WE HAVE STYLE - Morningstar, Inc

WE HAVE

STYLE

HONGGUO INTERNATIONAL HOLDINGS LIMITED 31F, Nanjing International Trade Center, 18 Zhongshan East Road, Nanjing, China P.C. 210005 Tel: 8625 4791001 Fax: 8625 4791996 email: [email protected]

Annual Report 2004

CONTENTS

CHAIRMAN’S STATEMENT

CORPORATE PROFILE

CORPORATE INFORMATION

MILESTONES

FINANCIAL REVIEW

BOARD OF DIRECTORS

EXECUTIVE OFFICERS

FINANCIAL HIGHLIGHTS

256810121415

CHAIRMAN’S

STATEMENTBUSINESS REVIEWYour company’s net profi t rose 24.6% to a record RMB 53.0 million in FY2004. This was achieved on a 33.5% revenue growth to RMB 294.5 million, refl ecting the growing strength of our two business segments – retail of ladies’ leather shoes in China and Original Equipment Manufacturing (OEM) of shoes for international brands. Retail sales which contributed 80% to Hongguo’s FY2004 revenue notched up a 24.8% increase to RMB 237.2 million. The contract manufacturing business performance grew much faster at 87.2% to record RMB 57.3 million in revenue compared to the previous year.

In keeping with our commitment to enhance shareholder value, the Board has approved a fi nal dividend of 28.3% or approximately 0.70 Singapore cent per ordinary share.

DEVELOPMENTSIn FY 2004, we acquired Jiangsu Unity Corporation (“JUC”) for the retailing of international apparel brands including Hugo Boss, Ermenegildo Zegna, amongst other. This marks out foray into a new, high-fashion retail segment, hitherto unexplored by any Chinese shoe retailing company but with strong synergistic alliances with our existing business segments.

In our core business of ladies’ footwear retailing, in FY2004 we not only increased our geographical spread in the major metropolises in China but also penetrated to the second- and third-tier rung cities, taking our distribution network strength to 487 outlets in 2004. This includes 375 outlets retailing our fl agship brand C.Banner, 55 devoted to E. Blan and 57 outlets belonging to the apparel range from JUC.

FY 2004 also was the year of extensive brand promotion and marketing activity. Veteran singer and actress, Ms. Qu Ying came on board as the brand ambassador for C. Banner, which maintained its popularity as the third-largest selling brand in China for the third year in a row.

In 2004, Hongguo supplemented the front-end promotional fervour with solid backup of production infrastructure. Work began on two new factories at Nanjing and Dongguan with production lines dedicated to in-house brands as well as contract manufacturing.

Contract manufacturing was the star performer in the year, with Australia’s Colorado brand adding another feather to our cap. Together with third-party manufacturing for the Nine West brand, this raised the total contract manufacturing volumes to 700,000 pairs of shoes in 2004 compared to 400,000 in 2003.

OUTLOOK Given the business momentum built in 2004, I am confi dent that the accelerated pace of growth will build up in 2005. Our growth strategy is being achieved through enlarging our retail outlets, increased third-party OEM as well as signifi cantly enlarging our overall manufacturing and design capacity.

In the retail business, Hongguo will add approximately 120 outlets – 50 each to C.Banner and E.Blan and 20 to the apparel business. This will take the total number of company retail outlets to 600 and position us as a major player tapping into the domestic consumer boom in China. Even as we embark on this expansion of our network, we have stepped up measures to ensure the continued improvement in performance of individual outlets and the overall contribution to the Group’s revenue and profi tability.

In the OEM sector, the rapid pace of growth is expected to continue in 2005 and beyond as major international brands seek to fi nd cheaper manufacturing locations in China and even to penetrate the domestic market. With our proven track record and status as a listed company, Hongguo will be able to benefi t further from this global outsourcing trend. Going forward, we will continue to build synergies with global players through international partnerships.

The new Nanjing and Dongguan factories will be ready in 2005 giving a 50.0% increase to production capability of the Group and support the growth of the two core businesses which will also benefi t from economies of scale.

Internally, we will continue to strive hard to drive home operational effi ciencies, cost controls and improved management controls. Externally, we operate in a market which is the second largest in the world for footwear and more opportunities are opening up with inceasing globalization. Given this scenario, I believe that we are on the cusp of our next stage of growth.

ACKNOWLEDGEMENTSI would like to thank our customers, business associates, management team and staff without whom none of our achievements would have been possible. Let us together march forward to create a global company with commitment to quality, class, customer and shareholder value. Let us do it with transparency and accountability. Let us hold up a mirror to ourselves. And for the world to see.

02 Hongguo International Holdings Limited

Chen YixiExecutive Chairman

This has been our first full year of operation as a public-listed

company and I am happy to report that on all financial parameters

of performance we have achieved commendable improvement.

In June 2003 when we were officially listed on the Singapore

Exchange, we had taken on an implicit responsibility to be

transparent, accountable and committed to our shareholders and to

strive hard to take the business to new heights. The 2004 financial

results bear testimony to a promise well-kept.

Annual Report 2004 03


Hongguo International Holdings Limited is the company behind one of the leading premium brands of ladies’ fashion footwear in China. Incorporated in Bermuda on 26 April 2002, listed on the Singapore Exchange in June 2003, our Group currently consists of fi ve wholly owned subsidiaries.

We specialise in the design, manufacture, and retail of our own brand of ladies’ fashion shoes in the PRC. Our management has played a signifi cant role in establishing our Group’s market share in the PRC ladies’ shoes industry.

Our “C.Banner” brand of fashion shoes are marketed as quality upmarket shoes, targeted at the brand and fashion conscious consumers, and has gained recognition within a short span of seven years and has been ranked 3rd in terms of market share for the last three consecutive years, according to an annual market survey of the ladies’ leather shoes industry by The China Industrial Information Issuing Centre of the National Statistics Board of the PRC.

We pride ourselves with a dynamic design and sales team who keep abreast with international fashion trends and consumer preference to create our distinctive line of contemporary women’s footwear that complements the young and trendy professionals.

In 2004, we took a huge step towards expanding our market coverage. Not only did we launch our second brand of ladies fashion shoes “E.Blan”, a mid-range ladies’ fashion shoes brand targeted at the third and fourth-tier cities in the PRC, we also acquired Jiangsu Unity Corporation (“JUC”), a chain of 50 boutiques carrying international fashion apparels such as Byford, Hugo Boss, G2000, U2, Bodyline and Ermenegildo Zegna.

With over 480 boutiques and retail outlets in major departmental stores in China’s major cities such as Beijing, Shanghai, Guangzhou, Nanjing, and in provinces such as Jiangsu, Anhui, Shandong, Zhejiang and Fujian, we are still expanding our market coverage in the PRC and seeking to capture new consumer segments.

Furthermore, as a testament of our quality standards and manufacturing capabilities, we are contract manufacturing for several international brands, including the US brand, Nine West, and Australian brand, Colorado. Although we only began outsourced manufacturing for Colorado in early 2004, they have increased their commitment for FY2005 by approximately four times. We believe that this is due to our commitment to quality, delivery schedules and dedication to our customers.

We will constantly explore for more new opportunities to thrive and further expand our market share in the fashion footwear industry, in both China and overseas countries.

CORPORATE

PROFILE


CORPORATE

INFORMATION

BOARD OF DIRECTORSChen Yixi (Executive Chairman) Li Wei (Managing Director) Miao Bingwen (Executive Director) Zhao Wei (Executive Director) Gui Zuhua (Chief Financial Offi cer) Huo Li (Executive Director) Tso Ming Sing(Non-Executive Director) (Resigned on 24 March 2005)Chen Seow Phun, John (Independent Director) S. Chandra Das (Independent Director) Liu Yunguang (Independent Director)

EXECUTIVE OFFICERSLi HuiWan Xiang Hua

AUDIT COMMITTEEChen Seow Phun, John (Chairman)S. Chandra DasLiu Yunguang

NOMINATING COMMITTEELiu Yunguang (Chairman)Chen YixiChen Seow Phun, John

REMUNERATION COMMITTEE S. Chandra Das (Chairman) Li Wei Liu Yunguang

JOINT COMPANY SECRETARIES Raymond Tong Wei Min, LLB (Hons)Chua Koh Peng, LLB (Hons)

BERMUDA ASSISTANT RESIDENTREPRESENTATIVE ANDASSISTANT SECRETARYA.S.& K. Services LtdCedar House41 Cedar AvenueHamilton HM12BermudaCorporate Information

SINGAPORE REGISTRAR AND SHARE TRANSFER AGENT Lim Associates (Pte) Ltd 10 Collyer Quay #19-08 Ocean Building Singapore 049315

BERMUDA REGISTRAR AND SHARE TRANSFER AGENT Argyle House 41A Cedar Avenue Hamilton HM12 Bermuda

AUDITORS Deloitte & Touche Certifi ed Public Accountants 6 Shenton Way #32-00 DBS Building Tower Two Singapore 068809 Audit Partner: Aric Loh Siang Khee Appointed with effect from fi nancial year ended 31st December 2002

PRINCIPAL BANKERS Bank of China, Jiangsu Branch No.148 South Zhongshan Road, Nanjing, Jiangsu The People’s Republic of China

REGISTERED OFFICE Canon’s Court 22 Victoria Street Hamilton HM12 Bermuda

BUSINESS OFFICE31F, Nanjing International Trade Center18 Zhongshan East RoadNanjing, ChinaP.C. 210005Tel: 8625 4791001Fax: 8625 4791996



MILESTONES

1995• Established in Nanjing, China, by founders Messrs Chen Yixi, Li Wei and Miao Bingwen• Acquired production facilities in Nanjing, and began to manufacture and market ladies' footwear under the brand name “ ” (“Qianbaidu”)

1996• Set up sales offi ces and started selling shoes in major cities and provinces of China

1999• Positioning of “ ” (“Qianbaidu”) as a quality product in the medium price range through branding and marketing activities• Ranked sixth in terms of market share for ladies' leather shoes in China by The China Industrial Information Issuing Centre of the National Statistics Board (CIIIC)

2001• Set up new product design and development centre and manufacturing facilities in Dongguan, the shoe manufacturing hub of China• Upgraded manufacturing facilities in Nanjing which increased the production capacity from 26,000 to 70,000 pairs of shoes per month• Started contract manufacturing of shoes for international brands for the export market• Ranked fourth in terms of market share for ladies' leather shoes in China by the CIIIC

2002• Adopted “C.Banner” as the equivalent of “Qianbaidu” brand name and marketed our merchandise as a premium brand for quality ladies' fashion footwear• Commenced trading business in Jordan’s Qualifying Industrial Zones• Upgraded Dongguan manufacturing facilities, bringing the total manufacturing capacity to 70,000 pairs of shoes per month• Set up additional product design centre in Guangzhou, China• Ranked third in terms of market shares for ladies' leather shoes in China by the CIIIC

2003• Achieved listing on the Singapore Exchange Main Board on 12 June 2003• Sales and distribution network expanded further from 280 to 312 outlets

2004• Launch of second in-house brand, “ ” (“E.blan”) in April• Acquired Jiangsu Unity Corporation Co. Ltd in June 2004 to distribute branded international fashion apparels such as Hugo Boss, G2000 and Ermenegildo Zegna at retail outlets in affl uent costal provinces• Appointment of award-winning singer and actress Ms. Qu Ying as C.Banner Brand Ambassador• For the third consecutive year, ranked third most popular shoe brand in China by the CIIC• As of 31 December 2004, sales and distribution network expanded to 487 outlets in major and developing PRC cities


SOUL

TO SOLEAnnual Report 2004 09

FINANCIAL

REVIEWRevenue

The Group’s revenue increased by RMB 73.9 million from RMB 220.6 million in FY2003 to RMB 294.5 million in FY2004, attributed to increase in retail sales by 24.8% to RMB 237.2 million and contract manufacturing revenue increase by 87.2% to RMB 57.3 million on larger orders from the likes of US-based footwear companies, such as the Nine West Group and 3CI; and Australia’s Colorado Group.

