##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 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 transaction period from  to
 COMMISSION FILE NUMBER
 CHINA GRENTECH CORPORATION LIMITED
 
 Cayman Islands
 
 16th Floor, Zhongyin Tower
Caitian North Road, Futian District
Shenzhen 518026, Peoples Republic of China
 
  Name of Each ExchangeTitle of Each Class
    
    On Which RegisteredAmerican depositary shares, each representing25 ordinary shares of par value US$0.00002 per share
    
    The Nasdaq National MarketOrdinary shares of par value US$0.00002 per share
    
    The Nasdaq National Market *
 
 *
    
    Not for trading, but only in connection with the registration of American depositary
shares.
  None
  None
    o þ
  o þ
    þ o
  o o þ
  o þ
  o þ




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##### 



Table of Contents
 PageFORWARD-LOOKING STATEMENTS
    
    
    1SUPPLEMENTAL INFORMATION
    
    
    2PART I
    
    
    
    
    3ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    3ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3.
    
    KEY INFORMATION
    
    
    3ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    18ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    
    32ITEM
5.
    
    OPERATING AND
FINANCIAL REVIEW AND PROSPECTS
    
    
    33ITEM
6.
    
    DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES
    
    
    51ITEM
7.
    
    MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS
    
    
    57ITEM
8.
    
    FINANCIAL
INFORMATION
    
    
    58ITEM
9.
    
    THE OFFER AND
LISTING
    
    
    59ITEM
10.
    
    ADDITIONAL
INFORMATION
    
    
    59ITEM
11.
    
    QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    61ITEM
12.
    
    DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    61PART
II
    
    
    
    
    61ITEM
13.
    
    DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES
    
    
    61ITEM
14.
    
    MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
    
    
    61ITEM
15.
    
    CONTROLS AND
PROCEDURES
    
    
    61ITEM
16A
    
    AUDIT COMMITTEE
FINANCIAL EXPERT
    
    
    61ITEM
16B
    
    CODE OF ETHICS
    
    
    61ITEM
16C
    
    PRINCIPAL ACCOUNTANT
FEES AND SERVICES
    
    
    62ITEM
16D
    
    EXEMPTIONS FROM THE
LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    62ITEM
16E
    
    PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    62ITEM
17.
    
    FINANCIAL
STATEMENTS
    
    
    62ITEM
18.
    
    FINANCIAL
STATEMENTS
    
    
    62ITEM
19.
    
    EXHIBITS
    
    
    62EX-11.1 Code of EthicsEX-12.1 302 CEO CertificationEX-12.2 302 CFO CertificationEX-13.1 906 Certification by the CEO and the CFO




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FORWARD-LOOKING STATEMENTS
   
    
    the Companys reliance on business relationships with the Chinese
telecommunications operators and base station equipment manufacturers, in particular,
the annual capital spending by China Mobile group and China Unicom group;
    
    risks associated with large accounts receivable, long collection periods and accounts receivable cycles;
    
    fierce competition in the wireless communication industry;
    
    growth of, and risks inherent in, the wireless communication industry in China;
    
    uncertainty as to future profitability and the Companys ability to obtain
adequate financing for its planned capital expenditure requirements;
    
    uncertainty as to its ability to continuously develop and manufacture new
radio frequency, or RF technology and keep up with changes in RF technology;
    
    uncertainty as to the issuance of 3G licenses by the PRC governmental
authorities;
    
    future changes to the regulations and policies governing the
telecommunications industry in China, including possible future industry restructuring;
    
    limitation on the Companys production capacity for RF products;
    
    risks associated with possible defects and errors in its wireless coverage products or RF products;
    
    uncertainty as to the Companys ability to protect and enforce its intellectual property rights; and
    
    uncertainty as to the Companys ability to attract and retain qualified
executives and personnel, particularly in its research and development department.
 
 1




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CONVENTIONS  Definitions
 
 SUPPLEMENTAL INFORMATION
      2




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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 SELECTED FINANCIAL DATA
   Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)(in thousands, except for per share and number of shares data)Consolidated statements of income
informationRevenues
    
    
    315,810
    
    
    
    360,816
    
    
    
    566,504
    
    
    
    716,270
    
    
    
    832,795
    
    
    
    106,712Cost of revenues
    
    
    (127,094
    )
    
    
    (141,053
    )
    
    
    (241,930
    )
    
    
    (328,064
    )
    
    
    (437,040
    )
    
    
    (56,001
    )Gross profit
    
    
    188,716
    
    
    
    219,763
    
    
    
    324,574
    
    
    
    388,206
    
    
    
    395,755
    
    
    
    50,711Operating expenses:Research and development costs
    
    
    (7,573
    )
    
    
    (12,410
    )
    
    
    (16,326
    )
    
    
    (30,616
    )
    
    
    (47,671
    )
    
    
    (6,108
    )Sales and distribution expenses
    
    
    (19,034
    )
    
    
    (27,965
    )
    
    
    (71,035
    )
    
    
    (91,489
    )
    
    
    (112,948
    )
    
    
    (14,473
    )General and administrative expenses
    
    
    (21,885
    )
    
    
    (23,865
    )
    
    
    (29,744
    )
    
    
    (41,057
    )
    
    
    (55,944
    )
    
    
    (7,169
    )Total operating expenses
    
    
    (48,492
    )
    
    
    (64,240
    )
    
    
    (117,105
    )
    
    
    (163,162
    )
    
    
    (216,563
    )
    
    
    (27,750
    )Operating income
    
    
    140,224
    
    
    
    155,523
    
    
    
    207,469
    
    
    
    225,044
    
    
    
    179,192
    
    
    
    22,961Other income/(expense):Interest income
    
    
    695
    
    
    
    3,049
    
    
    
    4,006
    
    
    
    3,213
    
    
    
    19,186
    
    
    
    2,458Interest expense
    
    
    (3,245
    )
    
    
    (6,933
    )
    
    
    (39,392
    )
    
    
    (36,105
    )
    
    
    (28,026
    )
    
    
    (3,591
    )Investment income
    
    
    
    
    
    
    176
    
    
    
    899
    
    
    
    159
    
    
    
    238
    
    
    
    30Foreign currency exchange gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,584
    
    
    
    (9,875
    )
    
    
    (1,265
    )Grant income
    
    
    1,431
    
    
    
    7,293
    
    
    
    716
    
    
    
    16,732
    
    
    
    7,670
    
    
    
    983Total other income/(expense)
    
    
    (1,119
    )
    
    
    3,585
    
    
    
    (33,771
    )
    
    
    (10,417
    )
    
    
    (10,807
    )
    
    
    (1,385
    )Income before income tax expense and
minority interests
    
    
    139,105
    
    
    
    159,108
    
    
    
    173,698
    
    
    
    214,627
    
    
    
    168,385
    
    
    
    21,576Income tax expense
    
    
    (9,703
    )
    
    
    (7,841
    )
    
    
    (16,020
    )
    
    
    (26,097
    )
    
    
    (18,277
    )
    
    
    (2,342
    )Income before minority interests
    
    
    129,402
    
    
    
    151,267
    
    
    
    157,678
    
    
    
    188,530
    
    
    
    150,108
    
    
    
    19,234Minority interests, net of tax
    
    
    (826
    )
    
    
    (2,419
    )
    
    
    (11,117
    )
    
    
    (7,086
    )
    
    
    (1,267
    )
    
    
    (162
    )Net income
    
    
    128,576
    
    
    
    148,848
    
    
    
    146,561
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    19,072Dividends, accretion to redemption
value and foreign currency rate
movements on mandatorily redeemable
convertible preference shares
    
    
    
    
    
    
    
    
    
    
    (3,509
    )
    
    
    (2,428
    )
    
    
    (549
    )
    
    
    (70
    )Net income available to ordinary
shareholders
    
    
    128,576
    
    
    
    148,848
    
    
    
    143,052
    
    
    
    179,016
    
    
    
    148,292
    
    
    
    19,002Net income per share available to
ordinary shareholders:Basic
    
    
    0.28
    
    
    
    0.32
    
    
    
    0.31
    
    
    
    0.38
    
    
    
    0.25
    
    
    
    0.03Diluted
    
    
    0.28
    
    
    
    0.32
    
    
    
    0.29
    
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.03Weighted average number of ordinary
shares:Basic
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    584,580,799Diluted
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    500,000,000
    
    
    
    500,000,000
    
    
    
    593,150,684
    
    
    
    593,150,684Total cash dividend declared to
ordinary shareholders
    
    
    24,800
    
    
    
    
    
    
    
    54,411
    
    
    
    29,653
    
    
    
    7,609
    
    
    
    975
 3




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As of December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)Consolidated balance sheet informationCash and cash equivalents
    
    
    111,558
    
    
    
    181,988
    
    
    
    302,932
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    59,895Pledged time deposits
    
    
    17,682
    
    
    
    69,214
    
    
    
    95,908
    
    
    
    76,250
    
    
    
    238,618
    
    
    
    30,576Accounts receivable, net
    
    
    66,768
    
    
    
    325,821
    
    
    
    248,662
    
    
    
    537,321
    
    
    
    747,859
    
    
    
    95,829Inventories
    
    
    110,539
    
    
    
    169,125
    
    
    
    296,404
    
    
    
    370,136
    
    
    
    434,406
    
    
    
    55,664Total current assets
    
    
    357,484
    
    
    
    776,620
    
    
    
    1,014,447
    
    
    
    1,172,072
    
    
    
    1,948,407
    
    
    
    249,665Property, plant and equipment, net
    
    
    27,729
    
    
    
    66,602
    
    
    
    96,505
    
    
    
    120,356
    
    
    
    168,603
    
    
    
    21,604Long-term accounts receivable
    
    
    121,971
    
    
    
    115,654
    
    
    
    126,649
    
    
    
    162,032
    
    
    
    268,957
    
    
    
    34,464Total assets
    
    
    525,394
    
    
    
    970,983
    
    
    
    1,250,539
    
    
    
    1,475,469
    
    
    
    2,415,834
    
    
    
    309,560Short-term bank loans
    
    
    61,050
    
    
    
    239,850
    
    
    
    164,850
    
    
    
    160,614
    
    
    
    336,050
    
    
    
    43,061Total current liabilities
    
    
    235,388
    
    
    
    479,209
    
    
    
    662,838
    
    
    
    738,551
    
    
    
    866,435
    
    
    
    111,023Long-term debt
    
    
    
    
    
    
    171,325
    
    
    
    171,325
    
    
    
    167,053
    
    
    
    
    
    
    
    Total liabilities
    
    
    235,388
    
    
    
    650,534
    
    
    
    834,163
    
    
    
    905,604
    
    
    
    866,435
    
    
    
    111,023Mandatorily redeemable convertible
preference shares
    
    
    
    
    
    
    43,868
    
    
    
    45,184
    
    
    
    45,441
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    282,626
    
    
    
    260,149
    
    
    
    348,790
    
    
    
    506,720
    
    
    
    1,530,428
    
    
    
    196,106
 EXCHANGE RATE INFORMATION
    Noon buying ratePeriod
    
    Period end
    
    
    Average(1)
    
    
    High
    
    
    Low(RMB per US$1.00)2001
    
    
    8.2766
    
    
    
    8.2772
    
    
    
    8.2786
    
    
    
    8.26762002
    
    
    8.2800
    
    
    
    8.2772
    
    
    
    8.2800
    
    
    
    8.26692003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2800
    
    
    
    8.27652004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9723
    
    
    
    8.0702
    
    
    
    7.8041November
    
    
    7.8340
    
    
    
    
    
    
    
    7.8750
    
    
    
    7.8303December
    
    
    7.8041
    
    
    
    
    
    
    
    7.8350
    
    
    
    7.08412007 (through May 1, 2007)
    
    
    7.7065
    
    
    
    
    
    
    
    7.8127
    
    
    
    7.7065January
    
    
    7.7714
    
    
    
    
    
    
    
    7.8127
    
    
    
    7.7705February
    
    
    7.7410
    
    
    
    
    
    
    
    7.7632
    
    
    
    7.7410March
    
    
    7.7232
    
    
    
    
    
    
    
    7.7454
    
    
    
    7.7232April
    
    
    7.7090
    
    
    
    
    
    
    
    7.7345
    
    
    
    7.7090
 
  (1)
    
    Determined by averaging the noon buying rates on the last business day of each month or the
elapsed portion thereof during the relevant period. CAPITALIZATION AND INDEBTEDNESS
  REASONS FOR THE OFFER AND USE OF PROCEEDS
  4




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RISK FACTORS
 Risks Relating to Our Company
 We derive a significant portion of our revenues from the China Unicom group and the China Mobile
group and our revenues could decline significantly if either of them reduces its purchases of, or
fails to pay for, our wireless coverage products and services
     Because we have limited bargaining leverage with the China Unicom group and the China Mobile group,
some contractual terms and market practices are materially adverse to our interest
  Changes in the procurement policies by our major customers may adversely affect our revenue and
profit margin on our wireless coverage products 5
    Table of Contents    We often begin work on a project before we have a contract for our products and services, which may
materially and adversely affect our cash flows from operating activities and liquidity
   We have long accounts receivable cycles and long collection periods and our liquidity and cash
flows from operations will deteriorate if our accounts receivable cycles or collection periods
continue to lengthen
  
    
    title has been transferred, i.e. the risk and rewards are transferred;
    
    delivery has occurred;
    
    persuasive evidence of an arrangement exists;
    
    price to the buyer is fixed and determinable;
    
    collectibility is reasonably assured; and
    
    we have an enforceable legal right to receive the contractually specified amount in cash
attributable to sale of products and such right is not contingent upon the installation
services and/or further action of the customers.
  
    
    the services have been rendered in full;
    
    the customer has issued a preliminary inspection certificate which indicates the
customers acceptance of the installation services provided; and
    
    we have an enforceable legal right to receive the contractually specified amount in cash
attributable to the installation services and such right is not contingent upon further
action of the customer.
 6




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
    
    43% of the contract value due upon the signing of the contract and the issuance of the completion certificate,
    
    an additional 38% due upon the issuance of the preliminary inspection certificate,
    
    a further 16% due upon the issuance of the final inspection certificate, and
    
    the final 3% due upon the expiration of our warranty period.
   We historically recognized significantly lower revenues in the first quarter, which sometimes
resulted in net losses in the first quarter, and our revenues may fluctuate significantly from
quarter to quarter in the future, resulting in quarterly net losses
    7




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We rely on short-term bank financing, including bills payable and sale of receivables, to finance
our operations; any expansion of our business will require further financing and will increase our
financial leverage
   Our inability to access long-term working capital financing due to the current regulatory
conditions in China has adversely affected, and could continue to have a negative impact on, our
liquidity
  If the wireless communication sector in China does not maintain its current pace of growth, or the
PRC government does not issue 3G licenses in the near future, the profitability and future
prospects of our business and our liquidity could be materially and adversely affected
  8




