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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Fiscal Year Ended December 31, 2007
 Commission file number: 001-12126
 CHINA ENTERPRISES LIMITED
 (Exact Name of Registrant as Specified in its Charter)
 Bermuda
 (Jurisdiction of Incorporation or Organization)
 Unit 3101, 31 st Floor, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong
(Address of Principal Executive Office)
  Name of Each Exchange onTitle of Each Class
    
    Which RegisteredN/A
    
    N/A
  Common stock, par value $0.01 per share
   None
     o þ
  o þ
  o þ
  o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated
filer þ(Do not check if a smaller reporting company)
Smaller reporting company o  U.S. GAAP þ
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board o
    
    Other o
  o þ
  o þ




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FORWARD-LOOKING STATEMENTS
  
    
    our business strategy;
    
    our ability to finance out business strategy;
    
    future developments in the tire industry in China and changes in government policies, and
    
    other statements relating to our future business development and financial performance.
    EXCHANGE RATE INFORMATION




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##### 



TABLE OF CONTENTS
  
 PART IItem 1
    
    Identity of Directors, Senior Management and AdvisersItem 2
    
    Offer Statistics and Expected TimetableItem 3
    
    Key InformationItem 4
    
    Information on the CompanyItem 5
    
    Operating and Financial Review and ProspectsItem 6
    
    Directors, Senior Management and EmployeesItem 7
    
    Major Shareholders and Related Party TransactionsItem 8
    
    Financial InformationItem 9
    
    Offer and ListingItem 10
    
    Additional InformationItem 11
    
    Quantitative and Qualitative Disclosure about Market RiskItem 12
    
    Description of Securities Other than Equity SecuritiesPART IIItem 13
    
    Defaults, Dividend Arrearages and DelinquenciesItem 14
    
    Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15
    
    Controls and ProceduresItem 16A
    
    Audit Committee Financial ExpertItem 16B
    
    Code of EthicsItem 16C
    
    Principal Accountant Fees and ServicesItem 16D
    
    Exemptions from the Listing Standards for Audit CommitteesItem 16E
    
    Purchases of Equity Securities by the Issuer and Affiliated PurchasersPART IIIItem 17
    
    Financial StatementsItem 18
    
    Financial StatementsItem 19
    
    ExhibitsSignaturesExhibit IndexEX-8EX-12.1EX-12.2EX-13.1EX-13.2EX-14.1




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
 AND ADVISERS




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ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE




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ITEM 3. KEY INFORMATION
 SELECTED FINANCIAL DATA




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(Amounts in thousands, except number of shares, their par values and per share data)
 Year ended December 31,2003
    

2004
    

2005
    

2006
    
    2007(a)
    
    
    
    
    
    
    
    (b)Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$Consolidated Statements of Operations Data:Revenues
    
    
    2,808,369
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    100,746
    
    
    
    (13,344
    )
    
    
    (27,522
    )
    
    
    (16,754
    )
    
    
    13,117
    
    
    
    1,798(Loss) profit from continuing
operations
    
    
    (56,781
    )
    
    
    181,942
    
    
    
    (26,324
    )
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (3,863
    )Loss from discontinued operations (a)
    
    
    (7,760
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (64,541
    )
    
    
    181,942
    
    
    
    (26,324
    )
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (3,863
    )Net (loss) income from operations
per share
    
    
    11.17
    
    
    
    20.18
    
    
    
    (2.92
    )
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (0.43
    )Basic and diluted (loss) earnings
from continuing operations per
common share (c)
    
    
    (6.30
    )
    
    
    20.18
    
    
    
    (2.92
    )
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (0.43
    )Basic and diluted loss from
discontinued operations per common
share (a) & (c)
    
    
    (0.86
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted (loss) earnings
per common share (c)
    
    
    (7.16
    )
    
    
    20.18
    
    
    
    (2.92
    )
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (0.43
    )Weighted-average number of common
share outstanding (c)
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310Dividend declared per common share- in Rmb
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - in US$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated Balance Sheets Data :Total assets
    
    
    509,666
    
    
    
    791,326
    
    
    
    684,273
    
    
    
    819,181
    
    
    
    575,076
    
    
    
    78,836Shareholders equity (Net assets)
    
    
    472,825
    
    
    
    667,981
    
    
    
    662,598
    
    
    
    599,297
    
    
    
    538,325
    
    
    
    73,798Supervoting common stock  par
value US$0.01 per share
    
    
    244
    
    
    
    244
    
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    Common stock  par value US$0.01
per share
    
    
    526
    
    
    
    526
    
    
    
    526
    
    
    
    770
    
    
    
    770
    
    
    
    106




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Notes:
 (a)
    
    The Company disposed the radial tire factory of Double Happiness, Yinchuan C.S.I.
(Greatwall) Rubber Co. Limited, or Yinchuan CSI, and C.S.I. Rubber Industries Limited, or CSI
Rubber, during the fiscal 2003. The Company has recorded the operating result of Yinchuan
CSI and CSI Rubber separately from continued operations as loss from discontinued operations
retrospectively.During the fiscal 2003, the Company also disposed a 25% interest in Hangzhou Zhongce Rubber Co.,
Limited, or Hangzhou Zhongce, leaving the Company with a minority interest of 26% in Hangzhou
Zhongce as of October 1, 2003. The Company consolidated the results of operations of Hangzhou
Zhongce for the nine months period ended September 30, 2003 and accounted for its share of equity
in earnings of Hangzhou Zhongce as an affiliate for the period from October 1, 2003 to December
31, 2003.(b)
    
    During the fiscal year 2007, following purchase and disposal of certain shares of Wing On
Travel (Holdings) Limited, or Wing On in the Stock Exchange of Hong Kong Limited, or HKSE,
the interest of Wing On held by the Company was diluted from approximately 20.36% to 12.77%,
and was accounted for as trading securities of the Company thereafter.(c)
    
    The calculation of basic and diluted (loss) earnings from continuing operations per common
share, basic and diluted loss from discontinued operations per common share and basic and
diluted loss per common share from 2003 to 2007 is based on the weighted-average number of
common stock outstanding during the years ended December 31, 2003 to 2007. The number of
common stock outstanding for 2003, 2004, 2005, 2006 and 2007 was 9,017,310. There were no
dilutive securities.
 EXCHANGE RATE INFORMATION




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Year Ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007(Rmb equivalent of US$1.00)
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    RmbAt unified exchange rate
 average rate calculated by using
the average of the exchange rates
on the last day of each
month during each period
    
    
    8.28
    
    
    
    8.28
    
    
    
    8.18
    
    
    
    7.96
    
    
    
    7.57
  At Unified Exchange Rate(Rmb equivalent of US$1.00)
    
    High
    
    LowMay 31, 2009
    
    
    6.83
    
    
    
    6.82April 30, 2009
    
    
    6.85
    
    
    
    6.82March 31, 2009
    
    
    6.84
    
    
    
    6.83February 28, 2009
    
    
    6.84
    
    
    
    6.83January 31, 2009
    
    
    6.85
    
    
    
    6.82December 31, 2008
    
    
    6.88
    
    
    
    6.83
 RISK FACTORS
  Risks Related to Our Business
 IF THE ULTIMATE PARENT COMPANY CEASED TO PROVIDE FINANCIAL SUPPORT, IT COULD HAS A SIGNIFICANT
IMPACT ON OUR FINANCIAL AND OPERATIONAL CONDITION




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THE COMPANY MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY ITS BUSINESS STRATEGY IN WHICH CASE ITS
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION WOULD SUFFER
    THE COMPANY MAY NOT BE ABLE TO FINANCE ACQUISITIONS, STRATEGIC INVESTMENTS OR OTHER EXPANSIONS OF
OPERATIONS OR MAY INCUR FINANCIAL OBLIGATIONS OR LIABILITIES IN CONNECTION WITH ANY ACQUISITION OR
EXPANSION




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FUTURE ACQUISITIONS OR STRATEGIC INVESTMENTS MAY NOT BE SUCCESSFUL AND MAY HARM OUR OPERATING
RESULTS
  DIVERSIFICATION MAY RESULT IN LOWERED RESPONSIVENESS TO CYCLICAL CHANGES OF DIFFERENT BUSINESSES
  AS A RESULT OF CHANGES IN THE COMPANYS ASSETS AND SOURCES OF INCOME, THE COMPANY COULD BECOME AN
INVESTMENT COMPANY FOR PURPOSES OF THE UNITED STATES INVESTMENT COMPANY ACT OF 1940




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CHANGES IN COMPOSITION OF THE COMPANYS ASSETS COULD RESULT IN THE COMPANY BEING DEEMED A PASSIVE
FOREIGN INVESTMENT COMPANY WHICH COULD HAVE A NEGATIVE IMPACT ON U.S. HOLDERS




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A GLOBAL ECONOMIC DOWNTURN COULD HAVE A MATERIAL ADVERSE EFFECT ON THE RESULTS OF OUR BUSINESS
  CHANGES IN ACCOUNTING STANDARDS AND TAXATION REQUIREMENTS COULD AFFECT OUR FINANCIAL RESULTS
  FAILURE OF INFORMATION TECHNOLOGY COULD CAUSE NEGATIVE IMPACT ON OUR OPERATIONS
  OUR OPERATIONS, ASSETS AND STAFF CAN BE EXPOSED TO RISKS RELATED TO EVENTS OF EXCEPTIONAL NATURE




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OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT TO COVER THE RISKS RELATED TO OUR FINANCIAL AND
LOSSES
  FAILURE TO ESTABLISH AND MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING COULD HAVE
A MATERIAL AND ADVERSE EFFECT ON THE ACCURACY IN REPORTING OUR FINANCIAL RESULTS OR PREVENTING
FRAUD




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THE FINANCIAL COSTS AND ADMINISTRATIVE BURDENS OF IMPLEMENTING THE SARBANES-OXLEY ACT OF 2002
COULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL RESULTS AND FINANCIAL CONDITION
  Risks for Doing Business in China
 THE COMPANYS BUSINESS FOCUS ON THE GREATER CHINA REGION SUBJECTS THE COMPANY AND ITS BUSINESS TO
THE POLITICAL, ECONOMIC AND OTHER DEVELOPMENTS IN THE REGION




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.




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RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR RESOURCES
EFFECTIVELY
  FLUCTUATIONS IN THE VALUE OF THE RENMINBI COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS




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NATURAL DISASTERS IN THE GREATER CHINA REGION COULD CAUSE SIGNIFICANT DAMAGE TO THE COMPANYS
BUSINESS AND FINANCIAL RESULTS
  OUR RESULTS COULD BE HARMED IF WE HAVE TO COMPLY WITH NEW ENVIRONMENTAL REGULATIONS




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LEGAL SYSTEM DIFFERENCES BETWEEN THE GREATER CHINA REGION AND THE UNITED STATES OF AMERICA COULD
IMPACT INVESTORS
  Risks Related to Our Capital Stock
 LIMITED LIQUIDITY IN THE COMPANYS SECURITIES MAY MAKE IT DIFFICULT TO SELL SHARES
  POSSIBLE VOLATILITY OF SHARE PRICES WORLDWIDE MAY HAVE SIGNIFICANT EFFECTS ON THE COMPANYS SHARE
PRICE




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ITEM 4. INFORMATION ON THE COMPANY
 HISTORY AND DEVELOPMENT OF THE COMPANY




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
    
    Orion Tire Corporation, a U.S. corporation in which the company has a 60% interest.
    
    Orion (B.V.I.) Tire Corporation, a British Virgin Islands company in which the company
has a 60% interest.
    
    Century Lead Limited, a British Virgin Islands company in which the company has a 100%
interest.
    
    Capital Canton Limited, a British Virgin Islands company in which the company has a
100% interest.
    
    Easy Legend Limited, a British Virgin Islands company in which the company has a 100%
interest.
    
    Million Good Limited, a British Virgin Islands company in which the company has a 100%
interest.
    
    Sincere Ocean Limited, a British Virgin Islands company in which the company has a 100%
interest.
    
    Supreme Solution Limited, a British Virgin Islands company in which the company has a
100% interest.
    
    Wealth Faith Limited, a British Virgin Islands company in which the company has a 100%
interest.
    
    Great Windfall Agents Limited, a British Virgin Islands company in which the company
has a 100% interest.
    
    Honest Map Limited a British Virgin Islands company in which the company has a 100%
interest.
    
    Ventures Kingdom Limited a British Virgin Islands company in which the company has a
100% interest.
  http://www.chinaenterpriseslimited.com st




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IMPORTANT EVENTS IN THE COMPANYS BUSINESS IN 2007
 Divestiture of Investment in Wing On
   Developments in Litigation relating to the Xiang Zhang Garden




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PRINCIPAL CAPITAL EXPENDITURES
  2005
    
    
    2006
    
    
    2007Rmb000
    
    
    Rmb000
    
    
    Rmb000Purchase of property, plant and equipment
    
    
    (344
    )
    
    
    
    
    
    
    Investments in and advances to affiliates, net
    
    
    (37,122
    )
    
    
    (2,227
    )
    
    
    (10,137
    )




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BUSINESS OVERVIEW
  Tire Business
  Travel Business




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ORGANIZATIONAL STRUCTURE




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CONSOLIDATED PRINCIPAL SUBSIDIARIES AS OF DECEMBER 31, 2007
 CompanysCountry of
    
    
    
    
    
    Ownership InterestConsolidated Subsidiary
    
    Incorporation
    
    Principal Activities
    
    Directly
    
    IndirectlyOrion Tire
Corporation
    
    U.S.A.
    
    Investment holding
    
    
    60
    %
    
    
    Orion
(B.V.I.) Tire Corporation
    
    BVI
    
    Investment holding
    
    
    60
    %
    
    
    Century Lead
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Capital Canton
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Easy Legend
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Million Good
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Sincere Ocean
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Supreme Solution
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Wealth Faith
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Great
Windfall Agents Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Honest Map
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Ventures Kingdom
Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    
 PROPERTY, PLANT AND EQUIPMENT
 Bermuda
  Hong Kong
 st




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  OPERATING RESULTS
 Overview
   CRITICAL ACCOUNTING POLICIES




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Accounting Estimates
  Income Taxes
  Derivatives Embedded in Certain Debt Securities




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RESULTS OF OPERATIONS
 Fiscal year ended December 31, 2007 compared with fiscal year ended December 31, 2006
 The Company




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Tire Business
  Travel Business
  Fiscal year ended December 31, 2006 compared with fiscal year ended December 31, 2005
 The Company




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Tire Business
  Travel Business
  Impact of Inflation




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Tax Regulations
  LIQUIDITY AND CAPITAL RESOURCES




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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
  Payments due by periodContractual Obligation
    
    Less than 1 year
    
    1-3 years
    
    More than 3 yearsRmb000
    
    Rmb000
    
    Rmb000Purchase Obligation
    
    
    402,000
    
    
    
    
    
    
    
    
 TREND INFORMATION




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OFF-BALANCE SHEET ARRANGEMENT




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
 Name
    
    Age
    
    Position
    
    Employed SinceYap, Allan
    
    
    53
    
    
    Chairman, Chief
Executive Officer and
Director of the Company
    
    2001(1)Chan Ling, Eva
    
    
    43
    
    
    Deputy Chairman and
Director of the Company
    
    2004(2)Dorothy Law
    
    
    39
    
    
    Director
    
    
    2000Richard Whittall
    
    
    50
    
    
    Independent Director
and Audit Committee
Member of the Company
    
    
    2000David Edwin Bussmann
    
    
    55
    
    
    Independent Director
and Audit Committee
Member of the Company
    
    2000(3)Lien Kait Long
    
    
    61
    
    
    Director
    
    
    1999Chow Chun Man, Jimmy
    
    
    39
    
    
    Chief Financial Officer
    
    
    2003
 
 (1)
    
    Dr. Yap, Allan is the Chairman of Hanny and served as an executive director of China
Strategic Holdings Limited until his resignation on June
16, 2006.(2)
    
    Ms. Chan Ling, Eva is an executive director of China Strategic Holdings Limited.(3)
    
