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

Transcription

1 Haier Electronics Group Co., Ltd. 海爾電器集團有限公司 * (Incorporated in Bermuda with limited liability) ( 於百慕達註冊成立之有限公司 ) 股份代號 : 1169 For identification purpose only * 僅供識別

2 annual report 2005 Haier Electronics Group Co., Ltd. 1 Table of Contents Mission and Corporate Development 2 Corporate Information 3 Chairman s Letter 5 Directors and Senior Management 9 Financial Review 12 Corporate Governance Report 16 Report of the Directors 21 Report of the Auditors 29 Consolidated Income Statement 30 Consolidated Balance Sheet 31 Consolidated Statement of Changes in Equity 32 Consolidated Cash Flow Statement 33 Balance Sheet 35 Notes to Financial Statements 36 Five Year Financial Summary 83 Notice of Annual General Meeting 84

3 2 Haier Electronics Group Co., Ltd. annual report 2005 Mission and Corporate Development MISSION Haier Electronics aims to become the listed flagship of the white goods business of the Haier Group and to be a global top 3 white goods manufacturer. CORPORATE STRUCTURE After the injection of the top loading washing machine business and the remaining 35.5% interest in Pegasus Telecom (Qingdao) Co., Ltd. from the Haier Group in January 2005 ( Asset Injection ) as well as the establishment of a new plant in Jiaonan, Qingdao, our simplified corporate structure is as follows: Haier Electronics Group Co., Ltd. Washing Machine Business Mobile Handset Business 80% 93.44% 60% 100% 100% Hefei Haier Washing Machine Co., Ltd. 20% Qingdao Haier Washing Machine Co., Ltd. Foshan Shunde Haier Electric Co., Ltd. Pegasus Electronic (Qingdao) Co., Ltd. Pegasus Telecom (Qingdao) Co., Ltd. 80% 20% Qingdao Jiaonan Haier Washing Machine Co., Ltd. The completion of the Asset Injection during the year has built up a solid foundation for us to proceed to the next stage of our transformation through both internal growth as well as potential further asset injection from the Haier Group. We are confident that we will succeed in achieving our mission to become a global top 3 white goods manufacturer.

4 annual report 2005 Haier Electronics Group Co., Ltd. 3 Corporate Information COMPANY NAME Haier Electronics Group Co., Ltd. AUDITORS Ernst & Young BOARD OF DIRECTORS Executive Directors YANG Mian Mian (Chairman) WU Ke Song (Deputy Chairman) CHAI Yong Sen LIANG Hai Shan CAO Chun Hua CUI Shao Hua SONG Chun Guang Independent Non-executive Directors LAM Kin Kau, Mark FUNG Hoi Wing, Henry LAU Ho Wai, Lucas WU Yinong PRINCIPAL BOARD COMMITTEES Audit Committee LAM Kin Kau, Mark (Chairman) FUNG Hoi Wing, Henry LAU Ho Wai, Lucas WU Yinong Remuneration Committee FUNG Hoi Wing, Henry (Chairman) LAM Kin Kau, Mark LAU Ho Wai, Lucas WU Yinong WU Ke Song CUI Shao Hua COMPANY SECRETARY Yip Wai Ming SOLICITORS Mallesons Stephen Jaques PRINCIPAL BANKER IN HONG KONG Nanyang Commercial Bank, Ltd. FINANCIAL YEAR END December 31 REGISTERED OFFICE Canon s Court 22 Victoria Street Hamilton HM12 Bermuda HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS Unit /F., The Center 99 Queen s Road Central Hong Kong BRANCH SHARE REGISTRAR AND TRANSFER OFFICE IN HONG KONG Tengis Limited 26/F., Tesbury Centure 28 Queen s Road East Hong Kong TELEPHONE NUMBER FAX NUMBER STOCK CODE WEBSITE PRINCIPAL BANKER IN THE PRC China Construction Bank Corporation

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6 annual report 2005 Haier Electronics Group Co., Ltd. 5 Chairman s Letter OVERVIEW With an overhaul in the corporate structure and direction of the Group, the year 2005 will be remembered as a year of historical milestone of the Group. On 28 January 2005, the Group completed the acquisition of the top loading washing machine business and remaining 35.5% equity interest in Pegasus Telecom (Qingdao) Co., Ltd. (the Asset Injection ) from Haier Group Corporation and Qingdao Haier Investment and Development Co., Ltd. (together with their respective subsidiaries, excluding the Group, the Haier Group ). As the Asset Injection was mainly satisfied by the issue of new shares, the Haier Group has thereby become the controlling shareholder of the Group and the name of the Company was also changed from Haier-CCT Holdings Limited to Haier Electronics Group Co., Ltd. with effect from 31 January This is expected to be the first in a series of steps being undertaken by the Haier Group to position the Company as the listed flagship of the Haier Group s white goods business. Our long term goal is to become a global top 3 white goods manufacturer and we believe that the Asset Injection has built up a solid foundation for the Group to achieve such mission.

7 6 Haier Electronics Group Co., Ltd. annual report 2005 Chairman s Letter (cont d) GROUP RESULTS Turnover in 2005 amounted to HK$4,940 million, representing a decrease of approximately 16% from HK$5,894 million in The washing machine business continued to exhibit strong growth in turnover of approximately 20% to HK$3,312 million in fiscal However, the Group s turnover has been adversely affected by a drop in turnover of the mobile handset business of approximately 48% to HK$1,629 million in the year Loss attributable to shareholders amounted to HK$433 million for the year ended 31 December 2005, against a profit attributable to shareholders of HK$119 million in The loss was mainly due to the performance of the mobile handset business, which recorded an operating loss of HK$139 million in fiscal 2005, and the impairment loss of HK$322 million in relation to goodwill attributable to the Group s acquired interest in the mobile handset business. The loss has substantially narrowed from HK$397 million in the first half of 2005 to HK$36 million in the second half of 2005, despite the continued loss of the mobile handset business, as a result of the strong performance of the washing machine business which recorded a strong operating profit of HK$73 million in the second half of the year. Despite a loss being reported, since impairment loss on goodwill is a non-cash item and coupled with contribution from the washing machine business, the Group continues to maintain a very strong cash flow position, with a net cash inflow from operating activities of HK$350 million in fiscal OUTLOOK The Board expects the operating environment in the mobile handset market in the PRC to remain difficult in the foreseeable future. To improve the performance of the Group, the Group is devoting more resources on the profit making washing machine business, whose contribution to Group turnover was substantially up from 47% in 2004 to 67% in As mentioned in our announcement dated 12 April 2006, we are also in negotiation and discussion with the Haier Group in relation to a possible disposal of the mobile handset business to the Haier Group. The Company will make appropriate announcement as required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ( Listing Rules ) in the event that the possible disposal materialises.

8 annual report 2005 Haier Electronics Group Co., Ltd. 7 It is Haier Group s intention to turn the Company into the listed flagship of its white goods business and in ultimately become a global top 3 white goods manufacturer. We are exploring further asset injection opportunities from the Haier Group subject to, among other things, the satisfactory completion of due diligence on their financial and operating performance, the negotiation of a legally binding agreement and receipt of all applicable governmental, regulatory and shareholders approval. At present, the Company has not entered into any agreement in respect of further asset injections. The Group will make appropriate announcement on further developments in accordance with the requirements of the Listing Rules. APPRECIATION I would like to take this opportunity to thank all my fellow directors and staff members for their dedicated services, contributions and support during the year. By Order of the Board Yang Mian Mian Chairman Hong Kong, 19 April 2006

9 8 Haier Electronics Group Co., Ltd. annual report 2005 Chairman s Letter (cont d) Haier s Dual Drive Washing Machine Gold medal in the 95th Concours Lépine International France

10 annual report 2005 Haier Electronics Group Co., Ltd.. 9 Directors and Senior Management The Directors of the Company and senior management of the Group as at 19 April 2006, the date of the Report of the Directors, are as follows: EXECUTIVE DIRECTORS Ms. YANG Mian Mian, aged 64, has served as the Chairman and an Executive Director of the Company since January She is responsible for determining corporate strategies and overall management of the Group. She graduated from Shandong Industrial Institute, which is now known as Shandong University, the People s Republic of China (the PRC ) in As one of the founders of the Haier Group, she has been in charge of the overall management of the white goods business since She is currently the President of Haier Group Corporation ( Haier Corp ) and the Chairman of Qingdao Haier Co., Ltd. (a company listed on the Shanghai Stock Exchange (the A Share Company )). Mr. WU Ke Song, aged 55, has served as the Deputy Chairman and an Executive Director of the Company since December 2001 and is also a member of the remuneration committee of the Company. He is responsible for worldwide business development of the Group and liaison with relevant government officials. He graduated from Shandong Industrial Institute which is now known as Shandong University, the PRC in 1974 and joined the Haier Group in He is also a Vice Chairman of the Board of Directors of Haier Corp. Mr. CHAI Yong Sen*, aged 43, has served as an Executive Director of the Company since December He has been the General Manager of the Group s mobile handset business since He graduated from Shanghai Mechanical Institute, the PRC in 1984 and has a Master s degree of Management. He joined the Haier Group in 1984 and has extensive experience in both washing machine business and mobile handset business, in particular in the sales and procurement functions. He is also a Vice President of Haier Corp. The appointment of Mr. Chai will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance with the bye-laws ( Bye-laws ) of the Company. Mr. Chai is not entitled to any fixed remuneration but is entitled to payment of discretionary bonus to be determined by the Board. As at 19 April 2006, being the latest practicable date ( Latest Practicable Date ) prior to the printing of this annual report for the purpose of ascertaining certain information herein, Mr. Chai is holding 10,000,000 options to subscribe for 10,000,000 shares in the Company at an exercise price of HK$0.150 per share. The options were granted on 19 November 2002 and are exercisable at any time between 19 November 2003 and 18 November Save as disclosed above, he does not have any other interests in the shares of the Company within Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the SFO ). Mr. Chai does not have any relationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules ) and save as disclosed above, there are no other matters that need to be brought to the attention of shareholders. Mr. Liang Hai Shan, aged 39, has served as an Executive Director of the Company since December He is mainly responsible for strategic procurement and overall quality control of products of the Group. He received a Bachelor s degree of Industry from the Xian Jiaotong University, the PRC and has 17 years of experience in the manufacture of household electrical appliances, in particular in raw material procurement function and white goods business. He is also a Vice President of Haier Corp. Mr. CAO Chun Hua, aged 37, has served as an Executive Director of the Company since January He is currently the General Manager of the Group s washing machine business. He graduated from Hangzhou Electronic Industry College, the PRC with a Bachelor s degree in He joined the Haier Group in 1995 and has since held a number of senior positions in the washing machine business. He is also a Vice President of Haier Corp.

11 10 Haier Electronics Group Co., Ltd.. annual report 2005 Directors and Senior Management (cont d) EXECUTIVE DIRECTORS (cont d) Mr. CUI Shao Hua*, aged 48, has served as an Executive Director of the Company since November 2002 and is a member of the remuneration committee of the Company. He is responsible for the Group s corporate finance function. He graduated from Jilin Institute of Finance and Commerce, the PRC in He joined the Haier Group in 1993 and has over 20 years of experience in financial management and listed companies operations. He is also a Deputy Chairman of the A Share Company. The appointment of Mr. Cui will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance with the Bye-laws. Mr. Cui is not entitled to any fixed remunerations but is entitled to payment of discretionary bonus to be determined by the Board. As at the Latest Practicable Date, Mr. Cui is holding 10,000,000 options to subscribe for 10,000,000 shares in the Company at an exercise price of HK$0.150 per share. The options were granted on 19 November 2002 and are exercisable at any time between 19 November 2003 and 18 November Save as disclosed above, he does not have any other interests in the shares of the Company within Part XV of the SFO. Mr. Cui does not have any relationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and save as disclosed above, there are no other matters that need to be brought to the attention of shareholders. Mr. SONG Chun Guang, aged 41, has served as an Executive Director of the Company since January He is now a Deputy General Manager and the Sales Director of the Group s mobile handset business. He obtained a Bachelor s degree of Engineering from Tianjin Industrial and Engineering College, the PRC in He joined the Haier Group in 1995 and has extensive experience in both washing machine business and mobile handset business. INDEPENDENT NON-EXECUTIVE DIRECTORS Mr. LAM Kin Kau, Mark*, aged 51, has served as an Independent Non-executive Director of the Company since April 2000 and is a member of both the audit committee and the remuneration committee of the Company. He is a fellow of the Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Secretaries and Administrators. He has been a practising accountant for over 20 years and is a director of various private companies. The appointment of Mr. Lam will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance with the Bye-laws. The emolument of Mr. Lam comprise a basic director s fee of HK$20,000 per month and a discretionary bonus to be determined by the Board which is determined by taking into account the experience of Mr. Lam and by reference to market range of the directors fee of independent non-executive directors for other listed companies of comparable size. As at the latest practicable date, Mr. Lam is holding 2,500,000 options to subscribe for 2,500,000 shares in the Company at an exercise price of HK$0.156 per share. The options were granted on 16 August 2002 and are exercisable at any time between 16 August 2003 and 15 August Save as disclosed above, he does not have any other interests in the shares of the Company within Part XV of the SFO. Mr. Lam does not have any relationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and save as disclosed above, there are no other matters that need to be brought to the attention of shareholders.

12 annual report 2005 Haier Electronics Group Co., Ltd.. 11 INDEPENDENT NON-EXECUTIVE DIRECTORS (cont d) Mr. FUNG Hoi Wing, Henry*, aged 50, has served as an Independent Non-executive Director of the Company since April 2000 and is a member of both the audit committee and the remuneration committee of the Company. He is a Notary Public and Solicitor of Messrs. Fung, Wong, Ng & Lam, Solicitors and Notaries of Hong Kong. He graduated from the University of Hong Kong in 1976 with a Bachelor s degree in Social Sciences. He was admitted as a solicitor of the Supreme Court of Hong Kong in In addition, he is a China- Appointed Attesting Officer and also admitted in England and Wales, the Australian Capital Territory and Singapore. The appointment of Mr. Fung will not be of a fixed term but he will be subject to retirement by rotation and re-election in accordance with the Bye-laws. The emolument of Mr. Fung comprise a basic director s fee of HK$20,000 per month and a discretionary bonus to be determined by the Board which is determined by taking into account the experience of Mr. Fung and by reference to market range of the directors fee of independent non-executive directors for other listed companies of comparable size. As at the latest practicable date, Mr. Fung is holding 2,000,000 options to subscribe for 2,000,000 shares in the Company at an exercise price of HK$0.156 per share. The options were granted on 16 August 2002 and are exercisable at any time between 16 August 2003 and 15 August Save as disclosed above, he does not have any other interests in the shares of the Company within Part XV of the SFO. Mr. Lam does not have any relationship with any directors, senior management or substantial or controlling shareholders of the Company and has no information to be disclosed pursuant to (h) to (w) of Rule 13.51(2) of the Listing Rules and save as disclosed above, there are no other matters that need to be brought to the attention of shareholders. Mr. LAU Ho Wai, Lucas, aged 44, has served as an Independent Non-executive Director of the Company since September 2004 and is a member of both the audit committee and the remuneration committee of the Company. He is a member of the Royal Institution of Chartered Surveyors and the Hong Kong Institute of Surveyors. He is also a registered professional surveyor and a practising chartered surveyor in Hong Kong. He has a Bachelor s degree in Land Economy, a Master s degree in Urban Design, a Bachelor s degree in Laws and a Master s degree in Laws (International Business Law) and has over 15 years of professional experience in the real estate field. Mr. WU Yinong, aged 43, has served as an Independent Non-executive Director of the Company since 28 January 2005 and is a member of both the audit committee and the remuneration committee of the Company. He graduated from Portland State University in the United States of America with a Master s degree in Business Administration in He has been in the investment banking industry for more than 10 years. Prior to pursuing his development in investment banking, he had held various positions in the United States and the PRC. SENIOR MANAGEMENT Mr. YIP Wai Ming

13 12 Haier Electronics Group Co., Ltd.. annual report 2005 Financial Review BUSINESS REVIEW Washing Machine Business The Group continues to be the leader in the washing machine market in the PRC. Sales of washing machines amounted to HK$3,312 million in fiscal 2005, up by approximately 20% from the year In view of the growth in sales, a new factory with an annual production capacity of approximately 1 million units of washing machines has been established in Jiaonan, Shandong Province, the PRC in the fourth quarter of 2005 with a focus on manufacturing products for exports. The new factory has boasted our total annual production capacity to more than 6 million units. To cater for further increase in demand, the Group is planning to set up another production base in Chongqing, the PRC which will add a further annual production capacity of 1 million units of washing machines in the second half of Operating profit of the washing machine business amounted to HK$95 million in fiscal 2005, representing a decrease of 25% as compared to HK$128 million in The decline was mainly due to substantial expenditure incurred in developing new products in the first half of The new products were launched in the second half of the year, and have since been providing substantial contribution to operating profit. Operating profit in the second half of 2005 amounted to HK$73 million, up substantially from HK$22 million in the first half of the year, and up by about 1.3% from the corresponding period in 2004 notwithstanding the rise in the cost of certain raw materials such as plastic and steel plates. The Board is optimistic on the performance of the washing machine business in Our new models are expected to continue to provide substantial contribution in The Group is also focusing on higher end products with higher profit margins, such as dual drive washing machines, which already resulted in a substantial increase in operating profit in the second half of the year. We are also seeing signs that the cost of certain raw materials, such as steel plates, are stabilizing or dropping. We see ourselves as a pioneer in the industry with a strong research and development capability. Our new models of environmentally friendly dual drive washing machines, which do not require the use of washing powder and use far less water and electricity than industry standards, have obtained more than 70 patents and was awarded the National Technology Advance Second-class Award by State Council of the PRC. The products are also well-received in overseas markets and won a gold medal in the 95th Concours Lépine International France and have been recommended by international organizations as a reference for new international standards. As our consumers are becoming increasingly environmentally conscious, we are committed to developing innovative and environmentally friendly products to satisfy their needs. We are confident in our ability to remain as a leader in the industry and a pioneer in technology innovation.