The increase in retail sales was derived mainly from a strengthened retail distribution network having gone up from 312 to 375 outlets as at 31 December, 2004 for the Company’s C.Banner brand and launch of E.Blan with 55 outlets. Aggressive brand promotion and marketing exercises also gave a boost to retail activity.

Contract manufacturing operations contributed 19.5% to revenue as there were increases in orders from new customers, such as the Colorado Group, adding to commitments from international brand Nine West.

JUC, which was acquired in June 2004, operates 57 retail outlets carrying branded international fashion apparels such as Byford, Hugo Boss, G2000, U2, Bodyline and Ermenegildo Zegna. JUC contributed RMB 16.7 million to the Group’s top-line.

Profi tability

Gross profi t for the Group increased by RMB 29.6 million or 37.2% from RMB 79.3 million in FY 2003 to RMB 108.9 million in FY 2004. Correspondingly, the gross profi t margin improved from 36% to 37% although contract manufacturing margin fell marginally. The sale of short-term investment of RMB 3.7 million and marketing commission of RMB 4.1 million from a Group brokering subsidiary were other components of the operating income.

The Group posted a profi t before tax of RMB 57.2 million, representing an increase of RMB 14.7 million or 34.7% over that achieved in the FY 2003. The profi t margin before taxation was fairly consistent at 19.4% on stable sales growth.

While an income tax provision of RMB 3.3 million was made for the Group subsidiary Mayfl ower (Nanjing) Industries Ltd., the other two subsidiaries Mayfl ower (Nanjing) Enterprise Ltd. and Dongguan Mayfl ower Footwear Corporation Ltd were fully tax-exempted. JUC recorded an expense of RMB 1.0 million at a tax rate of 33% applicable to local enterprises.

After accounting for income tax of RMB 4.3 million, net profi t for the year increased by RMB 10.5 million or 24.6% from RMB 42.5 million in FY 2003 to RMB 53.0 million in FY 2004.

The Group achieved a return on assets of 14.3% and a return on equity of 20.5%, refl ecting an increase from 13.7% and 19.7% reached in FY2003.

Financial Position

The Company’s net cash used in operating activities was approximately RMB 3.5 million, after offsetting cash outfl ow of RMB 40.9 million on receivables and prepayments. Increase in inventories for increased retail presence and higher raw material procurement cost resulted in cash outfl ow of RMB 48.1 million. Net cash used in investing activities was RMB 21.3 million and in fi nancing activities RMB 33.1 million. A dividend of approximately RMB 10.4 million was paid in 2004.

The Group’s net tangible asset backing per share increased from RMB 0.54 to 0.65 in FY 2004.

The debt to equity ratio was 0.21 for FY2004 same as for the previous year.


We pride ourselves with a dynamic design and

sales team who keep abreast with international

fashion trends and consumer preference to cre-

ate our distinctive line of contemporary women’s

footwear that complements the young and trendy

professionals.


BOARD OF

DIRECTORS


Chen Yixi founded our Group in 1995 and is currently the Executive Chairman of our Group who is responsible for the direction and strategic expansion of our Group. In 1988, Mr Chen graduated from Nanjing Normal University with a Bachelor’s Degree in News Propagation. From 1988 to 1993, he served with the news publications department of the Jiangsu Chinese Communist Party Council. Between 1993 and 1995, Mr Chen was the General Manager of Jiangsu Dajiang Manufacturing Co., Ltd. Mr Chen has played an important role in establishing our Company’s market share in the PRC ladies’ shoe industry.

Li Wei is a co-founder of our Group who has served as a director of our Group since 1995. Mr Li is currently our Managing Director and is responsible for the operations (including brand and product development), fi nance and human resource management of our Group. In 1989, Mr Li graduated from Nanjing University, PRC with a Bachelor’s Degree in Chemistry. From 1989 to 1991, he was the manager of the sales department of Zhenjiang Libao Footwear Co., Ltd, and he left in 1995 to establish Mayfl ower with his partners. Mr Li has over 15 years of experience in the PRC shoe industry.

Miao Bingwen is also a co-founder who has served as a director of our Group since 1995. Mr Miao is currently an Executive Director responsible for the sales and business planning of our Group. In 1988, he graduated from Nanjing University, PRC with a Bachelor’s Degree in Chemistry. From 1989 to 1995, he was the Nanjing market supervisor of Zhenjiang Libao Footwear Co., Ltd and he left in 1995 to establish Mayfl ower with his partners.


Zhao Wei joined our Group since December 1995 and is currently an Executive Director of our Group who oversees the manufacturing operations of our Group. Between 1992 to 1993, Mr Zhao was the Assistant Sales Manager of Nanjing Hongyi Footwear Co., Ltd. He was the Sales Manager of Zhengjiang Libao Footwear Co., Ltd and Nanjing Mayfl ower Footwear Co., Ltd from 1993 to 1995. He is currently the Director and General Manager of Mayfl ower (Nanjing) Industries Limited. Mr Zhao has over 10 years of experience in the PRC shoe industry.

Gui Zuhua joined our Group as Finance Manager in 1999 and has been the Chief Financial Offi cer of our Group since July 2001. In 1988, Mr Gui graduated from Anhui Institute of Finance and Trade, PRC. From 1989 to 1992, he served with the state-owned Changjiang Machinery Manufacturing Co., Ltd. Mr Gui has 10 years of experience in the fi nancial operations of foreign investments enterprises. He worked in the accounts department of the Hong Kong-PRC joint venture company, Nanjing Jiashan Textile Co., Ltd. from 1992 to 1993 and was in charge of the fi nance department of the Netherlands-PRC joint venture company, Nanjing Ou Jianong Pharmaceutical Co., Ltd. from 1993 and 1994. Between 1994 and 1999, he was the Finance Manager of the Taiwan-PRC joint venture company, Xin Xing Electronics (Nanjing) Co., Ltd.

Huo Li joined our Group as Investment Manager in 2001 and is currently an Executive Director of our Group who is responsible for the external investments of our Group. In 1988, Mr Huo graduated from Fudan University, PRC with a Bachelor’s Degree in Economics. From 1988 to 2001, Mr Huo served with the Bank of China, where he held various positions, including that of Deputy General Manager of Changzhou Branch.

John Chen was appointed as an Independent Director of our Group on 30 April 2003. He is the Managing Director of JCL Business Development Pte Ltd and the Executive Chairman of SAC Capital Pte Ltd. He holds a PhD degree in Electrical Engineering from the University of Waterloo, Canada. He taught at the National University of Singapore from 1983 to 1991. From 1991 to 1997, Dr Chen served as the Assistant Secretary-General of the National Trades Union Congress (NTUC). He also served as the Deputy Chairman and Managing Director of the NTUC Healthcare Co-op Ltd from 1992 to 1997. Dr Chen is a Member of Parliament since September 1988. From March 1997 to June 1999, he was the Minister of State of Communications. From June 1999 to November 2001, he was the Minister of State of Communications & Information Technology and Minister of State for National Development. Dr Chen has been a Board Member of the Economic Development Board (EDB), the Housing& Development Board (HDB), the Port of Singapore Authority (PSA) and Singapore Power Ltd. He presently sits on the Board of a number of publicly listed companies.

S. Chandra Das was appointed as an Independent Director of our Group on 30 April 2003. Mr Das has been the Chairman of NTUC Fairprice Co-operative Ltd since August 1993 and is presently the CEO of NUR Investment & Trading Pte Ltd, which is involved in trading and investments in India, Myanmar and Singapore. Mr Das is a former Member of Parliament. In 2000, he was conferred the President’s Medal by the Singapore Australian Business Council. In 2001, he was awarded the Distinguished Service Award by the National Trade Union Congress for his meritorious contribution to public service. Mr Das holds an Honours degree in Economics from the University of Singapore.

Liu Yunguang was appointed as an Independent Director of our Group on 30 April 2003. Mr Liu has been the president of Kind International Group since 1995. He graduated from Amoy (Xiamen) University, PRC, with a Bachelor’s Degree in Science. He worked in Xiamen DYTCOM Electronic Manufactory from 1988 and was the Vice-General Manager when he left in 1994. In 1995 he started his own businesses in the manufacturing of light industry products and environment protection products, acting as an agent of foreign nameplate products, and international trading.

EXECUTIVE

OFFICERSLi Hui joined our Group in September 1996 as a Sales Branch Manager. He is currently a Vice-General Manager of our Company and is responsible for our sales and market operations. Prior to joining our Group, Mr Li had served with the Gansu Trade and Economic Committee of the PRC government from 1986 to 1996, where he was responsible for the co-ordination of enterprises. Mr Li was the Sales Manager (Independent Retailers) of our Group from 1998 to 2000 and our Operations Manager from 2000 to 2001. Mr Li holds a Bachelor’s Degree in Communications Engineering from Gansu Communications College.

Wan Xianghua joined our Group in January 1996 as Manufacturing Manager. He is currently a Vice-General Manager of our Company and is responsible for our manufacturing operations. Mr Wan joined the Nanjing Hongyi Footwear Company Limited in 1992 and was the Vice-Director of the factory in charge of the manufacturing department when he left in 1995. Mr Wan holds a Bachelor’s Degree in Enterprise Management from Nanjing Jinling University.


