##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the Transition period from  to
 Commission file number: 001-12126
 CHINA ENTERPRISES LIMITED
  Bermuda   Unit 3101, 31st Floor, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong   Telephone: (852) 3151-0300 Fax: (852) 2372-0620
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredN/A
    
    N/A
  Common stock, par value $0.01 per share
  None
   o Yes þ No
 o Yes þ No
 o Yes þ No
 o Yes o No
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  U.S. GAAP þ
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board o
    
    Other o
 o o
 o Yes þ No




---



##### 



TABLE OF CONTENTS
 PART IItem 1 Identity of Directors, Senior Management and Advisers
    
    
    4Item 2 Offer Statistics and Expected Timetable
    
    
    4Item 3 Key Information
    
    
    4Item 4 Information on the Company
    
    
    11Item 5 Operating and Financial Review and Prospects
    
    
    14Item 6 Directors, Senior Management and Employees
    
    
    18Item 7 Major Shareholders and Related Party Transactions
    
    
    21Item 8 Financial Information
    
    
    23Item 9 Offer and Listing
    
    
    23Item 10 Additional Information
    
    
    24Item 11 Quantitative and Qualitative Disclosure about Market Risk
    
    
    27Item 12 Description of Securities Other than Equity Securities
    
    
    28PART IIItem 13 Defaults, Dividend Arrearages and Delinquencies
    
    
    29Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    29Item 15 Controls and Procedures
    
    
    29Item 16A Audit Committee Financial Expert
    
    
    30Item 16B Code of Ethics
    
    
    30Item 16C Principal Accountant Fees and Services
    
    
    30Item 16D Exemptions from the Listing Standards for Audit Committees
    
    
    30Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    30PART IIIItem 17 Financial Statements
    
    
    31Item 18 Financial Statements
    
    
    31Item 19 Exhibits
    
    
    32Exhibit 8Exhibit 12(1)Exhibit 12(2)Exhibit 13(1)Exhibit 13(2)Exhibit 14(1)
   2




---



##### Table of Contents



PART I
 This Annual Report for China Enterprises Limited (referred to in this report as the Company
or we and which terms shall include, when the context so requires, the subsidiaries of the
Company during the applicable period) should be read in conjunction with the consolidated
financial statements and accompanying notes includes in this report.
 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
    3




---



##### Table of Contents



ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 A. SELECTED FINANCIAL DATA
  Selected Consolidated Financial Information of the Company
 (Amounts in thousands, except number of shares, their par values and per share data)
 Year ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007 (a)
    
    
    2008 (a)Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Consolidated Statements of
Operations Data:Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (13,344
    )
    
    
    (27,522
    )
    
    
    (16,754
    )
    
    
    13,117
    
    
    
    (5,770
    )
    
    
    (846
    )(Loss) income from continuing
operations
    
    
    181,942
    
    
    
    (26,324
    )
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (71,441
    )
    
    
    (10,471
    )Net (loss) income
    
    
    181,942
    
    
    
    (26,324
    )
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (71,441
    )
    
    
    (10,471
    )Net (loss) income from operations
per share
    
    
    20.18
    
    
    
    (2.92
    )
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (7.92
    )
    
    
    (1.16
    )Basic and diluted (loss) earnings
per common share (b)
    
    
    20.18
    
    
    
    (2.92
    )
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (7.92
    )
    
    
    (1.16
    )Weighted-average number of common
share outstanding (b)
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310
    
    
    
    9,017,310Consolidated Balance Sheets Data :Total assets
    
    
    791,326
    
    
    
    684,273
    
    
    
    819,181
    
    
    
    575,076
    
    
    
    677,945
    
    
    
    99,369Shareholders equity (Net assets)
    
    
    667,981
    
    
    
    662,598
    
    
    
    599,297
    
    
    
    538,325
    
    
    
    458,805
    
    
    
    67,249Supervoting common stock  par
value US$0.01 per share
    
    
    244
    
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock  par value US$0.01
per share
    
    
    526
    
    
    
    526
    
    
    
    770
    
    
    
    770
    
    
    
    770
    
    
    
    113
  4




---



##### Table of Contents



Notes:(a)
    
    During fiscal year 2007, following the 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
Companys interest in Wing On was diluted from approximately 20.36% to 12.77%, and was accounted
for as trading securities of the Company thereafter.(b)
    
    The calculation of basic and diluted (loss) earnings from continuing operations per common
share, and basic and diluted (loss) earnings per common share from 2004 to 2008 is based on the
weighted-average number of common stock outstanding during the years ended December 31, 2004 to
2008. The number of common stock outstanding for 2004, 2005, 2006, 2007 and 2008 was 9,017,310.
There were no dilutive securities issued by the Company. Exchange Rate Information
   Year Ended December 31,(Rmb equivalent of US$1.00)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Rmb
    
    
    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
    
    
    
    8.18
    
    
    
    7.96
    
    
    
    7.57
    
    
    
    6.93
  At Unified Exchange Rate(Rmb equivalent of US$1.00)
    
    High
    
    
    LowNovember 30, 2009
    
    
    6.83
    
    
    
    6.83October 31, 2009
    
    
    6.83
    
    
    
    6.83September 30, 2009
    
    
    6.83
    
    
    
    6.83August 31, 2009
    
    
    6.84
    
    
    
    6.83July 31, 2009
    
    
    6.83
    
    
    
    6.82June 30, 2009
    
    
    6.84
    
    
    
    6.83
 B. CAPITALIZATION AND INDEBTEDNESS
  C. REASONS FOR THE OFFER AND PROCEEDS
   5




---



##### Table of Contents



D. RISK FACTORS
  Risks Related to Our Business
 THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT 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
  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
   6




---



##### Table of Contents



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
  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
    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
   7




---



##### Table of Contents



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
   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
   8




---



##### Table of Contents



Risks for Doing Business in China
 ANTI-DUMPING DUTIES COULD HARMED OUR RESULTS IF THE COMPANY IS EXPOSED TO LITIGATION LIABILITY
  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
      9




---



##### Table of Contents



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
    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
   10




---



##### Table of Contents



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
  
 ITEM 4. INFORMATION ON THE COMPANY
 A. HISTORY AND DEVELOPMENT OF THE COMPANY
     11




---



##### Table of Contents




    
    Capital Canton Limited, a British Virgin Islands company in which the company has a 100%
interest.
 
    
    Century Lead Limited, a British Virgin Islands company in which the company has a 100%
interest.
 
    
    Cosmos Regent Ltd, a British Virgin Islands company in which the company has a 100%
interest.
 
    
    Cyber Generation 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.
 
    
    Hangzhou Zhongce, a PRC company in which the company has a 26% interest.
 
    
    Million Good Limited, a British Virgin Islands company in which the company has a 100%
interest.
 
    
    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.
 
    
    Sincere Ocean Limited, a British Virgin Islands company in which the company has a 100%
interest.
  12




---



##### Table of Contents




    
    Supreme Solution 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.
 
    
    Wealth Faith Limited, a British Virgin Islands company in which the company has a 100%
interest.
 
    
    Whole Good Limited, a British Virgin Islands company in which the company has a 100%
interest.
 
    
    Wing On Travel (Holdings) Limited, a Hong Kong listed company in which the company has a
12.83% interest
  B. BUSINESS OVERVIEW
  Hangzhou Zhongce
  Wing On
     13




---



##### Table of Contents



C. ORGANIZATIONAL STRUCTURE
  CompanysCountry of
    
    
    
    Ownership InterestConsolidated Subsidiary
    
    Incorporation
    
    Principal Activities
    
    Directly
    
    
    IndirectlyCapital Canton Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Century Lead Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Cosmos Regent Ltd
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Cyber Generation Limited
    
    BVI
    
    Investment holding
    
    
    100
    %Great Windfall Agents Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Million Good Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Orion Tire Corporation
    
    USA
    
    Investment holding
    
    
    60
    %Orion (B.V.I.) Tire Corporation
    
    BVI
    
    Investment holding
    
    
    60
    %Sincere Ocean Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Supreme Solution Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Ventures Kingdom Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Wealth Faith Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
    
    
    Whole Good Limited
    
    BVI
    
    Investment holding
    
    
    100
    %
 D. PROPERTY, PLANT AND EQUIPMENT
   2006
    
    
    2007
    
    
    2008Rmb000
    
    
    Rmb000
    
    
    Rmb000Purchase of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    Investments in and advances to affiliate, net
    
    
    (2,227
    )
    
    
    (10,137
    )
    
    
    
 
 ITEM 5. Operating and Financial Review and Prospects
   14




---



##### Table of Contents



A. OPERATING RESULTS
 Overview
  Critical Accounting Policies
  Accounting Estimates
  Income Taxes
  Derivatives Embedded in Certain Debt Securities
  Results of Operations: Fiscal year ended December 31, 2008 compared with fiscal year ended
December 31, 2007
 The Company
   15




---



##### Table of Contents



Tire Business
  Results of Operations: Fiscal year ended December 31, 2007 compared with fiscal year ended
December 31, 2006
 The Company
     Tire Business
   16




---



##### Table of Contents



Travel Business
  Impact of Inflation
  Impact of Tax Regulations
  B. LIQUIDITY AND CAPITAL RESOURCES
        C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
   17




---



##### Table of Contents



D TREND INFORMATION
  E. OFF-BALANCE SHEET ARRANGEMENTS
  F. 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
    
    
    75,000
    
    
    
    
    
    
    
    
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. DIRECTORS AND SENIOR MANAGEMENT
 Name
    
    Age
    
    Position
    
    Employed SinceYap, Allan
    
    54
    
    Chairman, Chief Executive Officer and Director
    
    
    2001
    (1)Chan Ling, Eva
    
    44
    
    Deputy Chairman and Director
    
    
    2004
    (2)Dorothy Law
    
    40
    
    Director
    
    
    2000Richard Whittall
    
    51
    
    Independent Director and Audit Committee Member
    
    
    2000David Edwin Bussmann
    
    56
    
    Independent Director and Audit Committee Member
    
    
    2000
    (3)Lien Kait Long
    
    61
    
    Director
    
    
    1999Chow Chun Man, Jimmy
    
    40
    
    Chief Financial Officer
    
    
    2003
 
 (1)
    
    Dr. Yap, Allan is the Chairman of Hanny and served as an executive director of China
Strategic Holdings Limited, a publicly listed company in Hong Kong, 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 until his resignation on June 16, 2006.   18




---



##### Table of Contents



Biographies of Directors and Senior Management
        B. COMPENSATION
   19




---



##### Table of Contents



Name
    
    Salary (USD)
    
    
    Salary (Rmb)
    
    

Total (USD)
    
    

Total (Rmb)Executive DirectorYap, Allan
    
    
    20,000
    
    
    
    136,450
    
    
    
    20,000
    
    
    
    136,450Chan Ling, Eva
    
    
    20,000
    
    
    
    136,450
    
    
    
    20,000
    
    
    
    136,450Non-Executive DirectorDorothy Law
    
    
    20,000
    
    
    
    136,450
    
    
    
    20,000
    
    
    
    136,450Lien Kait Long
    
    
    20,000
    
    
    
    136,450
    
    
    
    20,000
    
    
    
    136,450Richard Whittall
    
    
    20,000
    
    
    
