a range of 0.72% to 8.27% (2006 : 0.72% to 5.09%) per annum. As at 30 June 2007, certain companies of the Group which are located in the PRC had cash and cash equivalents denominated in RMB amounting to approximately RMB525,187,000 (2006 : RMB296,483,000) which are deposited with fi nancial institutions in the PRC. Cash and bank balances which are denominated in RMB are not freely convertible into foreign currencies. Signifi cant cash and cash equivalents of the Group and Company that are not denominated in the functional currencies of the respective entities are as follows: GROUP COMPANY RMB 000 RMB 000 RMB 000 RMB 000 Singapore dollars 19,635 12,531 19,628 12,531 United States dollars 4,938 67, Hong Kong dollars ,458-15,458 51

54 NOTES TO FINANCIAL STATEMENTS 30 June TRADE RECEIVABLES GROUP RMB 000 RMB 000 Trade receivables 94,712 22,469 Advances to suppliers 27,989 18, ,701 41,115 Signifi cant trade receivables of the Group that are not denominated in the functional currencies of the respective entities are as follows: GROUP RMB 000 RMB 000 United States dollars 71,803 20,830 9 OTHER RECEIVABLES GROUP COMPANY RMB 000 RMB 000 RMB 000 RMB 000 Outside parties 14,696 6, Prepayments and others 1,523 1, Subsidiaries (Note 14) ,330 83,408 16,219 7, ,330 83,568 Amounts due from subsidiaries are mainly dividend receivable from subsidiary and they are unsecured, interest-free and repayable on demand. 10 INVENTORIES GROUP RMB 000 RMB 000 Raw materials 189, ,918 Work in progress Finished goods 5,007 13, , ,433 The cost of inventories recognised as an expense includes approximately RMB7,722,000 (2006 : RMB5,474,000) in respect of allowance for inventories obsolescence. The cost of inventories recognised as an expense also includes approximately RMB17,220,000 (2006 : RMB8,368,000) in respect of writedowns of inventory to net realisable value. 52

55 NOTES TO FINANCIAL STATEMENTS 30 June PROPERTY, PLANT AND EQUIPMENT GROUP Leasehold Leasehold Test Motor building improvements equipment Computers vehicles Total RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 Cost: At 1 July ,278 4,213 3,208 2,543 14,242 Additions from acquisition of subsidiary Additions 9,257 3,227 1,760 4,904 1,170 20,318 Disposals (25) (129) (154) At 30 June ,257 7,505 5,973 8,161 3,584 34,480 Additions - 3,487 10,134 6,951 2,246 22,818 Disposals - - (50) (82) (1,886) (2,018) At 30 June ,257 10,992 16,057 15,030 3,944 55,280 Accumulated depreciation: At 1 July ,804 Depreciation 106 2,288 1,205 1, ,201 Eliminated on disposals (9) (49) (58) At 30 June ,973 1,727 2, ,947 Depreciation 422 4,301 1,831 3, ,670 Eliminated on disposals (79) (983) (1,062) At 30 June ,274 3,558 5, ,555 Carrying amount: At 30 June ,729 3,718 12,499 9,605 3,174 37,725 At 30 June ,151 4,532 4,246 6,015 2,589 26, GOODWILL GROUP RMB 000 Cost: At 1 July Arising on acquisition of a subsidiary 1,620 At 30 June ,620 Arising on acquisition of a subsidiary 5,100 At 30 June ,720 Impairment: Impairment loss recognised during the year ended 30 June 2007 and balance at 30 June ,620 Carrying amount: At 30 June ,100 At 30 June ,620 Goodwill acquired in a business combination is allocated, at acquisition to the cash generating units ( CGUs ) that are expected to benefi t from that business combination. The goodwill arising during the years ended 30 June 2007 and 30 June 2006 relates to Shanghai QL Telecommunications Co. Limited and Shenzhen Neopoint Communication Co., Ltd respectively. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. Based on management s assessment, due to the continued losses incurred by Shenzhen Neopoint Communication Co., Ltd, an impairment loss on goodwill of approximately RMB1,620,000 (2006 : RMB Nil) was recognised for the fi nancial year ended 30 June 2007 and has been included in administrative expenses of the profi t and loss statement. 53

