UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)





xANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year ended: December 31,
2009





oTRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from ____________ to _____________





Commission
File No. 001-33648





WONDER
AUTO TECHNOLOGY, INC.





(Exact
name of registrant as specified in its charter)





Nevada
                  
                  88-0495105(State
      or other jurisdiction of incorporation or
                    organization)
                  
                  (I.R.S.
      Employer Identification
No.)





No.
16 Yulu Street


Taihe
District, Jinzhou City


Liaoning
Province 121013


People’s
Republic of China





(Address
of principal executive offices)





(86)
416-2661186





(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:




Title of each class
                
                Name of each exchange on which registeredCommon
      Stock, par value $0.0001 per share
                
                NASDAQ
      Global Market





Securities
registered pursuant to Section 12(g) of the Exchange Act: None




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act.
                      Yes
       ̈
      No x




Indicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act.
                      Yes
       ̈
      No x




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.
                    Yes
      x No  ̈




Indicate
      by check mark whether the registrant has submitted electronically and
      posted on its corporate Website, if any, every Interactive Data File
      required to be submitted and posted pursuant to Rule 405 of Regulation S-T
      (§ 232.405 of this chapter) during the preceding 12 months (or for such
      shorter period that the registrant was required to submit and post such
      files).
                    Yes
      o No  ̈




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K.
                   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      Accelerated Filer  o
                
                Accelerated
      Filer xNon-Accelerated
      Filer  o(Do not check if a smaller reporting company)
                
                Smaller
      reporting company  o




Indicate
      by check mark whether registrant is a shell company (as defined in Rule
      12b-2 of the Act).
                  Yes
      o No x




As of
June 30, 2009 (the last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the shares of the
registrant’s common stock held by non-affiliates (based upon the closing sale
price of such shares as reported on the NASDAQ Global Market) was approximately
$273 million. Shares of the registrant’s common stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding common stock have been excluded from the calculation in that such
persons may be deemed to be affiliates of the registrant. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.




There
were a total of 33,859,994 shares of the registrant’s common stock outstanding
as of March 4, 2010.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s Definitive Proxy Statement for its 2010 Annual Meeting of
Stockholder to be filed with the Commission within 120 days after the close of
the registrant’s fiscal year are incorporated by reference into Part III of this
Annual Report on Form 10-K.










WONDER
AUTO TECHNOLOGY, INC.




Annual
Report on FORM 10-K


For the Fiscal
Year Ended December 31, 2009








TABLE
OF CONTENTS





PART
      IItem
      1.
                                                                              Business.
                                                                              1Item
      1A.
                                                                              Risk
      Factors.
                                                                              10Item
      1B.
                                                                              Unresolved
      Staff Comments.
                                                                              26Item
      2.
                                                                              Properties.
                                                                              26Item
      3.
                                                                              Legal
      Proceedings.
                                                                              27Item
      4.
                                                                              Reserved.
                                                                              27PART
      IIItem
      5.
                                                                              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                                                                              28Item
      6.
                                                                              Selected
      Financial Data.
                                                                              30Item
      7.
                                                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                                                              31Item
      7A.
                                                                              Quantitative
      and Qualitative Disclosures About Market Risk.
                                                                              46Item
      8.
                                                                              Financial
      Statements and Supplementary Data.
                                                                              47Item
      9.
                                                                              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                                                                              48Item
      9A.
                                                                              Controls
      and Procedures.
                                                                              48Item
      9B.
                                                                              Other
      Information.
                                                                              50PART
      IIIItem
      10.
                                                                              Directors,
      Executive Officers and Corporate Governance.
                                                                              50Item
      11.
                                                                              Executive
      Compensation.
                                                                              50Item
      12.
                                                                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                                                                              50Item
      13.
                                                                              Certain
      Relationships and Related Transactions, and Director
      Independence.
                                                                              51Item
      14.
                                                                              Principal
      Accounting Fees and Services.
                                                                              51PART
      IVItem
      15.
                                                                              Exhibits,
      Financial Statement Schedules.
                                                                              51





Special
Note Regarding Forward Looking Statements





In
addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We
use words such as “believe,” “expect,” “anticipate,” “project,” “target,”
“plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are
intended to identify forward-looking statements. Such statements include, among
others, those concerning market and industry segment growth and demand and
acceptance of new and existing products; any projections of sales, earnings,
revenue, margins or other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements
regarding future economic conditions or performance; uncertainties related to
conducting business in China, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. You are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, as well as assumptions, which, if they were to
ever materialize or prove incorrect, could cause the results of the Company to
differ materially from those expressed or implied by such forward-looking
statements. Such risks and uncertainties, among others, include:





·
            The
      effects of the global economic
crisis;




·
            The
      effects of contraction in automotive sales and
  production;




·
            Escalating
      pricing pressures from our
customers;




·
            Our
      ability to accurately project market demand for our
    products;




·
            Our
      ability to require additional
capital;




·
            Risks
      associated with future investments or
  acquisitions;




·
            Interruption
      in our production processes;




·
            Our
      ability to attract new
customers;




·
            Our
      ability to employ and retain qualified
  employees;




·
            Competition
      and competitive factors in the markets in which we
  compete;




·
            General
      economic and business conditions in China and in the local economies in
      which we regularly conduct business, which can affect demand for the
      Company’s products and services;




·
            Changes
      in laws, rules and regulations governing the business community in China
      in general and the automobile industry in particular;
  and




·
            The
      risks identified in Item 1A. “Risk Factors” included
    herein.




All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements.  We assume no obligation and do not
intend to update these forward-looking statements, except as required by
law.





Use
of Terms





Except as
otherwise indicated by the context, references in this report to:





·
            “Company,”
      “WATG,” “we,” “us” and “our” are references to the combined business of
      Wonder Auto Technology, Inc., a Nevada corporation, and its subsidiaries
      on a consolidated basis;




·
            “Friend
      Birch” are references to Friend Birch Limited, a Hong Kong company and a
      direct, wholly owned subsidiary of the
Company;




·
            “Fuxin
      Huirui” are references to Fuxin Huirui Mechanical Co., Ltd., a corporation
      incorporated in the People’s Republic of China and an indirect, wholly
      owned subsidiary of the Company;




·
            “Jinan
      Worldwide” are references to Jinan Worldwide Auto Accessories Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;




·
            “Jinzhou
      Dongwoo” are references to Jinzhou Dongwoo Precision Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, 50% owned subsidiary of the
Company;




1




·
            “Jinzhou
      Equipment” are references to Jinzhou Wonder Auto Electrical Equipment Co.,
      Ltd., a corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;




·
            “Jinzhou
      Halla” are references to Jinzhou Halla Electrical Equipment Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;




·
            “Jinzhou
      Hanhua” are references to Jinzhou Hanhua Electrical System Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, 50% owned subsidiary of the
Company;




·
            “Jinzhou Jiade” are references to
      Jinzhou Jiade Machinery Co., Ltd., a corporation incorporated in the
      People’s Republic of China and an indirect, wholly owned subsidiary of the
      Company;




·
            “Jinzhou
      Karham” are references to Jinzhou Karham Electrical Equipment Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, 65% owned subsidiary of the
Company;




·
            “Jinzhou
      Lida” are references to Jinzhou Lida Auto Parts Co., Ltd., a corporation
      incorporated in the People’s Republic of China and an indirect, 50% owned
      subsidiary of the Company;




·
            “Jinzhou
      Motor” are references to Jinzhou Wonder Motor Co., Ltd., a corporation
      incorporated in the People’s Republic of China and an indirect, wholly
      owned subsidiary of the Company;




·
            “Jinzhou
      Wanyou” are references to Jinzhou Wanyou Mechanical Parts Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;




·
            “Wonder
      Auto” are references to Wonder Auto Limited, a British Virgin Islands
      company and a direct, wholly owned subsidiary of the
    Company;




·
            “SEC”
      are references to the United States Securities and Exchange
      Commission;




·
            “Securities
      Act” are references to Securities Act of 1933, as amended, and “Exchange
      Act” are to the Securities Exchange Act of 1934, as
    amended.




·
            “China”
      and “PRC” are references to People’s Republic of
  China;




·
            “RMB”
      are references to Renminbi, the legal currency of China;
    and




·
            “U.S.
      dollar,” “$” and “US$” are references to the legal currency of the United
      States.


2


PART
I





ITEM
      1.
            BUSINESS.





Overview




We are a
leading manufacturer of automotive electric parts, suspension products and
engine components in China. Our core products include alternators, starters,
engine valves and tappets, and rods and shafts for use in shock absorber
systems. We have been producing alternators and starters in China since 1997.
According to the China Association of Automobile Manufacturers, or CAAM, in 2008
we ranked second and third in sales revenue in the Chinese market for automobile
alternators and starters, respectively. Our subsidiary Jinan Worldwide, which we
acquired in October 2008, has been producing engine valves and tappets for over
50 years, and we believe we are now one of the largest manufacturers of engine
valves and tappets in China in terms of sales volume as a result of the
acquisition.





Our
products are used in a wide range of passenger and commercial automobiles, and
we are especially focused on the fast-growing small-to-medium engine passenger
vehicle market. We sell our products primarily within China to well-known
domestic and international automobile original equipment manufacturers, or OEMs,
engine manufacturers and automotive parts suppliers. We are increasingly
exporting our products to international markets. Our customers include SAIC GM
Wuling Automobile Co., Ltd., Beijing Hyundai Motor Company, Shenyang Aerospace
Mitsubishi Motors Engine Co., Ltd., Harbin Dongan Automotive Engine Co., Ltd.,
Shanghai Volkswagen Co., Ltd., BYD Company Limited, Tianjin Toyota Co., Ltd.,
Chery Automobile Co., Ltd., Dongfeng Yueda Kia Motors Co., Ltd., Geely
Automobile Co., Ltd., Tianjin FAW Xiali Automobile Co., Ltd., and a major North
American automobile OEM. Most of our customers subject us to a rigorous product
qualification process to ensure that our products meet their quality standards.
We believe that the complex and stringent requirements of each customer’s
qualification process acts as a barrier to entry for many new market
entrants.





Our
strategically-located manufacturing facilities in Jinzhou and Jinan, China house
our high-quality manufacturing, testing and research and development
capabilities. We currently have four alternator assembly lines, four starter
assembly lines, twenty engine valves production lines, five tappets production
lines and three rods and shafts production lines. Our current annual production
capacity is approximately 2.6 million units of alternators,
2.4 million units of starters, 27 million units of engine valves and
tappets, and 20 million units of rods and shafts, assuming two work shifts
per day with eight hours each.





We
actively pursue acquisition prospects and other strategic opportunities and have
completed the following transactions since the beginning of fiscal year
2009:





·
            On
      September 22, 2009, we acquired 100% of the equity interest in Friend
      Birch Limited, a Hong Kong company, thereby indirectly acquiring its
      wholly owned Chinese subsidiaries, Jinzhou Jiade Machinery Co., Ltd. and
      Jinzhou Lida Auto Parts Co., Ltd., which are engaged in designing,
      manufacturing and selling gas spring shafts and other thin mechanical
      shafts products, automotive springs and gas spring.  As part of
      the transaction, we also acquired all proprietary technology of Friend
      Birch Limited’s rods and shafts technology center in
    Brazil.





·
            On
      November 4, 2009, we entered into a joint venture agreement with Korea
      Teawon Dianzhuang Corporation, a Korean company, pursuant to which we
      agreed to establish a joint venture company named Jinzhou Wonder Teawon
      Co., Ltd. (“Jinzhou Teawon”), which will primarily engage in the
      manufacture of solenoid switches for automotive starters, alternator
      collector rings, starter communicators and other automobile
      parts.  Under the joint venture agreement, we will acquire 75%
      of Jinzhou Teawon.





·
            On
      January 18, 2010, through two separate transactions, we acquired an
      aggregate of 38.36% of equity interest in Applaud Group Limited which is a
      British Virgin Islands corporation and has no assets other than its
      ownership of 52.2% of equity interest in Jinheng Automotive Safety
      Technology Holdings Limited (“Jinheng Holding”).  As a result of
      the acquisition of an aggregate of 38.36% of Applaud, we will become the
      largest shareholder of Applaud and, thereby, owner of 20.02% of Jinheng
      Holdings. Jinheng Holdings is a high-tech automotive parts supplier that
      is primarily engaged in developing, manufacturing and selling components
      of automotive passive safety restraint systems (airbag and seatbelt),
      automotive engine electronic injection management systems, and components
      of diesel engines. Jinheng Holdings is listed on the Main Board of Hong
      Kong Stock Exchange. Our CEO and chairman, Qingjie Zhao, is an executive
      director of Jinheng Holdings.


1




History
and Corporate Structure




We were
incorporated on June 8, 2000 in the State of Nevada as “MGCC Investment
Strategies Inc.”  Until our reverse acquisition of Wonder Auto on June
22, 2006, our business strategy and ownership changed several times. On June 22,
2006, we acquired all of the capital stock of Wonder Auto in exchange for shares
of our capital stock. This share exchange transaction resulted in a change of
the ownership control of the Company. On August 25, 2006, we amended our
Articles of Incorporation and changed our name into “Wonder Auto Technology,
Inc.” As a result of the Wonder Auto acquisition, our business became the
business of our indirect, wholly-owned Chinese subsidiaries: (1) Jinzhou Halla,
(2) Jinzhou Dongwoo, (3) Jinzhou Wanyou, (4) Jinzhou Hanhua, (5) Jinzhou Karham,
(6) Jinzhou Motor, (7) Jinzhou Equipment, (8) Fuxin Huirui, (9) Jinan Worldwide;
(10) Jinzhou Jiade and (11) Jinzhou Lida.




We
conduct our operations in China through our PRC subsidiaries. The following
chart reflects our organizational structure as of the date of this annual
report.











Segment
Information




Our
business operations can be categorized into four segments based on the type of
products which we manufacture and sell, specifically, (i) alternators, (ii)
starters, (iii) rods and shafts and (iv) engine valves and
tappets.


2




Our
alternator product line offerings are available in seven series based on
different sizes and output rates and come in over 230 models. Our starter
product line offerings primarily consist of planetary type starters which are
small and lightweight and come in ten series with approximately 150 models based
on their size and power output. We manufacture and sell both alternators and
starters using largely the same facilities, personnel and other resources in
Jinzhou Halla.  Approximately 35.2% and 32.7% of our 2009 sales
revenue were derived from the sale of our alternator and starter
products.





Our
subsidiary Jinzhou Wanyou manufacturers our rod and shaft product line, which is
targeted primarily to international market outside China and accounts for
approximately 10.1% of our sales revenue in 2009. Our product offerings were
expanded to include engine valves and tappets as a result of our acquisition of
Jinan Worldwide in 2008.  Sales of our engine valves and tappets
accounted for 22.0% of our sales revenue in 2009.





For
financial information relating to our business segments, see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 24 to the consolidated financial statements appearing
elsewhere in this annual report. For a discussion of the risks attendant to our
foreign operations and of any dependence on one or more of the Company’s
segments upon such foreign operations, please see Item 1A, “Risk
Factors.”





Our
Products and Markets




Our
current products include automotive electrical parts, specifically, alternators
and starters; rods and shafts; and engine valves and tappets.




The
following table set forth sales information about our product mix in each of the
last three years.




