##### 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, 2007
 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: 000-51839
 CHINA GRENTECH CORPORATION LIMITED
  
 Cayman Islands
 
 15th Floor, Block A, Guoren Building
Keji Central 3rd Road
Hi-Tech Park, Nanshan District
Shenzhen 518057, Peoples Republic of China
 
  Name of Each ExchangeTitle of Each Class
    
    On Which RegisteredAmerican Depositary Shares, each representing
25 ordinary      shares of par value US$0.00002 per share
    
    The Nasdaq Global Select MarketOrdinary shares of par value US$0.00002 per share*
    
    The Nasdaq Global Select Market *
 
 *
    
    Not for trading, but only in connection with the registration of American Depositary Shares.  None
  None
  As of December 31, 2007, 614,064,000 ordinary shares, par value US$0.00002 per share.
  o þ
  o þ
   þ o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer  o  U.S. GAAP þ
    
    International Financial Reporting Standards as issued
by the International Accounting Standards Board o
    
    Other o
  o o
  o þ




---



##### 



Table of Contents
 FORWARD-LOOKING STATEMENTS
    
    
    1SUPPLEMENTAL INFORMATION
    
    
    2PART I
    
    
    
    
    3ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3.
    
    KEY INFORMATION
    
    
    3ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    18ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
    
    
    34ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    35ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    56ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    64ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    64ITEM 9.
    
    THE OFFER AND LISTING
    
    
    65ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    66ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    70ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    70PART II
    
    
    
    
    70ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    70ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    70ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    70ITEM 16A
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    72ITEM 16B
    
    CODE OF ETHICS
    
    
    73ITEM 16C
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    73ITEM 16D
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    73ITEM 16E
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    73ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    74ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    74ITEM 19.
    
    EXHIBITS
    
    
    74EX-4.1 CONTRACT FOR GRANT OF LAND USE RIGHTEX-8.1 LIST OF SUBSIDIARIESEX-12.1 SECTION 302 CERTIFICATION OF CEOEX-12.2 SECTION 302 CERTIFICATION OF CFOEX-13.1 SECTION 906 CERTIFICATION OF CEO & CFO




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
    
    our companys reliance on business relationships with the Chinese telecommunications
operators and base station equipment manufacturers, in particular, the annual capital
spending by Chinese telecommunications operators;
    
    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 our companys ability to obtain adequate
financing for our 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 the third generation wireless communication, or 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 our companys production capacity for RF products;
    
    risks associated with possible defects and errors in our wireless coverage products or
RF products;
    
    uncertainty as to our companys ability to protect and
enforce our intellectual
property rights; and
    
    uncertainty as to our companys ability to attract and retain qualified executives and
personnel, particularly in our research and development department.
 1




---



##### Table of Contents



SUPPLEMENTAL INFORMATION
      2




---



##### Table of Contents



ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 SELECTED FINANCIAL DATA
   Year ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands, except for per share and number of shares data)Consolidated statements of income
informationRevenues
    
    
    360,816
    
    
    
    566,504
    
    
    
    716,270
    
    
    
    832,795
    
    
    
    979,302
    
    
    
    134,250Cost of revenues
    
    
    (141,053
    )
    
    
    (241,930
    )
    
    
    (328,064
    )
    
    
    (437,040
    )
    
    
    (611,436
    )
    
    
    (83,820
    )Gross profit
    
    
    219,763
    
    
    
    324,574
    
    
    
    388,206
    
    
    
    395,755
    
    
    
    367,866
    
    
    
    50,430Operating expensesResearch and development costs
    
    
    (12,410
    )
    
    
    (16,326
    )
    
    
    (30,616
    )
    
    
    (47,671
    )
    
    
    (56,525
    )
    
    
    (7,749
    )Sales and distribution expenses
    
    
    (27,965
    )
    
    
    (71,035
    )
    
    
    (91,489
    )
    
    
    (112,948
    )
    
    
    (126,816
    )
    
    
    (17,385
    )General and administrative
expenses
    
    
    (23,865
    )
    
    
    (29,744
    )
    
    
    (41,057
    )
    
    
    (55,944
    )
    
    
    (68,498
    )
    
    
    (9,390
    )Total operating expenses
    
    
    (64,240
    )
    
    
    (117,105
    )
    
    
    (163,162
    )
    
    
    (216,563
    )
    
    
    (251,839
    )
    
    
    (34,524
    )Operating income
    
    
    155,523
    
    
    
    207,469
    
    
    
    225,044
    
    
    
    179,192
    
    
    
    116,027
    
    
    
    15,906Other income/(expense)Interest income
    
    
    3,049
    
    
    
    4,006
    
    
    
    3,213
    
    
    
    19,186
    
    
    
    22,313
    
    
    
    3,059Interest expense
    
    
    (6,933
    )
    
    
    (39,392
    )
    
    
    (36,105
    )
    
    
    (28,026
    )
    
    
    (35,347
    )
    
    
    (4,846
    )Investment income
    
    
    176
    
    
    
    899
    
    
    
    159
    
    
    
    238
    
    
    
    318
    
    
    
    44Foreign currency exchange
gain/(loss)
    
    
    
    
    
    
    
    
    
    
    5,584
    
    
    
    (9,875
    )
    
    
    (18,791
    )
    
    
    (2,576
    )Grant income
    
    
    7,293
    
    
    
    716
    
    
    
    16,732
    
    
    
    7,670
    
    
    
    7,355
    
    
    
    1,008Total other income/(expense)
    
    
    3,585
    
    
    
    (33,771
    )
    
    
    (10,417
    )
    
    
    (10,807
    )
    
    
    (24,152
    )
    
    
    (3,311
    )Income before income tax expense
and minority interests
    
    
    159,108
    
    
    
    173,698
    
    
    
    214,627
    
    
    
    168,385
    
    
    
    91,875
    
    
    
    12,595Income tax expense
    
    
    (7,841
    )
    
    
    (16,020
    )
    
    
    (26,097
    )
    
    
    (18,277
    )
    
    
    (10,321
    )
    
    
    (1,415
    )Income before minority interests
    
    
    151,267
    
    
    
    157,678
    
    
    
    188,530
    
    
    
    150,108
    
    
    
    81,554
    
    
    
    11,180Minority interests, net of tax
    
    
    (2,419
    )
    
    
    (11,117
    )
    
    
    (7,086
    )
    
    
    (1,267
    )
    
    
    982
    
    
    
    135Net income
    
    
    148,848
    
    
    
    146,561
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    82,536
    
    
    
    11,315Dividends, accretion to redemption
value and foreign currency rate
movements on mandatorily
redeemable convertible preference
shares
    
    
    
    
    
    
    (3,509
    )
    
    
    (2,428
    )
    
    
    (549
    )
    
    
    
    
    
    
    Net income available to ordinary
shareholders
    
    
    148,848
    
    
    
    143,052
    
    
    
    179,016
    
    
    
    148,292
    
    
    
    82,536
    
    
    
    11,315Net income per share available to
ordinary shareholders:Basic
    
    
    0.32
    
    
    
    0.31
    
    
    
    0.38
    
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.02Diluted
    
    
    0.32
    
    
    
    0.29
    
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.02Weighted average number of
ordinary shares:Basic
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    624,624,852
    
    
    
    624,624,852Diluted
    
    
    466,365,500
    
    
    
    500,000,000
    
    
    
    500,000,000
    
    
    
    593,150,684
    
    
    
    624,624,852
    
    
    
    624,624,852Total cash dividend declared to
ordinary shareholders
    
    
    
    
    
    
    54,411
    
    
    
    29,653
    
    
    
    7,609
    
    
    
    
    
    
    
    
 3




---



##### Table of Contents



Year ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Consolidated balance sheet
informationCash and cash equivalents
    
    
    181,988
    
    
    
    302,932
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    316,778
    
    
    
    43,426Pledged time deposits
    
    
    69,214
    
    
    
    95,908
    
    
    
    76,250
    
    
    
    238,618
    
    
    
    259,786
    
    
    
    35,613Accounts receivable, net
    
    
    325,821
    
    
    
    248,662
    
    
    
    537,321
    
    
    
    747,859
    
    
    
    925,838
    
    
    
    126,921Inventories
    
    
    169,125
    
    
    
    296,404
    
    
    
    370,136
    
    
    
    434,406
    
    
    
    542,094
    
    
    
    74,314Total current assets
    
    
    776,620
    
    
    
    1,014,447
    
    
    
    1,172,072
    
    
    
    1,948,407
    
    
    
    2,107,691
    
    
    
    288,938Property, plant and equipment, net
    
    
    66,602
    
    
    
    96,505
    
    
    
    120,356
    
    
    
    161,503
    
    
    
    225,069
    
    
    
    30,855Construction in progress
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,100
    
    
    
    134,637
    
    
    
    18,457Long-term accounts receivable
    
    
    115,654
    
    
    
    126,649
    
    
    
    162,032
    
    
    
    268,957
    
    
    
    389,505
    
    
    
    53,396Total assets
    
    
    970,983
    
    
    
    1,250,539
    
    
    
    1,475,469
    
    
    
    2,415,834
    
    
    
    2,997,299
    
    
    
    410,893Short-term bank loans
    
    
    239,850
    
    
    
    164,850
    
    
    
    160,614
    
    
    
    336,050
    
    
    
    456,050
    
    
    
    62,519Total current liabilities
    
    
    479,209
    
    
    
    662,838
    
    
    
    738,551
    
    
    
    866,435
    
    
    
    1,249,081
    
    
    
    171,235Long-term bank loans
    
    
    171,325
    
    
    
    171,325
    
    
    
    167,053
    
    
    
    
    
    
    
    150,000
    
    
    
    20,563Total liabilities
    
    
    650,534
    
    
    
    834,163
    
    
    
    905,604
    
    
    
    866,435
    
    
    
    1,405,019
    
    
    
    192,612Mandatorily redeemable
convertible preference shares
    
    
    43,868
    
    
    
    45,184
    
    
    
    45,441
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    260,149
    
    
    
    348,790
    
    
    
    506,720
    
    
    
    1,530,428
    
    
    
    1,586,517
    
    
    
    217,491
 Year ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Consolidated cash flow informationNet cash (used in)/provided by
operating activities
    
    
    (99,475
    )
    
    
    218,244
    
    
    
    (112,611
    )
    
    
    (114,778
    )
    
    
    (120,228
    )
    
    
    (16,482
    )Net cash used in investing activities
    
    
    (81,626
    )
    
    
    (74,337
    )
    
    
    (20,900
    )
    
    
    (243,150
    )
    
    
    (294,437
    )
    
    
    (40,364
    )Net cash provided by/(used in)
financing activities
    
    
    251,531
    
    
    
    (22,963
    )
    
    
    (40,813
    )
    
    
    708,514
    
    
    
    272,619
    
    
    
    37,373Cash and cash equivalents at the end
of year
    
    
    181,988
    
    
    
    302,932
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    316,778
    
    
    
    43,426
 EXCHANGE RATE INFORMATION
    Noon buying ratePeriod
    
    Period end
    
    Average(1)
    
    High
    
    Low(RMB per US$1.00)2003
    
    
    8.2767
    
    
    
    8.2772
    
    
    
    8.2800
    
    
    
    8.27652004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1940
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9723
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.6072
    
    
    
    7.8127
    
    
    
    7.29462008January
    
    
    7.1818
    
    
    
    7.2405
    
    
    
    7.2946
    
    
    
    7.1818February
    
    
    7.1115
    
    
    
    7.1644
    
    
    
    7.1973
    
    
    
    7.1100March
    
    
    7.0120
    
    
    
    7.0722
    
    
    
    7.1110
    
    
    
    7.0105April
    
    
    6.9870
    
    
    
    6.9997
    
    
    
    7.0185
    
    
    
    6.9840May
    
    
    6.9400
    
    
    
    6.9725
    
    
    
    7.0000
    
    
    
    6.9377June
    
    
    6.8993
    
    
    
    6.8591
    
    
    
    6.9633
    
    
    
    6.8591July
(through July 11, 2008)
    
    
    6.8338
    
    
    
    6.8520
    
    
    
    6.8632
    
    
    
    6.8338
 
 Source:
    
    Federal Reserve Bank of New York.(1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. 4




---



##### Table of Contents



CAPITALIZATION AND INDEBTEDNESS
  REASONS FOR THE OFFER AND USE OF PROCEEDS
  5




---



##### Table of Contents



RISK FACTORS
 Risks Relating to Our Company
 We
derive a significant portion of our revenues from China United Telecommunications Corporation and its affiliates, or the China Unicom group, and China Mobile
Communications Corporation and its affiliates, or 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
  6




---



##### Table of Contents



Changes in the procurement policies by our major customers may adversely affect our revenue and
profit margin on our wireless coverage products
  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
   
    
    40% of the contract value due upon the signing of the contract and the issuance of the
completion certificate,
    
    an additional 37% due upon the issuance of the preliminary inspection certificate,
    
    a further 19% due upon the issuance of the final inspection certificate, and
 7




---



##### Table of Contents




    
    the final 4% 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
    8




---



##### Table of Contents



We rely on 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
   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
  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
  9




---



##### Table of Contents



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.
  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;
 10




---



##### Table of Contents




    
    after-sale service capability;
    
    pricing; and
    
    relationships with wireless operators.
  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
   We hire third parties to carry out some of the initial installation of our wireless coverage
products, are liable for the failure or inadequacy of their services, and may be vulnerable to the
loss and unavailability of their services
  11




---



##### Table of Contents



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;
    
    infringement by others of our proprietary technology and intellectual property rights;
or
    
    refusal by relevant regulatory authorities to approve our patent or trademark
applications.
   12




---



##### Table of Contents



If we lose certain government tax concessions, our profitability may be materially and adversely
affected
   We may be treated as a resident enterprise for PRC tax purposes following the effectiveness of the new enterprise income tax law on January 1, 2008,
which may subject us to PRC income tax for our global income and withholding income tax for any dividends we pay to our non-PRC shareholders on profits earned after January 1, 2008
   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
  13




---



##### Table of Contents



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
  The interest of our principal shareholders may differ from your interest and their vote may
disadvantage our minority shareholders
  
    
    Guoren Industrial Developments Limited with 24.4%;
    
    Heng Xing Yue Investments Limited with 15.9%; and
    
    Drag Investments Limited with 10.5%.
  
    
    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.
 14




---



##### Table of Contents



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 dividends 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
  If
we continue to have any material weakness in our internal control
over financial reporting, we may be unable to timely and accurately
report our financial results, comply with disclosure controls and
procedures, internal control over financial reporting and other
reporting obligations or prevent fraud, which could harm our business
and operating results, the trading price of our stock and our access to capital
    15




---



##### Table of Contents



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 telecommunications operators in
China
   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
  16




---



##### Table of Contents



Changes in foreign exchange regulation in China may affect our ability to pay dividends in foreign
currencies
  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
   17




---



##### Table of Contents



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
   
 ITEM 4. INFORMATION ON THE COMPANY
 HISTORY AND DEVELOPMENT
 rd
 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 Microwave is owned by Lake (Hong Kong) Technology
Limited, an affiliated company of Professor Zhuang.    
    