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We may fail to offer products that meet industry standards or our customers specific requirements,
and as a result we may lose customers or orders or incur significant warranty or other costs, and
our revenue growth may be materially and adversely affected
   Our research and development efforts may not lead to successful development of commercially viable
or acceptable products, which could cause a decline in customer use of our products
  
    
    rapidly changing technology;
    
    evolving industry standards and transmission protocols;
    
    frequent improvements in products and services; and
    
    fierce competition from well-funded and technologically advanced companies.
  9




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Gross profit margins for our products and services vary substantially and any deterioration in the
gross profit margin for our principal products and services will have a material and adverse effect
on our results of operations
  Our industry is highly competitive and our inability to compete effectively would hurt our current
business and future growth potential
  
    
    research and development capability;
    
    product quality;
    
    scope and flexibility of product offering;
    
    after-sale service capability;
    
    pricing; and
    
    relationships with wireless operators at the local level.
  We have limited experience in operating outside mainland China, and failure to achieve our overseas
expansion strategy may have an adverse effect on our business growth in the future
  We rely on key managerial and technical personnel and failure to attract or retain such personnel
may compromise our ability to develop new products and to effectively carry on our research and
development and other efforts
  10




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We rely on third parties to carry out the initial installation of our wireless coverage products,
are liable for the failure or inadequacy of their services, and are vulnerable to the loss and
unavailability of their services
  We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss
or misappropriation of, or disputes over, our intellectual property
   
    
    departure of any of our management members or employees in possession of our confidential
proprietary information;
    
    breach by such departing management member or employee of his or her confidentiality and
non-disclosure undertaking to us;
    
    expiration of the protection period of our registered patents or trademarks;
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
    
    infringement by others of our proprietary technology and intellectual property rights; or
    
    refusal by relevant regulatory authorities to approve our patent or trademark applications.
   If we lose certain government tax concessions, our profitability may be materially and adversely
affected.
    If our customers increasingly provide their own equipment or accessories instead of ordering
them from us, our ability to generate revenues to sustain our business or support our growth may be
materially and adversely affected
 12




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If our idle or insufficient production capacity significantly increases during any particular
period, our results of operations for that period may be materially and adversely affected
  Our operations may be adversely affected by shortages of raw materials and the volatility in the
prices of raw materials.
   If we fail to acquire raw materials on time or on acceptable terms and consequently fail to fill
our customers orders in a timely and cost-effective manner, our business operations may be
materially and adversely affected
  We maintain limited insurance coverage and any significant product liability claim could have a
material and adverse effect on our financial condition
  13




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The interest of our principal shareholders may differ from your interest and their vote may
disadvantage our minority shareholders
  
    
    Guoren Industrial with 24.0%;
    
    Heng Xing Yue Investments Limited, or HXY Investments, with 18.3%; and
    
    Drag Investments with 10.3%.
  
    
    composition of our board of directors;
    
    selection of our senior management;
    
    amount and timing of dividends and other distributions;
    
    our overall strategic and investment decisions;
    
    issuance of securities and adjustment to our capital structure;
    
    amendment to our memorandum and articles of association; and
    
    other corporate actions requiring approval of our shareholders, including election and
removal of directors, merger, consolidation or sale of our assets, or any other change of
control event that may benefit our other shareholders generally.
  The major shareholder of one of our consolidated PRC subsidiaries has a veto right on some matters
under PRC law and may vote his shares or exercise his veto right in a manner adverse to our
interests
  Our primary source of funds for dividend and other distributions from our operating subsidiary in
China is subject to various legal and contractual restrictions and uncertainties, and our ability
to pay dividends or make other distributions to our shareholders is negatively affected by those
restrictions and uncertainties
  14




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Some of our production and research and development facilities and offices are situated on
properties under short-term leases or with defective titles and our operating costs may increase if
we are not able to renew the existing leases or if such leases can only be renewed on less
favorable terms
  .
  Investor confidence and market price of our ADSs may be adversely impacted if we or our independent
registered public accountants are unable to attest to the adequacy of the internal controls over
our financial reporting as of December 31, 2007, as required by Section 404 of the U.S.
Sarbanes-Oxley Act of 2002
  Risks Relating to Our Industry
 Our business might become subject to new regulatory restrictions, which may restrict the way in
which we conduct our business and subject us to severe penalties, and we may be materially and
adversely affected by any change in the composition of the primary telecommunication operators in
China
  15




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##### Table of Contents



Risks Relating to Business Operations in China
 Changes in Chinas political and economic policies and conditions could cause a substantial decline
in the demand for our products and services
  Changes in foreign exchange regulation in China may affect our ability to pay dividends in foreign
currencies
  16




---



##### Table of Contents



Fluctuation in the value of Renminbi could adversely affect the value of, and dividends payable on,
our shares and ADSs in foreign currency terms
  The uncertain legal environment in China could limit the legal protections available to you
   Outbreak of SARS or other epidemics could materially and adversely affect our overall operations
and results of operations
  Recent regulations relating to offshore investment activities by PRC residents may limit our
ability to acquire PRC companies and adversely affect our business and prospects
  17




---



##### Table of Contents



ITEM 4. INFORMATION ON THE COMPANY
 HISTORY AND DEVELOPMENT
 th
  
 18




---



##### Table of Contents



(1)
    
    The remaining 1% interest in Shenzhen Lingxian is owned by Ms. Xiujun Zhang, an employee of
ours.(2)
    
    The remaining 20% interest in Lake Communication is owned by Mr. Haifan Zhuang, son of
Professor Zhuang.(3)
    
    The remaining 20% interest in Lake Microwave is owned by Lake (Hong Kong) Technology Limited,
an affiliated company of Professor Zhuang.    
    
    Shenzhen Lingxian;
    
    Lake Communication; and
    
    Lake Microwave.
 Shenzhen Lingxian
  Lake Communication
  Lake Microwave
  19




---



##### Table of Contents



BUSINESS
 Overview
      Our Wireless Coverage Products and Services
  Wireless Coverage Products
  20




---



##### Table of Contents



Indoor Coverage.
 Outdoor Coverage.
 Base Station Coverage Extension.
 Our Services
  Design Services.
 Installation of Wireless Coverage Products.
 Project Warranties.
 21




---



##### Table of Contents



Our Sales Cycle
  Bidding Process.
   
    
    pricing;
    
    overall financial strength and operational scale;
    
    research and development capabilities;
    
    quality of products in terms of performance, functionality and reliability;
    
    proposed payment schedule; and
    
    range and standards of services to be provided, including after-sale services.
  
    
    specifications contained in customers bid invitations;
    
    quality control and random inspection of products;
    
    operational manuals and staff training; and
    
    other commercial terms, such as delivery, packaging, insurance and spare parts.
  Initial Inspection of Installed Wireless Coverage Products.
 Contract Signing.
 22




---



##### Table of Contents



Additional Inspection and Warranty Period.
 Payment.
 Selected Completed Projects
  Project
    
    Location
    
    Customer
    
    Completion dateIndoor coverageShangri-La Hotel Chengdu
    
    Chengdu
    
    China Unicom group
    
    September 2006Jiangbei District Court
    
    Jiangbei District
    
    China Telecom group
    
    September 2006Hulunbeier Hospital
    

Hulunbeier
    
    China Mobile group
    
    April 2006ER Hill Rest Home
    
    Inner Mongolia
    
    China Mobile group
    
    December 2005East Asia Sports Meet Stadium
    
    Macau
    
    China Unicom group
    
    August 2005The Peoples Bank of China Building
    
    Beijing
    
    China Telecom group
    
    November 2004Shanghai World Trade Shopping Mall
    
    Shanghai
    
    China Telecom group
    
    October 2004China Mobile groups Beijing Communication Center
    
    Beijing
    
    China Mobile group
    
    May 2004Outdoor coverageHailaer Airport
    
    Hulunbeier
    
    China Mobile Group
    
    October 2006Vanke City Garden Residential Area
    
    Dalian
    
    China Unicom group
    
    December 2005Base station coverage extensionWenzhou Nanlu Island Seafront coverage
    
    Zhejiang
    
    China Mobile group
    
    August 2005Wantoubu Ocean
    
    Guangxi
    
    China Unicom group
    
    June 2004Jinding Lake
    
    Beijing
    
    China Mobile group
    
    May 2004
 Our RF Parts and Components
    23




---



##### Table of Contents



Base Station RF Parts and Components
   
    
    We first go through stringent certification processes to become a certified supplier of
base station equipment manufacturers. Each equipment manufacturer has its unique
certification process, the principal conditions of which include production capacity,
management efficacy, quality control, environment protection, and overall reputation. To
date we have been certified by six major base station equipment manufacturers.
    
    We next obtain technology certification from our equipment manufacturer customers and
conduct product development according to the customer specifications. All of our RF
products and components are customized for each clients unique specifications.
    
    We then provide samples for certification by our base station equipment manufacturer
customers. We have to date developed more than 20 types of RF modules and RF subsystem
products for various equipment manufacturer customers.
    
    Finally, we obtain purchase orders with trial quantities and if our customers are
satisfied with the trials, we will proceed to bulk production.
 Repeater RF Parts and Components
  Production
 Production Facilities
   Production facilities
    
    Type of products
    
    Capacity
    
    Utilization(sets per month)
    
    (sets per month)Shenzhen
    
    Wireless coverage products
    
    
    2,400
    
    
    
    2,049RF parts and components
for base stations
    
    
    15,000
    
    
    
    10,000Quanzhou
    
    RF parts and components
for repeaters
    
    
    18,000
    
    
    
    10,700
 Shenzhen Production Facilities.
 Quanzhou Production Facilities.
 Production Process
 24




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##### Table of Contents




    
    integrated circuit board processing;
    
    covering and welding;
    
    manufacturing and assembly;
    
    testing; and
    
    quality control.
   Quality Control
  Quality Control for Raw Materials.
 Quality Control During Production.
 Final Testing Before Delivery.
 25




---



##### Table of Contents



Testing at Customer Site.
 Warranty.
  Research and Development
  RF Technology
     Research and Development Facilities
  26




---



##### Table of Contents



Sales, Marketing and Key Customers
 Sales and Marketing Team
     Pricing
  
    
    type, quantity and composition of RF products;
    
    internal target gross margin objectives;
    
    region in which the products are sold; and
    
    current market conditions, including the prevailing prices offered by our competitors.
  Key Customers
  Year ended December 31,2004
    
    2005
    
    2006(RMB)
    
    (%)
    
    (RMB)
    
    (%)
    
    (RMB)
    
    (US$)
    
    (%)(in millions, except for percentages)Wireless coverage products:China Unicom group
    
    
    345.8
    
    
    
    61.0
    %
    
    
    322.9
    
    
    
    45.1
    %
    
    
    298.7
    
    
    
    38.3
    
    
    
    35.9
    %China Mobile group
    
    
    157.3
    
    
    
    27.8
    
    
    
    241.6
    
    
    
    33.8
    
    
    
    277.1
    
    
    
    35.5
    
    
    
    33.3China Telecom group
    
    
    19.3
    
    
    
    3.4
    
    
    
    69.5
    
    
    
    9.7
    
    
    
    89.2
    
    
    
    11.4
    
    
    
    10.7China Netcom group
    
    
    8.2
    
    
    
    1.5
    
    
    
    36.8
    
    
    
    5.1
    
    
    
    69.2
    
    
    
    8.9
    
    
    
    8.3Overseas customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    1.3
    
    
    
    1.2Others
    
    
    3.0
    
    
    
    0.5
    
    
    
    23.4
    
    
    
    3.3
    
    
    
    56.6
    
    
    
    7.2
    
    
    
    6.8Subtotal
    
    
    533.6
    
    
    
    94.2
    %
    
    
    694.2
    
    
    
    97.0
    %
    
    
    800.8
    
    
    
    102.6
    
    
    
    96.2
    %RF products:Equipment manufacturers
    
    
    32.9
    
    
    
    5.8
    %
    
    
    22.1
    
    
    
    3.1
    %
    
    
    32.0
    
    
    
    4.1
    
    
    
    3.8
    %Total
    
    
    566.5
    
    
    
    100.0
    %
    
    
    716.3
    
    
    
    100.0
    %
    
    
    832.8
    
    
    
    106.7
    
    
    
    100.0
    %
 27




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##### Table of Contents



Suppliers and Raw Materials
  Competition
  28




---



##### Table of Contents




    
    steadily increasing market demand;
    
    increasing technical requirements;
    
    increasing number of transmission protocols, from GSM and CDMA to other protocols such as PHS and TD-SCDMA;
    
    expanding customer base, beginning with the China Mobile group and the China Unicom
group, and now including new entrants, the China Telecom group, the China Netcom group and
others; and
    
    increasing anticipation and planning for a potential issuance of 3G licenses and the
triggering of expanded market opportunities that are expected to attract new competitors to
enter into the wireless coverage market.
     29




---



##### Table of Contents



Property
 Owned Property
   Leased Property
  Use purpose
    
    Total area(square meters)Production
    
    
    3,450.5Production/Research and development/Office
    
    
    500.0Research and development
    
    
    1,763.0Warehouse
    
    
    3,245.0Office
    
    
    16,544.6Total
    
    
    25,503.1
  Intellectual Property Rights
     Insurance
  30




---



##### Table of Contents



Employees
  Shenzhen
    
    Quanzhou
    
    TotalManagement and administrative
    
    
    349
    
    
    
    46
    
    
    
    395Research and development
    
    
    419
    
    
    
    49
    
    
    
    468Production and quality control
    
    
    323
    
    
    
    194
    
    
    
    517Project design and technical service
    
    
    743
    
    
    
    
    
    
    
    743Sales and marketing
    
    
    358
    
    
    
    4
    
    
    
    362Total
    
    
    2,192
    
    
    
    293
    
    
    
    2,485
     Legal Proceedings
  Industry Regulation in China
  Research, Development and Production of Radio Transmission Equipment
   Connection of Radio Communication Equipment with a Public Telecommunication Network
  31




---



##### Table of Contents



Installation of Wireless Coverage Equipment
   
    
    lead project contractors,
    
    specialized contractors, and
    
    service subcontractors.
   Our Compliance with Regulations
     
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  32




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##### Table of Contents



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our audited consolidated financial statements and related notes
included in this annual report on Form 20-F . The audited consolidated financial statements have
been prepared in accordance with U.S. GAAP. The following discussion and analysis contain
forward-looking statements that involve risks and uncertainties.
 OVERVIEW
   33




---



##### Table of Contents



KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
  Expenditures by Wireless Operators and base station equipment manufacturers
  Highly Competitive Market
  Our Business Practice with Wireless Operators and Its Implication on Our Financial Condition
and Results of Operations
  Revenue Recognition Policy and Accounts Receivable Cycle
 34




---



##### Table of Contents




    
    the risk and rewards are transferred;
    
    delivery has occurred;
    
    persuasive evidence of an arrangement exists;
    
    price to the buyer is fixed and determinable;
    
    collectibility is reasonably assured; and
    
    we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.
  
    
    our customer has executed and signed a sales and purchase contract;
    
    our customer has issued a completion certificate to indicate its acceptance of our products;
    
    we have delivered and completed the initial installation of the wireless coverage products at our customers premises;
    
    we have an enforceable legal right to receive the amount attributable to the delivered
products and such right is not contingent upon our customers issuances of the preliminary
and final acceptance of the installation service; and
    
    the risk and reward of ownership and title of the delivered products have been
transferred to our customer.
  