FY2003 FY2004

RMB’000 RMB’000

Revenue

Revenue - Retail Sales 189,983 237,165

Revenue - Contract Manufacturing 30,610 57,306

Total Revenue 220,593 294,471

Profi tability

Gross Profi t 79,338 108,856

Profi t before taxation 42,504 57,239

Profi t after taxation 42,504 52,960

Return on Assets (%) 13.66% 14.30%

Return on Equity (%) 19.68% 20.49%

Earnings per ordinary share (RMB) 0.13 0.13

Financial Position

Total Assets 311,141 370,366

Total Debts 45,244 54,047

Shareholders’ Equity 215,927 258,452

Debt to equity ratio (times) 0.21 0.21

Net Tangible Assets per share (RMB) 0.54 0.65

Cashfl ows

Net cash generated from / (used in) operations 35,948 (3,546)

Number of ordinary shares issued 396,868,200 396,868,200

Net cash generated from / (used in) operations

per share (RMB) 0.091 (0.009)

FINANCIAL

HIGHLIGHTS


FINANCIAL

CONTENTS

17242728293032333451525354

CORPORATE GOVERNANCE REPORT

REPORT OF THE DIRECTORS

AUDITORS’ REPORT

BALANCE SHEETS

CONSOLIDATED PROFIT AND LOSS STATEMENT

STATEMENTS OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

NOTES TO CONSOLIDATED CASH FLOW STATEMENT

NOTES TO FINANCIAL STATEMENTS

STATEMENT OF DIRECTORS

SUBSTANTIAL SHAREHOLDERS

DISTRIBUTION OF SHAREHOLDINGS

NOTICE OF ANNUAL GENERAL MEETING



Hongguo International Holdings Ltd (the “Company”) continues to uphold a high standard of corporate governance in order to safeguard the interests of shareholders and enhance shareholders’ value. The Board of Directors (the “Board”) has put in place various self-regulating and monitoring mechanisms, as set out in the Best Practices Guide on Corporate Governance issued by The Singapore Exchange Securities Trading Limited (“SGX-ST”). This report describes the Company’s corporate governance processes and activities.

BOARD MATTERS Principle 1: Board’s Conduct of its Affairs

Apart from its statutory duties and responsibilities, the Board oversees the management and affairs of the Group. It focuses on strategies and policies, with particular attention paid to growth and financial performance. It delegates the formulation of business policies and day-to-day management to the Executive Directors.

The principal functions of the Board are:

(a) approving the Group’s key business strategies and financial objectives;

(b) approving the annual budget, major investments and divestments, and funding proposals;

(c) overseeing the processes for evaluating the adequacy of internal controls, risk management, financial reporting and compliance; and

(d) assuming responsibility for corporate governance.

The Board discharges its responsibilities either directly or indirectly through various Board committees.

The Board currently holds at least two scheduled meetings each year to review and deliberate on the key activities and business strategies of the Group, including reviewing and approving internal guidelines on materiality of transactions, acquisitions, financial performance, and to endorse the release of the interim and annual results. Where necessary, additional meetings may be held to address significant transactions or issues. The Company’s Bye-laws permit a Board meeting to be conducted by way of tele-conference and video-conference.

During the financial year, the Board held two meetings and the attendance of each Director at every Board and Board Committee meeting is as follows:-

Name Board Audit Nominating Remuneration Committee Committee Committee No. of No. of No. of No. of No. of No. of No. of No. of

meetings meetings meetings meetings meetings meetings meetings meetings

held attended held attended held attended held attended

Dr Chen Seow Phun, John 2 2 2 2 1 1 NA NA

Mr S.Chandra Das 2 2 2 2 NA NA 1 1

Mr Liu Yunguang 2 2 2 2 1 1 1 1

Mr Chen Yixi 2 2 NA NA 1 1 NA NA

Mr Li Wei 2 2 2 2 NA NA 1 1

Mr Miao Bingwen 2 1 NA NA NA NA NA NA

Mr Zhao Wei 2 1 NA NA NA NA NA NA

Mr Gui Zuhua 2 2 2 2 NA NA NA NA

Mr Huo Li 2 2 2 2 NA NA NA NA

Mr Tso Ming Sing 2 0 NA NA NA NA NA NA

Every Executive Director receives appropriate training to develop individual skills in order to discharge his or her duties. The Group also provides extensive information about its history, mission and values to the Directors. There are also update sessions to inform the Directors on new legislation and/or regulations which are relevant to the Group.



Principle 2: Board Composition and Balance

The Board comprises:

Non-Executive Independent DirectorsDr Chen Seow Phun, JohnMr S. Chandra DasMr Liu Yunguang

Executive DirectorsMr Chen Yixi, Executive ChairmanMr Li Wei, Managing DirectorMr Miao Bingwen, Executive DirectorMr Zhao Wei, Operations DirectorMr Gui Zuhua, Chief Financial OfficerMr Huo Li, Executive Director

Non-Executive DirectorTso Ming Sing (Resigned on 24 March 2005) There is a strong independent element on the Board, with Independent Directors constituting one-third of the Board. The independence of each Director is reviewed by the Nominating Committee (“NC”). The NC adopts the Code of Corporate Governance’s (“the Code”) definition of what constitutes an Independent Director in its review. The NC is of the view that the Non-executive Directors are independent.

The Board has examined its size and is of the view that it is an appropriate size for effective decision-making, taking into account the scope and nature of the operations of the Company. The NC is of the view that no individual or small group of individuals dominate the Board’s decision-making process.

The NC is of the view that the current Board consists of the appropriate mix of expertise and experience to meet the Company’s targets. Qualifications and experiences of the Board members are set out on pages 12 to 13 of the Annual Report.

Principle 3: Role of Executive Chairman and Chief Executive Officer

The Company keeps the posts of Executive Chairman and Managing Director separate and these positions are held by Mr Chen Yixi and Mr Li Wei respectively. Mr Chen Yixi is primarily responsible for overseeing the overall management and strategic development of the Group while Mr Li Wei manages the business operations of the Group with the other Executive Directors. The Executive Chairman is responsible for the effective working of the Board. The Executive Chairman’s responsibilities include:

• Scheduling of meetings to enable the Board to perform its duties responsibly while not interfering with the fl ow of the Group’s operations;• Preparing meeting agenda;• Assisting in ensuring the Group’s compliance with the Code;• Ensuring that Board Meetings are held when necessary; and• Reviewing Board papers before they are presented to the Board.

The Company Secretary may be called to assist the Executive Chairman in any of the above.

Both the Executive Chairman and the Managing Director exercise control over the quality, quantity and timeliness of information flow between the Board and management.

Principle 6: Access to information

The Board is provided with management reports containing complete, adequate and timely information, and papers containing relevant background or explanatory information required to support the decision making process.

Detailed Board papers are circulated to the Directors before the scheduled meetings so as to allow for a better understanding of the issues and to achieve a more effective discussion time for questions that members may have.

The Directors have separate and independent access to senior management and the Company Secretary. The Company Secretary attends all Board meetings and assists the Board to ensure that the Company complies with its’ Bye-laws and relevant rules and regulations, including requirements of the Companies Act and the SGX-ST.

In carrying out their duties, the Directors, whether individually or as a group, have direct access to the independent professional advisors to obtain advice. Any cost of obtaining such professional advice will be borne by the Company.


BOARD COMMITTEES

Nominating Committee(“NC”)

Principle 4: Board Membership

The NC comprises Dr Chen Seow Phun, John, Mr Chen Yixi and Mr Liu Yunguang, the majority of whom are Independent Directors. The Chairman of the NC is Mr Liu Yunguang. The Board has approved the written terms of reference of the NC. The NC performs the following functions:

a) reviewing and making recommendations to the Board on all candidates nominated for appointment to the Board;

b) reviewing all candidates nominated for appointment as senior management staff;

c) reviewing and recommending to the Board on an annual basis, the Board structure, size and composition, taking into account the balance between Executive and Non-executive, Independent and Non-independent Directors and having regard at all times to the principles of corporate governance and the Code;

d) procuring that at least one-third of the Board shall comprise of Independent Directors;

e) making recommendations to the Board on continuation of service of any Director who has reached the age of 70;

f) identifying and making recommendations to the Board as to the Directors who are to retire by rotation and to be put forward for re-election at each Annual General Meeting (“AGM”) of the Company, having regard to the Directors’ contribution and performance, including Independent Directors;

g) determining whether a Director is independent (taking into account the circumstances set out in the Code and other salient factors); and

h) proposing a set of objective performance criteria to the Board for approval and implementation, to evaluate the effectiveness of the Board as a whole and the contribution of each Director to the effectiveness of the Board.

Pursuant to the Company’s Bye-laws, other than the Managing Director, all Directors submit themselves for re-election at least once every three years.

The Company will examine the need to alter its Bye-laws to provide the Managing Director to be subject to the one-third rotation rule. This is to enable shareholders to exercise their full right to select all Board members.

The NC recommended to the Board that Mr Miao Bingwen and Mr Huo Li be nominated for re-appointment at the forthcoming AGM.

In making the recommendation, the NC had considered the Directors’ overall contribution and performance.

Principle 5: Board Performance

The NC has adopted a formal process for the evaluation of the performance of the Board. In 2004, the Group implemented the Board-approved evaluation process and performance criteria to assess the performance of the Board. In drawing up the objective performance criteria for such evaluation and determination, the NC considered a number of factors, including achieving financial targets, performance of the Board, performance of individual Director’s vis-à-vis attendance and contributions during Board meetings.

The NC assessed the Board’s performance as a whole in FY2004.

The assessment process involves and includes input from the Board members, applying the performance criteria recommended by the NC and approved by the Board. The Directors’ input are collated and reviewed by the Chairman of the NC, who presents a summary of the overall assessment to the NC for review. Areas where the Board’s performance and effectiveness could be enhanced and recommendations for improvement are then submitted to the Board for discussion and for implementation.



Audit Committee (“AC”)

Principle 11: Audit Committee

The Audit Committee (“AC”) of the Company comprises Dr Chen Seow Phun, John, Mr S. Chandra Das and Mr Liu Yunguang, all of whom are Independent Directors. The Chairman of the AC is Dr Chen Seow Phun, John.

The AC carried out its functions in accordance with the Singapore Companies Act, Cap. 50, the Best Practices Guide and the Code. The Board has approved the written terms of reference of the AC. The AC performs the following key functions, inter alia, others:

a) reviewing with external auditors the audit plan, their evaluation of the system of internal accounting controls and their audit report;

b) reviewing the overall internal control system;

c) reviewing the Group’s financial results and the announcements before submission to the Board for approval;

d) reviewing the assistance given by management to external auditors;

e) reviewing significant findings of internal investigations;

f) considering the appointment/re-appointment of external auditors;

g) reviewing interested person transactions; and

h) other functions as required by law or the Code.

Dr Chen Seow Phun, John is a Member of Parliament and a businessman. Mr S. Chandra Das is the Chairman of NTUC Fairprice Co-operative Ltd and Mr Liu Yunguang is the president of Kind International Group and a businessman. The Board considers that the members of the AC are qualified to discharge the responsibilities of the AC.

The AC is authorised to investigate any matter in its terms of reference, and has full access to and co operation of management. The AC has full discretion to invite any Director or executive officer to attend its meetings, as well as reasonable resources to enable it to discharge its function properly.

The AC, having reviewed the volume of non-audit services provided to the Company by the external auditors, and being satisfied that the nature and extent of such services will not prejudice the independence and objectivity of the external auditors, have recommended to the Board the re-appointment of Deloitte & Touche as Auditors of the Company.