    Shenzhen Lingxian Technology Co., Ltd., or Shenzhen Lingxian;
 19




---



##### Table of Contents




    
    Quanzhou Lake Communication Co., Ltd., or Lake Communication;
    
    Quanzhou Lake Microwave Co., Ltd., or Lake Microwave;
    
    Shenzhen Kaige Communication Technology Co., Ltd., or Shenzhen Kaige; and
    
    Shenzhen Kaixuan Communication Technology Co., Ltd., or Shenzhen Kaixuan.
 Shenzhen Lingxian
  Lake Communication
  Lake Microwave
  Shenzhen Kaige
  Shenzhen Kaixuan
  20




---



##### Table of Contents



BUSINESS
 Overview
      Our Wireless Coverage Products and Services
  21




---



##### Table of Contents



Wireless Coverage Products
   Indoor Coverage
 Outdoor Coverage
  Our Services
  Design Services.
 Installation of Wireless Coverage Products.
 22




---



##### Table of Contents



Project Warranties.
 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.
  23




---



##### Table of Contents



Initial Inspection of Installed Wireless Coverage Products.
 Contract Signing.
 Additional Inspection and Warranty Period.
 Payment.
 Selected Completed Projects
  Project
    
    Location
    
    Customer
    
    Completion dateIndoor coverageBeijing Subway Line No. 1
    
    Beijing
    
    Beijing Zhengtong
Network
Telecommunications
    
    December 2007Guangcai International Mansion
    
    Beijing
    
    China Unicom group
    
    May 2007Grand Lisboa Phase II
    
    Macau
    
    China Unicom group
    
    November 2007Brilliance Shimao International Plaza
    
    Shanghai
    
    China Mobile group
    
    March 2007Jin Mao Tower
    
    Shanghai
    
    China Telecom group
    
    November 2007Tianjin Olympic Center
    
    Tianjin
    
    China Unicom group
    
    March 2007Wuhan Times Square
    
    Wuhan
    
    China Unicom group
    
    December 2007Chairman Maos Memorial Hall
    
    Beijing
    
    China Unicom group
    
    December 2007Walmart Headquarters in Asia
    
    Shenzhen
    
    China Unicom group
    
    January 2007Jinan University
    
    Guangzhou
    
    China Unicom group
    
    August 2007Maotai Distillery Office Tower
    
    Zunyi
    
    China Unicom group
    
    November 2007Outdoor coveragePudong Avenue
    
    Shanghai
    
    China Mobile group
    
    January 2007Jinbei Highway
    
    Tianjin
    
    China Unicom group
    
    September 2007Flaming Mountains in Turpan
    
    Turpan
    
    China Unicom group
    
    May 2007Reservoir at Grape Village, Turpan City
    
    Turpan
    
    China Unicom group
    
    June 2007
 24




---



##### Table of Contents



Our RF Parts and Components
    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 47 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.
 25




---



##### Table of Contents



Production
 Production Facilities
   Production facilities
    
    Type of products
    
    Capacity
    
    Utilization(sets per month)
    
    (sets per month)Shenzhen
    
    Wireless coverage products
    
    
    2,667
    
    
    
    1,908RF parts and components for base stations
    
    
    30,000
    
    
    
    25,000Quanzhou
    
    RF parts and components for repeaters
    
    
    18,000
    
    
    
    14,225
 Shenzhen Production Facilities.
 Quanzhou Production Facilities.
 Production Process
   
    
    integrated circuit board processing;
    
    covering and welding;
    
    manufacturing and assembly;
    
    testing; and
    
    quality control.
   26




---



##### Table of Contents



Quality Control
  Quality Control for Raw Materials.
 Quality Control During Production.
 Final Testing Before Delivery.
 Testing at Customer Site.
 Warranty.
  Research and Development
  RF Technology
  27




---



##### Table of Contents



Research and Development Facilities
  Sales, Marketing and Key Customers
 Sales and Marketing Team
     28




---



##### Table of Contents



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 31,2005
    
    2006
    
    2007(RMB)
    
    (%)
    
    (RMB)
    
    (%)
    
    (RMB)
    
    (US$)
    
    (%)(in millions, except for percentages)Wireless coverage products:China Unicom group
    
    
    322.9
    
    
    
    45.1
    %
    
    
    298.7
    
    
    
    35.9
    %
    
    
    377.8
    
    
    
    51.8
    
    
    
    38.6
    %China Mobile group
    
    
    241.6
    
    
    
    33.8
    
    
    
    277.1
    
    
    
    33.3
    
    
    
    317.7
    
    
    
    43.6
    
    
    
    32.4China Telecom group
    
    
    69.5
    
    
    
    9.7
    
    
    
    89.2
    
    
    
    10.7
    
    
    
    49.6
    
    
    
    6.8
    
    
    
    5.1China Netcom group
    
    
    36.8
    
    
    
    5.1
    
    
    
    69.2
    
    
    
    8.3
    
    
    
    20.5
    
    
    
    2.8
    
    
    
    2.1Overseas customers
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    1.2
    
    
    
    11.6
    
    
    
    1.6
    
    
    
    1.2Others
    
    
    23.4
    
    
    
    3.3
    
    
    
    56.6
    
    
    
    6.8
    
    
    
    28.6
    
    
    
    3.9
    
    
    
    2.9Subtotal
    
    
    694.2
    
    
    
    97.0
    
    
    
    800.8
    
    
    
    96.2
    
    
    
    805.8
    
    
    
    110.5
    
    
    
    82.3RF products:Equipment manufacturers
    
    
    22.1
    
    
    
    3.1
    
    
    
    32.0
    
    
    
    3.8
    
    
    
    173.5
    
    
    
    23.8
    
    
    
    17.7Total
    
    
    716.3
    
    
    
    100.0
    %
    
    
    832.8
    
    
    
    100.0
    %
    
    
    979.3
    
    
    
    134.3
    
    
    
    100.0
    %
   29




---



##### Table of Contents



Suppliers and Raw Materials
  Competition
   
    
    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;
 30




---



##### Table of Contents




    
    expanding customer base, beginning with the China Mobile group and the China Unicom
group, and now including new entrants, the China Telecom group, and overseas customers;
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.
     Property
 Owned Property
   Leased Property
  31




---



##### Table of Contents



Intellectual Property Rights
     Insurance
  Employees
  Number of employeesManagement and administrative
    
    
    346Research and development
    
    
    429Production and quality control
    
    
    905Project design and technical service
    
    
    688Sales and marketing
    
    
    368Total
    
    
    2,736
   32




---



##### Table of Contents



Legal Proceedings
  Industry Regulation in China
  Research, Development and Production of Radio Transmission Equipment
   Connection of Radio Communication Equipment with a Public Telecommunication Network
  Installation of Wireless Coverage Equipment
   
    
    lead project contractors,
    
    specialized contractors, and
    
    service subcontractors.
 33




---



##### Table of Contents



Our Compliance with Regulations
       
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  34




---



##### 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
     35




---



##### Table of Contents



KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
  Expenditure
by Wireless Operators and Base Station Equipment Manufacturers
  Our Business Practice with Wireless Operators and Its Implication on Our Financial Condition
and Results of Operations
  Revenue Recognition Policy and Accounts Receivable Cycle
   
    
    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.
 
 36




---



##### Table of Contents




    
    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.
     37




---



##### Table of Contents



Liquidity Concern Arising out of Our Accounts Receivable Cycle and Revenue Cycle
  Significant Quarterly Fluctuations of Our Results of Operations
   38




---



##### 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 31,2005
    
    2005
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006
    
    2007
    
    2007
    
    2007
    
    2007(in thousands of RMB)Revenues
    
    
    8,272
    
    
    
    173,888
    
    
    
    156,042
    
    
    
    378,068
    
    
    
    14,796
    
    
    
    179,976
    
    
    
    187,729
    
    
    
    450,294
    
    
    
    31,286
    
    
    
    203,024
    
    
    
    273,214
    
    
    
    471,778Cost of revenues
    
    
    (3,871
    )
    
    
    (73,807
    )
    
    
    (75,915
    )
    
    
    (174,471
    )
    
    
    (6,787
    )
    
    
    (90,505
    )
    
    
    (98,659
    )
    
    
    (241,089
    )
    
    
    (18,300
    )
    
    
    (120,378
    )
    
    
    (165,634
    )
    
    
    (307,124
    )Gross profit
    
    
    4,401
    
    
    
    100,081
    
    
    
    80,127
    
    
    
    203,597
    
    
    
    8,009
    
    
    
    89,471
    
    
    
    89,070
    
    
    
    209,205
    
    
    
    12,986
    
    
    
    82,646
    
    
    
    107,580
    
    
    
    164,654Operating expenses:Research and development
costs
    
    
    (5,820
    )
    
    
    (6,935
    )
    
    
    (7,455
    )
    
    
    (10,406
    )
    
    
    (8,393
    )
    
    
    (8,306
    )
    
    
    (13,882
    )
    
    
    (17,090
    )
    
    
    (13,201
    )
    
    
    (14,326
    )
    
    
    (13,286
    )
    
    
    (15,712
    )Sales and distribution
expenses
    
    
    (19,566
    )
    
    
    (23,078
    )
    
    
    (25,980
    )
    
    
    (22,865
    )
    
    
    (24,138
    )
    
    
    (26,606
    )
    
    
    (25,905
    )
    
    
    (36,299
    )
    
    
    (28,599
    )
    
    
    (31,854
    )
    
    
    (33,636
    )
    
    
    (32,727
    )General and administrative
expenses
    
    
    (9,846
    )
    
    
    (9,015
    )
    
    
    (10,407
    )
    
    
    (11,789
    )
    
    
    (11,109
    )
    
    
    (10,967
    )
    
    
    (11,377
    )
    
    
    (22,491
    )
    
    
    (13,405
    )
    
    
    (15,655
    )
    
    
    (14,473
    )
    
    
    (24,965
    )Total operating expenses
    
    
    (35,232
    )
    
    
    (39,028
    )
    
    
    (43,842
    )
    
    
    (45,060
    )
    
    
    (43,640
    )
    
    
    (45,879
    )
    
    
    (51,164
    )
    
    
    (75,880
    )
    
    
    (55,205
    )
    
    
    (61,835
    )
    
    
    (61,395
    )
    
    
    (73,404
    )Operating income/(loss)
    
    
    (30,831
    )
    
    
    61,053
    
    
    
    36,285
    
    
    
    158,537
    
    
    
    (35,631
    )
    
    
    43,592
    
    
    
    37,906
    
    
    
    133,325
    
    
    
    (42,219
    )
    
    
    20,811
    
    
    
    46,185
    
    
    
    91,250Other (expense)/incomeInterest income
    
    
    583
    
    
    
    1,127
    
    
    
    371
    
    
    
    1,132
    
    
    
    859
    
    
    
    5,761
    
    
    
    8,108
    
    
    
    4,458
    
    
    
    2,456
    
    
    
    1,776
    
    
    
    2,525
    
    
    
    15,556Interest expense
    
    
    (5,438
    )
    
    
    (11,253
    )
    
    
    (10,104
    )
    
    
    (9,310
    )
    
    
    (8,897
    )
    
    
    (6,369
    )
    
    
    (4,063
    )
    
    
    (8,697
    )
    
    
    (6,062
    )
    
    
    (6,525
    )
    
    
    (8,398
    )
    
    
    (14,362
    )Investment income
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    Foreign currency exchange
gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,584
    
    
    
    1,101
    
    
    
    
    
    
    
    (6,333
    )
    
    
    (4,643
    )
    
    
    (2,788
    )
    
    
    (2,941
    )
    
    
    (4,369
    )
    
    
    (8,693
    )Grant income
    
    
    
    
    
    
    100
    
    
    
    250
    
    
    
    16,382
    
    
    
    127
    
    
    
    100
    
    
    
    
    
    
    
    7,443
    
    
    
    120
    
    
    
    3,310
    
    
    
    1,000
    
    
    
    2,925Total other
(expense)/income
    
    
    (4,855
    )
    
    
    (9,867
    )
    
    
    (9,483
    )
    
    
    13,788
    
    
    
    (6,571
    )
    
    
    (508
    )
    
    
    (2,288
    )
    
    
    (1,439
    )
    
    
    (6,274
    )
    
    
    (4,062
    )
    
    
    (9,242
    )
    
    
    (4,574
    )Income/(loss) before income
tax benefit/(expense) and
minority interests
    
    
    (35,686
    )
    
    
    51,186
    
    
    
    26,802
    
    
    
    172,325
    
    
    
    (42,202
    )
    
    
    43,084
    
    
    
    35,618
    
    
    
    131,885
    
    
    
    (48,493
    )
    
    
    16,749
    
    
    
    36,943
    
    
    
    86,676Income tax (expense)/benefit
    
    
    2,728
    
    
    
    (7,449
    )
    
    
    (7,093
    )
    
    
    (14,283
    )
    
    
    5,931
    
    
    
    (3,583
    )
    
    
    (5,043
    )
    
    
    (15,582
    )
    
    
    3,441
    
    
    
    (1,360
    )
    
    
    (3,816
    )
    
    
    (8,586
    )Income/(loss) before minority
interests
    
    
    (32,958
    )
    
    
    43,737
    
    
    
    19,709
    
    
    
    158,042
    
    
    
    (36,271
    )
    
    
    39,501
    
    
    
    30,575
    
    
    
    116,303
    
    
    
    (45,052
    )
    
    
    15,389
    
    
    
    33,127
    
    
    
    78,090Minority interests, net of tax
    
    
    655
    
    
    
    (3,276
    )
    
    
    (1,443
    )
    
    
    (3,022
    )
    
    
    533
    
    
    
    (68
    )
    
    
    162
    
    
    
    (1,894
    )
    
    
    241
    
    
    
    784
    
    
    
    (5
    )
    
    
    (38
    )Net Income/(loss)
    
    
    (32,303
    )
    
    
    40,461
    
    
    
    18,266
    
    
    
    155,020
    
    
    
    (35,738
    )
    
    
    39,433
    
    
    
    30,737
    
    
    
    114,410
    
    
    
    (44,811
    )
    
    
    16,173
    
    
    
    33,122
    
    
    
    78,052Dividends, accretion to
redemption value and of
foreign currency rate
movements on mandatorily
redeemable convertible
preference shares
    
    
    (904
    )
    
    
    (903
    )
    
    
    166
    
    
    
    (787
    )
    
    
    (909
    )
    
    
    360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Income/(loss) available
to ordinary shareholders
    
    
    (33,207
    )
    
    
    39,558
    
    
    
    18,432
    
    
    
    154,233
    
    
    
    (36,647
    )
    
    
    39,793
    
    
    
    30,737
    
    
    
    114,410
    
    
    
    (44,811
    )
    
    
    16,173
    
    
    
    33,122
    
    
    
    78,052
 As
ofMarch 31,
    
    June 30,
    
    Sept, 30
    
    Dec 31,
    
    March 31,
    
    June 30,
    
    Sept, 30
    
    Dec 31,
    
    March 31,
    
    June 30,
    
    Sept, 30
    
    Dec 31,2005
    
    2005
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006
    
    2007
    
    2007
    
    2007
    
    2007(in thousands of RMB)Cash and cash equivalents
    
    
    101,731
    
    
    
    80,080
    
    
    
    98,362
    
    
    
    128,608
    
    
    
    36,064
    
    
    
    647,751
    
    
    
    399,680
    
    
    
    467,423
    
    
    
    290,346
    
    
    
    303,642
    
    
    
    205,319
    
    
    
    316,778Pledged time deposits
    
    
    77,850
    
    
    
    75,417
    
    
    
    59,173
    
    
    
    76,250
    
    
    
    65,044
    
    
    
    65,652
    
    
    
    77,150
    
    
    
    238,618
    
    
    
    212,319
    
    
    
    228,065
    
    
    
    213,208
    
    
    
    259,786Accounts receivable, net
    
    
    237,276
    
    
    
    272,831
    
    
    
    370,816
    
    
    
    537,321
    
    
    
    461,360
    
    
    
    563,192
    
    
    
    604,360
    
    
    
    747,859
    
    
    
    720,433
    
    
    
    806,760
    
    
    
    938,746
    
    
    
    925,838Long-term accounts
receivable
    
    
    103,038
    
    
    
    141,956
    
    
    
    128,732
    
    
    
    162,032
    
    
    
    176,387
    
    
    
    214,331
    
    
    
    298,228
    
    
    
    268,957
    
    
    
    247,728
    
    
    
    281,830
    
    
    
    312,217
    
    
    
    389,505Short-term bank loans
    
    
    90,850
    
    
    
    158,450
    
    
    
    221,514
    
    
    
    160,614
    
    
    
    183,990
    
    
    
    261,631
    
    
    
    266,050
    
    
    
    336,050
    
    
    
    333,550
    
    
    
    426,050
    
    
    
    436,050
    
    
    
    456,050Long-term debt
    
    
    171,325
    
    
    
    171,325
    
    
    
    171,325
    
    
    
    167,053
    
    
    
    165,952
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,000
  FINANCIAL OVERVIEW
 Revenues
   Year ended December 31,2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %(in millions, except for percentages)Wireless coverage solutionsSale of wireless coverage products
    
    
    614.5
    
    
    
    85.8
    %
    
    
    679.6
    
    
    
    81.6
    %
    
    
    575.3
    
    
    
    78.9
    
    
    
    58.7
    %Installation services
    
    
    69.3
    
    
    
    9.7
    
    
    
    108.9
    
    
    
    13.1
    
    
    
    223.5
    
    
    
    30.6
    
    
    
    22.8RF parts and components
    
    
    22.0
    
    
    
    3.1
    
    
    
    32.0
    
    
    
    3.8
    
    
    
    173.6
    
    
    
    23.8
    
    
    
    17.7(Provision)/write back for settlement discounts
    
    
    6.8
    
    
    
    0.9
    
    
    
    5.1
    
    
    
    0.6
    
    
    
    4.3
    
    
    
    0.6
    
    
    
    0.5Others
    
    
    3.7
    
    
    
    0.5
    
    
    
    7.2
    
    
    
    0.9
    
    
    
    2.6
    
    
    
    0.4
    
    
    
    0.3Total
    
    
    716.3
    
    
    
    100.0
    %
    
    
    832.8
    
    
    
    100.0
    %
    
    
    979.3
    
    
    
    134.3
    
    
    
    100.0
    %
 39




---



##### Table of Contents



Wireless
Coverage Products and Services.
  Sale of RF Parts and Components.
 Cost of Revenues
   Year ended December 31,2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %(in millions, except for percentages)Cost of hardware
    
    
    277.3
    
    
    
    84.5
    %
    
    
    352.8
    
    
    
    80.7
    %
    
    
    459.8
    
    
    
    63.0
    
    
    
    75.2
    %Cost of services
    
    
    50.8
    
    
    
    15.5
    
    
    
    84.2
    
    
    
    19.3
    
    
    
    151.6
    
    
    
    20.8
    
    
    
    24.8Total
    
    
    328.1
    
    
    
    100.0
    %
    
    
    437.0
    
    
    