    
    we have rendered the services;
    
    our customer has issued a preliminary inspection certificate to indicate its preliminary
acceptance of the installation services we have provided;
    
    we have an enforceable legal right to receive the amount attributable to the installation
service element of the contract and such right is not contingent upon the issuance by our
customers of the final inspection certificate of the installation service; and
    
    our remaining obligation relating to our customers final inspection and acceptance of
the installation services is considered inconsequential or perfunctory.
  35




---



##### Table of Contents



Liquidity Concern Arising out of Our Accounts Receivable Cycle and Revenue Cycle
  Significant Quarterly Fluctuations of Our Results of Operations
  36




---



##### Table of Contents



Three months endedMarch 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    March 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    March 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,2004
    
    2004
    
    2004
    
    2004
    
    2005
    
    2005
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006(in
thousands of RMB)Revenues
    
    
    8,624
    
    
    
    233,089
    
    
    
    46,814
    
    
    
    277,977
    
    
    
    8,272
    
    
    
    173,888
    
    
    
    156,042
    
    
    
    378,068
    
    
    
    14,796
    
    
    
    179,976
    
    
    
    187,729
    
    
    
    450,294Cost of revenues
    
    
    (4,144
        )
    
    
    (95,693
        )
    
    
    (19,850
        )
    
    
    (122,243
        )
    
    
    (3,871
        )
    
    
    (73,807
        )
    
    
    (75,915
        )
    
    
    (174,471
        )
    
    
    (6,787
        )
    
    
    (90,505
        )
    
    
    (98,659
        )
    
    
    (241,089
        )Gross profit
    
    
    4,480
    
    
    
    137,396
    
    
    
    26,964
    
    
    
    155,734
    
    
    
    4,401
    
    
    
    100,081
    
    
    
    80,127
    
    
    
    203,597
    
    
    
    8,009
    
    
    
    89,471
    
    
    
    89,070
    
    
    
    209,205Operating expenses:Research and
development costs
    
    
    (4,325
        )
    
    
    (3,468
        )
    
    
    (3,842
        )
    
    
    (4,691
        )
    
    
    (5,820
        )
    
    
    (6,935
        )
    
    
    (7,455
        )
    
    
    (10,406
        )
    
    
    (8,393
        )
    
    
    (8,306
        )
    
    
    (13,882
        )
    
    
    (17,090
        )Sales and
distribution expenses
    
    
    (13,003
        )
    
    
    (16,324
        )
    
    
    (18,594
        )
    
    
    (23,114
        )
    
    
    (19,566
        )
    
    
    (23,078
        )
    
    
    (25,980
        )
    
    
    (22,865
        )
    
    
    (24,138
        )
    
    
    (26,606
        )
    
    
    (25,905
        )
    
    
    (36,299
        )General and
administrative
expenses
    
    
    (6,847
        )
    
    
    (7,397
        )
    
    
    (7,920
        )
    
    
    (7,580
        )
    
    
    (9,846
        )
    
    
    (9,015
        )
    
    
    (10,407
        )
    
    
    (11,789
        )
    
    
    (11,109
        )
    
    
    (10,967
        )
    
    
    (11,377
        )
    
    
    (22,491
        )Total operating
expenses
    
    
    (24,175
        )
    
    
    (27,189
        )
    
    
    (30,356
        )
    
    
    (35,385
        )
    
    
    (35,232
        )
    
    
    (39,028
        )
    
    
    (43,842
        )
    
    
    (45,060
        )
    
    
    (43,640
        )
    
    
    (45,879
        )
    
    
    (51,164
        )
    
    
    (75,880
        )Operating income/(loss)
    
    
    (19,695
        )
    
    
    110,207
    
    
    
    (3,392
        )
    
    
    120,349
    
    
    
    (30,831
        )
    
    
    61,053
    
    
    
    36,285
    
    
    
    158,537
    
    
    
    (35,631
        )
    
    
    43,592
    
    
    
    37,906
    
    
    
    133,325Other (expense)/incomeInterest income
    
    
    463
    
    
    
    1,008
    
    
    
    924
    
    
    
    1,611
    
    
    
    583
    
    
    
    1,127
    
    
    
    371
    
    
    
    1,132
    
    
    
    859
    
    
    
    5,761
    
    
    
    8,108
    
    
    
    4,458Interest expense
    
    
    (6,300
        )
    
    
    (13,016
        )
    
    
    (7,029
        )
    
    
    (13,047
        )
    
    
    (5,438
        )
    
    
    (11,253
        )
    
    
    (10,104
        )
    
    
    (9,310
        )
    
    
    (8,897
        )
    
    
    (6,369
        )
    
    
    (4,063
        )
    
    
    (8,697
        )Investment income
    
    
    5
    
    
    
    894
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
exchange gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,584
    
    
    
    1,101
    
    
    
    
    
    
    
    (6,333
        )
    
    
    (4,643
        )Grant income
    
    
    150
    
    
    
    
    
    
    
    100
    
    
    
    466
    
    
    
    
    
    
    
    100
    
    
    
    250
    
    
    
    16,382
    
    
    
    127
    
    
    
    100
    
    
    
    
    
    
    
    7,443Total other
(expense)/income
    
    
    (5,682
        )
    
    
    (11,114
        )
    
    
    (6,005
        )
    
    
    (10,970
        )
    
    
    (4,855
        )
    
    
    (9,867
        )
    
    
    (9,483
        )
    
    
    13,788
    
    
    
    (6,571
        )
    
    
    (508
        )
    
    
    (2,288
        )
    
    
    (1,439
        )Income/(loss) before
income tax
benefit/(expense) and
minority interests
    
    
    (25,377
        )
    
    
    99,093
    
    
    
    (9,397
        )
    
    
    109,379
    
    
    
    (35,686
        )
    
    
    51,186
    
    
    
    26,802
    
    
    
    172,325
    
    
    
    (42,202
        )
    
    
    43,084
    
    
    
    35,618
    
    
    
    131,885Income tax
(expense)/benefit
    
    
    4,188
    
    
    
    (3,629
        )
    
    
    1,551
    
    
    
    (18,130
        )
    
    
    2,728
    
    
    
    (7,449
        )
    
    
    (7,093
        )
    
    
    (14,283
        )
    
    
    5,931
    
    
    
    (3,583
        )
    
    
    (5,043
        )
    
    
    (15,582
        )Income/(loss) before
minority interests
    
    
    (21,189
        )
    
    
    95,464
    
    
    
    (7,846
        )
    
    
    91,249
    
    
    
    (32,958
        )
    
    
    43,737
    
    
    
    19,709
    
    
    
    158,042
    
    
    
    (36,271
        )
    
    
    39,501
    
    
    
    30,575
    
    
    
    116,303Minority interests,
net of tax
    
    
    447
    
    
    
    (5,379
        )
    
    
    127
    
    
    
    (6,312
        )
    
    
    655
    
    
    
    (3,276
        )
    
    
    (1,443
        )
    
    
    (3,022
        )
    
    
    533
    
    
    
    (68
        )
    
    
    162
    
    
    
    (1,894
        )Net Income/(loss)
    
    
    (20,742
        )
    
    
    90,085
    
    
    
    (7,719
        )
    
    
    84,937
    
    
    
    (32,303
        )
    
    
    40,461
    
    
    
    18,266
    
    
    
    155,020
    
    
    
    (35,738
        )
    
    
    39,433
    
    
    
    30,737
    
    
    
    114,410Dividends, accretion
to redemption value
and of foreign
currency rate
movements on
mandatorily redeemable
convertible preference
shares
    
    
    (877
        )
    
    
    (878
        )
    
    
    (877
        )
    
    
    (877
        )
    
    
    (904
        )
    
    
    (903
        )
    
    
    166
    
    
    
    (787
        )
    
    
    (909
        )
    
    
    360
    
    
    
    
    
    
    
    Net Income/(loss)
available to ordinary
shareholders
    
    
    (21,619
        )
    
    
    89,207
    
    
    
    (8,596
        )
    
    
    84,060
    
    
    
    (33,207
        )
    
    
    39,558
    
    
    
    18,432
    
    
    
    154,233
    
    
    
    (36,647
        )
    
    
    39,793
    
    
    
    30,737
    
    
    
    114,410
  Revenues
  37




---



##### Table of Contents



Year
ended December 31,2004
    

2005
    

2006RMB
    

%
    

RMB
    

%
    

RMB
    

US$
    

%(in
millions, except for percentages)Wireless
coverage solutionsSale
of wireless coverage products
    
    

503.9
    
    
    

88.9

%
    
    

614.5
    
    
    

85.8

%
    
    

679.6
    
    
    

87.1
    
    
    

81.6

%Installation
services
    
    

30.1
    
    
    

5.3
    
    
    

69.3
    
    
    

9.7
    
    
    

108.9
    
    
    

14.0
    
    
    

13.1RF
parts and components
    
    

32.9
    
    
    

5.8
    
    
    

22.0
    
    
    

3.1
    
    
    

32.0
    
    
    

4.1
    
    
    

3.8(Provision)/write
back for settlement discounts
    
    

(1.4

)
    
    

(0.2

)
    
    

6.8
    
    
    

0.9
    
    
    

5.1
    
    
    

0.6
    
    
    

0.6Others
    
    

1.0
    
    
    

0.2
    
    
    

3.7
    
    
    

0.5
    
    
    

7.2
    
    
    

0.9
    
    
    

0.9Total
    
    

566.5
    
    
    

100.0

%
    
    

716.3
    
    
    

100.0

%
    
    

832.8
    
    
    

106.7
    
    
    

100.0

%
 Provision of Wireless Coverage Products and Services.
  Sale of RF Parts and Components.
 Cost of Revenues
   Year
ended December 31,2004
    

2005
    

2006RMB
    

%
    

RMB
    

%
    

RMB
    

US$
    

%(in
millions, except for percentages)Cost
of hardware
    
    

220.4
    
    
    

91.1

%
    
    

277.3
    
    
    

84.5

%
    
    

352.8
    
    
    

45.2
    
    
    

80.7

%Cost
of services
    
    

21.5
    
    
    

8.9
    
    
    

50.8
    
    
    

15.5
    
    
    

84.2
    
    
    

10.8
    
    
    

19.3Total
    
    

241.9
    
    
    

100.0

%
    
    

328.1
    
    
    

100.0

%
    
    

437.0
    
    
    

56.0
    
    
    

100.0

%
 Cost of Hardware.
 38




---



##### Table of Contents



Cost of Services.
 Operating Expenses
  Year
ended December 31,2004
    
    
        
2005
    
    
    
2006RMB
    
    

%
    
    

RMB
    
    

%
    
    

RMB
    
    

US$
    
    

%(in millions, except for percentages)Research and development costs
    
    
    16.3
    
    
    
    13.9

%
    
    
    30.6
    
    
    
    18.8

%
    
    
    47.7
    
    
    
    6.1
    
    
    
    22.0

%Sales and distribution expenses
    
    
    71.0
    
    
    
    60.6
    
    
    
    91.5
    
    
    
    56.1
    
    
    
    113.0
    
    
    
    14.5
    
    
    
    52.2General and administrative expenses
    
    
    29.8
    
    
    
    25.5
    
    
    
    41.1
    
    
    
    25.1
    
    
    
    55.9
    
    
    
    7.2
    
    
    
    25.8Total operating expenses
    
    
    117.1
    
    
    
    100.0

%
    
    
    163.2
    
    
    
    100.0

%
    
    
    216.6
    
    
    
    27.8
    
    
    
    100.0

%
 Research and Development Costs.
 Sales and Distribution Expenses.
 General and Administrative Expenses.
 Interest Expense
  39




---



##### Table of Contents



Year
ended December 31,2004
    
    

2005
    
    

2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)(in thousands)Bank loan interest
    
    

5,534
    
    
    
    9,290
    
    
    
    13,709
    
    
    
    1,757Receivable
discounting fee
    
    
    14,966
    
    
    
    11,076
    
    
    
    8,666
    
    
    
    1,110Financial
charges on bills financing
    
    
    4,590
    
    
    
    1,043
    
    
    
    1,082
    
    
    
    139Interest
on exchangeable
bonds(1)
    
    
    13,706
    
    
    
    14,117
    
    
    
    3,341
    
    
    
    428Others(2)
    
    
    596
    
    
    
    579
    
    
    
    1,228
    
    
    
    157Total
    
    
    39,392
    
    
    
    36,105
    
    
    
    28,026
    
    
    
    3,591
 
 (1)
    
    In 2003, several of our ordinary shareholders, including Guoren Industrial, HXY Investments
and Drag Investments, issued an aggregate of US$20.7 million of 5% exchangeable bonds to our
preference shareholders, Actis China, Standard Chartered Private Equity and JAFCO, which bonds
are exchangeable into our ordinary shares held by these ordinary shareholders. These
exchangeable bonds are redeemable at an amount equal to their principal amount plus 8%
interest. Because we guarantee the bonds, we have accounted for the interest payment
obligation on the exchangeable bonds as our obligation. These exchangeable bonds were
exchanged into ordinary shares held by our ordinary shareholders upon the completion of our
initial global offering in 2006.(2)
    
    Others mainly consist of bank fees. Income Tax Expense
  Minority Interests, Net of Tax
  Critical Accounting Policies
  Revenue Recognition.
 40




---



##### Table of Contents




    
    the risk and rewards are transferred;
    
    delivery has occurred;
    
    persuasive evidence of an arrangement exists;
    
    price to the buyer is fixed and determinable;
    
    collectibility is reasonably assured; and
    
    we have an enforceable legal right to receive the contractually specified amount in cash attributable to the product sale.
     Allowance for Doubtful Accounts.
 Inventories.
  41




---



##### Table of Contents



Allowance for Warranties.
 Valuation of Long-lived Assets.
 Results of Operations
  Year
ended December 31,2004
    
    

2005
    
    

2006Revenues
    
    

100.0

%
    
    
    100.0
    %
    
    
    100.0
    %Cost
of revenues
    
    
    (42.7
    )
    
    
    (45.8
    )
    
    
    (52.5
    )Gross profit
    
    
    57.3
    
    
    
    54.2
    
    
    
    47.5Operating expenses:Research and development costs
    
    
    (2.9
    )
    
    
    (4.3
    )
    
    
    (5.7
    )Sales and distribution expenses
    
    
    (12.5
    )
    
    
    (12.8
    )
    
    
    (13.6
    )General and administrative expenses
    
    
    (5.2
    )
    
    
    (5.7
    )
    
    
    (6.7
    )Total operating expenses
    
    
    (20.6
    )
    
    
    (22.8
    )
    
    
    (26.0
    )Operating income
    
    
    36.7
    
    
    
    31.4
    
    
    
    21.5Other (expense)/ income:Interest income
    
    
    0.7
    
    
    
    0.4
    
    
    
    2.3Interest expense
    
    
    (7.0
    )
    
    
    (5.0
    )
    
    
    (3.4
    )Investment income
    
    
    0.2
    
    
    
    
    
    
    
    Foreign currency exchange gain/(loss)
    
    
    
    
    
    
    0.8
    
    
    
    (1.2
    )Grant income
    
    
    0.1
    
    
    
    2.3
    
    
    
    0.9Total other (expense)/income
    
    
    (6.0
    )
    
    
    (1.5
    )
    
    
    (1.3
    )Income before income tax expense and minority interests
    
    
    30.7
    
    
    
    29.9
    
    
    