(All
amounts, other than percentage, in thousands of U.S. dollars)





Year Ended December 31,2009
                
                
                2008
                
                
                2007Product
                
                Revenue
                
                
                Percent of
                  Revenue
                
                
                Revenue
                
                
                Percent of
                  Revenue
                
                
                Revenue
                
                
                Percentof
                  RevenueAlternators
                
                $
                74,250
                
                
                
                35.2
                %
                
                $
                63,256
                
                
                
                44.8
                %
                
                $
                59,790
                
                
                
                58.6
                %Starters
                
                
                68,946
                
                
                
                32.7
                %
                
                
                52,138
                
                
                
                36.9
                %
                
                
                35,014
                
                
                
                34.3
                %Rods
      and Shafts
                
                
                21,247
                
                
                
                10.1
                %
                
                
                18,106
                
                
                
                12.8
                %
                
                
                7,280
                
                
                
                7.1
                %Engine
      Valves and Tappets
                
                
                46,581
                
                
                
                22.0
                %
                
                
                7,690
                
                
                
                5.5
                %
                
                
                -
                
                
                
                -
                %Total
                
                $
                211,024
                
                
                
                100
                %
                
                $
                141,190
                
                
                
                100
                %
                
                $
                102,084
                
                
                
                100
                %




Alternators





Our
alternators are manufactured by Jinzhou Halla. An alternator is part of a car
engine’s electrical system which is connected to the engine belt of a vehicle
and converts mechanical energy into electricity to recharge the
battery.  The battery, in turn, provides power to all electrical
devices in the vehicle, such as the radio, power steering, headlights and
windshield wipers. We have developed, manufactured and sold seven series of
alternators, which are represented by different sizes and output rates, in over
230 models. Our alternators’ current electrical current flows range in size and
output from 35A to 120A. Larger alternators, as determined by their diameters,
have more electrical field coils and can produce stronger currents. Our
alternators have dual integrated fans and built-in integrated circuit
regulators. Our alternators are designed to produce high outputs while remaining
small and lightweight. The size and weight parameters result in the improved
cooling performance of integrated fans and higher output from the integrated
circuit regulators.





Starters





Our
starters are manufactured by Jinzhou Halla. A starter is part of a car engine’s
starting system, along with the starter solenoid. At ignition, the starter
solenoid is activated and provides power for the starter. The starter then spins
the engine a few revolutions to begin the internal combustion process. The
starters produced by our Company are known as planetary type starters. These
starters are small and lightweight due to their high speed motors combined with
speed reduction systems. We produce ten series of starters in terms of diameters
(ø) from ø67 to ø100, which produce between 0.85kW to 5.5kW of
power.


3





Rods
and Shafts





Our rods
and shafts are manufactured by Jinzhou Wanyou. Our rod and shaft products are
mainly used in shock absorber which is a key part in a vehicle’s suspension
system. A shock absorber rod is the stem in the shock absorber providing full
support of a vehicle’s suspension system. Jinzhou Wanyou currently produces 15
series of rods and shafts in terms of diameters from ø8 to ø28 with over 2,000
models.





Engine
Valves and Tappets





Our
engine valves and tappets are manufactured by Jinan Worldwide. Engine valves and
tappets are used in internal combustion engines to control and facilitate the
engine’s air intake and exhaust functions. Our engine valves and tappets are
critical to optimizing the engine’s power output and fuel
consumption.  At present, Jinan Worldwide produces 5 series of engine
valves and tappets in term of applications with over 200 models.




We strive
to produce high quality products and have established a quality control system
to ensure that we achieve this goal. We have obtained the ISO9002, QS9000, and
TS 16949 certificates for our quality management system.





Our
Industry




Overview
of Chinese Automobile Industry




China
experienced significant economic growth in 2009 and has overtaken the U.S. as
the world’s largest automobile market despite challenging global economic
conditions that have had a significant negative impact on the global automobile
industry. According to CAAM, China’s automobile production and sales volumes
were 13.8 million and 13.6 million units in 2009, representing a 48.3% and 46.2%
growth rate over 2008, respectively. Sales of passenger cars in China, including
sedans, multipurpose vehicles and sport-utility vehicles, were 10.3 million
units in 2009, up 7.3% year-over-year. The automobile vehicle population
exceeded 186 million units in 2009 according to the Chinese State Minister of
Public Security. The passenger vehicles population increased by 9.6 million
units, up to 42.4 million units, representing a 29.3% growth rate over
2008.





Most of
our products are manufactured for use in passenger automobiles with small to
medium engines, with displacements of 2.0 liters or below. Automobiles with
these engine displacements produce lower emissions, tend to be more fuel
efficient, more environmentally friendly and less expensive. Sales of small- to
medium-engine passenger cars with displacements of 2.0 liters or below in China
were approximately 9.45 million units in 2009, representing 91.5% of the
total sales of passenger car market in China.





We
believe growth in China’s automobile industry will primarily be driven by the
following factors:





China’s
Macroeconomic Growth.    China’s economy has
experienced significant growth since the early 1980s. According to the National
Bureau of Statistics of China, the gross domestic product, or GDP, in China was
RMB 33.54 trillion in 2009, representing an 8.7% growth as compared to 2008.
According toa report
published by the Organization for Economic Co-operation and Development (OECD)
in November 2009, China’s GDP growth in 2010 is expected to reach approximately
10%, as compared to an expected approximate 3.4% increase in global GDP. We
believe that a continued increase in China’s GDP will generate greater Chinese
consumer purchasing power for durable goods such as automobiles.





Low Per
Capita Rate of Vehicle Ownership.    According to the
CAAM, in 2009, the passenger vehicle ownership rate in China was approximately
25 passenger vehicles per 1,000 inhabitants, and even lower in remote areas in
China. According to Japan Automobile Manufacturers Association statistics, the
average passenger vehicle ownership rate in the United States was more than 450
passenger vehicles per 1,000 inhabitants and the world average passenger vehicle
ownership rate was over 100 passenger vehicles per 1,000 inhabitants in 2007. We
believe that sales of automobiles in China will experience continued growth,
given the significantly lower penetration rate of automobiles in China and
rising income levels in China.


4


Increasing
Urbanization and Rising Income Levels.    Overall
population growth and a trend towards urbanization have led to significant
growth in China’s urban population since 1978. According to the National Bureau
of Statistics of China, the urbanization rate in China grew at a CAGR of 2.8% in
the period from 2004 to 2008, while annual disposable income per capita of urban
residents grew at a CAGR of 13.8% in the same period. We expect a growing and
increasingly affluent urban population will result in greater need for more
efficient and individualized means of transportation, resulting in rising car
ownership.





Growth
of Highway Infrastructure.    According to the
National Bureau of Statistics of China, the total length of highways in China
increased from 1.2 million kilometers in 1996 to 3.7 million
kilometers in 2008, representing a CAGR of 10.0%. The growth in the total length
of expressways in China has been even faster, with the total length having
increased from 3,400 kilometers in 1996 to 65,000 kilometers in 2009,
representing a CAGR of 25.5%. We believe the continued growth of China’s
highways and related transportation infrastructure is likely to make automobile
transportation easier and more efficient resulting in a growing demand for
automobiles.





Favorable
Government Policies.    The Chinese government has
adopted a number of measures and initiatives intended to stimulate the growth
and development of China’s automobile industry. The following are selected
government initiatives that we believe are likely to have a favorable impact on
China’s automobile industry:





·
            On
      September 1, 2008, a measure was adopted by the PRC tax authority to
      reduce the consumption tax rates assessed on low-emission vehicles, which
      is a primary market for our
products.





·
            In
      November 2008, China’s State Council announced a RMB 4 trillion
      (approximately $585.7 billion) economic stimulus package which increases
      PRC government investment and spending on infrastructure projects,
      particularly roads, railways and
airports.





·
            On
      January 1, 2009, the Chinese State Tax Bureau implemented a new fuel
      tax which replaces six other fees imposed on vehicle owners and provides
      favorable tax treatment to low-emission
  vehicles.





·
            On
      January 14, 2009, the Chinese government announced a stimulus package
      of RMB 10 billion (approximately $1.5 billion) to specifically bolster
      China’s automobile industry, including investment in the development of
      alternative energy vehicles and
parts.





·
            On
      January 20, 2009, the Chinese State Tax Bureau reduced the sales tax
      imposed on sales of small engine vehicles with displacements of 1.6 liters
      or below by 50%.





·
            The
      Chinese Ministry of Financing approved and granted RMB 5 billion
      (approximately $732.1 million) for the “Cars to the Countryside” program,
      which is a government subsidy program that became effective on
      March 1, 2009. Under this program, individuals in rural areas who
      purchase minibuses with engine sizes of 1.3 liters or below between
      March 1, 2009 and December 31, 2009 will be entitled to a 10%
      subsidy of the full price of a
vehicle.





·
            On
      December 9, 2009, the Chinese State Council announced that the purchase
      tax for automobiles with displacement of 1.6 liters or less will be 7.5%
      until December 31, 2010.





·
            On
      January 18, 2010, the Chinese State Tax Bureau and the State Finance
      Ministry jointly announced a new stimulus package to encourage people to
      abandon the use of old vehicles for new vehicles, which will combine
      subsidies for old vehicles with a purchase tax deduction for new
      vehicles.





We expect
the above government measures and initiatives will accelerate the demand for
automobiles, particularly low-displacement automobiles, in China.





Overview
of Chinese Automobile Parts Industry




While the
Chinese automobile parts industry experienced rapid growth over the past several
years, starting in 2009, the Chinese automotive parts industry grew at a
considerably slower pace than in past years as the global economic crisis took
effect.  The number of automobiles in China reached 186 million at the
end of 2009, up 9.83% from 2008. According to Sinomind Consulting, a China based
automobile market research and management consulting company, China’s sales of
automobile parts reached $136.5 billion in 2008, up 23.9% from $110.2 billion in
2007. According to the United States Department of Commerce, China became the
second largest exporter of automobile parts into the United States in 2007,
overtaking Germany and following Japan.


5




We
believe that growth in China’s auto parts industry will continue due to several
important factors.  First, the continued growth of Chinese automobile
industry will lay a solid foundation for the growth in the OEM automobile parts
industry.  Second, increased levels of car ownership by Chinese
residents will lead to the growth of the replacement parts
market.  Finally, as Chinese and international automotive
manufacturers implement cost savings plans, we expect them to source components
directly from low cost manufacturing regions, such as China.




Our
Intellectual Property




Our goal
is to utilize our intellectual property to provide us with a competitive
advantage. We currently own 64 patents issued in China relating to our products.
Additionally, Jinzhou Halla has registered the trademark for the logo “” ,and Jinan Worldwide has registered the trademark for
the logo “”, “”, “”, “”, “”, “”, and “” with the Trademark office of the State Administration for
Industry and Commerce of China.





We cannot
give any assurance that the protection afforded our intellectual property will
be adequate. It may be possible for third parties to obtain and use, without our
consent, intellectual property that we own or are licensed to use. Unauthorized
use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
See Item 1A, “Risk Factors – Risks Related to our Business – Failure to
adequately protect our intellectual property rights may undermine our
competitive position, and litigation to protect our intellectual property rights
may be costly.” We may also be subject to litigation involving claims of patent
infringement or violation of other intellectual property rights of third
parties. See Item 1A, “Risk Factors – Risks Related to our Business – We may be
exposed to infringement or misappropriation claims by third parties, which, if
determined adversely against us, could disrupt our business and subject us to
significant liability to third parties.”





Sales
and Marketing




We market
our products directly to our customers though our sales department which, as of
December 31, 2009, consisted of approximately 141 employees. Each member of our
sales department receives one month of training in both the business and
technical aspects that they will need to perform their job functions. In
addition, we periodically provide continuing educational training for our sales
personnel. Members of our sales department generate sales leads by contacting
auto manufacturers directly and by attending industry trade shows and
exhibitions. Since we have established our status as one of the leading
suppliers of alternators, starters, rods and shafts, and engine valves and
tappets, our customers may also contact us for new projects. Although most of
our business is developed by direct personal contact and referrals from our
customers, we also advertise our products in industry trade journals and other
industry media.




In order
to attract international customers, we also attend international trade shows,
such as the automobile shows in Frankfurt and Las Vegas, to raise our brand
recognition and promote our products to the international market.  We
started selling our products directly to foreign customers in 2003. Our overseas
sales accounted for approximately 10.7% of our total sales revenue in
2009.




In
addition to our sales and marketing department which performs customer service
functions, we also employ outside representatives whose primary function is to
understand our customers’ needs and promote services that best meet their
requirements. These representatives also help our customers resolve installation
problems and provide general customer service. As of December 31, 2009, we had
twelve representatives stationed at different major customers, including one
Mexican representative.





Raw
Materials




The raw
materials we use to produce our starters and alternators fall into four general
categories: metal parts, semiconductors, chemicals, and packaging materials. The
main raw materials we use to produce our rods, shafts, engine valves and tappets
are iron and steel. The prices of these raw materials are determined based upon
prevailing market conditions, supply and demand. Supply and demand for these raw
materials is generally affected by the cyclical nature of the automobile
industry and the auto parts industry. Supply and demand is also affected by
macroeconomic conditions, including consumer disposable income and spending
patterns.


6





We
purchase the majority of our raw materials and components from suppliers located
in China, including Jiangsu Senyuan Special Steel Co., Ltd., Yingkou Die-Casting
Products Co., Ltd., Tianjin Jingda Rea Special Enamelled Wire Co., Ltd.,
Zhejiang Huanfang Auto Electrical Appliance Co. Ltd., Zhejiang Yuhuan Solenoid
Co., Ltd., and Jinzhou Hirvon Auto Electronics Co., Ltd.  In
situations where we procure raw materials from our subsidiaries, we purchase
such materials at cost with no additional mark-up and account for such
transactions through intercompany cost allocations.




A portion
of our raw materials and components are made to our technical specifications,
and the remainder of our raw materials and components are non-customized. We
consider the raw materials and components that are made to our technical
specifications to be proprietary to us, and we have entered into agreements with
some of our suppliers which prohibit them from supplying to other third parties
these raw materials and components. We believe that in most instances, raw
materials and components made to our technical specifications can be obtained
from multiple supply sources. We generally have not experienced any difficulties
in obtaining our requirements for raw materials.




Even
though multiple supply sources are available to us, our practice has been to
utilize limited vendors for certain types of raw materials and components needed
in our business based on our past relationship with particular vendors and their
abilities to deliver to us high quality raw materials and components on
favorable terms. Over the past years, we have been making efforts to diversify
our supply channels in order to increase our bargaining power with suppliers. In
2009, our top
five suppliers accounted for approximately 32% of our total cost of
sales, decreased from approximately 59% in 2008.




We
utilize local suppliers in close proximity to us, typically within 300
kilometers of our manufacturing facilities, in order to closely supervise their
activities, monitor quality, provide technical training and collaborate on
technical improvements. If geographically proximate suppliers continue to be
able to provide high quality raw materials and components to us, we intend to
continue to source our raw materials and components from them to take advantage
of lower shipping costs and favorable quality control capabilities.




Our
suppliers must meet our quality standards and delivery requirements consistently
to remain on our approved supplier list. If a supplier furnishes suboptimal
materials and components to us or is repeatedly late in deliveries, we remove
them from our approved supplier list.




We
typically purchase the raw materials that we use to produce our products from
our suppliers on credit.  Credit terms usually permit payment up to 90
days following the delivery of the raw materials. When we purchase raw materials
from Chinese suppliers, we are able to pay in RMB. When we purchase raw
materials from foreign suppliers, we usually pay in U.S. dollars. Our account
payables above six months accounted for 1.75%, 1.85% and 3.7% of our total
account payables in 2007, 2008 and 2009, respectively.




In 2009,
our three biggest suppliers were Jiangsu Senyuan Special Steel Co., Ltd.,
Yingkou Die-Casting Products Co., Ltd. and Tianjin Jingda Rea Special Enameled
Wire Co. Ltd., which accounted for approximately
7.1%, 6.7% and 6.6% of our total purchases, respectively. No suppliers
accounted for more than 10% of our total cost of sales in 2009.