56 NOTES TO FINANCIAL STATEMENTS 30 June OTHER INTANGIBLE ASSETS Software Development Licence cost Total GROUP RMB 000 RMB 000 RMB 000 Cost: At 1 July ,456-11,456 Additions 19,875-19,875 Exchange difference (56) - (56) At 30 June ,275-31,275 Additions 12,129 3,171 15,300 Written off (13,354) - (13,354) Exchange difference (836) - (836) At 30 June ,214 3,171 32,385 Amortisation: At 1 July ,205-1,205 Amortisation for the year 4,065-4,065 Exchange difference (10) - (10) At 30 June ,260-5,260 Amortisation for the year 8,648-8,648 Written off (6,241) - (6,241) Exchange difference (106) - (106) At 30 June ,561-7,561 Carrying amount: At 30 June ,653 3,171 24,824 At 30 June ,015-26,015 54

57 NOTES TO FINANCIAL STATEMENTS 30 June OTHER INTANGIBLE ASSETS (continued) COMPANY Software Licence RMB 000 Cost: At 1 July ,487 Additions 3,338 Exchange difference (50) At 30 June ,775 Additions 274 Written off (3,790) Exchange difference (138) At 30 June ,121 Amortisation: At 1 July Amortisation for the year 767 Exchange difference (9) At 30 June Amortisation for the year 961 Written off (1,290) Exchange difference (32) At 30 June Carrying amount: At 30 June At 30 June ,948 During the year, the Group and Company carried out a review of the recoverable amount of its intangible assets, having regard to rapid technology changes and market shifts. This review led to the write off of certain intangible assets, resulting in a loss of RMB7,113,000 (2006 : RMB Nil) and RMB2,500,000 (2006 : RMB Nil) recognised by the Group and the Company respectively. Such losses have been recognised in the profi t and loss statement, and included in the line item administrative expenses. 14 SUBSIDIARIES COMPANY RMB 000 RMB 000 Unquoted equity shares, at cost Amounts due from subsidiaries 221, , , ,290 The amounts due from subsidiaries effectively represent the Group s interest in these companies as there is no contractual obligation for the subsidiaries to repay the amount except upon liquidation of these subsidiaries. Details of the Company s signifi cant subsidiaries at 30 June 2007 are as follows: Country of Proportion of incorporation (or registration) / ownership interest or Name of subsidiary Country of operation voting power held Principal activities % % Longcheer PRC (Hong Kong) Mobile handset design Telecommunication solutions (H.K.) Limited (1) Longcheer Technology PRC Mobile handset design (Shanghai) Co., Ltd. (1) solutions Sinolong Technology PRC Mobile handset design (Shanghai) Co., Ltd. (1) solutions (1) Audited by overseas practices of Deloitte Touche Tohmatsu for consolidation purpose. 55

58 NOTES TO FINANCIAL STATEMENTS 30 June ASSOCIATES GROUP RMB 000 RMB 000 Cost of investment in associates 15,233 - Share of post-acquisition results (338) - 14,895 - Details of the Group s associates at 30 June 2007 is as follows: Country of Proportion of incorporation (or registration) / ownership interest or Name of associate Country of operation voting power held Principal activities % % Orisil Technology Cayman Islands / 42* - Investment holding Inc. (1) PRC Subsidiary held by Orisil Technology Inc. Orisil Technology PRC 42* - Design of bluetooth (Shanghai) Co., chipsets Limited (1) (1) Not audited as associate is not material. * As at 30 June 2007, the Group holds 1,680,000 convertible preference shares in Orisil Technology Inc. Each preference share can be converted to one ordinary share at the sole discretion of the holder. Each preference share has the same voting rights as the ordinary share, as well as equal rights to dividend. Summarised fi nancial information in respect of the Group s associate is set out below: RMB 000 RMB 000 Total assets 13,281 - Total liabilities Net assets 13,027 - Revenue - - Loss for the period (804) - Group s share of associate s results for the period (338) - 56