    20.2Income tax expense
    
    
    (2.8
    )
    
    
    (3.6
    )
    
    
    (2.2
    )Income before minority interests
    
    
    27.9
    
    
    
    26.3
    
    
    
    18.0Minority interests, net of tax
    
    

(2.0
    )
    
    
    (1.0
    )
    
    
    (0.2
    )Net income
    
    
    25.9
    
    
    
    25.3
    
    
    
    17.9Dividends, accretion to redemption values and foreign
exchange rate movements on mandatorily redeemable
convertible preference shares
    
    
    (0.6
    )
    
    
    (0.5
    )
    
    
    (0.1
    )Net income available to ordinary shareholders
    
    
    25.3
    %
    
    
    24.8
    %
    
    
    17.8
    %
 2006 compared to 2005
 Revenues.
 42




---



##### Table of Contents



Cost of Revenues.
 Gross Profit.
 Research and Development Costs.
 Sales and Distribution Expenses.
 General and Administrative Expenses.
 Operating Income.
 Other Expense/Income.
 Income Tax Expense.
 Minority Interests.
 43




---



##### Table of Contents



Net Income.
 Dividends, Accretions to Redemption Values and Foreign Exchange Rate Movements on Mandatorily
Redeemable Convertible
Preference Shares.
 2005 compared to 2004
 Revenues.
 Cost of Revenues.
 Gross Profit.
 Research and Development Costs.
 Sales and Distribution Expenses.
 General and Administrative Expenses.
 44




---



##### Table of Contents



Operating Income.
 Other Expense/Income.
 Income Tax Expense.
 Minority Interests.
 Net Income.
 Dividends, Accretions to Redemption Values and Foreign Exchange Rate Movements on Mandatorily
Redeemable Convertible Preference Shares.
 Liquidity and Capital Resources
     Year ended December 31,2004
    
    
    2005
    
    
    2006(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (US$)(in thousands)Net cash/provided by/ (used in) operating activities
    
    
    218,244
    
    
    

(112,611
    )
    
    
    (114,778
    )
    
    
    (14,707
    )Net cash used in investing activities
    
    
    (74,337
    )
    
    
    (20,900
    )
    
    
    (243,150
    )
    
    
    (31,157
    )Net cash (used in)/provided by financing activities
    
    
    (22,963
    )
    
    
    (40,813
    )
    
    
    708,514
    
    
    
    90,787Cash and cash equivalents at the end of year
    
    
    302,932
    
    
    
    128,608
    
    
    
    467,423
    
    
    

59,895
 45




---



##### Table of Contents



Accounts Receivable and Receivable Selling
   As
of December 31, 2006(RMB)
    
    

(US$)
    
    

(%)(in
millions, except for percentages)China
Unicom group
    
    

406.0
    
    
    

52.0
    
    
    

40.4

%China
Mobile group
    
    

303.4
    
    
    

38.9
    
    
    

30.2China
Telecom group
    
    

99.0
    
    
    

12.7
    
    
    

9.9China
Netcom group
    
    

66.8
    
    
    

8.6
    
    
    

6.6Others
    
    

129.8
    
    
    

16.6
    
    
    

12.9Total
    
    

1,005.0
    
    
    

128.8
    
    
    

100.0

%
  As
of December 31,2004
    

2005
    

2006(RMB)
    
    

(%)
    
    

(RMB)
    
    

(%)
    
    

(RMB)
    
    

(US$)
    
    

(%)(in
millions, except for percentages)Less
than one year
    
    

262.2
    
    
    

69.7

%
    
    

526.7
    
    
    

75.1

%
    
    

700.9
    
    
    

89.8
    
    
    

69.7

%Between
one to two years
    
    

100.6
    
    
    

26.7
    
    
    

154.0
    
    
    

22.0
    
    
    

231.3
    
    
    

29.7
    
    
    

23.0Between
two to three years
    
    

12.2
    
    
    

3.3
    
    
    

17.0
    
    
    

2.4
    
    
    

68.0
    
    
    

8.7
    
    
    

6.8Over
three years
    
    

1.1
    
    
    

0.3
    
    
    

3.9
    
    
    

0.5
    
    
    

4.8
    
    
    

0.6
    
    
    

0.5Total
    
    

376.1
    
    
    

100.0

%
    
    

701.6
    
    
    

100.0

%
    
    

1,005.0
    
    
    

128.8
    
    
    

100.0

%
  46




---



##### Table of Contents



Inventories
  47




---



##### Table of Contents



As
of December 31,2004
    

2005
    

2006(RMB)
    

(RMB)
    

(RMB)
    

(US$)(in
thousands)Raw
materials
    
    

43,799
    
    
    

55,572
    
    
    

65,395
    
    
    

8,380Work
in progress
    
    

4,991
    
    
    

4,057
    
    
    

5,135
    
    
    

658Finished
goods
    
    

247,614
    
    
    

310,507
    
    
    

363,876
    
    
    

46,626Total
    
    
    296,404
    
    
    
    370,136
    
    
    
    434,406
    
    
    
    55,664
   Finished
goods
    
        
Work
in progress
    
        
Raw
materials
    
        
Total(RMB)
    

(US$)
    

(%)
    

(RMB)
    

(US$)
    

(%)
    

(RMB)
    

(US$)
    

(%)
    

(RMB)
    

(US$)
    

(%)(in
thousands, except for percentages)AgeLess
than one year
    
    

357,435
    
    
    

45,801
    
    
    

98.2

%
    
    

5,135
    
    
    

658
    
    
    

100
    %
    
    

65,395
    
    
    

8,380
    
    
    

100
    %
    
    

427,965
    
    
    

54,839
    
    
    

98.5
    %One
to two years
    
    

6,441
    
    
    

825
    
    
    

1.8
    
    
    


    
    
    


    
    
    


    
    
    


    
    
    


    
    
    


    
    
    

6,441
    
    
    

825
    
    
    

1.5Total
    
    

363,876
    
    
    

46,626
    
    
    

100
    %
    
    

5,135
    
    
    

658
    
    
    

100
    %
    
    

65,395
    
    
    

8,380
    
    
    

100
    %
    
    

434,406
    
    
    

55,664
    
    
    

100.0
    %
  Borrowings
    Capital Expenditures and Contractual Commitments
   48




---



##### Table of Contents



As of December 31, 2006Payment Due by PeriodLess thanTotal
    
    1 Year
    
    1-3 Years
    
    After 3 YearsRMB
    
    US$
    
    RMB
    
    US$
    
    RMB
    
    US$
    
    RMB
    
    US$(in millions)Short-term bank loans
    
    
    336.1
    
    
    
    43.1
    
    
    
    336.1
    
    
    
    43.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bills payable
    
    
    78.6
    
    
    
    10.1
    
    
    
    78.6
    
    
    
    10.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    10.0
    
    
    
    1.3
    
    
    
    6.9
    
    
    
    0.9
    
    
    
    3.1
    
    
    
    0.4
    
    
    
    
    
    
    
    Other capital commitments
    
    
    219.6
    
    
    
    28.1
    
    
    
    219.6
    
    
    
    28.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    
    644.3
    
    
    
    82.6
    
    
    
    641.2
    
    
    
    82.2
    
    
    
    3.1
    
    
    
    0.4
    
    
    
    
    
    
    
    
 Off-Balance Sheet Arrangements and Contingent Liabilities
     Inflation
  Quantitative and Qualitative Disclosure about Market Risk
 Foreign Exchange Risk.
 Interest Rate Risk.
 Credit Risk.
 Corporate Structure
  49




---



##### Table of Contents



Taxation
     Recent Accounting Pronouncements
 FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements
 Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 SFAS No. 156, Accounting for Servicing of Financial Assets  an amendment of SFAS No. 140
 50




---



##### Table of Contents



Accounting for Servicing of Financial Assets  an
amendment of SFAS No. 140.
 SFAS No. 157, Fair value measurements
 Fair Value Measurements
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an
amendment of SFAS No. 115
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of SFAS No. 115.
 EITF Issue. 04-14, Accounting for Purchases and Sales of Inventory with the Same Counterparty
 Accounting for Purchases and Sales of Inventory with the Same Counterparty.
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Executive Officers
  Directors
and Executive Officers
    

Age
    

PositionYingjie Gao
    
    

51
    
    

Chairman
of the Board and Chief Executive OfficerKunjie Zhuang
    
    

70
    
    

Director
and Chief Technology OfficerRong Yu
    
    

42
    
    
    Director, Chief Financial Officer and Principal
Accounting OfficerLiping Mao
    
    

41
    
    

Director
and Vice PresidentCuiming Shi
    
    

66
    
    

Independent
DirectorXiaohu You
    
    

44
    
    

Independent
DirectorKin Kwong Mak
    
    

45
    
    

Independent
Director (Audit Committee financial expert)Tianwen Ding
    
    

50
    
    

Vice
PresidentQi Wang
    
    

41
    
    

Vice
PresidentQingchang Liu
    
    

39
    
    

Vice
PresidentGuanyu Huang
    
    

41
    
    

Vice
President
 Directors
 Yingjie Gao
 Kunjie Zhuang
 51




---



##### Table of Contents



Rong Yu
 Liping Mao
 Cuiming Shi
 Xiaohu You
 Kin Kwong Mak
 Executive Officers
 Tianwen Ding
 Qi Wang
 Qingchang Liu
 Guanyu Huang
  52




---



##### Table of Contents



Board of Directors
  Audit Committee
  
    
    selecting the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent auditors;
    
    reviewing and
approving all proposed related-party transactions;
    
    discussing the
annual audited financial statements with management and the
independent auditors;
    
    annually
reviewing and reassessing the adequacy of our audit committee
charter;
    
    meeting
separately and periodically with management and the independent
auditors;
    
    reviewing such other matters that are specifically delegated to our audit committee by
our board of directors from time to time; and
    
    reporting
regularly to the full board of directors.
 Compensation Committee
  
    
    reviewing and
determining the compensation package for our senior executives;
    
    reviewing and
making recommendations to our board with respect to the compensation
of our directors;
    
    reviewing and
approving officer and director indemnification and insurance
matters;
    
    reviewing and
approving any employee loan in an amount equal to or greater than
RMB100,000; and
    
    reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare
benefit plans.
 53




---



##### Table of Contents



Corporate Governance and Nominating Committee
  
    
    identifying
and recommending to the board nominees for election or re-election to
the board;
    
    making
appointments to fill any vacancy on our board;
    
    reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and
availability of service to us;
    
    identifying and recommending to the board any director to serve as a member of the
boards committees;
    
    advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate governance
and on any corrective action to be taken; and
    
    monitoring compliance with our code of business conduct and ethics, including reviewing
the adequacy and effectiveness of our procedures to ensure proper
compliance.
 Duties of Directors
  Employment and Service Agreements
    Compensation of Directors and Executive Officers
  54




---



##### Table of Contents



Indemnification
   Share Option Scheme
  
    
    motivate the eligible participants to optimize their performance efficiency for the
benefit of our company; and
    
    attract and retain or otherwise maintain an on-going business relationship with the
eligible participants whose contributions are or will be beneficial
to our long-term growth.
 Eligible Participants
  
    
    any full-time
or part-time employees, executives or officers of our company or any
of our subsidiaries;
    
    any
directors, including non-executive directors and independent
directors, of our company or any of our subsidiaries;
    
    any advisers,
consultants and agents to us or any of our subsidiaries; and
    
    such other persons who, in the sole opinion of our board of directors, will contribute or
have contributed to our development and operations and our quality of work, have shown
initiative and commitment in performing his/her duties, or have provided service or
contribution to our company for a specified length of time.
 Maximum Number of Shares
  55




---



##### Table of Contents



Price of Shares
  Restrictions on the Times of Grant of Options
  Transferability
  Exercise of Option and Duration of the Share Option Scheme
   Rights on Ceasing Employment or Death of an Employee
  
    
    by any reason other than death or termination of his employment on the grounds specified
in paragraph Right on Dismissal in the scheme, the grantee may exercise the option up to
the entitlement of the grantee as of the date of cessation (to the extent not already
exercised) within a period of one month from such cessation; or
    
    by reason of death, his personal representative(s) may exercise the option within a
period of 12 months from such cessation, which date shall be the last actual working day
with us or our subsidiary whether salary is paid in lieu of notice or not, failing which it
will lapse.
 Rights on Takeover/Winding-Up
  56




---



##### Table of Contents



Alteration of the Share Option Scheme
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 MAJOR SHAREHOLDERS
  Shares
beneficially ownedName
    

Number
    

%Guoren
Industrial(1)
    
    

150,000,000
    
    
    

24.0

%HXY
Investments(2)
    
    

114,587,375
    
    
    

18.3

%Actis
China(3)
    
    

61,730,925
    
    
    

9.9

%Drag
Investments(4)
    
    

64,290,000
    
    
    

10.3

%Standard
Chartered Private
Equity(5)
    
    

48,355,425
    
    
    

7.7

%Wells
Fargo & Company
(6)
    
    

46,014,950
    
    
    

7.4

%
 
 (1)
    
    Guoren Industrial is 65% owned by Mr. Yingjie Gao and 35% owned by Mr. Fan Zhang. Mr. Zhang
is not related to or otherwise affiliated with Mr. Gao.(2)
    
    Represents 120,710,000 ordinary shares owned by HXY Investments. HXY Investments is a British
Virgin Islands company 27.78% owned by Mr. Guang Shi, 18.055% by Ms. Yin Huang, 18.055% by Ms.
Rong Yu, 18.055% by Mr. Qi Wang and 18.055% by Mr. Jin
Wan.(3)
    
    Represents 61,730,925 ordinary shares owned by Actis China. Actis China is a wholly owned
subsidiary of Actis China Fund 2, L.P., which is a limited partnership registered in England.
Its limited partners have no voting or investment control over its investments (including the
shares held by Actis China Fund 2, L.P.). Investment and voting decisions are made by Actis
China Fund 2, L.P.s manager Actis Capital LLP through unanimous decision at meetings of Actis
Capital LLPs investment committee for Actis China Fund LLP. Actis China has entered into a
declaration of trust with Actis Executive Co- Investment Plan L.P. pursuant to which Actis
Executive Co-Investment Plan L.P. is the beneficial owner of 1.9% of the shares held by Actis
China.(4)
    
    Drag Investments is a British Virgin Islands company wholly owned by
Professor Kunjie Zhuang.(5)
    
    Represents 48,355,425 ordinary shares owned by Standard Chartered Private Equity. Standard
Chartered Private Equity is incorporated in Hong Kong and is indirectly wholly owned by
Standard Chartered PLC, a company incorporated in the United Kingdom. Standard Chartered PLC
is a widely held public company listed on the London Stock Exchange and the Hong Kong Stock
Exchange.(6)
    
    Wells Fargo & Company is a Delaware corporation with a diversified financial services in
banking, insurance, investments, mortgage and consumer finance. RELATED PARTY TRANSACTIONS
 Our Related-Party Transaction Policies
  57




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##### Table of Contents



Acquisitions of Equity Interests in Lake Microwave and Lake Communication
  Lease with Shenzhen Fang Sheng
  