    136,450
    
    
    
    20,000
    
    
    
    136,450David E. Bussmann
    
    
    20,000
    
    
    
    136,450
    
    
    
    20,000
    
    
    
    136,450
  C. BOARD PRACTICES
    D. EMPLOYEES
  E. SHARE OWNERSHIP
   20




---



##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. MAJOR SHAREHOLDERS
  Name of holder
    
    Number of shares held
    
    
    Percentage of classHanny Holdings Limited (1) (2) (3)
    
    
    2,610,600
    
    
    
    26.1
    %Peconic
Partners LLC (4)
    
    
    436,375
    
    
    
    4.8
    %William F.
Harnisch (5)
    
    
    516,175
    
    
    
    5.7
    %
 (1)
    
    On March 26, 2008, Hanny disclosed by way of announcement posted on the website of the HKSE
that it would sell 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.(2)
    
    On July 30, 2008, Hanny further disclosed in its Annual Report 2007-08 that 29.2% interest
including the interest as mentioned in (1) above in the issued share capital of the Company
was disposed of subsequent to its financial year ended March 31, 2008.(3)
    
    The 2,610,600 shares that Hanny beneficially owns include 610,600 shares held by its
indirect, non-wholly owned subsidiary, which represents an effective equity interest of 3.88%
in the issued share capital of the Company.(4)
    
    According to Amendment No. 17 to a report on Schedule 13G/A dated February 16, 2010, the
436,375 shares beneficially owned by Peconic Partners LLC consist of (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 Peconic Partners LLC
may be deemed to beneficially own by virtue of its position as an investment adviser to the
above five clients.(5)
    
    According to Amendment No. 17 to a report on Schedule 13G/A dated February 16, 2010, the
516,175 shares beneficially owned by William F. Harnisch consist of (A) 79,800 shares
beneficially owned individually by Mr. Harnisch himself 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 LLC, the investment adviser to the above five clients.  B. RELATED PARTY TRANSACTIONS
 Acquisition of 100% equity interest in certain subsidiaries from Hanny
  Convertible Notes
   21




---



##### Table of Contents



Other Related Party Transactions
  2007
    
    
    2008Rmb000
    
    
    Rmb000Due from:CSH and its subsidiaries
    
    
    732
    
    
    
    118GDI and its subsidiaries (GDI Group)
    
    
    2,294
    
    
    
    2,162Hanny and its subsidiaries (except GDI Group)
    
    
    26,823
    
    
    
    31,747Wing On and its subsidiaries
    
    
    37,587
    
    
    
    20,01267,436
    
    
    
    54,039Due to:CSH and its subsidiaries
    
    
    
    
    
    
    658GDI and its subsidiaries
    
    
    2,849
    
    
    
    2,780Hanny and
its subsidiaries (except GDI Group)
(Hanny Group)
    
    
    
    
    
    
    118,170ITC and its
subsidiaries
(except Hanny Group and GDI Group)
    
    
    1,157
    
    
    
    1,660Wing On and its subsidiaries
    
    
    
    
    
    
    1,6274,006
    
    
    
    124,895
  Management and Administrative Services Agreement
   22




---



##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
  Dividend Policy
   B. SIGNIFICANT CHANGES
    
 ITEM 9. THE LISTING
   Year Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)December 31, 2008
    
    
    0.60
    
    
    
    0.02December 31, 2007
    
    
    2.21
    
    
    
    0.55December 31, 2006
    
    
    2.59
    
    
    
    0.40December 31, 2005
    
    
    2.30
    
    
    
    0.31December 31, 2004
    
    
    6.90
    
    
    
    1.03
  23




---



##### Table of Contents



Quarter Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)December 31, 2009
    
    
    0.12
    
    
    
    0.05September 30, 2009
    
    
    0.12
    
    
    
    0.05June 30, 2009
    
    
    0.18
    
    
    
    0.04March 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
  Month Ended
    
    High
    
    
    Low(US$)
    
    
    (US$)February 28, 2010
    
    
    0.19
    
    
    
    0.05January 31, 2010
    
    
    0.11
    
    
    
    0.10December 31, 2009
    
    
    0.12
    
    
    
    0.05November 30, 2009
    
    
    0.09
    
    
    
    0.05October 31, 2009
    
    
    0.10
    
    
    
    0.08September 30, 2009
    
    
    0.10
    
    
    
    0.05
 
 ITEM 10. ADDITIONAL INFORMATION
 A. SHARE CAPITAL
    B. MEMORANDUM AND ARTICLES OF ASSOCIATION
   24




---



##### Table of Contents



C. MATERIAL CONTRACTS
  
    
    A conditional subscription agreement dated March 23, 2006 entered into between the
Company and Wing On in relation to the subscription by the Company for HK$300 million 2%
convertible exchangeable notes due 2011 of Wing On which entitle the holder thereof to
convert the outstanding principal into Wing On shares at the initial conversion price of
HK$0.79 per share.
 
    
    An 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 and Rosedale Luxury Hotel & Suited Limited for the consideration of HK$500,000.
 
    
    An 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 for the consideration of
HK$38,000,000.
 D. EXCHANGE CONTROLS
 Certain Foreign Issuer Considerations
      E. TAXATION
   25




---



##### Table of Contents



Bermuda Taxation
    United States Federal Income Taxation
 Taxation of Shareholders
    26




---



##### Table of Contents



United States Backup Withholding and Information Reporting
  F. DIVIDENDS AND PAYING AGENTS
  G. STATEMENTS BY EXPERTS
  H. DOCUMENTS ON DISPLAY
   
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   27




---



##### Table of Contents



Exchange Rate Information
    Foreign Currency Risk
    Interest Rate Fluctuations
    
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
   28




---



##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  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; and4.
    
    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.
     29




---



##### Table of Contents



ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B CODE OF ETHICS
  
 ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
   2008
    
    
    2007US$000
    
    
    US$000Audit Fees
    
    
    298
    
    
    
    320Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total
    
    
    298
    
    
    
    320
  
 ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   30




---



##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
    
 ITEM 18. FINANCIAL STATEMENTS
   31




---



##### Table of Contents



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, 2006, 2007 and 2008
    
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    
    F-3Consolidated Statements of Shareholders Equity for the years
ended December 31, 2006, 2007 and 2008
    
    
    F-5Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2007 and 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8




---



##### Table of Contents



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




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (Amounts in thousands)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Revenues:- third parties
    
    
    8,822,599
    
    
    
    11,649,022
    
    
    
    13,389,625
    
    
    
    1,962,569- related parties
    
    
    116,106
    
    
    
    137,305
    
    
    
    56,326
    
    
    
    8,256Total
    
    
    8,938,705
    
    
    
    11,786,327
    
    
    
    13,445,951
    
    
    
    1,970,825Cost of revenues
    
    
    (8,190,449
    )
    
    
    (10,431,737
    )
    
    
    (12,190,132
    )
    
    
    (1,786,754
    )Gross profit
    
    
    748,256
    
    
    
    1,354,590
    
    
    
    1,255,819
    
    
    
    184,071Selling, general and administrative expenses
    
    
    (544,178
    )
    
    
    (748,530
    )
    
    
    (756,503
    )
    
    
    (110,884
    )Government subsidies
    
    
    200
    
    
    
    1,165
    
    
    
    18,977
    
    
    
    2,782Other operating income (loss), net
    
    
    628
    
    
    
    (4,290
    )
    
    
    (40,484
    )
    
    
    (5,934
    )Operating income
    
    
    204,906
    
    
    
    602,935
    
    
    
    477,809
    
    
    
    70,035Non-operating income (expenses):Interest income
    
    
    4,584
    
    
    
    6,593
    
    
    
    4,785
    
    
    
    701Interest expenses
    
    
    (130,400
    )
    
    
    (159,431
    )
    
    
    (252,383
    )
    
    
    (36,993
    )Other loss
    
    
    (494
    )
    
    
    (9,849
    )
    
    
    (6,770
    )
    
    
    (992
    )Income before income taxes
and minority interests
    
    
    78,596
    
    
    
    440,248
    
    
    
    223,441
    
    
    
    32,751Income tax expenses (note 8)
    
    
    (16,337
    )
    
    
    (38,201
    )
    
    
    (77,408
    )
    
    
    (11,346
    )Minority interests
    
    
    (5,964
    )
    
    
    (16,360
    )
    
    
    (9,707
    )
    
    
    (1,423
    )Net income and comprehensive income
    
    
    56,295
    
    
    
    385,687
    
    
    
    136,326
    
    
    
    19,982
   F - 2




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands)
 As of December 31,2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    639,200
    
    
    
    399,840
    
    
    
    58,606Restricted cash
    
    
    17,410
    
    
    
    98,364
    
    
    
    14,418Accounts receivable, net of allowances for
doubtful receivables Rmb61,602 in 2007
and Rmb69,628 (US$10,206) in 2008
    
    
    802,072
    
    
    
    1,055,099
    
    
    
    154,650Notes receivables (note 3)
    
    
    75,532
    
    
    
    19,875
    
    
    
    2,913Other receivables
    
    
    21,034
    
    
    
    13,048
    
    
    
    1,912Inventories (note 4)
    
    
    1,868,345
    
    
    
    1,938,025
    
    
    
    284,064Prepaid expenses and other current assets
    
    
    74,772
    
    
    
    162,877
    
    
    
    23,874Due from related companies (note 11)
    
    
    27,640
    
    
    
    39,512
    
    
    
    5,791Deferred tax assets (note 8)
    
    
    130,062
    
    
    
    87,835
    
    
    
    12,874Total current assets
    
    
    3,656,067
    
    
    
    3,814,475
    
    
    
    559,102Prepayments for equipment
    
    
    236,593
    
    
    
    66,855
    
    
    
    9,799Property, plant and equipment, net (note 5)
    
    
    3,142,126
    
    
    
    4,124,429
    
    
    
    604,533Land use rights (note 5)
    
    
    123,995
    
    
    
    230,928
    
    
    
    33,848Deferred tax assets (note 8)
    
    
    4,469
    
    
    
    13,691
    
    
    
    2,007Due from related companies (note 11)
    
    
    2,090
    
    
    
    887
    
    
    
    130Other assets
    
    
    1,218
    
    
    
    2,201
    
    
    
    323Total assets
    
    
    7,166,558
    
    
    
    8,253,466
    
    
    
    1,209,742
  F - 3




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED BALANCE SHEETS  continued
 (Amounts in thousands)
 As of December 31,2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$LIABILITIES AND OWNERS EQUITYCurrent liabilities:Short-term bank loans (note 6)
    
    
    2,151,768
    
    
    
    2,812,012
    
    
    
    412,167Current portion of long-term bank loans (note 6)
    
    
    470,645
    
    
    
    438,000
    
    
    
    64,199Accounts payable
    
    
    874,305
    
    
    
    1,266,383
    
    
    
    185,618Advances from customers
    
    
    232,282
    
    
    
    168,199
    
    
    
    24,654Transportation expenses payable
    
    
    92,293
    
    
    
    75,489
    
    
    
    11,065Other payables
    
    
    222,741
    
    
    
    313,846
    
    
    
    46,002Government subsidies
    
    
    196,603
    
    
    
    247,352
    
    
    
    36,255Debenture payable (note 7)
    