    Mr. David Edwin Bussmann served as independent non-executive director of China Strategic
Holdings Limited, a public listed company in Hong Kong, until his resignation on June 16,
2006. Biographies of Directors and Senior Management




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Compensation of Directors and Senior Management
   CompensationName
    
    Salary (USD)
    
    
    Salary (Rmb)
    
    
    Total(USD)
    
    
    Total(Rmb)Executive
DirectorYap, Allan
    
    
    20,000
    
    
    
    145,548
    
    
    
    20,000
    
    
    
    145,548Chan Ling, Eva
    
    
    20,000
    
    
    
    145,548
    
    
    
    20,000
    
    
    
    145,548Non-Executive
DirectorDorothy Law
    
    
    20,000
    
    
    
    145,548
    
    
    
    20,000
    
    
    
    145,548Lien Kait Long
    
    
    20,000
    
    
    
    145,548
    
    
    
    20,000
    
    
    
    145,548Richard Whittall
    
    
    20,000
    
    
    
    145,548
    
    
    
    20,000
    
    
    
    145,548David E. Bussmann
    
    
    20,000
    
    
    
    145,548
    
    
    
    20,000
    
    
    
    145,548




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Board Practices
    Employees
  SHARE OWNERSHIP




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major shareholders
  Name of holder
    
    Number of shares held
    
    
    Percentage of classHanny Holdings Limited (1) (2) (3)
    
    
    5,239,800
    
    
    
    55.22
    %Peconic Partners LLC(4) (5)
    
    
    503,275
    
    
    
    5.58
    %
 
 (1)
    
    Consists of 3,000,000 shares of supervoting common stock, each share having 10 votes on
resolutions of shareholders, and 2,239,800 of common stock, each share having 1 vote on
resolutions of shareholders, held by Group Dragon Investments Limited. As part of the group
reorganization of China Strategic Holdings Limited, effective on May 19, 2006, China
Strategic Holdings Limited transferred to a wholly-owned subsidiary of Group Dragon
Investments Limited 2,239,800 shares of the Companys common stock previously held indirectly
and 3,000,000 shares of the Companys supervoting common stock previously held directly. As
a result of the group reorganization of China Strategic Holdings Limited, Group Dragon
Investments Limited has shared voting and dispositive control over 3,000,000 shares of the
Companys supervoting common stock, or 100% of the total number of supervoting common stock
outstanding, and 2,239,800 shares of the Companys common stock, or 37.22% of the total
common stock outstanding. As of June 16, 2006, Hanny indirectly owns 436,032,120 shares of
Group Dragon Investments Limited, or 98.92% of the total common stock outstanding of Group
Dragon Investments Limited. Group Dragon Investments Limited became an indirect wholly-owned
subsidiary of Hanny for the financial year ended December 31, 2007. On September 13, 2006,
the board of directors of the Company approved Group Dragon (B.V.I.) Limited, a wholly-owned
subsidiary of Group Dragon Investments Limited to convert 3,000,000 shares of supervoting
common stock into 3,000,000 shares of common stock of the Company.(2)
    
    On March 26, 2008, Hanny disclosed by way of announcement posted on the website




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of the HKSE that it would dispose to an independent third party its entire issued share
capital held in Kamthorn Limited, which held approximately 18.1% equity interest in the
issued share capital of the Company. The transaction was completed in May 2008.
 (3)
    
    On July 30, 2008, Hanny further disclosed in its annual report 2007-08 that 29.2% interest
including the interest as mentioned in (2) above in the issued share capital of the Company
was disposed of subsequent to its financial year ended March 31, 2008.(4)
    
    According to Amendment No. 16 to a report on Schedule 13G filed on February 9, 2007 (the
Amended Schedule 13G), Peconic Partners LLC (formerly known as FLA Advisers LLC), an
investment adviser registered with the U.S. Securities and Exchange Commission (Peconic
Partners) had shared voting and dispositive control over 446,375 shares of common stock
(Shares) or 4.95% for the total number of shares outstanding. Peconic shares investment
and dispositive power over the shares with various investment advisory clients of Peconic,
including Peconic Partners International Fund, Ltd. (formerly FLA International Fund Ltd), a
Bermuda company which reported shared ownership with Peconic Partners of 56,900 Shares or
0.63% of the total outstanding. According to Amended Schedule 13G, various client of the
reporting persons (Peconic Partners and Peconic Partners International Fund Ltd) have the
right to receive or the power to direct the receipt of dividends from, or the proceeds from
the sale of the shares of Companys common stock reflected in the Amended Schedule 13G.(5)
    
    According to Amendment No. 17 to a report on Schedule 13G filed on February 17, 2009,
516,175 Shares or 5.7% for the total number of shares outstanding which consist of (A) 79,800
Shares beneficially owned individually by Mr. William F. Harnisch (Mr. Harnisch); and (B)
(i) 218,775 Shares beneficially owned by Grenadier Fund; (ii) 116,100 Shares beneficially
owned by Triumph Fund II L.P.; (iii) 52,500 Shares beneficially owned by Peconic Partners
International Fund Ltd.; (iv) 46,300 Shares beneficially owned by Permal U.S. Capital Growth
Ltd.; and (v) 2,700 Shares beneficially owned by Triumph Fund III L.P., all of which Shares
Mr. Harnisch may be deemed to beneficially own by virtue of his position as President and
Chief Executive Officer of Peconic Partners, the investment adviser to the above five
clients.




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RELATED PARTY TRANSACTIONS
 Convertible note receivable from an affiliate
      2006
    
    2007Rmb000
    
    Rmb000Due from:China Strategic Holdings Limited and its subsidiaries
    
    
    331
    
    
    
    732




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2006
    
    2007Rmb000
    
    Rmb000Group Dragon Investments Limited and its subsidiaries (Group Dragon
Investments Limited Group)
    
    
    
    
    
    
    2,294Hanny and its subsidiaries (except Group Dragon Investments Limited
Group)
    
    
    
    
    
    
    26,823Wing On and its subsidiaries
    
    
    
    
    
    
    37,587331
    
    
    
    67,436Due to:Group Dragon Investments Limited and its subsidiaries
    
    
    203,025
    
    
    
    2,849Hanny and its subsidiaries (except Group Dragon Investments Limited
Group) (Hanny Group)
    
    
    203
    
    
    
    ITC and its subsidiaries (except Hanny Group and Group Dragon
Investments Limited Group)
    
    
    3,122
    
    
    
    1,157Wing On and its subsidiaries
    
    
    2,121
    
    
    
    208,471
    
    
    
    4,006
  Management and Administrative Services Agreement




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ITEM 8. FINANCIAL INFORMATION
 CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
  Dividend Policy
   SIGNIFICANT CHANGES




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##### Table of Contents



ITEM
9. OFFER AND LISTING
   Year Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)December 31, 2007
    
    
    2.21
    
    
    
    0.55December 31, 2006
    
    
    2.59
    
    
    
    0.40December 31, 2005
    
    
    2.30
    
    
    
    0.31December 31, 2004
    
    
    6.90
    
    
    
    1.03December 31, 2003
    
    
    3.50
    
    
    
    0.25
  Quarter Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)March 31, 2009
    
    
    0.35
    
    
    
    0.03December 31, 2008
    
    
    0.25
    
    
    
    0.02September 30, 2008
    
    
    0.35
    
    
    
    0.15June 30, 2008
    
    
    0.35
    
    
    
    0.26March 31, 2008
    
    
    0.60
    
    
    
    0.26December 31, 2007
    
    
    1.10
    
    
    
    0.56September 30, 2007
    
    
    1.30
    
    
    
    0.73June 30, 2007
    
    
    2.21
    
    
    
    0.55March 31, 2007
    
    
    1.75
    
    
    
    0.75




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##### Table of Contents



Quarter Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)December 31, 2006
    
    
    1.95
    
    
    
    0.75September 30, 2006
    
    
    2.55
    
    
    
    1.60June 30, 2006
    
    
    2.55
    
    
    
    1.63March 31, 2006
    
    
    2.59
    
    
    
    0.40
  Month Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)May 31, 2009
    
    
    0.50
    
    
    
    0.12April 30, 2009
    
    
    0.18
    
    
    
    0.04March 31, 2009
    
    
    0.12
    
    
    
    0.04February 28, 2009
    
    
    0.12
    
    
    
    0.05January 31, 2009
    
    
    0.35
    
    
    
    0.03December 31, 2008
    
    
    0.10
    
    
    
    0.02




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##### Table of Contents



ITEM 10. ADDITIONAL INFORMATION
 MEMORANDUM AND ARTICLES OF ASSOCIATION
  MATERIAL CONTRACTS
     EXCHANGE CONTROLS
 Certain Foreign Issuer Considerations




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---



##### Table of Contents



TAXATION
  Bermuda Taxation




---



##### Table of Contents



United States Federal Income Taxation
 Taxation of Shareholders




---



##### Table of Contents



United States Backup Withholding and Information Reporting




---



##### Table of Contents



DOCUMENTS ON DISPLAY




---



##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  EXCHANGE RATE INFORMATION
    FOREIGN CURRENCY RISK




---



##### Table of Contents



INTEREST RATE FLUCTUATIONS




---



##### Table of Contents



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES




---



##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES




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##### Table of Contents



ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS




---



##### Table of Contents



ITEM 15. CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures
  (b) Managements Annual Report on Internal Control over Financial Reporting
  1.
    
    Pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;2.
    
    Provide reasonable assurance that transactions are recorded as necessary to permit the
preparation of financial statements in accordance with the generally accepted accounting
principles;3.
    
    Provide reasonable assurance that receipts and expenditures are being made only in
accordance with the authorizations of management and directors of the Company;4.
    
    Provide reasonable assurance that unauthorized acquisition, use or disposition of
Company assets that could have a material effect on our financial statements would be
prevented or detected in a timely manner.




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##### Table of Contents



ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B CODE OF ETHICS
  
 ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
   2007
    
    2006US$000
    
    US$000Audit Fees
    
    
    320
    
    
    
    411Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total
    
    
    320
    
    
    
    411
 Audit Committee Pre-approval Policies and Procedures




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##### Table of Contents



ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS




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PART III
 
 ITEM
17. FINANCIAL STATEMENTS




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##### Table of Contents



ITEM 18. FINANCIAL STATEMENTS




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HANGZHOU ZHONGCE RUBBER CO., LTD.




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
    
    F-1Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2005, 2006 and 2007
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    F-3Consolidated Statements of Owners Equity for the years ended December 31, 2005, 2006 and 2007
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007
    
    F-6Notes to Consolidated Financial Statements
    
    F-8




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Deloitte Touche Tohmatsu
  F-1




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (Amounts in thousands)
 Year ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Revenues:- third parties
    
    
    6,406,337
    
    
    
    8,822,599
    
    
    
    11,649,022
    
    
    
    1,596,938- related parties
    
    
    100,015
    
    
    
    116,106
    
    
    
    137,305
    
    
    
    18,823Total
    
    
    6,506,352
    
    
    
    8,938,705
    
    
    
    11,786,327
    
    
    
    1,615,761Cost of revenues
    
    
    (5,771,884
    )
    
    
    (8,190,449
    )
    
    
    (10,431,737
    )
    
    
    (1,430,063
    )Gross profit
    
    
    734,468
    
    
    
    748,256
    
    
    
    1,354,590
    
    
    
    185,698Selling, general and administrative expenses
    
    
    (437,536
    )
    
    
    (544,178
    )
    
    
    (748,530
    )
    
    
    (102,614
    )Other operating (loss) income
    
    
    (3,394
    )
    
    
    628
    
    
    
    (4,290
    )
    
    
    (588
    )Operating income
    
    
    293,538
    
    
    
    204,706
    
    
    
    601,770
    
    
    
    82,496Non-operating income (expenses):Interest income
    
    
    3,692
    
    
    
    4,584
    
    
    
    6,593
    
    
    
    904Interest expenses
    
    
    (94,680
    )
    
    
    (130,400
    )
    
    
    (159,431
    )
    
    
    (21,856
    )Other income (loss)
    
    
    5,084
    
    
    
    (294
    )
    
    
    (8,684
    )
    
    
    (1,190
    )Income before income taxes
and minority interests
    
    
    207,634
    
    
    
    78,596
    
    
    
    440,248
    
    
    
    60,354Income tax expenses (note 8)
    
    
    (46,892
    )
    
    
    (16,337
    )
    
    
    (38,201
    )
    
    
    (5,237
    )Minority interests
    
    
    (19,413
    )
    
    
    (5,964
    )
    
    
    (16,360
    )
    
    
    (2,243
    )Net income and comprehensive income
    
    
    141,329
    
    
    
    56,295
    
    
    
    385,687
    
    
    
    52,874
  F-2




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands)
 As of December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    304,464
    
    
    
    639,200
    
    
    
    87,626Restricted cash
    
    
    76,155
    
    
    
    17,410
    
    
    
    2,387Accounts receivable, net of allowances for
doubtful receivables of Rmb53,719 in 2006
and Rmb61,602 in 2007
    
    
    866,744
    
    
    
    802,072
    
    
    
    109,954Notes receivables (note 3)
    
    
    50,790
    
    
    
    75,532
    
    
    
    10,355Other receivables
    
    
    36,608
    
    
    
    21,034
    
    
    
    2,884Inventories (note 4)
    
    
    1,718,457
    
    
    
    1,868,345
    
    
    
    256,127Prepaid expenses and other current assets
    
    
    72,078
    
    
    
    74,772
    
    
    
    10,250Due from related companies (note 11)
    
    
    9,680
    
    
    
    27,640
    
    
    
    3,789Deferred tax assets (note 10)
    
    
    63,291
    
    
    
    130,062
    
    
    
    17,830Total current assets
    
    
    3,198,267
    
    
    
    3,656,067
    
    
    
    501,202Prepayments for equipment
    
    
    146,306
    
    
    
    236,593
    
    
    
    32,434Property, plant and equipment, net (note 5)
    
    
    2,561,863
    
    
    
    3,142,126
    
    
    
    430,747Land use rights (note 5)
    
    
    126,711
    
    
    
    123,995
    
    
    
    16,998Deferred tax assets (note 8)
    
    
    6,788
    
    
    
    4,469
    
    
    
    613Due from related companies (note 11)
    
    
    1,382
    
    
    
    2,090
    
    
    
    287Other assets
    
    
    849
    
    
    
    1,218
    
    
    
    167Total assets
    
    
    6,042,166
    
    
    
    7,166,558
    
    
    
    982,448
 F-3




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED BALANCE SHEETS  continued
 (Amounts in thousands)
 As of December 31,2006
    
    
    2007
    
    
    2007Rmb
    
    
    Rmb
    
    
    US$LIABILITIES AND OWNERS EQUITYCurrent liabilities:Short-term bank loans (note 6)
    
    
    2,181,066
    
    
    
    2,151,768
    
    
    
    294,981Current portion of long-term bank
loans (note 6)
    
    
    164,000
    
    
    
    470,645
    
    
    
    64,520Accounts payable
    
    
    1,111,894
    
    
    
    874,305
    
    
    
    119,856Advances from customers
    
    
    79,359
    
    
    
    232,282
    
    
    
    31,843Government subsidies
    
    
    194,105
    
    
    
    196,603
    
    
    
    26,952Transportation expenses payable
    
    
    56,358
    
    
    
    92,293
    
    
    
    12,652Other payables
    
    
    203,725
    
    
    
    222,741
    
    
    
    30,535Debenture payable (note 7)
    
    
    
    
    
    
    360,000
    
    
    
    49,352Accrued liabilities
    
    
    254,362
    
    
    
    353,815
    
    
    
    48,504Due to related companies (note 11)
    
    
    1,628
    
    
    
    6,318
    
    
    
    866Income taxes payable (note 8)
    
    
    25,585
    
    
    
    56,370
    
    
    
    7,728Loans from related companies (note 11)
    
    
    30,592
    
    
    
    22,669
    
    
    
    3,108Total current liabilities
    
    
    4,302,674
    
    
    
    5,039,809
    
    
    