Our
Major Customers




Large
automobile manufacturers and automotive engine suppliers are our primary and
most desirable customers.  Our major customers include, among others,
Beijing Hyundai Mobis Auto Parts, Harbin Dongan Automotive Engine Co., Ltd.,
Shenyang Aerospace Mitsubishi Motors Engine Co., Ltd., Weichai Engine Logistic
Co., Ltd., Mianyang Xinchen Engine Co., Ltd., Shanghai GM Wuling Automotive Co.,
Ltd., Guangxi Yuchai Machinery Holdings Company, Jiangsu Mobis Auto Parts
Company, Magneti Marelli Suspension System (Brazil). As we continue to increase
sales in the domestic market, we also intend to grow our overseas sales. We
focus on maintaining long-term relationships with our customers. We have enjoyed
recurring orders from most of our customers for periods of four to ten years.
Our typical sales contract has a one-year term and is usually
renewable.




We
continued our efforts in diversifying our client base without lowering our total
sales revenue. In 2009, our top three customers accounted for approximately
29.9% of our total sales revenue as compared to approximately 34.9% in
2008.  In 2009, our two biggest customers Beijing Hyundai Mobis Auto
Parts Co., Ltd., and Harbin Dongan Automotive Engine Co., Ltd. accounted for
approximately13.9% and 10.8% of our total sales revenue, respectively. No other
customers accounted for more than 10% of our sales revenue in 2009. We plan to
further diversify our customer base in 2010 to enhance
profitability.


7




Research
and Development




We
believe that the development of new products and production methods is important
to our success. We currently operate four research and development centers, each
performing different research and development activities. Three of our research
and development centers are located at our principal business headquarters in
Jinzhou, China, focusing on the enhancement of current products, and the
development and testing of new alternator, starter and electric motor products.
The other research and development center is located in Jinan, China, focusing
on the development and testing of new engine valve and tappet products. As of
December 31, 2009, our research and development personnel consisted of
approximately 163 employees.




We are
often invited by our customers to jointly develop new components tailored to our
customers’ specific requirements. In 2009, we had 35 joint development programs
used in various models of sedans. Our OEM customers that we conduct joint
development projects with include FAW sedans, Chery Automobile, South Korea
Doosan and Shanghai GM Wuling. During the past several years, upon the
successful completion of most joint development project, we were engaged as the
supplier for the jointly developed products.




We
believe that our development period is shorter than many other industry
participants due to our dedicated research and development resources and our
close proximity to our customers. Many of our major competitors are foreign
joint ventures who generally conduct their primary research and development
activities in their home countries. We believe that our China-based research and
development operations provide us with an advantage over these competitors since
we are within geographic proximity to our customers and our research and
development personnel are able to communicate directly with our customers in
Chinese and quickly respond to their product requirements.





For the
fiscal years ended December 31, 2007, 2008 and 2009, our research and
development expenses for new products development, representing salaries of
personnel and other costs incurred for research and development of potential new
products, were $534,503, $1.2 million and $3.0 million, representing
approximately 0.5%, 0.9% and 1.4% of our total sales revenue in 2007, 2008
and 2009, respectively.  The amount incurred for purchase of
equipments for research and development were approximately $2.4 million,
$2.2 million and $704,616, representing approximately 3.0%, 1.5% and 0.3%
of our total sales revenue in 2007, 2008 and 2009, respectively.




Backlog




Our
backlog of orders was approximately $58 million as of December 31, 2009 compared
to approximately $12.3 million at December 31, 2008. We anticipate that
substantially all of the backlog at the end of 2009 will be delivered during
2010. In the opinion of management, the amount of backlog is not indicative of
trends in our business.





Regulation




Because
our operating subsidiaries are located in the PRC, we are regulated by the
national and local laws of the PRC.





There is
no private ownership of land in China. Upon payment of a land grant fee, land
use rights can be obtained from the government for a period up to 70 years in
the case of industrial land and are typically renewable. We have received the
necessary land use rights certificate for the 453,900 square feet of land
located at No. 16 Yulu Street, Jinzhou High Technology Industrial Park, Jinzhou,
China and the 179,500 square feet of land located at West Bo Hai Street, Open
Economic Zone, Jinzhou, China. We were granted land use rights from the Chinese
government for 1,842,000 square feet of land located at New Century Avenue,
Changqing District, Jinan High Technology Industrial Park, Shangdong, China. The
land use rights have a 50-year term and will expire on January 27, 2055. This
site houses our office building, a research and development center, as well as
our production facilities.





We are
also subject to China’s foreign currency regulations. The PRC government has
controlled Renminbi reserves primarily through direct regulation of the
conversion of Renminbi into other foreign currencies. Although foreign
currencies, which are required for “current account” transactions, can be bought
freely at authorized PRC banks, the proper procedural requirements prescribed by
PRC law must be met. At the same time, PRC companies are also required to sell
their foreign exchange earnings to authorized PRC banks, and the purchase of
foreign currencies for capital account transactions still requires prior
approval of the PRC government.


8





We do not
face any significant government regulations in connection with the production of
our products. We do not require any special government permits to produce our
products other than those permits that are required for all corporations in
China.





Our
Competition




The
automobile parts market in China is very competitive. We compete based upon the
price and quality of our products, product availability and customer service.
There are approximately 10 major competitors in this market trying to sell the
same products that we sell to the same group of target customers. Our primary
competitors are located in China and include Shanghai Valeo Automotive
Electrical Systems Co. Ltd., Hubei Shendian Auto Motor Co., Ltd. and Zhongqi
Changdian Co., Ltd.




With
China’s entry into the WTO and China’s agreement to lift its protections to
infant industries, we believe that competition will increase in the China auto
parts industry segment. Our primary international competitors include VALEO
(France), BOSCH (German), RAMY (U.S.), Mitsubishi Motor (Japan) and Denso
(Japan).  Some of our competitors have greater financial resources,
larger staff, and more established market recognition in both domestic Chinese
and international markets than we have.





Environmental
Compliance




Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise and air pollution and the disposal of waste and hazardous
materials. We are also subject to periodic inspections by local environmental
protection authorities. We believe we are in material compliance with the
relevant PRC environmental laws and regulations. We are not currently subject to
any pending actions alleging any violations of applicable PRC environmental
laws.





Our
Employees




As
ofDecember 31,
2009, we employed 3,766 full-time employees. The following table sets forth the
number of our full-time employees by function.





Function
                      
                      Number of EmployeesManufacturing
      and engineering
                      
                      3,180General
      and administration
                      
                      282Marketing
      and sales
                      
                      141Research
      and development
                      
                      163




As
required by applicable Chinese law, we have entered into employment contracts
with all of our officers, managers and employees. We believe that we maintain a
satisfactory working relationship with our employees, and we have not
experienced any significant labor disputes or any difficulty in recruiting staff
for our operations.




Our
employees in China participate in a state pension scheme organized by Chinese
municipal and provincial governments. We are required to contribute to the
scheme at the rates of 30.6% to 45.0% of theemployees’
salaries and wages.  The compensation expenses related to this scheme
was approximately $3.2 million, $1.2 million and $681,944 for the fiscal years
2009, 2008 and 2007, respectively.




In
addition, we are required by Chinese law to cover employees in China with
various types of social insurance.  We have purchased social insurance
for all of our employees.




9




Available
Information




Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, including exhibits, and amendments to those reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of
charge on our website at www.watg.cn as soon
as reasonably practicable after such reports are electronically filed with, or
furnished to, the SEC. Copies of these reports may also be obtained free of
charge by sending written requests to Investor Relation, Wonder Auto Technology,
Inc., No. 16 Yulu Street, Taihe District, Jinzhou City, Liaoning, People’s
Republic of China, 121013. The information posted on our web site is not
incorporated into this Annual Report.





ITEM
      1A.
            RISK
      FACTORS.





RISKS
RELATED TO OUR BUSINESS





The
global economic crisis could further impair the automotive industry thereby
limiting demand for our products and affecting the overall availability and cost
of external financing for our operations.





The
continuation or intensification of the recent global economic crisis and turmoil
in the global financial markets may adversely impact our business, the
businesses of our customers and our potential sources of capital financing. Our
automotive parts are primarily sold to automakers, engine manufacturers and auto
parts suppliers. The recent global economic crisis harmed most industries and
has been particularly detrimental to the automotive industry. Since virtually
all of our sales are made to auto industry participants, our sales and business
operations are dependent on the financial health of the automotive industry and
could suffer if our customers experience, or continue to experience, a downturn
in their business. In addition, the lack of availability of credit could lead to
a further weakening of the Chinese and global economies and make capital
financing of our operations more expensive for us or impossible altogether.
Presently, it is unclear whether and to what extent the economic stimulus
measures and other actions taken or contemplated by the Chinese government and
other governments throughout the world will mitigate the effects of the crisis
on the automotive industry and other industries that affect our business. These
conditions have not presently impaired our ability to access credit markets and
finance our operations. However, the impact of the current crisis on our ability
to obtain capital financing in the future, and the cost and terms of the
financing, is unclear. Furthermore, deteriorating economic conditions including
business layoffs, downsizing, industry slowdowns and other similar factors that
affect our customers could have further negative consequences for the automotive
industry and result in lower sales, price reductions in our products and
declining profit margins. The economic situation also could harm our current or
future lenders or customers, causing them to fail to meet their obligations to
us. No assurances can be given that the effects of the current crisis will not
damage on our business, financial condition and results of
operations.





A
contraction in automotive sales and production could have a material adverse
affect on our results of operations and liquidity and on the viability of our
supply base.





Automotive
sales and production are highly cyclical and depend, among other things, on
general economic conditions and consumer spending and preferences (which can be
affected by a number of issues including fuel costs and the availability of
consumer financing). As the volume of automotive production fluctuates, the
demand for our products also fluctuates. The global automotive sales and
production deteriorated substantially in the second half of 2008 and are not
expected to rebound significantly in the near term. While the China automotive
sales and production maintained modest growth momentum in 2008 and continued to
grow in 2009, the growth rate was down from previous years. A contraction in
automotive sales and production could harm our results of operations and
liquidity. In addition, our suppliers would also be subject to many of the same
consequences which could pressure their results of operations and liquidity.
Depending on an individual supplier’s financial condition and access to capital,
its viability could be challenged which could impact its ability to perform as
we expect and consequently our ability to meet our own commitments.





Escalating
pricing pressures from our customers may adversely affect our
business.





Pricing
pressure in the automotive supply industry has been substantial and is likely to
continue. Many vehicle manufacturers seek price reductions in both the initial
bidding process and during the term of the contract. Price reductions have
impacted our sales and profit margins and are expected to do so in the future.
If we are not able to offset continued price reductions through improved
operating efficiencies and reduced expenditures, those price reductions may have
a material adverse effect on our results of operations.


10





If
we fail to accurately project market demand for our products, our business
expansion plan could be jeopardized and our financial condition and results of
operations will suffer.





If actual
customer orders are less than our projected market demand, we will likely suffer
overcapacity problems and may have to leave capacity idle, which may reduce our
overall profitability and hurt our financial condition and results of
operations. Even though our business increasingly has included more
international sales, we derive most of our sales revenue from sales of our
products in China. The continued development of our business depends, in large
part, on continued growth in the automotive industry, especially in China.
Although China’s automotive industry has grown rapidly in the past, it may not
continue to grow at the same growth rate in the future or at all. However, the
developments in our industry are, to a large extent, outside of our control and
any reduced demand for automotive parts products and services, any other
downturn or other adverse changes in China’s automotive industry could severely
harm our business.





Our
business is capital intensive and our growth strategy may require additional
capital which may not be available on favorable terms or at all.





We
believe that our current cash and cash flow from operations are sufficient to
meet our present and reasonably anticipated cash needs. We may, however, require
additional cash resources due to changed business conditions, implementation of
our strategy to expand our manufacturing capacity or other investments or
acquisitions we may decide to pursue. If our own financial resources are
insufficient to satisfy our capital requirements, we may seek to sell additional
equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants that would
restrict our operations. Given the current global economic crisis, financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure
by us to raise additional funds on terms favorable to us, or at all, could limit
our ability to expand our business operations and could harm our overall
business prospects.





Due
to our rapid growth in recent years, our past results may not be indicative of
our future performance so evaluating our business and prospects may be
difficult.





Our
business has grown and evolved rapidly in recent years as demonstrated by our
growth in annual sales revenue from approximately $48.1 million in 2005 to
$211.0 million in 2009. We may not be able to achieve similar growth in future
periods, and our historical operating results may not provide a meaningful basis
for evaluating our business, financial performance and prospects. Moreover, our
ability to achieve satisfactory manufacturing results at higher volumes is
unproven. Therefore, you should not rely on our past results or our historical
rate of growth as an indication of our future performance.




We
face risks associated with future investments or acquisitions.





An
important element of our growth strategy is to invest in or acquire businesses
that will enable us, among other things, to expand the products we offer to our
existing target customer base, lower our costs for raw materials and components
and capitalize on opportunities to expand into new markets. We recently acquired
controlling interests in several complementary businesses, including Friend
Birch Limited and its subsidiaries which we expect to contribute to our future
growth. In the future, we may be unable to identify other suitable investment or
acquisition candidates or may be unable to make these investments or
acquisitions on commercially reasonable terms, if at all.





If we
complete an investment or acquisition, we may not realize the anticipated
benefits from the transaction. Integrating an acquired business is distracting
and time consuming, as well as a potentially expensive process. We are currently
in the process of integrating our operations with the operations of recently
acquired companies. The successful integration of these companies and any other
acquired businesses require us to:





·
            integrate
      and retain key management, sales, research and development, production and
      other personnel;





·
            incorporate
      the acquired products or capabilities into our offerings from an
      engineering, sales and marketing
perspective;





·
            coordinate
      research and development efforts;





·
            integrate
      and support pre-existing supplier, distribution and customer
      relationships; and


11





·
            consolidate
      duplicate facilities and functions and combine back office accounting,
      order processing and support
functions.





Acquisitions
involve a number of risks and present financial, managerial and operational
challenges, including:




·
            Our
      ability to successfully commercialize our strategic
      investments;





·
            increased
      expenses, including travel, legal, administrative and compensation
      expenses resulting from newly hired
employees;





·
            increased
      costs to integrate personnel, customer base and business practices of the
      acquired company with our own;





·
            adverse
      effects on our reported operating results due to possible write-down of
      goodwill associated with
acquisitions;





·
            potential
      disputes with sellers of acquired businesses, technologies, services,
      products and potential liabilities;





·
            potential
      liabilities as a result of assumption of liabilities of acquired
      companies; and





·
            dilution
      to our earnings per share if we issue common stock in any
      acquisition.





Moreover,
geographic distance between business operations, the compatibility of the
technologies and operations being integrated and the disparate corporate
cultures being combined also present significant challenges. Acquired businesses
are likely to have different standards, controls, contracts, procedures and
policies, making it more difficult to implement and harmonize company-wide
financial, accounting, billing, information and other systems. Our focus on
integrating operations may also distract attention from our day-to-day business
and may disrupt key research and development, marketing or sales efforts.
Performance problems with an acquired business, technology, product or service
could also have a material adverse impact on our reputation as a whole. Any
acquired business, technology, product or service could significantly
under-perform relative to our expectations. In addition, although we have
conducted due diligence with respect to our recently acquired companies, there
may still be unidentified issues and hidden liabilities, which could have a
material adverse effect on our business, liquidity, financial condition and
results of operations. For instance, in connection with our acquisition of Jinan
Worldwide, a previously state-owned enterprise, the local Chinese government
may, among other things, require us fulfill obligations of the prior owner of
Jinan Worldwide to contribute additional capital of approximately RMB 330
million into Jinan Worldwide by May 2010 and achieve certain performance targets
with respect to Jinan Worldwide. If we cannot overcome these challenges, we may
not realize actual benefits from past and future acquisitions, which will impair
our overall business results.