    
    360,000
    
    
    
    
    
    
    
    Accrued liabilities
    
    
    353,815
    
    
    
    411,027
    
    
    
    60,246Due to related companies (note 11)
    
    
    6,318
    
    
    
    20,724
    
    
    
    3,037Income taxes payable (note 8)
    
    
    56,370
    
    
    
    10,862
    
    
    
    1,592Loan from a related company (note 11)
    
    
    22,669
    
    
    
    
    
    
    
    Total current liabilities
    
    
    5,039,809
    
    
    
    5,763,894
    
    
    
    844,835Long-term bank loans, net of current portion
(note 6)
    
    
    515,000
    
    
    
    735,000
    
    
    
    107,732Due to a shareholder (note 11)
    
    
    67
    
    
    
    134
    
    
    
    20Deferred tax liabilities (note 8)
    
    
    3,277
    
    
    
    
    
    
    
    Total liabilities
    
    
    5,558,153
    
    
    
    6,499,028
    
    
    
    952,587Commitments and contingencies (note 9)Minority interests
    
    
    231,323
    
    
    
    241,030
    
    
    
    35,329Shareholders equity:Registered capital
    
    
    613,603
    
    
    
    613,603
    
    
    
    89,938Additional paid-in capital
    
    
    20,266
    
    
    
    20,266
    
    
    
    2,970Retained earnings
    
    
    743,213
    
    
    
    879,539
    
    
    
    128,918Total shareholders equity
    
    
    1,377,082
    
    
    
    1,513,408
    
    
    
    221,826Total liabilities and owners equity
    
    
    7,166,558
    
    
    
    8,253,466
    
    
    
    1,209,742
   F - 4




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Amounts in thousands)
 AdditionalRegistered
    
    
    paid-in
    
    
    Retainedcapital
    
    
    capital
    
    
    earnings
    
    
    TotalRmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at January 1, 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, 2008
    
    
    613,603
    
    
    
    20,266
    
    
    
    743,213
    
    
    
    1,377,082Net income
    
    
    
    
    
    
    
    
    
    
    136,326
    
    
    
    136,326Balance at December 31, 2008
    
    
    613,603
    
    
    
    20,266
    
    
    
    879,539
    
    
    
    1,513,408Balance at
December 31, 2008
(in US$)
    
    
    89,938
    
    
    
    2,970
    
    
    
    128,918
    
    
    
    221,826
   F - 5




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash flows from operating activities:Net income
    
    
    56,295
    
    
    
    385,687
    
    
    
    136,326
    
    
    
    19,982Adjustments to reconcile net income to net cash
(used in) provided by operating activities:Minority interests
    
    
    5,964
    
    
    
    16,360
    
    
    
    9,707
    
    
    
    1,423Deferred income taxes
    
    
    (19,683
    )
    
    
    (61,175
    )
    
    
    29,728
    
    
    
    4,357Loss (gain) on disposal of property, plant and
equipment
    
    
    (924
    )
    
    
    4,871
    
    
    
    (398
    )
    
    
    (58
    )Depreciation
    
    
    271,045
    
    
    
    343,627
    
    
    
    443,016
    
    
    
    64,935Amortization
    
    
    3,037
    
    
    
    3,170
    
    
    
    4,732
    
    
    
    694Allowance for doubtful accounts receivable
    
    
    (3,326
    )
    
    
    7,883
    
    
    
    8,026
    
    
    
    1,176Changes in operating assets and liabilities:Accounts and other receivables
    
    
    (163,061
    )
    
    
    72,363
    
    
    
    (253,067
    )
    
    
    (37,093
    )Notes receivables
    
    
    (39,012
    )
    
    
    (24,742
    )
    
    
    55,657
    
    
    
    8,158Inventories
    
    
    (339,076
    )
    
    
    (149,888
    )
    
    
    (69,680
    )
    
    
    (10,213
    )Prepaid expenses and other current assets
    
    
    (13,738
    )
    
    
    (2,694
    )
    
    
    (88,105
    )
    
    
    (12,914
    )Due from related companies
    
    
    (502
    )
    
    
    (17,960
    )
    
    
    (11,872
    )
    
    
    (1,740
    )Other assets
    
    
    (1,790
    )
    
    
    (369
    )
    
    
    (983
    )
    
    
    (144
    )Accounts payable and other payables
    
    
    110,236
    
    
    
    (29,715
    )
    
    
    328,107
    
    
    
    48,092Government subsidies
    
    
    (879
    )
    
    
    2,498
    
    
    
    33,283
    
    
    
    4,878Due to related companies
    
    
    
    
    
    
    4,690
    
    
    
    14,406
    
    
    
    2,111Accrued liabilities
    
    
    91,358
    
    
    
    99,453
    
    
    
    57,212
    
    
    
    8,386Income taxes payable
    
    
    (3,635
    )
    
    
    30,785
    
    
    
    (45,508
    )
    
    
    (6,670
    )Net cash (used in) provided by operating activities
    
    
    (47,691
    )
    
    
    684,844
    
    
    
    650,587
    
    
    
    95,360
  F - 6




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 CONSOLIDATED STATEMENTS OF CASH FLOWS  continued
 (Amounts in thousands)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (449,111
    )
    
    
    (937,190
    )
    
    
    (1,355,899
    )
    
    
    (198,739
    )Purchase of land use rights
    
    
    (66,134
    )
    
    
    (454
    )
    
    
    (111,665
    )
    
    
    (16,367
    )(Increase) decrease in prepayment paid for
property, plant and equipment
    
    
    (57,622
    )
    
    
    (90,287
    )
    
    
    169,738
    
    
    
    24,879Increase in government subsidies
    
    
    50,450
    
    
    
    
    
    
    
    17,466
    
    
    
    2,560(Increase) decrease in restricted bank deposits
    
    
    (7,314
    )
    
    
    58,745
    
    
    
    (80,954
    )
    
    
    (11,866
    )Proceeds from disposal of property, plant and
equipment
    
    
    3,177
    
    
    
    8,429
    
    
    
    5,167
    
    
    
    757(Increase) decrease in due from related companies
    
    
    
    
    
    
    (708
    )
    
    
    1,203
    
    
    
    176Net cash used in investing activities
    
    
    (526,554
    )
    
    
    (961,465
    )
    
    
    (1,354,944
    )
    
    
    (198,600
    )Cash flows from financing activities:Proceeds from short-term bank loans
    
    
    2,611,704
    
    
    
    2,929,636
    
    
    
    6,087,688
    
    
    
    892,296Repayment of short-term bank loans
    
    
    (2,184,427
    )
    
    
    (2,958,934
    )
    
    
    (5,427,444
    )
    
    
    (795,521
    )Proceeds from long-term bank loans
    
    
    260,000
    
    
    
    427,645
    
    
    
    659,699
    
    
    
    96,694Repayment of long-term bank loans
    
    
    (97,000
    )
    
    
    (139,000
    )
    
    
    (472,344
    )
    
    
    (69,233
    )Proceed from issue of debenture
    
    
    
    
    
    
    360,000
    
    
    
    
    
    
    
    Repayment of debenture payable
    
    
    
    
    
    
    
    
    
    
    (360,000
    )
    
    
    (52,767
    )Repayment of loans from a related company
    
    
    (56,609
    )
    
    
    (7,923
    )
    
    
    (22,669
    )
    
    
    (3,323
    )Increase (decrease) in amount due to a shareholder
    
    
    67
    
    
    
    (67
    )
    
    
    67
    
    
    
    10Net cash provided by financing activities
    
    
    533,735
    
    
    
    611,357
    
    
    
    464,997
    
    
    
    68,156Net (decrease) increase in cash and cash
equivalents
    
    
    (40,510
    )
    
    
    334,736
    
    
    
    (239,360
    )
    
    
    (35,084
    )Cash and cash equivalents, beginning of the year
    
    
    344,974
    
    
    
    304,464
    
    
    
    639,200
    
    
    
    93,690Cash and cash equivalents, end of the year
    
    
    304,464
    
    
    
    639,200
    
    
    
    399,840
    
    
    
    58,606Supplemental disclosures of cash flow information:Interest paid
    
    
    128,827
    
    
    
    187,935
    
    
    
    249,192
    
    
    
    36,525Income tax paid
    
    
    39,655
    
    
    
    68,591
    
    
    
    93,187
    
    
    
    13,664Non-cash investing activities:Other payables for
property, plant and equipment
    
    
    
    
    
    
    88,816
    
    
    
    74,189
    
    
    
    10,878
   F - 7




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands unless otherwise stated)
 1.
    
    ORGANIZATION AND BASIS OF PREPARATION
 Hangzhou 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.
 In 2008, the Company incorporated a PRC subsidiary Zhongce Rubber Fu Yang Co., Ltd. (Fu
Yang) and wholly owned 100% of Fu Yang. The principal activity of Fu Yang is in the
manufacture and sale of rubber tires in the PRC.
 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 (SEC) 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.
 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, 2008.
  F - 8




---



##### 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  continued
 These 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
Rmb1,949,419(US$285,733) as of December 31, 2008, with bank borrowings of
Rmb3,250,012(US$476,366) which will be matured in 2009.
 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
Rmb400,000 repayable substantially by 2011.
 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.
  F - 9




---



##### 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
 (c)
    
    Restricted CashBank deposits pledged as security for bank guarantees and bank drafts, and those bank
balances for staff quarter repair and maintenance as required by PRC municipal
government amounted to Rmb17,410 and Rmb98,364 (US$14,418) as of December 31, 2007,
and 2008, respectively.(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. The Group
writes down the cost of excess and slow moving inventories to the estimated market
value based on forecast demand. Slow moving inventories amounted to Rmb4,290 and
Rmb14,840 (US$2,175) were written down for the year ended December 31, 2007 and 2008,
respectively.(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 Rmb15,133,
Rmb28,504 and Rmb34,604 (US$5,072) for the years ended December 31, 2006, 2007 and
2008, 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 50 years.
  F - 10




---



##### 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 Rmb58,065,
Rmb58,413 and Rmb53,079 (US$7,780) for the years ended December 31, 2006, 2007 and
2008, 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 Rmb198,870, Rmb268,668 and Rmb288,010
(US$42,215) for the years ended December 31, 2006, 2007 and 2008, respectively.(j)
    
    Advertising ExpensesAdvertising expenses were Rmb3,204, Rmb3,705 and Rmb3,013 (US$442) for the years
ended December 31, 2006, 2007 and 2008, 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.
  F - 11




---



##### 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 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.
  F - 12




---



##### 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
 (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
Rmb6,257, Rmb28,257 and Rmb10,024 (US$1,469) in 2006, 2007 and 2008, respectively.The translation of Rmb amounts into United States dollar (US$) amounts as of and for
the year December 31, 2008 are included solely for the convenience of readers in the
United States of America and have been made at US$1.00 = Rmb6.8225, the noon buying
rates from Federal Reserve Bank of New York on December 31, 2008. 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.(o)
    
    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.(p)
    