59 NOTES TO FINANCIAL STATEMENTS 30 June TRADE PAYABLES GROUP RMB 000 RMB 000 Outside parties 263, ,424 Advances and deposits from customers 105, , , ,943 Signifi cant trade payables of the Group that are not denominated in the functional currencies of the respective entities are as follows: GROUP RMB 000 RMB 000 United States dollars 283, , OTHER PAYABLES GROUP COMPANY RMB 000 RMB 000 RMB 000 RMB 000 Accruals 43,068 45,442 7,183 3,460 Subsidiaries (Note 14) ,162 98,404 Payable for intangible assets 2,711 7, Deferred revenue 2, Minority shareholder of a subsidiary 1,000 1, ,811 54, , ,864 The amounts due to subsidiaries are unsecured, interest-free and repayable on demand. A minority shareholder of a subsidiary had provided a loan of RMB1,000,000 to a subsidiary of the Group. This amount was unsecured, interest-free and repayable on demand. Signifi cant other payables of the Group and Company that are not denominated in the functional currencies of the respective entities are as follows: GROUP COMPANY RMB 000 RMB 000 RMB 000 RMB 000 Singapore dollars 3,259 3,143 3,259 3,143 Hong Kong dollars ,018 15,436 57

60 NOTES TO FINANCIAL STATEMENTS 30 June SHARE-BASED PAYMENTS The Longcheer Share Option Scheme ( the Scheme ) was adopted on 25 February The Share Option Scheme is administered by the Remuneration Committee comprising Ow Chin Hock, Yeo Mui Sung and Tao Qiang. Under the Scheme, the aggregate number of shares that may be issued shall not exceed 5% of the issued share capital of the Company from time to time. Options entitle the option holder to subscribe for a specifi c number of new ordinary shares in the Company comprised in the option at a subscription price per share determined by reference to the daily offi cial list or other publication published by the Singapore Exchange Securities Trading Limited for a period of fi ve consecutive market days immediately preceding the relevant date of grant. The Remuneration Committee may fi x the subscription price at a discount up to 20% of the market price but not lower than the par value of the shares subject to the approval by the shareholders in a separate resolution. Options granted with the subscription price set at the market price shall only be exercised after the fi rst anniversary but before the tenth anniversary for executive directors and employees (fi fth anniversary for non-executive directors) from the date of grant. Options granted with the subscription price set at a discount to the market price shall only be exercised after the second anniversary but before the tenth anniversary for executive directors and employees (fi fth anniversary for non-executive directors) from the date of grant. No options with subscription price set at a discount to the market price will be granted to the independent directors. The shares under option may be exercised in whole or in part on the payment of the relevant subscription price. Options granted will lapse when the option holder ceases to be a full-time employee or non-executive director of the Company or any subsidiary of the Group subject to certain exceptions at the discretion of the Remuneration Committee. Since inception of the Scheme, no options were granted and no ordinary shares were issued by virtue of the exercise of options. 19 SHARE CAPITAL GROUP AND COMPANY Number of ordinary shares of US$0.02 each Authorised 2,500,000,000 2,500,000,000 US$50,000,000 US$50,000,000 Issued and paid up at end of year 396,664, ,664,100 RMB65,608,242 RMB65,608,242 The Company has one class of ordinary share which carry no right to fi xed income. 20 CAPITAL AND LEGAL RESERVES Capital reserves mainly arose from a restructuring exercise carried out in the year 2004 and representing the excess of fair value of the net assets acquired over cost of investment and capital structure changes of a subsidiary during the year ended 30 June Legal reserves relate to reserve fund appropriations. In accordance with relevant PRC regulations, certain subsidiaries of the Group, being wholly-owned foreign enterprises ( WOFE ) established in PRC, are required to appropriate not less than 10% of their profi ts after tax to a reserve fund, until the balance in the reserve fund reaches 50% of their registered capital. Subject to certain restrictions as set out in the relevant PRC regulations, these legal reserves may be used to offset accumulated losses, if any or fund further capital increases. 58