Our
acquisition strategy also depends on our ability to obtain necessary government
approvals. See “–Risks Related to Doing Business in China – We may be unable to
complete a business combination transaction efficiently or on favorable terms
due to complicated merger and acquisition regulations which became effective on
September 8, 2006.”





We
may not be able to realize the potential financial or strategic benefits of
strategic investment in Jinheng Holding, which could hurt our ability to grow
our business and harm our financial condition.





As part
of our growth strategy, we will continue to explore and make strategic
investments in business that is complementary or additive to our core business
and product offerings.  For instance, on January 18, 2010, through two
separate transactions, we made a strategic investment in which we acquired an
aggregate of 38.36% of equity interest in Applaud Group Limited, and, thereby,
owner of 20.02% of Jinheng Holding, which manufactures airbag safety devices for
automobiles.  We expect to utilize our strategic investment in Jinheng
Holding to further strengthen and broaden our research and development
expertise, expand customer base and improve value-added services. However, the
success of the strategic investment depends on various factors over which we may
have limited or no control. Mergers and acquisitions and strategic investments
are inherently subject to significant risks. For instance, the commercial
aspects and goals of our strategic investment may not materialize as desired or
yield the commercial benefits sought.  Moreover, regardless of whether
the commercial aspects and goals of the strategic investment prove to be
positive, an strategic investment in another company comes with the typical
investment risks, such as the partial or total loss of investment in the worst
case.  Our inability to pinpoint and make favorable strategic
investments, from both a commercial and investment perspective and our inability
to effectively manage the associated risks could materially and adversely affect
our business, financial condition and results of operations. In the case of
Jinheng Holding, our strategic investment may decline in value and/or may not
meet our desired objectives. If we do not successfully manage the risks
associated with this and other acquisitions and strategic investments, our
business, financial condition and results of operations could be materially and
adversely affected.


12





If
we fail to comply with covenants in our loan agreements, our lenders may allege
a breach of a covenant and seek to accelerate the loan or exercise other
remedies, which could strain our cash flow and harm our business, liquidity and
financial condition.





In
connection with loans made to us by several commercial lenders, we have entered
into loan agreements which impose upon us certain financial and operating
covenants. The financial covenants require us to satisfy certain financial
metrics and maintain financial ratios deemed appropriate by our lenders. The
operating covenants often require us to take certain actions, such as keeping
current on our debt payments, delivering reports to our lenders and so forth, or
refraining from taking actions without the lender’s consent or at all, such as
incurring additional debt, making capital expenditures, paying dividends or
distributions or acquiring other business or assets. Even though we strive to
comply with our covenants, we have failed in the past, and may fail in the
future, to do so and our lenders may notify us of such non-compliance and seek
to accelerate a loan or exercise other remedies. For instance, under our loan
agreement with DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH,
or DEG, dated November 24, 2006, we agreed not to make certain acquisitions
without prior consent of DEG. For some of our recent acquisitions, we did not
obtain prior approval from DEG, but instead have subsequently informed DEG about
the acquisitions. We have not received from DEG any written notice of
non-compliance or breach as we believe our subsequent notices have remedied any
problems. However, we cannot assure you that DEG will not, in the future, send a
notice of breach to us and require acceleration of the loan, in which case we
currently believe we have adequate cash to meet the payment obligation. If, in
the future, we fail to comply with our loan agreement covenants, and we receive
a notice of non-compliance or default, we will attempt to cure any
non-compliance and/or negotiate appropriate waivers with our lenders. If we
cannot cure any non-compliance or obtain a waiver, our lenders may declare us to
be in default, which would give them the right to accelerate our outstanding
indebtedness. If any larger amount of our indebtedness is accelerated as a
result of a default, we may be forced to repay our loans earlier than expected,
which would have a material adverse effect on our business, liquidity and
financial condition.





Any
interruption in our production processes could impair our financial performance
and negatively affect our brand.





We
manufacture or assemble our products primarily at our facilities in Jinzhou and
Jinan, China. Our manufacturing operations are complicated and integrated,
involving the coordination of raw material and component sourcing from third
parties, internal production processes and external distribution processes.
While these operations are modified on a regular basis in an effort to improve
manufacturing and distribution efficiency and flexibility, we may experience
difficulties in coordinating the various aspects of our manufacturing processes,
thereby causing downtime and delays. We have also been steadily increasing our
production capacity and have limited experience operating at these higher
production volume levels. In addition, we may encounter interruption in our
manufacturing processes due to a catastrophic loss or events beyond our control,
such as fires, explosions, labor disturbances or violent weather conditions. Any
interruptions in our production or capabilities at our facilities could result
in our inability to produce our products, which would reduce our sales revenue
and earnings for the affected period. If there is a stoppage in production at
any of our facilities, even if only temporary, or delays in delivery times to
our customers, our business and reputation could be severely affected. Any
significant delays in deliveries to our customers could lead to increased
returns or cancellations and cause us to lose future sales. We currently do not
have business interruption insurance to offset these potential losses, delays
and risks so a material interruption of our business operations could severely
damage our business.





Part
of our strategy involves the development of new products, and if we fail to
timely develop new products or we incorrectly gauge the potential market for new
products, our financial results will be adversely affected.





We plan
to utilize our in-house research and development capabilities to develop new
products that could become new sources of sales revenue for us in the future and
help us to diversify our revenue base. For example, we acquired the research and
development center owned by Friend Birch Limited which is focused on developing
new technology for rods and shafts. Our future research and development efforts
will continue to be focused on expanding our product offering beyond our current
products into other similar products and components for different applications,
such as hub motors for electric bicycles and electric vehicles. If we fail to
timely develop new products or if we miscalculate market demand for new products
that we develop, we may not be able to grow our sales revenue at expected growth
rates and may incur expenses relating to the development of new products that
are not offset by sufficient sales revenue generated by these new
products.


13





Exporting
our products outside of China is an important component of our overall growth
strategy, which could subject us to various economic, political, regulatory,
legal and foreign exchange risks.





We
currently sell most of our products in China. Our overseas sales accounted for
9.6%, 16.2% and 10.7% of our total sales revenue in 2007, 2008 and 2009,
respectively. We plan to selectively enter international markets in which an
opportunity to sell our products has been identified. The marketing,
distribution and sale of our products overseas expose us to a number of risks,
including:





·
            fluctuations
      in currency exchange rates;





·
            difficulty
      in designing products that are compatible with product standards in
      foreign countries;





·
            greater
      difficulty in accounts receivable
collection;





·
            increased
      marketing and sales costs;





·
            difficulty
      and costs of compliance with foreign regulatory requirements and different
      commercial and legal requirements;





·
            an
      inability to obtain, maintain or enforce intellectual property rights in
      foreign countries;





·
            changes
      to import and export regulations, including quotas, tariffs and other
      trade barriers, delays or difficulties in obtaining export and import
      licenses, repatriation controls on foreign earnings and currency
      conversion restrictions; and





·
            difficulty
      in engaging and retaining distributors and agents who are knowledgeable
      about, and can function effectively in, overseas
  markets.





If we
cannot effectively manage these risks, our ability to conduct or expand our
business abroad would be impaired, which may in turn hamper our business,
financial condition and prospects.




If
we cannot keep pace with market changes and produce automotive parts with new
technologies in a timely and cost-efficient manner to meet our customers’
requirements and preferences, the growth and success of our business will be
hindered.





The
automotive parts market in China is characterized by increasing demand for new
and advanced technologies, evolving industry standards, intense competition and
wide fluctuations in product supply and demand. If we cannot keep pace with
market changes and produce automotive parts incorporating new technologies in a
timely and cost-efficient manner to meet our customers’ requirements and
preferences, the growth and success of our business will suffer.





From time
to time, new products, product enhancements or technologies may replace or
shorten the life cycles of our products or cause our customers to defer
purchases of our existing products. Shorter product life cycles may require us
to invest more in developing and designing new products and to introduce new
products more rapidly, which may increase our costs of product development and
decrease our profitability. In addition, we may not be able to make such
additional investments and any additional investments we make in new product
development and introductions may not be successful.





Even if
we develop and introduce new products, their market acceptance is not assured
and depends on:





·
            the
      perceived advantages of our new products over existing competing
      products;





·
            our
      ability to attract vehicle manufacturers who are currently using our
      competitors’ products;


14





·
            product
      cost relative to performance; and





·
            the
      level of customer service available to support new
    products.





Therefore,
commercial acceptance by customers of our products may not occur at our expected
rate or level, and we may not be able to successfully adapt existing products to
effectively and economically meet customer demand, thus impairing the return
from our investments. We may also be required under applicable accounting
standards to recognize a charge for the impairment of assets to the extent our
existing products become uncompetitive or obsolete or if any new products fail
to achieve commercial acceptance. Any such charge may jeopardize our ability to
operate profitably.





Failure
to adequately protect our intellectual property rights may undermine our
competitive position, and litigation to protect our intellectual property rights
may be costly.





We strive
to strengthen and differentiate our product portfolio by developing new and
innovative products and product improvements. As a result, we believe that the
protection of our intellectual property will become increasingly important to
our business. Implementation and enforcement of intellectual property-related
laws in China has historically been lacking due primarily to ambiguities in PRC
intellectual property law. Accordingly, protection of intellectual property and
proprietary rights in China may not be as effective as in the United States or
other countries. Currently, we hold 64 PRC patents that relate to various
product configurations and product components. We will continue to rely on a
combination of patents, trade secrets, trademarks and copyrights to provide
protection in this regard, but this protection may be inadequate. For example,
our pending or future patent applications may not be approved or, if allowed,
they may not be of sufficient strength or scope. As a result, third parties may
use the technologies and proprietary processes that we have developed and
compete with us, which could negatively affect any competitive advantage we
enjoy, dilute our brand and harm our operating results.


In
addition, policing the unauthorized use of our proprietary technology can be
difficult and expensive. Litigation may be necessary to enforce our intellectual
property rights and given the relative unpredictability of China’s legal system
and potential difficulties enforcing a court judgment in China, there is no
guarantee litigation would result in an outcome favorable to us. Furthermore,
any such litigation may be costly and may divert management attention away from
our core business. An adverse determination in any lawsuit involving our
intellectual property is likely to jeopardize our business prospects and
reputation. We have no insurance coverage against litigation costs so we would
be forced to bear all litigation costs if we cannot recover them from other
parties. All of the foregoing factors could harm our business and financial
condition.





We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely against us, could disrupt our business and
subject us to significant liability to third parties.





Our
success largely depends on our ability to use and develop our technology,
know-how and product designs without infringing upon the intellectual property
rights of third parties. We may be subject to litigation involving claims of
patent infringement or violation of other intellectual property rights of third
parties. The holders of patents and other intellectual property rights
potentially relevant to our product offerings may be unknown to us or may
otherwise make it difficult for us to acquire a license on commercially
acceptable terms.





We have
not registered and do not own the logo . Wonder Auto
Group Limited, a Hong Kong company controlled by Mr. Qingjie Zhao, our chairman,
chief executive officer and president and is now dormant, has registered the “
” trademark in Hong Kong. Jinzhou Wonder Auto
Suspension System Co., Ltd. has registered the trademarks “ ” and “ ” in China. We have not been
able to register the logo in China because it is
similar to the trademarks registered by Jinzhou Wonder Auto Suspension System
Co., Ltd. An independent third party entity has registered the “Jinzhou Halla”
trademark in China. We currently do not sell any products or services using the
marks similar to the trademarks registered by Jinzhou Wonder Auto Suspension
System Co., Ltd. or “Jinzhou Halla” trademarks. We have entered into an
agreement with Jinzhou Wonder Auto Suspension System Co., Ltd. Under this
agreement, Jinzhou Wonder Auto Suspension System Co., Ltd. has agreed not to
bring any legal action against us for using the mark “ ” in China. However, we cannot assure you that no action will be
brought against us based on our use of “ ”.


15


There may
also be technologies licensed to and relied on by us that are subject to
infringement or other corresponding allegations or claims by others which could
damage our ability to rely on such technologies. In addition, although we
endeavor to ensure that companies that work with us possess appropriate
intellectual property rights or licenses, we cannot fully avoid the risks of
intellectual property rights infringement created by suppliers of components
used in our products or by companies with which we work in cooperative research
and development activities.





Our
current or potential competitors, many of which have substantial resources and
have made substantial investments in competing technologies, may have obtained
or may obtain patents that will prevent, limit or interfere with our ability to
make, use or sell our products in China or other countries. The defense of
intellectual property claims, including patent infringement suits, and related
legal and administrative proceedings can be both costly and time consuming, and
may significantly divert the efforts and resources of our technical and
management personnel. Furthermore, an adverse determination in any such
litigation or proceeding to which we may become a party could cause us
to:





·
            pay
      damage awards;





·
            seek
      licenses from third parties;





·
            pay
      additional ongoing royalties, which could decrease our profit
      margins;





·
            redesign
      our products; or





·
            be
      restricted by injunctions.




These
factors could effectively prevent us from pursuing some or all of our business
objectives and result in our customers or potential customers deferring,
canceling or limiting their purchase or use of our products, which could have a
material adverse effect on our financial condition and results of
operations.





We
rely on certain technologies licensed to us from third parties and the loss of
these licenses or failure to renew such licenses on a timely basis could
interrupt our production and have a material adverse impact on our
business.





We rely
on certain technologies licensed to us from third parties for manufacturing our
products. Through our licensing arrangements, we are able to integrate third
party technologies into our products. We can also produce and sell products that
are more suitable for specific types of vehicles utilizing these licensed
technologies. If certain licenses are terminated, or not timely renewed, the
production of our products using the licensed technologies would be disrupted
and our business and financial condition could be damaged. If any of our
licensors is alleged to have infringed on any other party’s proprietary right,
we may be prevented from using the technology in question, thus disrupting our
production.





We
may be subject to contractual obligations that limit our ability to sell our
automotive parts in certain markets.





When we
enter into commercial arrangements, we strive to negotiate the most favorable
contractual provisions for our company with respect to both pricing and other
terms. In some commercial arrangements, we have negotiated exclusivity,
preferred vendor and non-competition arrangements that are favorable to our
company. In other instances, counterparties to some of our commercial
arrangements have imposed such provisions upon us. For instance, in one of our
commercial arrangements, we are restricted from selling certain products using
intellectual property licensed from the other party to some foreign companies,
joint ventures with foreign companies and companies in countries where the
licensor has business. While we believe that our commercial arrangements, when
considered in their entirety, are favorable to our business, certain commercial
arrangements may restrict our ability to freely sell our products on terms
favorable to us or at all, which could have a negative impact on our sales
revenue and our ability to grow and expand our business.





If
we fail to maintain or improve our market position or respond successfully to
changes in the competitive landscape, our business and results of operations
will suffer.





Our
competition includes a number of global and PRC-based manufacturers and
distributors that produce and sell products similar to ours. We compete
primarily on the basis of quality, technological innovation and price. Our main
competitors include Shanghai Valeo Automotive Electrical Systems Co., Ltd., a
joint venture of Shanghai Auto Industrial Group and Valeo Group, Hubei Shendian
Auto Motor Co., Ltd., a joint venture of Hubei Shendian Auto Electrical
Equipment Co., Ltd., Zhongqi Changdian Co., Ltd. and Remy International, Inc.,
Bosch Group, Mitsubishi Motors Corporation and Denso Corporation. Many of our
competitors have longer operating histories, greater name recognition, larger
global market share, access to larger customer bases and significantly greater
economies of scale, as well as greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than we do. As a
result of these competitive pressures and expected increases in competition, we
may price our products lower than our competitors in order to maintain market
share. Any lower pricing may negatively affect our profit margins. If we fail to
maintain or improve our market position and respond successfully to changes in
the competitive landscape, our business and results of operations may
suffer.