14 annual report 2005 Haier Electronics Group Co., Ltd.. 13 Mobile Handset Business For the year ended 31 December 2005, turnover of the mobile handset business amounted to HK$1,629 million, representing a decrease of 48% from the year Competition remained intensive due to over capacity in the industry, price cutting strategy adopted by foreign branded manufacturers and the flood of illegal handsets into the PRC market which forced a majority of the domestic branded manufacturers to clear their inventories by cutting prices. These had adversely impacted the Group, and lead to a drop in volume and increase in provisions for doubtful debts and inventories. These resulted in an operating loss of HK$139 million in 2005, as compared to an operating profit of HK$47 million in the year In view of the intense competition in the mobile handset market in the PRC, during the year, the Board had conducted a review and decided to write off the entire amount of goodwill attributable to the Group s acquired interest in the mobile handset business, which resulted in an impairment loss of HK$322 million in The impairment loss had already been included in the Group s interim results for the six months ended 30 June 2005 announced on 23 September LIQUIDITY AND FINANCIAL RESOURCES The Group has maintained a healthy financial and liquidity position with a current ratio of 116% at 31 December 2005 (2004: 119%). As at 31 December 2005, the Group had a cash balance of HK$560 million (2004: HK$243 million), total bank and other loans of approximately HK$125 million (2004: HK$147 million) and zero-coupon 3-year convertible notes ( Convertible Notes ) with a face value of HK$233 million and a liability element of HK$212 million (2004: Nil). The Convertible Notes were issued to the Haier Group as part consideration for the Asset Injection, and are convertible into ordinary shares of the Company at HK$0.18 per share. During the year, 150,000,000 new shares were issued upon part conversion of the Convertible Notes. All the other borrowings of the Group were arranged on a short-term basis for working capital purposes, and were denominated in Renminbi, repayable within one year and bore interest at floating rates. Due to our focus on cash flow management, the Group has been able to generate a net cash inflow from operating activities of HK$350 million in 2005 despite a substantial loss being reported. The Group also has a very healthy cash position with a net cash balance (cash balance less borrowings) of HK$224 million as at 31 December There is no material effect of seasonality on the Group s borrowing requirements. The Group had contracted capital commitments amounting to HK$3 million as at 31 December 2005, which were mainly related to purchase of machinery for the expansion in production capacity of the Group s washing machines business.

15 14 Haier Electronics Group Co., Ltd.. annual report 2005 Financial Review (cont d) CAPITAL STRUCTURE AND GEARING RATIO As at 31 December 2005, the Group maintained a comfortable gearing ratio (total borrowings over shareholders equity) of 53% (2004: 29%), or 20% if the Convertible Notes are excluded. TREASURY POLICIES The Group employs a conservative approach to cash management and risk controls. Most of the Group s receipts and payments are in Renminbi and Hong Kong dollars. Cash is generally placed in short term deposits denominated either in Renminbi or Hong Kong dollars. As at 31 December 2005, apart from the Convertible Notes which are denominated in Hong Kong dollars, most of the Group s outstanding borrowings were denominated in Renminbi and were principally made on a floating rate basis. Foreign currency risk is not significant as liabilities in Renminbi will be matched by the Group s earnings, most of which are also denominated in Renminbi. The Group does not have any significant interest rate risk, as the current interest rate in the PRC stays at low level and is relatively stable. The Group does not have any financial instruments for hedging purposes. EMPLOYEES AND REMUNERATION POLICY The total number of employees of the Group as at 31 December 2005 was approximately 5,600, representing an increase of approximately 25% as compared to 31 December The Group ensures that the remuneration packages for its employees are competitive and employees are generally remunerated with a fixed monthly income, which is normally reviewed on an annual basis, plus discretionary performance related bonuses. Employees are also provided with benefits including provident fund and medical insurance. The Group maintains a share option scheme as an incentive to attract and retain talented employees. As at 31 December 2005, there were outstanding share options entitling the grantees to subscribe for approximately million new shares of the Company. MATERIAL ACQUISITION AND DISPOSAL OF SUBSIDIARIES AND ASSOCIATES Please refer to note 2.1 to the consolidated financial statements below for details of material acquisition of subsidiaries during the year.

16 CHARGE OF ASSETS As 31 December 2005, bank deposits of approximately HK$70,000 were pledged to secure general banking facilities granted to a subsidiary of the Group. annual report 2005 Haier Electronics Group Co., Ltd.. 15

17 16 Haier Electronics Group Co., Ltd. annual report 2005 Corporate Governance Report The board (the Board ) of directors (the Directors ) and the management (the Management ) of Haier Electronics Group Co., Ltd. (the Company ) recognise that sound corporate practices are crucial to the efficient operation of the Company and its subsidiaries (collectively the Group ) and the safeguarding of our shareholders interests. In this regard, the Board attaches great priority to reinforce the Company s corporate governance standards with emphasis on transparency, accountability and independence in order to enhance our long-term shareholders value. The Company has, throughout the year ended 31 December 2005, complied with most of the applicable code provisions (the Code Provision(s) ) and principles under the Code on Corporate Governance Practices (the CG Code ) as set out in Appendix 14 to the Rules Governing the Listing of Securities (the Listing Rules ) on The Stock Exchange of Hong Kong Limited (the Stock Exchange ) except for certain deviations as described below. This report describes the Company s corporate governance practices, explains its applications of and deviations from the CG Code, together with considered reasons for such deviations. BOARD OF DIRECTORS Composition The Board currently comprises seven executive Directors and four independent non-executive Directors (the INED(s) ). The Directors are well-versed in respective areas such as legal, accounting and finance, business management and industry knowledge and the Board as a whole has achieved an appropriate balance of skills and experience. The Directors biographical information is set out on pages 9 to 11 under the section headed Directors and Senior Management. To the best of the Company s knowledge, there is no financial or family relationship among the Board members. All of them are free to exercise their independent judgment on all matters concerning the Company. Delegation by the Board The Directors are collectively responsible for setting the Group s strategies, providing leadership and guidance to put them into effect, reviewing and monitoring the performance of the Group and are accountable to the Company s shareholders. To maximise the effectiveness of the Group s operations, the Board has delegated management and administration of the Group s daily operations to the executive Directors and the Management while reserving several important matters for its approval. To this end, the Board has adopted written guidelines (the Guidelines ) laying down the division of functions between the Board and the Management (including the executive Directors for the purpose of the Guidelines). Pursuant to the Guidelines, the major functions of the Board and the Management are summarized as follows: The Board is principally responsible for: 1. determining the overall strategy and approving annual operating budget of the Group; 2. reviewing all significant policies of the Group; 3. monitoring the performance of the Management to ensure that the business operations of the Group are properly planned and undertaken; 4. approving interim and annual results of the Group based on recommendations made by the audit committee of the Company; 5. approving material contracts and transactions for which the Management is required to obtain the Board s prior approval; and 6. subject to the requirements of the Listing Rules, approving transactions in which connected person(s) (as defined in the Listing Rules) of the Group is/are considered having a material conflict of interests.

18 annual report 2005 Haier Electronics Group Co., Ltd. 17 BOARD OF DIRECTORS (cont d) Delegation by the Board (cont d) The Management is principally responsible for: 1. exercising all such other powers and perform all such other acts as may be exercised and performed by the Directors, save and except for those that may specifically be reserved by the Board/or the committees set up by the Board for decision and implementation; or those that may only be exercised by the Board pursuant to The Companies Act of Bermuda, the Bye-laws of the Company, the Listing Rules and/or the Hong Kong Codes on Takeovers and Mergers and Share Repurchases; 2. formulating and implementing policies for business activities, internal controls and administration of the Company; 3. planning and deciding the Company s strategies on its business activities; and 4. keeping proper written records of its decisions taken which may be inspected by any members of the Board or the Board committees upon request. The Board will review those arrangements and the Guidelines on a periodic basis to ensure that they remain appropriate to the needs of the Group. Chairman and Chief Executive Officer ( CEO ) Under the Code Provision A.2.1, the roles of chairman and CEO should be separate and should not be performed by the same individual. Currently, the Company does not comply with such Code Provision since the Company does not have any person holding the title of CEO. Ms. Yang Mian Mian is the Chairman of the Board and is also performing the functions of CEO. The Board meets regularly to consider major matters affecting the business and operations of the Group. The Board considers that this structure will not impair the balance of power and authority between the Board and the Management and believes that this structure enables the Group to make and implement decision promptly and efficiently. INEDs The INEDs have the same duties of care and skill and fiduciary duties as the executive Directors. They are expressly identified as such in all corporate communications that disclose the names of the Directors. The INEDs are experienced professionals with expertise in respective areas of legal, accounting and finance. With their professional knowledge and experience, the INEDs advised the Company on its operation and management; provided independent opinion on the Company s connected transactions; participated in the Company s audit committee meetings and remuneration committee meetings. The INEDs have contributed to provide adequate checks and balance to protect the interests of the Company and the Company s shareholders as a whole, and to promote the development of the Company. The Company has received an annual confirmation of independence from each of the INEDs pursuant to Rule 3.13 of the Listing Rules and considers that all INEDs to be independent as at the date of this report. Under the Code Provision A.4.1, non-executive directors should be appointed for specific terms, subject to re-election. Currently, all INEDs are not appointed for a specific term but are subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Company s Bye-laws. As such, the Board considers that sufficient measures have been taken to ensure that the Company s corporate governance practices are no less exacting than those in the CG Code. Supply of and access to information Newly appointed Directors will receive induction packages containing the duties and responsibilities of directors under the Listing Rules and other applicable rules and regulations. Each of the Directors is briefed and updated from time to time on the latest legislative and regulatory developments to ensure that he/she is fully aware of his/her responsibilities under the Listing Rules, applicable legal and regulatory requirements. In order to ensure that their duties can be properly discharged, the Directors are entitled to seek advice from independent professional advisers whenever deemed necessary by them at the Company s expense.

19 18 Haier Electronics Group Co., Ltd. annual report 2005 Corporate Governance Report (cont d) BOARD OF DIRECTORS (cont d) Board Meetings Apart from consents obtained through circulation of written resolutions of all the Board members, the Board met 29 times during the year ended 31 December 2005 to review and approve, among other things, the 2004 annual results and 2005 interim results, the documents relating to corporate governance practices, continuing connected transactions and other operational issues of the Group. The Company s board meetings (the Board Meeting(s) ) are permitted to be held by means of telephone or other means of electronic communication under the Bye-laws of the Company. Reasonable notices are served and comprehensive information is provided to the Board members in advance of all the Board Meetings in order to enable them to make informed decisions on all matters transacted at the Board Meetings. The proceedings of the Board Meetings are normally conducted by the Chairman of the Company who ensures that sufficient time is allowed for discussion among the Directors and equal opportunities are being given to the Directors to express their views and share their concerns. The Company Secretary/Qualified Accountant attends the Board Meetings to advise Directors on corporate governance practices, and statutory compliance, accounting and financial matters whenever deemed necessary by the Board. The Company Secretary is responsible for preparing minutes recording all matters transacted and resolved at the Board Meetings. All the Board Minutes are kept by the Company Secretary and are open for inspection by the Directors. The following table shows the attendance of the Directors at the Board Meetings during the year ended 31 December 2005: No. of the Board Meetings attended/held Executive Directors: Ms. Yang Mian Mian (Chairman)* 18/20 Mr. Wu Ke Song (Deputy Chairman) 4/29 Mr. Chai Yong Sen 5/29 Mr. Liang Hai Shan 5/29 Mr. Cao Chun Hua* 4/20 Mr. Cui Shao Hua 27/29 Mr. Song Chun Guang* 2/20 Mr. Mak Shiu Tong, Clement # 9/9 Mr. Tam Ngai Hung, Terry # 9/9 Mr. Man Wei Dong # 0/9 INEDs: Mr. Lam Kin Kau, Mark 17/29 Mr. Fung Hoi Wing, Henry 17/29 Mr. Lau Ho Wai, Lucas 17/29 Mr. Wu Yinong* 10/20 * appointed on 28 January 2005 # resigned on 28 January 2005 It is challenging to arrange the Board Meeting that fits in with the tight and busy schedules of all the Directors. In particular, as certain of the executive Directors devote considerable time and efforts to the management and operation of the Group s business, they were only able to attend some of the Board Meetings in person and their attendance rate at the Board Meetings are relatively low during the fiscal year of To enable all the Directors to keep abreast of the Company s latest development and to discharge their duties properly, the Company Secretary will brief the Directors on those matters transacted at the Board Meetings that they were unable to attend. In addition, draft and final versions of board minutes will be sent to all Directors for their comments and records.

20 annual report 2005 Haier Electronics Group Co., Ltd. 19 BOARD OF DIRECTORS (cont d) Model Code for Securities Transactions by Directors The Company has adopted a model code (the Haier Electronics Model Code ) for securities transactions by Directors on no less exacting terms than the Model Code for Securities Transactions by Directors of Listed Issuers as set out Appendix 10 to the Listing Rules. Having made specific enquiry of all the Directors, the Company confirmed that all the Directors have complied with the required standard as set out in the Haier Electronics Model Code throughout the year ended 31 December In addition, the Board has adopted written guidelines (the Employees Guidelines for Securities Transactions ) for securities transactions by employees (the Relevant Employees ) who are likely to be in possession of unpublished price sensitive information of the Company on no less exacting terms than the Haier Electronics Model Code. Having made specific enquiry of all the Relevant Employees, the Company confirmed that all the Relevant Employees have complied with the required standard as set out in the Employees Guidelines for Securities Transactions throughout the year ended 31 December Board Committees The Board has established an Audit Committee (the Audit Committee ) and a Remuneration Committee (the Remuneration Committee ) (collectively the Committees ) to oversee particular aspects of the Company s affairs. To reinforce independence, the chairman of both the Committees is an INED. The Committees report to the full Board regularly. Each of the Committees has adopted specific terms of reference covering its duties, powers and functions which will be reviewed by the Board from time to time. The Company Secretary also acts as secretary of the Committees. The Committees adopt as far as practicable, the procedures and arrangement of the Board Meeting in relation to conduct of meetings, notice of meetings and recording of minutes. Further particulars of each of the Committees is set out below: (1) Audit Committee The Audit Committee currently comprises all four INEDs and is chaired by Mr. Lam Kin Kau, Mark. Mr. Lam is a professional accountant and has been a practicing accountant for over 20 years. The primary duties of the Audit Committee are to ensure the objectivity and credibility of financial reporting, to make recommendation to the Board on the appointment, reappointment and removal of the Group s external auditors and to review of the Company s financial controls, internal control and risk management systems. During the year ended 31 December 2005, the Audit Committee met twice with an attendance rate of 100% to review the management and accounting principles and practices adopted by the Group and to discuss internal controls and financial reporting matters including the review of 2004 annual results and 2005 interim results of the Group. Each member of the Audit Committee has unrestricted access to the Group s external auditors and the Management. (2) Remuneration Committee The Remuneration Committee currently comprises six members including two executive Directors, namely, Mr. Wu Ke Song and Mr. Cui Shao Hua and all four INEDs. The Remuneration Committee is chaired by Mr. Fung Hoi Wing, Henry, an INED. The primary duties of the Remuneration Committee are to make recommendations to the Board on policy and structure of all remuneration of the Directors. Each of the Directors has not involved in the determination of his/her own remuneration. The Remuneration Committee meets at least once a year. During the year under review, the Remuneration Committee Meeting has held one meeting in September 2005 with an attendance rate of 100%. At the meeting, members of the Remuneration Committee reviewed the remuneration packages and overall benefits of the Directors by taking into account factors such as remuneration packages and benefits offered by comparable companies, the respective contribution of each of the Directors to the Group and the business objectives of the Group. Insurance The Group has arranged appropriate directors and officers liability insurance to indemnify the Directors and senior staff of the Group for the potential liabilities incurred by them in discharging their duties. The Group reviews the insurance coverage for the Directors and the Group s senior staff on an annual basis.