    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.
  F - 13




---



##### 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
 (q)
    
    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.
  F - 14




---



##### 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)
    
    Recently Issued Accounting PronouncementsIn December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combination (SFAS 141R). SFAS 141R is relevant to all transactions or events in
which one entity obtains control over one or more other businesses. SFAS 141R
requires an acquirer to recognize any assets and non controlling interest acquired
and liabilities assumed to be measured at fair value as of the acquisition date.
Liabilities related to contingent consideration are recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of the
consideration may be resolved beyond a reasonable doubt. This revised approach
replaces SFAS 141s cost allocation process in which the cost of an acquisition was
allocated to the individual assets acquired and liabilities assumed based on their
respective fair value. SFAS 141R requires any acquisition-related costs and
restructuring costs to be expensed as incurred as opposed to allocating such costs to
the assets acquired and liabilities assumed as previously required by SFAS No. 141.
Under SFAS 141R, an acquirer recognizes liabilities for a restructuring plan in
purchase accounting only if the requirements of SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, are met. SFAS 141R allows for the
recognition of pre-acquisition contingencies at fair value only if these
contingencies are likely to materialize. If this criterion is not met at the
acquisition date, then the acquirer accounts for the non-contractual contingency in
accordance with recognition criteria set forth under SFAS No. 5, Accounting for
Contingencies, in which case no amount should be recognized in purchase accounting.
SFAS 141R is effective as of the beginning of an entitys first fiscal year that
begins after December 15, 2008. The Company is evaluating the impact, if any, of the
adoption of SFAS 141R. It is not expected to have a material impact on the Company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.
  F - 15




---



##### 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)
    
    Recently Issued Accounting Pronouncements continuedIn February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2,
Effective Date of FASB Statement No. 157, which defers the effective date of SFAS
No. 157 for all non-recurring fair value measurements of non-financial assets and
nonfinancial liabilities until fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. The Group is currently evaluating the
impact of adoption of FSP SFAS No. 157-2, for non-recurring fair value measurements
of non-financial assets and liabilities.In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS No. 162). The statement is intended to improve
financial reporting by identifying a consistent hierarchy for selecting accounting
principles to be used in preparing financial statements that are prepared in
conformance with US GAAP. SFAS No. 162 replaces the US GAAP hierarchy specified in
the American Institute of Certified Public Accountants (AICPA) Statement on
Auditing Standards No. 69 The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles and was effective on November 15, 2008. The adoption
of SFAS No. 162 did not have a material impact on the Companys current financial
position, results of operations or cash flow.In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP SFAS No.
157-3). FSP SFAS No. 157-3 clarifies the application of SFAS No. 157 in a market
that is not active and provides guidance on the key considerations in determining the
fair value of a financial instrument when the market for these instruments is not
active. The clarifying guidance provided in FSP SFAS No. 157-3 did not result in a
change to Groups financial position, results of operations and cash flows.At the November 24, 2008 meeting, the FASB ratified the consensus reached by the Task
Force in Issue No. 08-6: Equity Method Investment Accounting Considerations (EITF
08-6). Because of the significant changes to the guidance on subsidiary
acquisitions and subsidiary equity transactions and the increased use of fair value
measurements as a result of Statements 141(R) and 160, questions have arisen
regarding the application of that accounting guidance to equity method
investments. EITF 08-6 provides guidance for entities that acquire or hold
investments accounted for under the equity method. This issue is effective for
transactions occurring in fiscal years and interim periods beginning on or after
December 15, 2008. Early adoption is not permitted. The Group does not expect the
adoption of EITF 08-6 to have a material impact on the Groups consolidated financial
statements.
  F - 16




---



##### 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)
    
    Recently Issued Accounting Pronouncements continuedIn 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.In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. SFAS 165
will be effective for interim or annual period ending after June 15, 2009 and will be
applied prospectively. The Company is evaluating the impact, if any, of the adoption
of SFAS 165. It is not expected to have a material impact on the Companys financial
position, results of operations and cash flows.In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167). SFAS No. 167 eliminates Interpretation No. 46(R)s
exceptions to consolidating qualifying special-purpose entities, contains new
criteria for determining the primary beneficiary, and increases the frequency of
required reassessments to determine whether a company is the primary beneficiary of a
variable interest entity. SFAS No. 167 also contains a new requirement that any term,
transaction, or arrangement that does not have a substantive effect on an entitys
status as a variable interest entity, a companys power over a variable interest
entity, or a companys obligation to absorb losses or its right to receive benefits
of an entity must be disregarded in applying Interpretation No. 46(R)s provisions.
SFAS No. 167 will be effective for annual reporting period that begins after November
15, 2009. The Company is evaluating the impact, if any, of the adoption of SFAS
No.167. It is not expected to have a material impact on the Companys financial
position, results of operations and cash flows.
  F - 17




---



##### 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)
    
    Recently Issued Accounting Pronouncements continuedIn June 2009, the FASB issued SFAS No.168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162. Accounting Standards
CodificationTM(Codification) will become the source of authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. On the effective date of this
Statement, the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. This Statement is
effective for financial statements issued for interim and annual periods ending after
September 15, 2009. It is not expected to have a material impact on the Companys
financial position, results of operations and cash flows.
 3.
    
    NOTES RECEIVABLES
 Notes 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.
    
    INVENTORIES
  2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Raw materials
    
    
    791,317
    
    
    
    518,364
    
    
    
    75,979Work-in-progress
    
    
    125,834
    
    
    
    63,212
    
    
    
    9,265Finished goods
    
    
    951,194
    
    
    
    1,356,449
    
    
    
    198,8201,868,345
    
    
    
    1,938,025
    
    
    
    284,064
  F - 18




---



##### 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
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Property, plant and equipment,
net consists of the following:At cost:Buildings
    
    
    617,830
    
    
    
    733,846
    
    
    
    107,562Leasehold improvement
    
    
    
    
    
    
    1,350
    
    
    
    198Machinery and equipment
    
    
    3,272,628
    
    
    
    4,185,440
    
    
    
    613,476Motor vehicles
    
    
    34,800
    
    
    
    37,360
    
    
    
    5,476Furniture, fixtures and office equipment
    
    
    207,477
    
    
    
    374,041
    
    
    
    54,825Total
    
    
    4,132,735
    
    
    
    5,332,037
    
    
    
    781,537Less: Accumulated depreciation
    
    
    (1,545,774
    )
    
    
    (1,969,263
    )
    
    
    (288,643
    )Construction-in-progress
    
    
    555,165
    
    
    
    761,655
    
    
    
    111,639Total
    
    
    3,142,126
    
    
    
    4,124,429
    
    
    
    604,533
 Depreciation expenses of property, plant and equipment were Rmb271,045, Rmb343,627 and
Rmb443,016 (US$64,935) and amortization expenses of land use rights were Rmb3,037, Rmb3,170
and Rmb4,732 (US$694) for the years ended December 31, 2006, 2007 and 2008, respectively.
 As of December 31, 2007 and 2008, the Group had not obtained land use right certificates on
certain of their land use rights with a carrying amount of Rmb2,671 and Rmb2,613 (US$383),
respectively. As of December 31, 2007 and 2008, Hangzhou Sunrise and Fu Yang have pledged
certain land use rights, buildings and plant and machinery having an aggregate carrying
amount of Rmb56,658 and Rmb250,863(US$36,770), respectively to secure bank loans to the
Group.
 6.
    
    BANK LOANS
 As of December 31, 2007 and 2008, long-term bank loans of RmbNil and Rmb70,000 (US$10,260)
were secured by land use right, respectively. Also, long-term bank loans of RmbNil and
Rmb250,000 (US$36,643) were guaranteed by a third party as of December 31, 2007 and 2008
respectively. Long-term bank loans carried annual average interest rate of 6.6% in 2007 and
6.5% in 2008.The outstanding balances of long-term bank
loans as of December 31, 2008 were repayable
as follows:
 Rmb
    
    
    US$2009
    
    
    438,000
    
    
    
    64,1992010
    
    
    605,000
    
    
    
    88,6772011
    
    
    69,700
    
    
    
    10,2162012
    
    
    40,300
    
    
    
    5,9072013
    
    
    20,000
    
    
    
    2,9321,173,000
    
    
    
    171,931
  F - 19




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 6.
    
    BANK LOANS  continued
 As of December 31, 2007 and 2008, short-term bank loans are repayable on demand or within
twelve months from the balance sheet dates.
 As of December 31, 2007 and 2008, Rmb650,000 and Rmb604,000 (US$88,531) of the short-term
bank loans were guaranteed by third parties. Also, short-term bank loans of Rmb26,000 and
Rmb92,000 (US$13,485) were secured by land use right, building and plant and machinery of
the Group as of December 31, 2007 and 2008 respectively. The short-term bank loans carried
annual average interest rate of 6.2% in 2007 and 6.7% in 2008.
 As of December 31, 2007 and 2008, Rmb1,553,098 and Rmb857,000 (US$125,614) of the bank loans
of the Company were guaranteed by Hangzhou Sunrise.
 7.
    
    DEBENTURE PAYABLE
 On 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 had fully repaid the debenture loan on January
29, 2008.
 8.
    
    INCOME TAXES
  2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$PRC Enterprise Income Tax (EIT)
Current
    
    
    36,020
    
    
    
    99,376
    
    
    
    47,680
    
    
    
    6,989Deferred taxation expenses (benefit)- Current
    
    
    (19,683
    )
    
    
    (19,510
    )
    
    
    (22,279
    )
    
    
    (3,266
    )- Change in tax rate
    
    
    
    
    
    
    (41,665
    )
    
    
    52,007
    
    
    
    7,62316,337
    
    
    
    38,201
    
    
    
    77,408
    
    
    
    11,346
 Before the new enterprise income tax (EIT) law in the PRC (the New EIT Law) and its
implementation regulations became effective on January 1, 2008, the Company and its
subsidiaries were subject to the PRC Enterprises Income Tax (EIT) rate 16.5% and 33%
respectively as of December 31, 2006 and 2007.
 On 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.
  F - 20




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 8.
    
    INCOME TAXES  continued
 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.
 Pursuant to preferential tax policies for operating technologically advanced business, the
Company was subject to a reduced EIT of 15% from 2008 to 2010. The impact on the deferred
taxes resulting from change in enacted tax is an adjustment to the net deferred tax assets
of Rmb52,007, representing decrease in net deferred tax assets and an increase in deferred
tax expenses.
 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, 2008, 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 2006 to 2008 may be subject to examination by the PRC tax authorities.
  2006
    
    
    2007
    
    
    2008Tax provision at PRC enterprise income
tax rates
    
    
    33
    %
    
    
    33
    %
    
    
    25
    %Effect of Companys lower income tax rate
    
    
    (12
    %)
    
    
    (15
    %)
    
    
    (10
    %)Effect of change in tax rate
    
    
    
    
    
    
    (9
    %)
    
    
    23
    %Others
    
    
    
    
    
    
    
    
    
    
    (3
    %)Effective tax rate
    
    
    21
    %
    
    
    9
    %
    
    
    35
    %
  F - 21




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 8.
    