16





A
large percentage of our sales revenue is derived from sales to a limited number
of customers, and our business will suffer if sales to these customers
decline.





A
significant portion of our sales revenue historically has been derived from a
limited number of customers. Our top five customers accounted for approximately
35.6% of our sales in 2008 and 37.8% in 2009. Any significant reduction in
demand for vehicles manufactured by any of these major customers and any
decrease in their demand for our products could harm our sales and business
operations. The loss of one or more of these customers could damage our
business, financial condition and results of operations.





If
we cannot obtain sufficient raw materials and components at a reasonable cost,
our ability to produce and market our products, and thus our business, could
suffer.





We
purchase raw materials and component parts for our products from various
suppliers located primarily in Asia, most of which are located in China and a
few of which are located in South Korea. The raw materials we use to produce our
starters and alternators fall into four general categories: metal parts,
semiconductors, chemicals, and packaging materials. The main raw materials we
use to produce our rods, shafts, engine valves and tappets are iron and steel
rods. The majority of our raw materials and components are purchased from
suppliers in China, including Jiangsu Senyuan Special Steel Co., Ltd., Yingkou
Die-Casting Products Co., Ltd., Tianjin Jingda Rea Special Enameled Wire Co.
Ltd., Zhejiang Huanfang Auto Electrical Appliance Co. Ltd., and Zhejiang Yuhuan
Solenoid Co., Ltd. Purchases from our top five raw materials and component parts
suppliers accounted for approximately 32% of our total purchases in 2009. We may
experience a shortage in the supply of certain raw materials and components in
the future, and if any such shortage occurs, our manufacturing capabilities and
operating results of operations could be negatively affected. If any supplier is
unwilling or unable to provide us with high-quality raw materials and components
in required quantities and at acceptable costs, we may not be able to find
alternative sources on satisfactory terms in a timely manner, or at all. In
addition, some of our suppliers may fail to meet qualifications and standards
required by our customers now or in the future, which could impact our ability
to source raw materials and components. Our inability to find or develop
alternative supply sources could result in delays or reductions in manufacturing
and product shipments. Moreover, these suppliers may delay shipments or supply
us with inferior quality raw materials and components that may adversely impact
the performance of our products. The prices of raw materials and components
needed for our products could also increase, and we may not be able to pass
these price increases on to our customers. If any of these events occur, our
competitive position, reputation and business could suffer.





If
our customers and/or the ultimate consumers of the vehicles that use our
products successfully assert product liability claims against us due to defects
in our products, our operating results may suffer and our reputation may be
harmed.





Our
products are used primarily in low emission passenger vehicles. Significant
property damage, personal injuries and even death can result from malfunctioning
vehicles. If our products are not properly designed, built or installed or if
people are injured because of our products, we could be subject to claims for
damages based on theories of product liability and other legal theories. The
costs and resources to defend such claims could be substantial and, if such
claims are successful, we could be responsible for paying some or all of the
damages. We have maintained product liability insurance only for products
manufactured by Jinzhou Wanyou, which are sold in the United States and Canada.
Negative publicity from such claims may also damage our reputation, regardless
of whether such claims are successful. Any of these consequences resulting from
defects in our products would hurt our operating results and, in turn, the value
of our common stock.





Our
products may become subject to recall in the event of defects or other
performance related issues.





Like many
other participants in the automotive industry, we are at risk for product recall
costs which are costs incurred when, either voluntarily or involuntarily, a
product is recalled through a formal campaign to solicit the return of specific
products due to a known or suspected performance defect. Costs typically include
the cost of the product, part or component being replaced, the cost of the
recall borne by our customers and labor to remove and replace the defective part
or component. Our products have not been the subject of an open recall. If a
recall decision is made, we will need to estimate the cost of the recall and
record a charge to earnings in that period. In making this estimate, judgment is
required as to the quantity or volume to be recalled, the total cost of the
recall campaign, the ultimate negotiated sharing of the cost between us and the
customer and, in some cases, the extent to which the supplier of the part or
component will share in the recall cost. As a result, these estimates are
subject to change. Excessive recall costs or our failure to adequately estimate
these costs may negatively affect our operating results.


17





We
depend heavily on key personnel, and loss of key employees and senior management
could harm our business.





Our
future business and results of operations depend in significant part upon the
continued contributions of our key technical and senior management personnel,
including Qingjie Zhao, our chairman, chief executive officer and president,
Meirong Yuan, our director, chief financial officer and treasurer, Yuncong Ma,
our chief operating officer, Seuk Jun Kim, our vice president of new product
development, Yuguo Zhao, our vice president of sales and marketing and Yongdong
Liu, our vice president of production. They also depend in significant part upon
our ability to attract and retain additional qualified management, technical,
marketing and sales and support personnel for our operations. If we lose a key
employee, if a key employee fails to perform in his or her current position or
if we are not able to attract and retain skilled employees as needed, our
business could suffer. Turnover in our senior management could significantly
deplete institutional knowledge held by our existing senior management team and
impair our operations.





In
addition, if any of these key personnel joins a competitor or forms a competing
company, we may lose some of our customers. We have entered into confidentiality
and non-competition agreements with all of these key personnel. However, if any
disputes arise between these key personnel and us, it is not clear, in light of
uncertainties associated with the PRC legal system, what the court decisions
will be and the extent to which these court decisions could be enforced in
China, where all of these key personnel reside and hold some of their assets.
See “– Risks Related to Doing Business in China – Uncertainties with respect to
the PRC legal system could limit the legal protections available to you and
us.”





Certain
of our existing stockholders have substantial influence over our company, and
their interests may not be aligned with the interests of our other
stockholders.





Mr.
Qingjie Zhao, our chairman, chief executive officer and president, beneficially
owns approximately 19.4% of our common stock. As a result, he has significant
influence over our business, including decisions regarding mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. This concentration of
ownership may also have the effect of discouraging, delaying or preventing a
future change of control, which could deprive our stockholders of an opportunity
to receive a premium for their shares as part of a sale of our company and might
reduce the price of our shares.





Mr.
Qingjie Zhao’s association with other businesses could impede his ability to
devote ample time to our business and could pose conflicts of
interest.





Mr.
Qingjie Zhao, our chairman, chief executive officer and president, owns 10.4% of
China Wonder Limited, a company listed on the Alternative Investment Market of
the London Stock Exchange, which is principally engaged in the manufacture and
sale of specialty packaging machinery to the PRC pharmaceutical market. He also
serves as an executive director of Jinheng Holdings, a company listed on the
Hong Kong Stock Exchange of which we have a 20.02% indirect ownership. In
addition, Mr. Zhao serves as the chairman of Jinzhou Wonder Alternative Energy
Automobile Technology Co., Ltd., which is principally engaged in the research
and manufacture of electrical vehicles, Jinzhou Qingjie Electrical Power
Technology Co., Ltd., which has no current operations but will engage in the
battery business, and Jinzhou Wonder Packing Machinery Co., Ltd., which is
principally engaged in pharmaceutical packaging. Mr. Zhao devotes most of his
business time to our affairs and the remainder of his business time to the
affairs of other companies. Mr. Zhao’s decision-making responsibilities for
these companies are similar in the areas of public relations, management of
human resources, risk management and strategic planning. Also, we may enter into
agreement with these parties to sell or buy goods and services to or from them.
As a result, conflicts of interest may arise from time to time. We will attempt
to resolve any such conflicts of interest in our favor. Additionally, even
though Mr. Zhao is accountable to us and our stockholders as a fiduciary, which
requires that he exercise good faith and due care in handling our affairs, his
existing responsibilities to other entities may limit the amount of time he can
spend on our affairs.


18





Problems
with product quality or product performance could result in a decrease in
customers and revenue, unexpected expenses and loss of market
share.





Our
operating results depend, in part, on our ability to deliver quality products on
a timely and cost-effective basis. As our products become more advanced, it may
become more difficult to maintain our quality standards. If we experience
deterioration in the performance or quality of any of our products, it could
result in delays in shipments, cancellations of orders or customer returns and
complaints, loss of goodwill and harm to our brand and reputation. Furthermore,
our products are used together with components and in motor vehicles that have
been developed and maintained by third parties, and when a problem occurs, it
may be difficult to identify the source of the problem. In addition, some
automobile parts and components may not be fully compatible with our products
and may not meet our or our customers’ quality, safety, security or other
standards. The use by customers of our products with incompatible or otherwise
substandard components is largely outside of our control and could result in
malfunctions or defects in our products and result in harm to our brand. These
problems may lead to a decrease in customers and revenue, harm to our brand,
unexpected expenses, loss of market share, the incurrence of significant
warranty and repair costs, diversion of the attention of our engineering
personnel from our product development efforts, customer relation problems or
loss of customers, any one of which could materially adversely affect our
business.





Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may harm our results of
operations.





We are
subject to environmental, health and safety laws and regulations that affect our
operations, facilities and products in each of the jurisdictions in which we
operate. Some of our newly incorporated Chinese subsidies have not obtained
pollutant discharge permits required by Chinese laws. Other than the foregoing,
we believe that we are in material compliance with all material environmental,
health and safety laws and regulations related to our products, operations and
business activities. Although we have not suffered material environmental claims
in the past, the failure to comply with any present or future regulations could
result in the assessment of damages or imposition of fines against us,
suspension of production, cessation of our operations or even criminal
sanctions. New regulations could also require us to acquire costly equipment or
to incur other significant expenses. Our failure to control the use of, or
adequately restrict the discharge of, hazardous substances could subject us to
potentially significant monetary damages and fines or suspension of our business
operations, which could cause damage to our business.





We
have limited insurance coverage and do not carry any business interruption
insurance, third-party liability insurance for our manufacturing facilities or
insurance that covers the risk of loss of our products in shipment.





Operation
of our facilities involves many risks, including equipment failures, natural
disasters, industrial accidents, power outages, labor disturbances and other
business interruptions. Furthermore, if any of our products are faulty, then we
may become subject to product liability claims or we may have to engage in a
product recall. We do not carry any business interruption insurance, product
recall or third-party liability insurance for our manufacturing facilities or
with respect to our products to cover claims pertaining to personal injury or
property or environmental damage arising from defaults with our products,
product recalls, accidents on our property or damage relating to our operations.
We have obtained product liability insurance only for products manufactured by
Jinzhou Wanyou which are sold to customers in the United States and Canada.
Therefore, our existing insurance coverage may not be sufficient to cover all
risks associated with our business. As a result, we may be required to pay for
financial and other losses, damages and liabilities, including those caused by
natural disasters and other events beyond our control, out of our own funds,
which could have a material adverse effect on our business, financial condition
and results of operations.





Furthermore,
under the shipping terms of some of our customer contracts, we bear the risk of
loss in shipment of our products. We do not insure this risk. While we believe
that the shipping companies that we use carry adequate insurance or are
sufficiently solvent to cover any loss in shipment, there can be no assurance
that we will be adequately reimbursed upon the loss of a significant shipment of
our products.


19


We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have the operating effectiveness of our
internal controls attested to by our independent auditors.





As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules
requiring public companies to include a report of management on the Company’s
internal controls over financial reporting in their annual reports and the
independent registered public accounting firm auditing a company’s financial
statements to attest to and report on the operating effectiveness of such
company’s internal controls. Although our independent auditor has provided a
positive attestation for the year ended December 31, 2009, we can provide no
assurance that we will comply with all of the requirements imposed thereby and
we will receive a positive attestation from our independent auditors in the
future. In the event we identify significant deficiencies or material weaknesses
in our internal controls that we cannot remediate in a timely manner or we are
unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements.





Our
holding company structure may hinder the payment of dividends.





Wonder
Auto Technology, Inc. has no direct business operations, other than its
ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us due to
restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions as discussed below. If future dividends are paid in Renminbi,
fluctuations in the exchange rate for the conversion of Renminbi into U.S.
dollars may reduce the amount received by U.S. stockholders upon conversion of
the dividend payment into U.S. dollars.





PRC
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with PRC accounting standards and
regulations. Our subsidiaries in China are also required to set aside a portion
of their after tax profits according to PRC accounting standards and regulations
to fund certain reserve funds. Currently, our subsidiaries in China are the only
sources of sales revenue or investment holdings for the payment of dividends. If
they do not accumulate sufficient profits under PRC accounting standards and
regulations to first fund certain reserve funds as required by PRC accounting
standards, we will be unable to pay any dividends.





China
passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing
rules, both of which became effective on January 1, 2008, which provide that
dividends sourced from China payable to “non-resident enterprises” shall be
subject to Chinese enterprise income tax at a rate of 10%. Such dividend tax
rate may be reduced by applicable tax treaties or arrangements.





Under the
New EIT Law and its implementation rules, dividend payments between qualified
Chinese resident enterprises are exempted from enterprise income tax. However,
due to the short history of the New EIT Law, it remains unclear as to the
detailed qualification requirements for such exemption and whether dividend
payments from our Chinese subsidiaries to us will be exempted from enterprise
income tax if we are considered as a Chinese resident enterprise for tax
purposes.





RISKS
RELATED TO DOING BUSINESS IN CHINA





Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.





We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:





●
            the
      higher level of government
involvement;





●
              the
      early stage of development of the market-oriented sector of the
      economy;●
              the
      rapid growth rate;


●
            the
      higher level of control over foreign exchange;
  and


●
            the
      allocation of resources.








20




Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.





Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
automotive investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.





Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.





We
conduct substantially all of our business through our operating subsidiaries in
China. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference, but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all but one of our directors are residents of China
and not of the United States, and substantially all the assets of these persons
are located outside the United States. As a result, it could be difficult for
investors to effect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese officers, directors
and subsidiaries.





The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.





The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its
policies, laws and regulations, including those relating to taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.





Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.





Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.





Most of
our sales revenue and expenses are denominated in Renminbi. Under PRC law, the
Renminbi is currently convertible under the “current account,” which includes
dividends and trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in Renminbi, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in Renminbi
to fund our business activities outside China that are denominated in foreign
currencies.





Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or foreign lenders, these loans must be registered with SAFE, and
if we finance the subsidiaries by means of additional capital contributions,
these capital contributions must be approved by certain government authorities,
including the Ministry of Commerce, or their respective local counterparts.
These limitations could affect our PRC operating subsidiaries’ ability to obtain
foreign exchange through debt or equity financing.


21


Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.





The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and the Renminbi and between those currencies and other
currencies in which our sales may be denominated. Because substantially all of
our earnings and cash assets are denominated in Renminbi and our financial
results are reported in U.S. dollars, fluctuations in the exchange rate between
the U.S. dollar and the Renminbi will affect our balance sheet and our earnings
per share in U.S. dollars. In addition, appreciation or depreciation in the
value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue that will be
exchanged into U.S. dollars and earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.





Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
the People’s Bank of China regularly intervenes in the foreign exchange market
to prevent significant short-term fluctuations in the exchange rate, the
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the medium to long term. Moreover, it is possible that in the future
the PRC authorities may lift restrictions on fluctuations in the Renminbi
exchange rate and lessen intervention in the foreign exchange
market.





Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.





Currently,
some of our raw materials, components and major equipment are imported. In the
event that the U.S. dollars appreciate against Renminbi, our costs will
increase. If we cannot pass the resulting cost increases on to our customers,
our profitability and operating results will suffer. In addition, since our
sales to international customers are growing rapidly, we are increasingly
subject to the risk of foreign currency depreciation.




Failure to comply
with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal
liability, limit our ability to acquire PRC companies or to inject capital into
our PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits
to us or otherwise materially adversely affect us.





In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident's funds used to establish or acquire the offshore entity; (3)
covering the use of existing offshore entities for offshore financings; (4)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (5) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV's affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.