    100.0
    %
    
    
    611.4
    
    
    
    83.8
    
    
    
    100.0
    %
 Cost of Hardware.
 40




---



##### Table of Contents



Cost of Services.
 Operating Expenses
  Year ended December 31,2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %(in millions, except for percentages)Research and development
costs
    
    
    30.6
    
    
    
    18.8
    %
    
    
    47.7
    
    
    
    22.0
    %
    
    
    56.5
    
    
    
    7.7
    
    
    
    22.4
    %Sales and distribution
expenses
    
    
    91.5
    
    
    
    56.1
    
    
    
    113.0
    
    
    
    52.2
    
    
    
    126.8
    
    
    
    17.4
    
    
    
    50.4General and administrative
expenses
    
    
    41.1
    
    
    
    25.1
    
    
    
    55.9
    
    
    
    25.8
    
    
    
    68.5
    
    
    
    9.4
    
    
    
    27.2Total operating expenses
    
    
    163.2
    
    
    
    100.0
    %
    
    
    216.6
    
    
    
    100.0
    
    
    
    251.8
    
    
    
    34.5
    
    
    
    100.0
    %
 Research and Development Costs.
 Sales and Distribution Expenses.
 General and Administrative Expenses.
 Interest Expense
  41




---



##### Table of Contents



Year ended December 31,2005
    
    2006
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Bank loan interest
    
    
    9,290
    
    
    
    13,709
    
    
    
    24,345
    
    
    
    3,337Receivable discounting fee
    
    
    11,076
    
    
    
    8,666
    
    
    
    7,753
    
    
    
    1,063Financial charges on bills financing
    
    
    1,043
    
    
    
    1,082
    
    
    
    1,192
    
    
    
    163Interest on exchangeable bonds (1)
    
    
    14,117
    
    
    
    3,341
    
    
    
    
    
    
    
    Others (2)
    
    
    579
    
    
    
    1,228
    
    
    
    2,057
    
    
    
    282Total
    
    
    36,105
    
    
    
    28,026
    
    
    
    35,347
    
    
    
    4,846
 
 (1)
    
    In 2003, several of our ordinary shareholders, including Guoren Industrial Developments
Limited, Heng Xing Yue Investments Limited and Drag Investments Limited, 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 were exchangeable into our ordinary
shares held by these ordinary shareholders. These exchangeable bonds were redeemable at an
amount equal to their principal amount plus 8% interest. Because we
guaranteed the bonds, we
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. As a result, we were
no longer required to accrue interest expense with respect to the exchangeable bonds in 2007.(2)
    
    Others mainly consist of bank fees. Income Tax Expense
  Minority Interests, Net of Tax
  42




---



##### Table of Contents



Critical Accounting Policies
  Revenue Recognition.
 
    
    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.
    43




---



##### Table of Contents



Year ended December 31,2005
    
    2006
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Balance at beginning of year
    
    
    26,884
    
    
    
    20,057
    
    
    
    14,982
    
    
    
    2,054Reversal during the year
    
    
    (6,827
    )
    
    
    (5,075
    )
    
    
    (4,325
    )
    
    
    (593
    )Balance at end of year
    
    
    20,057
    
    
    
    14,982
    
    
    
    10,657
    
    
    
    1,461
 Allowance for Doubtful Accounts.
 Year ended December 31,2005
    
    2006
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Balance at beginning of year
    
    
    2,235
    
    
    
    4,147
    
    
    
    6,177
    
    
    
    846Bad debt expense
    
    
    1,912
    
    
    
    2,030
    
    
    
    16,177
    
    
    
    2,218Balance at end of year
    
    
    4,147
    
    
    
    6,177
    
    
    
    22,354
    
    
    
    3,064
 Inventories.
  Allowance for Warranties.
 Valuation of Long-lived Assets.
 44




---



##### Table of Contents



Acquisitions.
 Recoverability of the carrying amount of goodwill.
   Results of Operations
  Year ended December 31,2005
    
    2006
    
    2007Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    (45.8
    )
    
    
    (52.5
    )
    
    
    (62.4
    )Gross profit
    
    
    54.2
    
    
    
    47.5
    
    
    
    37.6Operating expenses:Research and development costs
    
    
    (4.3
    )
    
    
    (5.7
    )
    
    
    (5.8
    )Sales and distribution expenses
    
    
    (12.8
    )
    
    
    (13.6
    )
    
    
    (12.9
    )General and administrative expenses
    
    
    (5.7
    )
    
    
    (6.7
    )
    
    
    (7.0
    )Total operating expenses
    
    
    (22.8
    )
    
    
    (26.0
    )
    
    
    (25.7
    )Operating income
    
    
    31.4
    
    
    
    21.5
    
    
    
    11.9Other (expense)/ income:Interest income
    
    
    0.4
    
    
    
    2.3
    
    
    
    2.3Interest expense
    
    
    (5.0
    )
    
    
    (3.4
    )
    
    
    (3.6
    )Investment income
    
    
    
    
    
    
    
    
    
    
    Foreign currency exchange gain/(loss)
    
    
    0.8
    
    
    
    (1.2
    )
    
    
    (1.9
    )Grant income
    
    
    2.3
    
    
    
    0.9
    
    
    
    0.7Total other (expense)/income
    
    
    (1.5
    )
    
    
    (1.3
    )
    
    
    (2.5
    )Income before income tax expense and minority interests
    
    
    29.9
    
    
    
    20.2
    
    
    
    9.4Income tax expense
    
    
    (3.6
    )
    
    
    (2.2
    )
    
    
    (1.1
    )Income before minority interests
    
    
    26.3
    
    
    
    18.0
    
    
    
    8.3Minority interests, net of tax
    
    
    (1.0
    )
    
    
    (0.2
    )
    
    
    0.1Net income
    
    
    25.3
    
    
    
    17.9
    
    
    
    8.4Dividends, accretion to redemption values and foreign
exchange rate movements on mandatorily redeemable
convertible preference shares
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    Net income available to ordinary shareholders
    
    
    24.8
    
    
    
    17.8
    
    
    
    8.4
 45




---



##### Table of Contents



2007 compared to 2006
 Revenues.
 Cost
of Revenues.
 Gross Profit.
 Research and Development Costs.
 Sales and Distribution Expenses.
 General and Administrative Expenses.
 Operating Income.
 Other Expense/Income.
 46




---



##### Table of Contents



Income Tax Expense.
 Minority Interests.
 Net Income.
 2006 compared to 2005
 Revenues.
 Cost of Revenues.
 Gross Profit.
 Research and Development Costs.
 Sales and Distribution Expenses.
 General and Administrative Expenses.
 Operating Income.
 Other Expense/Income.
 47




---



##### Table of Contents



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 31,2005
    
    2006
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Net cash used in operating activities
    
    
    (112,611
    )
    
    
    (114,778
    )
    
    
    (120,228
    )
    
    
    (16,482
    )Net cash used in investing activities
    
    
    (20,900
    )
    
    
    (243,150
    )
    
    
    (294,437
    )
    
    
    (40,364
    )Net cash (used in)/provided by financing activities
    
    
    (40,813
    )
    
    
    708,514
    
    
    
    272,619
    
    
    
    37,373Cash and cash equivalents at the end of year
    
    
    128,608
    
    
    
    467,423
    
    
    
    316,778
    
    
    
    43,426
  48




---



##### Table of Contents



Accounts Receivable and Receivable Selling
   As of December 31, 2007(RMB)
    
    (US$)
    
    (%)(in millions, except for percentages)China Unicom group
    
    
    528.5
    
    
    
    72.5
    
    
    
    40.1
    %China Mobile group
    
    
    379.0
    
    
    
    52.0
    
    
    
    28.8China Telecom group
    
    
    116.4
    
    
    
    16.0
    
    
    
    8.8China Netcom group
    
    
    61.6
    
    
    
    8.4
    
    
    
    4.7Others
    
    
    232.4
    
    
    
    31.8
    
    
    
    17.6Total
    
    
    1,317.9
    
    
    
    180.7
    
    
    
    100
    %
  As of December 31,2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %(in millions, except for percentages)Less than one year
    
    
    526.7
    
    
    
    75.1
    %
    
    
    700.9
    
    
    
    69.7
    %
    
    
    831.1
    
    
    
    113.9
    
    
    
    63.1
    %Between one to two years
    
    
    154.0
    
    
    
    22.0
    
    
    
    231.3
    
    
    
    23.0
    
    
    
    275.4
    
    
    
    37.8
    
    
    
    20.8Between two to three years
    
    
    17.0
    
    
    
    2.4
    
    
    
    68.0
    
    
    
    6.8
    
    
    
    153.8
    
    
    
    21.1
    
    
    
    11.7Over three years
    
    
    3.9
    
    
    
    0.5
    
    
    
    4.8
    
    
    
    0.5
    
    
    
    57.6
    
    
    
    7.9
    
    
    
    4.4Total
    
    
    701.6
    
    
    
    100.0
    %
    
    
    1,005.0
    
    
    
    100.0
    %
    
    
    1,317.9
    
    
    
    180.7
    
    
    
    100.0
    %
 49




---



##### Table of Contents



As of December 31,2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %(in millions, except for percentages)Contractually due
    
    
    246.1
    
    
    
    35.1
    %
    
    
    353.5
    
    
    
    35.2
    %
    
    
    505.3
    
    
    
    69.3
    
    
    
    38.3
    %Non-contractually due
    
    
    455.5
    
    
    
    64.9
    %
    
    
    651.5
    
    
    
    64.8
    %
    
    
    812.6
    
    
    
    111.4
    
    
    
    61.7
    %Total
    
    
    701.6
    
    
    
    100.0
    %
    
    
    1,005.0
    
    
    
    100.0
    %
    
    
    1,317.9
    
    
    
    180.7
    
    
    
    100.0
    %
       50




---



##### Table of Contents



Inventories
   As of December 31,2005
    
    2006
    
    2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (US$)(in thousands)Raw materials
    
    
    55,572
    
    
    
    65,395
    
    
    
    137,723
    
    
    
    18,880Work in progress
    
    
    4,057
    
    
    
    5,135
    
    
    
    14,014
    
    
    
    1,921Finished goods
    
    
    310,507
    
    
    
    363,876
    
    
    
    390,357
    
    
    
    53,513Total
    
    
    370,136
    
    
    
    434,406
    
    
    
    542,094
    
    
    
    74,314
   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
    
    
    380,389
    
    
    
    52,147
    
    
    
    97.4
    %
    
    
    14,014
    
    
    
    1,921
    
    
    
    100
    %
    
    
    127,302
    
    
    
    17,452
    
    
    
    92.4
    %
    
    
    521,705
    
    
    
    71,519
    
    
    
    96.2
    %One to two years
    
    
    7,640
    
    
    
    1,047
    
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,421
    
    
    
    1,429
    
    
    
    7.6
    
    
    
    18,061
    
    
    
    2,476
    
    
    
    3.3Over two years
    
    
    2,328
    
    
    
    319
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,328
    
    
    
    319
    
    
    
    0.4Total
    
    
    390,357
    
    
    
    53,513
    
    
    
    100
    %
    
    
    14,014
    
    
    
    1,921
    
    
    
    100
    %
    
    
    137,723
    
    
    
    18,880
    
    
    
    100
    %
    
    
    542,094
    
    
    
    74,314
    
    
    
    100.00
    %
 Borrowings
    51




---



##### Table of Contents



Capital Expenditure and Contractual Commitments
   As of December 31, 2007Payment 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
    
    
    456.1
    
    
    
    62.5
    
    
    
    456.1
    
    
    
    62.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    192.0
    
    
    
    26.3
    
    
    
    10.3
    
    
    
    1.4
    
    
    
    84.3
    
    
    
    11.6
    
    
    
    97.4
    
    
    
    13.3Bills payable
    
    
    85.2
    
    
    
    11.7
    
    
    
    85.2
    
    
    
    11.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease
commitments
    
    
    9.7
    
    
    
    1.3
    
    
    
    8.7
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    
    
    
    
    Other capital
commitments
    
    
    84.2
    
    
    
    11.5
    
    
    
    84.2
    
    
    
    11.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
contractual
obligations
    
    
    785.2
    
    
    
    107.6
    
    
    
    634.2
    
    
    
    86.9
    
    
    
    41.0
    
    
    
    5.6
    
    
    
    110.0
    
    
    
    15.1
 Off-Balance Sheet Arrangements and Contingent Liabilities
     Inflation
  Quantitative and Qualitative Disclosure about Market Risk
 Foreign Exchange Risk.
 52




---



##### Table of Contents



Interest Rate Risk.
 Credit Risk.
 Corporate Structure
  Taxation
     53




---



##### Table of Contents



Recent Accounting Pronouncements
 FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in Income
Taxes
 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
 SFAS No. 141 (R), Business Combinations
 54




---



##### Table of Contents



Business Combinations
 SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements
 Noncontrolling Interests in Consolidated Financial
Statements Accounting Research Bulletin No. 51
 55




---



##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and senior management
  Directors and Executive Officers
    
    Age
    
    PositionYingjie Gao
    
    
    52
    
    
    Chairman of the board and chief executive officerKunjie Zhuang
    
    
    71
    
    
    Director and chief technology officerRong Yu
    
    
    43
    
    
    Director, chief financial officer and principal
accounting officerLiping Mao
    
    
    42
    
    
    Director and vice presidentCuiming Shi
    
    
    67
    
    
    Independent directorXiaohu You
    
    
    45
    
    
    Independent directorKin Kwong Mak
    
    
    46
    
    
    Independent director (audit committee financial expert)Tianwen Ding
    
    
    51
    
    
    Vice presidentQi Wang
    
    
    42
    
    
    Vice presidentQingchang Liu
    
    
    40
    
    
    Vice presidentGuanyu Huang
    
    
    42
    
    
    Vice president
 Yingjie Gao
 Kunjie Zhuang
 Rong Yu
 Liping Mao
 Cuiming Shi
 Xiaohu You
 56




---



##### Table of Contents



Kin Kwong Mak
 Tianwen Ding
 Qi Wang
 Qingchang Liu
 Guanyu Huang
 rd
 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;
 57




---



##### Table of Contents




    
    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.
 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;
 
 58




---



##### Table of Contents




    
    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
   59




---



##### 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.
  Number of shares
    
    Per shareto be issued upon
    
    exerciseName
    
    exercise of options
    
    price (US$)
    
    Grant date
    
    Date of ExpirationRong Yu
    
    
    200,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Liping Mao
    
    
    200,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Qi Wang
    
    
    150,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Qingchang Liu
    
    
    150,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Tianwen Ding
    
    
    150,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Guanyu Huang
    
    
    150,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Cuiming Shi
    
    
    100,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Xiaohu You
    
    
    100,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Kin Kwong Mak
    
    
    100,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010Other individuals as a group
    
    
    8,700,000
    
    
    
    0.21
    
    
    March 14, 2008
    
    March 14, 2010
 Eligible Participants
  60




---



##### Table of Contents




    
    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
    Price of Shares
  Restrictions on the Times of Grant of Options
  Transferability
  Exercise of Option and Duration of the Share Option Scheme
   61




---



##### Table of Contents



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
   Alteration of the Share Option Scheme
  Employees
  Share Ownership
  
    
    each of our executive officers and directors;
    
    each person known by us to beneficially own 5% or more of our ordinary shares; and
    
    all current directors and executive officers as a group.
  Shares beneficiallyowned(1)(2)Name
    
    Number of Shares
    
    %Directors and executive officers(3)Yingjie Gao(4)
    
    
    150,000,000
    
    
    
    24.4
    %Kunjie Zhuang(5)
    
    
    51,432,000
    
    
    
    8.4
    %Rong Yu(6)
    
    
    42,978,949
    
    
    
    7.0
    %Liping Mao
    
    
    
    
    
    
    Cuiming Shi
    
    
    
    
    
    
    Xiaohu You
    
    
    
    
    
    
    Kin Kwong Mak
    
    
    
    
    
    
    Tianwen Ding
    
    
    
    
    
    
    Qi Wang(7)
    
    
    18,845,605
    
    
    
    3.1
    %Qingchang Liu
    
    
    
    
    
    
    Guanyu Huang
    
    
    
    
    
    
    All current directors and executive officers as a group (11 persons)
    
    
    263,256,554
    
    
    
    42.9
    %Principal shareholdersGuoren Industrial Developments Limited(8)
    
    
    150,000,000
    
    
    
    24.4
    %Heng Xing Yue Investments Limited(9)
    
    
    97,403,375
    
    
    
    15.9
    %Drag Investments Limited(10)
    
    
    64,290,000
    
    
    
    10.5
    %Wells Fargo & Company(11)
    
    
    101,178,325
    
    
    
    16.5
    %
 62




---



##### Table of Contents



(1)
    
    Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and
Regulations under the Exchange Act, and includes voting or investment power with respect to
the ordinary shares.(2)
    
    The number of ordinary shares outstanding in calculating the percentages for each listed
person includes the ordinary shares underlying options held by such person. Percentage of
beneficial ownership of each listed person prior to the offering is based on 613,567,025
ordinary shares outstanding as of May 31, 2008, as well as the ordinary shares underlying
share options exercisable by such person within 60 days of the date of this annual report on
Form 20-F.(3)
    