    INCOME TAXES  continued
 The tax impact of temporary differences give rise to the following deferred tax
assets and liabilities are as follows:
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Deferred tax assets:Allowance for doubtful receivables
    
    
    15,275
    
    
    
    10,431
    
    
    
    1,529Warranty expenses
    
    
    38,775
    
    
    
    21,750
    
    
    
    3,188Accrued liabilities
    
    
    72,938
    
    
    
    50,317
    
    
    
    7,375Depreciation
    
    
    4,469
    
    
    
    13,241
    
    
    
    1,941Others
    
    
    3,074
    
    
    
    5,787
    
    
    
    848Total deferred tax assets
    
    
    134,531
    
    
    
    101,526
    
    
    
    14,881Deferred tax liability:Depreciation
    
    
    (3,277
    )
    
    
    
    
    
    
    Total deferred tax assets
    
    
    131,254
    
    
    
    101,526
    
    
    
    14,881
  2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$CurrentDeferred tax assets
    
    
    130,062
    
    
    
    87,835
    
    
    
    12,874Non-currentDeferred tax assets
    
    
    4,469
    
    
    
    13,691
    
    
    
    2,007Deferred tax liability
    
    
    (3,277
    )
    
    
    
    
    
    
    Total deferred tax assets
    
    
    131,254
    
    
    
    101,526
    
    
    
    14,881
  F - 22




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 9.
    
    COMMITMENTS AND CONTINGENCIES
 In the year ended December 31, 2008, there was a product liability against the Company which
has been settled subsequent to the year-end. Accordingly, the compensation settlement of
RMB 47,758 has been accrued as of the balance sheet date and included under accrued
liabilities. In respect to the above settlements, insurance claims amounting to Rmb35,914
(US$5,264) was agreed with insurance companies.
 As of December 31, 2007 and 2008, the Group had outstanding capital commitments for
construction of factory premises and purchase of equipment amounting to approximately
Rmb697,276 and Rmb250,072 (US$36,654), respectively.
 The Group leases certain of its warehouses under non-cancelable operating leases. Rental
expense was Rmb25,920, Rmb40,169 and Rmb43,075 (US$6,314) for the years ended December 31,
2006, 2007 and 2008, respectively.
 Future minimum lease payments under non-cancellable operating lease agreements as of
December 31, 2008 is:
 Rmb
    
    
    US$2009
    
    
    10,801
    
    
    
    1,5832010
    
    
    4,273
    
    
    
    626Total minimum lease payments
    
    
    15,074
    
    
    
    2,209
 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:
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Balance at beginning of year
    
    
    61,300
    
    
    
    155,102
    
    
    
    22,734Warranties paid
    
    
    (460,474
    )
    
    
    (524,118
    )
    
    
    (76,822
    )Warranty provision
    
    
    554,276
    
    
    
    514,016
    
    
    
    75,341Balance at end of year
    
    
    155,102
    
    
    
    145,000
    
    
    
    21,253
 In addition, the Group provided guarantees to third parties as of December 31, 2008. These
guarantees are full and unconditional and would require the Group to make scheduled payments
immediately if the third parties failed to do so. As of December 31, 2007 and 2008, the
maximum potential future payments of the bank guarantees to be Rmb650,000 and Rmb203,000
(US$29,754). The Group estimated that the fair value of the obligations assumed under
guarantees as of December 31, 2007 and 2008 to be Rmb4,465 (US$654) and recognized a
liability for such amount in the financial statements.
  F - 23




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 9.
    
    COMMITMENTS AND CONTINGENCIES continued
 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 its
financial condition or results of operations.
 In 2008, the Company became a defendant in an anti-dumping investigation in India. As at the
date of the report, the investigation was completed but no specific charges have been made
against the Company. Pending the imposition of charges, the amount of the loss, if any,
cannot be reasonably estimated.
 10.
    
    DISTRIBUTION OF PROFIT
 (a)
    
    Dividends
   F - 24




---



##### Table of Contents



HANGZHOU ZHONGCE RUBBER CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands unless otherwise stated)
 10.
    
    DISTRIBUTION OF PROFIT continued
 (b)
    
    Profit appropriation
    F - 25




---



##### 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 Companies
 Amounts due from (to) related parties are as follows:
 Note
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Due from related companies:- Current
    
    
    (1
    )
    
    
    27,640
    
    
    
    39,512
    
    
    
    5,791- Non-current
    
    
    (2
    )
    
    
    2,090
    
    
    
    887
    
    
    
    130Due to related companies:- Current
    
    
    (3
    )
    
    
    6,318
    
    
    
    20,724
    
    
    
    3,037
 (1)
    
    The related companies were the subsidiaries owned by shareholders
of the Company. The balances were unsecured, non-interest bearing and repayable
on demand.(2)
    
    The related companies were shareholder of the Company and a joint
venture partner of Hangzhou Sunrise. The balances were unsecured, non-interest
bearing and repayable after one year.(3)
    
    The related companies were a shareholder of the Company and
subsidiaries owned by shareholders the Company. The balances were unsecured,
non-interest bearing and repayable on demand. (b)
    
    Loan from related companies
  (c)
    
    Amount due to a shareholder
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Amount due to a shareholder
    
    
    67
    
    
    
    134
    
    
    
    20
   F - 26




---



##### 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  continued
 (d)
    
    Transaction with Related Companies
        12.
    
    STAFF RETIREMENT PLANS
 All 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, 2006, 2007 and 2008. The expenses reported in the consolidated statements of
operations and comprehensive income related to these arrangements were Rmb64,006, Rmb77,881
and Rmb77,968 (US$11,428) for the years ended December 31, 2006, 2007 and 2008,
respectively.
   F - 27




---



##### 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, 2006, 2007 and 2008
    
    FF-2Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    FF-3Consolidated Statements of Shareholders Equity and Comprehensive
Losses for the years ended December 31, 2006, 2007 and 2008
    
    FF-4Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2007 and 2008
    
    FF-5Notes to Consolidated Financial Statements
    
    FF-7




---



##### Table of Contents



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




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 (Amounts in thousands, except number of shares and per share data)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$General and administrative expenses
    
    
    (16,754
    )
    
    
    (6,208
    )
    
    
    (5,770
    )
    
    
    (846
    )Gain on disposal of subsidiaries (note 4)
    
    
    
    
    
    
    19,325
    
    
    
    
    
    
    
    Non-operating income (expenses):Interest income
    
    
    12,286
    
    
    
    9,536
    
    
    
    4,865
    
    
    
    713Interest expense
    
    
    
    
    
    
    (104
    )
    
    
    (3,834
    )
    
    
    (562
    )Other income
    
    
    551
    
    
    
    
    
    
    
    
    
    
    
    Investment income
    
    
    
    
    
    
    
    
    
    
    1,228
    
    
    
    180Compensation income (note 8)
    
    
    
    
    
    
    
    
    
    
    17,000
    
    
    
    2,492Net realised loss recognized on trading
securities
    
    
    
    
    
    
    (90,891
    )
    
    
    (2,568
    )
    
    
    (376
    )Unrealized loss on trading securities
still held at the balance sheet date
    
    
    
    
    
    
    (12,158
    )
    
    
    (56,673
    )
    
    
    (8,307
    )Change in fair value of conversion option (note 7)
    
    
    (19,459
    )
    
    
    19,248
    
    
    
    (4,244
    )
    
    
    (622
    )Loss on disposal of interest in
an equity method affiliate
    
    
    
    
    
    
    (68,991
    )
    
    
    
    
    
    
    Impairment loss recognized on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    (69,524
    )
    
    
    (10,190
    )Exchange gain
    
    
    
    
    
    
    
    
    
    
    3,105
    
    
    
    455Loss before income tax and equity in earnings
at equity method affiliates
    
    
    (23,376
    )
    
    
    (130,243
    )
    
    
    (116,415
    )
    
    
    (17,063
    )Income tax expense (note 10)
    
    
    (1,164
    )
    
    
    (19,324
    )
    
    
    9,529
    
    
    
    1,397Equity in earnings of equity method affiliates
    
    
    3,314
    
    
    
    121,389
    
    
    
    35,445
    
    
    
    5,195Net loss
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (71,441
    )
    
    
    (10,471
    )Basic loss per common share
    
    
    (2.35
    )
    
    
    (3.12
    )
    
    
    (7.92
    )
    
    
    (1.16
    )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




---



##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands, except number of shares and their par values)
 As of December 31,2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    521
    
    
    
    120
    
    
    
    17Notes receivable (note 5)
    
    
    20,153
    
    
    
    20,523
    
    
    
    3,008Prepaid expenses and other current assets
    
    
    3,834
    
    
    
    169
    
    
    
    25Due from related parties (note 15)
    
    
    67,436
    
    
    
    54,039
    
    
    
    7,921Trading securities
    
    
    12,393
    
    
    
    51,078
    
    
    
    7,487Total current assets
    
    
    104,337
    
    
    
    125,929
    
    
    
    18,458Investments in and advances to equity
method affiliates
(less allowance of Rmb7,601 in 2007
and 2008) (note 6)
    
    
    357,905
    
    
    
    393,350
    
    
    
    57,655Convertible note receivable (note 7)
    
    
    54,828
    
    
    
    49,668
    
    
    
    7,280Deposit paid for acquisition of available-for-sale
investment (note 9)
    
    
    
    
    
    
    75,000
    
    
    
    10,993Deposit paid for acquisition of properties (note 8)
    
    
    58,000
    
    
    
    
    
    
    
    Available-for-sale securities
    
    
    
    
    
    
    33,992
    
    
    
    4,982Other assets
    
    
    6
    
    
    
    6
    
    
    
    1Total assets
    
    
    575,076
    
    
    
    677,945
    
    
    
    99,369LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Due to related parties (note 15)
    
    
    4,006
    
    
    
    124,895
    
    
    
    18,307Amounts due to securities brokers
    
    
    
    
    
    
    41,239
    
    
    
    6,045Other payable
    
    
    90
    
    
    
    16,763
    
    
    
    2,457Accrued liabilities
    
    
    5,331
    
    
    
    5,663
    
    
    
    830Other taxes payable
    
    
    2,753
    
    
    
    2,753
    
    
    
    403Income taxes payable (note 10)
    
    
    5,247
    
    
    
    24,282
    
    
    
    3,559Total current liabilities
    
    
    17,427
    
    
    
    215,595
    
    
    
    31,601Deferred tax liability (note 10)
    
    
    19,324
    
    
    
    3,545
    
    
    
    519Total liabilities
    
    
    36,751
    
    
    
    219,140
    
    
    
    32,120Commitments and contingencies (note 13)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, 2007 and
December 31, 2008) (note 11)
    
    
    770
    
    
    
    770
    
    
    
    113Additional paid-in capital
    
    
    1,000,958
    
    
    
    1,000,958
    
    
    
    146,714Accumulated other comprehensive losses
    
    
    (7,288
    )
    
    
    (15,367
    )
    
    
    (2,252
    )Accumulated deficit
    
    
    (456,115
    )
    
    
    (527,556
    )
    
    
    (77,326
    )Total shareholders equity
    
    
    538,325
    
    
    
    458,805
    
    
    
    67,249Total liabilities and shareholders equity
    
    
    575,076
    
    
    
    677,945
    
    
    
    99,369
   FF - 3




---



##### Table of Contents



CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE LOSSES
 (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
    
    
    lossesRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at January 1, 2006
    
    
    3,000,000
    
    
    
    6,017,310
    
    
    
    244
    
    
    
    526
    
    
    
    1,065,319
    
    
    
    3,220
    
    
    
    (406,711
    )
    