21 20 Haier Electronics Group Co., Ltd. annual report 2005 Corporate Governance Report (cont d) ACCOUNTABILITY AND AUDIT The Directors acknowledge their responsibility for preparing financial statements of the Group in accordance with relevant statutory requirements and generally accepted accounting principles in Hong Kong and ensuring that the financial statements give a true and fair view of the Group s financial position. In preparing the financial statements of the Group for the year ended 31 December 2005, the Directors have adopted suitable accounting policies and applied them consistently; made judgments and estimates that are prudent and reasonable; and prepared the financial statements on a going concern basis. The Board aims to present a comprehensive, balanced and understandable assessment of the Group s development and prospects in all corporate communications, including but not limited to annual and interim reports, any price-sensitive announcements and financial disclosures required under the Listing Rules, any reports to regulators as well as to information required to be disclosed pursuant to other statutory requirements. INTERNAL CONTROL AND RISK MANAGEMENT The Group is committed to implementing effective internal controls and risk management procedures to identify and manage the risks that may be faced by the Group, as well as to safeguard the interests of the Group and the Company s shareholders as a whole. The Board is responsible for maintaining adequate internal controls and risk management procedures in the Group, and for reviewing its effectiveness through the Audit Committee on an on-going basis. The Board has delegated to the Management the implementation of the Group s internal controls covering financial, operational and compliance aspects, as well as risk management procedures. The Board has reviewed the overall effectiveness of the internal control system of the Group during the year ended 31 December 2005, and based on the assessment and recommendations made by the Audit Committee, is satisfied that during the year ended 31 December 2005, the Group has implemented adequate internal controls and risk management procedures. No significant areas of concern which might affect the Group s operation and the interests of the Company s shareholders were identified. REMUNERATION OF EXTERNAL AUDITORS The Group s independent external auditors are Ernst & Young, Certified Public Accountants. The remuneration for the audit and non-audit services provided by Ernst & Young to the Group during the year ended 31 December 2005 was as follows: Type of services Amount HK$ 000 Audit 6,000 Non-audit services Taxation 188 Other services 625 6,813 By Order of the Board Yip Wai Ming Company Secretary Hong Kong, 19 April 2006

22 annual report 2005 Haier Electronics Group Co., Ltd.. 21 Report of the Directors The directors ( Directors ) of Haier Electronics Group Co., Ltd. ( Company ) present their report and the audited financial statements of the Company and its subsidiaries (collectively the Group ) for the year ended 31 December PRINCIPAL ACTIVITIES The principal activity of the Company is investment holding. The principal activities of its subsidiaries are (i) the manufacture and sale of mobile handsets; and (ii) the manufacture and sale of washing machines. RESULTS AND DIVIDENDS The Group s loss for the year ended 31 December 2005 and the state of affairs of the Company and the Group at that date are set out in the financial statements on pages 30 to 82. The directors do not recommend the payment of any dividends in respect of the year. SUMMARY FINANCIAL INFORMATION A summary of the financial results and assets, liabilities and minority interests of the Group for the last five financial years, as extracted from the financial statements and restated as appropriate, is set out on page 83. This summary does not form part of the audited financial statements. PROPERTY, PLANT AND EQUIPMENT Details of movements in the property, plant and equipment of the Group during the year are set out in note 16 to the financial statements. SHARE CAPITAL, SHARE OPTIONS, WARRANTS AND CONVERTIBLE NOTES Details of movements in the Company s share capital, share options, warrants and convertible notes during the year, are set out in notes 31, 32 and 28 to the financial statements. PRE-EMPTIVE RIGHTS There are no provisions for pre-emptive rights under the Company s bye-laws or the laws of Bermuda which would oblige the Company to offer new shares on a pro rata basis to existing shareholders. PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANY Neither the Company, nor any of its subsidiaries purchased, sold or redeemed any of the listed securities of the Company during the year. RESERVES Details of movements in the reserves of the Company and the Group during the year are set out in note 33(b) to the financial statements and in the consolidated statement of changes in equity, respectively. DISTRIBUTABLE RESERVES At 31 December 2005, the Company had no reserve (2004: HK$120,691,000) available for distribution in accordance with the provisions of the Companies Act 1981 of Bermuda (as amended).

23 22 Haier Electronics Group Co., Ltd.. annual report 2005 Report of the Directors (cont d) MAJOR CUSTOMERS AND SUPPLIERS The information in respect of the Group s sales and purchases attributable to the major customers and suppliers, respectively, during the year is as follows: Percentage of the Group s total Sales Purchases % % % % The largest customer Five largest customers in aggregate The largest supplier Five largest suppliers in aggregate During the year, Haier Group Corporation ( Haier Corp ) and Qingdao Haier Investment and Development Co., Ltd. ( Haier Investment ) (collectively referred to as Haier Group ), the substantial shareholders of the Company, had beneficial interest in two of the five largest customers and four of the five largest suppliers of the Group, respectively. Save as disclosed above, none of the directors or any of their associates or any shareholders of the Company (which, to the best knowledge of the directors, owns more than 5% of the Company s issued share capital) had any beneficial interest in the Group s five largest customers or suppliers. DIRECTORS The directors of the Company during the year and up to the date of this report were as follows: Executive directors: Yang Mian Mian (appointed on 28 January 2005) Wu Ke Song Chai Yong Sen Liang Hai Shan Cao Chun Hua (appointed on 28 January 2005) Cui Shao Hua Song Chun Guang (appointed on 28 January 2005) Mak Shiu Tong, Clement (resigned on 28 January 2005) Tam Ngai Hung, Terry (resigned on 28 January 2005) Man Wei Dong (resigned on 28 January 2005) Independent non-executive directors: Lam Kin Kau, Mark Fung Hoi Wing, Henry Lau Ho Wai, Lucas Wu Yinong (appointed on 28 January 2005) In accordance with the bye-laws of the Company, Chai Yong Sen, Cui Shao Hua, Lam Kin Kau, Mark and Fung Hoi Wing, Henry will retire and, being eligible, will offer themselves for re-election at the forthcoming annual general meeting of the Company. The independent non-executive directors of the Company are not appointed for any specific terms and are subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the bye-laws of the Company. The Company has received annual confirmations of independence from each of Lam Kin Kau, Mark, Fung Hoi Wing, Henry, Lau Ho Wai, Lucas and Wu Yinong, and, on the basis on such confirmations, still considers them to be independent as at the date of this report.

24 annual report 2005 Haier Electronics Group Co., Ltd.. 23 DIRECTORS AND SENIOR MANAGEMENT S BIOGRAPHIES Biographical details of the directors of the Company and the senior management of the Group are set out on pages 9 to 11 of this annual report. DIRECTORS SERVICE CONTRACTS During the year, no director had a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. DIRECTORS INTERESTS IN CONTRACTS No director had a material interest, either directly or indirectly, in any contract of significance to the business of the Group to which the Company, or its holding company, or any of its subsidiaries or fellow subsidiaries was a party during the year. DIRECTORS INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES At 31 December 2005, except for the interests in share options of the Company as disclosed in note 32 to the financial statements, none of the Directors has any interests and short positions in the ordinary share(s) ( Share(s) ) or underlying shares of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the SFO )), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO, or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the Stock Exchange ) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 of the Listing Rules. DIRECTORS RIGHTS TO ACQUIRE SHARES OR DEBENTURES IN THE COMPANY Save as disclosed in note 32 to the financial statements regarding the share option scheme of the Company, at no time during the year were rights to acquire benefits by means of the acquisition of Shares in or debentures of the Company granted to any director of the Company or their respective spouse or minor children, or were any such rights exercised by them; or was the Company, its holding company, or any of its subsidiaries or fellow subsidiaries a party to any arrangement to enable the directors of the Company to acquire such rights in any other body corporate. SUBSTANTIAL SHAREHOLDERS INTERESTS IN SHARES AND UNDERLYING SHARES As at 31 December 2005, the following shareholders interested in 5% or more of the issued shares and/or underlying shares of the Company were recorded in the register of substantial shareholders required to be kept by the Company pursuant to Section 336 of the SFO: Long positions in Shares: Approximate Number of Total percentage of Number of Shares number of the Company s Shares under equity Shares issued Name Notes interested derivatives Nature of interests interested share capital Qingdao Haier Group 1 4,176,706,667 1,294,444,444 Beneficial owner 9,441,445, Holdings (BVI) Limited 3,970,294,819 Interests of parties acting in concert Haier Group Corporation 2 9,441,445,930 Interests of controlled 13,633,945, corporation 4,192,500,000 Interests of parties acting in concert

25 24 Haier Electronics Group Co., Ltd.. annual report 2005 Report of the Directors (cont d) SUBSTANTIAL SHAREHOLDERS INTERESTS IN SHARES AND UNDERLYING SHARES (cont d) Long positions in Shares: (cont d) Approximate Number of Total percentage of Number of Shares number of the Company s Shares under equity Shares issued Name Notes interested derivatives Nature of interests interested share capital Qingdao Haier Investment 3 3,366,000,000 Beneficial owner 13,633,945, and Development Co., Ltd. 826,500,000 Interests of controlled corporation 9,441,445,930 Interests of parties acting in concert Qingdao Haier Collective 4 13,633,945,930 Interests of controlled 13,633,945, Asset Management corporation Association Deutsche Bank AG 5 3,970,294,819 Beneficial owner 12,189,501, ,219,206,667 Interests of parties acting in concert Greatway International Corp ,172,486 Beneficial owner 880,172, Soaring Profit Holdings Limited 7 3,926,774,819 Interests of controlled 3,926,774, corporation CCT Telecom Holdings Limited 8 3,926,774,819 Interests of controlled 3,926,774, corporation Short positions in Shares: Approximate Number of Total percentage of Number of Shares number of the Company s Shares under equity Shares issued Name Notes interested derivatives Nature of interests interested share capital Deutsche Bank AG 5 3,926,774,819 Beneficial owner 3,926,774, CCT Telecom Holdings 8 3,926,774,819 Interests of controlled 3,926,774, Limited corporation

26 annual report 2005 Haier Electronics Group Co., Ltd.. 25 SUBSTANTIAL SHAREHOLDERS INTERESTS IN SHARES AND UNDERLYING SHARES (cont d) Notes: 1. Qingdao Haier Group Holdings (BVI) Limited ( Haier BVI ) held 4,176,706,667 Shares. Haier BVI was also interested in 1,294,444,444 underlying Shares under the convertible notes ( Convertible Notes ) issued to it as part of the consideration pursuant to an agreement dated 5 March 2004 entered into between Haier Group Corporation ( Haier Corp ), Qingdao Haier Investment and Development Co., Ltd. ( Haier Investment ) and the Company. In addition, Haier BVI was acting in concert with Deutsche Bank AG ( Deutsche Bank ) pursuant to an undertaking letter ( Undertaking Letter ) dated 5 January 2006 executed by Haier BVI and Deutsche Bank, pursuant to which Deutsche Bank agreed that, unless otherwise agreed and subject to the exceptions set out therein, Deutsche Bank will not sell or dispose of any of the 3,926,774,819 Shares acquired by Deutsche Bank pursuant to an agreement ( Sale and Purchase Agreement ) dated 16 November 2005 entered into between Deutsche Bank and CCT Telecom Holdings Limited ( CCT ). Furthermore, Deutsche Bank held another 43,520,000 Shares. Accordingly, Haier BVI was deemed to be interested in the said 3,926,774,819 Shares and 43,520,000 shares held by Deutsche Bank pursuant to the SFO. 2. Haier Corp was interested in 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI were interested. Haier BVI is a non-wholly owned subsidiary of Haier Corp. In addition, Haier Corp was taken to be interested in 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO as stated in note (1). Furthermore, Haier Corp was acting in concert with Haier Investment. As Haier Investment held 3,366,000,000 Shares and was interested in 826,500,000 Shares held by its non-wholly owned subsidiary as stated in note (3), Haier Corp was also taken to be interested in the 3,366,000,000 Shares held by Haier Investment and the 826,500,000 Shares which Haier Investment was taken to be interested. 3. Haier Investment held 3,366,000,000 Shares and was interested in (i) 826,500,000 Shares held by an indirect non-wholly owned subsidiary; and, by reason of its acting in concert with Haier Corp as set out in note (2), the following Shares in which Haier Corp were deemed to be interested pursuant to the SFO: (ii) the 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI was interested; and (iii) the 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO as stated in note (1). 4. Qingdao Haier Collective Asset Management Association was interested in (i) 3,366,000,000 Shares held by its non-wholly owned subsidiary, Haier Investment; (ii) 826,500,000 Shares held by Haier Investment s indirect non-wholly owned subsidiary as stated in note (3); (iii) 4,176,706,667 Shares held by Haier BVI and the 1,294,444,444 underlying shares under the Convertible Notes referred to in note (1) in which Haier BVI were interested; and (iv) 43,520,000 Shares and 3,926,774,819 Shares held by Deutsche Bank which Haier BVI were deemed to be interested pursuant to the SFO. 5. Deutsche Bank held 43,520,000 Shares. In addition, it held another 3,926,774,819 Shares acquired pursuant to the Sale and Purchase Agreement referred to in note (1). Furthermore, Deutsche Bank was acting in concert with Haier BVI pursuant to the Undertaking Letter referred to in note (1) above and is deemed to be interested in the 8,219,206,667 Shares in which Haier BVI was interested. Pursuant to a subscription agreement dated 16 November 2005 entered into between Deutsche Bank and Haier BVI, Haier BVI agreed to issue and Deutsche Bank agreed to subscribe for put warrants (the Warrant(s) ) in respect of 3,926,774,819 Shares at an issue price of HK$0.03 per Warrant. Upon exercise, the holders of the Warrants are entitled to put the Shares to Haier BVI. The exercise price of the Warrants is fixed at HK$ per Warrant. The number of Shares under the Warrants is equal to the number of Shares acquired by Deutsche Bank from CCT pursuant to the Sale and Purchase Agreement referred to in note (1) above. 6. Greatway International Corp. ( Greatway ) held 880,172,486 Shares. 7. Soaring Profit Holdings Limited ( Soaring Profit ) was interested in 479,002,333 Shares held by Info-net International Corp. ( Info-net ), 880,172,486 Shares held by Greatway, 810,000,000 Shares held by Clear Access Agents Limited ( Clear Access ), 733,600,000 Shares held by Super Control Investments Limited ( Super Control ), 700,000,000 Shares held by Invest Paradise Group Limited ( Invest Paradise ) and 324,000,000 Shares held by Full Elite Assets Limited ( Full Elite ). Info-net, Clear Access, Super Control, Invest Paradise and Full Elite were wholly-owned subsidiaries of Soaring Profit Holdings Limited ( Soaring Profit ). Pursuant to the Sale and Purchase Agreement referred to in note (1), CCT is under an obligation to deliver 3,926,774,819 Shares (including the 479,002,333 Shares held by Info-net, the 880,172,486 Shares held by Greatway, 810,000,000 Shares held by Clear Access, 733,600,000 Shares held by Super Control, 700,000,000 Shares held by Invest Paradise and 324,000,000 Shares held by Full Elite) to Deutsche Bank upon completion of the Sale and Purchase Agreement. 8. CCT was interested in 3,926,774,819 Shares in which Soaring Profit were taken to be interested through the subsidiaries as disclosed in note (7). Soaring Profit is a wholly-owned subsidiary of CCT.