The AC has met with the external auditors without the presence of Management to review matters that might be raised privately. The AC also met with the external auditors to discuss the results of their examinations and their evaluations of the systems of internal accounting controls.

The AC annually reviews the independence of the external auditors.

Minutes of AC meetings are circulated to fellow Directors by the Company Secretary.

In the opinion of the Directors, the Company is in compliance with the Best Practices of the SGX-ST on Audit Committees.

Principle 12: Internal controls

The AC acknowledges that the Group’s system of internal and operational controls has a key role in the identification and management of risks that are significant to the achievement of its business objectives. The Company reviews the effectiveness of internal and operational controls and risk management. The Board is of the view that there are adequate internal controls in the Group.

Principle 13: Internal audit

The Company has appointed its own internal auditor to perform financial audits and the audit of other management process to ensure compliance with the Company’s system of internal controls.



These internal controls and systems are designed to provide reasonable assurance as to the effectiveness and efficiency of operations, integrity and reliability of the financial information and to safeguard and maintain accountability of its assets. Procedures are in place to identify major business risks and evaluate potential financial effects.

The internal auditor has direct access to the AC.

The AC is satisfied that the internal audit is adequately resourced and has appropriate standing within the Group.

Remuneration Committee (“RC”)

Principle 7: Procedures for Developing Remuneration Policies

The Remuneration Committee (“RC”) comprises Dr Chen Seow Phun, John, Mr Li Wei and Mr Liu Yunguang, the majority of whom are Independent Directors. The Chairman of the RC is Mr S. Chandra Das

The Board has approved the written terms of reference of the RC. The RC performs the following functions:

(a) recommending to the Board a framework of remuneration for the Board and the key executives of the Group covering all aspects of remuneration such as Director’s fees, salaries, allowances, bonuses, options and benefi ts-in-kind;

(b) proposing to the Board, appropriate and meaningful measures for assessing the Executive Directors’ performance;

(c) determining the specific remuneration package for each Executive Director; (d) considering the eligibility of Directors for benefi ts under long-term incentive schemes; and

(e) considering and recommending to the Board the disclosure of details of the Company’s remuneration policy, level and mix of remuneration and procedure for setting remuneration and details of the specific remuneration packages of the Directors and key executives of the Company to those required by law or by the Code.

The members of the RC do not participate in any decisions concerning their own remuneration.

Principle 8: Level and Mix of Remuneration

The Company has a staff remuneration policy which comprises a fixed component and a variable component. The fixed and variable components are in the form of a base salary and variable bonus that is linked to the performance of the Company and individual.

The Independent Directors have not entered into service agreements with the Company. They are paid Directors’ fees, which are determined by the Board based on the effort, time spent and responsibilities as Director and member of the AC, NC and RC. The fees are subject to approval by the shareholders at each AGM. Except as disclosed, the Independent Directors do not receive any remuneration from the Company.

According to the respective service agreements of the Executive Directors:-

• each service agreement is valid for an initial period of 3 years commencing from 1 January 2003; • the remuneration of the Executive Directors include a fi xed salary and a variable performance related bonus which is designed to align their interests with those of the shareholders; and• the service agreement may be terminated by either the Company or the Executive Director giving not less than six month’s notice in writing.

The Company does not have any employee share option schemes.

Principle 9: Disclosure on Remuneration

The Board has not included an annual remuneration report in its annual report for FY2004 as the Board is of view that the matters which are required to be disclosed in the annual remuneration report have already been sufficiently disclosed in the Corporate Governance report and in the financial statements of the Company.



A breakdown, showing the level and mix of each individual Director’s remuneration in FY2004 is as follows:

Remuneration Base/fixed Variable or Director’s Other Band & Name salary performance fees ** benefits of Director Related income / bonuses Below $250,000

Executive Directors

Mr Chen Yixi 17.23% 82.77% - - Mr Li Wei 18.98% 81.02% - - Mr Miao Bingwen 18.98% 81.02% - - Mr Gui Zuhua 18.98% 81.02% - - Mr Huo Li 18.98% 81.02% - - Mr Zhao Wei 23.85% 76.15% - -

Independent Directors

Dr Chen Seow Phun, John - - 100% - Mr S. Chandra Das - - 100% - Mr Liu Yunguang - - 100% - (a) Mr Zhao Wei is appointed on 2 February 2004. (b) Mr Tso Ming Sing does not receive any director’s fee. ** these fees are subject to the approval of the shareholders at the forthcoming AGM.

A breakdown, showing the level and mix of the key executives (who are not Directors of the Company) in FY2004 is as follows:

Remuneration Base/fixed Variable or Director’s Other Band & Name salary performance fees ** of Director benefits Related income / bonuses

Below $250,000 Mr Wang Xianghua 100% - - - Mr Li Hui 100% - - -

The Company has no employees who are immediate family members of a Director and whose remuneration exceeded S$150,000 during the financial year ended 31 December 2004.

COMMUNICATION WITH SHAREHOLDERS

Principle 10: Accountability

The Board provides the shareholders with a detailed and balanced explanation and analysis of the Company’s performance, position and prospects on a half-yearly basis.

The management provides the Board with appropriately detailed management accounts of the Group’s performance, position and prospects on a half yearly basis.

Principles 14 and 15: Communication with Shareholders

The Board is mindful of the obligation to keep shareholders informed of all major developments that affect the Group in accordance with the SGX-ST’s Listing Rules.

The Board places great emphasis on investor relations. The Company strives to maintain a high standard of transparency and to promote better investor communications.

Information is communicated to shareholders on a timely basis through:

• annual reports that are prepared and issued to all shareholders within the mandatory period;• SGXNET and the press;• the Company’s website at http://www.hongguo.com at which shareholders can access information on the Group; and• the investor relations channel on fi nancial portal at http://www.shareinvestor.com.



At AGMs, shareholders are given the opportunity to air their views and ask Directors or management questions regarding the Company. Shareholders are encouraged to attend the AGMs to ensure a high level of accountability and to stay informed of the Group’s strategies and goals. The AGM is the principal forum for dialogue with shareholders. The external auditors are also present to assist the Directors in addressing any relevant queries from the shareholders.

The Company ensures that there are separate resolutions at general meetings on each distinct issue.

The Company’s Bye-laws allow a member of the Company to appoint one or two proxies to attend and vote at general meetings.

DEALINGS IN SECURITIES

The Company has adopted an Internal Code of Conduct on Dealing in the Company’s securities. The Code of Conduct has been modelled along the Best Practices Guide in the Listing Manual of the SGX-ST.

Directors and all key executives are advised not to deal in the Company’s shares on short-term considerations or when they are in possession of unpublished price-sensitive information. They are not allowed to deal in the Company’s shares during the period commencing one month before the announcement of the Company’s annual and half-yearly results and ending on the date of the announcement of the results. The Company has complied with the SGX-ST Best Practices Guide on dealings in the Company’s securities in FY2004.

MATERIAL CONTRACTS(Listing Manual Rule 1207(8))

Save for the service agreements between the Executive Directors and the Company, there are no material contracts of the Company or its subsidiaries involving the interest of any Director or controlling shareholders subsisting at the end of the financial year ended 31 December 2004.

RISK MANAGEMENT(Listing Manual Rule 1207(4)(d))

The Company does not have a Risk Management Committee. However, the management regularly review the Company’s business and operational activities to identify areas of significant business risks as well as appropriate measures to control and mitigate these risks. The management reviews all significant control policies and procedures and highlights all significant matters to the Directors and the AC.

INTERESTED PERSON TRANSACTIONS (Listing Manual Rule 907)

The Company has established procedures to ensure that all transactions with interested persons are reported on a timely manner to the AC and that the transactions are carried out on normal commercial terms and will not be prejudicial to the interests of the Company and its minority shareholders.

The aggregate value of interested person transactions entered into during the financial year under review is as follows:

Name of interested Aggregate value of all interested person Aggregate value of all interested person transactions during the financial year under person transactions conducted review (excluding transactions less than under shareholders’ mandate $100,000 and transactions conducted under pursuant to Rule 920 (excluding shareholders’ mandate pursuant to transactions less than $100,000) Rule 920) RMB’000 Loans from Nanjing 3,014 N.A. Hongguo Industry Group Corp

Rental charge to 481 N.A. Nanjing May Flower Footwear Corporation Rental charge to 315 N.A. Nanjing Hongguo Industry Group Corp

Loans from 3,748 N.A. Nanjing May Flower Footwear Corporation



The directors present their report together with the audited financial statements of the Company and the consolidated financial statements of the Group for the financial year ended December 31, 2004.

1 DIRECTORS

The directors of the Company in office at the date of this report are:

Chen Yixi Li Wei Miao Bingwen Gui Zuhua Huo Li Zhao Wei Tso Ming Sing (Appointed on May 31, 2004) Chen Seow Phun, John S. Chandra Das Liu Yunguang

2 AUDIT COMMITTEE

The Audit Committee comprises three non-executive directors – Dr Chen Seow Phun, John, Mr S. Chandra Das and Mr Liu Yunguang. The Chairman of the Audit Committee is Dr Chen Seow Phun, John. The directors recognise the importance of corporate governance and the offering of high standards of accountability to the shareholders of the Company. The Audit Committee meets periodically to perform the following functions:

(a) review the audit plans of the Company’s external auditors;

(b) review the external auditors’ reports;

(c) review the co-operation given by the Company’s officers to the external auditors;

(d) review the financial statements of the Company and the Group before their submission to the Board of Directors;

(e) nominate external auditors for re-appointment; and

(f) review interested person transactions, if any.

3 ARRANGEMENTS TO ENABLE DIRECTORS TO ACQUIRE BENEFITS BY MEANS OF THE ACQUISITION OF SHARES AND DEBENTURES

Neither at the end of the financial year nor at any time during the financial year did there subsist any arrangement whose object is to enable the directors of the Company to acquire benefits by means of the acquisition of shares or debentures in the Company or any other body corporate.




4 DIRECTORS’ INTERESTS IN SHARES AND DEBENTURES

The directors of the Company holding office at the end of the financial year had no interests in the share capital and debentures of the Company and related corporations as recorded in the register of directors’ shareholdings kept by the Company except as follows:

Name of directors and company At beginning At end in which interests are held of year of year

Hongguo International Holdings Limited - Ordinary shares of US$0.015 each

Chen Yixi 130,421,400 130,421,400 Li Wei 38,935,200 38,935,200 Miao Bingwen 35,390,400 35,390,400

The directors’ interests as at January 21, 2005 were the same as those at the end of the financial year.

5 DIRECTORS’ RECEIPT AND ENTITLEMENT TO CONTRACTUAL BENEFITS

Since the beginning of the financial year, no director has received or become entitled to receive a benefit by reason of a contract made by the Company or a related corporation with the director or with a firm of which he is a member, or with a company in which he has a substantial financial interest except as disclosed in the financial statements.

6 OPTION TO TAKE UP UNISSUED SHARES

During the financial year, no option to take up unissued shares of the Company or any corporation in the Group was granted.