    690,897Long-term bank loans, net of current portion
(note 6)
    
    
    533,000
    
    
    
    515,000
    
    
    
    70,600Due to a shareholder (note 11)
    
    
    134
    
    
    
    67
    
    
    
    9Deferred tax liabilities (note 8)
    
    
    
    
    
    
    3,277
    
    
    
    449Total liabilities
    
    
    4,835,808
    
    
    
    5,558,153
    
    
    
    761,955Commitments and contingencies (note 9)Minority interests
    
    
    214,963
    
    
    
    231,323
    
    
    
    31,712Owners equity:Registered capital
    
    
    613,603
    
    
    
    613,603
    
    
    
    84,117Additional paid-in capital
    
    
    20,266
    
    
    
    20,266
    
    
    
    2,778Retained earnings
    
    
    357,526
    
    
    
    743,213
    
    
    
    101,886Total owners equity
    
    
    991,395
    
    
    
    1,377,082
    
    
    
    188,781Total liabilities and owners equity
    
    
    6,042,166
    
    
    
    7,166,558
    
    
    
    982,448
  F-4




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED STATEMENTS OF OWNERS EQUITY
 (Amounts in thousands)
 AdditionalRegistered
    
    paid-in
    
    Retainedcapital
    
    capital
    
    earnings
    
    TotalRmb
    
    Rmb
    
    Rmb
    
    RmbBalance at January 1, 2005
    
    
    613,603
    
    
    
    20,266
    
    
    
    159,902
    
    
    
    793,771Net income
    
    
    
    
    
    
    
    
    
    
    141,329
    
    
    
    141,329Balance at December 31, 2006
    
    
    613,603
    
    
    
    20,266
    
    
    
    301,231
    
    
    
    935,100Net income
    
    
    
    
    
    
    
    
    
    
    56,295
    
    
    
    56,295Balance at December 31, 2007
    
    
    613,603
    
    
    
    20,266
    
    
    
    357,526
    
    
    
    991,395Net income
    
    
    
    
    
    
    
    
    
    
    385,687
    
    
    
    385,687Balance at December 31, 2007
    
    
    613,603
    
    
    
    20,266
    
    
    
    743,213
    
    
    
    1,377,082Balance at December 31, 2007
(in US$)
    
    
    84,117
    
    
    
    2,778
    
    
    
    101,886
    
    
    
    188,781
  F-5




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Year ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Cash flows from operating activities:Net income
    
    
    141,329
    
    
    
    56,295
    
    
    
    385,687
    
    
    
    52,874Adjustments to reconcile net income to net cash
provided by operating activities:Minority interests
    
    
    19,413
    
    
    
    5,964
    
    
    
    16,360
    
    
    
    2,243Deferred income taxes
    
    
    (11,872
    )
    
    
    (19,683
    )
    
    
    (61,175
    )
    
    
    (8,387
    )Loss (gain) on disposal of property, plant and
equipment
    
    
    3,327
    
    
    
    (924
    )
    
    
    4,871
    
    
    
    667Depreciation
    
    
    246,658
    
    
    
    271,045
    
    
    
    343,627
    
    
    
    47,107Amortization
    
    
    2,196
    
    
    
    3,037
    
    
    
    3,170
    
    
    
    434Changes in operating assets and liabilities:Accounts and other receivables, net
    
    
    (96,605
    )
    
    
    (166,387
    )
    
    
    80,246
    
    
    
    11,001Notes receivables
    
    
    17,768
    
    
    
    (39,012
    )
    
    
    (24,742
    )
    
    
    (3,392
    )Inventories
    
    
    (454,404
    )
    
    
    (339,076
    )
    
    
    (149,888
    )
    
    
    (20,548
    )Prepaid expenses and other current assets
    
    
    28,887
    
    
    
    (13,738
    )
    
    
    (2,694
    )
    
    
    (369
    )Due from related companies
    
    
    (653
    )
    
    
    (502
    )
    
    
    (17,960
    )
    
    
    (2,462
    )Other assets
    
    
    149
    
    
    
    (1,790
    )
    
    
    (369
    )
    
    
    (51
    )Accounts payable and other payables, net
    
    
    519,409
    
    
    
    159,807
    
    
    
    (27,217
    )
    
    
    (3,731
    )Due to related companies
    
    
    
    
    
    
    
    
    
    
    4,690
    
    
    
    643Accrued liabilities
    
    
    10,585
    
    
    
    91,358
    
    
    
    99,453
    
    
    
    13,634Income taxes payable
    
    
    (1,488
    )
    
    
    (3,635
    )
    
    
    30,785
    
    
    
    4,220Net cash provided by operating activities
    
    
    424,699
    
    
    
    2,759
    
    
    
    684,844
    
    
    
    93,883
 F-6




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED STATEMENTS OF CASH FLOWS  continued
 (Amounts in thousands)
 Year ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (753,829
    )
    
    
    (449,111
    )
    
    
    (937,190
    )
    
    
    (128,477
    )Purchase of land use rights
    
    
    
    
    
    
    (66,134
    )
    
    
    (454
    )
    
    
    (62
    )Decrease (increase) in prepayment paid for
property, plant and equipment
    
    
    31,435
    
    
    
    (57,622
    )
    
    
    (90,287
    )
    
    
    (12,377
    )(Increase) decrease in restricted bank deposits
    
    
    (29,917
    )
    
    
    (7,314
    )
    
    
    58,745
    
    
    
    8,053Proceeds from disposal of property, plant and
equipment
    
    
    1,296
    
    
    
    3,177
    
    
    
    8,429
    
    
    
    1,155Increase in due from related companies
    
    
    
    
    
    
    
    
    
    
    (708
    )
    
    
    (97
    )Net cash used in investing activities
    
    
    (751,015
    )
    
    
    (577,004
    )
    
    
    (961,465
    )
    
    
    (131,805
    )Cash flows from financing activities:Proceeds from short-term bank loans
    
    
    1,517,242
    
    
    
    2,611,704
    
    
    
    2,929,636
    
    
    
    401,617Repayment of short-term bank loans
    
    
    (1,340,805
    )
    
    
    (2,184,427
    )
    
    
    (2,958,934
    )
    
    
    (405,634
    )Proceeds from long-term bank loans
    
    
    245,000
    
    
    
    260,000
    
    
    
    427,645
    
    
    
    58,625Repayment of long-term bank loans
    
    
    (64,000
    )
    
    
    (97,000
    )
    
    
    (139,000
    )
    
    
    (19,055
    )Increase in debenture payable
    
    
    
    
    
    
    
    
    
    
    360,000
    
    
    
    49,352Repayment of loans from (advance to) a related
company
    
    
    81,360
    
    
    
    (56,609
    )
    
    
    (7,923
    )
    
    
    (1,086
    )Increase (decrease) in amount due to a shareholder
    
    
    
    
    
    
    67
    
    
    
    (67
    )
    
    
    (9
    )Net cash provided by financing activities
    
    
    438,797
    
    
    
    533,735
    
    
    
    611,357
    
    
    
    83,810Net increase (decrease) in cash and cash
equivalents
    
    
    112,481
    
    
    
    (40,510
    )
    
    
    334,736
    
    
    
    45,888Cash and cash equivalents, beginning of the year
    
    
    232,493
    
    
    
    344,974
    
    
    
    304,464
    
    
    
    41,738Cash and cash equivalents, end of the year
    
    
    344,974
    
    
    
    304,464
    
    
    
    639,200
    
    
    
    87,626Supplemental disclosures of cash flow information:Interest paid
    
    
    94,129
    
    
    
    128,827
    
    
    
    187,935
    
    
    
    25,764Income tax paid
    
    
    60,252
    
    
    
    39,655
    
    
    
    68,591
    
    
    
    9,403Non-cash investing activities:Other payables for
property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    88,816
    
    
    
    12,176
  F-7




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands unless otherwise stated)
 1.
    
    ORGANIZATION AND BASIS OF PREPARATIONHangzhou Zhongce Rubber Co., Ltd. (the Company) was incorporated in the Peoples Republic
of China (the PRC) on June 12, 1992. The Company is engaged in the manufacture and sale
of rubber tires in the PRC. The Company has a 51.24% equity interest in Hangzhou Fu Chun
Jiang Chemical Industrial Co., Ltd. (FCJ), incorporated in the PRC for a term of 20 years
commencing from September 28, 2001, and it is engaged in the manufacture and sale of tire
rubber and carbon powder. The Company and all its consolidated subsidiaries are
collectively referred to as the Group.The consolidated financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) for the special purpose of
filing with the United States Securities and Exchange Commission for complying with Article
3-09 of Regulation S-X of the Securities Act 1933 as the Company is a significant equity
method investee of China Enterprises Limited, a company traded on the OTC (Over-the-Counter)
Securities Market in the United States of America (the US).In 1998, an agreement was entered into by the Company with three other PRC enterprises to
establish a Sino-foreign equity joint venture, Hangzhou Sunrise Rubber Co., Ltd. (Hangzhou
Sunrise) in Hangzhou, Zhejiang Province, the PRC, to construct and operate a radial tire
factory. The total investment and registered capital of this joint venture was US$29,980
(Rmb248,000). The equity interest owned by the Company was 49.2% and its investment
commitment was satisfied by the contribution of its existing radial tire project under
construction into Hangzhou Sunrise while the other three shareholders contributed cash for
the remaining 50.8% interest in Hangzhou Sunrise. The radial tire factory of Hangzhou
Sunrise commenced operations in 2000.Upon the adoption of Financial Interpretation No. 46 (FIN 46) issued by the Financial
Accounting Standards Board (FASB), it requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the ownership interest held by the
equity investors in the entity does not have characteristics of a controlling financial
interest or does not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.The Company is the primary beneficiary of Hangzhou Sunrise because (i) the Company receives
a majority of the expected residual returns of Hangzhou Sunrise by virtue of its 49.2%
equity interest in Hangzhou Sunrise; and (ii) the Company has guaranteed more than majority
portion of bank loans of Hangzhou Sunrise since fiscal 2000, and accordingly, the Company
will absorb a majority of Hangzhou Sunrises expected losses disproportional to its expected
return if Hangzhou Sunrise is unable to repay its bank loans as they fall due. The Company
has consolidated Hangzhou Sunrise as its variable interest entity for the three years ended
December 31, 2007.
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 1.
    
    ORGANIZATION AND BASIS OF PREPARATION continuedThese consolidated financial statements are prepared assuming that the Group will continue
as a going concern, which assumes the realization of assets and the settlement of
liabilities in the normal course of operations. The Group has net current liabilities of
Rmb1,383,742 as of December 31, 2007, with bank borrowings of Rmb2,622,413 which will be
matured in 2008.The consolidated financial statements do not include any adjustments in the carrying amounts
of the assets and liabilities to their realizable amounts and the classification that might
be necessary if the Group be unable to continue as a going concern.The Groups continuation as a going concern is dependent upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis and to obtain additional
financing as may be required.The Group has historically met cash needs from borrowings and operating cash flows.
Subsequent to the balance sheet date, the Group has obtained new bank borrowings of
Rmb3,697,419 repayable substantially by 2009. Additionally, subsequent to year end the Group
has obtained additional banking facilities of Rmb1,090,127 for working capital.The directors of the Company are of the opinion that, taking into account the presently
available banking facilities and cash inflow from its operation, the Group has sufficient
working capital to meet its debts when they fall due in the foreseeable future.
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    Basis of ConsolidationThe Company consolidates all entities in which it is the primary beneficiary of
variable interests in variable interest entities and in those entities in which it
has a controlling financial interest.The consolidated financial statements include the assets, liabilities, revenue and
expenses of the Company and its consolidated subsidiaries.All intercompany balances and transactions have been eliminated on consolidation.
 (b)
    
    Cash and Cash EquivalentsThe Group considers cash in hand and demand deposits in banks with an original
maturity of three months or less when purchased to be cash and cash equivalents.
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HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (c)
    
    Restricted CashBank deposits pledged as security for bank guarantees and bank drafts, and those bank
balances for repair and maintenance funds for staff quarter are required by PRC
municipal government amounted to Rmb76,155 and Rmb17,410 (US$2,387) as of December
31, 2006, and 2007, respectively, are presented as restricted cash in the
consolidated balance sheets.(d)
    
    InventoriesInventories are stated at the lower of cost, on an average cost basis, or market
value. Costs of work-in-progress and finished goods comprise direct materials,
direct labor and an attributable proportion of production overheads.(e)
    
    Property, Plant and Equipment, netProperty, plant and equipment, net are stated at cost less accumulated depreciation.Depreciation is computed using the straight-line method over the assets estimated
economic useful lives. The estimated useful lives are as follows:
 Buildings
    
    20 yearsMachinery and equipment
    
    10 yearsMotor vehicles
    
    5 yearsFurniture, fixtures and office equipment
    
    5 years
 Construction-in-progress represents factory and office buildings under construction
and plant and machinery pending installation. Interest capitalized was Rmb16,217,
Rmb15,133 and Rmb28,504 (US$3,907) for the years ended December 31, 2005, 2006 and
2007, respectively. Assets under construction are not depreciated until construction
completed and the assets are ready for their intended use.(f)
    
    Land Use RightsLand use rights represent prepaid rent for land under operating lease arrangements.
Land use rights are amortized and recognized as rent expense over the lease term.
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (g)
    
    Impairment of Long Lived AssetsThe Group evaluates its long-lived assets for potential impairment based on a review
of projected undiscounted cash flows associated with these assets. Long-lived assets
are evaluated for impairment whenever events and circumstances exist that indicates
the carrying amount of these assets may not be recoverable. The assets are
considered to be impaired when the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposition exceeds its
carrying amount. Measurement of impairment losses for long-lived assets that the
Group expects to hold and use is based on the difference between the estimated fair
value of the assets and the carrying amount.(h)
    
    RevenuesRevenues are recognized upon delivery and acceptance of goods by the customers and
collectability is reasonably assured and the prices are fixed and determinable. The
Group permits the return of damaged or defective products and accounts for these
returns as deduction from sales. The estimated return is accrued at the time the
sale is recognized, based on historical experience.The Group presents revenues net of sales taxes incurred, which amounted to Rmb89,296,
Rmb58,065 and Rmb58,413 (US$8,008) for the years ended December 31, 2005, 2006 and
2007, respectively.(i)
    
    Shipping and Handling Fees and CostsCosts for transportation of products to customers is recorded as selling, general and
administrative expenses, and amounted to Rmb165,377, Rmb198,870 and Rmb268,668
(US$36,831) for the years ended December 31, 2005, 2006 and 2007, respectively.(j)
    
    Advertising ExpensesAdvertising expenses were Rmb1,927, Rmb3,204 and Rmb3,705 (US$508) for the years
ended December 31, 2005, 2006 and 2007, respectively.(k)
    
    Government SubsidiesGovernment subsidies are recognized when received and all the conditions for their
receipt have been met. Government subsidies are recognized as other income in the
consolidated statements of income and comprehensive income in the period in which the
related expenditure are recorded. Capital grants for the acquisition of equipment
are recorded as a liability until earned and are recognized as income over the
periods and in the proportion in which depreciation on those assets is charged.
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (l)
    
    Product WarrantyThe estimated cost of product warranty claims is accrued at the time the sale is
recognized, based on historical experience.(m)
    
    Income TaxesDeferred income taxes are recognized for temporary differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated financial
statements, unutilized tax loss carry forwards and credits by applying enacted
statutory tax rates applicable to future years. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities.Effective January 1, 2007, the Company adopted the Financial Accounting Standard
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements.
The interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides accounting guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. There is no material impact of FIN 48 on the
Companys consolidated financial statements.(n)
    