27 26 Haier Electronics Group Co., Ltd.. annual report 2005 Report of the Directors (cont d) SUBSTANTIAL SHAREHOLDERS INTERESTS IN SHARES AND UNDERLYING SHARES (cont d) Subsequent to the balance sheet date, on 5 January 2006, CCT and its subsidiaries disposed of their 3,926,774,819 Shares to Deutsche Bank, details of which were set out in the Company's announcements dated 22 November 2005 and 5 January Save as disclosed above, as at 31 December 2005, no other person, other than the directors of the Company, whose interests are set out in the section headed Directors interests and short positions in shares and underlying shares above, had registered an interest or short position in the Shares or underlying shares of the Company that was required to be recorded pursuant to Section 336 of the SFO. CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS (a) During the year, the Company s subsidiary, Pegasus Telecom (Qingdao) Co., Ltd. ( Pegasus Qingdao ), had the following continuing connected transactions with Haier Corp, Haier Investment, their subsidiaries and associates: Group Notes HK$ 000 HK$ 000 Sales of mobile handset products (i) 1,523,428 2,747,869 Purchases of materials (ii) 606,607 1,786,847 Utility service fee expenses (iii) 5,745 4,657 Interest expenses (iv) 3,594 3,442 Interest income (iv) Other service fee expenses (v) 1, Notes: (i) For the year ended 31 December 2005, the sales of mobile handset products were made at selling prices based on the costs of raw materials plus a processing fee which is not less than the industry standard. For the year ended 31 December 2004, the sales of mobile phones were made at selling prices based on the cost of materials plus processing fees ranging from 5% to 40% of the purchase price of the materials. (ii) The purchases were charged no more than the average market price or the consolidated and integrated tender and bidding price plus a 2.6% commission. (iii) (iv) (v) Utility service fee expenses were charged based on the state-prescribed prices plus actual administrative costs. Interest expenses/income was determined with reference to the standard rates published by the People s Bank of China. Other service fee expenses included legal consulting service fee, general security service fee, human resources service fee which were determined with reference to actual costs incurred.

28 annual report 2005 Haier Electronics Group Co., Ltd.. 27 CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS (cont d) (a) (cont d) Since Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde Haier Electric Co., Ltd. and Hefei Haier Washing Machine Co., Ltd. have become the Company s subsidiaries on 28 January 2005, they, together with Qingdao Jiaonan Haier Washing Machine Co., Ltd. and Qingdao Haier Electronics Sales Co., Ltd., had the following continuing connected transactions with Haier Corp, Haier Investment, their subsidiaries and associates: Group From 28 January 2005 to 31 December 2005 Notes HK$ 000 Sales of washing machines (vi) 310,782 Purchases of materials (vii) 2,405,228 Printing and packaging fee expenses (viii) 1,730 Mould charges (ix) 57,719 Utility service fee expenses (x) 10,776 Logistics charges (xi) 112,042 Promotion fee expenses (xii) 19,231 Other service fee expenses (xiii) 13,845 Interest income (xiv) 525 Trademark licence fee expenses (xv) 23,847 Notes: (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) The sales of washing machines were made to Haier Electrical Appliances Co., Ltd. ( Haier Electrical ), a subsidiary of Haier Investment, at selling prices representing differences between the selling prices of washing machines mutually agreed and the selling expenses of Haier Electrical not exceeding 2.5% of the selling prices of washing machines. The purchases of materials were determined based on the lower of the average market price or the consolidated and integrated tender and bidding price plus 2.6% commission. Printing and packaging fee expenses were charged on an actual cost basis plus a processing fee of not higher than those charged by independent third parties. Moulds were charged with reference to the average market tender and bidding price plus actual administrative costs. Utility service fee expenses were charged based on the state-prescribed prices plus actual administrative costs. Logistics charges were charged based on an actual costs basis and on terms more favourable than those offered by independent third parties. Promotion fee expenses were determined at the lower of 1.2% of the domestic sales of washing machines and RMB20 million (equivalent to HK$19,231,000). Other service fee expenses included legal consulting service fee, catering and travel agency service fee, human resources service fee, general security service fee, product certification service fee and equipment repair and maintenance service fee which were determined with reference to actual costs incurred. Interest income was determined with reference to the standard rates published by the People s Bank of China. Trademark licence fee expenses were charged at a rate of 0.8% (2004: 0.5%) of certain sales made by Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde Haier Electric Co., Ltd., Hefei Haier Washing Machine Co., Ltd. and Qingdao Jiaonan Haier Washing Machine Co., Ltd.. Except for the trademark licence fee expenses, the above transactions were defined as MH Continuing Connected Transactions and Non-exempt Continuing Connected Transactions in the circulars to the shareholders of the Company dated 17 December 2004 and 4 October 2005, respectively, and were approved by the shareholders at special general meetings of the Company on 4 January 2005 and 24 October 2005, respectively.

29 28 Haier Electronics Group Co., Ltd.. annual report 2005 Report of the Directors (cont d) CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS (cont d) (a) (cont d) The Stock Exchange has granted conditional waivers to the Company from strict compliance with the connected transactions requirements as set out in the Listing Rules for the three financial years ended 31 December The independent non-executive directors of the Company have reviewed MH Continuing Connected Transactions and Non-exempt Continuing Connected Transactions set out above and have confirmed that they were: (i) (ii) (iii) (iv) less than the cap amounts which were set out in the relevant agreements; entered into the usual and ordinary course of business of the Group; entered into either on normal commercial terms or, if there is not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Group than terms available to or from (as appropriate) independent third parties; and entered into in accordance with the relevant agreements governing them on terms that were fair and reasonable and in the interest of the Group s shareholders as a whole. (b) (c) On 25 June 2005, Haier Corp provided a corporate guarantee of RMB70,000,000 (equivalent to HK$67,308,000) to Haier Group Finance Co., Ltd. ( Haier Finance ), a subsidiary of Haier Corp and a financial institution approved by the People s Bank of China, as a security for banking facilities granted to Pegasus Qingdao for the period from 25 June 2005 to 24 June As at 31 December 2005, Pegasus Qingdao has utilised all of the above banking facilities. On 30 December 2005, Haier Corp provided a corporate guarantee of RMB30,000,000 (equivalent to HK$28,846,000) to Haier Finance as a security for banking facilities granted to Qingdao Jiaonan Haier Washing Machine Co., Ltd. ( Jiaonan Washing Machine ) for the period from 30 December 2005 to 29 December As at 31 December 2005, Jiaonan Washing Machine has utilised RMB15,000,000 of the above banking facilities. SUFFICIENCY OF PUBLIC FLOAT Based on information that is publicly available to the Company and within the knowledge of the directors, at least 25% of the Company s total issued share capital was held by the public as at the date of this report. AUDITORS Ernst & Young will retire and a resolution for their reappointment as auditors of the Company will be proposed at the forthcoming annual general meeting of the Company. ON BEHALF OF THE BOARD Yang Mian Mian Chairman Hong Kong 19 April 2006

30 annual report 2005 Haier Electronics Group Co., Ltd. 29 Report of the Auditors To the members Haier Electronics Group Co., Ltd. (Incorporated in Bermuda with limited liability) We have audited the financial statements on pages 30 to 82 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Company s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. BASIS OF OPINION We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company s and the Group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2005 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. Ernst & Young Certified Public Accountants Hong Kong 19 April 2006

31 30 Haier Electronics Group Co., Ltd. annual report 2005 Consolidated Income Statement (year ended 31 December 2005) Notes HK$ 000 HK$ 000 (Restated) REVENUE 6 4,940,474 5,893,839 Cost of sales (4,292,093) (5,277,340) Gross profit 648, ,499 Other income and gains, net 6 16,355 17,698 Selling and distribution costs (460,826) (332,460) Administrative expenses (222,463) (123,909) Other expenses (40,250) (30) Finance costs 8 (20,232) (12,152) Impairment of goodwill (321,947) PROFIT/(LOSS) BEFORE TAX 7 (400,982) 165,646 Tax 11 (16,855) (17,018) PROFIT/(LOSS) FOR THE YEAR (417,837) 148,628 Attributable to: Equity holders of the parent 12 (432,964) 119,479 Minority interests 15,127 29,149 (417,837) 148,628 DIVIDEND 13 8,508 EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT 14 Basic (2.77) cents 1.88 cents Diluted N/A N/A

32 annual report 2005 Haier Electronics Group Co., Ltd. 31 Consolidated Balance Sheet (31 December 2005) Notes HK$ 000 HK$ 000 (Restated) NON-CURRENT ASSETS Property, plant and equipment , ,705 Prepaid land premiums 17 25,462 11,885 Intangible assets 18 3,437 3,922 Goodwill 19 Deferred tax assets 30 12,736 21,527 Total non-current assets 677, ,039 CURRENT ASSETS Inventories , ,939 Trade and bills receivables , ,171 Prepayments, deposits and other receivables , ,736 Tax recoverable 3,342 4,940 Pledged deposits ,501 Cash and cash equivalents , ,741 Total current assets 1,820,845 1,791,028 CURRENT LIABILITIES Trade and bills payables ,116 1,136,940 Tax payable 5, Other payables and accruals , ,610 Provisions 29 20,184 16,499 Interest-bearing bank and other borrowings , ,044 Total current liabilities 1,574,323 1,501,918 NET CURRENT ASSETS 246, ,110 TOTAL ASSETS LESS CURRENT LIABILITIES 924, ,149 NON-CURRENT LIABILITIES Convertible notes ,528 Provisions 29 8,806 3,988 Deferred tax liabilities Total non-current liabilities 220,334 4,594 Net assets 704, ,555 EQUITY Equity attributable to equity holders of the parent Issued equity , ,324 Equity component of convertible notes 28 30,281 Reserves 33(a) (251,670) 156, , ,179 Minority interests 71, ,376 Total equity 704, ,555 Yang Mian Mian Chairman Cui Shao Hua Director

33 32 Haier Electronics Group Co., Ltd. annual report 2005 Consolidated Statement of Changes in Equity (year ended 31 December 2005) Attributable to equity holders of the parent Equity Retained component profits/ Exchange of Reserve (accumulated fluctuation Issued convertible fund losses) reserve Minority Total equity notes (note) (note) (note) Total interests equity Notes HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January 2004 (as restated) 352,324 15,697 30, , , ,107 Net profit for the year (as restated) 119, ,479 29, ,628 Transfer to reserves (as restated) 13,715 (13,715) Dividend (as restated) 13 (8,508) (8,508) (5,672) (14,180) At 31 December 2004 and 1 January 2005 (as restated) 352,324 29, , , , ,555 Net loss for the year (432,964) (432,964) 15,127 (417,837) Transfer from retained profits 29,848 (29,848) Exchange realignment 24,439 24,439 1,754 26,193 Dividend (6,303) (6,303) Acquisition of subsidiaries , ,307 (119,613) 325,694 Issue of convertible notes 28 33,790 33,790 33,790 Conversion of convertible notes 28 27,926 (3,509) 24,417 24,417 Exercise of share options 31 28,602 28,602 28,602 At 31 December ,159 30,281 59,260 (335,369) 24, ,770 71, ,111 Note: These reserve accounts comprise the consolidated reserves in the consolidated balance sheet.

34 annual report 2005 Haier Electronics Group Co., Ltd. 33 Consolidated Cash Flow Statement (year ended 31 December 2005) Notes HK$ 000 HK$ 000 (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax (400,982) 165,646 Adjustments for: Finance costs 8 20,232 12,152 Interest income 6 (3,329) (3,069) Depreciation 7 69,602 41,508 Amortisation of prepaid land premiums Amortisation of intangible assets Provision for bad and doubtful debts 7 35,663 Provision for obsolete and slow-moving inventories 7 53,831 18,430 Loss on disposal of items of property, plant and equipment 7 4,587 Impairment of goodwill 7 321,947 Operating profit before working capital changes 102, ,510 Increase in inventories (50,537) (78,291) Decrease in trade and bills receivables 260, Decrease in prepayments, deposits and other receivables 15,528 9,681 Increase/(decrease) in trade and bills payables (164,958) 279,109 Increase/(decrease) in other payables and accruals 176,440 (1,248) Increase in provisions 7,912 56,405 Effect of foreign exchange rate changes, net 1,538 Cash generated from operations 348, ,956 Interest received 3,329 3,069 Mainland China corporate income tax paid (2,265) (45,935) Net cash inflow from operating activities 350, ,090

35 34 Haier Electronics Group Co., Ltd. annual report 2005 Consolidated Cash Flow Statement (cont d) (year ended 31 December 2005) Notes HK$ 000 HK$ 000 (Restated) Net cash inflow from operating activities 350, ,090 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment (104,428) (43,519) Prepayment for land premiums (14,025) (6,859) Proceeds from disposal of items of property, plant and equipment 6,858 1,089 Acquisition of subsidiaries 34 80,189 Decrease/(increase) in pledged deposits 2,431 (2,501) Net cash outflow from investing activities (28,975) (51,790) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares upon exercise of share options 31 28,602 Interest paid (10,497) (12,152) Dividends paid to minority interests (6,303) (5,672) Dividends paid (8,508) New bank loans 81, ,495 Repayment of bank loans (65,421) (559,252) Net repayment of trust receipts (38,547) (24,127) Net cash outflow from financing activities (10,435) (428,216) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 310,594 (20,916) Cash and cash equivalents at beginning of year 242, ,657 Effect of foreign exchange rate changes, net 7,002 CASH AND CASH EQUIVALENTS AT END OF YEAR 560, ,741 ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 532, ,741 Time deposits with original maturity of less than three months when acquired 24 27, , ,741

36 annual report 2005 Haier Electronics Group Co., Ltd. 35 Balance Sheet (31 December 2005) Notes HK$ 000 HK$ 000 NON-CURRENT ASSETS Interests in subsidiaries 20 1,383,506 1,051,471 CURRENT ASSETS Prepayments, deposits and other receivables ,134 Cash and cash equivalents 24 51, ,830 Total current assets 51, ,964 CURRENT LIABILITIES Other payables and accruals 26 6,071 2,162 NET CURRENT ASSETS 45, ,802 TOTAL ASSETS LESS CURRENT LIABILITIES 1,428,705 1,187,273 NON-CURRENT LIABILITIES Convertible notes ,528 Net assets 1,217,177 1,187,273 EQUITY Issued capital 31 1,667, ,403 Equity component of convertible notes 28 30,281 Reserves 33(b) (480,177) 190,870 Total equity 1,217,177 1,187,273 Yang Mian Mian Chairman Cui Shao Hua Director

37

38 annual report 2005 Haier Electronics Group Co., Ltd BASIS OF PREPARATION These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRSs ) (which also include Hong Kong Accounting Standards ( HKASs ) and Interpretations) issued by Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention. These financial statements are presented in Hong Kong dollars (HK$) and all values are rounded to the nearest thousand except when otherwise indicated. Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December The results of subsidiaries acquired are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation. Minority interests represent the interests of outside shareholders in the results and net assets of the Company s subsidiaries. 3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS The following new and revised HKFRSs affect the Group and are adopted for the first time for the current year s financial statements: HKAS 1 HKAS 2 HKAS 7 HKAS 8 HKAS 10 HKAS 11 HKAS 12 HKAS 14 HKAS 16 HKAS 17 HKAS 18 HKAS 19 HKAS 20 HKAS 21 HKAS 23 HKAS 24 HKAS 27 HKAS 28 HKAS 31 HKAS 32 HKAS 33 HKAS 36 HKAS 37 HKAS 38 HKAS 39 HKAS 39 Amendment HKAS 40 HKFRS 2 HKFRS 3 HKFRS 5 HK(SIC)-Int 21 HK-Int 4 Presentation of Financial Statements Inventories Cash Flow Statements Accounting Policies, Changes in Accounting Estimates and Errors Events after the Balance Sheet Date Construction Contracts Income Taxes Segment Reporting Property, Plant and Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Consolidated and Separate Financial Statements Investments in Associates Interests in Joint Ventures Financial Instruments: Disclosure and Presentation Earnings per Share Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement Transition and Initial Recognition of Financial Assets and Financial Liabilities Investment Property Share-based Payment Business Combinations Non-current Assets Held for Sale and Discontinued Operations Income Taxes Recovery of Revalued Non-depreciable Assets Lease Determination of the Length of Lease Term in respect of Hong Kong Land Leases

39 38 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (cont d) The adoption of HKASs 2, 7, 8, 10, 11, 12, 14, 16, 18, 19, 20, 21, 23, 27, 28, 31, 32, 33, 37, 38, 39 and 40 and HKFRS 2 and 5, HK(SIC)-Int 21 and HK-Int 4 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group s and the Company s financial statements. HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and other disclosures. HKAS 21 had no material impact on the Group. In respect of acquisitions subsequent to 1 January 2005, any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of the assets and liabilities are treated as assets and liabilities of the foreign operation and are translated at the closing rate in accordance with HKAS 21. HKAS 24 has expanded the definition of related parties and affected the Group s related party disclosures. The impact of adopting the other HKFRSs is summarised as follows: (a) HKAS 17 Leases In prior years, leasehold land and buildings held for own use were stated at cost less accumulated depreciation and any impairment losses. Upon the adoption of HKAS 17, the Group s leasehold interest in land and buildings is separated into leasehold land and buildings. The Group s leasehold land is classified as an operating lease, because the title of the land is not expected to pass to the Group by the end of the lease term, and is reclassified from property, plant and equipment to prepaid land premiums, while buildings continue to be classified as part of property, plant and equipment. Prepaid land premiums for land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over the lease term. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment. This change in accounting policy has had no effect on the consolidated income statement and retained profits. The comparative amounts in the consolidated balance sheet for the year ended 31 December 2004 have been restated to reflect the reclassification of the leasehold land. (b) HKFRS 2 Share-based Payment In prior years, no recognition and measurement of share-based payment transactions in which employees (including directors) were granted share options over shares in the Company were required until such options were exercised by employees, at which time the share capital and share premium were credited with the proceeds received. Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments ( equity-settled transactions ), the cost of the equity-settled transactions with employees is measured by reference to the fair value at the date at which the instruments are granted. The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry to equity for employee share options. The revised accounting policy for share-based payment transactions is described in more detail in note 3.5 Summary of significant accounting policies below. The Group has adopted the transitional provisions of HKFRS 2 under which the new measurement policies have not been applied to (i) options granted to employees on or before 7 November 2002; and (ii) options granted to employees after 7 November 2002 but which had vested before 1 January As the Group did not have any employee share options which were granted during the period from 7 November 2002 to 31 December 2004 but had not yet vested as at 1 January 2005, the adoption of HKFRS 2 has had no impact on the retained profits as at 31 December 2003 and at 31 December 2004.