22





We
recently acquired Yearcity Limited and its subsidiary Jinan Worldwide, as well
as Fuxin Huirui and have not registered these companies with the relevant branch
of SAFE, as currently required. We plan to make the proper registration in the
next few months.  We have asked our stockholders who are PRC residents
as defined in Circular 75 to register with the relevant branch of SAFE, as
currently required, in connection with their equity interests in us and our
acquisitions of equity interests in our PRC subsidiaries. However, we cannot
provide any assurances that they can obtain the above SAFE registrations
required by Circular 75 and Notice 106. Moreover, because of uncertainty over
how Circular 75 will be interpreted and implemented, and how or whether SAFE
will apply it to us, we cannot predict how it will affect our business
operations or future strategies. For example, our present and prospective PRC
subsidiaries’ ability to conduct foreign exchange activities, such as the
remittance of dividends and foreign currency-denominated borrowings, may be
subject to compliance with Circular 75 and Notice 106 by our PRC resident
beneficial holders.





In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 75 and Notice 106. We also have
little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries' ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.





We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006.





On August
8, 2006, six Chinese regulatory agencies promulgated the Regulation on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, which became
effective on September 8, 2006, or the M&A Regulations. This regulation,
among other things, governs the approval process by which a Chinese company may
participate in an acquisition of assets or equity interests. Depending on the
structure of the transaction, the regulation will require the Chinese parties to
make a series of applications and supplemental applications to the government
agencies. In some instances, the application process may require the
presentation of economic data concerning a transaction, including appraisals of
the target business and evaluations of the acquirer, which are designed to allow
the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the
government agencies. Compliance with the regulations is likely to be more time
consuming and expensive than in the past and the government can now exert more
control over the combination of two businesses. Accordingly, due to this
regulation, our ability to engage in business combination transactions has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate a transaction that is acceptable to our stockholders or
sufficiently protect their interests in a transaction.


The
regulation allows Chinese government agencies to assess the economic terms of a
business combination transaction. Parties to a business combination transaction
may have to submit to the Ministry of Commerce and other relevant government
agencies an appraisal report, an evaluation report and the acquisition
agreement, all of which form part of the application for approval, depending on
the structure of the transaction. The regulations also prohibit a transaction at
an acquisition price obviously lower than the appraised value of the PRC
business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate and complete a
business combination transaction on financial terms that satisfy our investors
and protect our stockholders’ economic interests.





In
addition to the above risks, in many instances, we will seek to structure
transactions in a manner that avoids the need to make applications or a series
of applications with Chinese regulatory authorities under these M&A
regulations. If we fail to effectively structure an acquisition in a manner that
avoids the need for such applications or if the Chinese government interprets
the requirements of the M&A regulations in a manner different from our
understanding of such regulations, then acquisitions that we have effected may
be unwound or subject to rescission. Also, if the Chinese government determines
that our structure of any of our acquisitions does not comply with these
regulations, then we may also be subject to fines and
penalties.


23





Failure
to comply with Chinese regulations regarding the registration requirements for
employee stock ownership plans or share option plans may subject the PRC plan
participants or us to fines and other legal or administrative
sanctions.





In
December 2006, the People’s Bank of China promulgated the Administrative
Measures for Individual Foreign Exchange, which set forth the respective
requirements for foreign exchange transactions by Chinese individuals under
either the current account or the capital account. In January 2007, SAFE issued
the Implementation Rules of the Administrative Measures for Individual Foreign
Exchange, which, among other things, specified approval requirements for certain
capital account transactions such as a Chinese citizen’s participation in the
employee stock ownership plans or stock option plans of an overseas
publicly-listed company. On March 28, 2007, SAFE promulgated the Processing
Guidance on Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Holding Plans or Stock Option Plans of
Overseas-Listed Companies. Under this rule, PRC citizens who are granted stock
options by an overseas publicly-listed company are required, through a qualified
PRC domestic agent or PRC subsidiary of such overseas publicly-listed company,
to register with SAFE and complete certain other procedures. We and our Chinese
employees who receive stock option grants will be subject to this rule. Our
board of directors has adopted the Wonder Auto Technology, Inc. 2008 Equity
Incentive Plan. If we or the Chinese optionees fail to comply with these
regulations, we or these optionees may be subject to fines and other legal or
administrative sanctions.





PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from making loans or additional capital
contributions to our PRC operating subsidiaries.





As an
offshore holding company of our PRC operating subsidiaries, we may make loans to
our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to approval
by relevant governmental authorities in China and other requirements under
relevant PRC regulations.





We may
also decide to finance our PRC subsidiaries by means of capital contributions.
According to the relevant PRC regulations on foreign-invested enterprises in
China, depending on the amount of total investment and the type of business in
which a foreign-invested enterprise is engaged, capital contributions to
foreign-invested enterprises in China are subject to approval by the Ministry of
Commerce or its local branches. We may not obtain these government approvals on
a timely basis, if at all, with respect to future capital contributions by us to
our PRC subsidiaries. If we fail to receive such approvals, our ability to
capitalize our PRC operations may be negatively affected, which could materially
and adversely affect our liquidity and our ability to fund and expand our
business.





Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC stockholders.





On March
16, 2007, the National People’s Congress of China passed the New EIT Law, and on
November 28, 2007, the State Council of China passed the New EIT Law
Implementing Rules which took effect on January 1, 2008. Under the New EIT Law,
an enterprise established outside of China with “de facto management bodies”
within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes.  The implementing rules of the New EIT Law define de facto
management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise.





On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities.  Pursuant to the Notice, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a “non-domestically incorporated
resident enterprise” if (i) its senior management in charge of daily operations
reside or perform their duties mainly in China; (ii) its financial or personnel
decisions are made or approved by bodies or persons in China; (iii) its
substantial assets and properties, accounting books, corporate chops, board and
shareholder minutes are kept in China; and (iv) at least half of its directors
with voting rights or senior management often resident in China.  A
resident enterprise would be subject to an enterprise income tax rate of 25% on
its worldwide income and must pay a withholding tax at a rate of 10% when paying
dividends to its non-PRC shareholders.  However, it remains unclear as
to whether the Notice is applicable to an offshore enterprise incorporated by a
Chinese natural person.  Nor are detailed measures on imposition of
tax from non-domestically incorporated resident enterprises are
available. Therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.




24


We may be
deemed to be a resident enterprise by Chinese tax authorities.  If the
PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest
on financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax
purposes.  Finally, it is possible that future guidance issued with
respect to the new “resident enterprise” classification could result in a
situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC
shareholders from transferring our shares.  We are actively monitoring
the possibility of “resident enterprise” treatment for the 2010 tax year and are
evaluating appropriate organizational changes to avoid this treatment, to the
extent possible.





If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.





RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY





The
price of our common stock may fluctuate significantly, which could negatively
affect us and holders of our common stock.





The
trading price of our common stock may fluctuate significantly in response to a
number of factors, many of which are beyond our control. For instance, if our
financial results are below the expectations of securities analysts and
investors, the market price of our common stock could decrease, perhaps
significantly. Other factors that may affect the market price of our common
stock include announcements relating to significant corporate transactions;
fluctuations in our quarterly and annual financial results; operating and stock
price performance of companies that investors deem comparable to us; and changes
in government regulation or proposals relating to us. In addition, since the
middle of 2008, the U.S. securities markets have experienced significant price
and volume fluctuations. These fluctuations often have been unrelated to the
operating performance of companies in these markets. Market fluctuations and
broad market, economic and industry factors may negatively affect the price of
our common stock, regardless of our operating performance. You may not be able
to sell your shares of our common stock at or above your purchase price, or at
all. Any volatility of or a significant decrease in the market price of our
common stock could also negatively affect our ability to make acquisitions using
common stock. Further, if we were to be the object of securities class action
litigation as a result of volatility in our common stock price or for other
reasons, it could result in substantial costs and diversion of our management’s
attention and resources, which could negatively affect our financial
results.





The
market price of our stock may be affected by low volume.





Our
common stock has a relatively low average daily volume. Reported average daily
trading volume in our common stock for the three month period ended March 1,
2010, was approximately 0.7 million shares. Without a significantly larger
average trading volume, our common stock will be less liquid than the common
stock of companies with higher trading volume, as a result, the trading prices
for our common stock may be more volatile.





We
do not intend to pay dividends on shares of our common stock for the foreseeable
future.





We have
never declared or paid any cash dividends on shares of our common stock. We
intend to retain any future earnings to fund the operation and expansion of our
business and, therefore, we do not anticipate paying cash dividends on shares of
our common stock in the foreseeable future.


25


Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change-of-control.





Our
Articles of Incorporation authorizes the board of directors to issue up to
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by the stockholders. These terms
may include preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of the
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.





None.





ITEM
      2.
            PROPERTIES.





All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a
period of up to 70 years. This period may be renewed at the expiration of the
initial and any subsequent terms. Granted land use rights are transferable and
may be used as security for borrowings and other obligations.




We were
granted land use rights from the Chinese government for following properties:
(1) 453,900 square feet of land located at No. 16 Yulu Street, Jinzhou High
Technology Industrial Park, Jinzhou, China. The land use rights have a 30-year
term and will expire on August 15, 2026. Our headquarters are located at this
site. This site houses our office building, a research and development center,
as well as our production facilities; (2) 179,500 square feet of land located at
West Bo Hai Street, Open Economic Zone, Jinzhou, China. This site houses our
production facilities and (3) 1,842,000 square feet of land located at New
Century Avenue, Changqing District, Jinan High Technology Industrial Park,
Shandong, China. The land use rights have a 50-year term and will expire on
January 27, 2055. This site houses our office building, a research and
development center, as well as our production facilities.




In
addition to the land use rights, we also have ownership of eleven other
properties.  Two properties are located at No. 16 Yulu Street, two
properties are located at Fuzhou Street, Taihe District of Jinzhou and the
remaining seven are residential properties located at Huianli Guta District of
Jinzhou. We have placed mortgages on the land and the four properties located at
No. 16 Yulu Street and Fuzhou Street to secure certain bank loan from China Bank
Jinzhou Branch for an amount up to RMB 50 million (approximately $6.25
million).




We also
own 2,100 square feet of office space at Focus Square, No. 6 Futong St.,
Wangjing, Chaoyang District, Beijing where our Beijing Representative Office is
located.




We
currently have four alternator assembly lines, four starter assembly lines,
twenty engine valves production lines, five tappets production lines and three
rods and shafts production lines. Our current annual production capacity is
approximately 2.6 million units of alternators, 2.4 million units of
starters, 27 million units of engine valves and tappets, and
20 million units of rods and shafts, assuming two work shifts per day with
eight hours each.





We
currently work in two work shifts of eight hours, each to maximize the
capabilities of our assembly lines. For 2007, 2008 and 2009, the utilization
rates of our alternator production lines were approximately 108%, 78% and 89%,
respectively, while those of our starter production lines were approximately
86%, 75% and 90%, respectively.  The utilization rates of our engine
valve and tappet production lines for 2008 and 2009 were approximately 75% and
88%, respectively, while those of our rod and shaft production lines were
approximately 110% and 95%, respectively.




We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our
business.


26


ITEM
      3.
            LEGAL
      PROCEEDINGS.





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business.  However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.  We
are currently not aware of any such legal proceedings or claims that we believe
will have a material adverse affect on our business, financial condition or
operating results.





ITEM
      4.
            RESERVED.





ITEM X.
              Executive
      Officers




Our
executive officers as of March 4, 2010 are as follows:





NAME
            
            AGE
            
            POSITIONQingjie Zhao
            
            53
            
            Chairman, Chief Executive Officer and
      PresidentMeirong Yuan
            
            39
            
            Chief Financial Officer and
      TreasurerYuncong Ma
            
            64
            
            Chief Operating OfficerSeuk Jun Kim
            
            54
            
            Vice President of New Product DevelopmentYuguo Zhao
            
            54
            
            Vice
      President of Sales and MarketingYongdong Liu
            
            41
            
            Vice President of Production





Qingjie Zhao.  Mr.
Zhao has been our Chief Executive Officer and President since June 22, 2006 and
Chairman of our board since July 2006. Mr. Zhao joined our subsidiary, Jinzhou
Halla, as its Chairman in October 1997. Mr. Zhao is also currently an executive
director and 10.4% owner of China Wonder Limited, a company listed on the
Alternative Investment Market of the London Stock Exchange, which is principally
engaged in the manufacture and sale of specialty packaging machinery to the PRC
pharmaceutical market, and an executive director of Jinzhou Jinheng Automotive
Safety System Co., Ltd., which is principally engaged in the manufacture and
sale of automotive airbag safety systems in China. Our company, China Wonder
Limited and Jinzhou Jinheng Automotive Safety System Co., Ltd. do not directly
compete with each other.  Mr. Zhao devotes most of his business time
to our affairs and the remainder of business time to the affairs of other
companies. Mr. Zhao’s decision making responsibilities for these three companies
are similar in the areas of public relations, management of human resources,
risk management and strategic planning. Mr. Zhao graduated from the Liaoning
Industry Academy in 1982. He thereafter became a faculty member at the Liaoning
University of Technology from 1982 to 1989. After leaving his post at the
Liaoning University of Technology, Mr. Zhao joined Jinzhou Shock Absorber Co.,
which is principally engaged in the manufacture and sale of suspension systems
for automobiles, in January 1989 as an engineer and the head of the research
department. He became its Chief Executive Officer in 1991 and remained in that
position until 1997.





Meirong Yuan.  Mr.
Yuan became our Chief Financial Officer and Treasurer on June 22, 2006 and our
director on March 2007. He has been the Vice President of Jinzhou Wonder
Industrial Co., Ltd. Since June 2005. Mr. Yuan also served as a director of
Jinzhou Halla since January 2002. From July 2003 to June 2005, Mr. Yuan served
as the Vice President of Shenzhen Luante Asphalt Advanced Technology Co. Ltd.
and was in charge of accounting and finance. Between October 2000 and October
2001, Mr. Yuan studied at ISMA Center in England. Mr. Yuan is a CPA in China and
has a Ph.D. in management from South California University for Professional
Study.





Yuncong Ma.  Mr. Ma
became our Chief Operating Officer on June 22, 2006. He has been the General
Manager of our subsidiary Jinzhou Halla since 1997 and is responsible for
Jinzhou Halla’s overall operations. He has over 30 years of production
experience and over 16 years of management experience in the automotive
industry. Mr. Ma graduated from the Harbin Institute of Technology in 1970
specializing in machine crafting. After graduation, Mr. Ma worked for Jinzhou
Huaguang Electron Tube Factory from 1970 to 1989. During that time, he worked in
various posts in its production, technology and corporate structuring
departments and was promoted to the post of Production Manager in 1984. Mr. Ma
joined Jinzhou Shock Absorber Co., Ltd. in 1989 as its Chief Engineer and Vice
Factory Manager.


27





Seuk Jun Kim.  Mr.
Kim became our Vice President of New Product Development in February 2007. From
June 2006 to February 2007, Mr. Kim served as our Vice President for Research
and Development. Mr. Kim joined Jinzhou Halla in October 1997 and has served as
its Vice President of Research and Development since January 2005. Mr. Kim is
responsible for Jinzhou Halla’s research and development and quality control
functions. In 1981, Mr. Kim graduated from Pohang University of Science and
Technology in Korea with a bachelor’s degree in automotive electrical
engineering. Prior to formally joining Jinzhou Halla in 1997, Mr. Kim worked at
the Korea Qingzhou Electrical Machinery Factory where he was in charge of
technical support.





Yuguo Zhao.  Mr.
Zhao became our Vice President of Sales and Marketing on June 22, 2006, and he
has been the head of sales and marketing since June 1996 when he joined Jinzhou
Halla. He became the Assistant General Manager in January 2005. Mr. Zhao is
responsible for our sales and after-sales operations. In 1979, Mr. Zhao
graduated from the Jinzhou Agriculture Academy, formerly known as Jinzhou
Agriculture Automotive School. Between 1980 and 1996, he worked for Jinzhou
Electrical as its Production Department Manager, Chief of Production and Chief
of Operations, among other posts.