7 OPTION EXERCISED

During the financial year, there were no shares of the Company or any corporation in the Group issued by virtue of the exercise of an option to take up unissued shares.

8 UNISSUED SHARES UNDER OPTION

At the end of the financial year, there were no unissued shares of the Company or any corporation in the Group under option.


9 AUDITORS

The auditors, Deloitte & Touche, have expressed their willingness to accept re-appointment.

ON BEHALF OF THE DIRECTORS

Chen Yixi

Li Wei

February 4, 2005



We have audited the accompanying financial statements of Hongguo International Holdings Limited set out on pages 28 to 50 for the year ended December 31, 2004 (expressed in Renminbi). These financial statements are the responsibility of the Company’s directors. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Singapore Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the directors, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements of the Group and the balance sheet and statement of changes in equity of the Company are properly drawn up in accordance with the provisions of the Singapore Financial Reporting Standards so as to present fairly the state of affairs of the Group and of the Company as at December 31, 2004 and of the changes in equity of the Group and the Company and the results and cash flows of the Group for the year ended on that date.

Deloitte & ToucheCertified Public Accountants

Aric Loh Siang KheePartner

SingaporeFebruary 4, 2005

AUDITORS’ REPORT To The Members Of Hongguo International Holdings

Limited


(Expressed in Renminbi)

Group Company

Note 2004 2003 2004 2003

RMB’000 RMB’000 RMB’000 RMB’000ASSETS

Current assets:Cash and bank balances 5 53,665 111,650 16,698 10,677Trade receivables 6 60,663 36,877 - - Other receivables and prepayments 7 47,993 19,691 - - Inventories 8 147,381 92,095 - -

Total current assets 309,702 260,313 16,698 10,677

Non-current assets:Fixed deposits (secured) 5 16,173 4,213 - - Due from subsidiaries 9 - - 140,013 124,013Investment in subsidiaries 9 - - - - Other investments 10 16,553 29,796 16,553 29,796Plant and equipment 11 20,571 16,819 - - Intangible assets 12 1,367 - - - Goodwill 13 6,000 - - -

Total non-current assets 60,664 50,828 156,566 153,809

Total assets 370,366 311,141 173,264 164,486

LIABILITIES ANDSHAREHOLDERS’ EQUITY

Current liabilities:Trade payables 31,060 28,128 - - Notes payable 14 31,700 12,150 - - Bank loans 15 5,794 10,747 - - Other payables 16 25,939 21,842 9,817 5,984Income tax payable 868 - - -

Total current liabilities 95,361 72,867 9,817 5,984

Non-current liability:Bank loan 15 16,553 22,347 - -

Shareholders’ equity:Issued capital 17 49,271 49,271 49,271 49,271Share premium 98,093 98,093 98,093 98,093Reserve and expansion funds 18 14,557 6,592 - - Proposed dividend 13,946 10,626 13,946 10,626Accumulated profit 82,585 51,345 2,137 512

Total shareholders’ equity 258,452 215,927 163,447 158,502

Total liabilities and shareholders’ equity 370,366 311,141 173,264 164,486

See accompanying notes to financial statements.

BALANCE SHEETSDecember 31, 2004


CONSOLIDATED PROFIT AND LOSS STATEMENTYear ended December 31, 2004

(Expressed in Renminbi)

Group

Note 2004 2003

RMB’000 RMB’000

Revenue 19 294,471 220,593

Cost of sales (185,615) (141,255)

Gross profit 108,856 79,338

Other operating income 20 8,675 5,622

Selling and distribution costs (27,253) (23,108)

Administrative expenses (28,672) (17,851)

Profit from operations 21 61,606 44,001

Finance costs 22 (4,367) (1,497)

Profit before income tax 57,239 42,504

Income tax 23 (4,279) -

Net profit for the year 52,960 42,504

Basic earnings per share (RMB cents) 24 13.3 13.2



STATEMENTS OF CHANGES IN EQUITYYear ended December 31, 2004(Expressed in Renminbi)

Reserve and Issued Share expansion Proposed Accumulated capital premium funds dividend profits Total

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Group

Balance at December 31, 2002 28,968 - 2,303 - 23,756 55,027

Conversion of preference shares 6,522 18,308 - - - 24,830

Issue of shares:

Initial public offering 9,311 61,483 - - - 70,794

Private placement 4,470 39,600 - - - 44,070

Share issue expenses - (21,298) - - - (21,298)

Net profit for the year - - - - 42,504 42,504

Transfer - - 4,289 - (4,289) -

Proposed dividend - - - 10,626 (10,626) -

Balance at December 31, 2003 49,271 98,093 6,592 10,626 51,345 215,927

Dividend paid - - - (10,435) - (10,435)

Overprovision of dividend - - - (191) 191 -

Net profit for the year - - - - 52,960 52,960

Transfer - - 7,965 - (7,965) -

Proposed dividend - - - 13,946 (13,946) -

Balance at December 31, 2004 49,271 98,093 14,557 13,946 82,585 258,452


STATEMENTS OF CHANGES IN EQUITY

Year ended December 31, 2004(Expressed in Renminbi)

Issued Share Proposed Accumulated capital premium dividend profits Total

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Company

Balance at December 31, 2002 28,968 - - 1 28,969

Conversion of preference shares 6,522 18,308 - - 24,830

Issue of shares:

Initial public offering 9,311 61,483 - - 70,794

Private placement 4,470 39,600 - - 44,070

Share issue expenses - (21,298) - - (21,298)

Net profit for the year - - - 11,137 11,137

Proposed dividend - - 10,626 (10,626) -

Balance at December 31, 2003 49,271 98,093 10,626 512 158,502

Dividend paid - - (10,435) - (10,435)

Overprovision of dividend - - (191) 191 -

Net profit for the year - - - 15,380 15,380

Proposed dividend - - 13,946 (13,946) -

Balance at December 31, 2004 49,271 98,093 13,946 2,137 163,447



CONSOLIDATED CASH FLOW STATEMENTYear ended December 31, 2004(Expressed in Renminbi)

2004 2003 RMB’000 RMB’000

Cash flows from operating activities: Profit before income tax 57,239 42,504 Adjustments for: Depreciation expense 3,328 2,259 Gain on sales of other investments (3,662) - Interest expense 4,367 1,497 Interest income (229) (228) Amortisation of intangible assets 349 - Intangible assets written off 549 - Loss on disposal of plant and equipment 7 - Allowance for bad debts 374 - Allowance for inventories 1,385 -

Operating profit before working capital changes 63,707 46,032

Trade receivables (19,922) (2,302) Other receivables and prepayments (21,005) (1,435) Inventories (48,089) (13,091) Trade payables 2,932 (739) Notes payable 19,550 2,100 Due from (to) related parties (non-trade) 4,082 (781) Other payables 3,541 7,661

Cash generated from operations 4,796 37,445

Interest paid (4,367) (1,497) Franchise fees paid (564) - Income tax paid (3,411) -

Net cash (used in) from operating activities (3,546) 35,948

Cash flows used in investing activities: Purchase of plant and equipment (6,524) (5,574) Proceeds from disposal of plant and equipment 5 114 Proceeds from sales of other investments 16,905 - Acquisition of subsidiary, net of cash acquired (Note A) (31,912) - Increase in other investments - (29,796) Interest received 229 228

Net cash used in investing activities (21,297) (35,028)

Cash flows from financing activities: Issue of ordinary shares - 114,864 Share issue expenses - (21,298) (Repayment of) Proceeds from bank loans (10,747) 17,094 Repayment of loan from related parties - (3,243) Dividend paid (10,435) - Increase in fixed deposits pledged (11,960) (1,002)

Net cash (used in) from financing activities (33,142) 106,415

Net (decrease) increase in cash (57,985) 107,335Cash at beginning of year 111,650 4,315

Cash at end of year (Note B) 53,665 111,650


NOTES TO CONSOLIDATED CASH FLOW STATEMENT

A. During the year, the Group acquired Jiangsu Unity Corporation Co. Limited. The fair value of assets acquired were as follows:

2004 2003 RMB’000 RMB’000

Cash and bank balances 88 - Trade receivables 4,238 - Other receivables and prepayments 10,823 - Inventories 8,582 - Plant and equipment 568 - Intangible assets 1,701 - Goodwill 6,000 -

Consideration paid 32,000 - Less: cash acquired (88) -

Cash out flow on acquisition of subsidiary 31,912 -

B. Cash at end of year comprises: 2004 2003 RMB’000 RMB’000

Cash and bank balances 69,838 115,863 Less: Fixed deposits pledged (16,173) (4,213)

53,665 111,650


NOTES TO FINANCIAL STATEMENTSDecember 31, 2004(Expressed in Renminbi)


1 GENERAL

The Company (Reg. No. BMG458401087) is incorporated in Bermuda with its principal place of business at 31 Floor of International Trade Center, 18 Zhong Shan East Road, Nanjing, China and registered office at Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.

The financial statements are expressed in Renminbi (“RMB”) being the measurement currency of the Company and its subsidiaries.

The principal activity of the Company is that of investment holding.

The principal activities of the subsidiaries are described in Note 9 to the financial statements.

The financial statements of the Company and of the Group for the year ended December 31, 2004 were authorised for issue by the Board of Directors on February 4, 2005.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) BASIS OF ACCOUNTING - The financial statements are prepared in accordance with the historical cost convention and are drawn in accordance with the Singapore Financial Reporting Standards.

The group’s principal operations are conducted in the People’s Republic of China. Accordingly, the financial statements have been prepared in Renminbi (“RMB”), being the measurement currency of the principal companies in the group.

b) BASIS OF CONSOLIDATION - The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries) made up to December 31 each year. Control is achieved when the Company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities. On acquisition, the assets and liabilities of the relevant subsidiaries are measured at their fair values at the date of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by other members of the Group. All significant intercompany transactions and balances between Group enterprises are eliminated on consolidation.

In the Company’s financial statements, investment in subsidiaries is carried at cost less any impairment in net recoverable value that has been recognised in the profit and loss statement.

c) FINANCIAL ASSETS – The Company’s and Group’s principal financial assets are cash and bank balances, trade and other receivables, amounts due from related parties and other investments. Trade and other receivables and amounts due from related parties are stated at their nominal values as reduced by appropriate allowances for estimated irrecoverable amounts. The accounting policy for other investments is described below. Cash and bank balances are stated at their nominal values.


December 31, 2004(Expressed in Renminbi)


d) FINANCIAL LIABILITIES AND EQUITY - Significant financial liabilities include interest bearing loans, trade, notes and other payables and amounts due to related parties.

Interest-bearing loans are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

Trade and other payables and amounts due to related parties are stated at their nominal values.

e) INVENTORIES - Inventories are measured at the lower of cost (weighted average method) and net realisable value. Cost comprises all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution.

f) PLANT AND EQUIPMENT - Plant and equipment are carried at cost, less accumulated depreciation and any impairment loss where the recoverable amount of the asset is estimated to be lower than its carrying amount.