    Foreign CurrenciesThe functional currency of the Company and its subsidiaries is Renminbi (Rmb).
Foreign currency transactions are translated into the functional currencies of the
Company and its subsidiaries at the applicable exchange rates quoted by the Peoples
Bank of China (the exchange rates) prevailing at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated into
functional currencies using the applicable exchange rates prevailing at the
respective balance sheet dates. Exchange differences are included in the
consolidated statement of operations. The Group had foreign exchange loss of
Rmb5,557, Rmb6,257 and Rmb28,527(US$3,910) in 2005, 2006 and 2007, respectively.The translation of Rmb amounts into United States dollar (US$) amounts as of and for
the year December 31, 2007 are included solely for the convenience of readers in the
United States of America and have been made at US$1.00 = Rmb7.2946, the noon buying
rates from Federal Reserve Bank of New York on December 31, 2007. No representation
is made that the Renminbi amounts could have been, or could be, converted into United
States dollar at that or at any other rate.
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (o)
    
    Comprehensive IncomeComprehensive income consists of net income and other gains and losses affecting
owners equity that result from transactions and other events and circumstances from
non-owner sources.(p)
    
    Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses
for the years presented. Actual results may differ from those estimates.
Significant estimates in these financial statements that are susceptible to change as
more information becomes available are useful lives of long-lived assets; valuation
allowances for receivables and deferred tax assets; liability for product warranty;
and the valuation of certain financial instruments.(q)
    
    Fair Value of Financial InstrumentsThe carrying value of current financial assets and current financial liabilities
approximates fair value due to the short-term nature of these instruments. Bank loans
approximate their carrying value as the interest rates approximate those which would
have been available for loans of similar remaining maturity at the respective year
ends. The fair value of the financial guarantees issued by the Group is determined
based on the sum of probability-weighted present values in a range of estimated cash
flows.
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (r)
    
    Concentration of Credit RiskThe Groups financial instruments that are exposed to concentration of credit risk
consist primarily of its cash and cash equivalents, restricted cash, accounts and
other receivables and advances to related parties and guarantee issued by the Group.
The Groups cash and cash equivalents and restricted cash are high-quality deposits
placed with banking institutions with high credit ratings; therefore, the credit risk
is limited. The accounts receivable largely represent amounts due from the Groups
customers and the concentrations of credit risk associated with the accounts
receivable are considered minimal due to the Groups diverse customer base. Majority
of the customers are located in the PRC. The Group maintains allowances to cover
potential bad debts and believes that no significant credit risk exists as a result
of its diverse group of customers. Credit losses, when realized, have historically
been within the range of managements expectations. The other receivables comprise
principally deposits to suppliers and other tax receivable. The Company does not
believe there is a significant credit risk from any of these counterparties as they
are either major suppliers of the Group or local government authorities. The Group
has reviewed the credit worthiness and financial position of its affiliate for credit
risks associated with advances to these entities. This affiliate has good credit
standing and the Group does not expect to incur significant loss for uncollected
advances from these entities. The credit risk arising on the guarantee is low because
of the credit quality of the related parties who historically have not had any event
of default.The Group does not purchase derivative instruments to manage risks.(s)
    
    Recently Issued Accounting PronouncementsIn September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurement (SFAS No. 157). SFAS No. 157 addresses
standardizing the measurement of fair value for companies who are required to use a
fair value measure of recognition for recognition or disclosure purposes. The FASB
defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measure date. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The Group does not expect that the adoption of SFAS No. 157 will have a
material impact on its financial position, results of operations and cash flows.
 F-14




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (s)
    
    Recently Issued Accounting Pronouncements- continuedIn February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159), an amendment of FASB No. 115.
This statement permits entities to choose to measure many financial instrument and
certain other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities without having to apply complex
hedge accounting provisions. SFAS No. 159 is effective from fiscal year commencing
November 15, 2007. The Group does not expect that the adoption of SFAS No. 159 will
have a material impact on its consolidated financial position, cash flows, and
results of operations.In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). The objective of SFAS No. 141R is to improve the relevance,
representational faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its
effects. SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The Group is currently evaluating the
impact, if any, of the adoption of SFAS No. 141R on its Groups financial position,
results of operations and cash flows.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. SFAS No. 160 defines a noncontrolling
interest, sometimes called a minority interest, is the portion of equity in a
subsidiary not attributable, directly or indirectly, to a parent. The objective of
SFAS No. 160 is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated financial
statements. SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Group is evaluating
the impact, if any, of the adoption of SFAS No. 160.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS No. 161). This statement establishes
enhanced disclosures about the entitys derivative instruments and hedging
activities. This statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Adoption of SFAS No.
161 will result in enhanced disclosure regarding the Companys derivatives. The
Group is evaluating the impact, if any, of the adoption of SFAS No. 161.
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
 (s)
    
    Recently Issued Accounting Pronouncements continuedIn October 2008, the FASB issued FASB Staff Position FAS
157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not
Active (FSP
157-3). FSP 157-3 clarified the application of FAS 157. FSP 157-3 demonstrated how
the fair value of a financial asset is determined when the market for that financial
asset is inactive. FSP 157-3 was effective upon issuance, including prior periods
for which financial statements had not been issued. The Group is evaluating the
impact that this statement will have, if any, on its consolidated financial
statements.In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures about
Variable Interest Entities (FSP FIN 46(R)-8). FSP FIN 46(R)-8 requires enhanced
disclosures about a companys involvement in VIEs. The enhanced disclosures required
by this FSP are intended to provide users of financial statements with a greater
understanding of: (i) the significant judgments and assumptions made by a company in
determining whether it must consolidate a VIE and/or disclose information about its
involvement with a VIE; (ii) the nature of restrictions on a consolidated VIEs assets
reported by a company in its statement of financial position, including the carrying
amounts of such assets; (iii) the nature of, and changes in, the risks associated
with a companys involvement with a VIE; (iv) how a companys involvement with a VIE
affects the companys financial position, financial performance, and cash flows.
This FSP was effective for the year ended December 31, 2008 and had no impact on the
financial position and results of operations.
 3.
    
    NOTES RECEIVABLESNotes receivables represent bank drafts that are non-interest bearing and due within six
months. Such bank drafts have been arranged with third-party financial institutions by
certain customers to settle their purchases from the Group.
 4.
    
    INVENTORIESInventories by major categories are summarized as follows:
 2006
    
    2007Rmb
    
    RmbRaw materials
    
    
    652,165
    
    
    
    791,317Work-in-progress
    
    
    79,809
    
    
    
    125,834Finished goods
    
    
    986,483
    
    
    
    951,1941,718,457
    
    
    
    1,868,345
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 5.
    
    PROPERTY, PLANT AND EQUIPMENT, NET AND LAND USE RIGHTS
 2006
    
    2007Rmb
    
    RmbProperty, plant and equipment, net consists of the following:At cost:Buildings
    
    
    599,486
    
    
    
    617,830Machinery and equipment
    
    
    2,805,671
    
    
    
    3,272,628Motor vehicles
    
    
    25,891
    
    
    
    34,800Furniture, fixtures and office equipment
    
    
    112,199
    
    
    
    207,477Total
    
    
    3,543,247
    
    
    
    4,132,735Less: Accumulated depreciation
    
    
    (1,225,769
    )
    
    
    (1,545,774
    )Construction-in-progress
    
    
    244,385
    
    
    
    555,165Total
    
    
    2,561,863
    
    
    
    3,142,126
 Depreciation expenses of property, plant and equipment were Rmb246,658, Rmb271,045 and
Rmb343,627(US$47,107) and amortization expenses of land use rights were Rmb2,196, Rmb3,037
and Rmb3,170 (US$434)for the years ended December 31, 2005, 2006 and 2007, respectively.As of December 31, 2006 and 2007, the Group had not obtained land use right certificates on
certain of their land use rights with a carrying amount of Rmb2,300 and Rmb2,671 (US$366),
respectively. As of December 31, 2006 and 2007, Hangzhou Sunrise has pledged certain land
use rights and buildings having an aggregate carrying amount of Rmb113,398 and Rmb108,382
(US$14,858), respectively to secure bank loans to the Group.
 6.
    
    BANK LOANSAs of December 31, 2006 and 2007, long-term bank loans of Rmb29,000 and RmbNil (US$Nil) were
secured by land use right, respectively. Long-term bank loans carry fixed interest rates
and had average annual interest rates of approximately 5.9% in 2006 and 6.6% in 2007.The outstanding balances of long-term bank loans as of December 31, 2007 were repayable as
follows:
 Rmb2008
    
    
    470,6452009
    
    
    325,0002010
    
    
    130,0002011
    
    
    60,000985,645
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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 6.
    
    BANK LOANS continuedAs of December 31, 2006 and 2007, short-term bank loans are repayable on demand or within
twelve months from the balance sheet dates.As of December 31, 2006 and 2007, Rmb610,000 and Rmb650,000 (US$89,107) of the short-term
bank loans were guaranteed by third parties. Also, short-term bank loans of Rmb26,000
(US$3,564) were secured by land use right and building of the Group as of December 31, 2006
and 2007. The short-term bank loans carried fixed interest rates and the average annual
interest rates were approximately 5.3% in 2006 and 6.2% in 2007.As of December 31, 2006 and 2007, Rmb1,368,067 and Rmb1,553 ,098 (US$212,911) of the bank
loans of the Company were guaranteed by Hangzhou Sunrise.
 7.
    
    DEBENTURE PAYABLEOn March 6, 2006, the Board of Directors has approved the issuance of debenture loan for a
maximum amount of Rmb360,000. The issuance of debenture by the Group was completed on
January 29, 2007. The total issued amount was Rmb360,000 and the maturity date was the 365-day from the date of issuance. The issuance of debenture was to meet the short-term cash
flow requirements of the Group. The Group has fully repaid the debenture loan on January
29, 2008.
 8.
    
    INCOME TAXESIncome taxes consists of:
 2005
    
    2006
    
    2007Rmb
    
    Rmb
    
    RmbPRC Enterprise Income Tax (EIT)Current
    
    
    58,764
    
    
    
    36,020
    
    
    
    99,376Deferred taxation- Current
    
    
    (11,872
    )
    
    
    (19,683
    )
    
    
    (19,510
    )- Change in tax rate
    
    
    
    
    
    
    
    
    
    
    (41,665
    )46,892
    
    
    
    16,337
    
    
    
    38,201
 The Group is subject to PRC income tax rates from 16.5% to 33%. The Company was subject to
State united income tax rate of 15% and a local income tax rate of 1.5% except for two
branches of the Company, which were subject to State united income tax rate of 30% and the
local income tax rate of 3%. FCJ and Hangzhou Sunrise were subject to State united income
tax rate of 30% and the local income tax rate of 3%.
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HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 8.
    
    INCOME TAXES  continuedOn March 16, 2007, the PRC government promulgated Law of the Peoples Republic of China on
Enterprise Income Tax (the New Tax Law), which will be effective from January 1, 2008.
The New Tax Law provides that enterprises established under the laws of foreign countries or
regions and whose de facto management bodies are located within the PRC territory are
considered PRC resident enterprises, and will be subject to the PRC enterprise income tax at
the rate of 25% of worldwide income. The new tax rate will become effective in January 1,
2008.Due to the changes in the New Tax Law in March 2007, the Companys deferred tax balances
were calculated based on the newly enacted tax rate to be effective January 1, 2008. The
impact on the deferred taxes resulting from change in enacted tax is an adjustment to the
net deferred tax assets of Rmb41,665, representing an increase in net deferred tax assets
and an increase in deferred tax benefit.The Company adopted the provisions of FIN 48 effective January 1, 2007. The Group has made
its assessment of the level of tax authority for each tax position (including the potential
application of interest and penalties) based on the technical merits, and has measured the
unrecognized tax benefits associated with the tax positions. Based on the evaluation by the
Company, it is concluded that there are no significant uncertain tax positions requiring
recognition in financial statements. The Company has no material unrecognized tax benefit
which would favourably affect the effective income tax rate in future periods. The Group
classifies interest and/or penalties related to income tax matters in income tax expense.
As of December 31, 2007, there is no interest and penalties related to uncertain tax
positions. The Group does not anticipate any significant increases or decreases to its
liability for unrecognized tax benefit within the next twelve months. The tax positions for
the years 2005 to 2007 may be subject to examination by the PRC tax authorities.The reconciliation of the effective income tax rate based on profit before income
taxes and minority interests stated in the consolidated statements of operations
to the statutory income tax rates in the PRC is as follows:
 2005
    
    2006
    
    2007Tax provision at PRC enterprise income
tax rates
    
    
    33
    %
    
    
    33
    %
    
    
    33
    %Effect of Companys lower income tax rate
    
    
    (12
    %)
    
    
    (12
    %)
    
    
    (15
    %)Effect of change in tax rate
    
    
    
    
    
    
    
    
    
    
    (9
    %)Underprovision from prior years
    
    
    1
    %
    
    
    
    
    
    
    Valuation allowance
    
    
    (2
    %)
    
    
    
    
    
    
    Others
    
    
    3
    %
    
    
    
    
    
    
    Effective tax rate
    
    
    23
    %
    
    
    21
    %
    
    
    9
    %
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HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 8.
    
    INCOME TAXES continuedThe tax impact of temporary differences give rise to the following deferred tax assets and
liabilities are as follows:
 2006
    
    2007Rmb
    
    RmbDeferred tax assets:Allowance for doubtful receivables
    
    
    9,026
    
    
    
    15,275Warranty expenses
    
    
    10,115
    
    
    
    38,775Accrued liabilities
    
    
    42,022
    
    
    
    72,938Depreciation
    
    
    6,787
    
    
    
    4,469Others
    
    
    2,129
    
    
    
    3,073Total deferred tax assets
    
    
    70,079
    
    
    
    134,531Deferred tax liability:Depreciation
    
    
    
    
    
    
    (3,277
    )Net deferred tax assets
    
    
    70,079
    
    
    
    131,254
 Net deferred tax asset is classified as follows:
 2006
    
    2007Rmb
    
    RmbCurrentDeferred tax assets
    
    
    63,291
    
    
    
    130,062Non-currentDeferred tax assets
    
    
    6,788
    
    
    
    4,469Deferred tax liabilities
    
    
    
    
    
    
    (3,277
    )70,079
    
    
    
    131,254
 9.
    
    COMMITMENTS AND CONTINGENCIESAs of December 31, 2006 and 2007, the Group had outstanding capital commitments for
construction of factory premises and purchase of equipment amounting to approximately
Rmb283,225 and Rmb697,276 (US$95,588), respectively.The Group leases certain of its warehouses under non-cancelable operating leases. Rental
expense was Rmb19,960, Rmb25,920 and Rmb40,169 (US$5,507) for the years ended December 31,
2005, 2006 and 2007, respectively.
 F-20




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 9.
    
    COMMITMENTS AND CONTINGENCIES continuedFuture minimum lease payments under non-cancellable operating lease agreements as of
December 31, 2007 is:
 Rmb2008
    
    
    20,9452009
    
    
    10,6542010
    
    
    1,913Total minimum lease payments
    
    
    33,512
 The Group also records an estimate of the product warranty obligation at the time of sale
based on the Groups historical experience. Changes in product warranty provision are as
follows:
 2006
    
    2007Rmb
    
    RmbBalance at beginning of year
    
    
    48,800
    
    
    
    61,300Warranties paid
    
    
    (156,572
    )
    
    
    (460,474
    )Warranty provision
    
    
    169,072
    
    
    
    554,276Balance at end of year
    
    
    61,300
    
    
    
    155,102
 In addition, the Group provided guarantees to related companies as of December 31, 2007.
These guarantees are full and unconditional and would require the Group to make scheduled
payments immediately if the related companies failed to do so. As of December 31, 2006 and
2007, the maximum potential future payments of the bank guarantees to be Rmb650,000
(US$89,107). The Group estimated that the fair value of the obligations assumed under
guarantees as of December 31, 2006 and 2007 to be Rmb4,465 (US$612) and recognized a
liability for such amount in the financial statements.In addition, the Company and its subsidiary are parties to a variety of contractual
agreements under which the Group may be obligated to indemnify the other party for certain
matters. These contracts primarily relate to the operating leases, financial agreements and
various other agreements. Under these contracts the Group may provide certain routine
indemnifications relating to representations and warranties (e.g., ownership of assets,
environmental or tax indemnifications) or personal injury matters. Historically, the Group
has not made any payment for these indemnifications and believes that if the Group were to
incur a loss in any of these matters, the loss would not have a material effect on our
financial condition or results of operations.
 F-21




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 9.
    