Yongdong Liu.  Mr.
Liu became our Vice President of Production on June 22, 2006, and he has been
the Head of Production of Jinzhou Halla since May 2001 and an Assistant General
Manager of Jinzhou Halla since January 2005. Mr. Liu oversees our production,
purchasing, human resources and administration functions. Mr. Liu graduated from
the Suzhou Institute of Silk Textile Technology with a degree in weaving
mechanical design in 1992. Between 1992 and 1996, Mr. Liu worked in Jinzhou
Electrical and was responsible for its production technologies. He joined us in
June 1996 as a division head in the production department.




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





Market
Information





Our
common stock is quoted on the Nasdaq Global Market under the symbol
“WATG.”




The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock.  These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.





Closing Bid Prices(1)High
                  
                  
                  LowYear Ended
      December 31, 20091st
      Quarter
                  
                  $
                  4.28
                  
                  
                  $
                  2.082nd
      Quarter
                  
                  
                  11.10
                  
                  
                  
                  3.653rd
      Quarter
                  
                  
                  12.28
                  
                  
                  
                  8.404th
      Quarter
                  
                  
                  15.50
                  
                  
                  
                  10.62Year
      Ended December 31, 20081st
      Quarter
                  
                  $
                  12.63
                  
                  
                  $
                  6.472nd
      Quarter
                  
                  
                  9.27
                  
                  
                  
                  7.033rd
      Quarter
                  
                  
                  9.42
                  
                  
                  
                  6.414th
      Quarter
                  
                  
                  5.93
                  
                  
                  
                  2.58





(1)The
above table sets forth the range of high and low closing prices per share of our
common stock as reported by www.quotemedia.com
for the periods indicated.





Approximate
Number of Holders of Our Common Stock





As of
March 1, 2010, there were approximately 138 holders of record of our common
stock.  This number excludes the shares of our common stock owned by
stockholders holding stock under nominee security position
listings.


28


Dividend Policy





Other
than the dividends declared or paid by our subsidiary Wonder Auto before the
reverse acquisition transaction and the forward stock split in 2006, we have
never declared dividends or paid cash dividends. Our board of directors will
make any future decisions regarding dividends. We currently intend to retain and
use any future earnings for the development and expansion of our business and do
not anticipate paying any cash dividends in the near future.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following table includes the information as of December 31, 2009 for each
category of our equity compensation plan:





Plan
                    
                    Number of Securities to be
                      Issued Upon Exercise of
                      Outstanding Options,
                      Warrants and Rights (2)
                    
                    
                    Weighted-Average
                      Exercise Price of Outstanding
                      Options, Warrants and
                      Rights
                    
                    
                    Number of Securities
                      Remaining Available for
                      Future Issuance
                      Under the PlanEquity
      compensation plans approved by security holders (1)
                    
                    
                    1,674,400
                    
                    
                    $
                    11.48
                    
                    
                    
                    1,825,600Equity
      compensation plans not approved by security holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    1,674,400
                    
                    
                    $
                    11.48
                    
                    
                    
                    1,825,600


(1)
On April 30, 2008, our Board of Directors authorized the establishment of the
Wonder Auto Technology, Inc. Equity Incentive Plan, or Plan, whereby we are
authorized to issue a maximum 3.5 million shares of our common stock to certain
employees, consultants and directors.





(2) On
November 24, 2009, the Company’s compensation committee granted options to
purchase a total of 1,674,400 shares of our common stock to certain officers,
directors and employees with an exercise price of $11.48. One third of the
option will vest and become exercisable on each of the filing dates of the
Company's Annual Reports on Form 10-K for fiscal years 2009, 2010 and 2011,
respectively, upon the achievement of certain income thresholds which are set to
be US$23.0 million for fiscal year 2009, US$34.5 million for fiscal year 2010
and US$42.3 million for fiscal year 2011.





Recent
Sales of Unregistered Securities





We have
not sold any equity securities during the fiscal year ended December 31, 2009
that were not previously disclosed in a quarterly report on Form 10-Q or a
current report on Form 8-K that was filed during the 2009 fiscal
year.





Report
of Offering of Securities and Use of Proceeds Therefrom




On
November 16, 2009, we completed an underwritten public offering of our common
stock pursuant to a shelf Registration Statement on Form S-3 (Registration No.
333-161358), filed with the SEC on August 14, 2009 (declared effective August
21, 2009), including a base prospectus included therein and a final prospectus
supplement filed with the SEC on November 12, 2009. Our net proceeds, after
deduction of the underwriting discount of $3.7 million and offering expenses of
$1.8 million, were approximately $69.0 million. None of the expense payments
were made to the underwriters, to any of our directors, officers or affiliates
or to any persons owning 10% or more of any class of our equity
securities.




We used
some of the net proceeds from the offering for general corporate purposes,
including $6.5 million for the expansion of capacity at our existing facilities,
$14.9 million for investment in Jinheng Holding, and $11.7 million for the
acquisition of Friend Birch. The remaining net proceeds from the offering have
been invested in cash and cash equivalents. The use of the proceeds from the
offering does not represent a material change in the use of proceeds described
in the prospectus supplement described above.





Purchases
of Equity Securities





No
repurchases of our common stock were made during the fourth quarter of
2009.


29


ITEM
      6.
            SELECTED
      FINANCIAL DATA.





The
following selected historical financial information should be read in
conjunction with our consolidated financial statements and related notes and the
information contained in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”





The
selected consolidated statement of operations data and statement of cash flows
data for the years ended December 31, 2009, 2008 and 2007 and the selected
balance sheet data as of December 31, 2009 and 2008 are derived from our audited
consolidated financial statements included elsewhere in this report. The
selected consolidated financial data for the years ended December 31, 2006 and
2005 and the selected balance sheet data as of December 31, 2007, 2006 and 2005
are derived from our audited consolidated financial statements not included in
this report.





(All
amounts, except for share and per share amounts, in thousands of U.S.
dollars)





Fiscal
      Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Statement
      of Operations Data:Sales
      revenue
                  
                  $
                  211,024
                  
                  
                  $
                  141,190
                  
                  
                  $
                  102,084
                  
                  
                  $
                  72,150
                  
                  
                  $
                  48,063Cost
      of sales
                  
                  
                  159,660
                  
                  
                  
                  104,750
                  
                  
                  
                  76,460
                  
                  
                  
                  57,342
                  
                  
                  
                  35,963Gross
      profit
                  
                  
                  51,364
                  
                  
                  
                  36,439
                  
                  
                  
                  25,624
                  
                  
                  
                  14,808
                  
                  
                  
                  12,100Operating
      expenses:Administrative
      expenses
                  
                  
                  11,674
                  
                  
                  
                  6,827
                  
                  
                  
                  3,565
                  
                  
                  
                  1,918
                  
                  
                  
                  1,155Share-based
      compensation
                  
                  
                  1,172
                  
                  
                  
                  706
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Research
      and development expenses
                  
                  
                  3,027
                  
                  
                  
                  1,648
                  
                  
                  
                  1,136
                  
                  
                  
                  948
                  
                  
                  
                  824Selling
      expenses
                  
                  
                  7,768
                  
                  
                  
                  4,093
                  
                  
                  
                  3,291
                  
                  
                  
                  2,138
                  
                  
                  
                  2,148Unusual
      charge - make good provision
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  18,266
                  
                  
                  
                  7,508
                  
                  
                  
                  -Income/(loss)
      from operations
                  
                  
                  27,724
                  
                  
                  
                  23,165
                  
                  
                  
                  (634
                  )
                  
                  
                  2,297
                  
                  
                  
                  7,972Income
      taxes
                  
                  
                  3,224
                  
                  
                  
                  2,175
                  
                  
                  
                  1,389
                  
                  
                  
                  1,270
                  
                  
                  
                  897Net
      income (loss) attributable to WATG
                  
                  
                  22,859
                  
                  
                  
                  18,909
                  
                  
                  
                  (3,750
                  )
                  
                  
                  716
                  
                  
                  
                  6,401Earnings
      (losses) per share - basic and diluted
                  
                  
                  0.82
                  
                  
                  
                  0.70
                  
                  
                  
                  (0.16
                  )
                  
                  
                  0.03
                  
                  
                  
                  0.37Balance
      Sheet Data:Working
      capital
                  
                  $
                  97,785
                  
                  
                  $
                  26,359
                  
                  
                  $
                  56,143
                  
                  
                  $
                  18,933
                  
                  
                  $
                  10,185Current
      assets
                  
                  
                  236,788
                  
                  
                  
                  156,728
                  
                  
                  
                  99,260
                  
                  
                  
                  56,127
                  
                  
                  
                  38,467Total
      assets
                  
                  
                  362,252
                  
                  
                  
                  263,030
                  
                  
                  
                  142,397
                  
                  
                  
                  78,000
                  
                  
                  
                  52,090Current
      liabilities
                  
                  
                  139,003
                  
                  
                  
                  130,369
                  
                  
                  
                  43,117
                  
                  
                  
                  37,194
                  
                  
                  
                  28,282Total
      liabilities
                  
                  
                  163,778
                  
                  
                  
                  150,028
                  
                  
                  
                  60,740
                  
                  
                  
                  37,194
                  
                  
                  
                  33,236Stockholders’
      equity
                  
                  
                  192,650
                  
                  
                  
                  102,060
                  
                  
                  
                  78,442
                  
                  
                  
                  38,227
                  
                  
                  
                  18,853Statement
      of Cash Flows Data:Net
      cash provided by (used in):Operating
      Activities
                  
                  $
                  18,157
                  
                  
                  $
                  9,106
                  
                  
                  $
                  12,170
                  
                  
                  $
                  1,389
                  
                  
                  $
                  11,439Investing
      Activities
                  
                  
                  (38,518
                  )
                  
                  
                  (37,266
                  )
                  
                  
                  (24,566
                  )
                  
                  
                  (6,219
                  )
                  
                  
                  (2,099
                  )Financing
      Activities
                  
                  
                  94,537
                  
                  
                  
                  9,226
                  
                  
                  
                  29,232
                  
                  
                  
                  8,308
                  
                  
                  
                  (6,952
                  )


30


ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.





Overview





We are a
leading manufacturer of automotive electric parts, suspension products and
engine components in China. Our products include alternators, starters, engine
valves and tappets, and rods and shafts for use in shock absorber
systems.





Our
products are used in a wide range of passenger and commercial automobiles, and
we are especially focused on the fast-growing small- to medium-engine passenger
vehicle market. We sell our products primarily within China to well-known
domestic and international automobile OEMs, engine manufacturers and automotive
parts suppliers. We are increasingly exporting our products to
international markets. Our customers include SAIC GM Wuling Automobile Co.,
Ltd., Beijing Hyundai Motor Company, Shenyang Aerospace Mitsubishi Motors Engine
Co., Ltd., Harbin Dongan Automotive Engine Co., Ltd., Shanghai Volkswagen Co.,
Ltd., BYD Company Limited, Tianjin Toyota Co., Ltd., Chery Automobile Co., Ltd.,
Dongfeng Yueda Kia Motors Co., Ltd., Geely Automobile Co., Ltd., Tianjin FAW
Xiali Automobile Co., Ltd., and a major North American automobile OEM. Most of
our customers subject us to a rigorous product qualification process to ensure
that our products meet their quality standards. We believe that the complex and
stringent requirements of each customer’s qualification process acts as a
barrier to entry for many new market entrants.





Our
strategically-located manufacturing facilities in Jinzhou and Jinan, China house
our high-quality manufacturing, testing and research and development
capabilities. We currently have four alternator assembly lines, four starter
assembly lines, twenty engine valves production lines, five tappets production
lines and three rods and shafts production lines. Our current annual production
capacity is approximately 2.6 million units of alternators,
2.4 million units of starters, 27 million units of engine valves and
tappets, and 20 million units of rods and shafts, assuming two work shifts
per day with eight hours each.





In
November 2009, we completed an underwritten public offering whereby we sold
6,900,000 shares of our common stock at a public offering price of $10.75 per
share and received net proceeds of approximately $69.0 million. The
offering was made under the Company’s Shelf Registration Statement on Form S-3
(Registration No. 333-161358), filed with the Securities and Exchange Commission
on August 14, 2009.





Recent
Developments





On
January 18, 2010, through two separate transactions, we acquired an aggregate of
38.36% of equity interest in Applaud Group Limited which is a British Virgin
Islands corporation and has no assets other than its ownership of 52.2% of
equity interest in Jinheng Holding.  As a result of the acquisition of
an aggregate of 38.36% of Applaud, we will become the largest shareholder of
Applaud and, thereby, owner of 20.02% of Jinheng Holdings. Jinheng Holdings is a
high-tech automotive parts supplier that is primarily engaged in developing,
manufacturing and selling components of automotive passive safety restraint
systems (airbag and seatbelt), automotive engine electronic injection management
systems, and components of diesel engines. Jinheng Holdings is listed on the
Hong Kong Stock Exchange. Our CEO and chairman Qingjie Zhao is an executive
director of Jinheng Holdings. We expect to utilize our strategic investment in
Jinheng Holding to further strengthen and broaden our research and development
expertise, expand customer base and improve value-added services.





Our
Strategic Priorities





We have
six strategic priorities designed to create long-term sustainable growth for our
company and value for our shareholders. These strategic priorities are: vertical
integration; sales expansion into select international markets; increasing
production capacity; strengthening of our research and development capabilities;
developing new products and focusing on supplying parts and components for
low-emission vehicles.


31


Our
Core Capabilities





As we
operate and grow our business, we seek to enhance and capitalize on what we view
as our core capabilities described below:





●
              Leading
      Market Position.According
      to CAAM, in 2008 we ranked second and third in sales revenue in the
      Chinese market for automobile alternators and starters, respectively. Our
      subsidiary Jinan Worldwide, which we acquired in October 2008, has been
      producing engine valves and tappets for over 50 years, and we believe we
      are now one of the largest manufacturers of engine valves and tappets in
      China in terms of sales volume as a result of the acquisition. We believe
      our brand and our products are well recognized and accepted in the
      automotive industry in China.●
              Established Supplier
      Network. We purchase the majority of raw materials and components
      used in our products through a network of low-cost suppliers, primarily
      located within close proximity to our manufacturing facilities. We have
      established long-term relationships with many of our suppliers. Our
      established supplier network enables us to maintain a competitive low cost
      structure, shorten our product lead-times, closely monitor product quality
      and enjoy sourcing stability.





●
            Proprietary Manufacturing Processes.We have invested
      substantial time and resources in developing customized assembly lines and
      equipment to optimize our manufacturing efficiency. Our proprietary
      manufacturing processes and customized equipment provide flexibility and
      efficiency, achieve shorter lead-times, improve quality assurance, reduce
      equipment downtime and material wastage and provide greater
      cost-competitiveness.





●
            Strong Long-Term Customer
      Base. We are a qualified supplier of automotive components to many
      leading automobile industry players in China and worldwide. Given the high
      switching costs and rigorous qualification processes of our customers, we
      believe many of them have come to rely on us as a primary supplier of key
      components based on our proven ability to meet their growing demand and
      quality standards.