Depreciation is charged so as to write off the cost of assets less 10% residual value of plant and equipment in equal annual instalments over their estimated useful lives using the straight-line method on the following bases:

Machinery - 10% Motor vehicles - 20% Fixtures and equipment - 20%

Fully depreciated assets still in use are retained in the financial statements.

No depreciation is provided on construction-in-progress.

g) INTANGIBLE ASSETS – This represents upfront fee payable on the franchise licences and are amortised using the straight-line method over the respective franchise period ranging from 2 to 3 years. Intangible assets are stated at cost less amortisation. Where an indication of impairment exists, the carrying amount of any intangible assets is assessed and written down immediately to its recoverable amount.

h) OTHER INVESTMENTS – Investments held for long-term are stated at cost less any impairment in net recoverable value.

i) GOODWILL – Goodwill arising on consolidation represents the excess of the cost of acquisition over the group’s interest in the fair value of the identifiable assets and liabilities of the subsidiaries at the date of acquisition. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. With effect from July 1, 2004, the group elected to early adopt FRS 103 Business Combinations. Under FRS 103, amortisation of goodwill is discontinued and goodwill is subject to an annual impairment test.

j) BORROWINGS COSTS - Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the costs of those assets.

All other borrowing costs are recognised as an expense in the period in which they are incurred.



k) IMPAIRMENT OF ASSETS - At each balance sheet date, the Company and the Group reviews the carrying amounts of their assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

l) PROVISIONS - Provisions are recognised when the Company has a present obligation as a result of a past event where it is probable that it will result in an outflow of economic benefits that can be reasonably estimated.

m) LEASES - Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognised as assets of the Group at their fair value at the date of acquisition. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Finance costs, which represent the difference between the total leasing commitments and the fair value of the assets acquired, are charged to the profit and loss statement over the term of the relevant lease using the effective interest rate method.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

n) REVENUE RECOGNITION - Revenue from sale of goods is recognised when goods are delivered and title has passed. Commission income is recognised when services have been rendered.

Interest income is accrued on a time proportionate basis, by reference to the principal outstanding and at the interest rate applicable, on an effective yield basis.

o) RETIREMENT BENEFIT COSTS - Payments to defined contribution retirement benefit plans (including state-managed retirement benefit schemes) are charged as an expense when incurred.

p) INCOME TAX - Tax expense is determined on the basis of tax effect accounting, using the liability method, and it is applied to all significant temporary differences arising between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, except that a debit balance for deferred tax is not carried forward unless there is a reasonable expectation of realisation.

Deferred tax is charged or credited to the profit and loss statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same tax authority.




q) FOREIGN CURRENCY TRANSACTIONS - The books of the Company are maintained in its measurement currency, namely Renminbi. Transactions in foreign currencies are recorded in Renminbi at the rates ruling at the date of the transactions. At each balance sheet date, recorded monetary balances that are denominated in foreign currencies are recorded at the rates ruling at the balance sheet date. All realised and unrealised exchange adjustment gains and losses are dealt with in the profit and loss statement.

The financial statements of the subsidiaries are expressed in Renminbi.

r) RESERVES – Pursuant to the relevant laws and regulations in the PRC and the articles of association, the Company’s subsidiaries in the People’s Republic of China (“PRC”) are required to make appropriation from profit after taxation as reported in the PRC statutory financial statements, at 10% of such profit after taxation, to the reserve fund until the balance reaches at least 50% of the registered capital of the subsidiaries. The reserve fund may be used to make up losses incurred to increase capital.

In addition, the Company’s subsidiaries in PRC are required to make appropriation from profit after taxation to the enterprise expansion fund. Subject to approval by relevant government authority, the enterprise expansion fund may also be used to increase capital. The appropriation shall be approved by the board of directors of the subsidiaries.

The amount available for the purpose of profit distribution to investors is the amount reported in the PRC statutory financial statements.

3 FINANCIAL RISKS AND MANAGEMENT

a) Interest rate risk

The Group is exposed to interest rate risk through the impact of rate changes on interest bearing liabilities and assets. These exposures are managed partly by using natural hedges that arise from offsetting interest rate sensitive assets and liabilities.

b) Credit risk

The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, if any, as estimated by the Group’s management based on prior experience and the current economic environment.

The credit risk on liquid funds is limited because the counterparties are banks with good credit ratings.

c) Significant concentrations of credit risk

Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect Groups of counterparties whose aggregate credit exposure is significant in relation to the Group’s total credit exposure.

As at December 31, 2004, 37.7% (2003 : 23.2%) of trade receivable balance amounting to RMB22,877,473 (2003 : RMB8,538,096) relates to 5 major debtors. 48.7% (2003 : 48.8%) of advances to suppliers balance amounting to RMB14,497,010 (2003 : RMB1,551,686) relates to 5 major suppliers.



d) Foreign currency risk

The Group’s foreign currency exposures arose mainly from the exchange rate movements of the United States dollar and the Renminbi. The Group’s exposure to foreign currency risk is minimal as substantially all its transactions are in Renminbi.

e) Liquidity risk

It is the Group’s policy for the raising of capital and placing of surplus fund to be managed centrally. Management is of the view that adequate lines of credit with banks can be made available to ensure liquidity.

f) Fair values of financial assets and financial liabilities

The management is of the view that the carrying values of the financial assets and financial liabilities approximate their fair values.

4 RELATED PARTY TRANSACTIONS

Related parties are entities with common direct or indirect shareholders and/or directors. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions.

Some of the transactions and arrangements are with related parties and the effect of these on the basis determined between the parties are reflected in these financial statements. The balances are unsecured, interest-free and without fixed repayment terms except for the amounts due from related parties which bear interest at Nil% (2003 : 5.31%) per annum.

Significant related party transactions:

Group

2004 2003

RMB’000 RMB’000

Transfer of plant and equipment - (113) Interest income - (79) Rental expense 796 796

5 CASH AND BANK BALANCES

Group Company

2004 2003 2004 2003

RMB’000 RMB’000 RMB’000 RMB’000

Cash and bank balances 69,838 115,863 16,698 10,677 Secured fixed deposits shown as non-current assets (16,173) (4,213) - -

Shown as current assets 53,665 111,650 16,698 10,677

As at December 31, 2004, the amount of fixed deposits secured for notes payable (Note 14) and credit cards were RMB16,023,000 (2003 : RMB4,063,000) and RMB150,000 (RMB150,000) respectively.




6 TRADE RECEIVABLES

Group

2004 2003

RMB’000 RMB’000

Outside parties 61,037 36,877 Less: Allowance for bad debts (374) -

60,663 36,877

Movement in allowance: 2004 2003

RMB’000 RMB’000

Balance at beginning of year - - Charge to profit and loss 374 -

Balance at end of year 374 -

7 OTHER RECEIVABLES AND PREPAYMENTS

Group

2004 2003

RMB’000 RMB’000

Deposit for land use right 7,012 7,012 Advances to: Suppliers 29,790 3,178 Staff 35 1,188 Others 1,006 921 Related party (Note 4) - 3,526 Deposits 5,503 1,222 Prepayments 2,325 1,170 Advance payment of value added tax - 968 Tax recoverable 1,472 506 Other receivables 850 -

47,993 19,691

8 INVENTORIES Group

2004 2003

RMB’000 RMB’000 At cost: Work in process 129,047 5,631 Raw materials 6,342 9,201 Finished goods 10,035 71,487

145,424 86,319

At net realisable value after allowance for slow-moving inventories: Raw materials 1,695 600 Finished goods 263 5,176

1,957 5,776

Total 147,381 92,095



Group

2004 2003

RMB’000 RMB’000

Movements in allowance:

Balance at beginning of year 4,295 3,551 Charge to profit and loss 1,385 744

Balance at end of year 5,680 4,295

9 INVESTMENT IN SUBSIDIARIES

Company

2004 2003

RMB’000 RMB’000

Unquoted equity shares, at cost - -

The balances with subsidiaries are unsecured, interest-free and without fixed repayment terms.

a) The company, Jiangsu Unity Corporation Co. Limited (“Jiangsu Unity”), was established on May 11, 2004. By a sale and purchase agreement dated May 18, 2004 between Jiangsu Unity and Nanjing Unity Corporation Co., Ltd, Jiangsu Unity acquired Nanjing Unity Corporation Co., Ltd’s business, assets and undertakings relating to the fashion apparels business (the “Unity Undertakings”) for a total consideration of RMB26,000,000, based on the net book value of the Unity Undertakings as at April 30, 2004.

b) On May 28, 2004, Wang Shu Hang and Jin Zhi Cong contributed RMB14,300,000 and RMB11,700,000 to the paid up capital of Jiangsu Unity of RMB26,000,000.

c) By a sale and purchase agreement dated June 10, 2004, the subsidiaries, Mayflower (Nanjing) Industries Limited and Dongguan Mayflower Footwear Corporation Limited acquired 90% and 10% (comprising RMB23,400,000 and RMB2,600,000 paid up) equity interest in Jiangsu Unity respectively from Wang Shu Hang and Jin Zhi Cong for a consideration of RMB32,000,000. The consideration was based on a willing-buyer, willing-seller basis and represented a goodwill of RMB6,000,000 over the net book value of the Unity Undertakings as at April 30, 2004. As a result, Jiangsu Unity Corporation Co. Limited became a subsidiary of the group.




Details of subsidiaries are as follows:

Effective equity interest Place of Cost of held by incorporation Principal Subsidiary investment the Group /operation activities

2004 2003 2004 2003 RMB’000 RMB’000 % %

Held by the Company

Best Invent Holdings (a) (a) 100 100 British Investment Limited Virgin holding Islands

Best Value Profits (a) (a) 100 100 British Investment Limited Virgin holding and Islands marketing and

sales agent

Held by Best Invent Holdings Limited

Mayflower (Nanjing) 45,521 (b) 45,521 (b) 100 100 Nanjing, Manufacturer and Industries Limited China retailer of branded fashion footwear

Dongguan Mayflower 8,278 (b) 8,278 (b) 100 100 Dongguan, Manufacturer of Footwear Corporation China branded fashion Limited footwear

Mayflower (Nanjing) 88,643 (c) - 100 - Nanjing, Manufacturer and Enterprise Limited China retailer of branded fashion footwear

142,442 53,799

Held by Best Value Profits Limited

Mayflower Jordanian 100 100 Jordan Manufacturer of Garment & Footwear footwear Industries Company Limited

Held by Mayflower (Nanjing) Industries Limited

Jiangsu Unity 90 - Nanjing, Distributor of Corporation China international and Co. Limited domestic branded apparel



Effective equity interest Place of held by incorporation Principal Subsidiary the Group /operation activities

2004 2003 % %

Held by Dongguan Mayflower Footwear Corporation Limited

Jiangsu Unity 10 - Nanjing, Distributor of Corporation China international and Co. Limited domestic branded apparel

Note on auditors for 2004:

All the above subsidiaries were audited by Deloitte & Touche, Singapore for 2004 for the purpose of preparation of consolidated financial statements of the Company.