61 NOTES TO FINANCIAL STATEMENTS 30 June REVENUE GROUP RMB 000 RMB 000 Sale of goods 2,342,252 1,868,528 Rendering of services 92, ,467 2,434,628 1,983, OTHER OPERATING INCOME GROUP RMB 000 RMB 000 Interest income 14,895 6,888 Refund of value-added tax 1, Others 2,575-18,709 7, INCOME TAX EXPENSE GROUP RMB 000 RMB 000 Current year 6,065 5,971 Overprovision in prior years (346) (278) 5,719 5,693 Foreign withholding tax 13,650 7,123 Income tax expense for the year 19,369 12,816 Longcheer Technology (Shanghai) Co., Ltd. and Sinolong Technology (Shanghai) Co., Ltd., both wholly-owned subsidiaries of the Group, are regarded by the PRC tax authority as Foreign Investment Enterprises. Pursuant to the relevant tax laws and regulations in the PRC, these companies are exempt from income tax for two years starting from their fi rst-profi t making year followed by a 50% reduction for the next three years. The total charge for the year can be reconciled to the accounting profi t as follows: GROUP RMB 000 RMB 000 Profit before tax 206, ,098 Income tax at 33% (1) 68,013 78,242 Tax effect of non-allowable items 2,743 - Tax-exempt income (53,946) (67,503) Overprovision prior years (346) (278) Foreign withholding tax 13,650 7,123 Effects of different tax rates of overseas operations (5,611) (4,768) Others (5,134) - Tax expense for the year 19,369 12,816 (1) PRC statutory tax rate has been used as the operations of the Group are mainly carried out in the PRC. 59

62 NOTES TO FINANCIAL STATEMENTS 30 June INCOME TAX EXPENSE (continued) Withholding taxes provided for in Hong Kong are eligible to claim foreign tax credits in the PRC when they are paid under the double tax agreement between PRC and Hong Kong. On this basis, foreign tax credits are taken into consideration for income derived out of the PRC to determine the tax payable in the PRC. As one of its subsidiaries is a Foreign Investment Enterprise, it is entitled to the tax incentives mentioned above. Therefore, the taxable profi ts generated in the calendar year 2006 will be exempted from Foreign Enterprise Income Tax, while those generated in the calendar year 2007 will be subject to Foreign Enterprise Income Tax at a 50% reduction. Accordingly, the royalty fee received from Hong Kong is considered a domestic-sourced income. In the event that the PRC s tax authority disputes the claim of foreign tax credits on such domestically sourced income, there is a potential additional tax provision of approximately RMB 7,073,000 (2006 : RMB Nil). 24 PROFIT FOR THE YEAR Profi t for the year has been arrived at after charging (crediting): GROUP RMB 000 RMB 000 Depreciation of property, plant and equipment 10,670 6,201 Impairment of goodwill 1,620 - Write off of other intangible assets 7,113 - Amortisation of intangible assets (included in administrative expense) 8,648 4,065 Employee benefits expense (including directiors remuneration and defined contribution plans) 179, ,405 Defined contribution plans 17,691 7,890 Directors remuneration 6,076 12,337 Directors fees Audit fees 1,617 1,750 Non-audit fees paid to auditors Net foreign exchange gains (1,500) (3,638) Research and development cost (including certain staff costs and depreciation expenses) 102,919 61,422 Loss on disposal of property, plant and equipment Reversal of allowance for doubtful debts - (74) Allowance for inventory 7,722 5,474 Write down of inventory 17,220 8,368 Cost of inventories recorded as expense 1,988,260 1,619, EARNINGS PER SHARE The calculation of basic earnings per ordinary share is based on the net profi t for the year attributable to equity holders of the Company of RMB187,787,000 (2006 : RMB224,526,000) divided by the weighted average number of ordinary shares of 396,664,100 (2006 : 396,664,100) in issue during the fi nancial year. No fully diluted earnings per ordinary share is presented as the Company does not have any dilutive potential ordinary shares outstanding as at the balance sheet date. 60