 ITEM 8. FINANCIAL INFORMATION
  Legal Proceedings
  Dividend Policy
  
    
    the level of
our cash and retained earnings;
    
    our expected
financial performance;
    
    our projected
levels of capital expenditure and other investment plans;
    
    the adequacy
of our working capital; and
    
    the dividend yield of similarly listed companies with similar growth prospects as well as
comparable providers of wireless coverage products and services
globally.
  58




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
    Price
per ADS (US$)High
    

LowAnnual2006 (from listing date)
    
    

22.50
    
    
    

8.21QuarterlyFirst Quarter, 2006 (from listing date)
    
    

22.50
    
    
    

16.88Second Quarter, 2006
    
    

18.30
    
    
    

10.50Third Quarter, 2006
    
    

14.60
    
    
    

8.21Fourth Quarter, 2006
    
    

19.81
    
    
    

10.11MonthlyNovember 2006
    
    

17.85
    
    
    

12.75December 2006
    
    

19.81
    
    
    

15.17January 2007
    
    

19.00
    
    
    

13.68February 2007
    
    

14.23
    
    
    

11.71March 2007
    
    

12.30
    
    
    

9.06April 2007
    
    

11.81
    
    
    

9.76
 
 ITEM 10. ADDITIONAL INFORMATION
 SHARE CAPITAL
  MEMORANDUM AND ARTICLES OF ASSOCIATION
  MATERIAL CONTRACTS
  59




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##### Table of Contents



EXCHANGE CONTROLS
   TAXATION
  Cayman Islands Taxation
  United States Federal Income Taxation
   
    

    banks;
 
    
    insurance companies;
 
    
    broker dealers;
 
    
    traders in securities that elect to mark to market;
 
    
    partnerships and their partners;
 
    
    tax-exempt entities;
 
    
    holders who are not U.S. Holders;
 
    
    persons liable for alternative minimum tax;
 
    
    persons holding a share or ADS as part of a straddle, constructive sale, hedging,
conversion or integrated transaction; or
 
    
    holders that actually or constructively own 10% or more of our voting stock.
 * * * * * * * * * * * * * * * * * * * * *
 Prospective purchasers are urged to consult their tax advisors about the United States federal,
state and local tax consequences to them of the purchase, ownership and disposition of shares or
ADSs.
 * * * * * * * * * * * * * * * * * * * * *
  
    
    an individual citizen or resident of the United States;
 
    
    a corporation (or other entity treated as a corporation for United States federal
income tax purposes) organized in or under the laws of the United States, any state thereof
or the District of Columbia;
 
    
    an estate whose income is subject to United States federal income taxation regardless
of its source;
 
    
    a trust that is subject to the primary supervision of a court within the United States
and the control of one or more United States persons; or
 
    
    a trust that has a valid election in effect under applicable U.S. Treasury regulations
to be treated as a United States person.
   U.S. Holders
 Taxation of Dividends and Other Distributions on the Shares or ADSs
    Taxation of Disposition of Shares or ADSs
  Passive Foreign Investment Company
  
    
    at least 75% of its gross income is passive income, or
 
    
    at least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held for
the production of passive income.
     
    
    the excess distribution or gain will be allocated ratably over your holding period for
the shares or ADSs,
 
    
    the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we were a passive foreign investment company, will be treated
as ordinary income, and
 
    
    the amount allocated to each other year will be subject to tax at the highest tax rate
in effect for that year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.
  DIVIDENDS AND PAYING AGENTS
  STATEMENT BY EXPERTS
  DOCUMENTS ON DISPLAY
  SUBSIDIARY INFORMATION
  60




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##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART
II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS.
  USE OF PROCEEDS
     
 ITEM 15. CONTROLS AND PROCEDURES
 Evalution
of Disclosure Controls and Procedures
  Changes
in Internal Controls over Financial Reporting
   
 ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B CODE OF ETHICS
  61




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##### Table of Contents



ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit
Fees
    

Audit-Related
Fees
    

Tax
Fees
    

Other
Fees(in
millions of RMB)2005
    
    

4.2
    
    
    


    
    
    


    
    
    

2006
    
    

2.5
    
    
    


    
    
    


    
    
    


  
 ITEM
16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM
16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 ExhibitNo.
    

Description
of Exhibit1.1
    
    

Amended
and Restated Memorandum and Articles of Association of the
Registrant(1)2.1
    
    

Form
of share
certificate(1)2.2
    
    

Form
of deposit agreement, including form of American Depositary
Receipt(2)11.1
    
    

Code
of Ethics12.1
    
    

302
CEO
Certification12.2
    
    

CEO
Certification12.5
    
    

302 CFO
Certification13.1
    
    

906 Certification
by the CEO and the CFO
 
 (1)
    
    Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-132381)
filed with the SEC in connection with our global offering in
November 2004.(2)
    
    Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-132385)
filed with the SEC with respect to American Depositary Shares representing our ordinary
shares. 62




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##### Table of Contents



SIGNATURE
  China GrenTech Corporation Limited/s/ Yingjie GaoName:

Yingjie
GaoTitle:

Chief
Executive Officer  63




---



##### 



INDEX
TO THE FINANCIAL STATEMENTS
  
 Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    
    F-2Consolidated Statements of Income for the years ended December 31, 2004, 2005
and 2006
    
    
    F-3Consolidated Statements of Shareholders Equity for the years ended December 31,
2004, 2005 and 2006
    
    
    F-4Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2005 and 2006
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-8




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 F-1




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
 
 Consolidated Balance Sheets
as of December 31 2005 and 2006
  Note
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    US$AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    59,895Pledged time deposits
    
    
    3
    
    
    
    76,250
    
    
    
    238,618
    
    
    
    30,576Accounts
receivable, net of allowances for estimated settlement discounts and
doubtful debts of RMB 24,204 and RMB 21,159 respectively as of December 31, 2005 and 2006
    
    
    4
    
    
    
    537,321
    
    
    
    747,859
    
    
    
    95,829Inventories
    
    
    5
    
    
    
    370,136
    
    
    
    434,406
    
    
    
    55,664Prepaid expenses and other current assets
    
    
    
    
    
    
    51,275
    
    
    
    52,635
    
    
    
    6,744Deferred income taxes and deferred tax
charges
    
    
    6
    
    
    
    8,482
    
    
    
    7,466
    
    
    
    957Total current assets
    
    
    
    
    
    
    1,172,072
    
    
    
    1,948,407
    
    
    
    249,665Property, plant and equipment, net
    
    
    7
    
    
    
    120,356
    
    
    
    168,603
    
    
    
    21,604Lease prepayments, net
    
    
    8
    
    
    
    4,736
    
    
    
    13,632
    
    
    
    1,746Investment securities
    
    
    9
    
    
    
    7,944
    
    
    
    7,944
    
    
    
    1,018Goodwill
    
    
    11
    
    
    
    8,216
    
    
    
    8,216
    
    
    
    1,053Intangible assets, net
    
    
    10
    
    
    
    113
    
    
    
    75
    
    
    
    10Long-term accounts receivable, net
    
    
    4
    
    
    
    162,032
    
    
    
    268,957
    
    
    
    34,464Total assets
    
    
    
    
    
    
    1,475,469
    
    
    
    2,415,834
    
    
    
    309,560LiabilitiesCurrent liabilitiesShort-term bank loans
    
    
    14
    
    
    
    160,614
    
    
    
    336,050
    
    
    
    43,061Accounts payable
    
    
    
    
    
    
    174,367
    
    
    
    181,220
    
    
    
    23,221Bills payable
    
    
    
    
    
    
    29,067
    
    
    
    78,576
    
    
    
    10,069Accrued expenses and other payables
    
    
    12
    
    
    
    263,331
    
    
    
    208,833
    
    
    
    26,759Amounts due to related parties
    
    
    21
    
    
    
    1,920
    
    
    
    
    
    
    
    Income tax payable
    
    
    
    
    
    
    28,344
    
    
    
    35,760
    
    
    
    4,582Dividend payable
    
    
    
    
    
    
    80,908
    
    
    
    25,996
    
    
    
    3,331Total current liabilities
    
    
    
    
    
    
    738,551
    
    
    
    866,435
    
    
    
    111,023Long-term debt
    
    
    15
    
    
    
    167,053
    
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    905,604
    
    
    
    866,435
    
    
    
    111,023Commitments and contingencies
    
    
    25Minority interests
    
    
    
    
    
    
    17,704
    
    
    
    18,971
    
    
    
    2,431Mandatorily redeemable convertible preference shares
US$0.00002 par value; 33,634,500 shares authorized, issued
and outstanding as of December 31, 2005; fully converted
into ordinary shares and nil outstanding as of
of December 31, 2006
    
    
    16
    
    
    
    45,441
    
    
    
    
    
    
    
    Shareholders equityOrdinary shares US$0.00002 par value; 2,500,000,000 shares
authorized, 466,365,500 and 625,000,000 issued and outstanding
as of December 31, 2005 and 2006
respectively
    
    
    17
    
    
    
    77
    
    
    
    103
    
    
    
    13Contributed surplus
    
    
    
    
    
    
    158,534
    
    
    
    853,476
    
    
    
    109,363Statutory reserves
    
    
    
    
    
    
    117,092
    
    
    
    132,403
    
    
    
    16,966Retained earnings
    
    
    
    
    
    
    231,017
    
    
    
    544,446
    
    
    
    69,764Total shareholders equity
    
    
    
    
    
    
    506,720
    
    
    
    1,530,428
    
    
    
    196,106Total liabilities and shareholders equity
    
    
    
    
    
    
    1,475,469
    
    
    
    2,415,834
    
    
    
    309,560
  F-2




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
 
 Consolidated
Statements of Income
for the years ended December 31, 2004, 2005 and 2006
  Note
    
    2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Revenues
    
    
    18
    
    
    
    566,504
    
    
    
    716,270
    
    
    
    832,795
    
    
    
    106,712Cost of revenues
    
    
    19
    
    
    
    (241,930
    )
    
    
    (328,064
    )
    
    
    (437,040
    )
    
    
    (56,001
    )Gross profit
    
    
    
    
    
    
    324,574
    
    
    
    388,206
    
    
    
    395,755
    
    
    
    50,711Operating expenses:Research and development costs
    
    
    19
    
    
    
    (16,326
    )
    
    
    (30,616
    )
    
    
    (47,671
    )
    
    
    (6,108
    )Sales and distribution expenses
    
    
    19
    
    
    
    (71,035
    )
    
    
    (91,489
    )
    
    
    (112,948
    )
    
    
    (14,473
    )General and administrative
expenses
    
    
    19
    
    
    
    (29,744
    )
    
    
    (41,057
    )
    
    
    (55,944
    )
    
    
    (7,169
    )Total operating expenses
    
    
    
    
    
    
    (117,105
    )
    
    
    (163,162
    )
    
    
    (216,563
    )
    
    
    (27,750
    )Operating income
    
    
    
    
    
    
    207,469
    
    
    
    225,044
    
    
    
    179,192
    
    
    
    22,961Other income/(expense)Interest income
    
    
    
    
    
    
    4,006
    
    
    
    3,213
    
    
    
    19,186
    
    
    
    2,458Interest expense
    
    
    
    
    
    
    (39,392
    )
    
    
    (36,105
    )
    
    
    (28,026
    )
    
    
    (3,591
    )Investment income
    
    
    
    
    
    
    899
    
    
    
    159
    
    
    
    238
    
    
    
    30Foreign currency exchange
gain/(loss)
    
    
    
    
    
    
    
    
    
    
    5,584
    
    
    
    (9,875
    )
    
    
    (1,265
    )Grant income
    
    
    
    
    
    
    716
    
    
    
    16,732
    
    
    
    7,670
    
    
    
    983Total other expense
    
    
    
    
    
    
    (33,771
    )
    
    
    (10,417
    )
    
    
    (10,807
    )
    
    
    (1,385
    )Income before income tax expense and
minority interests
    
    
    
    
    
    
    173,698
    
    
    
    214,627
    
    
    
    168,385
    
    
    
    21,576Income tax expense
    
    
    6
    
    
    
    (16,020
    )
    
    
    (26,097
    )
    
    
    (18,277
    )
    
    
    (2,342
    )Income before minority interests
    
    
    
    
    
    
    157,678
    
    
    
    188,530
    
    
    
    150,108
    
    
    
    19,234Minority interests, net of tax
    
    
    
    
    
    
    (11,117
    )
    
    
    (7,086
    )
    
    
    (1,267
    )
    
    
    (162
    )Net income
    
    
    
    
    
    
    146,561
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    19,072Dividends, accretion to redemption value
and of foreign currency rate movements
on mandatorily redeemable convertible
preference shares
    
    
    16
    
    
    
    (3,509
    )
    
    
    (2,428
    )
    
    
    (549
    )
    
    
    (70
    )Net income available to ordinary
shareholders
    
    
    
    
    
    
    143,052
    
    
    
    179,016
    
    
    
    148,292
    
    
    
    19,002Net income per share available to ordinary
shareholders: Basic
    
    
    20
    
    
    
    0.31
    
    
    
    0.38
    
    
    
    0.25
    
    
    
    0.03 Diluted
    
    
    20
    
    
    
    0.29
    
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.03Weighted average number of ordinary
shares: Basic
    
    
    20
    
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    584,580,799 Diluted
    
    
    20
    
    
    
    500,000,000
    
    
    
    500,000,000
    
    
    
    593,150,684
    
    
    
    593,150,684
  F-3




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
 
 Consolidated
Statements of Shareholders Equity
for the years ended December 31, 2004, 2005 and 2006
  Ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    Contributed
    
    Statutory
    
    Retained
    
    shareholdersNote
    
    shares
    
    Amount
    
    surplus
    
    reserves
    
    earnings
    
    equityRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of January 1, 2004
    
    
    
    
    
    
    466,365,500
    
    
    
    77
    
    
    
    158,534
    
    
    
    57,249
    
    
    
    44,289
    
    
    
    260,149Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,561
    
    
    
    146,561Appropriation to statutory reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,721
    
    
    
    (25,721
    )
    
    
    Dividends declared on ordinary
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54,411
    )
    
    
    (54,411
    )Dividends declared on mandatorily
redeemable convertible
preference shares
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,193
    )
    
    
    (2,193
    )Accretion to redemption value on
mandatorily redeemable
convertible preference shares
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,316
    )
    
    
    (1,316
    )Balance as of December 31, 2004
    
    
    
    
    
    
    466,365,500
    
    
    
    77
    
    
    
    158,534
    
    
    
    82,970
    
    
    
    107,209
    
    
    
    348,790Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,444
    
    
    
    181,444Interest on long-term debt paid by
shareholders
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,567
    
    
    
    8,567Appropriation to statutory reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,122
    
    
    
    (34,122
    )
    
    
    Dividends declared on ordinary
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,653
    )
    
    
    (29,653
    )Dividends declared on mandatorily
redeemable convertible
preference shares
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,139
    )
    
    
    (2,139
    )Accretion to redemption value on
mandatorily redeemable
convertible preference shares
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,385
    )
    
    
    (1,385
    )Effect of foreign currency rate
movement on mandatorily redeemable
convertible preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,096
    
    
    
    1,096Balance as of December 31, 2005
    
    
    
    
    
    
    466,365,500
    
    
    
    77
    
    
    
    158,534
    
    
    
    117,092
    
    
    
    231,017
    
    
    