Notes on cost:

(a) Cost of investment amounted to US$2 (equivalent to RMB17).

(b) Cost of investment held by Best Invent Holdings Limited in Mayflower (Nanjing) Industries Limited and Dongguan Mayflower Footwear Corporation Limited amounted to US$5,500,000 (equivalent to RMB45,521,300) and US$1,000,000 (equivalent to RMB8,278,300) respectively.

(c) Cost of investment amounted to US$10,718,500 (equivalent to RMB88,643,462).

10 OTHER INVESTMENTS

Group and Company

2004 2003

RMB’000 RMB’000 At cost: Quoted fund 16,553 16,553 Unquoted fund - 13,243

Total 16,553 29,796

Market value: Quoted fund 24,102 21,345




11 PLANT AND EQUIPMENT Fixtures Motor and Construction Machinery vehicles equipment in-progress Total

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Group

Cost: At beginning of year 10,821 5,960 6,005 - 22,786 Arising on acquisition of subsidiary - 616 515 - 1,131 Additions 2,400 1,816 1,422 886 6,524 Disposals - (22) (3) - (25)

At end of year 13,221 8,370 7,939 886 30,416

Accumulated depreciation: At beginning of year 2,354 1,181 2,432 - 5,967 Arising on acquisition of subsidiary - 267 296 - 563 Depreciation for the year 1,066 1,225 1,037 - 3,328 Disposals - (13) - - (13)

At end of year 3,420 2,660 3,765 - 9,845

Depreciation for last year 905 504 850 - 2,259

Carrying amount: At beginning of year 8,467 4,779 3,573 - 16,819

At end of year 9,801 5,710 4,174 886 20,571

12 INTANGIBLE ASSETS Franchise Renovation fees costs Total

RMB’000 RMB’000 RMB’000 Group

Costs: At beginning of year - - - Acquisition 1,166 535 1,701 Additions 550 14 564 Written off - (549) (549)

At end of year 1,716 - 1,716

Accumulated amortisation At beginning of year - - - Amortisation for the year 349 - 349

At end of period 349 - 349

Carrying amount: At end of year 1,367 - 1,367

At beginning of year - - -



13 GOODWILL ON CONSOLIDATION

Group

2004 2003

RMB’000 RMB’000

At beginning of year - - Additions 6,000 -

At end of year 6,000 -

Goodwill on consolidation arose from the acquisition of Jiangsu Unity Corporation Co. Limited during the year.

14 NOTES PAYABLE

The notes payable are interest-free and secured on the cash deposits of a subsidiary amounting to RMB16,023,000 (2003 : RMB4,063,000) [Note 5].

15 BANK LOANS

Group

2004 2003

RMB’000 RMB’000

Term loan 1 22,347 24,830 Term loan 2 - 8,264

22,347 33,094 Non-current portion (Term loan 1) (16,553) (22,347)

Current portion 5,794 10,747

(a) Term loan 1 is secured by a pledge over a subsidiary’s registered capital, bears interest at 4.42% (2003 : 3.73%) per annum and is repayable by November 2006.

(b) Term loan 2 was guaranteed by the Company (2003 : the Company) and bears interest at an average rate of 2.97% (2003 : 2.97%) per annum. The loan has been fully repaid during the year.

16 OTHER PAYABLES

Group Company

2004 2003 2004 2003

RMB’000 RMB’000 RMB’000 RMB’000

Subsidiary (Note 9) - - 1,738 2,620 Related party (Note 4) 6,762 6,206 - - Accruals 12,479 8,245 8,079 3,364 Deposits 925 2,162 - - Advance from customers 5,654 2,582 - - Value added tax 119 2,647 - -

Total 25,939 21,842 9,817 5,984




17 ISSUED CAPITAL

Group and Company 2004 2003 2004 2003 2004 2003

Number of ordinary Number of ordinary RMB’000 RMB’000 shares of US$0.015 each shares of US$1 each

Authorised 800,000,000 800,000,000 12,000,000 12,000,000 99,000 99,000

Issued and paid up: At beginning of year 396,868,200 - - 3,500,000 49,271 28,968 Conversion of RCPS - - - 788,000 - 6,522 Others - - - 23 - - 396,868,200 - - 4,288,023 49,271 35,490 Sub-division of shares - 285,868,200 - (4,288,023) - - Shares issued on: Initial public offering - 75,000,000 - - - 9,311 Private placement - 36,000,000 - - - 4,470

At end of year 396,868,200 396,868,200 - - 49,271 49,271

18 RESERVE AND EXPANSION FUNDS

Group

2004 2003

RMB’000 RMB’000

Reserve fund 12,420 6,592 Enterprise expansion fund 2,137 -

Total 14,557 6,592

a) Reserve fund

Pursuant to relevant laws and regulations in the PRC and the Articles of Association, the company’s subsidiaries in the PRC are required to transfer 10% of its profit after taxation as reported in the PRC statutory financial statements to the reserve fund until the balances reaches at least 50% of the registered capital of the company’s subsidiaries. The reserve may be used to make up for losses incurred or to increase capital.

b) Enterprises expansion fund

Enterprise expansion funds represents an amount set aside from the profit after taxation of the company. The quantum of contribution to the enterprise expansion fund is determined by the board of directors. Enterprise expansion funds may be used for expanding the enterprise’s scale of production or operation; and upon approval by the original approval authority, such funds may also be used to increase investment.

Subject to approval by the relevant government authority, the enterprise expansion fund may also be used to increase capital. The appropriation shall be approved by the board of directors.



19 REVENUE

Revenue represents invoiced value of goods sold. All intra-group transactions are excluded from the revenue of the Group.

20 OTHER OPERATING INCOME Group

2004 2003

RMB’000 RMB’000

Commission income 4,146 4,104 Gain on sale of investments: Unquoted fund 1,562 - Treasury bonds 2,100 - Management fees 42 - Gain on sales of raw materials and consumables - 1,267 Interest income from: Non-related companies 229 149 Related party - 79 Others 596 23

Total 8,675 5,622

21 PROFIT FROM OPERATIONS

Group

2004 2003

Number of staff at end of year 1,869 1,441

Number of directors of the Company in remuneration bands is as follows: 2004 2003

S$500,000 and above - - S$250,000 to S$499,999 3 - Below S$250,000 7 9

Total 10 9

Group

2004 2003

RMB’000 RMB’000

Directors’ remuneration: Directors of the Company 7,800 4,860 Directors of subsidiaries 62 229 Staff costs (including directors’ remuneration) 26,428 16,967 Cost of defined contribution plans included in staff costs above 461 535 Audit fees paid to auditors 1,044 846 Allowance for inventories 1,385 744 Allowance for bad debts 374 - Foreign currency exchange adjustment (gain) loss (19) 42




22 FINANCE COSTS Group

2004 2003

RMB’000 RMB’000

Interest expense on bank loans and notes payable 4,367 1,497

23 INCOME TAX

The income tax varied from the amount of income tax determined by applying the PRC income tax rate of 33% (2003 : 33%) to profit before income tax as a result of the following differences:

Group

2004 2003

RMB’000 RMB’000

Income tax expense at PRC rate 35,059 14,026 Tax-exempt income (31,691) (14,154) FRS adjustments 820 - Effect of different tax rates of non-PRC operations - 128 Others 91 -

4,279 -

a) No income tax is payable by the Company and the Group during the current year.

b) Mayflower (Nanjing) Industries Limited is a production enterprise located in Nanjing. In accordance with the tax legislations applicable to foreign investment enterprises, the subsidiary is entitled to exemptions from PRC income tax for the two years commencing from the first profit-making year of operations, after offsetting all unexpired tax losses carried forward from the previous years, and thereafter, entitled to a 50% relief from PRC income tax for the next three years. 2002 was the first year of the tax exemption period.

c) Dongguan Mayflower Footwear Corporation Limited is a production enterprise located in Dongguan, the PRC. In accordance with the tax legislations applicable to foreign investment enterprises, Dongguan Mayflower Footwear Corporation Limited is entitled to exemptions from PRC income tax for the two years commencing from their first profit-making year of operations, after offsetting all unexpired tax losses carried forward from the previous years, and thereafter, entitled to a 50% relief from PRC income tax of 24% for the next three years.

The company had obtained approval from the PRC tax authority that its first profit-making year of operations is 2003. Accordingly, the company is entitled to exemption from PRC income tax for 2003 and 2004.

d) Mayflower (Nanjing) Enterprise Limited is a production enterprise located in Nanjing. In accordance with the tax legislations applicable to foreign investment enterprises, the company is entitled to exemptions from PRC income tax for the two years commencing from the first profit-making year of operations, after offsetting all unexpired tax losses carried forward from the previous years, and thereafter, entitled to a 50% relief from PRC income tax for the next three years. 2004 was the first year of the tax exemption period.

e) Jiangsu Unity Corporation Co., Limited is a is a production enterprise located in Nanjing. In accordance with the tax legislations applicable to local enterprises, the company is subjected to the PRC income tax rate of 33% for the net profit for the year adjusted in accordance with the relevant tax laws.



f) The profits of certain subsidiaries are not subject to tax in their countries of incorporation.

24 EARNINGS PER SHARE

The basic earnings per ordinary share is calculated on the Group’s net profit for the year of RMB 52,960,000 (2003 : RMB42,504,000) divided by 396,868,200 ordinary shares (2003 : weighted average number of ordinary shares of 321,107,089) in issue during the year.

There is no dilution as no share options were granted during the year.

25 CAPITAL EXPENDITURE COMMITMENTS

Group

2004 2003

RMB’000 RMB’000

Estimated amounts committed for future capital expenditure but not provided for in the financial statements 1,952 1,952

26 OPERATING LEASE COMMITMENTS

Group

2004 2003

RMB’000 RMB’000

Minimum lease payments under operating leases included in the profit and loss statement 3,862 2,899

At the balance sheet date, the commitments in respect of non-cancellable operating leases for the rental of factory space and retail outlets were as follows:

Group

2004 2003

RMB’000 RMB’000

Future minimum lease payments payable: Within one year 2,439 1,552 In the second to fifth years inclusive 11,929 1,407 After five years 14,400 -

Total 28,768 2,959

27 DIVIDENDS

Subsequent to December 31, 2004, the directors of the Company recommend that a final dividend be paid at 0.4246 US cents per ordinary share totalling US$1,685,000 (equivalent to RMB13,946,000) for the financial year just ended on the ordinary shares of the Company. The proposed dividends are not accrued as a liability for the current financial year in accordance with Financial Reporting Standards 10 – Events After The Balance Sheet Date.