40 annual report 2005 Haier Electronics Group Co., Ltd IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (cont d) (c) HKFRS 3 Business Combinations and HKAS 36 Impairment of Assets In prior years, goodwill arising on acquisitions on or after 1 January 2001 was capitalised and amortised on the straight-line basis over its estimated useful life and was subject to impairment testing when there was any indication of impairment. The adoption of HKFRS 3 and HKAS 36 has resulted in the Group ceasing annual goodwill amortisation and commencing testing for impairment at the cash-generating unit level annually (or more frequently if events or changes in circumstances indicate that the carrying value may be impaired). Any excess of the Group s interest in the net fair value of the acquirees identifiable assets and liabilities over the cost of acquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in the income statement. During the year, the Company has adopted HKFRS 3 and the Asset Injection and the Call Option Exercise have been accounted for using reverse acquisition accounting, details of which are set out in note 2.2 to the financial statements. 3.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January 2006: HKAS 1 Amendment HKAS 19 Amendment HKAS 39 Amendment HKAS 39 Amendment HKAS 39 & HKFRS 4 Amendments HKFRSs 1 & 6 Amendments HKFRS 6 HKFRS 7 HKFRS-Int 4 HKFRS-Int 5 HK(IFRIC)-Int 6 Capital Disclosures Actuarial Gains and Losses, Group Plans and Disclosures Cash Flow Hedge Accounting of Forecast Intragroup Transactions The Fair Value Option Financial Guarantee Contracts First-time Adoption of Hong Kong Financial Reporting Standards and Exploration for and Evaluation of Mineral Resources Exploration for and Evaluation of Mineral Resources Financial Instruments: Disclosures Determining whether an Arrangement contains a Lease Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January The revised standard will affect the disclosures about qualitative information about the Group s objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance. HKFRS 7 corporates the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for annual periods beginning on or after 1 January In accordance with the amendments to HKAS 39 regarding financial guarantee contracts, financial guarantee contracts are initially recognised at fair value and are subsequently measured at the higher of (i) the amount determined in accordance with HKAS 37 and (ii) the amount initially recognised, less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18. The HKAS 19 Amendment, HKAS 39 Amendment regarding cash flow hedge accounting of forecast intragroup transactions, HKFRSs 1 and 6 Amendments, HKFRS 6, HKFRS-Int 5 and HK(IFRIC)-Int 6 do not apply to the activities of the Group. HK(IFRIC)-Int 6 shall be applied for annual periods beginning on or after 1 December Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant impact on the Group s financial statements in the period of initial application.

41 40 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 3.4 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES Effect on the consolidated balance sheet Effect of adopting HKAS 17 # Prepaid land premiums 31 December 1 January Increase/(decrease)

42 annual report 2005 Haier Electronics Group Co., Ltd SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Goodwill on acquisition for which the agreement date is on or after 1 January 2005 (cont d) For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated: represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and is not larger than a segment based on either the Group s primary or the Group s secondary reporting format determined in accordance with HKAS 14 Segment Reporting. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. An impairment loss recognised for goodwill is not reversed in a subsequent period. Excess over the cost of business combinations (applicable to business combinations for which the agreement date is on or after 1 January 2005) Any excess of the Group s interest in the net fair value of the acquirees identifiable assets and liabilities over the cost of the acquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognised immediately in the income statement. Impairment of assets Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets, financial assets and goodwill), the asset s recoverable amount is estimated. An asset s recoverable amount is calculated as the higher of the asset s or cash-generating unit s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is credited to the income statement in the period in which it arises.

43 42 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Related parties A party is considered to be related to the Group if: (a) (b) (c) (d) (e) (f) directly or indirectly through one or more intermediaries, the party (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group; the party is an associate; the party is a jointly-controlled entity; the party is a member of the key management personnel of the Group or its parent; the party is a close member of the family of any individual referred to in (a) or (d); or the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e). Property, plant and equipment and depreciation Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and machinery is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment and the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement. Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows: Buildings 2% to 10% Plant and machinery 5% to 19% Tools, furniture and fixtures 10% to 33% Motor vehicles 9% to 20% Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset. Construction in progress represents a building under construction and equipment pending installation. It is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is reclassified to the appropriate category of the property, plant and equipment when completed and ready for use.

44 annual report 2005 Haier Electronics Group Co., Ltd SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Intangible assets (other than goodwill) The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date. Patents and licence Purchased patents and licences are stated at cost less any impairment losses and are amortised on the straight-line basis over their estimated useful lives of 10 years. Research and development costs All research costs are charged to the income statement as incurred. Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred. Deferred development costs are stated at cost less any impairment losses and are amortised using the straight-line basis over the commercial lives of the underlying products, commencing from the date when the products are put into commercial production. Leases Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms. Prepaid land premiums under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms. Investments and other financial assets (applicable to the year ended 31 December 2005) Financial assets in the scope of HKAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets, after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date. All regular way purchases and sales of financial assets are recognised on the trade date, i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

45 44 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Impairment of financial assets (applicable to the year ended 31 December 2005) The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e., the effect interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in profit or loss. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Derecognition of financial assets (applicable to the year ended 31 December 2005) A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: the rights to receive cash flows from the asset have expired; the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risk and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group s continuing involvement is limited to the fair value of the transferred asset and the option exercise price.

46 annual report 2005 Haier Electronics Group Co., Ltd SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process. Convertible notes The component of convertible notes that exhibits characteristics of a liability is recognised as a liability in the balance sheet, net of transaction costs. On issuance of convertible notes, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note; and this amount is carried as a long term liability on the amortised cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognised and included in shareholders equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years. Transaction costs are apportioned between the liability and equity components of the convertible notes based on the allocation of proceeds to the liability and equity components when the instruments are first recognised. Derecognition of financial liabilities (applicable to the year ended 31 December 2005) A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference between the respective carrying amounts is recognised in profit or loss. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on the estimated selling prices less any estimated costs to be incurred to completion and disposal. Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group s cash management. For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use. Provision A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement. Provisions for installation services and product warranties granted by the Group on certain products are recognised based on sales volume and past experience of the level of installation service rendered, repairs or returns, discounted to their present values as appropriate.

47 46 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement or in equity if it relates to items that are recognised in the same or a different period directly in equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with interests in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised except: where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with interests in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Government grants Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

48 annual report 2005 Haier Electronics Group Co., Ltd SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (a) (b) (c) income from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; rental income, on a time proportion basis over the lease terms; and interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset. Employee benefits Share-based payment transactions The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments ( equity-settled transactions ). The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company ( market conditions ), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting date ). The cumulative expense recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Group s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and the end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings/(loss) per share. The Group has adopted the transitional provisions of HKFRS 2 in respect of equity-settled awards and has applied HKFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested on 1 January 2005 and to those granted on or after 1 January 2005.

49 48 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 3.5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Employee benefits (cont d) Paid leave carried forward The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward. Employment Ordinance long service payments Certain of the Group s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance. Pension schemes The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the MPF Scheme ) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administrated fund. The Group s employer voluntary contributions, which are refunded to the Group when the employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Scheme. In addition to the MPF Scheme, the Group operates a separate defined contribution retirement benefits scheme for those employees who were eligible to participate in this scheme. This scheme operates in a similar way to the MPF Scheme, except that when an employee leaves this scheme before his/her interest in the Group s employer contributions vest fully, the ongoing contributions payable by the Group are reduced by the relevant amount of the forfeited employer contributions. The employees of the Group s subsidiaries in Mainland China are required to participate in central pension scheme operated by the local municipal government. These subsidiaries are required to contribute a certain percentage of its payroll costs to the central pension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme. Dividends Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability. Interim dividends are simultaneously proposed and declared, because the Company s bye-laws grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared. Foreign currencies These financial statements are presented in Hong Kong dollars, which is the Company s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

50 annual report 2005 Haier Electronics Group Co., Ltd SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont d) Foreign currencies (cont d) The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar. As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at exchange rates ruling at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting exchange differences are included in a separate component of equity as the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year. 4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES Judgements In the process of applying the Group s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements: Operating lease commitments Group as lessor The Group has entered into commercial property leases on its property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases. Classification between investment properties and owner-occupied properties The Group determines whether a property qualifies as an investment property and has developed criteria in making that judgement. Investment property is a property held to earn rentals or for capital appreciation or both. Therefore, the Group considers whether a property generates cash flows largely independently of the other assets held by the Group. Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), the Group accounts for the portions separately. If the portions could not be sold separately, the property is an investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgement is made on an individual property basis to determine whether ancillary services are so significant that a property does not qualify as investment property. Estimation uncertainty The key assumption concerning the future and other key sources of estimation uncertainty at the balance sheet date, that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below. Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The goodwill arising from the Asset Injection and Call Option Exercise amounting to HK$321,947,000 was impaired during the year. Further details are set out in note 19 to the financial statements.

51 50 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 5. SEGMENT INFORMATION Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment. The Group s operating businesses are structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Group s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows: (a) (b) (c) the mobile handset business segment manufactures and sells mobile phones; the washing machine business segment manufactures and sells washing machine; and the corporate and others segment includes general corporate income and expense items. In determining the Group s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets. (a) Business segments The following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group s business segments for the year ended 31 December 2005 and Mobile handset Washing machine business business Corporate and others Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) (Restated) (Restated) (Restated) Segment revenue: Sales to external customers 1,628,830 3,143,385 3,311,644 2,750,454 4,940,474 5,893,839 Other revenue 8,346 8,842 4,680 5,787 13,026 14,629 Total 1,637,176 3,152,227 3,316,324 2,756,241 4,953,500 5,908,468 Segment results (139,002) 47,006 95, ,723 (18,336) (62,132) 174,729 Interest income 3,329 3,069 Finance costs (20,232) (12,152) Impairment of goodwill (321,947) Profit/(loss) before tax (400,982) 165,646 Tax (16,855) (17,018) Profit/(loss) for the year (417,837) 148,628

52 annual report 2005 Haier Electronics Group Co., Ltd SEGMENT INFORMATION (cont d) (a) Business segments (cont d) Mobile handset Washing machine business business Corporate and others Eliminations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Restated) (Restated) (Restated) (Restated) (Restated) Assets and liabilities: Segment assets 1,099,562 1,121, , ,455 8,931 (7,429) 1,922,283 1,924,358 Deferred tax assets 12,736 21,527 Tax recoverable 3,342 4,940 Pledged deposits 70 2,501 Cash and cash equivalents 560, ,741 Total assets 2,498,768 2,196,067 Segment liabilities 700, , , ,137 6,226 (7,429) 1,453,292 1,358,037 Tax payable 5, Interest-bearing bank and other borrowings 124, ,044 Convertible notes 211,528 Deferred tax liabilities 606 Total liabilities 1,794,657 1,506,512 Other segment information: Depreciation and amortisation 50,076 22,153 20,418 20, ,710 42,351 Capital expenditure 4,717 30, ,551 19, ,453 50,378 Provision for obsolete and slow-moving inventories 53,148 18, ,831 18,430 Provision for bad and doubtful debts 34,303 1,360 36,663 Product warranty and installation provision 108,272 83, ,272 83,513

53 52 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 5. SEGMENT INFORMATION (cont d) (b) Geographical segments The following table presents revenue information for the Group s geographical segments for the year ended 31 December 2005 and Elsewhere in the People s Republic of Hong Kong China (the PRC ) European Union Others Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) (Restated) (Restated) (Restated) (Restated) Segment revenue: Sales to external customers 47, ,457 4,893,379 5,626,353 75,137 37,892 4,940,474 5,893,839 Other revenue 13,026 14,629 13,026 14,629 Total revenue 47, ,457 4,906,405 5,640,982 75,137 37,892 4,953,500 5,908,468 No further geographical segment information is presented as over 90% of the Group s assets are located in Mainland China. 6. REVENUE, OTHER INCOME AND GAINS Revenue, which is also the Group s turnover, represents the net invoiced value of goods sold, net of value-added tax and after allowances for returns and trade discounts. An analysis of revenue, other income and gains is as follow: Group HK$ 000 HK$ 000 (Restated) Revenue Sale of washing machines 3,311,644 2,750,454 Sale of mobile phones 1,628,830 3,143,385 4,940,474 5,893,839 Other income and gains, net Compensation received from suppliers 4,575 Interest income 3,329 3,069 Sale of scrap materials 2,739 3,000 Government subsidies (note) 2,121 4,963 Gross rental income in respect of: Land and buildings 1,548 1,892 Plant and machinery 4,401 1,548 6,293 Others 2, ,355 17,698 Note: During the year, two of the Group s subsidiaries in Mainland China received subsidies from the relevant authorities of Qingdao Municipality and Shunde Municipality as an encouragement for advanced research and development.

54 annual report 2005 Haier Electronics Group Co., Ltd PROFIT/(LOSS) BEFORE TAX The Group s profit/(loss) before tax is arrived at after charging/(crediting): Notes HK$ 000 HK$ 000 (Restated) Cost of inventories sold 4,205,871 5,182,772 Depreciation 16 69,602 41,508 Amortisation for prepaid land premiums Amortisation of intangible assets* Research and development costs* 94,611 75,557 Auditors remuneration 6,000 2,100 Staff costs (including directors remuneration note 9): Wages and salaries 133,922 65,191 Net pension scheme contributions 22,964 17,936 Total staff costs 156,886 83,127 Minimum lease payments under operating leases in respect of land and buildings 8,676 3,522 Provision for obsolete and slow-moving inventories* 53,831 18,430 Provision for bad and doubtful debts**: Trade receivables 34,303 Other receivables 1,360 35,663 Product warranty and installation provision 108,272 83,513 Impairment of goodwill*** 321,947 Loss on disposal of items of property, plant and equipment** 4,587 Foreign exchange differences, net (3,686) 1,072 * The amortisation of intangible assets, research and development costs and provision for obsolete and slow-moving inventories for the year are included in Cost of sales on the face of the consolidated income statement. ** The loss on disposal of items of property, plant and equipment and provision for bad and doubtful debts are included in Other expenses on the face of the consolidated income statement. *** The impairment of goodwill is disclosed on the face of the consolidated income statement.

55 54 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 8. FINANCE COSTS Group HK$ 000 HK$ 000 (Restated) Interest on bank and other loans wholly repayable within five years 10,497 12,152 Interest on convertible notes (note 28) 9,735 20,232 12, DIRECTORS REMUNERATION Directors remuneration for the year, disclosed pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules ) and Section 161 of the Hong Kong Companies Ordinance, is as follows: Group 2005 HK$ 000 Fees 943 Other emoluments: Salaries, allowances and benefits in kind Performance related bonuses Employee share option benefits Pension scheme contributions 943 There was no remuneration paid by the Group to the Company s directors in the prior year as the Company was not yet consolidated into the Group in the prior year. (a) Independent non-executive directors: The fees paid to independent non-executive directors during the year were as follows: 2005 HK$ 000 Lam Kin Kau, Mark 240 Fung Hoi Wing, Henry 240 Lau Ho Wai, Lucas 240 Wu Yinong There was no other emolument payable to the independent non-executive directors during the year.