    COMMITMENTS AND CONTINGENCIES continuedIn 2007, the Company became a defendant in a number of product liability lawsuits and claims
seeking compensatory and, in some cases, punitive damages based on allegations that personal
injury, property damage and/or other loss resulted from accidents caused by tire failures.
Such claims, even if lacking merit, could result in the expenditure of significant financial
and managerial resources. The Company believes that the resolution of these other matters
currently pending will not individually or in the aggregate have a material adverse effect
on the Companys financial condition or results of operations.
 10.
    
    DISTRIBUTION OF PROFIT
 (a)
    
    DividendsThe Group can declare dividends based on the profits as reported in their statutory
financial statements. Such profits will be different from the amounts reported under
US GAAP. The Group had an aggregate retained earnings on a consolidation basis of
Rmb348,566 and Rmb646,957 (US$88,690) as of December 31, 2006 and 2007, as reported
in their statutory financial statements.(b)
    
    Profit appropriationIn accordance with the relevant laws and regulations for Sino-foreign equity joint
venture enterprises, the Company and FCJ are required to make appropriation of 5% or
a higher percentage of after tax profit as prepared in accordance with accounting
principles generally accepted in the PRC to non-distributable reserve funds as
determined by the Board of Director of the entities. These reserves include a
general reserve fund and an enterprise expansion fund. The general reserve fund is
used to offset future extraordinary losses. The entities may, upon resolution passed
by the shareholders, convert the general reserve fund into capital. The enterprises
expansion fund is used for the expansion of the entities operation and can be
converted to capital subject to approval by the relevant authorities. In addition,
certain of the entities were granted special reserve fund by the government for
specific projects carried out by the relevant PRC entities. There is no specific
requirement for appropriation for Hangzhou Sunrise. All these reserve funds are
included in retained earnings of the entities but can only be used for specific
purpose and are not distributable as cash dividend.Included in the retained earnings of the Group as of December 31, 2005, 2006 and
2007, was non-distributable amounts of Rmb1,403, Rmb1,288 and Rmb1,288 (US$177).
 F-22




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 11.
    
    RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS
 (a)
    
    Due from (to) Related CompaniesCurrent portion of amounts due from related companies primarily arise from sales of
tires and are unsecured, non-interest bearing and repayable at the end of credit
periods granted ranging from 90 days to 180 days.Non-current portion of amounts due from related companies represent funds advanced to
related companies and are unsecured, non-interest bearing and repayable more than 1
year.The amounts due to related companies are unsecured, non-interest bearing and has no
fixed repayment terms.The loans from related companies represent funds advanced to the Group and are
unsecured and repayable within 1 year. The balance is interest-free.The amount due to a shareholder is unsecured, non-interest bearing and repayable more
than 1 year.(b)
    
    Transaction with Related CompaniesThe Group paid sub-contracting charges to a related company of approximately
Rmb26,350, Rmb25,476 and Rmb33,716 (US$4,622) for tire processing for the years ended
December 31, 2005, 2006 and 2007, respectively.The Group recorded purchases from a related company of approximately Rmb54,101,
Rmb42,884 and Rmb97,082 (US$13,309) for the years ended December 31, 2005, 2006 and
2007, respectively.The Group recorded sales to related companies of approximately Rmb100,015, Rmb116,106
and Rmb137,305 (US$18,823) for the years ended December 31, 2005, 2006 and 2007,
respectively.The Company recorded sales of property, plant and equipment to a shareholder of
approximately RmbNil, Rmb428 and RmbNil (US$Nil) that have been reflected in the
Groups consolidated financial statements for the years ended December 31, 2005, 2006
and 2007, respectively.
 F-23




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##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 12.
    
    STAFF RETIREMENT PLANSAll of the Chinese employees of the Group are entitled to an annual pension on retirement,
which is equal to their ending basic salaries at their retirement dates. The Chinese
government is responsible for the pension liabilities to these retired employees. The Group
is only required to make specified contributions to the state-sponsored retirement plan
calculated at rates ranging from 14% to 20% of basic monthly salaries for the years ended
December 31, 2005, 2006 and 2007. The expenses reported in the consolidated statements of
operations and comprehensive income related to these arrangements were Rmb40,075, Rmb64,006
and Rmb77,881 (US$10,677) for the years ended December 31, 2005, 2006 and 2007,
respectively.13.
    
    POST BALANCE SHEET EVENTSSubsequent to December 2007, the Company became a defendant in a product liability lawsuit.
Such lawsuit is still in early stage and no specific claim amount had been specified in
application submitted to the court, thus the outcome is uncertain. The Company believes that
the resolution will not have a material adverse effect on the Companys financial condition
or result of operations, as the Company is insured by Product Liability Insurance.
  F-24




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##### Table of Contents



CHINA ENTERPRISES LIMITED




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
    
    FF-1Consolidated Financial Statements:Consolidated Statements of Operations for the years ended
December 31, 2005, 2006 and 2007
    
    FF-2Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    FF-3Consolidated Statements of Shareholders Equity and Comprehensive
Loss for the years ended December 31, 2005, 2006 and 2007
    
    FF-4Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2006 and 2007
    
    FF-5Notes to Consolidated Financial Statements
    
    FF-7




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Deloitte Touche Tohmatsu
 FF-1




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 (Amounts in thousands, except number of shares and per share data)
 Year ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General and administrative expenses
    
    
    (27,522
    )
    
    
    (16,754
    )
    
    
    (6,208
    )
    
    
    (851
    )Gain on disposal of subsidiaries (note 3)
    
    
    
    
    
    
    
    
    
    
    19,325
    
    
    
    2,649Operating (loss) income
    
    
    (27,522
    )
    
    
    (16,754
    )
    
    
    13,117
    
    
    
    1,798Non-operating income (expenses):Interest income
    
    
    13,036
    
    
    
    12,286
    
    
    
    9,536
    
    
    
    1,307Interest expense
    
    
    
    
    
    
    
    
    
    
    (104
    )
    
    
    (14
    )Other income
    
    
    
    
    
    
    551
    
    
    
    
    
    
    
    Net loss recognized on trading securities sold
during the year
    
    
    
    
    
    
    
    
    
    
    (90,891
    )
    
    
    (12,460
    )Unrealized loss recognized on trading securities
still held at the balance sheet date
    
    
    
    
    
    
    
    
    
    
    (12,158
    )
    
    
    (1,667
    )Change in fair value of conversion option (note 6)
    
    
    (42,873
    )
    
    
    (19,459
    )
    
    
    19,248
    
    
    
    2,639Loss on disposal of interest in
an equity method affiliate
    
    
    
    
    
    
    
    
    
    
    (68,991
    )
    
    
    (9,458
    )Loss before income tax and equity in earnings
at equity method affiliates
    
    
    (57,359
    )
    
    
    (23,376
    )
    
    
    (130,243
    )
    
    
    (17,855
    )Income tax expense (note 9)
    
    
    (4,083
    )
    
    
    (1,164
    )
    
    
    (19,324
    )
    
    
    (2,649
    )Equity in earnings of equity method affiliates
    
    
    35,118
    
    
    
    3,314
    
    
    
    121,389
    
    
    
    16,641Net loss
    
    
    (26,324
    )
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (3,863
    )Basic loss per common share
    
    
    (2.92
    )
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (0.43
    )Number of common shares used in
the calculation of basic loss per common share
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
  FF-2




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands, except number of shares and their par values)
 As of December 31,2006
    
    
    2007
    
    
    2007Rmb
    
    
    Rmb
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    7,120
    
    
    
    521
    
    
    
    71Notes receivable (note 4)
    
    
    
    
    
    
    20,153
    
    
    
    2,763Prepaid expenses and other current assets
    
    
    288
    
    
    
    3,834
    
    
    
    526Due from related parties (note 13)
    
    
    331
    
    
    
    67,436
    
    
    
    9,244Trading securities
    
    
    
    
    
    
    12,393
    
    
    
    1,699Total current assets
    
    
    7,739
    
    
    
    104,337
    
    
    
    14,303Investments in and advances to equity method affiliates
(less allowance of Rmb7,601 in 2006 and 2007) (note 5)
    
    
    461,961
    
    
    
    357,905
    
    
    
    49,064Convertible note receivable (note 6)
    
    
    247,781
    
    
    
    50,271
    
    
    
    6,892Derivative instruments (note 6)
    
    
    43,454
    
    
    
    4,557
    
    
    
    625Deposit paid for acquisition of properties (note 7)
    
    
    58,000
    
    
    
    58,000
    
    
    
    7,951Plant and equipment, net (note 8)
    
    
    240
    
    
    
    
    
    
    
    Other assets
    
    
    6
    
    
    
    6
    
    
    
    1Total assets
    
    
    819,181
    
    
    
    575,076
    
    
    
    78,836LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Due to related parties (note 13)
    
    
    208,471
    
    
    
    4,006
    
    
    
    549Accrued liabilities
    
    
    3,413
    
    
    
    5,421
    
    
    
    743Other taxes payable
    
    
    2,753
    
    
    
    2,753
    
    
    
    378Income taxes payable (note 9)
    
    
    5,247
    
    
    
    5,247
    
    
    
    719Total current liabilities
    
    
    219,884
    
    
    
    17,427
    
    
    
    2,389Deferred tax liability (note 9)
    
    
    
    
    
    
    19,324
    
    
    
    2,649Total liabilities
    
    
    219,884
    
    
    
    36,751
    
    
    
    5,038Commitments and contingencies (note 11)Shareholders equity:Common stock  par value US$0.01 per share
(50,000,000 shares authorized; 9,017,310 shares
issued and outstanding at December 31, 2006 and
December 31, 2007) (note 10)
    
    
    770
    
    
    
    770
    
    
    
    106Additional paid-in capital
    
    
    1,026,237
    
    
    
    1,000,958
    
    
    
    137,219Accumulated other comprehensive income (loss)
    
    
    227
    
    
    
    (7,288
    )
    
    
    (999
    )Accumulated deficit
    
    
    (427,937
    )
    
    
    (456,115
    )
    
    
    (65,528
    )Total shareholders equity
    
    
    599,297
    
    
    
    538,325
    
    
    
    73,798Total liabilities and shareholders equity
    
    
    819,181
    
    
    
    575,076
    
    
    
    78,836
  FF-3




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE LOSS
 (Amounts in thousands, except number of shares)
 Accumulatedothercompre-Supervoting
    
    
    
    
    
    
    Supervoting
    
    
    
    
    
    
    Additional
    
    
    hensivecommon
    
    
    Common
    
    
    common
    
    
    Common
    
    
    paid-in
    
    
    (losses)
    
    
    Accumulated
    
    
    
    
    
    
    Comprehensivestock
    
    
    stock
    
    
    stock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    deficit
    
    
    Total
    
    
    lossRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at January 1, 2005
    
    
    3,000,000
    
    
    
    6,017,310
    
    
    
    244
    
    
    
    526
    
    
    
    1,047,559
    
    
    
    39
    
    
    
    (380,387
    )
    
    
    667,981Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,324
    )
    
    
    (26,324
    )
    
    
    (26,324
    )Dilution of interest in an equity method
affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,760
    
    
    
    
    
    
    
    
    
    
    
    17,760
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,181
    
    
    
    
    
    
    
    3,181
    
    
    
    3,181Balance at December 31, 2005
    
    
    3,000,000
    
    
    
    6,017,310
    
    
    
    244
    
    
    
    526
    
    
    
    1,065,319
    
    
    
    3,220
    
    
    
    (406,711
    )
    
    
    662,598
    
    
    
    (23,143
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,226
    )
    
    
    (21,226
    )
    
    
    (21,226
    )Transfer from supervoting common stock
to common stock
    
    
    (3,000,000
    )
    
    
    3,000,000
    
    
    
    (244
    )
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognition of equity-settled share based
payments of an equity method affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,455
    
    
    
    
    
    
    
    
    
    
    
    2,455
    
    
    
    Dilution of interest in an equity method
affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,537
    )
    
    
    
    
    
    
    
    
    
    
    (41,537
    )
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,993
    )
    
    
    
    
    
    
    (2,993
    )
    
    
    (2,993
    )Balance at December 31, 2006
    
    
    
    
    
    
    9,017,310
    
    
    
    
    
    
    
    770
    
    
    
    1,026,237
    
    
    
    227
    
    
    
    (427,937
    )
    
    
    599,297
    
    
    
    (24,219
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,178
    )
    
    
    (28,178
    )
    
    
    (28,178
    )Recognition of equity-settled share based
payments of an equity method affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    558
    
    
    
    
    
    
    
    
    
    
    
    558
    
    
    
    Dilution of interest in an equity method
affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,837
    )
    
    
    
    
    
    
    
    
    
    
    (25,837
    )
    
    
    Release upon disposal of interest in
an equity method affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,924
    )
    
    
    
    
    
    
    (2,924
    )
    
    
    (2,924
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,591
    )
    
    
    
    
    
    
    (4,591
    )
    
    
    (4,591
    )Balance at December 31, 2007
    
    
    
    
    
    
    9,017,310
    
    
    
    
    
    
    
    770
    
    
    
    1,000,958
    
    
    
    (7,288
    )
    
    
    (456,115
    )
    
    
    538,325
    
    
    
    (35,693
    )Balance at December 31, 2007 (in US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    137,219
    
    
    
    (999
    )
    
    
    (62,528
    )
    
    
    73,798
    
    
    
    (4,893
    )
  FF-4




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Year ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Cash flows from operating activities:Net loss
    
    
    (26,324
    )
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (3,863
    )Adjustments to reconcile net loss to
net cash used in operating activities:Change in fair value of conversion option
    
    
    42,873
    
    
    
    19,459
    
    
    
    (19,248
    )
    
    
    (2,639
    )Equity in earnings of equity method affiliates
    
    
    (35,118
    )
    
    
    (3,314
    )
    
    
    (121,389
    )
    
    
    (16,641
    )Dividend received from associate
    
    
    
    
    
    
    1,868
    
    
    
    1,766
    
    
    
    242Loss on disposal of interest in
an equity method affiliate
    
    
    
    
    
    
    
    
    
    
    68,991
    
    
    
    9,458Gain on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    (19,325
    )
    
    
    (2,649
    )Depreciation and amortization
    
    
    42
    
    
    
    62
    
    
    
    57
    
    
    
    8Amortization of discount on subscription of
convertible note receivable
    
    
    (1,912
    )
    
    
    (8,894
    )
    
    
    (9,358
    )
    
    
    (1,283
    )Interest income from convertible note
    
    
    
    
    
    
    
    
    
    
    5,908
    
    
    
    810Changes in operating assets and liabilities
(net of effects of dispositions)Other receivables
    
    
    2,642
    
    
    
    3,832
    
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    (317
    )
    
    
    49
    
    
    
    (3,072
    )
    
    
    (421
    )Trading securities
    
    
    
    
    
    
    
    
    
    
    229,144
    
    
    
    31,412Accounts and other payables
    
    
    (37
    )
    
    
    (3,041
    )
    
    
    
    
    
    
    Accrued liabilities
    
    
    282
    
    
    
    1,886
    
    
    
    2,010
    
    
    
    276Income taxes payable
    
    
    4,083
    
    
    
    1,164
    
    
    
    
    
    
    
    Deferred tax
    
    
    
    
    
    
    
    
    
    
    19,324
    
    
    
    2,649Net cash provided by (used in) operating activities
    
    
    (13,786
    )
    
    
    (8,155
    )
    
    
    126,630
    
    
    
    17,359Cash flows from investing activities:Decrease in subscription payable
    
    
    (62,989
    )
    
    
    
    
    
    
    
    
    
    
    Decrease in notes receivable
    
    
    24,298
    
    
    
    4,164
    
    
    
    
    
    
    
    Payment for the deposit on acquisition of
properties
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    Investments in and advances to equity method
affiliates, net
    
    
    (37,122
    )
    
    
    (2,227
    )
    