    
    662,598Net 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
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,441
    )
    
    
    (71,441
    )
    
    
    (71,441
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,079
    )
    
    
    
    
    
    
    (8,079
    )
    
    
    (8,079
    )Unrealized loss on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,524
    )
    
    
    
    
    
    
    (69,524
    )
    
    
    (69,524
    )Impairment loss on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,524
    
    
    
    
    
    
    
    69,524
    
    
    
    69,524Balance at December 31, 2008
    
    
    
    
    
    
    9,017,310
    
    
    
    
    
    
    
    770
    
    
    
    1,000,958
    
    
    
    (15,367
    )
    
    
    (527,556
    )
    
    
    458,805
    
    
    
    (79,520
    )Balance at December 31, 2008 (in US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    146,714
    
    
    
    (2,252
    )
    
    
    (77,326
    )
    
    
    67,249
    
    
    
    (11,656
    )
   FF - 4




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash flows from operating activities:Net loss
    
    
    (21,226
    )
    
    
    (28,178
    )
    
    
    (71,441
    )
    
    
    (10,471
    )Adjustments to reconcile net loss to
net cash used in operating activities:Change in fair value of conversion option
    
    
    19,459
    
    
    
    (19,248
    )
    
    
    4,244
    
    
    
    622Impairment loss on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    69,524
    
    
    
    10,190Equity in earnings of equity method affiliates
    
    
    (3,314
    )
    
    
    (121,389
    )
    
    
    (35,445
    )
    
    
    (5,195
    )Dividend received from associate
    
    
    1,868
    
    
    
    1,766
    
    
    
    
    
    
    
    Compensation income from disclaiming rights
in deposit paid for acquisition of properties
    
    
    
    
    
    
    
    
    
    
    (17,000
    )
    
    
    (2,492
    )Loss on disposal of interest in
an equity method affiliate
    
    
    
    
    
    
    68,991
    
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    
    
    
    
    (19,325
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    62
    
    
    
    57
    
    
    
    
    
    
    
    Amortization of discount on subscription of
convertible note receivable
    
    
    (8,894
    )
    
    
    (9,358
    )
    
    
    (3,180
    )
    
    
    (466
    )Interest income from convertible note
    
    
    
    
    
    
    5,908
    
    
    
    1,124
    
    
    
    165Interest income from notes receivable and
related party receivable
    
    
    
    
    
    
    
    
    
    
    (1,684
    )
    
    
    (247
    )Write-off of other current assets
    
    
    
    
    
    
    
    
    
    
    467
    
    
    
    68Deferred tax
    
    
    
    
    
    
    19,324
    
    
    
    (15,779
    )
    
    
    (2,313
    )Changes in operating assets and liabilities:Other receivables
    
    
    3,832
    
    
    
    
    
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    49
    
    
    
    (3,072
    )
    
    
    47
    
    
    
    7Accounts and other payables
    
    
    (3,041
    )
    
    
    
    
    
    
    
    
    
    
    Accrued liabilities
    
    
    1,886
    
    
    
    2,010
    
    
    
    2,086
    
    
    
    306Income taxes payable
    
    
    1,164
    
    
    
    
    
    
    
    
    
    
    
    Net cash used in operating activities
    
    
    (8,155
    )
    
    
    (102,514
    )
    
    
    (67,037
    )
    
    
    (9,826
    )Cash flows from investing activities:Decrease in notes receivable
    
    
    4,164
    
    
    
    
    
    
    
    Purchase of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    (53,232
    )
    
    
    (7,802
    )Investments in and advances to equity method
affiliates, net
    
    
    (2,227
    )
    
    
    (10,137
    )
    
    
    
    
    
    
    Proceeds from disposals of interest in an equity
method affiliate
    
    
    
    
    
    
    137,603
    
    
    
    
    
    
    
    Disposal of subsidiaries
    
    
    
    
    
    
    (12,431
    )
    
    
    
    
    
    
    Decrease (increase) in due from related parties
    
    
    491
    
    
    
    (135,021
    )
    
    
    20,456
    
    
    
    2,998Decrease in trading securities
    
    
    
    
    
    
    229,144
    
    
    
    28,349
    
    
    
    4,155Net cash provided by (used in) investing activities
    
    
    2,428
    
    
    
    209,158
    
    
    
    (4,427
    )
    
    
    (649
    )
  FF - 5




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS  continued
 (Amounts in thousands)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash flows provided by (used in) financing activities:Change in due to related parties
    
    
    (1,821
    )
    
    
    (112,778
    )
    
    
    71,061
    
    
    
    10,416Effect of exchange rate change
    
    
    
    
    
    
    (465
    )
    
    
    2
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (7,548
    )
    
    
    (6,599
    )
    
    
    (401
    )
    
    
    (59
    )Cash and cash equivalents, beginning of year
    
    
    14,668
    
    
    
    7,120
    
    
    
    521
    
    
    
    76Cash and cash equivalents, end of year
    
    
    7,120
    
    
    
    521
    
    
    
    120
    
    
    
    17Supplemental schedule of cash flow information:Interest paid
    
    
    
    
    
    
    (104
    )
    
    
    (3,834
    )
    
    
    (562
    )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 7)
    
    
    
    
    
    
    157,974
    
    
    
    
    
    
    
    Conversion of convertible note receivable,
and the related transfer from derivative
instruments, to trading securities
(see note 7)
    
    
    
    
    
    
    82,417
    
    
    
    
    
    
    
    Transfer of retained interest in an equity
method affiliate to trading securities
upon its disposal
    
    
    
    
    
    
    159,155
    
    
    
    
    
    
    
    Assignment of receivable through current
accounts of related parties and note receivable
    
    
    
    
    
    
    20,153
    
    
    
    15,846
    
    
    
    2,323Subscription 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
    
    
    
    
    
    
    
    
    
    
    
    Compensation income received and deposit
paid on behalf by a former subsidiary
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    10,993Payables for acquisition of a subsidiary
    
    
    
    
    
    
    
    
    
    
    34,417
    
    
    
    5,045
   FF - 6




---



##### 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 ACTIVITIES
 China 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), Wealth Faith Limited (Wealth
Faith, incorporated in the BVI), Cosmos Regent Limited (Cosmos
Regent, incorporated in the BVI), Cyber Generation Limited (Cyber
Generation, incorporated in the BVI) and Whole Good Limited (Whole
Good, incorporated in the BVI). The Company and all of its
subsidiaries are collectively referred to as the Group.As of December 31, 2007 and 2008, 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.
  FF - 7




---



##### 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)
    
    ReclassificationsWe have reclassified Rmb229,144 (US$33,587) of cash provided by operating activities
to cash provided by investing activities related to trading securities for fiscal
2007 in our Consolidated Statements of Cash Flows. This reclassification had no
effect on the net decrease in cash and equivalents or on net earnings, as previously
reported.(d)
    
    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.(e)
    
    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.
  FF - 8




---



##### 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)
    
    Trading SecuritiesTrading securities refer to 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
Companys investments in trading securities is based on the quoted market price on
the last business day of the fiscal year.(g)
    
    Available-for-sale SecuritiesAvailable-for-sale securities consist of quoted equity securities that are not
designated as trading securities. It is held at fair value with unrealized gains and
losses reported in accumulated other comprehensive loss. Any unrealized losses that
are deemed other-than-temporary are included in current period earnings and removed
from accumulated other comprehensive loss.Realized gains and losses on investment securities are included in current period
earnings. For purposes of computing realized gains and losses, the cost basis of each
investment sold is generally based on the average cost method.The Company regularly evaluates each available-for-sale securities whether the
decline in fair value is other-than-temporary and objective evidence of impairment
could include:
 
    
    The severity and duration of the fair value decline;
    
    Deterioration in the financial condition of the issuer; and
    
    Evaluation of the factors that could cause individual
securities to have an other-than-temporary impairment.
 During the year ended December 31, 2008, Rmb69,524 (US$10,190) of losses previously
classified in other comprehensive losses were reclassified into earnings to recognize
an other-than-temporary decline in fair value.
  FF - 9




---



##### 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)
    
    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.(i)
    
    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 losses.
  FF - 10




---



##### 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
 (i)
    
    Foreign Currencies  continuedThe translation of Renminbi amounts into US$ amounts as of and for the year December
31, 2008 are included solely for the convenience of readers in the United States of
America and have been made at US$1.00 = Rmb6.8225, the noon buying rate from the
Federal Reserve Bank of New York on December 31, 2008. 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.(j)
    
    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 2006, 2007 and 2008. No diluted loss per share
was presented for 2006, 2007 and 2008, as the conversion of the outstanding
convertible notes issued by Wing On Travel (Holdings) Limited (a company incorporated
in Bermuda, hereafter together with its subsidiaries collectively referred as Wing
On) is antidilutive.(k)
    
    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, impairment of
available-for-sale securities, valuation of derivative instruments and valuation
allowances for deferred tax assets.(l)
    
    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.
  FF - 11




---



##### 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)
    
    Comprehensive LossesComprehensive losses represents changes in equity resulting from transactions and
other events and circumstances from nonowner sources. Comprehensive losses consist of
net loss and the foreign exchange differences arising from translation to reporting
currency.(n)
    
    Recently Issued Accounting PronouncementsIn December 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141 (Revised 2007), Business Combination (SFAS No. 141R). SFAS No.
141R is relevant to all transactions or events in which one entity obtains control
over one or more other businesses. SFAS No. 141R requires an acquirer to recognize
any assets and non controlling interest acquired and liabilities assumed to be
measured at fair value as of the acquisition date. Liabilities related to contingent
consideration are recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of the consideration may be resolved
beyond a reasonable doubt. This revised approach replaces SFAS No. 141s cost
allocation process in which the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their respective fair
value. SFAS No. 141R requires any acquisition-related costs and restructuring costs
to be expensed as incurred as opposed to allocating such costs to the assets acquired
and liabilities assumed as previously required by SFAS No. 141. Under SFAS No. 141R,
an acquirer recognizes liabilities for a restructuring plan in purchase accounting
only if the requirements of SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, are met. SFAS No. 141R allows for the recognition of
pre-acquisition contingencies at fair value only if these contingencies are likely to
materialize. If this criterion is not met at the acquisition date, then the acquirer
accounts for the non-contractual contingency in accordance with recognition criteria
set forth under SFAS No. 5, Accounting for Contingencies, in which case no amount
should be recognized in purchase accounting. SFAS No. 141R is effective as of the
beginning of an entitys first fiscal year that begins after December 15, 2008. The
Company is evaluating the impact, if any, of the adoption of SFAS No. 141R. It is not
expected to have a material impact on the Companys financial position, results of
operations and cash flows.
  FF - 12