56 annual report 2005 Haier Electronics Group Co., Ltd DIRECTORS REMUNERATION (b) Executive directors: Salaries, Employee allowances Performance share Pension and benefits related option scheme Fees in kind bonuses benefits contributions Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Yang Mian Mian Wu Ke Song Chai Yong Sen Liang Hai Shan Cao Chun Hua Cui Shao Hua Song Chun Guang Mak Shiu Tong, Clement* Tam Ngai Hung, Terry* Man Wei Dong* There was no arrangement under which a director waived or agreed to waive any remuneration during the year. * Mak Shiu Tong, Clement, Tam Ngai Hung, Terry and Man Wei Dong resigned as directors of the Company on 28 January FIVE HIGHEST PAID EMPLOYEES The five highest paid employees during the year did not include any director (2004: Nil), details of whose remuneration are set out in note 9 above. Details of the remuneration of the five (2004: five) non-director, highest paid employees for the year are as follows: Group HK$ 000 HK$ 000 (Restated) Salaries, allowances and benefits in kind 4,124 4,153 Performance related bonuses Employee share option benefits Pension scheme contributions ,158 4,167

57 56 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 10. FIVE HIGHEST PAID EMPLOYEES (cont d) The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows: Number of employees Nil to HK$1,000, HK$1,500,001 to HK$2,000,000 2 HK$2,000,001 to HK$2,500, TAX No provision for Hong Kong profits tax has been made as the Group did not generate any assessable profits arising in Hong Kong during the year (2004: Nil). The Group has seven subsidiaries established in the PRC, four of which are Sino-foreign equity joint ventures, two of which are wholly-foreign owned enterprises and the remaining one is a limited liability company. Except for the limited liability company and one Sino-foreign equity joint venture, all subsidiaries are entitled to preferential tax treatments including reduction of PRC corporate income tax ( CIT ) and full exemption from CIT tax for two years starting from its first profit-making year following by a 50% reduction for the next consecutive three years HK$ 000 HK$ 000 (Restated) Group: Current Mainland China: Charge for the year 8,068 18,617 Overprovision in prior years (1,860) Deferred (note 30) 8, Tax charge for the year 16,855 17,018

58 annual report 2005 Haier Electronics Group Co., Ltd TAX (cont d) A reconciliation of the tax charge/(credit) applicable to profit/(loss) before tax using the statutory or applicable rates for the locations in which the Company and its subsidiaries are domiciled to the tax charge/(credit) at the effective tax rates, and a reconciliation of the statutory or applicable rates to the effective tax rates, are as follows: Group 2005 Hong Kong PRC Total HK$ 000 % HK$ 000 % HK$ 000 % Loss before tax (339,816) (61,166) (400,982) Tax at the statutory or applicable tax rates (59,468) 17.5 (20,185) 33.0 (79,653) 19.9 Income not subject to tax (1,742) 0.5 (1,742) 0.4 Expenses not deductible for tax 56,350 (16.5) 56,350 (14.1) Tax losses not recognised 4,860 (1.5) 45,350 (74.1) 50,210 (12.5) Temporary differences not recognised 21,182 (34.7) 21,182 (5.3) Tax exemption (29,492) 48.2 (29,492) 7.4 Tax charge at the Group s effective rate 16,855 (27.6) 16,855 (4.2) Group 2004 Hong Kong PRC Total HK$ 000 % HK$ 000 % HK$ 000 % Profit before tax 165, ,646 Tax at the statutory or applicable tax rates 54, , Expenses not deductible for tax 2, , Overprovision in prior years (1,860) (1.1) (1,860) (1.1) Tax exemption (38,386) (23.2) (38,386) (23.2) Tax charge at the Group s effective rate 17, , NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT The net loss from ordinary activities attributable to equity holders of the parent for the year ended 31 December 2005 dealt with in the financial statements of the Company, was HK$1,250,311,000 (note 33(b)). 13. DIVIDEND No dividend has been paid or declared by the Company during the year (2004: Nil). The dividend disclosed for the year ended 31 December 2004 represented dividend declared by a subsidiary of Haier Holdings (BVI) Limited to its previous owner, Haier Corp, out of its retained profits after setting aside a required percentage of its net earnings to the relevant statutory reserves in accordance with the rules and regulations applicable in the PRC and its article of associ

59 58 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 14. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT Under reverse acquisition accounting method (note 2.2), the 6,369,706,667 ordinary shares issued by the Company for the purposes of the Asset Injection and the Call Option Exercise (note 2.1) are deemed to be issued on 1 January 2004 for the purposes of calculating earnings/(loss) per share. The calculation of basic earnings/(loss) per share amounts is based on the net profit/(loss) for the year attributable to ordinary equity holders of the parent, and the weighted average number of ordinary shares in issue during the year. A diluted loss per share amount for the year ended 31 December 2005 has not been disclosed as share options and convertible notes outstanding during the year had anti-dilutive effects on the basic loss per share amount for the year. A diluted earnings per share amount for the year ended 31 December 2004 has not been disclosed as no diluting events existed during that year. The calculations of basic earnings/(loss) per share is based on: HK$ 000 HK$ 000 (Restated) Earnings Net profit/(loss) attributable to ordinary equity holders of the parent, used in the basic earnings/(loss) per share calculation (432,964) 119,479 Number of shares (Restated) Shares Weighted average number of ordinary shares in issue during the year used in the basic earnings/(loss) per share calculation 15,620,283,153 6,369,706,667

60 annual report 2005 Haier Electronics Group Co., Ltd RELATED PARTY TRANSACTIONS (a) In addition to the related party transactions detailed in notes 16, 22, 23, 24, 25, 26, 27, and 28 to the financial statements, the Group had the following material transactions with related parties during the year. (i) The Company s subsidiary, Pegasus Qingdao, had the following material transactions with Haier Corp, Haier Investment, their subsidiaries and associates. Haier Corp, Haier Investment, their subsidiaries and associates are companies that have certain key management personnel in common with the Company. Group Notes HK$ 000 HK$ 000 Sales of mobile handset products (i) 1,523,428 2,747,869 Purchases of materials (ii) 606,607 1,786,847 Utility service fee expenses (iii) 5,745 4,657 Interest expenses (iv) 3,594 3,442 Interest income (iv) Other service fee expenses (v) 1, Notes: (i) For the year ended 31 December 2005, the sales of mobile handset products were made at selling prices based on the costs of raw materials plus a processing fee which is not less than the industry standard. For the year ended 31 December 2004, the sales of mobile phones were made at selling prices based on the cost of materials plus processing fees ranging from 5% to 40% of the purchase price of the materials. (ii) (iii) (iv) (v) The purchases were charged no more than the average market price or the consolidated and integrated tender and bidding price plus a 2.6% commission. Utility service fee expenses were charged with reference to the state-prescribed prices. Interest expenses/income was determined with reference to the standard rates published by the People s Bank of China. Other service fee expenses included legal consulting service fee, general security service fee, human resources service fee which were determined with reference to actual costs incurred.

61 60 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 15. RELATED PARTY TRANSACTIONS (cont d) (ii) The Company s subsidiaries, Qingdao Haier Washing Machine Co., Ltd., Foshan Shunde Haier Electric Co., Ltd., Hefei Haier Washing Machine Co., Ltd., Qingdao Jiaonan Haier Washing Machine Co., Ltd. (collectively the Washing Machine Companies ) and Qingdao Haier Electronics Sales Co., Ltd. had the following material transactions with Haier Corp,

62 annual report 2005 Haier Electronics Group Co., Ltd RELATED PARTY TRANSACTIONS (cont d) (b) On 25 June 2005, Haier Corp provided a corporate guarantee of RMB70,000,000 (equivalent to HK$67,308,000) to Haier Group Finance Co., Ltd. ( Haier Finance ), a subsidiary of Haier Corp and a financial institution approved by the People s Bank of China, as a security for banking facilities granted to Pegasus Qingdao for the period from 25 June 2005 to 24 June As at 31 December 2005, Pegasus Qingdao utilised all of the above banking facilities. (c) (d) On 30 December 2005, Haier Corp provided a corporate guarantee of RMB30,000,000 (equivalent to HK$28,846,000) to Haier Finance as a security for banking facilities granted to Qingdao Jiaonan Haier Washing Machine Co., Ltd. ( Jiaonan Washing Machine ) for the period from 30 December 2005 to 29 December As at 31 December 2005, Jiaonan Washing Machine utilised RMB15,000,000 of the above banking facilities. During the year, the remuneration paid or payable to the Company s directors by the Group amounted to HK$943,000, details of which are set out in note 9 to the financial statements. The related party transactions in respect of items (a), (b) and (c) above also constitute continuing connected transactions or connected transactions as defined in Chapter 14A of the Listing Rules. 16. PROPERTY, PLANT AND EQUIPMENT Group Tools, furniture Plant and and Motor Construction Buildings machinery fixtures vehicles in progress Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ December 2005 At 31 December 2004 and 1 January 2005 (as restated): Cost 181, ,221 56,568 5, ,794 Accumulated depreciation and impairment (45,997) (163,955) (14,894) (4,243) (229,089) Net carrying amount 135, ,266 41, ,705 At 1 January 2005, net of accumulated depreciation and impairment 135, ,266 41, ,705 Additions 53,618 38,689 6, , ,428 Acquisition of subsidiaries (note 34) 80, ,339 27, ,023 Disposals (11,445) (11,445) Depreciation provided during the year (11,266) (41,637) (16,296) (403) (69,602) Transfers 682 4, (5,875) Exchange realignment 6,228 8,930 1, ,179 At 31 December 2005, net of accumulated depreciation and impairment 265, ,415 61,329 1, ,288 At 31 December 2005: Cost 323, ,120 92,947 5, ,967 Accumulated depreciation and impairment (58,592) (166,705) (31,618) (4,764) (261,679) Net carrying amount 265, ,415 61,329 1, ,288

63 62 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 16. PROPERTY, PLANT AND EQUIPMENT (cont d) Group Tools, furniture Plant and and Motor Construction Buildings machinery fixtures vehicles in progress Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ December 2004 (as restated) At 1 January 2004: Cost 181, ,591 31,136 4,828 2, ,846 Accumulated depreciation and impairment (39,728) (139,462) (9,770) (4,103) (193,063) Net carrying amount 141, ,129 21, , ,783 At 1 January 2004, net of accumulated depreciation and impairment 141, ,129 21, , ,783 Additions ,587 24, ,522 43,519 Disposals (1,055) (34) (1,089) Depreciation provided during the year (6,269) (29,501) (5,540) (198) (41,508) Transfers 3, (3,998) At 31 December 2004, net of accumulated depreciation and impairment 135, ,266 41, ,705 At 31 December 2004: Cost 181, ,221 56,568 5, ,794 Accumulated depreciation and impairment (45,997) (163,955) (14,894) (4,243) (229,089) Net carrying amount 135, ,266 41, ,705

64 annual report 2005 Haier Electronics Group Co., Ltd PROPERTY, PLANT AND EQUIPMENT (cont d) As at 31 December 2005, four of the Group s buildings situated in Qingdao or Shunde, the PRC, did not have building ownership certificates registered under the name of the respective subsidiaries of the Company. The carrying amounts of those buildings situated at Qingdao and Shunde at 31 December 2005 were HK$164,745,000 and HK$53,885,000 respectively. In addition, two of the aforementioned buildings in Qingdao did not have land use right certificates registered under the name of the respective subsidiaries of the Company at 31 December On 24 February 2005, Haier Corp issued an undertaking to the Company pursuant to which Haier Corp agreed to provide other suitable properties to the Group to ensure the continuing operations of the respective subsidiaries of the Company operating in Qingdao. That undertaking also indemnifies the Group to bear any losses arising from the above defective land use right and property title issues in Qingdao and for any moving cost/loss incurred, if, for any reason, the respective subsidiaries were not able to continue using the buildings before the related acquisition and registration procedures are completed. In the opinion of the directors, the Group is entitled to lawfully and validly occupy and use the buildings for its daily operations, notwithstanding the fact that the related land use right certificates have not yet obtained and the application procedures for the building ownership certificates have not yet been completed. 17. PREPAID LAND PREMIUMS Group HK$ 000 HK$ 000 (Restated) Carrying amount at 1 January As previously reported Effect of adopting HKAS 17 (note 3.4) 12,150 5,553 As restated 12,150 5,553 Additions 14,025 6,859 Exchange realignment 350 Recognised during the year (510) (262) Carrying amount at 31 December 26,015 12,150 Current portion included in prepayments, deposits and other receivables (553) (265) Non-current portion 25,462 11,885 The Group s leasehold land is held under a medium term lease and is situated in Mainland China. As at 31 December 2005, the land use rights of two parcels of land occupied by the Group in Qingdao, the PRC, were not acquired by and registered under the name of the respective subsidiaries of the Company, details of which are set out in note 16 to the financial statements. During the year, one of the Group s subsidiaries in Jiaonan, the PRC, acquired a parcel of land for a cash consideration of HK$3,538,000. The respective land use right certificate was obtained by that subsidiary on 6 January 2006.

65 64 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 18. INTANGIBLE ASSETS Group Patents and licenses HK$ December 2005 At 1 January 2005: Cost 5,810 Accumulated amortisation (1,888) Net carrying amount 3,922 Cost at 1 January 2005, net of accumulated amortisation 3,922 Amortisation provided during the year (598) Exchange realignment 113 At 31 December ,437 At 31 December 2005: Cost 5,978 Accumulated amortisation (2,541) Net carrying amount 3, December 2004 At 1 January 2004: Cost 5,810 Accumulated amortisation (1,307) Net carrying amount 4,503 Cost at 1 January 2004, net of accumulated amortisation 4,503 Amortisation provided during the year (581) At 31 December ,922 At 31 December 2004: Cost 5,810 Accumulated amortisation (1,888) Net carrying amount 3,922

66 annual report 2005 Haier Electronics Group Co., Ltd GOODWILL Group HK$ December 2005 Cost at 1 January 2005 (as restated) Acquisition of subsidiaries (note 34) 321,947 Impairment during the year (321,947) Cost and net carrying amount at 31 December December 2004 Cost and net carrying amount at 1 January and 31 December 2004 (as restated) Impairment testing of goodwill Goodwill acquired through business combination has been allocated to the mobile handset business cash-generating unit, which is a reportable segment, for impairment testing. Mobile handset business cash-generating unit The recoverable amount of the mobile handset business cash-generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The discount rate applied to cash flow projections is 17.2% and cash flows beyond the five-year period are extrapolated using a growth rate of 3% which is determined with reference to the prevailing inflation rate in Mainland China. Senior management estimated the budgeted gross margin based on past performance and their expectations for market development. The discount rate used is before tax and reflects specific risks relating to the mobile handset business cash-generating units. During the year, due to intensifying competition and price reduction of mobile phones in the mobile phone market in Mainland China, the Group recognised a goodwill impairment loss of HK$321,947,000 for its mobile handset business. The goodwill impairment loss is determined with reference to the recoverable amount of the Group s mobile handset business. 20. INTERESTS IN SUBSIDIARIES Company HK$ 000 HK$ 000 Unlisted investments, at cost 3,517,747 1,963,638 Due from subsidiaries 2, Due to a subsidiary (8,894) (8,747) 3,511,213 1,955,499 Impairment (2,127,707) (904,028) 1,383,506 1,051,471

67 66 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 20. INTERESTS IN SUBSIDIARIES (cont d) During the year, due to intensifying competition and price reduction of mobile phones in the Mainland China market, the Company recognised an impairment loss of investment costs of HK$1,223,679,000 for its subsidiaries engaging in the mobile phone business. The impairment loss is determined with reference to the recoverable amount of the subsidiaries. The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayment. Particulars of the principal subsidiaries are as follows: Percentage Place of Nominal value of equity registration and of registered attributable to Principal Name operations capital the Company activities Direct Indirect Pegasus Telecom (Qingdao) PRC US$12,000, Manufacture Co., Ltd* and sale of mobile phones Pegasus Electronic (Qingdao) PRC US$29,980, Manufacture Co., Ltd.* and sale of mobile phones Qingdao Haier Washing Machine PRC RMB150,000, Manufacture Co., Ltd.** and sale of washing machines Foshan Shunde Haier Electric PRC RMB48,000, Manufacture Co., Ltd.** and sale of washing machines Hefei Haier Washing Machine PRC RMB12,000, Manufacture Co., Ltd.** and sale of washing machines Qingdao Jiaonan Haier Washing PRC RMB10,000, Manufacture Machine Co., Ltd.*** and sale of washing machines Qingdao Haier Electronics Sales PRC RMB5,000, # Sale of washing Co., Ltd.** machines * Registered as a wholly-foreign-owned enterprise under the PRC law. ** Registered as a Sino-foreign equity joint venture enterprise under PRC Law. *** Registered as a limited liability company under the PRC law. # Interest held through Foshan Shunde Haier Electric Co., Ltd., a 60% indirectly owned subsidiary of the Company. The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

68 annual report 2005 Haier Electronics Group Co., Ltd INVENTORIES Group HK$ 000 HK$ 000 (Restated) Raw materials 113, ,735 Work in progress 68, ,212 Finished goods 250,725 88, , , TRADE AND BILLS RECEIVABLES The Group normally allows an average credit period of 30 to 90 days to its trade customers. Trade receivables are non-interestbearing. An aged analysis of the trade and bills receivables as at the balance sheet date, based on the invoice date and net of provisions, is as follows: Group HK$ 000 HK$ 000 (Restated) Trade receivables Within 1 month 310, ,370 1 to 2 months 114, ,715 2 to 3 months 77,899 10,037 Over 3 months 33,803 47, , ,124 Bills receivable 140,919 76, , ,171 Included in the Group s trade and bills receivables are amounts due from subsidiaries and associates of Haier Corp and Haier Investment of HK$485,608,000 (2004: HK$847,738,000 (as restated)), which are repayable on similar credit terms to those offered to the major customers of the Group. Further details in respect of the sales to these related parties are set out in note 15 to the financial statements.