    506,720
 F-4




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Shareholders Equity
for the years ended December 31, 2004, 2005 and 2006 (Continued)
 Ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    Contributed
    
    Statutory
    
    Retained
    
    shareholdersNote
    
    shares
    
    Amount
    
    surplus
    
    reserves
    
    earnings
    
    equityRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of January 1, 2006
    
    
    
    
    
    
    466,365,500
    
    
    
    77
    
    
    
    158,534
    
    
    
    117,092
    
    
    
    231,017
    
    
    
    506,720Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,841
    
    
    
    148,841Interest on long-term debt paid by
shareholders
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,345
    
    
    
    8,345Appropriation to statutory reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,311
    
    
    
    (15,311
    )
    
    
    Dividends declared on ordinary
shares
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,609
    )
    
    
    (7,609
    )Dividends declared on mandatorily
redeemable convertible
preference shares
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (548
    )
    
    
    (548
    )Accretion to redemption value on
mandatorily redeemable
convertible preference shares
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (360
    )
    
    
    (360
    )Effect of foreign currency rate
movement on mandatorily redeemable
convertible preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359
    
    
    
    359Issue of new shares, net of related
offering costs of RMB 71,534
    
    
    1,17
    
    
    
    125,000,000
    
    
    
    20
    
    
    
    649,002
    
    
    
    
    
    
    
    
    
    
    
    649,022Conversion of mandatorily redeemable
convertible preference shares
    
    
    16
    
    
    
    33,634,500
    
    
    
    6
    
    
    
    45,940
    
    
    
    
    
    
    
    
    
    
    
    45,946Extinguishment of obligations in respect
of long-term debt and related
interest payable
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,712
    
    
    
    179,712Balance as of December 31, 2006
    
    
    
    
    
    
    625,000,000
    
    
    
    103
    
    
    
    853,476
    
    
    
    132,403
    
    
    
    544,446
    
    
    
    1,530,428Balance as of December 31,
2006  US$
    
    
    
    
    
 
     625,000,000
    
    
    
    13
    
    
    
    109,363
    
    
    
    16,966
    
    
    
    69,764
    
    
    
    196,106
  F-5




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
 
 Consolidated
Statements of Cash Flows
for the years ended December 31, 2004, 2005 and 2006
  Note
    
    2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Cash flow from operating activitiesNet income
    
    
    
    
    
    
    146,561
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    19,072Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    1,297
    
    
    
    166Depreciation of property, plant and equipment
    
    
    19
    
    
    
    11,622
    
    
    
    16,707
    
    
    
    22,050
    
    
    
    2,826Amortization of lease prepayments and intangible
assets
    
    
    
    
    
    
    131
    
    
    
    145
    
    
    
    330
    
    
    
    42Interest expense on Exchangeable Bonds
    
    
    
    
    
    
    13,706
    
    
    
    14,117
    
    
    
    3,340
    
    
    
    428Minority interests
    
    
    
    
    
    
    11,117
    
    
    
    7,086
    
    
    
    1,267
    
    
    
    162Allowance for doubtful accounts
    
    
    
    
    
    
    308
    
    
    
    1,912
    
    
    
    2,030
    
    
    
    260Deferred income taxes and deferred tax charges
    
    
    
    
    
    
    (3,353
    )
    
    
    4,228
    
    
    
    1,016
    
    
    
    130Foreign currency exchange (gain)/loss
    
    
    
    
    
    
    
    
    
    
    (5,584
    )
    
    
    8,428
    
    
    
    1,080Changes in operating assets and liabilities, net of effects
of acquisition of a subsidiary:Accounts receivable
    
    
    
    
    
    
    70,016
    
    
    
    (345,954
    )
    
    
    (319,493
    )
    
    
    (40,939
    )Inventories
    
    
    
    
    
    
    (127,278
    )
    
    
    (73,732
    )
    
    
    (64,270
    )
    
    
    (8,235
    )Prepaid expenses and other current assets
    
    
    
    
    
    
    (39,365
    )
    
    
    6,556
    
    
    
    (1,360
    )
    
    
    (174
    )Accounts payable
    
    
    
    
    
    
    84,463
    
    
    
    21,722
    
    
    
    6,853
    
    
    
    878Bills payable
    
    
    
    
    
    
    14,996
    
    
    
    (562
    )
    
    
    49,509
    
    
    
    6,344Accrued expenses and other payables
    
    
    
    
    
    
    22,518
    
    
    
    54,476
    
    
    
    19,888
    
    
    
    2,549Income tax payable
    
    
    
    
    
    
    11,561
    
    
    
    3,868
    
    
    
    7,416
    
    
    
    950Amounts due to related parties
    
    
    
    
    
    
    1,234
    
    
    
    960
    
    
    
    (1,920
    )
    
    
    (246
    )Net cash provided by/(used in) operating activities
    
    
    
    
    
    
    218,244
    
    
    
    (112,611
    )
    
    
    (114,778
    )
    
    
    (14,707
    )Cash flow from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (46,080
    )
    
    
    (40,961
    )
    
    
    (71,639
    )
    
    
    (9,180
    )Purchase of land use rights
    
    
    
    
    
    
    (962
    )
    
    
    
    
    
    
    (9,188
    )
    
    
    (1,177
    )(Increase)/decrease in pledged time deposits
    
    
    
    
    
    
    (26,694
    )
    
    
    19,658
    
    
    
    (162,368
    )
    
    
    (20,806
    )Acquisition of interests in subsidiary, net of cash acquired
    
    
    
    
    
    
    (1,067
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    466
    
    
    
    403
    
    
    
    45
    
    
    
    6Net cash used in investing activities
    
    
    
    
    
    
    (74,337
    )
    
    
    (20,900
    )
    
    
    (243,150
    )
    
    
    (31,157
    )Cash flow from financing activitiesRepurchase of registered capital interests
    
    
    17
    
    
    
    (46,000
    )
    
    
    
    
    
    
    
    
    
    
    Net proceeds from issue of new shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    649,022
    
    
    
    83,164Principal payments of short-term bank loans
    
    
    
    
    
    
    (646,330
    )
    
    
    (283,850
    )
    
    
    (342,104
    )
    
    
    (43,836
    )Proceeds from short-term bank loans
    
    
    
    
    
    
    571,330
    
    
    
    279,614
    
    
    
    517,540
    
    
    
    66,316Proceeds from/(payment for) collection of sold accounts
receivable on behalf of financial institutions, net
    
    
    
    
    
    
    98,037
    
    
    
    (25,955
    )
    
    
    (54,321
    )
    
    
    (6,961
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (10,622
    )
    
    
    (61,623
    )
    
    
    (7,896
    )Net cash (used in)/provided by financing activities
    
    
    
    
    
    
    (22,963
    )
    
    
    (40,813
    )
    
    
    708,514
    
    
    
    90,787Effect of foreign currency exchange rate change on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,771
    )
    
    
    (1,508
    )Net increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    120,944
    
    
    
    (174,324
    )
    
    
    338,815
    
    
    
    43,415Cash and cash equivalents:At beginning of year
    
    
    
    
    
    
    181,988
    
    
    
    302,932
    
    
    
    128,608
    
    
    
    16,480At end of year
    
    
    
    
    
    
    302,932
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    59,895
 F-6




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2005 and 2006 (Continued)
 2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:Income tax
    
    
    7,812
    
    
    
    18,001
    
    
    
    9,844
    
    
    
    1,261Interest expense
    
    
    25,686
    
    
    
    29,693
    
    
    
    24,686
    
    
    
    3,163Significant Non-Cash Transactions:Interest on long-term debt paid by shareholders
    
    
    
    
    
    
    8,567
    
    
    
    8,345
    
    
    
    1,069Extinguishment of obligations in respect of long-term
debt and related interest payable
    
    
    
    
    
    
    
    
    
    
    179,712
    
    
    
    23,028Conversion of mandatorily redeemable convertible
preference shares into new ordinary shares
    
    
    
    
    
    
    
    
    
    
    45,946
    
    
    
    5,887Acquisition on additional equity interest in subsidiary by
transfer and exchange of accounts
receivable
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
  F-7




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
 
 Notes to the Consolidated Financial Statements
 December 31, 2004, 2005 and 2006
 (1)
    
    Principal Activities, Basis of Presentation and Organization
 Principal Activities
  Basis of Presentation and Organization
   F-8




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (1)
    
    Principal Activities, Basis of Presentation and Organization (continued)
    (2)
    
    Summary of Significant Accounting Policies and Practices
 (a)
    
    Principles of Consolidation
  (b)
    
    Foreign Currency Transactions
    
 F-9




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (b)
    
    Foreign Currency Transactions (continued)
    (c)
    
    Use of Estimates
  (d)
    
    Cash and Cash Equivalents
  F-10




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (e)
    
    Accounts Receivable
    (f)
    
    Inventories
  (g)
    
    Property, Plant and Equipment
   YearsBuildings
    
    
    20Equipment and machinery
    
    
    5-10Motor vehicles
    
    
    10Office equipment and computer software
    
    
    5
  F-11




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (h)
    
    Lease Prepayments
  (i)
    
    Goodwill and Other Intangible Assets
 Goodwill
and Other Intangible Assets.
   F-12




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2)
    
    Summary of Significant Accounting Policies and Practices (Continued)
 (j)
    
    Investment securities
  (k)
    
    Impairment of Long-Lived Assets
   F-13




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2)
    
    Summary of Significant Accounting Policies and Practices (Continued)(l)
    
    Revenue Recognition
  Wireless coverage products and services
 Revenue Arrangements with Multiple Deliverables
  F-14




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2) Summary of Significant Accounting Policies and Practices (Continued)
 (l) Revenue Recognition (continued)
     F-15




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2) Summary of Significant Accounting Policies and Practices (Continued)
 (l) Revenue Recognition (continued)
    RF-based parts and components
   (m) Cost of Revenues
  F-16




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2) Summary of Significant Accounting Policies and Practices (Continued)
 (n) Deferred Income Taxes
  (o) Advertising and Research and Development Costs
  (p) Freight Costs
  (q) Bills Payable
  F-17




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2) Summary of Significant Accounting Policies and Practices (Continued)
 (r) Government Grants
  (s) Commitments and Contingencies
  (t) Income per Share
 Computation of Earnings per Share
 F-18




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (2) Summary of Significant Accounting Policies and Practices (Continued)
 (u) Share-Based Payment
  (v) Segment Reporting
   (w) Recently Issued Accounting Standards
 FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 F-19




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (w) Recently Issued Accounting Standards (Continued)
 Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements
 SFAS
No. 156, Accounting for Servicing of Financial Assets - an amendment of SFAS No.
140
 , Accounting for Servicing of Financial
Assets  an amendment of SFAS No. 140.
 SFAS No. 157, Fair value measurements
 Fair Value Measurements
 F-20




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (w) Recently Issued Accounting Standards (Continued)
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of SFAS No. 115
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of SFAS No. 115
 EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same
Counterparty
 Accounting for Purchases and Sales of Inventory with the Same Counterparty
 (3) Pledged Time Deposits
  2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Pledged deposits with financial institutions for security on:- accounts receivable sold (Note (a))
    
    
    57,198
    
    
    
    32,349
    
    
    
    4,145- bills payable (Note (b))
    
    
    19,052
    
    
    
    50,187
    
    
    
    6,431- short-term bank loans (Note (b))
    
    
    
    
    
    
    156,082
    
    
    
    20,00076,250
    
    
    
    238,618
    
    
    
    30,576
 F-21




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (3)
    
    Pledged Time Deposits (Continued)
 a)
    
    In its ordinary course of business, the Company entered into certain one-year agreements with
independent financial institutions to sell, on an ongoing basis, accounts receivable up to a
specified amount (which totalled RMB 400 million as of December 31, 2005 and 2006). Accounts
receivable are sold at a discount, which is adjusted based upon the timing of collection by
the financial institutions. Under the terms of certain of these agreements, a portion of the
sold receivables are subject to certain limited recourse provisions pursuant to which the
Company is required to deposit twenty percent of the sale proceeds into a restricted bank
account as security in the event of default of payment by the paying accounts receivable
customer. The cash in the restricted bank account is released to the Company upon full
payment by the customer and is released on a proportionate basis to the extent that the
collections fall short of the amount of accounts receivable sold. The Company did not
experience any significant losses under these recourse provisions during the three-year period
ended December 31, 2006. The Company surrendered control over the accounts receivable
transferred to the financial institutions. Accordingly, pursuant to the provisions of SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,accounts receivable of RMB 375,200,000 RMB 180,117,000 and RMB 117,664,000 (US$
15,077,000) were derecognized from the balance sheet on their respective dates of the transfer
during 2004, 2005 and 2006, respectively. The Company received proceeds from the sale of the
accounts receivable of RMB 360,234,000, RMB 169,041,000 and RMB
108,998,000 (US$ 13,967,000)
respectively for the years ended December 31, 2004, 2005 and 2006, and recorded a discount on
the sale of accounts receivable of RMB 14,966,000, RMB 11,076,000 and
RMB 8,666,000 (US$
1,110,000) respectively, which was included in interest expense for the years ended December 31,
2004, 2005 and 2006. Discount on the sale of accounts receivable is calculated based on the
time when the agreement was entered into but is subject to adjustments for the actual
collections of the accounts receivable. These adjustments are recorded as interest expenses in
the period during which it occurs.
   F-22




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (3) Pledged Time deposits (continued)
 b)
    
    The Company entered into several financing facilities for bills and short-term loans with
banks during the years presented. Under the terms of the arrangements, cash deposits ranging
from 30% to 100% of the respective financing facilities amount were pledged to the banks. The
pledged deposits will be released upon the termination or expiry of these facilities.
 (4) Accounts Receivable, net
  2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Accounts receivable
    
    
    721,680
    
    
    
    1,020,005
    
    
    
    130,701Less:
Allowance for estimated settlement discounts
    
    
    (20,057
    )
    
    
    (14,982
    )
    
    
    (1,920
    )701,623
    
    
    
    1,005,023
    
    
    
    128,781Less: Allowance for doubtful accounts
    
    
    (4,147
    )
    
    
    (6,177
    )
    
    
    (791
    )697,476
    
    
    
    998,846
    
    
    
    127,990Amounts due after one year, net
    
    
    (162,032
    )
    
    
    (268,957
    )
    
    
    (34,464
    )535,444
    
    
    
    729,889
    
    
    
    93,526Bills receivable
    
    
    1,877
    
    
    
    17,970
    
    
    
    2,303537,321
    
    
    
    747,859
    
    
    
    95,829
   F-23




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (4) Accounts Receivable, net (continued)
  2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Balance at beginning of year
    
    
    1,927
    
    
    
    2,235
    
    
    
    4,147
    
    
    
    532Charged to statements of income
    
    
    308
    
    
    
    1,912
    
    
    
    2,030
    
    
    
    260Balance at end of year
    
    
    2,235
    
    
    
    4,147
    
    
    
    6,177
    
    
    
    792
  2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    USS000Balance at beginning of year
    
    
    25,512
    
    
    
    26,884
    
    
    
    20,057
    
    
    
    2,570Amount charged to
statements of income
    
    
    1,372
    
    
    
    
    
    
    
    
    
    
    
    Amount written back
    
    
    
    
    
    
    (6,827
    )
    
    
    (5,075
    )
    