    The address of our current executive officers and directors is c/o China GrenTech Corporation
Limited, 15th Floor, Block A, Guoren Building, Keji Central 3rd Road, Hi-Tech Park,
Nanshan District, Shenzhen 518057, Peoples Republic of China.(4)
    
    Mr. Yingjie Gao, our chairman and chief executive officer, beneficially owns 150,000,000
ordinary shares, which are held through his wholly-owned company, Guoren Industrial
Developments Limited.(5)
    
    Professor Kunjie Zhuang, our director and chief technology officer, beneficially owns
64,290,000 ordinary shares, which are held through his majority-owned company, Drag
Investments Limited.(6)
    
    Ms. Rong Yu, our director, chief financial officer and principal accounting officer,
beneficially owns 42,978,949 ordinary shares, which are held indirectly through Heng Xing Yue
Investments Limited and through her wholly-owned company, Well Sino Enterprises Limited, which
is a shareholder of Heng Xing Yue Investments Limited.(7)
    
    Mr. Qi Wang, our vice president, beneficially owns 18,845,605 ordinary shares, which are held
indirectly through Heng Xing Yue Investments Limited.(8)
    
    Guoren Industrial Developments Limited is a British Virgin Islands company with its business
address at 16th Floor, Zhongyin Tower
Caitian North Road, Futian District, Shenzhen 518026, Peoples Republic of China. Its principal
business is investment holding. Guoren Industrial Developments Limited is wholly-owned by Mr.
Yingjie Gao, our chairman and chief executive officer, who shares with Guoren Industrial
Developments Limited both voting and dispositive power over our ordinary shares. Mr. Yingjie
Gao is the sole director of Guoren Industrial Developments Limited. This share information is
based upon a report on Schedule 13D filed by Guoren Industrial Developments Limited with the
U.S. Securities and Exchange Commission on February 12, 2008.(9)
    
    Heng Xing Yue Investments Limited is a British Virgin Islands company with its business
address at 16th Floor, Zhongyin Tower
Caitian North Road, Futian District, Shenzhen 518026, Peoples Republic of China. Its principal
business is investment holding. Heng Xing Yue Investments Limited is beneficially owned by (i)
Ms. Rong Yu, our director, chief financial officer and principal accounting officer
(approximately 35.24%), directly and indirectly through her wholly-owned company, Well Sino
Enterprises Limited, a British Virgin Islands company; (ii) Mr. Qi Wang, our vice president
(approximately 19.348%); (iii) Ms. Yin Huang (approximately 35.24%), directly and indirectly
through her wholly-owned company, Leakey Investments Limited, a British Virgin Islands company;
(iv) Mr. Jin Wan (approximately 3.893%); and (v) Mr. Guang Shi (approximately 6.279%). Each
beneficial owner of Heng Xing Yue Investments Limited has the voting rights with respect to the
securities beneficially owned by him or her. This share information is based upon a report on
Schedule 13G/A filed by Heng Xing Yue Investments Limited with the U.S. Securities and Exchange
Commission on February 12, 2008.(10)
    
    Drag Investments Limited is a British Virgin Islands company with its business address at
16th Floor, Zhongyin Tower
Caitian North Road, Futian District, Shenzhen 518026, Peoples Republic of China. Its principal
business is investment holding. Drag Investments Limited is 80%-owned by Professor Kunjie
Zhuang, our director and chief technology officer, and 20%-owned by Mr. Haifan Zhuang, a son of
Professor Kunjie Zhuang. Each beneficial owner of Drag Investments Limited has the voting
rights with respect to the securities beneficially owned by him. This share information is
based upon a report on Schedule 13G/A filed by Drag Investments Limited with the U.S.
Securities and Exchange Commission on February 12, 2008.(11)
    
    Wells Fargo & Company is a Delaware company with its business address at 420 Montgomery
Street, San Francisco, California 94163, U.S.A. This share information is based upon a report
on Schedule 13G/A filed by Wells Fargo & Company with the U.S. Securities and
Exchange Commission on January 17, 2008. We have no further information regarding the
beneficial ownership of Wells Fargo & Company. 63




---



##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 MAJOR SHAREHOLDERS
  RELATED PARTY TRANSACTIONS
 Share-based compensation
  Our Related-Party Transaction Policies
  Acquisitions of Equity Interest in Lake Communication
  Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
  Legal Proceedings
  Dividend Policy
  
    
    the level of our cash and retained earnings;
 64




---



##### Table of Contents




    
    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.
   
 ITEM 9. THE OFFER AND LISTING
   65




---



##### Table of Contents



Price per ADS (US$)High
    
    LowAnnual2006 (from listing date)
    
    
    22.50
    
    
    
    8.212007
    
    
    19.00
    
    
    
    6.89QuarterlyFirst 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
    
    
    
    10.11First Quarter, 2007
    
    
    19.00
    
    
    
    9.06Second Quarter, 2007
    
    
    14.94
    
    
    
    9.76Third Quarter, 2007
    
    
    14.03
    
    
    
    6.89Fourth Quarter, 2007
    
    
    12.78
    
    
    
    7.41First Quarter, 2008
    
    
    9.12
    
    
    
    3.85Second Quarter, 2008
    
    
    6.20
    
    
    
    4.37MonthlyJanuary 2008
    
    
    9.12
    
    
    
    6.67February 2008
    
    
    7.59
    
    
    
    6.80March 2008
    
    
    6.96
    
    
    
    3.85April 2008
    
    
    6.20
    
    
    
    4.37May 2008
    
    
    6.20
    
    
    
    4.70June 2008
    
    
    5.27
    
    
    
    4.46
 
 ITEM 10. ADDITIONAL INFORMATION
 SHARE CAPITAL
  MEMORANDUM AND ARTICLES OF ASSOCIATION
  MATERIAL CONTRACTS
  EXCHANGE CONTROLS
   66




---



##### Table of Contents



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 advisers about the United States federal,
state and local tax consequences to them of the purchase, ownership and disposition of shares or
ADSs.
 * * * * * * * * * * * * * * * * * * * * *
 67




---



##### Table of Contents




    
    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
  68




---



##### Table of Contents



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
  69




---



##### Table of Contents



DOCUMENTS ON DISPLAY
  SUBSIDIARY INFORMATION
  
 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
  70




---



##### Table of Contents



Managements
Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
 Internal Control  Integrated Framework
 
    
    Inadequate level of review of the basis and assumptions used for classification of trade
receivables into short-term and long-term categories:The basis and assumptions used for classification of short-
and long-term trade receivables were
established in accordance with our accounting policy, however, we did not
review and update them on a timely basis in order to reflect the most recent repayment patterns.
As a result, adjustments were recorded to reclassify receivable
balances from short-term to long-term and to adjust the discounting
effect of the long-term receivable balances. These adjustments are
reflected in our consolidated financial statements for the year ended
December 31, 2007.
    
    Ineffective controls over monitoring of the level and the status of inventory pending for
installation located at the sites of our customers:We had certain amounts of inventory awaiting installation
which were stored at our
customers sites as of December 31, 2007. We have
ineffective controls over monitoring the level and the status of
such inventory.
This material weakness also affects the controls over physical
inventories and lower of cost or market valuation which are not effective.
The status of certain inventory awaiting installation was not
updated in a timely manner, resulting in an understatement of cost of
revenues in our companys unaudited management accounts.
This material weakness led to corrective adjustments to the
consolidated financial statements for the year ended December
31, 2007.
 71




---



##### Table of Contents




    
    Inadequate level of management review of critical manual Excel spreadsheet containing trade receivable
aging information:We relied on the manual Excel spreadsheet for trade receivable ageing analysis and
revenue recognition for U.S. GAAP compliance purposes. There was
documentary evidence of the Excel
spreadsheet being reviewed, but inaccurate entries of information to the Excel spreadsheet
were identified. As a result, we had to re-assess the
adequacy of provision for
doubtful debts, resulting in an adjustment of allowance for doubtful
debts in our consolidated financial
statements for the year ended December 31, 2007.
   Remediation Plan
  
    
    Establish policies and procedures for classifying short- and long-term trade receivables in
order to properly assess the reasonableness of the balance of trade
receivables. The policies
and procedures would include performance of reasonableness assessment at least annually with
consideration to the receivable collection plans prepared by each representative office,
payment history of customers and market forecast. At the end of each year, our finance
department would utilize the current year collection data to ensure
classification of trade receivables into short-term and
long-term categories, with the
discounting effect to be reflected accurately in the consolidated
financial statements.
    
    Enhance control and monitoring of inventory awaiting installation by establishing formal
inventory count procedures for such inventory. Branches are also
responsible for regular inventory count and the counting results should be reviewed and
confirmed by the appropriate personnel of the branches, and reported to the finance department
for recording and filing.
    
    Establish Excel spreadsheet review procedures for ensuring adequate review of critical
information shown in the Excel spreadsheet. The review personnel would include appropriate
management personnel, and the financial controllers review
would also be required to monitor the risk of error.
In addition, we would establish requirements for relevant documents
such as a review
form being maintained for documenting the review status, and
maintaining review procedures for accuracy
and completeness of source data, correctness and reasonableness of formula and the
reconciliation between batch sums. The responsible reviewers would endorse the Excel
spreadsheet as documentary evidence of their reviews.
    
    Arrange training for financial and accounting personnel on a periodic basis to furnish
them with adequate knowledge of U.S. GAAP and SEC rules and disclosure.
  
 Changes in Internal Control over Financial Reporting
  ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
  72




---



##### Table of Contents



ITEM 16B CODE OF ETHICS
  
 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
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    
  
 ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
 Total Number of
    
    ApproximateAverage
    
    
    
    
    
    ADSs Purchased
    
    Dollar Value of ADSsTotal Number of
    
    Price
    
    Average
    
    as Part of Publicly
    
    that May Yet BeAmerican Depositary
    
    Paid
    
    Price Paid
    
    Announced Plans
    
    Purchased UnderPeriod
    
    Shares Purchased (1)
    
    Per ADS
    
    Per ADS (2)
    
    or Programs
    
    the ProgramsUS$
    
    RMB
    
    
    
    
    
    US$January 1 through January 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1 through February 28, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1 through March 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    April 1 through April 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 1 through May 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1 through June 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 1 through July 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    August 1 through August 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1 through September 30, 2007
    
    
    19,930
    
    
    
    8.8368
    
    
    
    66.21
    
    
    
    19,930
    
    
    
    7,823,883October 1 through October 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1 through November 30, 2007
    
    
    120,281
    
    
    
    8.4855
    
    
    
    61.90
    
    
    
    140,211
    
    
    
    6,803,238December 1 through December 31, 2007
    
    
    297,229
    
    
    
    8.1124
    
    
    
    59.18
    
    
    
    437,440
    
    
    
    4,391,996Total
    
    
    437,440
    
    
    
    8.2480
    
    
    
    60.17
    
    
    
    437,440
 
 (1)
    
    Our companys American Depositary Share (ADS) to ordinary share ratio is one ADS for every 25
ordinary shares.(2)
    
    The conversion from United States dollars into Renminbi (RMB) is based on the noon buying
rates adopted by our company for the reporting of our periodic results as follows: 73




---



##### Table of Contents



Exchange ratePeriod
    
    Period ended
    
    US$ to RMBJuly 1 through September 30, 2007
    
    September 30, 2007
    
    
    7.4928October 1 through December 31, 2007
    
    December 31, 2007
    
    
    7.2946
 (3)
    
    On September 21, 2007, we announced a share repurchase
program authorized by our board
of directors. Under the terms of the approved share repurchase
program, we may
repurchase up to US$8.0 million worth of our issued and outstanding ADSs from time to time in
open-market transactions on Nasdaq. The share repurchase program does not have an expiration
date and may be modified or discontinued at anytime by our board of directors.
 
 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)4.1
    
    
    Contract for grant of land use right of Shenzhen Municipality8.1
    
    
    List of subsidiaries11.1
    
    
    Code of ethics (3)12.1
    
    
    CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    
    
    CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    
    CEO and CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (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.(3)
    
    Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2006 filed with the SEC on May 4, 2007. 74




---



##### Table of Contents



SIGNATURE
  China GrenTech Corporation Limited/s/
Rong YuName:
    Rong YuTitle:
    Chief Financial Officer  75




---



##### Table of Contents



INDEX TO THE FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    
    F-2Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007
    
    
    F-3Consolidated Statements of Shareholders Equity for the years ended December 31, 2005, 2006 and 2007
    
    
    F-4Consolidated
Statements of Cash Flows for the years ended December 31, 2005,
2006 and 2007
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-8




---



##### 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, 2006 and 2007
 Note
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    US$AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    467,423
    
    
    
    316,778
    
    
    
    43,426Pledged time deposits
    
    
    3
    
    
    
    238,618
    
    
    
    259,786
    
    
    
    35,613Accounts receivable, net
    
    
    4
    
    
    
    747,859
    
    
    
    925,838
    
    
    
    126,921Inventories
    
    
    5
    
    
    
    434,406
    
    
    
    542,094
    
    
    
    74,314Prepaid expenses and other current assets
    
    
    
    
    
    
    52,635
    
    
    
    54,184
    
    
    
    7,428Deferred income taxes and deferred tax charges
    
    
    6
    
    
    
    7,466
    
    
    
    9,011
    
    
    
    1,236Total current assets
    
    
    
    
    
    
    1,948,407
    
    
    
    2,107,691
    
    
    
    288,938Property, plant and equipment, net
    
    
    7
    
    
    
    161,503
    
    
    
    225,069
    
    
    
    30,855Construction in progress
    
    
    7
    
    
    
    7,100
    
    
    
    134,637
    
    
    
    18,457Lease prepayments, net
    
    
    8
    
    
    
    13,632
    
    
    
    89,683
    
    
    
    12,295Investment securities
    
    
    9
    
    
    
    7,944
    
    
    
    7,944
    
    
    
    1,089Goodwill
    
    
    11
    
    
    
    8,216
    
    
    
    38,247
    
    
    
    5,243Intangible assets, net
    
    
    10
    
    
    
    75
    
    
    
    37
    
    
    
    5Prepayment for fixed assets
    
    
    
    
    
    
    
    
    
    
    4,486
    
    
    
    615Long-term accounts receivable
    
    
    4
    
    
    
    268,957
    
    
    
    389,505
    
    
    
    53,396Total assets
    
    
    
    
    
    
    2,415,834
    
    
    
    2,997,299
    
    
    
    410,893LiabilitiesCurrent liabilitiesShort-term bank loans
    
    
    14
    
    
    
    336,050
    
    
    
    456,050
    
    
    
    62,519Accounts payable
    
    
    
    
    
    
    181,220
    
    
    
    329,220
    
    
    
    45,133Bills payable
    
    
    
    
    
    
    78,576
    
    
    
    85,216
    
    
    
    11,682Accrued expenses and other payables
    
    
    12
    
    
    
    208,833
    
    
    
    340,765
    
    
    
    46,715Income tax payable
    
    
    
    
    
    
    35,760
    
    
    
    37,830
    
    
    
    5,186Dividend payable
    
    
    
    
    
    
    25,996
    
    
    
    
    
    
    
    Total current liabilities
    
    
    
    
    
    
    866,435
    
    
    
    1,249,081
    
    
    
    171,235Long-term bank loan
    
    
    15
    
    
    
    
    
    
    
    150,000
    
    
    
    20,563Deferred income tax liabilities
    
    
    6
    
    
    
    
    
    
    
    5,938
    
    
    
    814Total liabilities
    
    
    
    
    
    
    866,435
    
    
    
    1,405,019
    
    
    
    192,612Commitments and contingencies
    
    
    26Minority interests
    
    
    
    
    
    
    18,971
    
    
    
    5,763
    
    
    
    790Shareholders equityOrdinary shares US$0.00002 par value;
2,500,000,000 shares authorized, 625,000,000
issued as of December 31, 2006 and 2007
respectively; 625,000,000 and 614,064,000
outstanding as of December 31, 2006 and 2007
respectively
    
    
    17
    
    
    
    103
    
    
    
    103
    
    
    
    14Contributed surplus
    
    
    
    
    
    
    853,476
    
    
    
    853,476
    
    
    
    117,001Statutory reserves
    
    
    
    
    
    
    132,403
    
    
    
    146,077
    
    
    
    20,025Retained earnings
    
    
    
    
    
    
    544,446
    
    
    
    613,308
    
    
    
    84,077Treasury stock at cost, nil share and 437,440
shares as of December 31, 2006 and 2007
respectively
    
    
    
    
    
    
    
    
    
    
    (26,447
    )
    
    
    (3,626
    )Total shareholders equity
    
    
    
    
    
    
    1,530,428
    
    
    
    1,586,517
    
    
    
    217,491Total liabilities and shareholders equity
    
    
    
    
    
    
    2,415,834
    
    
    
    2,997,299
    
    
    
    410,893
  F-2




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Income
for the years ended December 31, 2005, 2006 and 2007
 Note
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Revenues
    