63 NOTES TO FINANCIAL STATEMENTS 30 June DIVIDEND During the current fi nancial year, tax exempt interim dividend of 1.60 Singapore cents (equivalent RMB8.10 cents) per share (total dividend RMB31,964,000) [2006: tax exempt interim dividend of 1.04 Singapore cents (equivalent RMB5.20 cents) per share and special dividend of 3.12 Singapore cents (equivalent RMB15.60 cents) per share (total dividend RMB80,000,000)] was paid to shareholders in respect of the current fi nancial year ended 30 June During the current fi nancial year, tax exempt fi nal dividend of 1.56 Singapore cents (equivalent RMB7.80 cents) per share (total dividend RMB31,132,000) in respect of year ended 30 June 2006 [2006 : tax exempt fi nal dividend of 1.23 Singapore cents (equivalent RMB6.10 cents) per share (total dividend RMB23,586,000) in respect of year ended 30 June 2005] was paid to the shareholders. In respect of the current fi nancial year, the directors propose that a tax exempt fi nal dividend of 1.60 Singapore cents (equivalent RMB8.00 cents) per share will be paid to shareholders. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these fi nancial statements. 27 ACQUISITION OF SUBSIDIARIES On 19 December 2006, the Group acquired 57% of the paid up capital of Shanghai QL Telecommunications Co., Limited for a cash consideration of RMB33,600,000. The transaction has been accounted for by the purchase method of accounting. On 31 October 2005, the Group acquired 51% of the paid up capital of Shenzhen Neopoint Communication Co., Ltd for a cash consideration of approximately RMB3,000,000. The transaction has been accounted for by the purchase method of accounting. The attributable net assets of the subsidiaries acquired are as follows: GROUP RMB 000 RMB 000 Current assets 50,000 5,908 Non-current assets - 75 Current liabilities - (3,277) Less: Minority interest (21,500) (1,326) Net assets acquired 28,500 1,380 Goodwill 5,100 1,620 Purchase consideration 33,600 3,000 Total consideration, satisfied by cash 33,600 3,000 Net cash inflow arising on acquisition: Cash consideration paid (33,600) (3,000) Cash and cash equivalents acquired 50,000 3,148 16, The carrying amounts of net assets of Shanghai QL Telecommunications Co., Limited and Shenzhen Neopoint Communication Co., Ltd upon acquisition approximated their fair values. Contributions from Shanghai QL Telecommunications Co., Limited during the year ended 30 June 2007 and Shenzhen Neopoint Communication Co., Ltd during the year ended 30 June 2006 are not signifi cant to the Group. 61

64 NOTES TO FINANCIAL STATEMENTS 30 June COMMITMENTS GROUP RMB 000 RMB 000 Amounts committed but not provided for in the financial statements 4, OPERATING LEASE COMMITMENTS The group as lessee GROUP RMB 000 RMB 000 Minimum lease payments under operating leases recognised as an expense in the year 9,013 6,869 At the balance sheet date, the Group has outstanding commitments under non-cancellable operating leases, which fall due as follows: GROUP RMB 000 RMB 000 Within one year 9,038 10,670 In the second to fifth year inclusive 9,177 16,202 18,215 26,872 Operating lease payments represent rentals payable by the group for certain of its offi ce properties. Leases are negotiated for an average term of 3 years and rentals are fi xed for an average of 3 years. 30 SEGMENT INFORMATION The Group is engaged in only one business segment which relates to mobile handset design and sales of mobile handset printed circuit board assembly and mobile handsets, including its related components. The Group s revenue and profi t before income tax are substantially derived from sales in Greater China. Furthermore, most of the assets and capital expenditure of the Group are employed in Greater China. Hence, the geographical segment information is as presented in the fi nancial statements. 62

65 STATEMENT OF DIRECTORS In the opinion of the directors, the consolidated fi nancial statements of the Group and the balance sheet and statement of changes in equity of the Company as set out on pages 37 to 62 are drawn up so as to give a true and fair view of the state of affairs of the Group and of the Company as at 30 June 2007, and of the results, changes in equity and cash fl ows of the Group and changes in equity of the Company for the fi nancial year then ended 30 June 2007 and at the date of this statement, there are reasonable grounds to believe that the Company will be able to pay its debts when they fall due. ON BEHALF OF THE DIRECTORS... Tao Qiang... Du Junhong 26 September