    
    (10,137
    )
    
    
    (1,390
    )Purchase of property, plant and equipment
    
    
    (344
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposals of interest in an equity
method affiliate
    
    
    
    
    
    
    
    
    
    
    137,603
    
    
    
    18,864Disposal of subsidiaries (note 3)
    
    
    
    
    
    
    
    
    
    
    (12,431
    )
    
    
    (1,704
    )Decrease (increase) in due from related parties
    
    
    37,426
    
    
    
    491
    
    
    
    (135,021
    )
    
    
    (18,510
    )Net cash (used in) provided by investing activities
    
    
    (46,731
    )
    
    
    2,428
    
    
    
    (19,986
    )
    
    
    (2,740
    )
 FF-5




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS  continued
 (Amounts in thousands)
 Year ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Cash flows provided by (used in) financing activities:Change in due to related parties
    
    
    33,771
    
    
    
    1,821
    
    
    
    (112,778
    )
    
    
    (15,461
    )Effect of exchange rate change
    
    
    
    
    
    
    
    
    
    
    (465
    )
    
    
    (63
    )Net decrease in cash and cash equivalents
    
    
    (26,746
    )
    
    
    (7,548
    )
    
    
    (6,599
    )
    
    
    (905
    )Cash and cash equivalents, beginning of year
    
    
    41,414
    
    
    
    14,668
    
    
    
    7,120
    
    
    
    976Cash and cash equivalents, end of year
    
    
    14,668
    
    
    
    7,120
    
    
    
    521
    
    
    
    71Supplemental schedule of non-cash investing
and financing activities:Conversion of convertible note receivable,
and the related transfer from derivative
instruments, to equity interest in an affiliate
(see note 6)
    
    
    72,244
    
    
    
    
    
    
    
    157,974
    
    
    
    21,656Conversion of convertible note receivable,
and the related transfer from derivative
instruments, to trading securities
(see note 6)
    
    
    
    
    
    
    
    
    
    
    82,417
    
    
    
    11,298Transfer of retained interest in an equity
method affiliate to trading securities
upon its disposal
    
    
    
    
    
    
    
    
    
    
    159,155
    
    
    
    21,818Assignment of receivable through current
accounts of related parties and note receivable
    
    
    
    
    
    
    
    
    
    
    20,153
    
    
    
    2,763Assignment of notes receivable and related
interest receivable to fellow subsidiaries
through current accounts of a fellow
subsidiary and parent company
    
    
    76,662
    
    
    
    
    
    
    
    
    
    
    
    Subscription of convertible note receivable
issued by an equity method affiliate partially
offset against an advance receivable from
the affiliate
    
    
    
    
    
    
    104,071
    
    
    
    
    
    
    
    Liability to parent company for payment of
subscription of convertible note receivable
issued by an equity method affiliate
    
    
    
    
    
    
    205,049
    
    
    
    
    
    
    
    
  FF-6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 1.
    
    ORGANIZATION AND PRINCIPAL ACTIVITIESChina Enterprises Limited (the Company) was incorporated in Bermuda on January 28, 1993.
Its common stocks trade on the OTC (Over-the-Counter) Securities Market in the United States
of America (the US).China Strategic Holdings Limited (CSH), a public company listed on The Stock Exchange of
Hong Kong Limited (the HKSE), was the Companys ultimate parent company before its
completion of a group reorganization in May 2006 following which the Company became a
wholly-owned subsidiary of Group Dragon Investments Limited (GDI), a then equity method
affiliate of Hanny Holdings Limited (HHL), a public company listed on HKSE. In June 2006,
HHL acquired a controlling interest in GDI and became the parent company. On December 8,
2006, HHL became a subsidiary of ITC Corporation Limited (ITC), a public company listed on
HKSE and as a result ITC became the ultimate parent company. On May 18, 2007, HHL ceased to
be a subsidiary of ITC and HHL became the ultimate parent company till April 7, 2008 when
HHL reduced its equity interest in the Company.The accompanying financial statements include the financial statements of the Company and
its wholly owned subsidiaries which mainly consist of Million Good Limited (Million Good,
incorporated in the British Virgin Islands, BVI) and Wealth Faith Limited (Wealth Faith,
incorporated in the BVI). The Company and all of its subsidiaries are collectively referred
to as the Group.As of December 31, 2006 and 2007, the Company had a 26% equity interest in Hangzhou Zhongce
Rubber Co., Limited (HZ, located in Hangzhou, Zhejiang Province, the PRC). HZ and its
consolidated subsidiaries (the PRC entities) are engaged in the manufacture of rubber
tires in the PRC.As of December 31, 2006, the Company also had a 20.36% equity interest in Wing On Travel
(Holdings) Limited (a company incorporated in Bermuda, hereinafter together with its
subsidiaries collectively referred to as Wing On). Consequent to disposal of equity
interest as described in note 5, the Companys equity interest in Wing On decreased to
12.77% which was classified as trading securities. As of December 31, 2007, the equity
interest further decreased to 1.23%. Wing On is engaged in the provision of package tours,
travel and other related services and hotel operation with its shares listed on HKSE.
 FF-7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    Basis of PresentationThe consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP).(b)
    
    Basis of ConsolidationThe Company consolidates all entities in which it is the primary beneficiary of
variable interests in variable interest entities and entities in which it has a
controlling financial interest. The Company does not have variable interest in any
variable interest entity during the periods presented.The consolidated financial statements include the assets, liabilities, revenue and
expenses of the Company and its consolidated subsidiaries.All intercompany balances and transactions have been eliminated on consolidation.(c)
    
    Equity method investments in affiliatesInvestments in 50% or less owned companies over which the Company exercises
significant influence but not control, are accounted for using the equity method.
Under the equity method, the Companys proportionate share of the affiliates net
income or loss is included in the consolidated statement of operations.The Company records the gains or losses arising from issuance by an equity method
affiliate of its own stock in additional paid-in capital account within shareholders
equity in the consolidated financial statements.(d)
    
    Cash and Cash EquivalentsThe Company considers cash on hand, demand deposits with banks with original
maturities of three months or less when purchased to be cash and cash equivalents.(e)
    
    Trading SecuritiesTrading securities refer to debt and equity securities that are bought and held
principally for the purpose of selling them in the near term, and are reported at
fair value, with unrealized gains and losses included in earnings. The fair value of
the Groups investments in trading securities is based on the sales price on the last
business day of the fiscal year.
 FF-8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 (f)
    
    Plant and Equipment, NetPlant and equipment, net are carried at cost less accumulated depreciation. Gains and
losses from the disposal of property and equipment are included in income from
operation. Depreciation is calculated on a straight-line basis over the estimated
useful lives of assets of 5 years.(g)
    
    Income TaxesDeferred income taxes are recognized for temporary differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated financial
statements, unutilized tax loss carry forwards by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Current income taxes
are provided in accordance with the laws of the relevant taxing authorities.Effective January 1, 2007, the Company adopted the Financial Accounting Standard
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements.
The interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides accounting guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. There is no material impact of FIN 48 on the
Companys consolidated financial statements.
 FF-9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 (h)
    
    Foreign CurrenciesThe functional currency of the Company and its Hong Kong domiciled subsidiaries is
Hong Kong dollars. The functional currency of the subsidiaries in PRC is the
Renminbi (Rmb). The Company has elected Renminbi as its reporting currency.Foreign currency transactions are translated into the functional currencies of the
Company and its subsidiaries at the applicable exchange rates quoted by the Peoples
Bank of China (the exchange rates) prevailing at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated into
functional currencies using the applicable exchange rates prevailing at the
respective balance sheet dates. Exchange differences are included in the
consolidated statement of operations.Assets and liabilities of the Company and its subsidiaries domiciled in Hong Kong
have been translated at the rates of exchange ruling at the balance sheet and all
income and expense items are translated at the average rates of exchange over the
year. Exchange difference resulting from the translation have been recorded as a
component of comprehensive income.The translation of Renminbi amounts into US$ amounts as of and for the year December
31, 2007 are included solely for the convenience of readers in the United States of
America and have been made at US$1.00 = Rmb7.2946, the noon buying rate from the
Federal Reserve Bank of New York on December 31, 2007. No representation is made
that the Renminbi amounts could have been, or could be, converted into United States
dollar at that rate or at any other rate.(i)
    
    Loss Per ShareBasic loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding during the year. The company does not have dilutive
potential common shares during fiscal 2005, 2006 and 2007. No diluted loss per share
was presented for 2005 and 2006, as the conversion of the equity method affiliates
outstanding convertible notes is antidilutive.
 FF-10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 (j)
    
    Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses
for the years presented. Actual results may differ from those estimates. Significant
estimates in these financial statements that are susceptible to change as more
information becomes available are collectability of receivables, useful lives of
plant and equipment and valuation of derivative instruments.(k)
    
    Financial InstrumentsThe Company recognizes all derivative instruments on the balance sheet at fair value
with changes in fair values reported in the statement of operations.The Groups financial instruments that are exposed to concentration of credit risk
consist primarily of its cash and cash equivalents, advances to affiliates, notes
receivable, amounts due from related parties and convertible note receivables. The
Group has reviewed the credit worthiness and financial position of its related
parties for credit risks associated with amounts due from them. These entities have
good credit standing and the Group does not expect to incur significant losses for
uncollected advances from these entities.The carrying value of current financial assets and current financial liabilities
approximate their fair value due to the short-term maturity of these instruments.
The fair value of convertible notes receivable as of December 31, 2007 was
approximately Rmb56,291. The assumptions adopted for the valuation of the Convertible
note receivable as of December 31, 2007 under the Black-Scholes model are as follows:
    (l)
    
    Comprehensive (Loss) IncomeComprehensive (loss) Income represents changes in equity resulting from transactions
and other events and circumstances from nonowner sources. Comprehensive (loss) income
consists of net loss and the foreign exchange differences arising from translation to
reporting currency.
 FF-11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 (m)
    
    Recently Issued Accounting PronouncementsIn September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, ''Fair Value Measurement (SFAS No. 157). SFAS No. 157 addresses
standardizing the measurement of fair value for companies who are required to use a
fair value measure of recognition for recognition or disclosure purposes. The FASB
defines fair value as ''the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measure date. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The Group does not expect that the adoption of SFAS No. 157 will have a
material impact on its financial position, results of operations and cash flows.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159), an amendment of FASB No. 115.
This statement permits entities to choose to measure many financial instrument and
certain other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities without having to apply complex
hedge accounting provisions. SFAS No. 159 is effective from fiscal year commencing
November 15, 2007. The Group does not expect that the adoption of SFAS No. 159 will
have a material impact on its consolidated financial position, cash flows, and
results of operations.In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). The objective of SFAS No. 141R is to improve the relevance,
representational faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its
effects. SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The Group is currently evaluating the
impact, if any, of the adoption of SFAS No. 141R on its Groups financial position,
results of operations and cash flows.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. SFAS No. 160 defines a noncontrolling
interest, sometimes called a minority interest, is the portion of equity in a
subsidiary not attributable, directly or indirectly, to a parent. The objective of
SFAS No. 160 is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated financial
statements. SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Group is evaluating
the impact, if any, of the adoption of SFAS No. 160.
 FF-12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 (m)
    
    Recently Issued Accounting Pronouncements  continuedIn March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS No. 161). This
statement establishes enhanced disclosures about the entitys
derivative instruments and hedging activities. This statement is
effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Adoption of SFAS No. 161
will result in enhanced disclosure regarding the Companys
derivatives. The Group is evaluating the impact, if any, of the
adoption of SFAS No. 161.In October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active (FSP
157-3). FSP 157-3 clarified the application of FAS 157. FSP 157-3 demonstrated how
the fair value of a financial asset is determined when the market for that financial
asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for
which financial statements had not been issued. The Group is evaluating the impact
that this statement will have, if any, on its consolidated financial statements.
 FF-13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 3.
    
    GAIN ON DISPOSAL OF SUBSIDIARIESIn December 2007, the Company disposed of its entire equity interest in Manwide Holdings
Limited (Manwide) and
(CHINESE CHARACTER) (expressed in English as Rosedale Luxury Hotel & Suites
Limited, Rosedale). The combined net liabilities of Manwide and Rosedale at the date of
disposal were as follows:
 RmbNet liabilities disposed of:Plant and equipment, net
    
    
    186Due from a related party
    
    
    47,763Cash and cash equivalents
    
    
    12,431Due to related parties
    
    
    (79,229
    )Accrued liabilities
    
    
    (2
    )(18,851
    )Gain on disposal
    
    
    19,325Total consideration
    
    
    474Satisfied by:Consideration receivable
    
    
    474Cash and cash equivalents disposal of
    
    
    (12,431
    )
 4.
    
    NOTES RECEIVABLEThe notes, carrying interest at commercial rates, was unsecured and receivable from an
unrelated party.
 FF-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 5.
    
    INVESTMENTS IN AND ADVANCES TO EQUITY METHOD AFFILIATES
 2006
    
    2007Rmb
    
    RmbInvestments in equity method affiliates
    
    
    461,827
    
    
    
    357,771Advances to equity method affiliates
    
    
    7,735
    
    
    
    7,735Total
    
    
    469,562
    
    
    
    365,506Less: Allowance for advances to equity method affiliate
    
    
    (7,601
    )
    
    
    (7,601
    )461,961
    
    
    
    357,905
 Wing On:In April 2002, the Group subscribed for 4,800,000,000 new ordinary shares of HK$0.01 each
(Subscription Shares) in Wing On, representing approximately 34.6% of the then outstanding
share capital of Wing On, at an issue price of HK$0.027 per Subscription Shares.During 2004, Wing On entered into agreements with the Company and an independent party in
relation to the issuance of convertible notes, whereby Wing On issued convertible notes to
the Company (the Note) for a consideration of HK$155,000 (equivalent to approximately
Rmb164,873). The Note is convertible into new shares of Wing On during a period of three
years from the date of issue, at an initial conversion price of HK$0.02 per share, subject
to adjustments.As a result of capital raising activities of Wing On during 2005, there was a dilution of
the Companys interest in Wing On and the creation of an implied sale of a portion of the
Companys investment. In accordance with its accounting policy, the Company recorded a net
gain totaling Rmb17,760 as an increase of additional paid-in capital during the fiscal year
2005. The net gain represents the difference between the Companys carrying basis and the
fair value of the portion of the investment in Wing On deemed to have been sold.
 FF-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 5.
    
    INVESTMENTS IN AND ADVANCES TO EQUITY METHOD AFFILIATES  continuedWing On:  continuedFollowing the issue of shares in Wing On in 2005, the conversion price of the Note was
adjusted to HK$0.0197 per share in accordance with its terms and conditions. On March 14,
2005, the day immediately preceding the effective date of the share consolidation of every
one hundred shares of HK$0.01 each in the issued and unissued ordinary share capital of Wing
On into one share of HK$1.00 each, the conversion price at the Note was adjusted to HK$1.97
per new consolidated share.In 2005, the Company also purchased a total of 6,967,700 ordinary shares of Wing On for cash
consideration of approximately Rmb13,451, resulting in excess over cost of approximately
Rmb819 which was allocated to property, plant and equipment that are subject to depreciation
and amortization. The Company further exercised all of the conversion rights of the Note of
approximately Rmb58,344 at the adjusted conversion price of HK$1.97 per share under the
terms of the Note, resulting in the issuance of 27,918,781 new ordinary shares of Wing On to
Million Good. This additional investment amounted to Rmb72,244 which comprised Rmb46,762 of
the carrying value of the Note (net of unamortized discount on subscription) and the fair
value of the related convertible feature of Rmb25,482.As a result of capital raising activities of Wing On during 2006, there was a net dilution
of the percentage of Companys equity ownership in Wing On from 27.74% to 20.36% and the
loss totaling Rmb41,537 was recognized as a decrease in additional paid-in capital during
the fiscal year 2006. From May 24 through June 6, 2006, the Company also purchased a total
of 2,948,000 ordinary shares of Wing On for cash consideration of approximately Rmb2,227,
resulting in excess over cost of approximately Rmb2,431 which was allocated to property,
plant and equipment that are subject to depreciation and amortization.In June 2007, the Company converted a total of HK$158,000 (equivalent to approximately
Rmb148,916) Convertible Notes (see note 6 for details) of Wing On into ordinary shares of
HK$0.10 each of Wing On at conversion price of HK$0.79 per share and purchased a total of
15,000,000 ordinary shares of Wing On for cash consideration of approximately Rmb10,137,
resulting in excess over cost of approximately Rmb106,356 which was allocated to property,
plant and equipment that are subject to depreciation and amortization. As a result of
capital raising activities of Wing On, there was a net dilution of the percentage of
Companys equity ownership in Wing On and the loss totaling Rmb25,837 was recognized as a
decrease in additional paid-in capital during the fiscal year 2007.The Group also disposed 200,000,000 shares of Wing On with total proceeds of Rmb137,603 and
resulting in a loss on disposal of Rmb68,991. Subsequent to these significant transactions,
the interest of Wing On held by the Company was decreased from approximately 20.36% to
12.77% as at June 30, 2007, and was accounted for as trading securities of the Company
thereafter.
 FF-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 5.
    