    
    19
    
    
    
    716,270
    
    
    
    832,795
    
    
    
    979,302
    
    
    
    134,250Cost of revenues
    
    
    
    
    
    
    (328,064
    )
    
    
    (437,040
    )
    
    
    (611,436
    )
    
    
    (83,820
    )Gross profit
    
    
    
    
    
    
    388,206
    
    
    
    395,755
    
    
    
    367,866
    
    
    
    50,430Operating expenses:Research and development costs
    
    
    
    
    
    
    (30,616
    )
    
    
    (47,671
    )
    
    
    (56,525
    )
    
    
    (7,749
    )Sales and distribution expenses
    
    
    
    
    
    
    (91,489
    )
    
    
    (112,948
    )
    
    
    (126,816
    )
    
    
    (17,385
    )General and administrative expenses
    
    
    
    
    
    
    (41,057
    )
    
    
    (55,944
    )
    
    
    (68,498
    )
    
    
    (9,390
    )Total operating expenses
    
    
    
    
    
    
    (163,162
    )
    
    
    (216,563
    )
    
    
    (251,839
    )
    
    
    (34,524
    )Operating income
    
    
    
    
    
    
    225,044
    
    
    
    179,192
    
    
    
    116,027
    
    
    
    15,906Other income/(expense)Interest income
    
    
    
    
    
    
    3,213
    
    
    
    19,186
    
    
    
    22,313
    
    
    
    3,059Interest expense
    
    
    
    
    
    
    (36,105
    )
    
    
    (28,026
    )
    
    
    (35,347
    )
    
    
    (4,846
    )Investment income
    
    
    
    
    
    
    159
    
    
    
    238
    
    
    
    318
    
    
    
    44Foreign currency exchange
gain/(loss)
    
    
    
    
    
    
    5,584
    
    
    
    (9,875
    )
    
    
    (18,791
    )
    
    
    (2,576
    )Grant income
    
    
    
    
    
    
    16,732
    
    
    
    7,670
    
    
    
    7,355
    
    
    
    1,008Total other expense
    
    
    
    
    
    
    (10,417
    )
    
    
    (10,807
    )
    
    
    (24,152
    )
    
    
    (3,311
    )Income before income tax expense and
minority interests
    
    
    
    
    
    
    214,627
    
    
    
    168,385
    
    
    
    91,875
    
    
    
    12,595Income tax expense
    
    
    6
    
    
    
    (26,097
    )
    
    
    (18,277
    )
    
    
    (10,321
    )
    
    
    (1,415
    )Income before minority interests
    
    
    
    
    
    
    188,530
    
    
    
    150,108
    
    
    
    81,554
    
    
    
    11,180Minority interests, net of tax
    
    
    
    
    
    
    (7,086
    )
    
    
    (1,267
    )
    
    
    982
    
    
    
    135Net income
    
    
    
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    82,536
    
    
    
    11,315Dividends, accretion to redemption value
and of foreign currency rate
movements
on mandatorily redeemable
convertible
preference shares
    
    
    16
    
    
    
    (2,428
    )
    
    
    (549
    )
    
    
    
    
    
    
    Net income available to ordinary
shareholders
    
    
    
    
    
    
    179,016
    
    
    
    148,292
    
    
    
    82,536
    
    
    
    11,315Net income per share available to ordinary
shareholders: Basic
    
    
    21
    
    
    
    0.38
    
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.02 Diluted
    
    
    21
    
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.02Weighted average number of ordinary
shares: Basic
    
    
    21
    
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    624,624,852
    
    
    
    624,624,852 Diluted
    
    
    21
    
    
    
    500,000,000
    
    
    
    593,150,684
    
    
    
    624,624,852
    
    
    
    624,624,852
  F-3




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Shareholders Equity
for the years ended December 31, 2005, 2006 and 2007
 Ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    Contributed
    
    Statutory
    
    Retained
    
    Treasury
    
    shareholdersNote
    
    shares
    
    Amount
    
    surplus
    
    reserves
    
    earnings
    
    stock
    
    equityRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of January 1, 2005
    
    
    
    
    
    
    466,365,500
    
    
    
    77
    
    
    
    158,534
    
    
    
    82,970
    
    
    
    107,209
    
    
    
    
    
    
    
    348,790Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,444
    
    
    
    
    
    
    
    181,444Interest on long-term debt
paid by shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    506,720Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,841
    
    
    
    
    
    
    
    148,841Interest on long-term debt
paid by shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 convertiblepreference 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
    
    
    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
    
    
    
    
    
    
    
    1,530,428
 F-4




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Shareholders Equity
for the years ended December 31, 2005, 2006 and 2007
 Ordinary shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalContributed
    
    Statutory
    
    Retained
    
    Treasury
    
    shareholdersNote
    
    Number of shares
    
    Amount
    
    surplus
    
    reserves
    
    earnings
    
    stock
    
    equityRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of January 1, 2007
    
    
    
    
    
    
    625,000,000
    
    
    
    103
    
    
    
    853,476
    
    
    
    132,403
    
    
    
    544,446
    
    
    
    
    
    
    
    1,530,428Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,536
    
    
    
    
    
    
    
    82,536Share repurchased during the year
    
    
    
    
    
    
    (10,936,000
    )

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,447
    )
    
    
    (26,447
    )Appropriation to statutory
reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,674
    
    
    
    (13,674
    )
    
    
    
    
    
    
    Balance as of December 31, 2007
    
    
    
    
    
    
    614,064,000
    
    
    
    103
    
    
    
    853,476
    
    
    
    146,077
    
    
    
    613,308
    
    
    
    (26,447
    )
    
    
    1,586,517Balance as of December 31,
2007 US$
    
    
    
    
    
    
    614,064,000
    
    
    
    14
    
    
    
    117,001
    
    
    
    20,025
    
    
    
    84,077
    
    
    
    (3,626
    )
    
    
    217,491
  F-5




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2006 and 2007
 Note
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Cash flow from operating activitiesNet income
    
    
    
    
    
    
    181,444
    
    
    
    148,841
    
    
    
    82,536
    
    
    
    11,315Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    1,297
    
    
    
    308
    
    
    
    42Depreciation of property, plant and equipment
    
    
    20
    
    
    
    16,707
    
    
    
    22,050
    
    
    
    29,004
    
    
    
    3,976Amortization of lease prepayments and intangible assets
    
    
    
    
    
    
    145
    
    
    
    330
    
    
    
    1,216
    
    
    
    167Interest expense on Exchangeable Bonds
    
    
    
    
    
    
    14,117
    
    
    
    3,340
    
    
    
    
    
    
    
    Minority interests
    
    
    
    
    
    
    7,086
    
    
    
    1,267
    
    
    
    (982
    )
    
    
    (135
    )Allowance for doubtful accounts
    
    
    
    
    
    
    1,912
    
    
    
    2,030
    
    
    
    16,177
    
    
    
    2,218Deferred income taxes and deferred tax charges
    
    
    
    
    
    
    4,228
    
    
    
    1,016
    
    
    
    (1,545
    )
    
    
    (212
    )Foreign currency exchange (gain)/loss
    
    
    
    
    
    
    (5,584
    )
    
    
    8,428
    
    
    
    18,791
    
    
    
    2,576Changes in operating assets and liabilities, net of effects
of acquisition of a subsidiary:Accounts receivable
    
    
    
    
    
    
    (345,954
    )
    
    
    (319,493
    )
    
    
    (380,865
    )
    
    
    (52,212
    )Inventories
    
    
    
    
    
    
    (73,732
    )
    
    
    (64,270
    )
    
    
    (104,373
    )
    
    
    (14,308
    )Prepaid expenses and other current assets
    
    
    
    
    
    
    6,556
    
    
    
    (1,360
    )
    
    
    1,061
    
    
    
    145Accounts payable
    
    
    
    
    
    
    21,722
    
    
    
    6,853
    
    
    
    142,652
    
    
    
    19,556Bills payable
    
    
    
    
    
    
    (562
    )
    
    
    49,509
    
    
    
    6,640
    
    
    
    910Accrued expenses and other payables
    
    
    
    
    
    
    54,476
    
    
    
    19,888
    
    
    
    66,370
    
    
    
    9,099Income tax payable
    
    
    
    
    
    
    3,868
    
    
    
    7,416
    
    
    
    2,782
    
    
    
    381Amounts due to related parties
    
    
    
    
    
    
    960
    
    
    
    (1,920
    )
    
    
    
    
    
    
    Net cash used in operating activities
    
    
    
    
    
    
    (112,611
    )
    
    
    (114,778
    )
    
    
    (120,228
    )
    
    
    (16,482
    )Cash flow from investing activitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (40,961
    )
    
    
    (71,639
    )
    
    
    (193,117
    )
    
    
    (26,474
    )Purchase of land use rights
    
    
    
    
    
    
    
    
    
    
    (9,188
    )
    
    
    (75,890
    )
    
    
    (10,404
    )Decrease/(increase) in pledged time deposits
    
    
    
    
    
    
    19,658
    
    
    
    (162,368
    )
    
    
    (31,359
    )
    
    
    (4,299
    )Acquisition of interests in subsidiary, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,842
    
    
    
    801Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    403
    
    
    
    45
    
    
    
    87
    
    
    
    12Net cash used in investing activities
    
    
    
    
    
    
    (20,900
    )
    
    
    (243,150
    )
    
    
    (294,437
    )
    
    
    (40,364
    )Cash flow from financing activitiesRepurchase of treasury stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,447
    )
    
    
    (3,626
    )Net proceeds from issue of new shares
    
    
    
    
    
    
    
    
    
    
    649,022
    
    
    
    
    
    
    
    Principal payments of short-term bank loans
    
    
    
    
    
    
    (283,850
    )
    
    
    (342,104
    )
    
    
    (612,050
    )
    
    
    (83,904
    )Proceeds from bank loans
    
    
    
    
    
    
    279,614
    
    
    
    517,540
    
    
    
    882,050
    
    
    
    120,918(Payment for)/proceeds from collection of sold accounts
receivable on behalf of financial institutions, net
    
    
    
    
    
    
    (25,955
    )
    
    
    (54,321
    )
    
    
    58,862
    
    
    
    8,070Dividends paid to minority interest holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,800
    )
    
    
    (521
    )Dividends paid to ordinary shareholders
    
    
    
    
    
    
    (10,622
    )
    
    
    (61,623
    )
    
    
    (25,996
    )
    
    
    (3,564
    )Net cash (used in)/provided by financing activities
    
    
    
    
    
    
    (40,813
    )
    
    
    708,514
    
    
    
    272,619
    
    
    
    37,373Effect of foreign currency exchange rate change on cash
    
    
    
    
    
    
    
    
    
    
    (11,771
    )
    
    
    (8,599
    )
    
    
    (1,179
    )Net (decrease)/increase in cash and cash equivalents
    
    
    
    
    
    
    (174,324
    )
    
    
    338,815
    
    
    
    (150,645
    )
    
    
    (20,652
    )Cash and cash equivalents:At beginning of year
    
    
    
    
    
    
    302,932
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    64,078At end of year
    
    
    
    
    
    
    128,608
    
    
    
    467,423
    
    
    
    316,778
    
    
    
    43,426
 F-6




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2006 and 2007 (Continued)
 2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:Income tax
    
    
    18,001
    
    
    
    9,844
    
    
    
    8,251
    
    
    
    1,131Interest expense, net of interest capitalized
    
    
    29,693
    
    
    
    24,686
    
    
    
    32,829
    
    
    
    4,500Significant Non-Cash Transactions:Interest on long-term debt paid by shareholders
    
    
    8,567
    
    
    
    8,345
    
    
    
    
    
    
    
    Extinguishment of obligations in respect of long-term
debt and related interest payable
    
    
    
    
    
    
    179,712
    
    
    
    
    
    
    
    Conversion of mandatorily redeemable convertible
preference shares into new ordinary shares
    
    
    
    
    
    
    45,946
    
    
    
    
    
    
    
    Acquisition on additional equity interest in subsidiary by
transfer and exchange of accounts receivable
    
    
    20,000
    
    
    
    
    
    
    
    77,494
    
    
    
    10,623
  F-7




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (1)
    
    Principal Activities, Basis of Presentation and OrganizationPrincipal ActivitiesChina GrenTech Corporation Limited (the Company, formerly known as Powercom Holdings
Limited) and its subsidiaries (hereinafter, collectively referred to as the Group) are
principally engaged in the manufacture and sale of wireless coverage products and services in
the Peoples Republic of China (the PRC). The Group derives substantially all of its
revenues from China United Telecommunications Corporation and its affiliates (the China
Unicom Group), China Mobile Communications Corporation and its affiliates (the China Mobile
Group) and China Telecom Corporation Limited and its affiliates (the China Telecom Group).
At December 31, 2007, the China Unicom Group and the China Mobile Group are the only two
licensed wireless communication operators in the PRC (see Note 25).
 Basis of Presentation and OrganizationThe Company was incorporated in the Cayman Islands and was established on December 3, 2003,
as part of the reorganization and initial public offering (IPO) of Shenzhen GrenTech
Company Limited (Shenzhen GrenTech, formerly known as Shenzhen Powercom Company Limited)
and its subsidiaries (the Reorganization) in preparation of its initial public offering
of securities. Shenzhen GrenTech was established in the PRC in July 1999 as a domestic
limited liability company with registered capital of RMB 10,000,000. The registered capital
was subsequently increased to RMB 112,000,000 in 2000. As of December 31, 2007, Shenzhen
GrenTechs principal subsidiaries consist of i) Shenzhen Lingxian Technology Company Limited
(Shenzhen Lingxian), a 99% owned domestic limited liability company; ii) Quanzhou Lake
Communication Company Limited (Lake Communication), an 100% owned domestic limited
liability company and; iii) Quanzhou Lake Microwave Company Limited (Lake Microwave),
an 80% owned domestic limited liability company; iv) Shenzhen Kaige Technology Company
Limited (Kaige), an 100% owned domestic limited liability company; v) Shenzhen Kaixuan
Technology Company Limited (Kaixuan), a domestic limited liability company wholly owned by
Kaige. Please refer to Note 18 in respect of the acquisition of the additional 20% equity
interest of Lake Communication and 100% equity interest of Kaige and Kaixuan in December
2007.In connection with the Reorganization in December 2003, the shareholders of Shenzhen GrenTech,
through a series of related transactions, including the issuance of Exchangeable Bonds to third
party investors for proceeds of US$20,700,000, transferred their entire equity interests in
Shenzhen GrenTech to the Company in exchange for 466,365,500 ordinary shares of the Company
(see Note 17). As the Reorganization was completed for the sole purpose of establishing the
legal structure of the Company in preparation for the initial public offering of securities of
GrenTech, and as the shareholders proportionate equity interests in the Company upon
consummation of the Reorganization were identical to their proportionate equity interests in
Shenzhen GrenTech just prior to the consummation of the Reorganization, the accompanying
consolidated financial statements have been prepared as a reorganization of businesses under common control in a manner similar to a pooling-of-interests. Accordingly, the assets
and liabilities transferred to the Company have been stated at the historical carrying
amounts of Shenzhen GrenTech.
 F-8




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (1)
    
    Principal Activities, Basis of Presentation and Organization (continued)On April 4, 2006, the Company completed its initial public offering and sold 5,000,000 ADSs,
representing 125,000,000 new ordinary shares, at an initial public offering price of US$18.00
per ADS. The Company received net proceeds, after deduction of the related offering costs,
in the amount of RMB 649,022,000 (approximately US$83,164,000).The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (US GAAP).This basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Companys principal subsidiaries, which are
prepared in accordance with the accounting principles and the relevant financial regulations
applicable to enterprises limited by shares as established by the Ministry of Finance of the
PRC (PRC GAAP), the accounting standards used in the country of their domicile. The
accompanying consolidated financial statements reflect necessary adjustments not recorded in
the books of account of the Companys subsidiaries to present them in conformity with US
GAAP.
 (2)
    
    Summary of Significant Accounting Policies and Practices
 (a)
    
    Principles of ConsolidationThe consolidated financial statements include the financial statements of the Company
and its subsidiaries. All significant intercompany balances and transactions have been
eliminated on consolidation.(b)
    
    Foreign Currency TransactionsThe Company and its subsidiaries functional and reporting currency is the RMB.Transactions denominated in currencies other than Renminbi (RMB) are translated into
RMB at the exchange rates quoted by the Peoples Bank of China
(the PBOC) prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into RMB using the
applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting
exchange differences are recorded in the statements of income.Commencing from July 21, 2005, the PRC government moved the RMB into a managed floating
exchange rate regime based on market supply and demand with
reference to a basket of currencies. The exchange rate of the U.S. dollar against the
RMB was adjusted from approximately RMB 8.28 per U.S. dollar on July 20, 2005 to RMB
8.11 per U.S. dollar on July 21, 2005. The exchange rate has continued to rise in a
steady manner since the initial adjustment.
 F-9




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (b)
    