66 Substantial Shareholders as at 12 September 2007 (As recorded in the Register of Substantial Shareholders) Distribution of Shareholdings No. of Size of Shareholdings Shareholders % No. of Shares % , ,000-10,000 1, ,743, ,001-1,000,000 1, ,726, ,000,001 and above ,193, TOTAL : 3, ,664, Twenty Largest Shareholders No. Name No. of Shares % 1. DBS Nominees Pte Ltd 75,926, Eightcheer Investment Limited 50,308, Longdu Investment Limited 41,818, DBS Vickers Securities (S) Pte Ltd 35,985, Longpartner Investment Limited 27,101, Tomorrow Electronic Co., Ltd 23,932, Citibank Nominees Singapore Pte Ltd 23,713, Raffl es Nominees Pte Ltd 17,831, HSBC (Singapore) Nominees Pte Ltd 7,994, OCBC Securities Private Ltd 7,557, UOB Kay Hian Pte Ltd 3,534, Phillip Securities Pte Ltd 2,330, Citibank Consumer Nominees Pte Ltd 2,196, Morgan Stanley Asia (Singapore) Securities Pte Ltd 1,413, United Overseas Bank Nominees Pte Ltd 1,413, Kim Eng Securities Pte. Ltd. 1,139, CIMB-GK Securities Pte. Ltd. 936, Hong Leong Finance Nominees Pte Ltd 898, Moo Kwee Chong 800, Lee Lok Fui 755, TOTAL : 327,582,

67 Substantial Shareholders as at 12 September 2007 (As recorded in the Register of Substantial Shareholders) Direct Interest % Deemed Interest % Longdu Investment Limited 59,818, Eightcheer Investment Limited 50,308, Tomorrow Electronic Co., Ltd 43,932, Longpartner Investment Limited 27,101, Dr Du Junhong (1) ,920, Tang Jiping (2) ,410, Tao Qiang (3) ,033, JF Asset Management (Singapore) Limited ,600, IDG-Accel China Growth Fund L.P. 20,736, IDG-Accel China Growth Fund Associates L.P. (4) ,047, IDG-Accel China Growth Fund GP Associates Ltd. (5) ,047, Patrick McGovern (6) ,047, Quan Zhou (7) ,000, Notes: (1) Dr Du Junhong is deemed to be interested in the Shares held by Longdu Investment Limited as he is the sole shareholder and director. He is also deemed to be interested in the Shares held by Longpartner Investment Limited ( Longpartner Investment ) as he holds approximately 27.78% of the shares in Longpartner Investment. (2) Mr Tang Jiping is deemed to be interested in the Shares held by Eightcheer Investment Limited ( Eightcheer Investment ) as he holds 25% of the shares in Eightcheer Investment and is also a director of Eightcheer Investment. He is also deemed to be interested in the Shares held by Longpartner Investment as he holds 9.26% of the shares in Longpartner Investment. (3) Mr Tao Qiang is deemed to be interested in the Shares held by Tomorrow Electronic Co., Ltd as he is the sole shareholder and director. He is also deemed to be interested in the Shares held by Longpartner Investment Limited as he holds approximately 62.96% of the shares in Longpartner Investment. (4) IDG-Accel China Growth Fund Associates L.P. is deemed to be interested in Longcheer by virtue of its power to directly or indirectly control or infl uence IDF-Accel China Growth Fund L.P. in its dealing and exercise of the Longcheer shares and the voting rights thereof. (5) IDG-Accel China Growth Fund GP Associates Ltd. is deemed to be interested in Longcheer by virtue of its power to directly or indirectly control or infl uence IDF-Accel China Growth Fund L.P. in its dealing and exercise of the Longcheer shares and the voting rights thereof. (6) Patrick McGovern is deemed to be interested in Longcheer by virtue of its power to directly or indirectly control or infl uence IDF-Accel China Growth Fund L.P. in its dealing and exercise of the Longcheer shares and the voting rights thereof. (7) Quan Zhou is deemed to be interested in Longcheer by virtue of its power to directly or indirectly control or infl uence IDF-Accel China Growth Fund L.P. in its dealing and exercise of the Longcheer shares and the voting rights thereof. 65