69 68 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 23. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES Group Company HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) Prepayments 55,052 54, ,134 Deposits and other receivables 90,889 77, , , ,134 Included in prepayments are amounts advanced to subsidiaries and associates of Haier Corp and Haier Investment of HK$49,228,000 (2004: HK$48,411,000) (as restated)) for the purchases of moulds and materials. The amount are unsecured, interest free and are repayable on demand. 24. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS Group Company HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) Cash and bank balances 533, ,242 23,906 1,168 Time deposits 27,362 27, , , ,242 51, ,830 Less: Pledged deposits (70) (2,501) Cash and cash equivalents 560, ,741 51, ,830 At the balance sheet date, the cash and bank balances and time deposits of the Group denominated in Renminbi ( RMB ) amounted to HK$432,514,000 (2004: HK$242,741,000 (as restated)). The RMB is not freely convertible into other currencies, however, under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business. Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and one month depending on the immediate cash requirement of the Group, and earn interest at the respective short term time deposit rates. The carrying amounts of the cash and cash equivalents and the pledged deposits approximate to their fair values. Included in the Group s cash and cash equivalents are deposits of approximately HK$260,133,000 (2004: HK$59,524,000 (as restated)) placed with Haier Finance, a financial institution approved by the People s Bank of China. The interest rate on these deposits was 0.72% per annum. Further details of the interest income attributable to the deposits placed with Haier Finance are set out in note 15 to the financial statements.

70 annual report 2005 Haier Electronics Group Co., Ltd TRADE AND BILLS PAYABLES An aged analysis of the trade payables as at the balance sheet date, based on the invoice date, is as follows: Group HK$ 000 HK$ 000 (Restated) Trade payables Within 1 month 445, ,215 1 to 2 months 129, ,033 2 to 3 months 119,850 91,458 Over 3 months 181, , ,971 1,136,940 Bills payable 96, ,116 1,136,940 Included in the Group s trade payables are amounts due to subsidiaries of Haier Corp and Haier Investment of HK$756,040,000 (2004: HK$793,724,000 (as restated)) which are repayable on similar credit terms to those offered by the major suppliers of the Group. Further details of the purchases from these related parties are set out in note 15 to the financial statements. The trade payables are non-interest-bearing and are normally settled on credit terms ranging from 30 to 60 days. 26. OTHER PAYABLES AND ACCRUALS Group Company HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) Other payables 301, ,955 Accruals 151,100 75,655 6,071 2, , ,610 6,071 2,162 Included in the Group s other payables are amounts due to subsidiaries of Haier Corp and Haier investment of HK$57,638,000 (2004: HK$73,446,000 (as restated)) which are unsecured, interest-free and are repayable on demand.

71 70 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 27. INTEREST-BEARING BANK AND OTHER BORROWINGS Effective Group Company interest rate (%) Maturity HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) Current Other loans, unsecured (note) or on demand 81,731 65,421 Trust receipts, unsecured or on demand 43,076 81, , ,044 Non-current Convertible notes (note 28) , , , , ,528 Analysed into: Group Company HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) Bank loans repayable: Within one year or on demand 43,076 81,623 Other borrowings repayable: Within one year or on demand 81,731 65,421 In the second year In the third to fifth year, inclusive 211, , ,259 65, , , , ,528 Note: Other loans comprised two loans borrowed from Haier Finance, which are guaranteed by Haier Corp, bear interest at a rate of approximately 5% per annum and are repayable within one year. Further details of the interest expense attributable to the loans borrowed from Haier Finance are set out in note 15 to the financial statements. The Group s other loans are denominated in RMB and the convertible notes are denominated in Hong Kong Dollars. The Group s trust receipts are denominated in either United States Dollars or Japanese Yen. Except for the convertible notes, all other borrowings of the Group bear interest at floating interest rates. The directors consider that the carrying amounts of the Group s current borrowings approximate to their fair values. The fair value of the liability portion of the convertible notes is estimated at approximately HK$200 million, which is calculated by discounting the expected future cash flows at the prevailing interest rates.

72 annual report 2005 Haier Electronics Group Co., Ltd CONVERTIBLE NOTES On 28 January 2005, the Company issued convertible notes with an aggregate principal amount of HK$260 million to a subsidiary of Haier Group, Qingdao Haier Group Holdings (BVI) Ltd., as part of the purchase consideration for the Asset Injection. Further details are set out in note 2.1 to the financial statements. The convertible notes have a three-year term and are non-interest-bearing. Each note is convertible at any time prior to the fifth business days before 27 January 2008, at the note holder s option, into the Company s ordinary shares at a conversion price of HK$0.18 per share. When the notes were issued, the prevailing market interest rate for similar notes without the conversion option was higher than the interest rate at which the notes were issued. The fair value of the liability component of the convertible notes was determined at the issuance date, using the prevailing market interest rate for similar debt without a conversion option of 4.75% and is carried as a long term liability. The remaining portion was allocated to the conversion option that was recognised and included in shareholders equity. The net proceeds received from the issue of the convertible notes have been split between the liability and the equity components, as follows: Group and Company HK$ 000 HK$ 000 Nominal value of convertible notes issued during the year 260,000 Equity component (33,790) Liability component at the issuance date 226,210 Interest expense (note 8) 9,735 Conversion of convertible notes (note) (24,417) Liability component at 31 December (note 27) 211,528 Note: During the year, convertible notes with face value of HK$ 27,000,000 were converted into 150,000,000 ordinary shares of the Company. Accordingly, the equity component and liability component of the convertible notes were reduced by HK$3,509,000 and HK$24,417,000, respectively. Subsequent to the balance sheet date, on 3 January 2006 and 8 February 2006, 350,000,000 ordinary shares of the Company were issued upon conversion of the convertible notes with face value of HK$63,000,000 at a conversion price of HK$0.18 per share.

73 72 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 29. PROVISIONS Group Product warranties and installation HK$ 000 HK$ 000 (Restated) At beginning of year (as restated) 20,487 21,735 Additional provision 108,272 83,513 Amounts utilised during the year (100,360) (84,761) Exchange realignment 591 At 31 December 28,990 20,487 Portion classified as current liabilities (20,184) (16,499) Non-current portion 8,806 3,988 The Group provides installation services and three-year warranties to its customers on washing machines, under which faulty products are repaired or replaced. The amount of provisions is estimated based on sales volume and past experience of the level of installation service rendered, repairs or returns. The estimation basis is reviewed on an ongoing basis and revised where appropriate. 30. DEFERRED TAX The movements in deferred tax assets and liabilities (representing the provision for obsolete and slow-moving inventories, accruals and provisions) during the year are as follows: Deferred tax assets HK$ 000 HK$ 000 (Restated) Group At 1 January (as restated) 21,527 23,260 Deferred tax charged to the income statement during the year (note 11) (9,410) (1,733) Exchange realignment 619 At 31 December 12,736 21,527 Deferred tax liabilities HK$ 000 HK$ 000 (Restated) Group At 1 January (as restated) 606 2,078 Deferred tax credited to the income statement during the year (note 11) (623) (1,472) Exchange realignment 17 At 31 December 606

74 annual report 2005 Haier Electronics Group Co., Ltd DEFERRED TAX (cont d) The Group has tax losses arising in Hong Kong of HK$35,702,000 (2004: HK$40,419,000 (as restated)) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in the Company and subsidiaries that have been loss-making for some time. At 31 December 2005, there is no significant unrecognised deferred tax liability (2004: Nil) for taxes that would be payable on the unremitted earnings of certain of the Group s subsidiaries as the Group has no liability to additional tax should such amounts be remitted. There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders. 31. ISSUED EQUITY Group Issued equity HK$ 000 At 1 January 2004 and ,324 Acquisition of subsidiaries (note (i)) 445,307 Conversion of convertible notes (note 28) 27,926 Exercise of share options (note (ii)) 28,602 At 31 December ,159 Due to the use of reverse acquisition accounting (note 2.2), the amount of issued equity, comprising share capital, contributed surplus and share premium in the consolidated balance sheet, represents the amount of issued equity of legal subsidiaries, the Haier Businesses. The equity structure (i.e. the number and type of shares) reflects the equity structure of the legal parent, Haier Electronics Group Co., Ltd. Company HK$ 000 HK$ 000 Authorised: 30,000,000,000 (2004: 30,000,000,000) shares of HK$0.10 each 3,000,000 3,000,000 Issued and fully paid: 16,670,734,612 (2004: 9,964,027,945) shares of HK$0.10 each 1,667, ,403

75 74 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 31. ISSUED EQUITY (cont d) A summary of the transactions involving the Company s share capital during the year is as follows: Share Number of Issued premium shares in issue capital account Total HK$ 000 HK$ 000 HK$ 000 At 1 January ,964,016, ,402 70,174 1,066,576 Warrants exercised 11, At 31 December 2004 and beginning of year 9,964,027, ,403 70,179 1,066,582 Transfer of share premium account and contributed surplus to set off against accumulated losses (note (iii)) (70,179) (70,179) Issue of shares on the Asset Injection (note 2.1) 4,026,706, , , ,806 Issue of shares on the Call Option Exercise (note 2.1) 2,343,000, , , ,600 Conversion of convertible notes (note 28) 150,000,000 15,000 12,926 27,926 Exercise of share options (note (ii)) 187,000,000 18,700 9,902 28,602 At 31 December ,670,734,612 1,667, ,264 2,246,337 Notes: (i) (ii) (iii) The deemed consideration in respect of the acquisition of subsidiaries amounted to HK$755,307,000 (note 34). The convertible notes of HK$260,000,000 and cash consideration of HK$50,000,000 satisfied by the Company in respect of the acquisition of subsidiaries (note 2.1) are regarded as deemed distributions to Haier Group. Details of the Company s share option schemes and the share options issued under the schemes are included in note 32 to the financial statements. Pursuant to a special resolution passed at the annual general meeting of the Company held on 25 May 2005, the Company carried out the following capital reorganisations: (a) (b) the credit balance of share premium account amounted to HK$70,179,000 was reduced and applied to offset an equivalent amount of the accumulated losses of the Company as at 31 December 2004; and the credit balance of contribution surplus amounted to HK$844,286,000 was reduced and applied to offset an equivalent amount of the accumulated losses of the Company as at 31 December Warrants On 22 February 2002, the Company made a bonus issue of warrants to the shareholders whose names appeared on the register of members of the Company on 22 February 2002, on the basis of one unit of warrant for every ten shares of HK$0.10 each in the share capital of the Company held on that date. As a result, 893,876,600 units of warrants (the 2004 warrants ) in the amount of HK$464,815,832 were issued pursuant to the bonus issue. 11,371 warrants were exercised for 11,371 shares at HK$0.52 per share in On 26 February 2004, all outstanding 2004 warrants were expired and the subscription rights attaching to the 2004 warrants which have not been exercised by 26 February 2004 were expired and lapsed.

76 annual report 2005 Haier Electronics Group Co., Ltd SHARE OPTION SCHEMES The share option scheme adopted by the Company on 24 November 1997 and subsequently amended on 4 December 1997 (the Old Share Option Scheme ) was terminated and a new share option scheme (the New Share Option Scheme ) was adopted by the Company on 28 February 2002 to comply with the new amendments to the Listing Rules in respect of the share option schemes of a listed company. As a result, the Company may no longer grant further options under the Old Share Option Scheme. However, all options granted prior to the termination of the Old Share Option Scheme will remain in full force and effect. Unless otherwise cancelled or amended, the New Share Option Scheme will remain in force for 10 years from the date of adoption. The share options granted under the Old Share Option Scheme were fully exercised during the year. As at 31 December 2005, there were 607,500,000 share options outstanding under the New Share Option Scheme. The purpose of the New Share Option Scheme is to provide incentives and rewards to the eligible participants who contribute to the success of the operations of the Group. Eligible participants of the New Share Option Scheme include any employee, executive or officer of the Group (including executive and non-executive directors of the Company) and any supplier, consultant, agent, adviser, shareholder, customer, partner and business associate who, in the sole discretion of the board of directors of the Company (the Board ), has contributed to the Group. Pursuant to the New Share Option Scheme, the maximum number of shares in respect of which options may be granted under the New Share Option Scheme is such number of shares, when aggregated with shares subject to any other share option scheme(s) of the Company (which, for this purpose, excludes the Old Share Option Scheme), must not exceed 10% of the issued share capital of the Company as at the date of adoption of the New Share Option Scheme. The maximum number of shares issuable upon exercise of the options granted under the New Share Option Scheme and any other share option scheme(s) of the Company (including exercised, cancelled and outstanding options) to each eligible participant in any 12-month period is limited to 1% of the shares of the Company in issue as at the date of grant. Any further grant of share options in excess of this 1% limit shall be subject to the issue of a circular by the Company (and if required, the holding company) and the shareholders approval of the Company (and if required, the approval of the shareholders of the holding company) at a general meeting. Share options granted to a director or substantial shareholder of the Company, or to any of their respective associates, are subject to the approval in advance by the independent non-executive directors of the Company (and if required, the independent nonexecutive directors of the holding company), excluding the independent non-executive director(s) of the Company and the holding company who is/are the grantee(s) of the options. In addition, any share option granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their respective associates, in excess of 0.1% of the shares of the Company in issue as at the date of grant or with an aggregate value (based on the closing price of the shares of the Company as at the date of grant) in excess of HK$5 million, within any 12-month period, are subject to the issue of a circular by the Company (and if required, the holding company) and the shareholders approval of the Company (and if required, the approval of the shareholders of the holding company) in advance at a general meeting. The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the Board, and commences on a specified date and ends on a date which is no later than 10 years from the date of grant of the share options or the expiry date of the New Share Option Scheme, whichever is earlier. The exercise price of the share options is determinable by the Board, but may not be less than the highest of (i) the closing price of the shares of the Company as stated in the daily quotation sheet of the Stock Exchange on the date of grant, which must be a trading day; (ii) the average closing price of the shares of the Company as stated in the Stock Exchange s daily quotation sheets for the five trading days immediately preceding the date of grant; and (iii) the nominal value of the shares of the Company.