    Foreign Currency Transactions (continued)For the convenience of the readers, the 2007 RMB amounts included in the accompanying
consolidated financial statements have been translated into United States dollars at
the rate of US$1.00 = RMB 7.2946, being the noon buy rate for U.S. dollars in effect on
December 31, 2007 in the City of New York for cable transfer in Renminbi per U.S.
dollar as certified for custom purposes by the Federal Reserve Bank. No representation
is made that the RMB amounts could have been, or could be, converted into United States
dollars at that rate or at any other certain rate on December 31, 2007, or at any other
date.RMB is not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the PBOC or other institutions authorized to buy and
sell foreign exchange. The exchange rate adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC, which are determined largely by supply
and demand.As a result of the decline of the exchange rate of the U.S. dollar against RMB, the
carrying value of the mandatorily redeemable convertible preference shares, which was
denominated in U.S. dollars, was reduced by RMB 1,096,000 and RMB 359,000 (US$46,000)
respectively for the year ended December 31, 2005 and the period from January 1, 2006
to April 3, 2006 (being the date of conversion into ordinary shares). The effects of
the foreign currency rate movements were reflected as adjustments to shareholders
equity in 2005 and 2006.
 (c)
    
    Use of EstimatesThe preparation of the consolidated financial statements in accordance with US GAAP
requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates. On an ongoing basis, management reviews its
estimates and assumptions including those related to the recoverability of the carrying
amount of property, plant and equipment, fair value of intangibles acquired in a
purchase business combination and in subsequent recovery assessments, valuation
allowances for accounts receivable, realizable values for inventories, accrued warranty
costs and revenue recognition. Changes in facts and circumstances may result in revised
estimates.
 F-10




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (d)
    
    Cash and Cash EquivalentsCash and cash equivalents consist of cash on hand and in banks, including certificates
of deposit with initial terms of less than three months.As at December 31, 2006 and 2007, the Group has foreign currency cash deposits
denominated in U.S. dollars of US$50,554,000 (equivalent to RMB394,528,000) and
US$26,111,000 (equivalent to RMB190,469,000), respectively. The conversion of foreign
deposit to RMB is subject to the approval from State Administration of Foreign
Exchange.
 (e)
    
    Accounts ReceivableAccounts receivable are stated at the historical carrying amount, net of an allowance
for doubtful accounts. The allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in the Companys existing accounts
receivable. The Company determines the allowance based on historical write-off
experience, customer specific facts and economic conditions. Allowance for doubtful
accounts is charged to general and administrative expenses.Outstanding account balances are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.The Companys off-balance-sheet credit exposure consists primarily of receivables sold
to financial institutions that are subject to limited recourse (Note 3).(f)
    
    InventoriesInventories are stated at the lower of cost or market. Cost is determined using the
weighted average cost method. Cost of work in progress and finished goods comprises
direct materials, direct production cost and an allocated proportion of production
overheads based on normal capacity. Cost of finished goods also includes
cost of installation services performed on finished good products
delivered and installed on customers sites, and such installation
services are pending for inspection and acceptance by customers as of
the balance sheet date.(g)
    
    Property, Plant and EquipmentProperty, plant, and equipment are stated at cost less accumulated depreciation and
impairment. Depreciation of property, plant and equipment is calculated based on the
straight-line method (after taking into account their respective estimated residual
values) over the estimated useful lives of the assets as follows:
 YearsBuildings
    
    
    20-56Equipment 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, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (h)
    
    Lease PrepaymentsLease prepayments represent the cost of land use rights in the PRC. Land use rights
are carried at cost and amortized on a straight-line basis over the period of rights of
50-70 years.(i)
    
    Goodwill and Other Intangible AssetsGoodwill represents the excess of the cost of an acquisition over the fair value of
net assets of businesses acquired. Goodwill and intangible assets other than goodwill
which are determined to have indefinite useful lives are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets.Goodwill is tested annually for impairment, and is tested for impairment more
frequently if events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds the
assets fair value. This determination is made at the reporting unit level and
consists of two steps. First, the Company determines the fair value of a reporting
unit and compares it to its carrying amount. Second, if the carrying amount of a
reporting unit exceeds its fair value, an impairment loss is recognized for any excess
of the carrying amount of the reporting units goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141, Business Combinations. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill.As of December 31, 2007, goodwill was attributable to i) the acquisition of additional
9% equity interest in Shenzhen Lingxian in 2005; ii) the acquisition of additional 20%
equity interest in Lake Communication in 2007; iii) the acquisition of the 100% equity
interest of Kaige and Kaixuan in 2007 (Note 18).Intangible assets with estimated useful lives consist of registered patents that are
amortized on a straight-line basis over the estimated useful life of 10 years.Total amortization expense relating to intangible assets was RMB 37,000, RMB 38,000 and
RMB 38,000 (US$5,000) for the years ended December 31, 2005, 2006 and 2007,
respectively.
 F-12




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (j)
    
    Investment securitiesInvestments in equity securities of privately held companies where the Companys level
of ownership is such that it cannot exercise significant influence over the investee
(i.e. voting common stock ownership of less than 20%) are stated at cost, adjusted for
declines in fair value that are considered other than temporary. Fair value of the
investments is estimated based on market value appraisals or other valuation
techniques. In determining whether impairment is other-than-temporary, the Company
considers whether it has the ability and intent to hold the investment until a market
price recovery and whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in this assessment
includes, but is not limited to, the reasons for the impairment, the severity and
duration of the impairment, changes in value subsequent to year end, and forecasted
performance, cash flows and the net assets of the investee. Any impairment is charged
to earnings and a new cost basis for the investment is established.(k)
    
    Impairment of Long-Lived AssetsLong-lived assets, including intangible assets with finite useful lives, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.Recoverability of long-lived assets to be held and used is measured by a comparison of
the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset, including identifiable intangible assets with
finite useful lives. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value is
measured by the assets discounted cash flows or market value, if readily determinable.
 F-13




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (l)
    
    Revenue RecognitionThe Company derives revenues principally from the provision and sale of wireless
coverage products and services, and sale of RF parts and components. Revenue is
recognized when the risk and rewards are transferred, delivery has occurred or the
services have been rendered, persuasive evidence of any arrangement exists, the price
to the buyer is fixed or determinable and collectibility is reasonably assured. These
criteria as they apply to the provision and sale of wireless coverage products and
services, and the sale of RF-based parts and components and RF-based wireless
communication system products are as follows:Wireless coverage products and servicesA wireless coverage products and services contract consists of two revenue-generating
activities, or deliverables, the sale of wireless coverage products and the provision
of installation services. Pursuant to Emerging Issues Task Force Issue No.
00-21,Revenue Arrangements with Multiple Deliverables, the equipment sale and
installation services are accounted for as separate units of accounting for the
following reasons: i) the equipment has standalone value as it can and has been sold
separately by the Company; ii) objective and reliable evidence of the fair value for
the installation services exists as evidenced by the amount charged by independent
third parties; and iii) there are no refund rights in these arrangements. As objective
and reliable evidence of fair value exists for both the equipment and installation
services, the appropriate revenue recognition convention is separately applied to each
of the two deliverables.Revenue is allocated to each deliverable based on their relative fair values, such as
the sales price for the deliverable when it is sold on a stand-alone basis or based on
third-party pricing for a similar deliverable. Revenue attributable to the sale of the
wireless coverage products element is recognized when i) the buyer has executed and
signed a sales and purchase contract, which specifies the price, payment terms, and the
wireless coverage products and installation services to be delivered and provided; ii)
the wireless coverage products have been delivered to the buyers premises; iii) the
risk and rewards of ownership and title of the delivered wireless coverage products
have been transferred to the buyer; iv) the buyer has issued a completion certificate,
which indicates the buyers acceptance of the functionality, specifications, and
performance of the delivered wireless coverage products; and v) the Company has an
enforceable legal right to receive the contractually specified amount in cash
attributable to the delivered wireless coverage products and such right is not
contingent upon the Company providing the remaining installation services or the
buyers acceptance of the installation services.
 F-14




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (l)
    
    Revenue Recognition (continued)A portion of the installation service deliverable is rendered concurrently with the
delivery of wireless coverage products. As the amount of the wireless coverage products
and service contract consideration is not contractually due and customer acceptance is
not deemed to occur until the issuance of the completion certificate. Revenue for the
wireless coverage products deliverable is not recognized until the issuance of the
completion certificate.Revenue attributable to the installation service element of the contract is not
recognized until i) the services have been rendered; ii) the buyer has issued a
preliminary inspection certificate, which indicates the buyers acceptance of the
installation services provided; iii) the Company has an enforceable legal right to
receive the contractually specified amount in cash attributable to the installation
service element of the contract and such right is not contingent upon the buyers
issuance of a final inspection certificate; and iv) the Companys remaining obligation
relating to the buyers final acceptance of the installation services is considered
inconsequential or perfunctory.Pursuant to the terms of the Companys contracts, the customers are generally required
to pay i) a range of 30% to 60% of the contract sum either upon signing of the sales
and purchase contract or the issuance of the completion certificate, ii) a range of 30%
to 60% of the contract sum upon issuance of the preliminary inspection certificate,
iii) a range of 10% to 30% of the contract sum upon the issuance of the final
inspection certificate and iv) a range of zero to 10% of the contract sum upon the
expiration of the warranty period. The Company has allowed its customers to pay the
contract sum in installments as a standard business practice. Sales of wireless
coverage products and services are made under these payment terms and, provided that
the above criteria for revenue recognition are met, are recognized as revenue due to:
i) the Companys history of successfully collecting all amounts due under the original
payment terms without making significant concessions on payments; and ii) the Companys
enforceable legal right to receive the contractually specified amount in cash
attributable to the element of the contract that has been delivered, and the Companys
intent to enforce this right, when considered necessary.The portion of the contract sum recognized as revenue in excess of the amounts received
under the contract payment terms is recorded in accounts receivable in the accompanying
consolidated balance sheets. The portion of the amounts received under the contract
payment terms in excess of the revenue recognized is recorded as deferred income and
included in accrued expenses and other payables in the accompanying consolidated
balance sheets. Amounts due under the contract terms beyond one year are reclassified
as long term accounts receivable and are discounted at discount rate generally
available for discounting similar instruments with PRC banks.
 F-15




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (l)
    
    Revenue Recognition (continued)Provisions for estimated settlement discounts provided to customers are recorded as a
reduction of revenue in the same period that revenue is recognized. The provision for
estimated settlement discounts, which is based on historical settlement data, is the
Companys best estimate of the amount of discounts to be provided to customers to
encourage prompt payment.For most wireless coverage products and services contracts, the Company provides free
repairs and replacement for defective parts for a duration of 12 months to 36 months
after the issuance of final inspection certificate. The Company records a provision for
estimated future costs to be incurred during the warranty period in the same period
that revenue is recognized. Allowances for warranties are recorded as cost of revenues
and are established on an individual basis. The estimates reflect historic trends of
warranty costs adjusted for specific conditions that may arise and the number of
contracts under warranty at each financial year-end.Certain of the Companys wireless coverage products and service contracts contain
penalty clauses in which a penalty is levied on the party responsible for the delay in
the execution of the contract. In addition, under certain circumstances, certain
contracts may be terminated should the Company fail to provide products or installation
services within a specified timeframe. In the event of termination, the Company would
be entitled to recover a portion of the contract consideration billable pursuant to its
legally enforceable right under PRC law.RF-based parts and componentsThe Company recognizes revenues from the sale of stand-alone RF parts and components
when the risk and rewards of ownership and title to the products have been transferred
to the buyer, which coincides with delivery and acceptance of the products by the
buyer.Revenue is stated net of value added taxes (VAT), sales returns, trade discounts and
allowances. In the PRC, VAT of 17% on invoice amount is collected in respect of the
sales of goods on behalf of the tax authorities. The VAT collected is not revenue of
the Company; instead the amount is recorded as a liability on the balance sheet until
such VAT is paid to the tax authorities.(m)
    
    Cost of RevenuesCost of revenues consists primarily of material costs, payroll compensation,
installation costs, depreciation, rentals and related expenses, which are directly
attributable to the production of products and rendering of services. Write-down of
inventory to lower of cost or market is also recorded in cost of revenues.
 F-16




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (n)
    
    Deferred Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance is provided to reduce
the amount of deferred tax assets if it is considered more likely than not that some
portion, or all, of the deferred tax assets will not be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the
statements of income in the period that includes the enactment date.(o)
    
    Advertising and Research and Development CostsAdvertising and research and development costs are expensed as incurred. Advertising
costs included in sales and distribution expenses amounted to RMB 2,036,000, RMB
955,000 and RMB 35,000 (US$5,000) for the years ended December 31, 2005, 2006 and 2007,
respectively. Research and development costs consist primarily of the remuneration of
research and development staff, depreciation and maintenance expenses of research and
development equipment, material costs and rental expenses for premises used for
research and development.(p)
    
    Freight CostsThe Company records freight costs related to the transporting of the raw materials to
the Companys warehouse in cost of revenues and all other outbound freight costs in
sales and distribution expenses. For the years ended December 31, 2005, 2006, and 2007,
freight costs included in cost of revenues were RMB 2,546,000, RMB 2,608,000 and RMB
3,691,000 (US$506,000), respectively, and RMB 2,970,000, RMB 3,731,000, and RMB
3,790,000 (US$520,000) were included in sales and distribution expenses, respectively.(q)
    
    Bills PayableBills payable represent bills issued by financial institutions to the Companys
vendors. The Companys vendors receive payments from the financial institutions direct
upon maturity of the bills and the Company is obliged to repay the face value of the
bills to the financial institutions. Interest is charged at the prevailing bank
borrowing rate on the outstanding balances of the bills paid by the financial
institution and is recorded as interest expense when incurred.
 F-17




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (r)
    
    Government GrantsReceipts of government grants to encourage research and development activities which
are unconditional and non-refundable are recognized as grant income in the accompanying
consolidated statements of income upon receipt.(s)
    
    Commitments and ContingenciesLiabilities for loss contingencies arising from claims, assessments, litigation, fines
and penalties and other sources are recorded when it is probable that a liability has
been incurred and the amount of the assessment can be reasonably estimated.(t)
    
    Income per ShareIn accordance with SFAS No.128, Computation of Earnings per Share, basic net income per
share available to ordinary shareholders is computed by dividing net income available
to ordinary shareholders by the weighted average number of ordinary shares outstanding
during the period. Diluted net income per share available to ordinary shareholders is
calculated by dividing net income available to ordinary shareholders by the weighted
average number of ordinary and dilutive potential ordinary shares outstanding during
the period. Dilutive potential ordinary shares consist of shares issuable pursuant to
mandatorily redeemable convertible preference shares, and are determined using the
as-converted method.
 F-18




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (2)
    
    Summary of Significant Accounting Policies and Practices (continued)
 (u)
    
    Share-Based PaymentA share option scheme was established on August 25, 2005 (the 2005 Options Scheme)
which allows the Company to grant options to its employees to acquire ordinary shares
of the Company. The Company has adopted SFAS No. 123R Share-Based Payment, which
requires that share based payment transactions with employees, such as share options,
be measured based on the grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service period, with a
corresponding addition to paid-in capital. Under this method, compensation cost related
to employee share options or similar equity instruments is measured based on the fair
value of the award at the date of grant and is recognized over the period during which
an employee is required to provide service in exchange for the award, which generally
is the vesting period, if any. In March 2008, the Company granted 10,000,000 share
options under the 2005 Options Scheme to the employees of the Group (see Note 28).(v)
    
    Segment ReportingThe Company uses the management approach in determining operating segments. The
management approach considers the internal organization and reporting used by the
Companys chief operating decision maker for making operating decisions, allocating
resources and assessing performance. Based on this assessment, the Company has
determined it has only one operating segment which is the manufacture and sale of
communication products in the PRC.In view of the fact that the Company operates and manages its business solely in the
PRC and substantially all of its customers are located in the PRC, no geographical
segment information is presented.
 F-19




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (w)
    
    Recently Issued Accounting StandardsSFAS No. 157, Fair value measurementsIn September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements.
Under SFAS No. 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years, with early adoption permitted.
Subsequently in February 2008, FASB issued FASB Staff Position (FSP) FAS 157-1
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurement for Purposes of Lease Classification
or Measurement under Statement 13, and FSP FAS 157-2, Effective Date of FASB
Statement No. 157. FSP FAS 157-1 amends the scope of SFAS No. 157 and other accounting
standards that address fair value measurements for purpose of lease classification or
measurement under Statement 13. The FSP is effective on initial adoption of Statement
157. FSP FAS 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008 for all non-financial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial statements
on a recurring basis. Management does not expect the adoption of SFAS No. 157, FSP FAS
157-1 and FSP FAS 157-2 will have a material impact on the Groups consolidated
financial statements.(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. 115In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of
SFAS No. 115. SFAS No.
159 permits companies to measure certain financial instruments and certain other items
at fair value. The standard requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. This Statement
is effective for the Group in years beginning after November 15, 2007. The Group has
elected not to adopt the fair value option as permitted under SFAS No. 159.
 F-20




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (w)
    