28 BUSINESS GEOGRAPHICAL SEGMENTS

Primary reporting format – business segments

The Group is primarily engaged in two business segments, namely (1) manufacturer and retailer of branded fashion footwear and (2) contract manufacturing of footwear. The Group adopts these two business segments as the basis for its primary segment information. Primary segment information for the Group based on business segments are as follows:

STATEMENT OF GROUP RESULTS 2004

Contract Retail manufacturing Total

RMB’000 RMB’000 RMB’000

Revenue 237,165 57,306 294,471

Result: Segment result 45,922 7,009 52,931

Other operating income 8,675

Profit from operations 61,606 Finance costs (4,367)

Profit before income tax 57,239 Income tax expense (4,279)

Profit attributable to the Group 52,960

Other information: Purchase of plant and equipment 5,579 945 6,524 Depreciation of plant and equipment 2,433 895 3,328 Amortisation of intangible assets 349 - 349

2003


RMB’000 RMB’000 RMB’000

Revenue 189,983 30,610 220,593

Result: Segment result 35,496 2,883 38,379

Other operating income 5,622

Profit from operations 44,001 Finance costs (1,497)

Profit before income tax 42,504 Income tax expense -

Profit attributable to the Group 42,504

Other information: Purchase of plant and equipment 4,789 785 5,574 Depreciation of plant and equipment 1,894 365 2,259



2004


RMB’000 RMB’000 RMB’000 STATEMENT OF NET ASSETS

Assets: Segment assets 298,170 72,196 370,366

Liabilities: Segment liabilities 72,108 17,459 89,567

Unallocated liabilities 22,347

Total 111,914

2003


RMB’000 RMB’000 RMB’000 STATEMENT OF NET ASSETS

Assets: Segment assets 266,285 44,856 311,141

Liabilities: Segment liabilities 53,269 8,851 62,120

Unallocated liabilities 33,094

Total 95,214

Secondary reporting format – geographical segments

The geographical locations of the customers of the Group principally comprise the People’s Republic of China (“PRC”) and other locations.

Revenue by location of customers 2004 2003

RMB’000 RMB’000

PRC 245,125 189,983 Others 49,346 30,610

294,471 220,593

Assets and additions to fixed assets (“Capital Additions”) by geographical areas in which the assets are located are as follows:

2004 2003

Total Capital Total Capital assets additions assets dditions

RMB’000 RMB’000 RMB’000 RMB’000

PRC 313,516 6,710 270,873 5,574 Others 56,850 945 40,268 -

370,366 7,655 311,141 5,574


In our opinion, the accompanying financial statements of the Company and consolidated financial statements of the Group set out on pages 28 to 50 are drawn up so as to give a true and fair view of the state of affairs of the Company and of the Group as at December 31, 2004 and changes in equity of the Company and of Group and of the results and cash flows of the Group for the financial year then ended and at the date of this statement, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due.

ON BEHALF OF THE DIRECTORS

Chen Yixi

Li Wei

February 4, 2005

STATEMENT OF DIRECTORS


SUBSTANTIAL SHAREHOLDERS

Substantial Shareholders

Substantial shareholders of the Company (as recorded in the Register of Substantial Shareholders) as at 11 March 2005.

No. of Ordinary shares of US$0.015 eachName Direct Interest % Indirect Interest % Chen Yixi 130,421,400 32.86 - - Li Wei 38,935,200 9.81 - - Miao Bingwen 35,390,400 8.92 - -

Free Float

As at 11 March 2005, approximately 48.41% of the issued share capital of the Company was held in the hands of the public (on the basis of information available to the Company).

Accordingly, the Company has complied with Rule 723 of the Listing Manual of the Singapore Exchange Securities Trading Limited.


DISTRIBUTION OF SHAREHOLDINGS

as at 11 March 2005Authorised share capital : US$12,000,000Issued and fully paid-up capital : US$5,953,023Number of shares : 396,868,200Class of shares : Ordinary shares of US$0.015 eachVoting rights : One vote per share

SIZE OF SHAREHOLDINGS SHAREHOLDERS % NO. OF SHARES %

1 - 999 9 0.31 2,600 0.001,000 - 10,000 1,050 35.65 7,887,200 1.9910,001 - 1,000,000 1,863 63.26 98,690,000 24.871,000,001 AND ABOVE 23 0.78 290,288,400 73.14

TOTAL 2,945 100.00 396,868,200 100.00

TWENTY LARGEST SHAREHOLDERS

NO. NAME NO. OF SHARES % 1 CHEN YIXI 115,421,400 29.082 LI WEI 38,935,200 9.813 MIAO BINGWEN 35,390,400 8.924 UOB KAY HIAN PTE LTD 27,583,400 6.955 MERRILL LYNCH (SINGAPORE) PTE LTD 15,000,000 3.786 HSBC (SINGAPORE) NOMINEES PTE LTD 11,600,000 2.927 OCBC SECURITIES PRIVATE LTD 9,193,000 2.328 HL BANK NOMINEES (S) PTE LTD 5,850,000 1.479 PHILLIP SECURITIES PTE LTD 5,362,000 1.3510 DBS VICKERS SECURITIES (S) PTE LTD 3,941,000 0.9911 KIM ENG SECURITIES PTE. LTD 3,677,000 0.9312 UNITED OVERSEAS BANK NOMINEES PTE LTD 3,072,000 0.7713 NG WONG WAI LAN 2,001,000 0.5014 RAFFLES NOMINEES PTE LTD 1,740,000 0.4415 G K GOH STOCKBROKERS PTE LTD 1,735,000 0.4416 TAN SENG @ TAN HUN SENG 1,605,000 0.4017 DBS NOMINEES PTE LTD 1,307,000 0.3318 CITIBANK CONSUMER NOMINEES PTE LTD 1,250,000 0.3119 LIM & TAN SECURITIES PTE LTD 1,240,000 0.3120 SINGAPORE NOMINEES PTE LTD 1,130,000 0.28

TOTAL 287,033,400 72.30



NOTICE IS HEREBY GIVEN that the Annual General Meeting of Hongguo International Holdings Limited (the “Company”) will be held at Crystal Suite, Level 2, Holiday Inn Singapore-Parkview, 11 Cavenagh Road, Singapore 229616 on Tuesday, 26 April 2005 at 10.00 a.m. for the following purposes:

AS ORDINARY BUSINESS

1. To receive and adopt the Directors’ Report and Audited Accounts of the Company for the financial year ended 31 December 2004 together with the Auditors’ Report thereon. (Resolution 1)

2. To declare a first and final dividend of 0.42 US cent per ordinary share not applicable to tax for the financial year ended 31 December 2004. (Resolution 2)

3. To re-elect the following Directors retiring pursuant to Bye-law 104 of the Bye-laws of the Company:

Mr Miao Bingwen (Resolution 3) Mr Huo Li (Resolution 4)

4. To approve the payment of Directors’ fees of S$120,000 for the financial year ended 31 December 2004. (2003: S$105,000/-) (Resolution 5)

5. To re-appoint Messrs Deloitte & Touche as the Company’s Auditors and to authorise the Directors to fix their remuneration. (Resolution 6)

6. To transact any other ordinary business which may properly be transacted at an Annual General Meeting.

AS SPECIAL BUSINESS

To consider and if thought fit, to pass the following resolution as an Ordinary Resolution, with or without any modifications:

7. Authority to allot and issue shares up to fifty per cent. (50%) of issued capital

“That, pursuant to Rule 806(2) of the Listing Manual of the Singapore Exchange Securities Trading Limited (the “Listing Manual”), authority be and is hereby given to the Directors to:-

(a) allot and issue shares in the Company; and

(b) issue convertible securities and any shares in the Company pursuant to convertible securities

(whether by way of rights, bonus or otherwise) at any time and upon such terms and conditions and for such purposes and to such persons as the Directors shall in their absolute discretion deem fit, provided that the aggregate number of shares (including any shares to be issued pursuant to the convertible securities) in the Company to be issued pursuant to such authority shall not exceed fifty per cent. (50%) of the issued share capital of the Company for the time being and that the aggregate number of shares in the Company to be issued other than on a pro-rata basis to the then existing shareholders of the Company shall not exceed twenty per cent. (20%) of the issued share capital of the Company for the time being. Unless revoked or varied by the Company in general meeting, such authority shall continue in full force until the conclusion of the next Annual General Meeting of the Company or the date by which the next Annual General Meeting is required by law or by the Company’s Bye-laws to be held, whichever is earlier, except that the Directors shall be authorised to allot and issue new shares pursuant to the convertible securities notwithstanding that such authority has ceased.


For the purposes of this Resolution and Rule 806(3) of the Listing Manual, the percentage of issued share capital is based on the issued share capital of the Company at the time this Resolution is passed after adjusting for:-

(i) new shares arising from the conversion or exercise of convertible securities;

(ii) new shares arising from exercising share options or vesting of share awards outstanding or subsisting at the time of the passing of this Resolution, provided the options or awards were granted in compliance with the rules of the Listing Manual; and

(iii) any subsequent consolidation or subdivision of shares.” [See Explanatory Note (i)] (Resolution 7)

By Order of the Board

Raymond Tong Wei MinChua Koh PengJoint Company Secretaries

Singapore, 4 April 2005

Explanatory Note:

(i) The Ordinary Resolution 7 proposed in item 7 above, if passed, will empower the Directors from the date of the above Meeting until the date of the next Annual General Meeting, to allot and issue shares and convertible securities in the Company. The aggregate number of shares (including any shares issued pursuant to the convertible securities) which the Directors may allot and issue under this Resolution will not exceed fifty per cent. (50%) of the issued share capital (as defined in Resolution 7) of the Company. For issues of shares other than on a pro rata basis to all shareholders, the aggregate number of shares to be issued will not exceed twenty per cent. (20%) of the issued share capital (as defined in Resolution 7) of the Company. This authority will, unless previously revoked or varied at a general meeting, expire at the next Annual General Meeting of the Company or the date by which the next Annual General Meeting of the Company is required by law or by the Company’s Bye-laws to be held, whichever is the earlier. However, notwithstanding the cessation of this authority, the Directors are empowered to issue shares pursuant to any convertible securities issued under this authority.

Notes:

1. If a member being a depositor whose name appears in the Depository Register (as defined in the Bye-laws of the Company) wishes to attend and vote at the Annual General Meeting, then he/it should complete the Proxy Form and deposit the duly completed Proxy Form at the office of the Company’s Singapore Share Transfer Agent, Lim Associates (Pte) Ltd at 10 Collyer Quay #19-08, Ocean Building, Singapore 049315, at least 48 hours before the time of the Annual General Meeting.

2. If a depositor wishes to appoint a proxy/proxies, then the Proxy Form must be deposited at the office of the Company’s Singapore Share Transfer Agent, Lim Associates (Pte) Ltd at 10 Collyer Quay #19-08, Ocean Building, Singapore 049315, at least 48 hours before the time of the Annual General Meeting.


This page has been intentionally left blank.

This page has been intentionally left blank.

Hongguo International Holdings Limited

WE HAVE

STYLE


WE HAVE

STYLE


WE HAVE

STYLE

Documents

WE HAVE STYLE - Morningstar, Inc