77 76 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 32. SHARE OPTION SCHEMES (cont d) Details of the movements of share options under the Old Share Option Scheme during the year were as follows: Number of share options Date of Outstanding Lapsed/ Outstanding grant of Exercise as at Exercised cancelled as at share Exercise price per Category 1 January during during 31 December options period of share of participant 2005 the year the year 2005 (Note 1) share options (Note 2) HK$ EMPLOYEES In aggregate 3,000,000 (3,000,000) 13/7/ /1/ /7/2006* Notes: 1. The vesting period of the share options is from the date of grant until the commencement of the exercise period. 2. The exercise price of the share options is subject to adjustment(s) in the case of rights or bonus share issues, or other similar changes in the share capital of the Company. * The date of expiry has been extended one year from the original date of expiry of 12 July 2005 to 12 July 2006 pursuant to the Board resolution of the Company passed on 30 June Details of the movements of share options under the New Share Option Scheme during the year were as follows: Number of share options Price of Company s shares Transfer Outstanding Lapsed/ from/(to) Outstanding Date of Exercise Exercise as at Exercised cancelled other category as at grant of period price per Immediately At exercise 1 January during during during 31 December share options of share share before the date of Name or category of participant 2005 the year the year the year 2005 (Note 1) options (Note 2) exercise date option HK$ HK$ HK$ Executive directors Wu Ke Song 89,000,000 (27,000,000 ) 62,000,000 19/11/ /11/ /11/2007 Chai Yong Sen 89,000,000 (27,000,000 ) 62,000,000 19/11/ /11/ /11/2007 Liang Hai Shan 89,000,000 (29,000,000 ) 60,000,000 19/11/ /11/ /11/2007 Cui Shao Hua 89,000,000 (29,000,000 ) 60,000,000 19/11/ /11/ /11/2007 Mak Shiu Tong, Clement (Note 3) 89,000,000 (89,000,000 ) 16/8/ /08/ /08/2007 Tam Ngai Hung, Terry (Note 3) 89,000,000 (89,000,000 ) 16/8/ /08/ /08/2007 Man Wei Dong (Note 3) 89,000,000 (89,000,000 ) 19/11/ /11/ /11/ ,000,000 (112,000,000 ) (89,000,000 ) (178,000,000 ) 244,000,000

78 annual report 2005 Haier Electronics Group Co., Ltd SHARE OPTION SCHEMES (cont d) Details of the movements of share options under the New Share Option Scheme during the year were as follows: (cont d) Number of share options Price of Company s shares Transfer Outstanding Lapsed/ from/(to) Outstanding Date of Exercise Exercise as at Exercised cancelled other category as at grant of period price per Immediately At exercise 1 January during during during 31 December share options of share share before the date of Name or category of participant 2005 the year the year the year 2005 (Note 1) options (Note 2) exercise date option HK$ HK$ HK$ Independent non executive directors Lam Kin Kau, Mark 5,000,000 5,000,000 16/8/ /8/ /8/2007 Fung Hoi Wing, Henry 5,000,000 (3,000,000 ) 2,000,000 16/8/ /8/ /8/ ,000,000 (3,000,000 ) 7,000,000 Other employees In aggregate 247,500,000 (247,500,000 ) 16/8/ /8/ /8/2007 Other participants In aggregate (69,000,000 ) 425,500, ,500,000 16/8/ /8/ /8/ ,500,000 (184,000,000 ) (89,000,000 ) 607,500,000 Notes: 1. The vesting period of the share options is from the date of grant until the commencement of the exercise period. 2. The exercise price of the share options is subject to adjustment(s) in the case of rights or bonus share issues, or other similar changes in the share capital of the Company. 3. Mak Shiu Tong, Clement, Tam Ngai Hung, Terry, and Man Wei Dong resigned as directors of the Company on 28 January At the balance sheet date, the Company had 607,500,000 share options outstanding under the New Share Option Scheme, which represented a total of approximately 3.64% of the Company s shares in issue as at that date. The exercise in full of these remaining share options would, under the present capital structure of the Company, result in the issue of 607,500,000 additional ordinary shares of the Company and additional share capital of HK$60,750,000 and share premium of HK$32,556,000 (before issue expenses). Subsequent to the balance sheet date, certain directors exercised in aggregate 206,500,000 share options (52,000,000 share options each for Wu Ke Song and Chai Yong Sen, 50,000,000 share options each for Liang Hai Shan and Cui Shao Hua and 2,500,000 share options for Lam Kin Kau, Mark) and certain other participants exercised 51,000,000 share options. In addition, an employee was granted 5,000,000 share options subsequent to the balance sheet date.

79 78 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 33. RESERVES (a) Group The amounts of the Group s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity on page 32 the financial statements. In accordance with the relevant PRC laws and regulations applicable to sino-foreign venture enterprises and wholly-owned enterprises, certain subsidiaries of the Company in the PRC are required to transfer a certain percentage of their net profit for the year to reserve funds. These funds are non-distributable. For the purpose of determining the appropriations to these funds, the net profit is determined in accordance with the applicable financial rules and regulations in the PRC. (b) Company Share premium Contributed Accumulated account surplus losses Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,174 1,035,156 (870,038) 235,292 Exercise of warrants 5 5 Net loss for the year (44,427) (44,427) At 31 December 2004 and beginning of the year 70,179 1,035,156 (914,465) 190,870 Transfer of share premium account and contributed surplus to set off against accumulated loss (note 31(iii)) (70,179) (844,286) 914,465 Issue of shares on the Asset Injection (note 2.1) 322, ,136 Issue of shares on the Call Option Exercise (note 2.1) 234, ,300 Conversion of convertible notes (note 28) 12,926 12,926 Exercise of share options (note 31(ii)) 9,902 9,902 Net loss for the year (1,250,311) (1,250,311) At 31 December , ,870 (1,250,311) (480,177) Note: The contributed surplus of the Company represents the excess of the fair value of the shares of the subsidiaries acquired, over the nominal value of the Company s shares issued in exchange therefor. Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus is distributable to shareholders in certain circumstances.

80 annual report 2005 Haier Electronics Group Co., Ltd BUSINESS COMBINATION On 28 January 2005, the Company acquired Haier Businesses, which are treated as the acquirer for accounting purpose in the business combination under HKFRS 3, details of which are set out in note 2.2 to the financial statements. The fair values of the identifiable assets and liabilities of the Former Group as at the date of acquisition, which have no significant differences from their carrying amounts immediately before the acquisition were as follows: Notes HK$ 000 HK$ 000 Property, plant and equipment 228,023 Cash and bank balances 130,189 Prepayments and other receivables 30,805 Trade payables (134) Accruals and other payables (75,136) Minority interests 119, ,360 Goodwill , ,307 Consideration satisfied by: Issued equity ,307 Convertible notes* 260,000 Cash* 50, ,307 * regarded as deemed distributions to Haier Group (note 31) An analysis of the net inflow of cash and cash equivalents in respect of the acquisition is as follows: HK$ 000 HK$ 000 Cash and bank balances acquired 130,189 Cash consideration (50,000) Net inflow of cash and cash equivalents in respect of the acquisition 80,189 The Former Group had no post-acquisition contribution to the Group s turnover and contributed HK$114,687,000 to the Group s consolidated loss for the year ended 31 December There would have been no significant differences to the Group s consolidated loss for the year had the combination taken place at the beginning of the year.

81 80 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 35. CONTINGENT LIABILITIES At the balance sheet date, neither the Group nor the Company had any significant contingent liabilities. 36. OPERATING LEASE ARRANGEMENTS (a) As lessor The Group leases part of its buildings under an operating lease arrangement, with the lease negotiated for a term of twelve months. At the balance sheet date, the Group had total future minimum lease receivables under the non-cancellable operating lease with its tenants falling due as follows: Group HK$ 000 HK$ 000 Within one year 1,356 1,646 In the second to fifth year, inclusive 721 1,356 2,367 (b) As leasee The Group leases certain of its buildings under operating lease arrangement. Leases for the buildings are negotiated for terms ranging from one to ten years. At the balance sheet date, the Group had total future minimum lease payments under non-cancellable operating lease falling due as follows: Group HK$ 000 HK$ 000 Within one year 1,908 2,341 In the second to fifth year, inclusive 5,213 5,604 After five years 1,136 7,121 9,081

82 annual report 2005 Haier Electronics Group Co., Ltd COMMITMENTS In addition to the operating lease commitments detailed in note 36(b) above, the Group and the Company had the following commitments at the balance sheet date: Group Company HK$ 000 HK$ 000 HK$ 000 HK$ 000 Contracted, but not provided for: Acquisition of fixed assets 2,982 13,764 Contracted, but not provided for: Capital contribution payable to a wholly-owned subsidiary in the PRC 14,153 2,982 13,764 14, FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group s principal financial instruments, comprise convertible notes, other interest-bearing loans and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. It is, and has been, throughout the year under review, the Group s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group s financial instruments are cash flow interest rate risk, foreign currency risk, credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Cash flow interest rate risk The Group s exposure to the risk of changes in market interest rates related primarily to the Group s short term debt obligations with a floating interest rate. The Group s policy is to manage its interest cost using an appropriate mix of fixed and variable rate borrowings. Foreign currency risk The Group has transactional currency exposures. Such exposures arise from sales or purchases by operating units in currencies other than the units functional currency. Foreign currency risk is not considered significant because most of the Group s sales and purchases are denominated in RMB. Credit risk The Group trades only with recognised and creditworthy customers. It is the Group s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the Group s exposure to bad debts is not significant. With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, the Group s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these financial assets. Since the Group trade only with recognised and creditworthy customers, there is no requirement for collateral.

83 82 Haier Electronics Group Co., Ltd. annual report 2005 Notes to Financial Statements (cont d) (31 December 2005) 38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont d) Liquidity risk The Group s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and other borrowings. As the Group s major operations are in Mainland China, all of the Group s borrowings (except for the convertible notes) are borrowed from Haier finance or major local banks in Mainland China, on a short term basis for working capital purpose. 39. COMPARATIVE AMOUNTS As further explained in notes 2.1, 2.2, 3.2 and 3.4 to the financial statements, due to the application of reverse acquisition accounting and adoption of new and revised HKFRSs during the current year, the comparative amounts and presentation of certain items and balances in the financial statements have been reclassified and restated to comply with the current year s presentation and accounting treatment. 40. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the board of directors on 19 April 2006.

84 annual report 2005 Haier Electronics Group Co., Ltd.. 83 Five Year Financial Summary A summary of the financial results and of the assets, liabilities and minority interests of the Group for the last five financial years, as extracted from financial statements and reclassified as appropriate, is set out below. Year ended 31 December RESULTS HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Restated) (Restated) (Restated) (Restated) REVENUE 4,940,474 5,893,839 3,751,640 2,794,422 2,333,026 Cost of sales (4,292,093) (5,277,340) (3,229,896) (2,350,569) (1,997,811) Gross profit 648, , , , ,215 Other income and gains, net 16,355 17,698 9,165 10,094 34,537 Selling and distribution costs (460,826) (332,460) (246,706) (300,394) (220,003) Administrative expenses (222,463) (123,909) (115,807) (94,075) (89,266) Other expenses (40,250) (30) (6,324) (896) Finance costs (20,232) (12,152) (19,852) (13,158) (7,256) Impairment of goodwill (321,947) PROFIT/(LOSS) BEFORE TAX (400,982) 165, ,220 45,424 53,227 Tax (16,855) (17,018) (31,453) (10,227) (9,711) PROFIT/(LOSS) FOR THE YEAR (417,837) 148, ,767 35,197 43,516 Attributable to: Equity holders of the parent (432,964) 119, ,595 27,365 26,852 Minority interests 15,127 29,149 3,172 7,832 16,664 (417,837) 148, ,767 35,197 43,516 ASSETS, LIABILITIES AND MINORITY INTERESTS Total assets 2,498,768 2,196,067 2,154,945 1,782,565 1,432,815 Total liabilities (1,794,657) (1,506,512) (1,599,838) (1,256,360) (899,763) Minority interests (71,341) (180,376) (156,899) (163,259) (151,263) 632, , , , ,789

85 84 Haier Electronics Group Co., Ltd. annual report 2005 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN that the annual general meeting (the Meeting ) of Haier Electronics Group Co., Ltd. (the Company ) will be held at Victoria Room I, Level 2, Four Seasons Hotel Hong Kong, 8 Finance Street, Central, Hong Kong on Monday, 22 May 2006 at 3:00 p.m. for the following purposes: AS ORDINARY BUSINESS: 1. To receive and consider the audited financial statements and the reports of the directors (the Directors ) and auditors (the Auditors ) of the Company for the year ended 31 December To re-elect the retiring Directors and to authorise the board (the Board ) of Directors to determine the remuneration of the Directors. 3. To re-appoint the Auditors and to authorise the Board to determine the remuneration of the Auditors. AS SPECIAL BUSINESS, to consider and, if thought fit, to pass, with or without amendments, the following Resolution nos. 4, 5, 6 and 7 as Ordinary Resolutions of the Company and Resolution no. 8 as Special Resolution of the Company: ORDINARY RESOLUTIONS 4. THAT subject to and conditional upon the listing committee (the Listing Committee ) of The Stock Exchange of Hong Kong Limited (the Stock Exchange ) granting the listing of, and permission to deal in, the shares (the Shares ) of HK$0.10 each in the share capital of the Company to be issued pursuant to the exercise of share options which may be granted under the New Scheme Limit (as defined below), the refreshment of the existing limit in respect of the granting of share options under the Company s share option scheme adopted on 28 February 2002, up to 10 per cent. of the number of the Shares in issue (the New Scheme Limit ) as at the date of passing of this Resolution be and is hereby approved and the Directors be and are hereby authorized to do such acts and execute such documents to effect the New Scheme Limit and to exercise all powers of the Company to allot, issue and deal with the Shares to be issued pursuant to the exercise of such options. 5. THAT: (a) (b) (c) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase issued Shares, subject to and in accordance with all applicable laws and the requirements of the Rules Governing the Listing of Securities (the Listing Rules ) on the Stock Exchange be and is hereby generally and unconditionally approved; the approval in paragraph (a) above shall authorise the Directors on behalf of the Company during the Relevant Period (as hereinafter defined) to procure the Company to repurchase the Shares at a price determined by the Directors; the aggregate nominal amount of the Shares which are authorised to be repurchased by the Directors pursuant to the approval in paragraph (a) above shall not exceed 10 per cent. of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing of this Resolution, and the said approval shall be limited accordingly; and

86 annual report 2005 Haier Electronics Group Co., Ltd. 85 (d) For the purpose of this Resolution, Relevant Period means the period from the date of passing of this Resolution until whichever is the earliest of: (i) (ii) (iii) the conclusion of the next annual general meeting of the Company; the expiration of the period within which the next annual general meeting of the Company is required by the bye-laws of the Company (the Bye-laws ) or any applicable laws to be held; or the date upon which the authority set out in this Resolution is revoked or varied by way of an ordinary resolution of the shareholders of the Company in general meeting. 6. THAT: (a) (b) (c) (d) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional Shares and to make or grant offers, agreements, options and rights of exchange or conversion which might require the exercise of such powers be and is hereby generally and unconditionally approved; the approval in paragraph (a) above shall authorise the Directors on behalf of the Company during the Relevant Period (as hereinafter defined) to make or grant offers, agreements, options and rights of exchange or conversion which would or might require the exercise of such powers after the end of the Relevant Period (as hereinafter defined); the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted or issued (whether pursuant to an option or otherwise) by the Directors pursuant to the approval granted in paragraph (a) above, otherwise than pursuant to (i) a Rights Issue (as hereinafter defined); or (ii) any option scheme or similar arrangement of the Company for the granting or issuance of Shares or rights to acquire Shares; or (iii) the exercise of rights of subscription or conversion under the terms of any warrants issued or to be issued by the Company or any securities which are convertible into Shares; or (iv) any scrip dividend or similar arrangement providing for the allotment of Shares in lieu of the whole or part of a dividend on Shares in accordance with the Bye-laws from time to time, shall not exceed 20 per cent. of the aggregate nominal amount of the issued share capital of the Company as at the date of passing of this Resolution, and the said approval shall be limited accordingly; and for the purposes of this Resolution: Relevant Period shall have the same meaning as that ascribed to it under the Resolution no. 5; and Rights Issue means an offer of shares open for a period fixed by the Directors to the holders of shares of the Company on the register on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of any relevant jurisdiction, or the requirements of any recognised regulatory body or any stock exchange, in any territory outside Hong Kong).

87 86 Haier Electronics Group Co., Ltd. annual report 2005 Notice of Annual General Meeting (cont d) 7. THAT conditional upon the passing of the Resolutions nos. 5 and 6 above, the general mandate granted to the Directors to allot, issue and deal with additional Shares pursuant to the Resolution no. 6 be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of share capital of the Company repurchased by the Company under the authority granted pursuant to the Resolution no. 5 as set out in the notice convening the Meeting, provided that such amount shall not exceed 10 per cent. of the aggregate nominal amount of the issued share capital of the Company as at the date of passing of this Resolution SPECIAL RESOLUTION 8. THAT the existing Bye-laws be and are hereby amended in the following manner: By replacing the word Special by Ordinary where it appears in the existing Bye-laws 97.A(vi) and 104 and related side-note(s). Hong Kong, 26 April 2006 By Order of the Board of HAIER ELECTRONICS GROUP CO., LTD. Yang Mian Mian Chairman Notes: 1. The Register of Members of the Company will be closed from Thursday, 18 May 2006 to Monday, 22 May 2006 (both days inclusive) during which period no transfer of the Shares will be registered. 2. A shareholder entitled to attend and vote at the Meeting is entitled to appoint one or more proxies to attend and to vote in his stead. A proxy need not be a shareholder of the Company. 3. In case of the joint registered holders of any Shares, any one of such persons may vote at any meeting, either in person or by proxy; but if more than one of such joint holders be present at any meeting in person or by proxy, the said person whose name stands first on the Register of Members of the Company shall alone be entitled to vote in respect thereof. 4. To be valid, a form of proxy in the prescribed form together with the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, must be lodged with the branch share registrar and transfer office of the Company in Hong Kong, Tengis Limited at 26/F, Tesbury Centre, 28 Queen s Road East, Wanchai, Hong Kong not less than 48 hours before the time fixed for holding the Meeting. 5. With respect to the Resolution no. 2 as set out in this notice, Messrs. Chai Yong Sen, Cui Shao Hua, Lam Kin Kau, Mark and Fung Hoi Wing, Henry will retire upon the conclusion of the Meeting and, being eligible, will offer themselves for re-election. The profiles of the above Directors have been set out in the 2005 Annual Report of the Company. 6. A circular containing details of the Meeting and the accompanying proxy form have been sent to the shareholders of the Company together with the 2005 Annual Report of the Company.

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