68 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the Annual General Meeting of LONGCHEER HOLDINGS LIMITED (the Company ) will be held at The Oriental Singapore, Harbour View 5, Level 5, 5 Raffl es Avenue, Marina Square, Singapore , on Monday, 22 October 2007 at 9.30 am for the following purposes: AS ORDINARY BUSINESS 1. To receive and adopt the Directors Report and the Audited Accounts of the Company for the year ended 30 June 2007 together with the Auditors Report thereon. (Resolution 1) 2. To declare a fi nal dividend of S$ per ordinary share, tax not applicable, for the year ended 30 June 2007 (2006: S$ per ordinary share). (Resolution 2) 3a. To note the retirement of Ms Yeo Mui Sung and Mr Li Jinliang. (i) (ii) Ms Yeo Mui Sung retires pursuant to Bye-law 86(1) of the Company s Bye-laws and has given notice of her intention not to seek reelection at this Annual General Meeting ( AGM ). Ms Yeo has recently assumed the position of Chief Financial Offi cer at MediaCorp Pte Ltd and has indicated her desire to focus her attention on her new appointment. Mr Li Jinliang has notifi ed the Company of his intention to retire at this AGM. Mr Li has attained the age of 78 years and would like to devote more time to pursue his personal interests. 3b. To note the appointment of Mr See Yen Tarn and Mr David Hwang Soo Chin as Directors, such appointments to take effect upon the retirement of Ms Yeo Mui Sung and Mr Li Jinliang at the conclusion of this AGM. On the recommendation of the Nominating Committee, Mr See Yen Tarn and Mr David Hwang Soo Chin were appointed Directors of the Company to fi ll the vacancies arising from the retirement of Ms Yeo Mui Sung and Mr Li Jinliang. Mr See Yen Tarn will be a non-executive and non-independent Director. Mr David Hwang Soo Chin will be a non-executive and independent Director. 4. To approve the payment of Directors fees of S$188,000 for the year ended 30 June 2007 (2006: S$180,000). (Resolution 3) 5. To re-appoint Deloitte & Touche, Certifi ed Public Accountants, as the Company s Auditors and to authorise the Directors to fi x their remuneration. (Resolution 4) 6. To transact any other ordinary business which may properly be transacted at an Annual General Meeting. AS SPECIAL BUSINESS To consider and if thought fi t, to pass the following resolutions as Ordinary Resolutions, with or without any modifi cations: 7. Authority to allot and issue shares up to 50 per centum (50%) of issued shares (a) That, authority be and is hereby given to the Directors of the Company at any time to: (i) (ii) (iii) issue shares in the capital of the Company (the shares whether by way of rights, bonus or otherwise); and/or make or grant offers, agreements or options (collectively, the Instruments ) that might or would require shares to be issued, including but not limited to the creation and issue of (as well as adjustments to) warrants, debentures or other instruments convertible into shares; and issue additional Instruments arising from adjustments made to the number of Instruments previously issued in the event of rights, bonus or capitalisation issues; and 66