    Recently Issued Accounting Standards (continued)SFAS No. 141 (R), Business CombinationsIn December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No.
141(R) establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any controlling interest in the acquiree and the
goodwill acquired. SFAS No. 141(R) requires most identifiable assets, liabilities,
noncontrolling interests and goodwill acquired in a business combination to be recorded
at full fair value. SFAS No. 141(R) also establishes disclosure requirements to
enable users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141(R) applies to business combinations for
which the acquisition date is on or after December 15, 2008. SFAS No. 141R will be
applied prospectively to business combinations with an acquisition date on or after the
effective date.SFAS No. 160, Noncontrolling Interests in Consolidated Financial StatementsIn December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements  an amendment to Accounting Research Bulletin No.
51. SFAS No. 160 establishes accounting and reporting standards that require the
ownership interest in subsidiaries held by parties other than the parent be clearly
identified and presented in the consolidated balance sheets within equity, but separate
from the parents equity; the amount of consolidated net income attributable to the
parent and the noncontrolling interest be clearly identified and presented on the face
of the consolidated statements of operations; and changes in a parents ownership
interest while the parent retains its controlling financial interest in its subsidiary
be accounted for consistently. This statement is effective for fiscal years beginning
on or after December 15, 2008, including prospective accounting for any noncontrolling
interests that arose before the effective date. Except for the classification of
minority interest as a component of equity, management does not expect the initial
adoption of SFAS No. 160 will have a material impact on the Groups consolidated
financial statements.
 F-21




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (3)
    
    Pledged Time DepositsPledged time deposits at December 31, 2006 and 2007 consist of the following:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Pledged deposits with financial
institutions for security on: accounts receivable sold (Note (a))
    
    
    32,349
    
    
    
    51,499
    
    
    
    7,060 bills payable (Note (b))
    
    
    50,187
    
    
    
    62,396
    
    
    
    8,553 short-term bank loans (Note (b))
    
    
    156,082
    
    
    
    145,891
    
    
    
    20,000238,618
    
    
    
    259,786
    
    
    
    35,613
 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 and 300 million as of December 31, 2006 and
2007 respectively). 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 ten to 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, 2007. 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
180,117,000, RMB 117,664,000 and RMB
200,440,000 (USD 27,478,000) were derecognized from the balance sheet on their respective
dates of the transfer during 2005, 2006 and 2007, respectively. The Company received proceeds
from the sale of the accounts receivable of RMB 169,041,000, RMB 108,998,000 and RMB
192,687,000 (US$26,415,000) respectively for the years ended December 31, 2005, 2006 and 2007,
and recorded a discount on the sale of accounts receivable of RMB 11,076,000, RMB 8,666,000
and RMB 7,753,000 (US$1,063,000) respectively, which was included in interest expense for the
years ended December 31, 2005, 2006 and 2007. 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 accounts receivable. These adjustments are
recorded as interest expenses in the period during which occurs.As of December 31, 2006 and 2007, accounts receivable sold to financial institutions yet to
be settled by the Companys customers amounted to RMB 143,986,000 and RMB 179,176,000
(US$24,563,000) respectively.
 F-22




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (3)
    
    Pledged Time Deposits (continued)Pursuant to the sales agreements with the financial institutions, the Company is responsible
for servicing the accounts receivable sold until the expiration of the sales agreements. The
service obligations primarily comprise of serving notice to customers and collecting the
cash on behalf of the financial institutions and remitting the cash to the financial
institutions by a specified time. No servicing obligation was recorded at the date of sale
as the amount was considered to be immaterial. As of December 31, 2006 and 2007, an amount
of RMB 17,761,000 and RMB 76,623,000 (US$10,504,000) respectively had been collected by the
Company pending transfer to the financial institutions, and are included in accrued expenses
and other payables in the accompanying consolidated balance sheets.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, netAccounts receivable at December 31, 2006 and 2007 consist of the following:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Accounts receivable net of
allowances for estimated settlement
discounts of RMB 14,982 and RMB
10,657 respectively as of December
31, 2006 and 2007
    
    
    1,005,023
    
    
    
    1,317,868
    
    
    
    180,663Less: Allowance for doubtful accounts
    
    
    (6,177
    )
    
    
    (22,354
    )
    
    
    (3,064
    )998,846
    
    
    
    1,295,514
    
    
    
    177,599Amounts due after one year, net
    
    
    (268,957
    )
    
    
    (389,505
    )
    
    
    (53,396
    )729,889
    
    
    
    906,009
    
    
    
    124,203Bills receivable
    
    
    17,970
    
    
    
    19,829
    
    
    
    2,718747,859
    
    
    
    925,838
    
    
    
    126,921
 F-23




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
  2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Balance at beginning of year
    
    
    26,884
    
    
    
    20,057
    
    
    
    14,982
    
    
    
    2,054Reversal during the year
    
    
    (6,827
    )
    
    
    (5,075
    )
    
    
    (4,325
    )
    
    
    (593
    )Balance at end of year
    
    
    20,057
    
    
    
    14,982
    
    
    
    10,657
    
    
    
    1,461
     2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Balance at beginning of year
    
    
    2,235
    
    
    
    4,147
    
    
    
    6,177
    
    
    
    846Charged to statements of income
    
    
    1,912
    
    
    
    2,030
    
    
    
    16,177
    
    
    
    2,218Balance at end of year
    
    
    4,147
    
    
    
    6,177
    
    
    
    22,354
    
    
    
    3,064
 F-24




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 5)
    
    InventoriesInventories at December 31, 2006 and 2007 consist of the following:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Raw materials
    
    
    65,395
    
    
    
    137,722
    
    
    
    18,880Work-in-progress
    
    
    5,135
    
    
    
    14,014
    
    
    
    1,921Finished goods
    
    
    363,876
    
    
    
    390,358
    
    
    
    53,513434,406
    
    
    
    542,094
    
    
    
    74,314
  F-25




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax ExpenseCayman Islands TaxUnder the current Cayman Islands laws, the Company is not subject to tax on income or capital
gains.PRC TaxSubsidiaries established in the Shenzhen Special Economic Zone of the PRC, namely Shenzhen
GrenTech, Shenzhen Lingxian, Kaige and Kaixuan were subject to the preferential income tax
rate of 15%.Pursuant to the applicable Income Tax Law of the PRC, Shenzhen GrenTech is eligible for an
exemption from income tax for two years starting from the first profitable year of operations
and thereafter, a 50 percent relief from income tax for the following three years (the tax
holiday). The local tax bureau initially determined the year 2000 was the first
profit-making year of Shenzhen GrenTech and therefore, Shenzhen GrenTech was exempted from
income tax in 2000 and 2001, and income tax for 2002 was provided for at a reduced rate of
7.5%. Subsequent to the initial determination, the PRC tax authorities reversed the initial
determination in 2004 and concluded that the first profit-making year of Shenzhen GrenTech
should have been 2001. Consequently, Shenzhen GrenTech became fully exempted for PRC income
for 2001 and 2002 and subject to PRC income PRC income tax at the rate of 7.5% for 2003, 2004
and 2005. Shenzhen GrenTech applied for and was granted on December 13, 2005, an extension of
its 50 percent relief from income tax for an additional three-year period commencing from
January 1, 2006. Consequently, Shenzhen GrenTech was subject to reduced tax rate of 7.5% in
2006, and 2007.Shenzhen Lingxian was entitled to full exemption from income tax for two years starting from
the first profit-making year and a 50% reduction in the next three years as approved by the
tax authorities. As the first profit-making year of Shenzhen Lingxian was 2002, Shenzhen
Lingxian was fully exempted for PRC income tax for 2002 and 2003 and subject to PRC income at
the rate of 7.5% for 2004, 2005 and 2006. Shenzhen Lingxian applied for and was granted on
June 28, 2007 an extension of its 50 percent relief from income tax for an additional
three-year period commencing from January 1, 2007. Consequently, Shenzhen Lingxian was
subject to reduced tax rate of 7.5% in 2007.Lake Microwave was a foreign investment enterprise (FIE) established in a coastal open
economic area and was subject to income tax at a rate of 27%. Lake Communication was subject
to standard income tax rate of 33%.On March 16, 2007, the Fifth Plenary Session of the Tenth National Peoples Congress passed
the Corporate Income Tax Law of the PRC (the new tax law)
which took effect on January
1, 2008. Further, on December 6, 2007, the State Council released the Implementation Rules
to the Corporate Income Tax Law (the implementation rules).
According to the new tax law, from January 1, 2008 the applicable corporate income tax rates
for enterprises in the PRC will be reduced from 33% to 25%.
 F-26




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax Expense (continued)Under the new tax law being effective from January 1, 2008 and in accordance with
Notification of the State Council on Carrying out the Transitional Preferential Policies
concerning Enterprise Income Tax (Guo Fa [2007] No.39) issued by the State Council on
December 26, 2007, an entity established before March 16, 2007 that was entitled to
preferential tax treatment prior to the new tax law will be subject to a transitional tax
rate beginning in period 2008 (Transitional Tax Rate) before the new corporate income tax
rate of 25% applies. The Transitional Tax Rate is 18%, 20%, 22%, 24% and 25% in 2008, 2009,
2010, 2011 and 2012 onwards respectively. The Transitional Tax Rate applies to Shenzhen
GrenTech, Shenzhen Lingxian, Kaige and Kaixuan effective from January 1, 2008. The tax
relief extension (50% reduction of applicable tax rate) for Shenzhen GrenTech and Shenzhen
Lingxian will not be grandfathered under the new tax law.The enactment of the new tax law is not expected to have any financial effect on the amounts
accrued in the balance sheet in respect of current tax payable. The deferred tax assets and
liabilities of Shenzhen GrenTech, Shenzhen Lingxian, Kaige and Kaixuan are measured using
enacted tax rates expected to apply to taxable income, based on the Transitional Tax Rate,
in the years in which those temporary differences are expected to be recovered or settled.Lake Communication and Lake Microwave would be subject to the enterprise income tax rate of
25% commencing from January 1, 2008. The deferred tax assets and liabilities of Lake
Communication and Lake Microwave are measured using the new tax rate of 25%.Substantially, all the income and income tax expense derived by the Company is domestic in
nature.Income tax expense consists of:
 PRC Income tax
    
    Current
    
    Deferred
    
    TotalRMB000
    
    RMB000
    
    RMB000Year ended December 31, 2005
    
    
    21,869
    
    
    
    4,228
    
    
    
    26,097Year ended December 31, 2006
    
    
    17,261
    
    
    
    1,016
    
    
    
    18,277Year ended December 31, 2007
    
    
    11,866
    
    
    
    (1,545
    )
    
    
    10,321Year ended December 31, 2007 (US$)
    
    
    1,627
    
    
    
    (212
    )
    
    
    1,415
 F-27




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax Expense (continued)Income tax expense reported in the consolidated statements of income differs from the amount
computed by applying the PRC income tax rate of 15% (the statutory tax rate of the Companys
principal subsidiaries) for the years ended December 31, 2005, 2006 and 2007 for the
following reasons:
 2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Income before income tax expense
    
    
    214,627
    
    
    
    168,385
    
    
    
    91,875
    
    
    
    12,595Computed expected tax expense
    
    
    32,194
    
    
    
    25,258
    
    
    
    13,781
    
    
    
    1,889Non-deductible entertainment
expenses
    
    
    4,072
    
    
    
    4,756
    
    
    
    4,405
    
    
    
    604Other non-deductible expenses
    
    
    284
    
    
    
    705
    
    
    
    885
    
    
    
    121Non-taxable income
    
    
    (1,317
    )
    
    
    (36
    )
    
    
    (48
    )
    
    
    (7
    )Tax rate differential of other
subsidiaries
    
    
    7,241
    
    
    
    331
    
    
    
    2,385
    
    
    
    327Tax holiday
    
    
    (16,377
    )
    
    
    (13,602
    )
    
    
    (11,048
    )
    
    
    (1,514
    )Deferred tax valuation allowance
    
    
    
    
    
    
    865
    
    
    
    4,526
    
    
    
    621Effect on changes in tax rate
on deferred tax assets
    
    
    
    
    
    
    
    
    
    
    (4,565
    )
    
    
    (626
    )Actual income tax expense
    
    
    26,097
    
    
    
    18,277
    
    
    
    10,321
    
    
    
    1,415
  2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Decrease in net income per share
available to ordinary shareholders: Basic
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.002 Diluted
    
    
    0.03
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.002
 F-28




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax Expense (continued)As of December 31, 2007, the Group has unused tax losses of RMB12,204,000 (US$1,674,000). The
tax losses will expire as follows if unutilized:
 RMB000
    
    US$0002008
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    2010
    
    
    573
    
    
    
    792011
    
    
    1,412
    
    
    
    1942012
    
    
    10,219
    
    
    
    1,40112,204
    
    
    
    1,674
  2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Balance at the beginning of
year
    
    
    
    
    
    
    
    
    
    
    865
    
    
    
    119Charge to statement of income
    
    
    
    
    
    
    865
    
    
    
    4,526
    
    
    
    620Charge in tax rate
    
    
    
    
    
    
    
    
    
    
    (210
    )
    
    
    (29
    )Balance at the end of year
    
    
    
    
    
    
    865
    
    
    
    5,181
    
    
    
    710
 Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109
 F-29




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax Expense (continued)Under the new tax law, a withholding tax may be applied on the gross amount of dividends
received by the Company after January 1, 2008. The implementation rules provides for the
withholding tax rate to be at 10%. On February 22, 2008, the Ministry of Finance and the
State Administration of Taxation of the PRC jointly issued the Ministry of Finance and the
State Administrations Notice on Certain Preferential Corporate Income Tax Policies, Caishui
[2008] No.1, which provides that the distributions of earnings attributable to periods prior
to December 31, 2007 are exempted from withholding tax and the Company intends to reinvest in
the subsidiaries in the PRC indefinitely. As a result, no deferred tax liability has been
recognized.As of January 1, 2007 and for the twelve-month ended December 31, 2007, the Group did not
have unrecognized tax benefits, and it does not expect that the amount of unrecognized tax
benefits will change significantly within the next 12 months. The Groups accounting policy
is to accrue interest and penalties related to unrecognized tax benefits, if and when
required, as a component of income tax expense in the consolidated statements of income.
 F-30




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax Expense (continued)The tax effects of temporary differences that give rise to significant portions of the
deferred tax asset/liabilities as of December 31, 2006 and 2007 are presented below:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Deferred tax assetsAccount receivables
    
    
    1,762
    
    
    
    7,971
    
    
    
    1,094Accrual
    
    
    923
    
    
    
    2,256
    
    
    
    309Tax losses
    
    
    865
    
    
    
    2,780
    
    
    
    3813,550
    
    
    
    13,007
    
    
    
    1,784Less: valuation allowance
    
    
    (865
    )
    
    
    (5,181
    )
    
    
    (710
    )2,685
    
    
    
    7,826
    
    
    
    1,074Deferred tax charged on unrealized
profits on inter-company sales
    
    
    4,781
    
    
    
    1,185
    
    
    
    162Total deferred tax assets and deferred
tax charged
    
    
    7,466
    
    
    
    9,011
    
    
    
    1,236Deferred tax liabilitiesProperty, plant and equipment
    
    
    
    
    
    
    (5,604
    )
    
    
    (768
    )Lease prepayments
    
    
    
    
    
    
    (334
    )
    
    
    (46
    )Total deferred tax liabilities
    
    
    
    
    
    
    (5,938
    )
    
    
    (814
    )Net deferred tax assets
    
    
    7,466
    
    
    
    3,073
    
    
    
    422
  F-31




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (6)
    
    Income Tax Expense (continued)In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible and tax carryforwards are utilizable. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon an assessment of the level of historical
taxable income and projections for future taxable income over the periods in which the
deferred tax assets are deductible or can be utilized, management believes that the deferred
tax asset as of December 31, 2006 and 2007 is more likely than not to be realized. The amount
of the deferred tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income are reduced.Deferred tax liabilities as at December 31, 2007 were the tax effect of the temporary
differences related to the fair value adjustments resulted from the acquisition of Kaige and
Lake Communication in 2007.None of the goodwill recognized by the Group is deductible for tax purpose.
 (7)
    
    Property, Plant and Equipment, net and Construction in ProgressProperty, plant and equipment consist of the following:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Buildings
    
    
    9,686
    
    
    
    35,327
    
    
    
    4,843Equipment and machinery
    
    
    185,284
    
    
    
    215,157
    
    
    
    29,495Motor vehicles
    
    
    20,522
    
    
    
    27,611
    
    
    
    3,785Office equipment and computer software
    
    
    9,763
    
    
    
    34,652
    
    
    
    4,751225,255
    
    
    
    312,747
    
    
    
    42,874Accumulated depreciation
    
    
    (63,752
    )
    
    
    (87,678
    )
    
    
    (12,019
    )161,503
    
    
    
    225,069
    
    
    
    30,855Construction in progress
    
    
    7,100
    
    
    
    134,637
    
    
    
    18,457168,603
    
    
    
    359,706
    
    
    
    49,312
  F-32




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (8)
    
    Lease Prepayments, net
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Prepaid land use rights
    
    
    14,609
    
    
    