    INVESTMENTS IN AND ADVANCES TO EQUITY METHOD AFFILIATES  continuedThe following table presents summarized comparative financial
information for the Companys investments in 50% or less owned
investments, over which the Company has the ability to exercise
significant influence but does not control, which are accounted for
using the equity method:
 2005
    
    2006
    
    2007Rmb
    
    Rmb
    
    RmbRevenues
    
    
    8,396,696
    
    
    
    10,982,860
    
    
    
    11,786,327Gross profit
    
    
    1,095,091
    
    
    
    1,113,408
    
    
    
    1,354,590Operating profit
    
    
    277,012
    
    
    
    252,332
    
    
    
    601,770Net income
    
    
    126,357
    
    
    
    1,795
    
    
    
    385,687Current assets
    
    
    3,442,255
    
    
    
    4,680,343
    
    
    
    3,656,067Non-current assets
    
    
    4,779,558
    
    
    
    5,087,746
    
    
    
    3,510,491Current liabilities
    
    
    4,384,235
    
    
    
    4,988,172
    
    
    
    5,039,809Non-current liabilities
    
    
    1,354,208
    
    
    
    2,196,489
    
    
    
    518,344Shareholders equity
    
    
    1,820,173
    
    
    
    1,937,075
    
    
    
    1,377,082Minority interests
    
    
    663,197
    
    
    
    646,353
    
    
    
    231,323
 As of December 31, 2006 and 2007, advance to an affiliate was Rmb7,735 which were interest
free and the Group will not demand repayment within one year from the respective balance
sheet dates and the amount is therefore considered as non-current.As of December 31, 2006, there was an amount due to an affiliate of Rmb2,121 which was
unsecured, interest free and repayable on demand. The amount had been fully repaid during
fiscal 2007.Equity ownership percentages for these affiliates are presented below:
 Place ofincorporation/Affiliate
    
    registration
    
    2006
    
    2007Wing On
    
    Bermuda
    
    
    20.36
    %
    
    
    N/AX One Holdings Limited
    
    Hong Kong
    
    
    33.33
    %
    
    
    33.33
    %HZ
    
    PRC
    
    
    26
    %
    
    
    26
    %
 The fair values of the investment in Wing On were approximately HK$70,871 (equivalent to
Rmb71,296) as of December 31, 2006. The fair values were determined with the reference to
quoted market bid prices.
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 6.
    
    CONVERTIBLE NOTE RECEIVABLE, NET/DERIVATIVE INSTRUMENTSOn March 23, 2006, Wing On entered into a subscription agreement with the Company and other
subscribers in relation to the subscription of 2% convertible exchangeable notes (the
Convertible Notes) with an aggregate principal amount of HK$1,000,000. The Company and
other subscribers agreed to subscribe for the Convertible Notes with principal amount of
HK$300,000 and HK$700,000 by cash, respectively.The initial conversion price of the Convertible Notes is HK$0.79 per share, subject to
anti-dilutive adjustments. Unless previously converted or lapsed or redeemed by Wing On,
Wing On will redeem the Notes on the fifth anniversary from the date of issue of the Notes
(the Maturity Date) at the redemption amount which is 110% of the principal amount of the
Notes outstanding.The Company shall have the right to convert, on any business day commencing from the 7th day
after the date of issue of the Convertible Notes up to and including the date which is 7
days prior to the Maturity Date, the whole or any part (in an amount or integral multiple of
HK$1,000) of the principal amount of the Convertible Notes into shares of Wing On at the
then prevailing conversion price. Had the Convertible Notes been converted into new shares
of Wing On in full as of December 31, 2006 and 2007, the equity ownership percentage on Wing
On held by the Company would increase from 20.36% to 26.86% and 1.23% to 3.88%.Subject to certain restrictions which are intended to facilitate compliance of relevant
rules and regulations, each noteholder shall have the right to exchange from time to time
all or part (in the amount of HK$10,000 or integral multiples thereof) of 50% of the initial
principal amount of its Convertible Notes for shares in the share capital of any company
which is an affiliated company of Wing On as defined in the Rules Governing the Listing of
Securities on the HKSE or subsidiary of Wing On that is to be listed on a stock exchange
through an initial public offering at the price (the Spin-off Shares), subject to
anti-dilutive adjustments, at which the Spin-off Shares are actually issued to the public at
the time of the listing on that stock exchange. The decision on whether to list any of its
affiliated company or subsidiary in the future is at the sole discretion of the directors of
Wing On.The subscription of the Convertible Notes by the Company was completed on June 8, 2006 which
was paid by its intermediate holding company, GDI, on behalf of the Company as to HK$198,999
(equivalent to Rmb205,049), with the remainder of Rmb104,071 being offset by an advance
previously made to Wing On.The Company exercised certain of its conversion rights in principal amount of HK$158,000
(equivalent to Rmb148,916) (see note 5) and HK$79,000 (equivalent to RMB74,458) in June 2007
and July 2007 respectively, under the terms of the Convertible Notes.
 FF-18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 6.
    
    CONVERTIBLE NOTE RECEIVABLE, NET/DERIVATIVE INSTRUMENT  continuedIn accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, as amended, the conversion option element of the Note and Convertible Notes
represents an embedded derivative instrument which must be accounted for separately from the
Note and Convertible Notes and, as such, to be measured at fair value when initially
recorded and at subsequent reporting dates. The note element of the Note and Convertible
Notes were also measured at fair value initially and subsequently at amortized cost, and was
presented as convertible note receivable from an equity method affiliate on the consolidated
balance sheet. The fair value of this conversion options were estimated using the
Black-Scholes option pricing model at the date of its issuance and at each subsequent
balance sheet date. The impact of changes in fair value of this conversion option, taking
into account the portion of the conversion option exercised during fiscal 2005, 2006 and
2007, was loss of Rmb42,873, loss of Rmb19,459 and gain of Rmb19,248 which have been
recognized in the consolidated statement of operations for fiscal 2005, 2006 and 2007,
respectively.7.
    
    DEPOSIT PAID FOR ACQUISITION OF PROPERTIESOn June 16, 2004, Manwide, a subsidiary, entered into a conditional sale and purchase
agreement with Shanghai Jiu Sheng Investment Limited (Jiu Sheng), an unrelated property
developer, for the acquisition of a parcel of land situated in Shanghai, the PRC (the
Land) and the 24-storey building and carpark being constructed (the Building,
hereinafter with the Land are collectively referred to as the Xiang Zhang Garden).The total consideration for the acquisition of Xiang Zhang Garden, on a completion basis, is
Rmb450,000. A deposit of Rmb50,000 was paid by Manwide to Jiu Sheng on June 18, 2004 and
recorded as deposit paid for acquisition of properties as of December 31, 2004.The remaining consideration of Rmb400,000 is to be settled by the assumption of bank loans
of Rmb380,000 and cash consideration of Rmb20,000 upon the grant of bank loan and the
transfer of the ownership of Xiang Zhang Garden to Manwide. The closing of the acquisition
is subject to certain conditions precedent.
 FF-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 7.
    
    DEPOSIT PAID FOR ACQUISITION OF PROPERTIES  continuedAccording to the conditional sale and purchase agreement, prior to the
completion of acquisition, Jiu Sheng should (i) obtain the certificate
in respect of the land use rights of the Land and the ownership of the
Building; (ii) obtain an approval from the relevant government
authorities in Shanghai that the authorized usage of the properties be
changed from office to both commercial and residential and that all
relevant fees and charges arising from the sale of the Land payable to
the relevant government authorities having been settled in full; (iii)
agree with Manwide on the specification of installation, fixtures and
furniture and other internal decoration of the properties; (iv)
procure all the contractors engaged in the development/construction of
the properties to enter into agreements with Manwide to bind these
contractors with obligations to Manwide to rectify all defects of the
properties which may arise after the completion of the
development/construction; and (v) procure the granting of a loan
(Loan) to be granted by PRC banks to Manwide to finance the
remaining consideration.Provided that if the conditions are not fulfilled on or before June 1,
2005, Manwide shall agree to a further extension of not less than 60
days without imposing any fine on Jiu Sheng. If the conditions are
not fulfilled within the extended period, Manwide shall be entitled to
terminate the agreement and Jiu Sheng shall refund the deposit to
Manwide together with interests accrued during the period from the
date of the agreement to the date of deposit is refunded and
calculated on the relevant prevailing market interest rate.It is one of the conditions for completion of the acquisition that Jiu
Sheng should obtain approval for the change of authorized usage of the
properties from office to both commercial and residential. Should Jiu
Sheng fail to obtain such approval within 150 days from the date of
the agreement, Manwide is entitled to either (i) to proceed with the
agreement in accordance with the existing terms and conditions; or
(ii) to acquire the 1st to 7th floors and the 23rd floor of the
properties together with the two levels underground carparks for a
consideration of Rmb70,000.However, the conditions stated above for the change of use of Xiang
Zhang Garden had not been fulfilled within the said period and
accordingly, Jiu Sheng and the Group entered into another agreement
dated February 3, 2005 pursuant to which, among other things, (i) the
Group would pay, on behalf of Jiu Sheng, Rmb22,000 to the main
contractor of Xiang Zhang Garden (the Main Contractor); and (ii)
the amount paid by the Group in (i) would be deducted from the
purchases consideration of Xiang Zhang Garden.Further, the Group had advanced an additional Rmb8,000 to Jiu Sheng
pursuant to this additional agreement and the aggregate sum paid by
the Group to Jiu Sheng amounted to Rmb58,000 as of December 31, 2005.In June 2005, the Group had commenced legal proceedings against Jiu Sheng, among other
things, to demand Jiu Sheng to fulfill its obligations under the above two agreements and
applied to a PRC court an injunction order on Xiang Zhang Garden to stop Xiang Zhang Garden
from being transferred (the Injunction Order(s)). It had also come to the attention of
the Group that one of the three secured creditors of Jiu Sheng and the Main Contractor had
already applied to and being granted the Injunction Orders and they, together with the other
two secured creditors, had priority over the Group on Xiang Zhang Garden.As a condition precedent to the application of the Injunction Order, an institution in the
PRC provided a guarantee of Rmb402,000 to the PRC court on behalf of the Group.
 FF-20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 7.
    
    DEPOSIT PAID FOR ACQUISITION OF PROPERTIES  continuedOn June 22, 2006, the Peoples High Court of Shanghai City ruled the
case in favor of the Group and demanded Jiu Sheng to continue
fulfilling its obligations under the agreement dated February 3, 2005
and to cooperate with the Group to effect the release of the
Injunction Orders and settlement of the related liabilities with its
creditors so as to proceed with the transfer of legal title of Xiang
Zhang Garden to the Group. The judgment also, among other things,
demanded Jiu Sheng to pay Rmb5,900 to the Group as compensation for
the breach of the sale and purchase agreements.In August 2006, the Group has applied to the Peoples High Court of Shanghai City for a
court execution order to enforce the June 2006 judgment against Jiu Sheng. At the same
time, Jiu Sheng has initiated various discussions with the Group and its legal counsel with
a view to settle this out of court but there was no significant progress on the resolution
of this matter then.In December 2007, the Company completed a transfer of certain of its assets and liabilities,
including the deposit paid for acquisition of Xiang Zhang Garden, from its subsidiaries
Manwide and Rosedale to another subsidiary of the Company before the completion of the
disposition of Manwide and Rosedale to an independent third party (note 3).In March 2008, the Group has entered into an agreement with Jiu Sheng through Rosedale, to
disclaim its rights in Xiang Zhang Garden for a compensation of Rmb83,000 which was received
in April 2008.8.
    
    PLANT AND EQUIPMENT, NETPlant and equipment, net consist of the following:
 2006
    
    2007Rmb
    
    RmbFurniture and fixtures
    
    
    12
    
    
    
    Motor vehicle
    
    
    332
    
    
    
    Total
    
    
    344
    
    
    
    Less: Accumulated depreciation
    
    
    (104
    )
    
    
    240
    
    
    
    
 Depreciation expense was Rmb42, Rmb62 and Rmb57 for years ended December 31, 2005, 2006 and
2007 respectively.
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 9.
    
    INCOME TAXES PAYABLEThe components of profit (loss) from continuing operations before
income taxes and minority interests are as follows:
 Year ended December 31,2005
    
    2006
    
    2007Rmb
    
    Rmb
    
    RmbThe PRC
    
    
    30,207
    
    
    
    7,510
    
    
    
    97,092All other jurisdictions
    
    
    (52,448
    )
    
    
    (27,572
    )
    
    
    (105,946
    )(22,241
    )
    
    
    (20,062
    )
    
    
    (8,854
    )
 BermudaThe Company was incorporated under the laws of Bermuda and, under current Bermuda law, is
not subject to tax on income or on capital gains. The Company has received an undertaking
from the Ministry of Finance of Bermuda pursuant to the provisions of the Exempted
Undertakings Tax Protection Act, 1966, as amended, that in the event that Bermuda enacts any
legislation imposing tax computed on profits or income, including any dividend or capital
gains withholding tax, or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then the imposition of any such tax shall not
be applicable to the Company or to any of its operations or the shares, debentures or other
obligations of the Company until March 28, 2016. This undertaking is not to be construed so
as to (i) prevent the application of any such tax or duty on such person as an ordinary
resident in Bermuda; or (ii) prevent the application of any tax payable in accordance with
the provision of the Land Tax Act, 1967 or otherwise payable in relation to any land leased
to the Company in Bermuda.Hong KongThe Company and certain of its subsidiaries are operating in Hong Kong and their income
taxes have been calculated by applying the current rate of taxation of 17.5% to the
estimated taxable income earned in or derived from Hong Kong during the period, if
applicable.In the 2008-09 Financial Budget delivered on February 27, 2008, the Financial Secretary of
the Government of the Hong Kong Special Administrative Region proposed to lower the Hong
Kong Profits Tax rate from 17.5% to 16.5%. The proposal was formally enacted on June 26,
2008The Company and certain of its subsidiaries operated in Hong Kong are taxed at 17.5% up to
December 31, 2007 and at 16.5% beginning from January 1, 2008, on the assessable profits
arising in or derived from Hong Kong.
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 9.
    