    
    (650
    )Balance at end of year
    
    
    26,884
    
    
    
    20,057
    
    
    
    14,982
    
    
    
    1,920
  (5) Inventories
  2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Raw materials
    
    
    55,572
    
    
    
    65,395
    
    
    
    8,380Work-in-progress
    
    
    4,057
    
    
    
    5,135
    
    
    
    658Finished goods
    
    
    310,507
    
    
    
    363,876
    
    
    
    46,626370,136
    
    
    
    434,406
    
    
    
    55,664
  F-24




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (6) Income Tax Expense
 Cayman Islands Tax
  PRC Tax
     F-25




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (6) Income Tax Expense (continued)
    PRC Income tax
    
    Current
    
    Deferred
    
    TotalRMB000
    
    RMB000
    
    RMB000Year ended December 31, 2004
    
    
    19,373
    
    
    
    (3,353
    )
    
    
    16,020Year ended December 31, 2005
    
    
    21,869
    
    
    
    4,228
    
    
    
    26,097Year ended December 31, 2006
    
    
    17,261
    
    
    
    1,016
    
    
    
    18,277Year ended December 31, 2006 (US$)
    
    
    2,212
    
    
    
    130
    
    
    
    2,342
  F-26




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (6) Income Tax Expense (continued)
 2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Income before income tax expense
    
    
    173,698
    
    
    
    214,627
    
    
    
    168,385
    
    
    
    21,576Computed expected tax expense
    
    
    26,055
    
    
    
    32,194
    
    
    
    25,258
    
    
    
    3,237Non-deductible entertainment expenses
    
    
    4,515
    
    
    
    4,072
    
    
    
    4,756
    
    
    
    609Other non-deductible expenses
    
    
    2,313
    
    
    
    284
    
    
    
    705
    
    
    
    90Non-taxable income
    
    
    (562
    )
    
    
    (1,317
    )
    
    
    (36
    )
    
    
    (5
    )Tax rate differential of other subsidiaries
    
    
    7,122
    
    
    
    7,241
    
    
    
    331
    
    
    
    43Tax holiday
    
    
    (10,642
    )
    
    
    (16,377
    )
    
    
    (13,602
    )
    
    
    (1,743
    )Deferred tax valuation allowance
    
    
    
    
    
    
    
    
    
    
    865
    
    
    
    111Income tax refunded
    
    
    (12,781
    )
    
    
    
    
    
    
    
    
    
    
    Actual income tax expense
    
    
    16,020
    
    
    
    26,097
    
    
    
    18,277
    
    
    
    2,342
  2004
    
    2005
    
    2006
    
    2006RMB
    
    RMB
    
    RMB
    
    US$Decrease in net income per share available
to ordinary shareholders:- Basic
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.003- Diluted
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.02
    
    
    
    0.003
  2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Accounts receivable
    
    
    4,637
    
    
    
    1,762
    
    
    
    226Accrued expenses
    
    
    884
    
    
    
    923
    
    
    
    118Unrealized profit on intercompany revenues
    
    
    2,961
    
    
    
    4,781
    
    
    
    613Tax losses
    
    
    
    
    
    
    865
    
    
    
    1118,482
    
    
    
    8,331
    
    
    
    1,068Less: valuation allowance
    
    
    
    
    
    
    (865
    )
    
    
    (111
    )Net deferred tax assets
    
    
    8,482
    
    
    
    7,466
    
    
    
    957
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (6) Income Tax Expense (continued)
   F-28




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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (7)
    
    Property, Plant and Equipment, netProperty, plant and equipment consist of the following:
 2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Buildings
    
    
    9,686
    
    
    
    9,686
    
    
    
    1,241Equipment and machinery
    
    
    129,973
    
    
    
    185,284
    
    
    
    23,742Motor vehicles
    
    
    18,216
    
    
    
    20,522
    
    
    
    2,630Office equipment and computer software
    
    
    5,751
    
    
    
    9,763
    
    
    
    1,251163,626
    
    
    
    225,255
    
    
    
    28,864Accumulated depreciation
    
    
    (43,270
    )
    
    
    (63,752
    )
    
    
    (8,169
    )120,356
    
    
    
    161,503
    
    
    
    20,695Construction in progress
    
    
    
    
    
    
    7,100
    
    
    
    909120,356
    
    
    
    168,603
    
    
    
    21,604
 (8)
    
    Lease Prepayments, net
 2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Prepaid land use rights
    
    
    5,421
    
    
    
    14,609
    
    
    
    1,871Accumulated amortization
    
    
    (685
    )
    
    
    (977
    )
    
    
    (125
    )4,736
    
    
    
    13,632
    
    
    
    1,746
 Amortization expense for the years ended December 31, 2004, 2005 and 2006 were RMB
94,000, RMB 108,000 and RMB 292,000 (US$ 37,000) respectively.(9)
    
    Investment SecuritiesInvestment securities at December 31, 2005 and 2006 represented a 4.67% equity interest in
Quanzhou Bank, a privately held bank in the PRC. Such investment was not marketable, and
therefore accounted for using the cost method.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (10)
    
    Intangible Assets, net
 2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Patent
    
    
    375
    
    
    
    375
    
    
    
    48Accumulated amortization
    
    
    (262
    )
    
    
    (300
    )
    
    
    (38
    )113
    
    
    
    75
    
    
    
    10
   RMB000
    
    US$0002007
    
    
    38
    
    
    
    52008
    
    
    37
    
    
    
    52009
    
    
    
    
    
    
    2010
    
    
    
    
    
    
    2011
    
    
    
    
    
    
    75
    
    
    
    10
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (11)
    
    GoodwillOn March 28, 2005, the Company entered into a sale and purchase agreement with Ms Zhang Xiu
Jun, the then 10% minority shareholder of Shenzhen Lingxian, whereby Ms Zhang sold her 9%
equity interest in Shenzhen Lingxian to Shenzhen GrenTech for RMB 20,000,000. The purchase
price was determined taking into consideration the estimated fair value of 9% equity interest
of Shenzhen Lingxian as of March 28, 2005, and was paid by the transfer of the Companys
accounts receivable with carrying value of RMB 20,000,000 as at that date. Consequently, the
Company recorded a goodwill of RMB 8,216,000 from the acquisition.The above acquisition was not considered significant to the Companys financial position or
results of operations for the periods presented.(12)
    
    Accrued Expenses and Other PayablesAccrued expenses and other payables at December 31, 2005 and 2006 consist of the following:
 2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Amounts collected on sold accounts receivable
on behalf of financial institutions (Note 3)
    
    
    72,082
    
    
    
    17,761
    
    
    
    2,276Allowance for product warranties (Note 13)
    
    
    11,794
    
    
    
    12,308
    
    
    
    1,577Accruals for salaries and welfare
    
    
    8,394
    
    
    
    9,872
    
    
    
    1,265Deferred income
    
    
    85,145
    
    
    
    47,803
    
    
    
    6,125VAT payable
    
    
    45,985
    
    
    
    91,747
    
    
    
    11,756Bsuiness and other taxes payable
    
    
    6,090
    
    
    
    9,820
    
    
    
    1,258Accrued interest on Exchangeable Bonds (Note 15)
    
    
    19,129
    
    
    
    
    
    
    
    Reimbursement payment to staff
    
    
    2,833
    
    
    
    2,680
    
    
    
    344Others
    
    
    11,879
    
    
    
    16,842
    
    
    
    2,158263,331
    
    
    
    208,833
    
    
    
    26,759
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (13)
    
    Allowance for Product WarrantiesAn analysis of the allowance for product warranties for 2004, 2005 and 2006 is as
follows:
 2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Balance at beginning of year
    
    
    9,623
    
    
    
    11,981
    
    
    
    11,794
    
    
    
    1,511Amount charged to expense
    
    
    8,011
    
    
    
    9,281
    
    
    
    8,240
    
    
    
    1,056Amount utilized
    
    
    (5,653
    )
    
    
    (9,468
    )
    
    
    (7,726
    )
    
    
    (990
    )Balance at end of year
    
    
    11,981
    
    
    
    11,794
    
    
    
    12,308
    
    
    
    1,577
 (14)
    
    Short-Term Bank LoansShort-term bank loans outstanding, which are all denominated in Renminbi, are as follows:
 2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000- Unsecured
    
    
    109,854
    
    
    
    176,050
    
    
    
    22,559- Secured
    
    
    50,760
    
    
    
    160,000
    
    
    
    20,502160,614
    
    
    
    336,050
    
    
    
    43,061
 During the years ended December 31, 2004, 2005 and 2006, the Company entered into
various loan agreements with commercial banks with terms ranging from three months to one
year to finance its working capital. None of the loan agreements requires the Company to
comply with any financial covenants. The weighted average interest rate of short-term bank
loans outstanding as of December 31, 2005 and 2006 were 4.42% and 5.58% per annum,
respectively.The Company had available undrawn committed bank loan facilities and bills financing
facilities amounting to RMB 52,756,000 (US$ 6,760,000) and RMB 40,130,000 (US$ 5,142,000)
respectively as of December 31, 2006. In addition, the Company had available committed
receivable selling facilities of RMB 258,250,000 (US$ 33,092,000) as of December 31, 2006.
Of the unutilized bills financing facilities and receivable selling facilities, the Company
will be required to pledge with the banks a time deposit equal to 30% and 20% respectively as
security for the amount to be utilized.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (15)
    
    Long-Term DebtOn December 17, 2003, the shareholders of the Company entered into an Exchangeable Bonds
Subscription Agreement (the Agreement) with three investors  Actis China Investment
Holdings No.1 Limited (Actis China), Standard Chartered Private Equity Limited (SCPEL)
and JAFCO Asia Technology Fund (JATF). Pursuant to the Agreement, the shareholders of the
Company issued exchangeable bonds (Exchangeable Bonds) at par value bearing interest at a
rate of 5% per annum, to Actis China, SCPEL and JATF for a total consideration of US$ 20.7
million. The bond holders were entitled to a premium payment when the total dividend as
declared and paid to ordinary shareholders exceeded a specified amount. The Exchangeable
Bonds would be automatically converted into approximately 131,365,500 existing ordinary shares held by the shareholders of the Company at a conversion price of US$ 0.16 per share
immediately prior and upon an initial public offering. Accordingly, no new ordinary shares
would be issued by the Company. The conversion price was determined based on the estimated
fair value of the Companys ordinary shares at the date of the Agreement. Proceeds received
by the shareholders from the issuance of the Exchangeable Bonds were entirely used by the
shareholders to subscribe 461,365,500 newly issued ordinary shares of the Company. The
Company used the proceeds from the sale of 461,365,500 newly issued ordinary shares to
complete the Reorganization through the acquisition of Shenzhen GrenTech by its wholly owned
subsidiary, GrenTech (BVI) Limited. The effect of these transactions was to distribute the
proceeds from the issuance of the Exchangeable Bonds to the Companys existing shareholders.
The ultimate shareholders and their respective proportionate ordinary share ownership
interest in the underlying net assets of the Company were identical to their respective
equity interests held in Shenzhen GrenTech as a result of these transactions (Note 1).In connection with issuance of the Exchangeable Bonds, the Company provided a guarantee to
the bondholders effective from the date of the Agreement until all liabilities of the
shareholders under the Exchangeable Bonds and the Agreement are discharged in full when the
Exchangeable Bonds are converted to ordinary shares or redeemed. Under the Agreement and the
relevant guarantee and the share pledge agreements, the Company was subject to various
covenants and restrictions, including a minimum after-tax profit requirement. In addition,
whether the anticipated initial public offering is successful or not, the holders of
Exchangeable Bonds are entitled to redeem the Exchangeable Bonds at any time after three
years from the date of issuance of the preference shares (see Note 16) or in the event of the
occurrence of triggering events such as the Company receiving third party demand letters for
immediate repayment of aggregate indebtedness over RMB 50,000,000. The Exchangeable Bonds
were redeemable at an amount equal to the principal amount of the Exchangeable Bonds plus 8%
interest.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (15)
    
    Long-Term Debt (continued)Because the Exchangeable Bonds were guaranteed by the Company, the debt obligation and
related interest costs were pushed down to the Company, and were reflected in the
consolidated financial statements as though the Company was the primary obligor. The push
down of Exchangeable Bonds was reflected as long-term debt in the consolidated balance sheet,
with a corresponding decrease in retained earnings in 2003. In association with the pushed
down debt and pursuant to the guarantee given by the Company, interest expense of RMB
13,706,000 and RMB 14,117,000 and RMB 3,340,000 (US$ 428,000), calculated based on interest
of 8% per annum, was pushed down and recognized with a corresponding increase to interest
payable for the year ended December 31, 2004, 2005 and 2006 respectively. The amount of
interest payable by the Company would depend on the satisfaction of the obligation by the
shareholders pursuant to the guarantee arrangement specified above. Upon satisfaction of the
obligation by the shareholders or release of the guarantee, the amount of interest payable
would be recorded as an adjustment to retained earnings. Any unpaid portion would be credited
to the retained earnings upon the conversion of the Exchangeable Bonds.In January 2005 and 2006, shareholders of the Company satisfied their obligation and paid
interest on the Exchangeable Bonds in the amount of RMB 8,567,000 and RMB 8,345,000 (US$
1,069,000), respectively. Accordingly, the Company reduced its accrued interest on
Exchangeable Bonds and increased retained earnings by the same amounts in the years ended
December 31, 2005 and 2006 respectively.In connection with the IPO and pursuant to a board resolution of the Company dated April 3,
2006, the Exchangeable Bonds were converted fully into 131,365,500 existing ordinary shares
held by the shareholders of the Company in April 2006. Consequently, the Companys
obligations in respect of the Exchangeable Bonds and unpaid portion of interest payable,
totalling RMB 179,712,000 (US$ 23,028,000), were extinguished and such amount was credited to
the retained earnings.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (16)
    
    Mandatorily Redeemable Convertible Preference SharesOn December 30, 2003, the Company received RMB 43,565,000 (US$ 5,300,000) from three
investors  Actis China, SCPEL and JATF, in exchange for 33,634,500 mandatorily redeemable
convertible preference shares. The holders of the preference shares were entitled to a fixed
cumulative preference dividend of 5% per annum based on the face value of the preference shares and a special dividend as when the total dividend declared and payable to the ordinary
shareholders exceeds a certain amount. In addition, upon redemption, the Company was
required to pay the subscription price plus an 8% per annum compounded return less any
preference dividends accrued, declared or paid up to the date of redemption. Cumulative
preference dividends and accretion to redemption value were reflected as a reduction to net
income to arrive at net income available to ordinary shareholders in the accompanying
consolidated statements of income. In December 2004 and 2005 and April 2006, the directors
declared a preference share dividend of RMB 0.065, RMB 0.064 and RMB 0.016 (US$ 0.002) per share, respectively, totalling RMB 2,193,000 and RMB 2,139,000 and RMB 548,000 (US$ 70,000)
to the holders of preference shares, respectively. In addition, accretion to redemption
value of RMB 1,316,000, RMB 1,385,000 and RMB 360,000 (US$ 46,000), being the difference
between the 8% yield on the mandatorily redeemable convertible preference shares upon
redemption and the actual dividend declared of 5%, was accrued and charged to consolidated
statements of income for the years ended December 31, 2004, 2005 and 2006 respectively.In connection with the IPO and pursuant to a board resolution of the Company dated April 3,
2006, the mandatorily redeemable convertible preference shares were converted fully into
33,634,500 new ordinary shares of the Company in April 2006.The mandatorily redeemable convertible preference shares contained the following terms:Liquidation PreferenceOn a distribution of assets of the Company on a winding up or other return of capital, the
holders of the preference shares are entitled, in proportion to the number of preference shares held by them and in priority to any holder of any other class of shares, to receive an
amount equal to the sum of the subscription price of the preference shares and any and all
accrued and unpaid dividends.ConversionIn accordance with the articles of association of the Company, the holders of the preference shares have the right to convert their preference shares into ordinary shares only upon the
occurrence of an initial public offering of the Companys ordinary shares. The rate at which
the preference shares shall be converted into ordinary shares shall be one ordinary share for
every one preference share, subject to certain anti-dilutive adjustments.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (16)
    