---



##### 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
 (n)
    
    Recently Issued Accounting Pronouncements  continuedIn December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  An Amendment of ARB No. 51 (SFAS No. 160).
This Statement amends ARB No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity and should be reported as equity on the
financial statements. SFAS No. 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the non
controlling interest. Furthermore, disclosure of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest is required on
the face of the financial statements. SFAS No. 160 is effective as of the beginning
of an entitys first fiscal year that begins after December 15, 2008. The Company is
evaluating the impact, if any, of the adoption of SFAS No. 160. It is not expected to
have a material impact on the Companys financial position, results of operations and
cash flows.In February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP SFAS No. 157-2), which defers the
effective date of SFAS No. 157, Fair Value Measurements for all non-recurring fair
value measurements of non-financial assets and nonfinancial liabilities until fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years. The Group is currently evaluating the impact of adoption of FSP SFAS No.
157-2, for non-recurring fair value measurements of non-financial assets and
liabilities.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 and hedging activities. This
statement is effective for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. Adoption of SFAS No. 161 will result in
enhanced disclosure regarding the Companys derivatives. The Company is evaluating
the impact, if any, of the adoption of SFAS No. 161.In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful
Life of Intangible Assets (FSP SFAS No. 142-3). This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and
Other Intangible Assets. This FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The guidance for
determining the useful life of a recognized intangible asset in this FSP shall be
applied prospectively to intangible assets acquired after the effective date. The
Company is evaluating the impact, if any, of the adoption of FSP SFAS No. 142-3. It
is not expected to have a material impact on the Companys financial position,
results of operations and cash flows.
  FF - 13




---



##### 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
 (n)
    
    Recently Issued Accounting Pronouncements  continuedIn October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP SFAS No. 157-3).
FSP SFAS No. 157-3 clarifies the application of SFAS No. 157 in a market that is not
active and provides guidance on the key considerations in determining the fair value
of a financial instrument when the market for these instruments is not active. The
clarifying guidance provided in FSP SFAS No. 157-3 did not result in a change to
Groups financial position, results of operations and cash flows.At the November 24, 2008 meeting, the FASB ratified the consensus reached by the Task
Force in Issue 08-6: Equity Method Investment Accounting Considerations (EITF
08-6). Because of the significant changes to the guidance on subsidiary
acquisitions and subsidiary equity transactions and the increased use of fair value
measurements as a result of Statements 141(R) and 160, questions have arisen
regarding the application of that accounting guidance to equity method investments.
EITF 08-6 provides guidance for entities that acquire or hold investments accounted
for under the equity method. This issue is effective for transactions occurring in
fiscal years and interim periods beginning on or after December 15, 2008. Early
adoption is not permitted. The Group does not expect the adoption of EITF 08-6 to
have a material impact on the Groups consolidated financial statements.In November 2008, the FASB ratifies the consensus reached by the Task Force in EITF
Issue 08-7, Accounting for Defensive Intangible Assets (EITF 08-7). EITF 08-7
requires entities that will acquire a defensive intangible asset after the effective
date of SFAS 141R, to account for the acquired intangible asset as a separate unit of
accounting and amortize the acquired intangible asset over the period during which
the asset would diminish in value. EITF 08-7 is effective for defensive intangible
assets acquired in fiscal years beginning on or after December 15, 2008. The Company
is evaluating the impact, if any, of the adoption of EITF 08-7. It is not expected to
have a material impact on the Companys financial position, results of operations and
cash flows.In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). SFAS
No. 165 sets forth the period after the balance sheet date during which management of
a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances
under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date.
SFAS No. 165 will be effective for interim or annual period ending after June 15,
2009 and will be applied prospectively. The Company is evaluating the impact, if any,
of the adoption of SFAS No. 165. It is not expected to have a material impact on the
Companys financial position, results of operations and cash flows.
  FF - 14




---



##### 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
 (n)
    
    Recently Issued Accounting Pronouncements  continuedIn June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R) (SFAS No. 167). SFAS No. 167 eliminates Interpretation No. 46(R)s
exceptions to consolidating qualifying special-purpose entities, contains new
criteria for determining the primary beneficiary, and increases the frequency of
required reassessments to determine whether a company is the primary beneficiary of a
variable interest entity. SFAS No. 167 also contains a new requirement that any term,
transaction, or arrangement that does not have a substantive effect on an entitys
status as a variable interest entity, a companys power over a variable interest
entity, or a companys obligation to absorb losses or its right to receive benefits
of an entity must be disregarded in applying Interpretation No. 46(R)s provisions.
SFAS No. 167 will be effective for annual reporting period that begins after November
15, 2009. The Company is evaluating the impact, if any, of the adoption of SFAS No.
167. It is not expected to have a material impact on the Companys financial
position, results of operations and cash flows.In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162 (SFAS No.168). SFAS No.168
will become the source of authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under authority
of federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of this Statement, the Codification will supersede
all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification will
become non-authoritative. This Statement is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. It is not expected to
have a material impact on the Companys financial position, results of operations and
cash flows.
  FF - 15




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 3.
    
    ACQUISITION
 In April 2008, China Enterprises Limited acquired 100% equity interest in Cosmos Regent
Limited, Cyber Generation Limited and Whole Good Limited, companies engaged in securities
investment, from HHL group. Pursuant to the terms of the acquisition agreements, total
consideration was Rmb34,417 (US$5,045), and the amount was settled through current account
with HHL. The primary assets acquired were the securities held and the acquisition has
been accounted for an acquisition of assets.The following summarizes the estimated fair value of assets acquired and liabilities
assumed on the date of acquisition:
 Rmb
    
    
    US$Assets acquired:Accounts and other receivable
    
    
    63
    
    
    
    9Amount due from related parties
    
    
    23,518
    
    
    
    3,447Available-for-sale securities
    
    
    51,102
    
    
    
    7,490Trading securities
    
    
    68,645
    
    
    
    10,062Total
    
    
    143,328
    
    
    
    21,008Liabilities assumed:Amount due to related parties
    
    
    32,498
    
    
    
    4,763Accounts and other payable
    
    
    57,042
    
    
    
    8,361Tax payable
    
    
    19,371
    
    
    
    2,839Total
    
    
    108,911
    
    
    
    15,963Net assets acquired
    
    
    34,417
    
    
    
    5,045
  FF - 16




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 4.
    
    GAIN ON DISPOSAL OF SUBSIDIARIES
 In 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:
 Rmb
    
    
    US$Net liabilities disposed of:Plant and equipment, net
    
    
    186
    
    
    
    27Due from a related party
    
    
    47,763
    
    
    
    7,000Cash and cash equivalents
    
    
    12,431
    
    
    
    1,822Due to related parties
    
    
    (79,229
    )
    
    
    (11,613
    )Accrued liabilities
    
    
    (2
    )
    
    
    (18,851
    )
    
    
    (2,764
    )Gain on disposal
    
    
    19,325
    
    
    
    2,833Total consideration
    
    
    474
    
    
    
    69Satisfied by:Consideration receivable
    
    
    474
    
    
    
    69Cash and cash equivalents disposed of
    
    
    (12,431
    )
    
    
    (1,822
    )
 5.
    
    NOTES RECEIVABLE
 The notes, carrying interest at commercial rates, was unsecured and receivable from an
unrelated party.
 6.
    
    INVESTMENTS IN AND ADVANCES TO EQUITY METHOD AFFILIATES
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Investments in equity method affiliates
    
    
    357,771
    
    
    
    393,216
    
    
    
    57,635Advances to equity method affiliates
    
    
    7,735
    
    
    
    7,735
    
    
    
    1,134Total
    
    
    365,506
    
    
    
    400,951
    
    
    
    58,769Less: Allowance for advances to equity
method affiliate
    
    
    (7,601
    )
    
    
    (7,601
    )
    
    
    (1,114
    )357,905
    
    
    
    393,350
    
    
    
    57,655
  FF - 17




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 6.
    
    INVESTMENTS IN AND ADVANCES TO EQUITY METHOD AFFILIATES  continuedEquity ownership percentages for these affiliates are presented below:
 Place ofincorporation/Affiliate
    

registration
    
    2007
    
    
    2008X One Holdings Limited (X One)
    
    Hong Kong
    
    
    33.33
    %
    
    
    33.33
    %HZ
    
    PRC
    
    
    26
    %
    
    
    26
    %
 Hangzhou: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.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.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 7 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.
  FF - 18




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 6.
    
    INVESTMENTS IN AND ADVANCES TO EQUITY METHOD AFFILIATES  continuedWing On:  continuedThe Company 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.As of December 31, 2007 and 2008, advance to an affiliate was Rmb7,735 (US$1,134) 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.
 7.
    
    CONVERTIBLE NOTE RECEIVABLE
 On 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. In July 2008, the conversion price was reduced from HK$0.79 per
share to HK$0.339 per share as a result of right issue of Wing On. 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, 2007 and 2008, the
equity ownership percentage on Wing On held by the Company would
increase from 1.23% to 3.88% and 12.83% to 12.32%.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.
  FF - 19




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 7.
    
    CONVERTIBLE NOTE RECEIVABLE  continuedThe 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 of 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 Rmb148,916 (see note 6 and Rmb74,458 in June 2007 and July
2007 respectively, under the terms of the Convertible Notes.In accordance with SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended, the conversion
option element of the Convertible Notes represents an embedded
derivative instrument which must be accounted for separately from
the Convertible Notes and, as such, to be measured at fair value
when initially recorded and at subsequent reporting dates. The debt
element of the Convertible Notes was also measured at fair value
initially and subsequently at amortized cost with effective interest
rate of 6.5%. 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 2006, 2007 and 2008, was loss of Rmb19,459, gain of Rmb19,248
and loss of Rmb4,244 (US$622) which have been recognized in the
consolidated statement of operations for fiscals 2006, 2007 and
2008, respectively.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, 2008 was approximately Rmb46,939 (US$6,880).
The assumptions adopted for the valuation of the Convertible note receivable as of December
31, 2008 under the Black-Scholes model are as follows:
      FF - 20




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 7.
    
    CONVERTIBLE NOTE RECEIVABLE  continuedConvertible note receivable consists of:
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Debt element
    
    
    50,271
    
    
    
    49,553
    
    
    
    7,263Embedded derivative instrument
    
    
    4,557
    
    
    
    115
    
    
    
    1754,828
    
    
    
    49,668
    
    
    
    7,280
 8.
    
    DEPOSIT PAID FOR ACQUISITION OF PROPERTIES
 On 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,
was 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 was 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
was subject to certain conditions precedent.
  FF - 21




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 8.
    
    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.
  FF - 22




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 8.
    
    DEPOSIT PAID FOR ACQUISITION OF PROPERTIES  continuedAs 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.On 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.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 Rmb75,000 which was received
by Rosedale, in April 2008 and a gain of Rmb17,000 had been recognized in the consolidated
statement of operations.
 9.
    
    DEPOSIT PAID FOR ACQUISITION OF AVAILABLE-FOR-SALE INVESTMENT
 On April 15, 2008, Wealth Faith, a subsidiary, entered into a Memorandum of Understanding
(MOU) with a third party for the acquisition of equity ownership interest in Always Rich
Resources Inc. (Always Rich), a unrelated investment holding company. Always Rich
indirectly holds a property under developing and parcel of land situated in Guangzhou, the
PRC.The total consideration for the acquisition of certain interest in Always Rich was
Rmb150,000. A deposit of Rmb75,000 was paid to the third party vendor on April 24, 2008 and
recorded as deposit paid for acquisition of available-for-sale investment as of December 31,
2008. As of the date of this report, no formal agreement has been entered into between
Wealth Faith and the third party.
  FF - 23




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 10.
    