    INCOME TAXES PAYABLE  continuedPRCThe Groups PRC entities and subsidiaries are subject to income taxes calculated at tax
rates (ranging from 16.5% to 33%) on the taxable income as reported in the statutory
financial statements adjusted for taxation based on tax laws prevailing at their respective
places of establishment and operations.On March 16, 2007, the PRC government promulgated Law of the Peoples Republic of China on
Enterprise Income Tax (New Tax Law), which will be effective from January 1, 2008. The Tax
Law provides that enterprises established under the laws of foreign countries or regions and
whose de facto management bodies are located within the PRC territory are considered PRC
resident enterprises, and will be subject to the PRC enterprise income tax at the rate of
25% of worldwide income. The new tax rate will become effective in January 1, 2008.Deferred tax liability of Rmb19,324 as of December 31, 2007 has been recognized on the
undistributed earnings of the Companys affiliate in the PRC. In an announcement formally
made on February 22, 2008, the PRC authorities clarified the distributions made out of
undistributed earnings that arose prior to January 1, 2008 would not attract witholding tax.
Consequently, the deferred tax liability will be written back in the year ending December
31, 2008.The Company adopted the provisions of FIN 48 effective January 1, 2007. The Group has made
its assessment of the level of tax authority for each tax position (including the potential
application of interest and penalties) based on the technical merits, and has measured the
unrecognized tax benefits associated with the tax positions. Based on the evaluation by the
Company, it is concluded that there are no significant uncertain tax positions requiring
recognition in financial statements. The Company has no material unrecognized tax benefit
which would favorably affect the effective income tax rate in future periods. The Group
classifies interest and/or penalties related to income tax matters in income tax expense. As
of December 31, 2007, there is no interest and penalties related to uncertain tax positions.
The tax positions for the years 2005 to 2007 may be subject to examination by the PRC and
Hong Kong tax authorities.
 FF-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 9.
    
    INCOME TAXES PAYABLE  continuedThe reconciliation of the effective income tax rate based on profit (loss) from operations
before income taxes to the statutory income tax rates in Hong Kong is as follows:
 Year ended December 31,2005
    
    2006
    
    2007Profit tax rate in Hong Kong
    
    
    17.5
    %
    
    
    17.5
    %
    
    
    17.5
    %Permanent differences relating to
non-taxable income and non-deductible
expenses
    
    
    (29.6
    %)
    
    
    4.6
    %
    
    
    4.22
    %Effect on withholding income tax on dividend
    
    
    
    
    
    
    
    
    
    
    (218.25
    %)Change in valuation allowance
    
    
    (10.0
    %)
    
    
    (6.5
    %)
    
    
    Tax rate difference between tax
jurisdictions
    
    
    16.1
    %
    
    
    (21.4
    %)
    
    
    (21.72
    %)Others
    
    
    (12.4
    %)
    
    
    
    
    
    
    Effective tax rate
    
    
    (18.4
    %)
    
    
    (5.8
    %)
    
    
    (218.25
    %)
 The tax impact of temporary differences gives rise to the following deferred tax assets/liability:
 2006
    
    2007Rmb
    
    RmbCurrent deferred tax assets:Pre-operating expenses
    
    
    3,541
    
    
    
    Valuation allowance for deferred tax assets
    
    
    (3,541
    )
    
    
    
    
    
    
    Non-current deferred tax liability:Withholding income tax on dividend
    
    
    
    
    
    
    (19,324
    )
 Income taxes expense consists of:
 Year ended December 31,2005
    
    2006
    
    2007Rmb
    
    Rmb
    
    RmbCurrent
    
    
    4,083
    
    
    
    1,164
    
    
    
    Deferred taxation
    
    
    
    
    
    
    
    
    
    
    19,3244,083
    
    
    
    1,164
    
    
    
    19,324
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 10.
    
    CAPITAL STOCKShare CapitalThe Company was incorporated with an initial share capital of 1,200,000 Common Stock with a
par value of US$0.01 each which was later reclassified to Supervoting Common Stock. On May
14, 1993, the authorized share capital of the Company was further increased from US$12 to
US$700 by the creation of 50,000,000 shares of Common Stock of par value US$0.01 each and
18,800,000 shares of Supervoting Common Stock of par value US$0.01 each. As a result, the
total number of authorized Supervoting Common Stock is 20,000,000 shares. 6,000,000 shares
of Supervoting Common Stock (including the 1,200,000 Common Stock reclassified to
Supervoting Common Stock) were issued to the then ultimate parent company of the Company as
a consideration for the transfer of two PRC entities to the Company and on June 23, 1993,
the Company redeemed 3,000,000 shares of its outstanding Supervoting Common Stock at their
par value of US$0.01 per share.In September 2006, the Company converted the entire outstanding 3,000,000 shares of
Supervoting Common Stock into the same number of Common Stock of par value of US$0.01 each
pursuant to the bye-laws of the Company upon receipt of a written notification from the sole
holder of Supervoting Common Stock. There was no outstanding Supervoting Common Stock as at
December 31, 2006 and 2007.Capital StockEach share of Supervoting Common Stock is entitled to 10 votes whereas each share of Common
Stock is entitled to one vote. The Common Stock is identical to the Supervoting Common
Stock as to the payment of dividends. Except for the difference in voting rights described
above, the Supervoting Common Stock and the Common Stock rank pari passu in all respects.
 11.
    
    COMMITMENTS AND CONTINGENCIESAs of December 31, 2006 and 2007, the Group had outstanding capital commitments for
acquisition of properties amounting to approximately Rmb402,000.
 12.
    
    DISTRIBUTION OF PROFIT
 (a)
    
    DividendsDividends from the PRC entities will be declared based on the profits as reported in
their statutory financial statements. Such profits will be different from the
amounts reported under U.S. GAAP. As of December 31, 2006, the Companys only
subsidiary established in the PRC had no distributable profit and As of December 31,
2007, the Company did not have any subsidiaries in the PRC. As of December 31, 2006
and 2007, the Companys affiliates in the PRC had accumulated profits on a
consolidated basis of Rmb348,566 and Rmb743,213, respectively, as reported in their
statutory financial statements.The Company did not propose or pay any dividends on the outstanding Supervoting
Common Stock and Common Stock for the year ended December 31, 2005 and on the
outstanding Common Stock for the years ended December 31, 2006 and 2007.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 12.
    
    DISTRIBUTION OF PROFIT  continued
 (b)
    
    Profit appropriationIn accordance with the relevant laws and regulations for Sino-foreign equity joint
venture enterprises, the PRC entities are required to make appropriation of 5% of
after tax profit as prepared in accordance with accounting principles generally
accepted in the PRC to non-distributable reserve funds as determined by the Board of
Director of the PRC entities. These reserves include a general reserve fund, an
enterprise expansion fund, and a staff welfare and incentive bonus fund. The general
reserve fund is used to offset future extraordinary losses. The PRC entities may,
upon resolution passed by the shareholders, convert the general reserve fund into
capital. The enterprises expansion fund is used for the expansion of the PRC
entities operation and can be converted to capital subject to approval by the
relevant authorities. In addition, certain of the PRC entities were granted special
reserve fund by the government for specific projects carried out by the relevant PRC
entities. All other reserve fund are included in retained earnings of the PRC
entities but can only be used for specific purpose and are not distributable as cash
dividend.Included in the accumulated deficit of the Group as of December 31, 2005, 2006 and
2007 was non-distributable reserves attributable of Rmb1,403, Rmb1,288 and Rmb1,288,
respectively.
 13.
    
    RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTSParties are considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or are under
common control with the Company. Related parties also include principal owners of the
Company, its management, members of the immediate families of principal owners of the
Company and its management and other parties with which the Company may deal if one party
controls or can significantly influence the management or operating policies of the other to
an extent that one of the transacting parties might be prevented from fully pursuing its own
separate interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of the
transacting parties and can significantly influence the other to an extent that one or more
of the transacting parties might be prevented from fully pursuing its own separate interests
is also a related party.
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 13.
    
    RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS  continuedOther than those disclosed elsewhere in the consolidated financial statements, the Company
also had the following related party balances:
 (a)
    
    Due from/to Related Parties
 2006
    
    
    2007Rmb
    
    
    RmbDue from:CSH and its subsidiaries
    
    
    331
    
    
    
    732GDI and its subsidiaries (GDI Group)
    
    
    
    
    
    
    2,294HHL and its subsidiaries (except GDI Group)
    
    
    
    
    
    
    26,823Wing On and its subsidiaries
    
    
    
    
    
    
    37,587331
    
    
    
    67,436Due to:GDI and its subsidiaries
    
    
    203,025
    
    
    
    2,849HHL and its subsidiaries (except GDI Group)
(HHL Group)
    
    
    203
    
    
    
    ITC and its subsidiaries
(except HHL Group and GDI Group)
    
    
    3,122
    
    
    
    1,157Wing On and its subsidiaries (note 5)
    
    
    2,121
    
    
    
    208,471
    
    
    
    4,006
 As of December 31, 2006 and 2007, the amounts due from/to related parties were
unsecured, non-interest bearing and had no fixed repayment terms except for Rmb12,941
due from a fellow subsidiary as of December 31, 2007 carries interest at Hong Kong
Prime rate plus 1%. Interest income from the fellow subsidiary was not significant
for the year ended December 31, 2007.
 FF-27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 13.
    
    RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS  continued
 (b)
    
    Management and Administrative Services AgreementPursuant to a management and administrative services agreement between the Company
and the former ultimate parent company in 1993 and renewed in 1997, 2000 and 2004,
for a term of three years, the former ultimate parent company, CSH, will provide
certain management services to the Company for an annual fee of US$15 (Rmb120). In
addition, the Company has agreed to reimburse the former ultimate parent company for
administrative services of approximately Rmb4,798 and Rmb2,525 for the years ended
December 31, 2005 and 2006, respectively, rendered on behalf of the Company on a cost
plus 5% basis. The agreement was terminated upon the group reorganization in May
2006 when CSH ceased to be the ultimate parent company of the Group. Payment of
annual fee for the years ended December 31, 2005, 2006 and 2007 were Rmb120, Rmb120
and RmbNil, respectively.
 14.
    
    STAFF RETIREMENT PLANSAll of the Chinese employees of the PRC entities and Rosedale are entitled to an annual
pension on retirement, which is equal to their ending basic salaries at their retirement
dates. The Chinese government is responsible for the pension liabilities to these retired
employees. The PRC entities and Rosedale are only required to make specified contributions
to the state-sponsored retirement plan calculated at rates ranging from 14% to 20% of
average monthly salaries for the years ended December 31, 2005, 2006 and 2007. The expense
reported in the consolidated statements of operations related to these arrangements was
Rmb18, Rmb24 and Rmb20 for the years ended December 31, 2005, 2006 and 2007, respectively.
 15.
    
    OTHER SUPPLEMENTAL INFORMATIONThe following items are included in the consolidated statements of operations:
 Year ended December 31,2005
    
    2006
    
    2007Rmb
    
    Rmb
    
    RmbForeign exchange gain (loss), net
    
    
    (3,834
    )
    
    
    551
    
    
    
    
 16.
    
    PLEDGE OF ASSETSAs of December 31, 2006 and 2007, trading securities amounting to RmbNil and Rmb12,393 are
collateralized to secure the securities trading margin facilities of the Company.
 FF-28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 17.
    
    SUBSEQUENT EVENTSIn addition to those disclosed elsewhere in the consolidated financial statements, the Group
had the following subsequent events:
 a)
    
    In March 2008, the Company entered into a share purchase agreement with Hanny
Magnetics (B.V.I.) Limited, a then fellow subsidiary, to acquire the entire 100%
interest in three securities investment companies, at a total cash consideration of
HK$38,000 (equivalent to Rmb35,815). The acquisition was consummated in April 2008.
The Company is in the process of determining the fair values of the assets acquired and
liabilities assumed to allocate the purchase price.b)
    
    In April 2008, the Group entered into a Memorandum of Understating (MOU) with
a third party to acquire certain equity interest in a property investment company, for
a consideration of Rmb150,000. A deposit of Rmb75,000 was paid to the vendor pursuant
to the MOU. At of the date of the report, no formal agreement had been entered into.
  FF-29




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##### Table of Contents



ITEM 19. EXHIBITS
  ExhibitNumber
    
    Description1
    
    Memorandum and Articles of Association (incorporated by reference
to Exhibit 1 to the Companys Form 20-F for the fiscal year ended
December 31, 2001, Document Control Number: 02048962)4(a)1
    
    Contract dated June 16, 2004 between Shanghai Jiu Sheng Investment
Company Limited and the Company for the acquisition of the
Properties (incorporated by reference to Exhibit 4(a)2 to the
Companys Form 20-F for the fiscal year ended December 31, 2005)4(a)2
    
    Contract dated March 23, 2006 entered into between the Company and
Wing On in relation to the subscription by the Company of the
HK$300 million 2% convertible exchangeable notes due 2011 of Wing
On which entitle the holders thereof to convert the outstanding
principal into Wing On shares at the initial conversion price of
HK$0.79 per share of Wing On (incorporated by reference to Exhibit
4(a)6 to the Companys Form 20-F for the fiscal year ended
December 31, 2005)8
    
    Subsidiaries of the Company10(a)1
    
    Agreement dated December 5, 2007 entered into between the Company
and Martin Pacific Limited for the sale and purchase of the entire
issued share capital of Manwide Holdings Limited (incorporated by
reference to Exhibit 10(a)1 to the Companys Form 20-F for the
fiscal year ended December 31, 2006)10(a)2
    
    Agreement dated March 25, 2008 entered into between the Company
and Hanny Magnetics (B.V.I.) Limited for the sale and purchase of
the entire issued share capital of Cosmos Regent Limited, Cyber
Generation Limited and Whole Good Limited (incorporated by
reference to Exhibit 10(a)2 to the Companys Form 20-F for the
fiscal




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##### Table of Contents



ExhibitNumber
    
    Descriptionyear ended December 31, 2006)12(1)
    
    Certification of the CEO of the Company pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended12(2)
    
    Certification of the CFO of the Company pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended13(1)
    
    Certification of the CEO of the Company pursuant to Section 906 of
the Sarbanes-Oxley Act of 200213(2)
    
    Certification of the CFO of the Company pursuant to Section 906 of
the Sarbanes-Oxley Act of 200214(1)
    
    Code of Ethics for Chief Executive and Senior Financial Officers




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##### Table of Contents



SIGNATURES
  China Enterprises Limited
(Registrant)/s/ Chow Chun Man, JimmyCHOW CHUN MAN, JIMMYChief Financial Officer




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##### Table of Contents



EXIHIBITS INDEX
 ExhibitNumber
    
    Description1
    
    Memorandum and Articles of Association (incorporated by reference
to Exhibit 1 to the Companys Form 20-F for the fiscal year ended
December 31, 2001, Document Control Number: 02048962)4(a)1
    
    Contract dated June 16, 2004 between Shanghai Jiu Sheng Investment
Company Limited and the Company for the acquisition of the
Properties (incorporated by reference to Exhibit 4(a)2 to the
Companys Form 20-F for the fiscal year ended December 31, 2005)4(a)2
    
    Contract dated March 23, 2006 entered into between the Company and
Wing On in relation to the subscription by the Company of the
HK$300 million 2% convertible exchangeable notes due 2011 of Wing
On which entitle the holders thereof to convert the outstanding
principal into Wing On shares at the initial conversion price of
HK$0.79 per share of Wing On (incorporated by reference to Exhibit
4(a)6 to the Companys Form 20-F for the fiscal year ended
December 31, 2005)8
    
    Subsidiaries of the Company10(a)1
    
    Agreement dated December 5, 2007 entered into between the Company
and Martin Pacific Limited for the sale and purchase of the entire
issued share capital of Manwide Holdings Limited (incorporated by
reference to Exhibit 10(a)1 to the Companys Form 20-F for the
fiscal year ended December 31, 2006)10(a)2
    
    Agreement dated March 25, 2008 entered into between the Company
and Hanny Magnetics (B.V.I.) Limited for the sale and purchase of
the entire issued share capital of Cosmos Regent Limited, Cyber
Generation Limited and Whole Good Limited




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##### Table of Contents



ExhibitNumber
    
    Description(incorporated by
reference to Exhibit 10(a)2 to the Companys Form 20-F for the
fiscal year ended December 31, 2006)12(1)
    
    Certification of the CEO of the Company pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.12(2)
    
    Certification of the CFO of the Company pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.13(1)
    
    Certification of the CEO of the Company pursuant to Section 906 of
the Sarbanes-Oxley Act of 200213(2)
    
    Certification of the CFO of the Company pursuant to Section 906 of
the Sarbanes-Oxley Act of 200214(1)
    
    Code of Ethics for Chief Executive and Senior Financial Officers