69 Notice of Annual General Meeting (b) (notwithstanding the authority conferred by this Resolution may have ceased to be in force) issue shares in pursuance of any Instrument made or granted by the Directors while the authority under this Resolution was in force, provided always that: (i) (ii) the aggregate number of shares to be issued pursuant to this Resolution (including shares to be issued in pursuance of Instruments made or granted pursuant to this Resolution) does not exceed 50% of the Company s issued share capital (as calculated in accordance with sub-paragraph (ii) below), of which the aggregate number of shares to be issued other than on a pro rata basis to shareholders of the Company (including shares to be issued in pursuance of Instruments made or granted pursuant to this Resolution) does not exceed 20% of the issued share capital of the Company (as calculated in accordance with sub-paragraph (ii) below), subject to such manner of calculation as may be prescribed by the Singapore Exchange Securities Trading Limited ( SGX- ST ) for the purpose of determining the aggregate number of shares that may be issued under sub-paragraph (i) above, the percentage of issued share capital shall be based on the issued share capital of the Company as at the time this Resolution is passed, after adjusting for; (a) (b) (c) new shares arising from the conversion or exercise of any convertible securities; or new shares arising from the exercise of share options or vesting of share awards outstanding or subsisting at the time this Resolution is passed, and any subsequent consolidation or subdivision of shares, and (iii) (iv) in exercising the authority conferred by this Resolution, the Company shall comply with the provisions of the Listing Manual of the SGX-ST for the time being in force (unless such compliance has been waived by the SGX-ST) and the Bye-Laws for the time being of the Company; and (unless revoked or varied by the Company in General Meeting) the authority conferred by this Resolution shall continue in force until the conclusion of the next Annual General Meeting of the Company or the date by which the next Annual General Meeting of the Company is required by law to be held, whichever is earlier. [See Explanatory Note (i)] (Resolution 5) 8. Authority to allot and issue shares under the Longcheer Share Option Scheme That pursuant to The Companies Act 1981 of Bermuda, as amended or modifi ed from time to time, the Directors be authorised and empowered to allot and issue shares in the capital of the Company to all the holders of options granted by the Company, whether granted during the subsistence of this authority or otherwise, under the Longcheer Share Option Scheme ( the Scheme ) upon the exercise of such options and in accordance with the terms and conditions of the Scheme, provided always that the aggregate number of additional ordinary shares to be allotted and issued pursuant to the Scheme shall not exceed fi ve per centum (5%) of the issued shares in the capital of the Company from time to time [See Explanatory Note (ii)] (Resolution 6) By Order of the Board Yvonne Choo Hazel Chia Luang Chew Company Secretaries Singapore, 6 October

70 Notice of Annual General Meeting Explanatory Notes: (i) The Ordinary Resolution 7 proposed in item 7 above, if passed, will empower the Directors from the date of this Meeting until the date of the next Annual General Meeting, or the date by which the next Annual General Meeting is required by law to be held or when varied or revoked by the Company in general meeting, whichever is the earlier, to allot and issue shares and convertible securities in the Company. The number of shares and convertible securities that the Directors may allot and issue under this resolution would not exceed fi fty per centum (50%) of the issued shares in the capital of the Company at the time of the passing of this resolution. For issue of shares and convertible securities other than on a pro rata basis to all shareholders, the aggregate number of shares and convertible securities to be issued shall not exceed twenty per centum (20%) of the issued shares in the capital of the Company. For the purpose of this resolution, the percentage of issued capital is based on the Company s issued capital at the time this proposed Ordinary Resolution is passed after adjusting for new shares arising from the conversion or exercise of convertible securities, the exercise of share options or the vesting of share awards outstanding or subsisting at the time when this proposed Ordinary Resolution is passed and any subsequent consolidation or subdivision of shares. (ii) The Ordinary Resolution 8 proposed in item 8 above, if passed, will empower the Directors of the Company, to allot and issue shares in the Company of up to a number not exceeding in total fi ve per centum (5%) of the issued shares in the capital of the Company from time to time pursuant to the exercise of the options under the Scheme. Notes: 1. A Shareholder being a Depositor whose name appears in the Depository Register (as defi ned in Section 130A of the Companies Act, Cap. 50 of Singapore) is entitled to appoint a proxy to attend and vote in his/her stead. A proxy need not be a Member of the Company. 2. If a Depositor wishes to appoint a proxy/proxies to attend the Meeting, then he/she must complete and deposit the Depositor Proxy Form at the offi ce of the Singapore Share Transfer Agent, Lim Associates (Pte) Ltd at 3 Church Street #08-01, Samsung Hub, Singapore , at least forty-eight (48) hours before the time of the Meeting. 3. If the Depositor is a corporation, the instrument appointing a proxy must be executed under seal or the hand of its duly authorised offi cer or attorney. 68

71 No.401 Caobao Road, Shanghai People s Republic of China Tel: Fax: Website : service@longcheertel.com