    INCOME TAXES
 The components of profit (loss) from continuing operations before income taxes and equity in
earnings of equity method affiliates are as follows:
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$The PRC
    
    
    4,196
    
    
    
    (24,297
    )
    
    
    15,890
    
    
    
    2,329All other jurisdictions
    
    
    (27,572
    )
    
    
    (105,946
    )
    
    
    (132,305
    )
    
    
    (19,392
    )(23,376
    )
    
    
    (130,243
    )
    
    
    (116,415
    )
    
    
    (17,063
    )
 Income taxes expense consists of:
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Current
    
    
    1,164
    
    
    
    
    
    
    
    6,250
    
    
    
    916Deferred
    
    
    
    
    
    
    19,324
    
    
    
    (15,779
    )
    
    
    (2,313
    )1,164
    
    
    
    19,324
    
    
    
    (9,529
    )
    
    
    (1,397
    )
 Bermuda
 The 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.
  FF - 24




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 10.
    
    INCOME TAXES  continuedHong 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 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% to be applied prospectively. The proposal was
formally enacted on June 26, 2008.The 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.PRCThe Groups PRC entities and subsidiaries are subject to income taxes calculated at tax
rates (ranging from 16.5% to 33% up to December 31, 2007 and 15% to 25% beginning from
January 1, 2008) on the taxable income.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 and Rmb3,545 (US$519) as of December 31, 2007 and 2008
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 arouse prior to January 1, 2008 would
not attract withholding tax. Consequently, deferred tax liability of Rmb19,324 (US$2,832)
has been written back for the year ended 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, 2008, there is no interest and penalties related to uncertain tax positions.
The tax positions for the years 2001 to 2008 may be subject to examination by the PRC and
Hong Kong tax authorities.
  FF - 25




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 10.
    
    INCOME TAXES  continuedThe tax impact of temporary differences gives rise to the following deferred tax
assets/liability:
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Current deferred tax asset:Tax losses
    
    
    
    
    
    
    7,567
    
    
    
    1,109Valuation allowances
    
    
    
    
    
    
    (7,567
    )
    
    
    (1,109
    )
    
    
    
    
    
    
    
    Non-current deferred tax liability:Withholding income tax on dividend
    
    
    (19,324
    )
    
    
    (3,545
    )
    
    
    (519
    )
 Movement in valuation allowance:
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$At the beginning of the year
    
    
    
    
    
    
    
    
    
    
    Current year addition
    
    
    
    
    
    
    7,567
    
    
    
    1,109At the end of the year
    
    
    
    
    
    
    7,567
    
    
    
    1,109
 The Group has total tax operating loss carry forwards of RmbNil and Rmb45,858 (US$6,722) as
of December 31, 2007 and 2008, respectively. The valuation allowance refers to the estimated
portion of the deferred tax assets that are not more likely than not to be realized.The 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 31,2006
    
    
    2007
    
    
    2008Profit tax rate in Hong Kong
    
    
    17.5
    %
    
    
    17.5
    %
    
    
    16.5
    %Permanent differences relating to
non-taxable income and non-deductible
expenses
    
    
    4.6
    %
    
    
    4.2
    %
    
    
    2.1
    %Effect on withholding income tax on dividend
    
    
    
    
    
    
    (218.3
    %)
    
    
    19.5
    %Change in valuation allowance
    
    
    (6.5
    %)
    
    
    
    
    
    
    (23.5
    %)Tax rate difference between tax
jurisdictions
    
    
    (21.4
    %)
    
    
    (21.7
    %)
    
    
    (2.8
    %)Effective tax rate
    
    
    (5.8
    %)
    
    
    (218.3
    %)
    
    
    11.8
    %
  FF - 26




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 11.
    
    CAPITAL STOCK
 Share 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, 2007 and 2008.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.
 12.
    
    FAIR VALUE MEASUREMENTS
 Effective from January 1, 2008, the Company adopted the SFAS 157, Fair Value Measurements
for all financial assets and liabilities and nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the consolidated financial statements on a
recurring basis (at least annually). SFAS No. 157 defines fair value as the price that would
be received to sell the asset or paid to transfer a liability (i.e. the exit price) in an
orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it
would transact and also considers assumptions that market participants would use when
pricing the asset or liability.
  FF - 27




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 12.
    
    FAIR VALUE MEASUREMENTS  continuedFair Value HierarchySFAS 157 establishes a fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. A
financial instruments categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. SFAS 157
establishes three levels of inputs that may be used to measure fair value:Level 1 applies to assets or liabilities for which there are quoted prices in active markets
for identical assets or liabilities.Level 2 applies to assets or liabilities for which there are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability such as quoted prices
for similar assets or liabilities in active markets; quoted prices for identical assets or
liabilities in markets with insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which significant inputs are observable or can be
derived principally from, or corroborated by, observable market data.Level 3 applies to assets or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of the fair value of the
assets or liabilities.The following table summarizes the Companys financial assets and liabilities measured at
fair value on a recurring basis as of December 31, 2008:
 Quoted prices
    
    
    SignificantIn Active
    
    
    Other
    
    
    Significant
    
    
    BalanceMarket for
    
    
    Observable
    
    
    Unobservable
    
    
    as ofIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    December 31,(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2008Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Current Asset:Trading securities
    
    
    51,078
    
    
    
    
    
    
    
    
    
    
    
    51,078
    
    
    
    7,487Available-for-sale securities
    
    
    33,992
    
    
    
    
    
    
    
    
    
    
    
    33,992
    
    
    
    4,982Derivatives instruments
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    115
    
    
    
    17Total
    
    
    85,070
    
    
    
    115
    
    
    
    
    
    
    
    85,185
    
    
    
    12,486
  FF - 28




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 12.
    
    FAIR VALUE MEASUREMENTS  continuedIn addition, the Company has entered into a subscription agreement with Wing On in
relation to the subscription of the Convertible Notes (see note 7). The fair value of
conversion options were estimated using the Black-Scholes option pricing model and recorded
as derivative instruments in the consolidated balance sheets. Since significant observable
inputs such as risk free rates, volatility and dividend yield are used in valuation model
and considered a level 2 item in the fair value hierarchy.
 13.
    
    COMMITMENTS AND CONTINGENCIES
 As of December 31, 2007, the Company had outstanding capital commitments for acquisition of
properties amounting to approximately Rmb402,000. As of December 31, 2008, the Company has
outstanding capital commitments for acquisition of equity interest amounting to
approximately Rmb75,000 (US$10,993).
 14.
    
    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, 2007 and 2008, the Companys
affiliates in the PRC had accumulated profits on a consolidated basis of Rmb743,213
and Rmb861,870 (US$126,328), respectively, as reported in their statutory financial
statements.The Company did not propose or pay any dividends on the outstanding Common Stock for
the years ended December 31, 2006, 2007 and 2008.
  FF - 29




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 14.
    
    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 Company as of December 31, 2006, 2007 and
2008 was non-distributable reserves attributable of Rmb1,288, Rmb1,288 and Rmb1,288
(US$189), respectively.
 15.
    
    RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS
 Parties 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.
  FF - 30




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 15.
    
    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
 2007
    
    
    2008
    
    
    2008Rmb
    
    
    Rmb
    
    
    US$Due from:CSH and its subsidiaries
    
    
    732
    
    
    
    118
    
    
    
    17GDI and its subsidiaries (GDI Group)
    
    
    2,294
    
    
    
    2,162
    
    
    
    317HHL and its subsidiaries (except GDI Group)
    
    
    26,823
    
    
    
    31,747
    
    
    
    4,654Wing On and its subsidiaries
    
    
    37,587
    
    
    
    20,012
    
    
    
    2,93367,436
    
    
    
    54,039
    
    
    
    7,921Due to:CSH and its subsidiaries
    
    
    
    
    
    
    658
    
    
    
    96GDI and its subsidiaries
    
    
    2,849
    
    
    
    2,780
    
    
    
    408HHL and its
subsidiaries (except GDI Group)
(HHL Group)
    
    
    
    
    
    
    118,170
    
    
    
    17,321ITC and its
subsidiaries
(except HHL Group and GDI Group)
    
    
    1,157
    
    
    
    1,660
    
    
    
    243Wing On and its subsidiaries (note 6)
    
    
    
    
    
    
    1,627
    
    
    
    2394,006
    
    
    
    124,895
    
    
    
    18,307
 As of December 31, 2007 and 2008, the amounts due from/to related parties were
unsecured, non-interest bearing and had no fixed repayment terms except for Rmb12,941
and RmbNil due from a fellow subsidiary as of December 31, 2007 and 2008 carries
interest at Hong Kong Prime rate plus 1%. Interest income from the fellow subsidiary
for the year ended December 31, 2008 was Rmb190 (US$28) while it was not significant
for the year ended December 31, 2007.
  FF - 31




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 15.
    
    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 Rmb120 (US$15). In
addition, the Company has agreed to reimburse the former ultimate parent company for
administrative services of approximately, 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, 2006, 2007 and 2008 were Rmb120, RmbNil
and RmbNil, respectively.
 16.
    
    STAFF RETIREMENT PLANS
 All 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, 2006, 2007 and 2008. The expense
reported in the consolidated statements of operations related to these arrangements was
Rmb24, Rmb20 and Rmb20 (US$3) for the years ended December 31, 2006, 2007 and 2008,
respectively.
 17.
    
    PLEDGE OF ASSETS
 As of December 31, 2007 and 2008, trading and available-for-sale securities amounting to
Rmb12,393 and Rmb82,187 (US$12,046) are collateralized to secure the securities trading
margin facilities of the Company.
 18.
    
    SUBSEQUENT EVENTS
 In addition to those disclosed elsewhere in the consolidated financial statements, the Group
had the following subsequent events:
 (a)
    
    In April 2009, X One was dissolved by striking off pursuant to Section 291 of the Hong Kong
Companies Ordinance.
  FF - 32




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued
 (Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
 (b)
    
    In July 2009, Wing On made a repurchase offer to all Convertible Notes holders to repurchase
the Convertible Notes at their full value by issuing its share at HK$0.035 per share (the
Repurchase Offer I). Wing On has to fulfill several conditions before the completion of
the offer as stated in the Repurchase Offer I agreement. As of November 11, 2009, the Board
of Directors of Wing On determined Wing On could not fulfil certain of the conditions and
the Repurchase Offer I lapsed automatically.(c)
    
    In December 2009, Wing On made another repurchase offer to all Convertible Notes holders to
repurchase the Convertible Notes at a price equal to 80% of the outstanding principal amount
of the Convertible Notes (the Repurchase Offer II). The Repurchase Offer II is
conditional upon fulfilment of several conditions. The Group accepted the Repurchase Offer
II in full. On March 2, 2010, the Board of Directors of Wing On
determined Wing On could not fulfil certain of such prerequisite
conditions and accordingly, the Repurchase Offer II lapsed
automatically.
   FF - 33




---



##### 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)4
    (a)3
    
    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)4
    (a)4
    
    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 year ended December 31, 2006)8
    
    
    Subsidiaries of the Company12
    (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
  32




---



##### Table of Contents



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




---



##### Table of Contents



EXHIBITS 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)4
    (a)3
    
    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)4
    (a)4
    
    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 year ended December 31, 2006)8
    
    
    Subsidiaries of the Company12
    (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