    91,838
    
    
    
    12,590Accumulated amortization
    
    
    (977
    )
    
    
    (2,155
    )
    
    
    (295
    )13,632
    
    
    
    89,683
    
    
    
    12,295
    (9)
    
    Investment SecuritiesInvestment securities at December 31, 2006 and 2007 represented a 4.67% and 1.13% equity
interest respectively in Quanzhou Bank, a privately held bank in the PRC. Such investment was
not marketable, and therefore accounted for using the cost method.
 F-33




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (10)
    
    Intangible Assets, net
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Patent
    
    
    375
    
    
    
    375
    
    
    
    51Accumulated amortization
    
    
    (300
    )
    
    
    (338
    )
    
    
    (46
    )75
    
    
    
    37
    
    
    
    5
 Amortization expense for the years ended December 31, 2005, 2006 and 2007 were RMB 37,000,
RMB 38,000 and RMB 38,000 (US$5,209) respectively.The estimated amortization expense of intangible assets for the next five years is as
follows:
 RMB000
    
    US$0002008
    
    
    37
    
    
    
    52009
    
    
    
    
    
    
    2010
    
    
    
    
    
    
    2011
    
    
    
    
    
    
    2012
    
    
    
    
    
    
    37
    
    
    
    5
 (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 settled by the transfer of
the accounts receivable of Shenzhen GrenTech with carrying value of RMB 20,000,000 as at that
date. Consequently, the Group recorded a goodwill of RMB 8,216,000 from the acquisition.
This acquisition was not considered to be material to the Companys financial position or
results of operations for the periods presented.In December 2007, the Group acquired additional 20% equity interest of Lake Communication and
100% equity interest of Kaige (see Note 18). As a result, the Group recorded goodwill of RMB
10,658,000 (US$1,461,000) and RMB 19,373,000 (US$2,656,000), respectively. The acquisitions
took place during 2007 in aggregate were not considered to be material to the Companys
financial position or results of operations for the periods presented.All goodwill recognized are not deductible for tax purposes.
 F-34




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (12)
    
    Accrued Expenses and Other PayablesAccrued expenses and other payables at December 31, 2006 and 2007 consist of the following:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000Amounts collected on sold accounts receivable
on behalf of financial institutions (Note 3)
    
    
    17,761
    
    
    
    76,623
    
    
    
    10,504Allowance for product warranties (Note 13)
    
    
    12,308
    
    
    
    12,328
    
    
    
    1,690Accruals for salaries and welfare
    
    
    9,872
    
    
    
    10,469
    
    
    
    1,435Deferred income
    
    
    47,803
    
    
    
    88,764
    
    
    
    12,168Value-Added Tax (VAT) payable
    
    
    91,747
    
    
    
    97,484
    
    
    
    13,364Business and other taxes payable
    
    
    9,820
    
    
    
    20,182
    
    
    
    2,767Reimbursement payment to staff
    
    
    2,680
    
    
    
    6,938
    
    
    
    951Consideration payable for acquisition of Kaige
    
    
    
    
    
    
    10,000
    
    
    
    1,371Others
    
    
    16,842
    
    
    
    17,977
    
    
    
    2,465208,833
    
    
    
    340,765
    
    
    
    46,715
 (13)
    
    Allowance for Product WarrantiesAn analysis of the allowance for product warranties for 2005, 2006 and 2007 is as
follows:
 2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Balance at beginning of year
    
    
    11,981
    
    
    
    11,794
    
    
    
    12,308
    
    
    
    1,687Amount charged to expense
    
    
    9,281
    
    
    
    8,240
    
    
    
    10,483
    
    
    
    1,437Amount utilized
    
    
    (9,468
    )
    
    
    (7,726
    )
    
    
    (10,463
    )
    
    
    (1,434
    )Balance at end of year
    
    
    11,794
    
    
    
    12,308
    
    
    
    12,328
    
    
    
    1,690
 F-35




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (14)
    
    Short-Term Bank LoansShort-term bank loans outstanding, which are all denominated in Renminbi, are as follows:
 2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000 Unsecured
    
    
    176,050
    
    
    
    296,050
    
    
    
    40,585 Secured
    
    
    160,000
    
    
    
    160,000
    
    
    
    21,934336,050
    
    
    
    456,050
    
    
    
    62,519
 During the years ended December 31, 2006 and 2007, the Company entered into various loan
agreements with commercial banks with terms ranging from three months to one year to finance
its working capital. The weighted average interest rate of short-term bank loans
outstanding as of December 31, 2006 and 2007 were 5.58 % and 6.27% per annum, respectively.The Company had available undrawn committed bank loan facilities and bills financing
facilities amounting to RMB 16,600,000 (US$2,276,000) and RMB 50,560,000 (US$6,931,000)
respectively as of December 31, 2007. In addition, the Company had available committed
receivable selling facilities of RMB 42,510,000 (US$5,828,000) as of December 31, 2007. Of
the unutilized bill 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 of the
amount to be utilised.
 F-36




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (14)
    
    Short-Term Bank Loans (continued)One of the short term loan agreements required the Group to maintain certain financial ratios
and minimum amounts of consolidated net worth. The Group was in compliance with these
covenants as of December 31, 2006 and 2007.(15)
    
    Long-Term Bank LoanOn May 22, 2007, Shenzhen GrenTech entered into a long term loan agreement with China
Construction Bank (CCB), amounting to RMB 150,000,000. The loan is scheduled to be repaid
by four equal annual instalments of RMB 20,000,000, commencing on May 22, 2009 and a balloon
payment of RMB 70,000,000 on May 21, 2013. Interest is paid to CCB on a monthly basis. The
loan is secured by the land use rights acquired by the Group for the construction of the new
head quarters in SHHTIP (Note 8).The loan bears an interest rate of the annual benchmark borrowing rate assigned by the
Peoples Bank of China with 5% discount. The benchmark borrowing rate assigned by the
Peoples Bank of China as of December 31, 2007 was 7.81%.
 F-37




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (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 2005 and April 2006, the directors declared a preference share dividend of RMB
0.064 and RMB 0.016 per share, respectively, totalling RMB 2,139,000 and RMB 548,000 to the
holders of preference shares, respectively. In addition, accretion to redemption value of 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, 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.
 F-38




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (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.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).
 F-39




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (18)
    
    Acquisitions(a)
    
    Acquisition of the entire equity interest of Kaige and its wholly owned subsidiary, KaixuanOn December 19, 2007, Shenzhen GrenTech entered into a sale and purchase agreement with an
independent third party, Huaming Investment Holdings Limited Company Limited (Huamning),
whereby Huaming agreed to transfer 100% equity interest in Kaige and its wholly owned
subsidiary, Kaixuan to Shenzhen GrenTech for a consideration of RMB 57,866,000
(US$7,933,000). The consideration was settled by RMB 10,000,000 cash and the transfer of the
accounts receivable of Shenzhen GrenTech with carrying value of RMB 47,866,000 as at December
25, 2007, being effective date of acquisition. With the acquisition of Kaige and Kaixuan,
the Group is able to carry out installation services for wireless equipments on its own. The
goodwill recognized is attributable to the higher efficiency and potential cost savings
achieved through the vertical integration from the production to the installation service of
wireless products.The Company has accounted for the above acquisition under the purchase method. The results
of operations of Kaige and Kaixuan are consolidated and included in the financial statements
of the Company from December 25, 2007.(b)
    
    Acquisition of the additional 20% equity interest of Lake CommunicationOn December 19, 2007, Shenzhen GrenTech entered into a sale and purchase agreement with Mr.
Zhuang Haifan, the then 20% minority shareholder of Lake Communication, whereby Mr. Zhuang
Haifan sold his 20% equity interest in Lake Communication to Shenzhen GrenTech for a
consideration RMB 29,628,000 (US$4,062,000). The consideration would be settled by the
transfer of the account receivable of Shenzhen GrenTech with carrying value of RMB 29,628,000
as at December 19, 2007, being the effective date of acquisition. Mr. Zhuang Haifan is the
son of Mr. Zhuang Kunjie, who is a director and the Chief Technology Officer of China
GrenTech at the date of the acquisition.The Company has accounted for the above acquisition of the additional equity interest under
the purchase method. As a result of the acquisition of additional 20% equity interest, the
Company has become a wholly owned subsidiary of Shenzhen GrenTech.The Company considers the above acquisitions in aggregate were not material to the
Companys financial position or results of operations for the periods presented.
 F-40




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (19)
    
    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 sales of RF parts and components and RF-based wireless
access products. The components of revenues are as follows:
 2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Sale of wireless coverage products
    
    
    614,503
    
    
    
    679,606
    
    
    
    575,335
    
    
    
    78,871Installation services of
wireless coverage products
    
    
    69,338
    
    
    
    108,867
    
    
    
    223,461
    
    
    
    30,633RF parts and components
    
    
    22,068
    
    
    
    32,027
    
    
    
    173,545
    
    
    
    23,791Other products
    
    
    3,534
    
    
    
    7,220
    
    
    
    2,636
    
    
    
    362709,443
    
    
    
    827,720
    
    
    
    974,977
    
    
    
    133,657Write back of settlement discounts
    
    
    6,827
    
    
    
    5,075
    
    
    
    4,325
    
    
    
    593716,270
    
    
    
    832,795
    
    
    
    979,302
    
    
    
    134,250
 (20)
    
    DepreciationDepreciation of property, plant and equipment is included in the following:
 2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Cost of revenues
    
    
    10,824
    
    
    
    14,366
    
    
    
    18,951
    
    
    
    2,598Research and development costs
    
    
    1,931
    
    
    
    2,504
    
    
    
    3,834
    
    
    
    525Sales and distribution expenses
    
    
    1,760
    
    
    
    2,104
    
    
    
    3,361
    
    
    
    461General and administrative expenses
    
    
    2,192
    
    
    
    3,076
    
    
    
    2,858
    
    
    
    39216,707
    
    
    
    22,050
    
    
    
    29,004
    
    
    
    3,976
 F-41




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (21)
    
    Net Income available to Ordinary Shareholders
 2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Net income available to ordinary shareholders
    
    
    179,016
    
    
    
    148,292
    
    
    
    82,536
    
    
    
    11,315Denominator for basic net income available to
ordinary shareholders:Weighted average number of ordinary
shares outstanding
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    624,624,852
    
    
    
    624,624,852Basic net income per share available to
ordinary shareholders
    
    
    0.38
    
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.02Net income available to ordinary shareholders
    
    
    179,016
    
    
    
    148,292
    
    
    
    82,536
    
    
    
    11,315Dividend, accretion to redemption value
and foreign exchange currency rate
movements
on mandatorily redeemable convertible
preference shares
    
    
    2,428
    
    
    
    549
    
    
    
    
    
    
    
    Diluted net income available to ordinary shareholders
    
    
    181,444
    
    
    
    148,841
    
    
    
    82,536
    
    
    
    11,315Denominator for diluted net income available to
ordinary shareholders:Weighted average number of ordinary
shares
outstanding
    
    
    466,365,500
    
    
    
    584,580,799
    
    
    
    624,624,852
    
    
    
    624,624,852Weighted average number of
mandatorily
redeemable convertible preference
shares
    
    
    33,634,500
    
    
    
    8,569,885
    
    
    
    
    
    
    
    500,000,000
    
    
    
    593,150,684
    
    
    
    624,624,852
    
    
    
    624,624,852Diluted net income per share available to
ordinary shareholders
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.13
    
    
    
    0.02
 Basic and diluted net income per share available to ordinary shareholders for the year ended
December 31, 2005 has been calculated as if 466,365,500 ordinary shares had been issued and
outstanding throughout for such period. There was no dilutive ordinary share outstanding
throughout the year ended December 31, 2007.
 F-42




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (22)
    
    Related Party TransactionsThe principal related party transactions during the years ended December 31, 2005, 2006 and
2007 are as follows:
 2005
    
    2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Acquisition of additional
20% equity share of Lake
Communication (Note 18)
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    4,113Payment for rental (Note (a))
    
    
    960
    
    
    
    960
    
    
    
    
    
    
    
    
  
 (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 and such
relationship is ceased on August 16, 2006. The lease which expired on December 31, 2005,
was subsequently renewed until December 31, 2006. On December 13, 2006, Shenzhen Fang
had been merged with Kaige and renewed the rental agreement until December 31, 2007. A
rental of RMB 960,000, RMB 960,000 and nil which was determined with reference to the
market rental, was charged to expenses for 2005, 2006, and that of 2007, respectively. As at 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.(23)
    
    Pension and Other Post Retirement 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 7,889,000, RMB
10,970,000 and RMB 11,982,000 (US$1,643,000) for the years ended December 31, 2005, 2006 and
2007 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.
 F-43




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (24)
    
    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, 2006 and 2007 were recorded in the
accompanying consolidated balance sheet at their net present value based on a discount rate
of 5.58% and 6.82% per annum respectively, which approximated the discount rate generally
available for discounting similar instruments with PRC banks. The carrying amount of long
term accounts receivable approximate their fair value.The carrying amount of long-term debt approximates their fair value based on the borrowing
rates currently available for debt securities with similar terms and average maturities.
 F-44




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (25)
    
    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, 2005,
2006 and 2007:
 2005
    
    
    
    
    
    2006
    
    
    
    
    
    2007
    
    
    
    
    
    2007RMB000
    
    %
    
    RMB000
    
    %
    
    RMB000
    
    %
    
    US$000China Unicom Group
    
    
    322,896
    
    
    
    45
    
    
    
    298,693
    
    
    
    36
    
    
    
    377,785
    
    
    
    39
    
    
    
    51,790China Mobile Group
    
    
    241,575
    
    
    
    34
    
    
    
    277,098
    
    
    
    33
    
    
    
    317,735
    
    
    
    32
    
    
    
    43,558China Telecom Group
    
    
    69,490
    
    
    
    10
    
    
    
    89,169
    
    
    
    11
    
    
    
    49,636
    
    
    
    5
    
    
    
    6,804ZTE Kangxu
    
    
    2,444
    
    
    
    
    
    
    
    10,412
    
    
    
    1
    
    
    
    123,076
    
    
    
    13
    
    
    
    16,872
   2006
    
    2007
    
    2007RMB000
    
    RMB000
    
    US$000China Unicom Group Current portion
    
    
    305,813
    
    
    
    345,538
    
    
    
    47,369 Long-term portion
    
    
    100,162
    
    
    
    182,969
    
    
    
    25,083405,975
    
    
    
    528,507
    
    
    
    72,452China Mobile Group Current portion
    
    
    223,374
    
    
    
    229,328
    
    
    
    31,438 Long-term portion
    
    
    80,010
    
    
    
    149,714
    
    
    
    20,524303,384
    
    
    
    379,042
    
    
    
    51,962China Telecom Group Current portion
    
    
    70,158
    
    
    
    87,297
    
    
    
    11,967 Long-term portion
    
    
    28,853
    
    
    
    29,059
    
    
    
    3,98499,011
    
    
    
    116,356
    
    
    
    15,951ZTE Kangxu Current portion
    
    
    12,342
    
    
    
    102,136
    
    
    
    14,002 Long-term portion
    
    
    
    
    
    
    
    
    
    
    12,342
    
    
    
    102,136
    
    
    
    14,002820,712
    
    
    
    1,126,041
    
    
    
    154,367
 F-45




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (26)
    
    Commitments and Contingencies
 (i)
    
    Operating lease commitmentsFuture minimum lease payments under non-cancelable operating leases as of December 31,
2007 are as follows:
 RMB000
    
    US$0002008
    
    
    8,716
    
    
    
    1,1952009
    
    
    761
    
    
    
    1042010
    
    
    95
    
    
    
    132011
    
    
    52
    
    
    
    72012
    
    
    30
    
    
    
    49,654
    
    
    
    1,323
 For the years ended December 31, 2005, 2006 and 2007, total rental expenses for
non-cancellable and cancellable operating leases were RMB 13,361,000, RMB 16,385,000 and
RMB 18,910,000 (US$2,592,000) respectively.(ii)
    
    Capital commitmentsCapital commitments for future purchase of property, plant and equipment as of December
31, 2007 was RMB 84,216,000 (US$11,552,000).(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. The failure
of the Companys installed wireless coverage 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.
 F-46




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (27)
    
    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
the accounting standards and regulations prevailing in the PRC (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, 2007, 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 no 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, 2006 and 2007, an amount of RMB 132,403,000 and RMB 146,077,000
(US$20,025,000) were appropriated from retained earnings and set aside for statutory general
reserves respectively by the Companys subsidiaries.As of December 31, 2006 and 2007, 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 9%
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-47




---



##### Table of Contents



China GrenTech Corporation Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005, 2006 and 2007
 (28)
    
    Subsequent eventGranting of share options under the 2005 Options Scheme.On March 14, 2008, the Company granted 10,000,000 share options (ordinary share) under
the 2005 Options Scheme to the employees of the Group at an exercise price of US$5.31 per ADS
share. Each ADS share represents 25 ordinary shares of the Company. These share options
vest over a 2 years period from the grant date of May 14, 2008 and have terms of 5 years from
the date of grant.
 F-48