    Mandatorily Redeemable Convertible Preference Shares (continued)RedemptionIn accordance with the articles of association of the Company, the holders of preference shares are entitled to redeem the preference shares upon serving written demand to the
Company. Such demand may be made by a holder of preference share at any time after three
years from the date of issuance of the preference shares or in the event of the occurrence of
a triggering event as specified in the articles of association, such as receiving third party
demand letters for immediate repayment of aggregate indebtedness over RMB 50,000,000.Voting RightsEach mandatorily redeemable preference share carries the same number of votes as an ordinary
share.(17)
    
    Shareholders equityRegistered capitalPrior to the Reorganization, the registered capital of Shenzhen GrenTech was RMB 112,000,000.
Capital contribution in excess of the registered capital was credited to contributed surplus.In October 2003, Shenzhen GrenTech repurchased a total of 28.672% equity interests from two
shareholders, for total consideration of RMB 66,308,000 of which RMB 20,308,000 and RMB
46,000,000 was paid in 2003 and 2004 respectively. Shenzhen GrenTech, through Shenzhen
Lingxian, simultaneously sold 28.672% equity interests to the three existing shareholders of
Shenzhen GrenTech for a total consideration of RMB 66,308,000 which was fully received as of
December 31, 2003. In connection with the said share transfers, the Company had unrestricted
use of the excess cash proceeds from the reissuance of shares over the amounts paid through
the final settlement in 2004. Since all of the risks and rewards ownership of the said shares of Shenzhen GrenTech were transferred to the three existing shareholders
simultaneously with the purchase of the equity interests by Shenzhen GrenTech, the share
transfers are deemed to occur at the same time for accounting purposes.Ordinary sharesIn connection with the Reorganization described in Note 1, the Company issued 932,731
ordinary shares (as adjusted for the five-hundred-for-one share split as described below) to
the shareholders of Shenzhen GrenTech in exchange for the transfer of their equity interests
in Shenzhen GrenTech. Accordingly, the registered capital of Shenzhen GrenTech was eliminated
through a corresponding increase in the par value of ordinary shares of RMB 77,000 and
contributed surplus of RMB 111,923,000.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (17)
    
    Shareholders equity (continued)On August 25, 2005, the Company declared a five-hundred-for-one share split of the Companys shares. The share split was effected in the form of subdividing each of the
Companys issued and unissued ordinary shares and mandatorily redeemable convertible
preference shares into 500 ordinary shares and 500 redeemable convertible preference shares,
respectively. The par value of the ordinary shares was adjusted from US$ 0.01 per share to
US$ 0.00002 per share. All references in the accompanying consolidated financial statements
and notes to the number of shares, per share amounts and par value data of the Companys
ordinary and mandatorily redeemable convertible preference shares have been restated to
reflect the effect of the share split for all periods presented.On April 3, 2006, the directors declared dividends totalling RMB 7,609,000 to the holders of
the Companys ordinary shares in issue as of that date.In connection with the IPO, 125,000,000 new ordinary shares of the Company were issued to
public shareholders in April 2006 (Note 1).(18)
    
    RevenuesThe Company derives revenues from the provision of wireless coverage products and services,
which consist of the sale of wireless coverage equipment and the rendering of related
installation services, as well as sale of RF parts and components. The components of revenues
are as follows:
 2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Sale of wireless coverage products
    
    
    503,904
    
    
    
    614,503
    
    
    
    679,606
    
    
    
    87,083Installation services of wireless
coverage products
    
    
    30,115
    
    
    
    69,338
    
    
    
    108,867
    
    
    
    13,950Sale of other products
    
    
    33,857
    
    
    
    25,602
    
    
    
    39,247
    
    
    
    5,029567,876
    
    
    
    709,443
    
    
    
    827,720
    
    
    
    106,062Less: (Provision for)/write back
of settlement
discounts
    
    
    (1,372
    )
    
    
    6,827
    
    
    
    5,075
    
    
    
    650566,504
    
    
    
    716,270
    
    
    
    832,795
    
    
    
    106,712
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (19)
    
    DepreciationDepreciation of property, plant and equipment is included in the following:
 2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Cost of revenues
    
    
    6,917
    
    
    
    10,824
    
    
    
    14,366
    
    
    
    1,841Research and development costs
    
    
    1,065
    
    
    
    1,931
    
    
    
    2,504
    
    
    
    320Sales and distribution expenses
    
    
    1,468
    
    
    
    1,760
    
    
    
    2,104
    
    
    
    270General and administrative expenses
    
    
    2,172
    
    
    
    2,192
    
    
    
    3,076
    
    
    
    39411,622
    
    
    
    16,707
    
    
    
    22,050
    
    
    
    2,825
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (20)
    
    Net income available to Ordinary Shareholders
 2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Net income available to ordinary shareholders
    
    
    143,052
    
    
    
    179,016
    
    
    
    148,292
    
    
    
    19,002Denominator for basic net income available to
ordinary shareholders:Weighted average number of ordinary
shares outstanding
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    584,580,799Basic net income per share available to
ordinary shareholders
    
    
    0.31
    
    
    
    0.38
    
    
    
    0.25
    
    
    
    0.03Net income available to ordinary shareholders
    
    
    143,052
    
    
    
    179,016
    
    
    
    148,292
    
    
    
    19,002Dividend, accretion to redemption value
and foreign exchange currency rate movements
on mandatorily redeemable convertible
preference shares
    
    
    3,509
    
    
    
    2,428
    
    
    
    549
    
    
    
    70Diluted net income available to ordinary
shareholders
    
    
    146,561
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    19,072Denominator for diluted net income available to
ordinary shareholders:Weighted average number of ordinary shares
outstanding
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    584,580,799Weighted average number of mandatorily
redeemable convertible preference shares
    
    
    33,634,500
    
    
    
    33,634,500
    
    
    
    8,569,885
    
    
    
    8,569,885500,000,000
    
    
    
    500,000,000
    
    
    
    593,150,684
    
    
    
    593,150,684Diluted net income per share available to
ordinary shareholders
    
    
    0.29
    
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.03
 Basic and diluted net income per share available to ordinary shareholders for the years
ended December 31, 2004 and 2005 have been calculated as if 466,365,500 ordinary shares had
been issued and outstanding throughout for such periods.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (21)   Related Party Transactions
  2004
    
    2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    RMB000
    
    US$000Payment for rental (Note (a))
    
    
    960
    
    
    
    960
    
    
    
    960
    
    
    
    123
  2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000Due to related companyShenzhen Fang Sheng AutoBig World Management
Co., Ltd (Shenzhen Fang Sheng) (Note(a))

    
    
    1,920
    
    
    
    
    
    
    
    
  (a)
    
    Shenzhen GrenTech has leased and occupied certain premises in an office building
of floor area of approximately 1,433.35 square metres owned by Shenzhen Fang Sheng.
Certain directors of the Company are also directors of Shenzhen Fang Sheng. The lease
which expired on December 31, 2005, was subsequently renewed until December 31, 2006
under the same contract terms. A rental of RMB 960,000 which was determined with
reference to the market rental, was charged to expenses for 2004, 2005 and 2006.As of December 31, 2005, the Company had a balance due to Shenzhen Fang Sheng of RMB
1,920,000 in respect of the rental, which was fully settled during 2006.(b)
    
    As of December 31, 2005 and 2006, the 20% minority equity interest in Lake
Communication is owned by the son of a director of the Company.
 (22)
    
    Pension and Other Postretirement BenefitsPursuant to the relevant PRC regulations, the Company is required to make contributions at a
rate 8% to 9% of employees salaries and wages to a defined contribution retirement scheme
organized by the local social security bureau in respect of the retirement benefits for the
Companys employees in the PRC. The total amount of contributions of RMB 3,964,000, RMB
7,889,000 and RMB 10,970,000 (US$ 1,406,000) for the years ended December 31, 2004, 2005 and
2006 respectively, was charged to expense in the accompanying consolidated statements of
income. The Company has no other obligation to make payments in respect of retirement
benefits of the employees.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (23)
    
    Fair Value of Financial InstrumentsThe fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amount of financial
assets, such as cash and cash equivalents, short-term accounts receivable, bills receivable,
amounts due from related parties, accounts and bills payable, accruals and other payables,
amounts due to related parties and other payables, approximates their fair values because of
the short maturity of these instruments. The carrying amount of short-term borrowings
approximate fair value determined based on the borrowing rates currently available for debt
securities with similar terms and maturities. The investment securities represented unquoted
equity securities of an entity established in the PRC. There is no quoted market price for
such equity securities and accordingly, it is impracticable to have a reasonable estimate of
the fair value.Long term accounts receivables as of December 31, 2005 and 2006 were recorded in the
accompanying consolidated balance sheet at their net present value based on a discount rate
of 4.42% and 5.58% per annum respectively, which approximated the discount rate generally
available for discounting similar instruments with commercial banks in the PRC. The carrying
amount of long term accounts receivable approximate their fair value.The carrying amount of long-term debt approximated their fair value based on the borrowing
rates currently available for debt securities with similar terms and average maturities.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (24)
    
    Business and Credit ConcentrationsSubstantially all of the Companys customers are located in the PRC. The following are
customers that individually comprise 10% or more of gross revenue for the years ended
December 31, 2004, 2005 and 2006:
 2004
    
    
    
    
    
    2005
    
    
    
    
    
    2006
    
    
    
    
    
    2006RMB000
    
    %
    
    RMB000
    
    %
    
    RMB000
    
    %
    
    US$000China Unicom Group
    
    
    345,847
    
    
    
    61
    
    
    
    322,896
    
    
    
    45
    
    
    
    298,693
    
    
    
    36
    
    
    
    38,274China Mobile Group
    
    
    157,327
    
    
    
    28
    
    
    
    241,575
    
    
    
    34
    
    
    
    277,098
    
    
    
    33
    
    
    
    35,507China Telecom Group
    
    
    19,299
    
    
    
    3
    
    
    
    69,490
    
    
    
    10
    
    
    
    89,169
    
    
    
    11
    
    
    
    11,426
   2005
    
    2006
    
    2006RMB000
    
    RMB000
    
    US$000China Unicom Group Current portion
    
    
    288,052
    
    
    
    305,813
    
    
    
    39,186 Long-term portion
    
    
    79,032
    
    
    
    100,162
    
    
    
    12,835367,084
    
    
    
    405,975
    
    
    
    52,021China Mobile Group Current portion
    
    
    147,779
    
    
    
    223,374
    
    
    
    28,623 Long-term portion
    
    
    43,772
    
    
    
    80,010
    
    
    
    10,252191,551
    
    
    
    303,384
    
    
    
    38,875China Telecom Group Current portion
    
    
    35,002
    
    
    
    70,158
    
    
    
    8,990 Long-term portion
    
    
    17,164
    
    
    
    28,853
    
    
    
    3,69752,166
    
    
    
    99,011
    
    
    
    12,687610,801
    
    
    
    808,370
    
    
    
    103,583
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (25)
    
    Commitments and Contingencies
 (i)
    
    Operating lease commitmentsFuture minimum lease payments under non-cancelable operating leases as of December 31,
2006 are as follows:
 RMB000
    
    US$0002007
    
    
    6,912
    
    
    
    8862008
    
    
    1,945
    
    
    
    2492009
    
    
    1,156
    
    
    
    1482010
    
    
    
    
    
    
    2011
    
    
    
    
    
    
    10,013
    
    
    
    1,283
 For the years ended December 31, 2004, 2005 and 2006, total rental expenses for
non-cancellable and cancellable operating leases were RMB 8,480,000, RMB 13,361,000 and
RMB 16,385,000 (US$ 2,100,000), respectively.(ii)
    
    Capital commitmentsCapital commitments for future purchase of property, plant and equipment as of December
31, 2006 was RMB 219,612,000 (US$ 28,141,000).(iii)
    
    ContingenciesIn the ordinary course of its business, the Company provides customers with one to three
years of warranty protection, under which the Company agrees to repair or replace
defective installed wireless coverage products at no additional cost to the customers.
The contracts generally do not contain disclaimers or limitations on product liabilities
for special, consequential and incidental damages, nor does the Company typically cap
the amounts the customers may recover for damages. In addition, the Company does not
currently maintain any insurance for product liability or warranty claims. A failure of
the Companys products to operate properly and the potential damage from malfunction of
the Companys products could give rise to substantial liabilities under the warranties
and otherwise.
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##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2004, 2005 and 2006
 (26)
    
    China GrenTech Corporation Limited (Parent Company)In accordance with the relevant PRC regulations, the Companys subsidiaries may pay
dividends only out of their accumulated profits, if any, determined in accordance with
PRC GAAP. In addition, the Companys subsidiaries are required to set aside at least
10% of their respective accumulated profits each year, if any, to fund the statutory
general reserve until the balance of the reserve reaches 50% of their respective
registered capital. The statutory general reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year losses,
if any, and may be converted into share capital by the issue of new shares to
shareholders in proportion to their existing shareholdings, or by increasing the par
value of the shares currently held by them, provided that the reserve balance after such
issue is not less than 25% of the registered capital. As of December 31, 2006, the
statutory general reserve already reached 50% of the registered capital of certain
subsidiaries of the Company and no additional transfer is required.Furthermore, certain subsidiaries were previously required to allocate 5% to 10% of the
profit after tax, determined in accordance with PRC GAAP, to the statutory public welfare
fund, which was restricted to be used for capital expenditures for staff welfare facilities
owned by the Company. In accordance with the new regulations which became effective January
1, 2006, appropriation to the statutory public welfare fund is longer required and the
balance of the statutory public welfare fund of RMB 40,986,000 had been transferred to the
statutory general reserve on January 1, 2006.As of December 31, 2005 and 2006, an aggregate amount of RMB 117,092,000 and RMB 132,403,000
(US$ 16,966,000) were appropriated from retained earnings and set aside for statutory general
reserves and public welfare fund respectively by the Companys subsidiaries.As of December 31, 2005 and 2006, the amount of restricted net assets of the Companys
subsidiaries, which may not be transferred to the Company in the forms of loans, advances or
cash dividends by the subsidiaries without the consent of a third party, was approximately
23% and 9% respectively of the Companys consolidated net assets as discussed above. In
addition, the current foreign exchange control policies applicable in the PRC also restrict
the transfer of assets or dividends outside the PRC.
 F-44