Principal
Factors Affecting Our Financial Performance





Our
operating results are primarily affected by the following factors:





●
            General
      economic conditions.Our
      financial results will be influenced by general economic conditions, the
      financial stability of our customers and suppliers, consumer confidence
      levels, instability and fluctuations in the capital markets and other
      unforeseen factors. Notwithstanding the global economic downturn, China’s
      GDP growth in 2009 is expected to reach approximately 10%, substantially
      higher than the global GDP growth rate which is projected to be
      approximately 3.4%. Since most of our sales revenue is generated from the
      Chinese market, we expect to benefit from the continued economic growth in
      China. Currently, it will also be challenging to maintain our historic
      growth rate due to general economic conditions which may reduce the demand
      for our products and overall ability and cost of external financing for
      our operations.  To meet this challenge, we plan to focus on
      further integrating our operations and generating greater synergies across
      our portfolio of technologies, products, and subsidiaries. We also plan to
      focus on increasing our manufacturing and administrative efficiencies
      through targeted cost savings
initiatives.





●
            Government
      Policies.The PRC
      government has adopted a number of measures and initiatives to spur the
      growth and development of small engine and low-emission vehicles. These
      measures include reduction of consumption tax rates assessed on low
      emission vehicles, implementation of a new fuel tax which provides
      favorable tax treatment to low emission vehicles and a 50% sales tax
      deduction imposed upon the sales of small engine vehicles with
      displacements of 1.6L and below.  We anticipate these measures
      will have a positive impact on sales of our products. We also intend to
      capitalize on the favorable government policies on alternative energy
      vehicles by deepening our penetration into that market and by developing
      products for use in electric
vehicles.


32





●
            Export.Recent
      market events, especially the global economic slow-down, the challenging
      automotive industry conditions and the continued global credit crisis, are
      adversely impacting global automotive demand which may adversely impact
      our business, especially our exports. Export sales may also subject us to
      various economic, political, regulatory, legal and foreign exchange risks.
      However, we also see great opportunities for expanding our market share in
      the international market. As international automotive manufacturers
      implement cost saving plans, we expect them to source components directly
      from low cost manufacturing regions, such as China. We believe our high
      quality, low cost products will be attractive to international automakers
      and engine manufacturers. In addition, our subsidiary Jinzhou Wanyou is
      specialized in the manufacturing of rods and shafts. With more and more
      oversea automakers ceasing to manufacture rods and shafts themselves due
      to cost concerns, we anticipate more sales opportunities for our rods and
      shafts in the oversea market. We also plan to utilize our existing export
      sales network and resources to sell engine valves and tappets manufactured
      by our recently acquired subsidiary Jinan Worldwide. This strategy, if
      successfully implemented, will further increase our export
      sales.





Taxation





United
States and British Virgin Islands





We are
subject to United States tax at a tax rate of 34%. No provision for income taxes
in the United States has been made as we have no income taxable in the United
States.





Our
subsidiaries Wonder Auto and Yearcity Limited were incorporated in the British
Virgin Islands and, under the current laws of the BVI, are not subject to income
taxes. Friend Birch is incorporated in Hong Kong and subject to a profit tax
rate of 16.5% on the assessable profits.





China





Before
the implementation of the New EIT Law, foreign-invested enterprises established
in the PRC, unless granted preferential tax treatments by the PRC government,
were generally subject to an enterprise income tax, or EIT, rate of 33.0%, which
included a 30.0% state income tax and a 3.0% local income tax. On March 16,
2007, the National People’s Congress of China passed the New EIT Law, and on
November 28, 2007, the State Council of China passed its implementing rules,
both of which took effect on January 1, 2008. The New EIT Law and its
implementing rules impose a unified EIT of 25.0% on all domestic-invested
enterprises and foreign-invested enterprises, unless they qualify under certain
limited exceptions. Despite these changes, there will be a transition period for
enterprises, whether foreign-invested or domestic, that are currently receiving
preferential tax treatments granted by relevant tax
authorities.  Enterprises that are subject to an EIT rate lower than
25% may continue to enjoy the lower rate and will transition into the new EIT
rate over a five year period beginning on the effective date of the New EIT
Law.  Enterprises that are currently entitled to exemptions for a
fixed term will continue to enjoy such treatment until the exemption term
expires.  Preferential tax treatment will continue to be granted to
industries and projects that qualify for such preferential treatments under the
New EIT Law.





As
approved by the relevant tax authority in the PRC, Jinzhou Halla, Jinzhou
Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua, Jinzhou Karham, Fuxin Huirui and Jinan
Worldwide were entitled to two years’ exemption from the first profit making
calendar year of operations after offset of accumulated taxable losses, followed
by a 50% tax reduction for the immediate next three calendar
years.  Following is summary of these preferential tax treatments,
known as “tax holidays,” and the effective tax rates applicable to these
companies:





·
            The
      tax holiday of Jinzhou Halla commenced in fiscal year
      2001.  Accordingly, Jinzhou Halla was subject to tax rate of
      13.5% for 2003, 2004 and 2005.  Furthermore, Jinzhou Halla,
      being a foreign-invested enterprise engaged in an advanced technology
      industry, was approved to enjoy a further three years’ 50% tax reduction
      for 2006, 2007, and thereafter subject to a tax rate of
    15%.





·
            The
      tax holiday of Jinzhou Dongwoo commenced in fiscal year
      2004.  Accordingly, Jinzhou Dongwoo was subject to tax rate of
      13.5% for 2006 and 2007, 12.5% for 2008 and 25% for
      2009.





·
            Jinzhou
      Wanyou has elected to commence the tax holiday in fiscal year
      2007.  Accordingly, Jinzhou Wanyou was exempted from EIT for
      2007 and 2008 and thereafter was and will be entitled to a 50% reduction
      on EIT rate to 12.5% for 2009, 2010 and
  2011.





·
            The
      tax holiday of Jinzhou Hanhua commenced in fiscal year
      2005.  Accordingly, Jinzhou Hanhua was subject to tax rate of
      13.5% for 2007 and 12.5% for 2008 and 2009. It will be subject to tax rate
      of 25% for 2010.


33


·
            Jinzhou
      Karham has elected to commence the tax holiday in fiscal year
      2008.  Accordingly, Jinzhou Karham was exempted from EIT for
      2008 and 2009 and thereafter will be entitled to a 50% reduction on EIT
      rate 12.5% for 2010, 2011 and
2012.





·
            The
      tax holiday of Fuxin Huirui commenced in the fiscal year
      2008.  Accordingly, Fuxin Huirui was exempted from EIT for 2008
      and 2009 and thereafter will be entitled to a 50% reduction on EIT rate
      12.5% for 2010, 2011 and
2012.





·
            The
      tax holiday of Jinan Worldwide commenced in the fiscal year of
      2006.  Accordingly, Jinan Worldwide was and will be subject to
      tax rate of 12.5% for 2008, 2009 and
  2010.





·
            Jinzhou
      Motor, Jinzhou Equipment, Jinzhou Lida and Jinzhou Jiade are subject to
      the New EIT Law and the EIT rate of
25%.





In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see
Item 1A, “Risk Factors – Risks Related to Our Business – Under the New EIT Law,
we may be classified as a ‘resident enterprise’ of China. Such classification
will likely result in unfavorable tax consequences to us and our non-PRC
stockholders.”





In
addition, the New EIT Law and its implementing rules generally provide that a
10% withholding tax applies to China-sourced income derived by non-resident
enterprises for PRC enterprise income tax purposes unless the jurisdiction of
incorporation of such enterprises’ shareholder has a tax treaty with China that
provides for a different withholding arrangement.





Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.





Business
Segment Information




Our
business operations can be categorized into four segments based on the type of
products we manufacture and sell, specifically (i) alternators, (ii) starters,
(iii) rods and shafts, and (iv) engine valves and tappets.





In 2009,
our sales revenue from our alternator products was $74.2 million, our sales
revenue from our starter products was $68.9 million, our sales revenue from our
rod and shaft products was $21.2 million, and our sales revenue from our engine
valves and tappets was $46.6 million. Among the four principal products, rods
and shafts production enjoyed the fastest growth rate and the highest gross
margin, reaching approximately 25-30%.





We
manufacture and sell both our alternators and starters using largely the same
facilities, personnel and other resources in Jinzhou Halla. Rods and shafts are
mainly manufactured by our subsidiary Jinzhou Wanyou. Valves and tappets are
manufactured by our newly acquired subsidiary Jinan Worldwide.





Additional
information regarding our products can be found at Note 24 in our audited
consolidated financial statements contained elsewhere in this annual
report.





Results
of Operations





The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of sales revenue.





(all
amounts, other than percentages, in thousands of U.S. dollars)


34




Year
      Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Amount
                    
                    
                    %
      of
                      Revenue
                    
                    
                    Amount
                    
                    
                    %
      of
                      Revenue
                    
                    
                    Amount
                    
                    
                    %
      of
                      RevenueSales
      revenue
                    
                    
                    211,024
                    
                    
                    
                    100
                    %
                    
                    
                    141,190
                    
                    
                    
                    100
                    %
                    
                    
                    102,084
                    
                    
                    
                    100
                    %Cost
      of sales
                    
                    
                    159,660
                    
                    
                    
                    75.7
                    %
                    
                    
                    104,750
                    
                    
                    
                    74.2
                    %
                    
                    
                    76,460
                    
                    
                    
                    74.9
                    %Gross
      profit
                    
                    
                    51,364
                    
                    
                    
                    24.3
                    %
                    
                    
                    36,439
                    
                    
                    
                    25.8
                    %
                    
                    
                    25,624
                    
                    
                    
                    25.1
                    %Administrative
      expenses
                    
                    
                    11,674
                    
                    
                    
                    5.5
                    %
                    
                    
                    6,827
                    
                    
                    
                    4.8
                    %
                    
                    
                    3,565
                    
                    
                    
                    3.5
                    %Share-based
      compensation
                    
                    
                    1,172
                    
                    
                    
                    0.6
                    %
                    
                    
                    706
                    
                    
                    
                    0.5
                    %
                    
                    
                    —
                    
                    
                    
                    —Research
      and development expenses
                    
                    
                    3,027
                    
                    
                    
                    1.4
                    %
                    
                    
                    1,648
                    
                    
                    
                    1.2
                    %
                    
                    
                    1,136
                    
                    
                    
                    1.1
                    %Selling
      expenses
                    
                    
                    7,768
                    
                    
                    
                    3.7
                    %
                    
                    
                    4,093
                    
                    
                    
                    2.9
                    %
                    
                    
                    3,291
                    
                    
                    
                    3.2
                    %Unusual
      charge-make good provision
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    18,266
                    
                    
                    
                    17.9
                    %Total
      expenses
                    
                    
                    23,640
                    
                    
                    
                    11.2
                    %
                    
                    
                    13,275
                    
                    
                    
                    9.4
                    %
                    
                    
                    26,258
                    
                    
                    
                    25.7
                    %Other
      income
                    
                    
                    1,177
                    
                    
                    
                    0.6
                    %
                    
                    
                    1,360
                    
                    
                    
                    1.0
                    %
                    
                    
                    287
                    
                    
                    
                    0.3
                    %Government
      grants
                    
                    
                    2,755
                    
                    
                    
                    1.3
                    %
                    
                    
                    193
                    
                    
                    
                    0.1
                    %
                    
                    
                    1,497
                    
                    
                    
                    1.5
                    %Net
      finance costs
                    
                    
                    4,578
                    
                    
                    
                    2.2
                    %
                    
                    
                    2,246
                    
                    
                    
                    1.6
                    %
                    
                    
                    2,409
                    
                    
                    
                    2.4
                    %Equity
      in unconsolidated affiliate
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,073
                    
                    
                    
                    0.8
                    %
                    
                    
                    34
                    
                    
                    
                    0.0
                    %Income
      (loss) before income taxes and noncontrolling interests
                    
                    
                    27,079
                    
                    
                    
                    12.8
                    %
                    
                    
                    23,544
                    
                    
                    
                    16.7
                    %
                    
                    
                    (1,225
                    )
                    
                    
                    (1.2
                    )%Income
      taxes
                    
                    
                    3,224
                    
                    
                    
                    1.5
                    %
                    
                    
                    2,175
                    
                    
                    
                    1.5
                    %
                    
                    
                    1,389
                    
                    
                    
                    1.4
                    %Noncontrolling
      interests
                    
                    
                    996
                    
                    
                    
                    0.5
                    %
                    
                    
                    2,460
                    
                    
                    
                    1.7
                    %
                    
                    
                    1,137
                    
                    
                    
                    1.1
                    %Net
      income/(loss) attributable to WATG
                    
                    
                    22,859
                    
                    
                    
                    10.8
                    %
                    
                    
                    18,909
                    
                    
                    
                    13.4
                    %
                    
                    
                    (3,750
                    )
                    
                    
                    (3.7
                    )%





Year Ended December 31, 2009
Compared to Year Ended December 31, 2008





Sales Revenue.
      Sales revenue increased $69.8 million, or 49.5%, to $211.0 million in 2009
      from $141.2 million in 2008. In 2009, sales revenue from alternators,
      starters, rods and shafts, engine valves and tappets increased $11.0
      million, $16.8 million, $3.1 million and $38.9 million from 2008,
      respectively. This increase was mainly attributable to our recent
      acquisition of Jinan Worldwide which contributed $38.9 million in sales
      revenue in 2009. We acquired 65% interest in Jinan Worldwide in October
      2008 and the remaining 35% interest in January 2009. We also benefited
      from the increased sales of starter and alternator products in 2009 due to
      the high market demand.




The
following tables show the different segments and geographic areas comprising our
total sales revenue:




Sales
Revenue by Product Segments


(all
amounts, other than percentages, in thousands of U.S. dollars)





Year
      Ended December 31,
                  
                  
                  Percent
      changeComponents
      of Sales Revenue
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
      v. 2008Alternator
                  
                  
                  74,250
                  
                  
                  
                  63,256
                  
                  
                  
                  17.4
                  %Starter
                  
                  
                  68,946
                  
                  
                  
                  52,138
                  
                  
                  
                  32.2
                  %Rod
      and shaft
                  
                  
                  21,247
                  
                  
                  
                  18,106
                  
                  
                  
                  17.3
                  %Engine
      valve and tappet
                  
                  
                  46,581
                  
                  
                  
                  7,690
                  
                  
                  
                  505.7
                  %Total
      sales revenue
                  
                  
                  211,024
                  
                  
                  
                  141,190
                  
                  
                  
                  49.5
                  %


35


Revenue
By Geographic Areas


(all
amounts in thousands of U.S. dollars)





Year
      Ended December 31,2009
                
                
                2008PRC
                
                
                188,377
                
                
                
                118,251South
      Korea
                
                
                5,868
                
                
                
                9,066Brazil
                
                
                6,996
                
                
                
                5,903Mexico
                
                
                1,584
                
                
                
                1,769United
      States
                
                
                7,135
                
                
                
                3,469Others
                
                
                1,064
                
                
                
                2,732Total
                
                
                211,024
                
                
                
                141,190




Cost of Sales.  Our
cost of sales increased $54.9 million, or 52.4%, to $159.7 million in 2009 from
$104.8 million in 2008. This increase was mainly due to the increase in our raw
material and labor costs, which we believe was generally in line with the
increase in our sales volume. As a percentage of sales revenue, the cost of
sales increased to 75.7% in 2009 from 74.2% in 2008.  The slight
percentage increase was mainly because a larger portion of our sales revenue was
generated from alternators and starters with mid-to-small displacement as
compared to 2008. Our alternators and starters for small-to-mid displacement
engine vehicles generally have a lower margin than our alternators and starters
for large displacement engine vehicles, and starter products generally have a
lower average sales price.




Gross Profit.
Our gross profit increased $14.9 million,41.0%, to $51.4 million in 2009 from
$36.4 million in 2008. Gross profit as a percentage of sales revenue was 24.3%
in 2009, as compared to 25.8% in 2008. The decreased gross margin was mainly due
to the factor as discussed above.




Administrative Expenses.Our
administrative expenses increased $4.8 million, or 71.0%, to $11.7 million in
2009 from $6.8 million in 2008. As a percentage of sales revenue, administrative
expenses increased to 5.5% in 2009 from 4.8% in 2008. The increase in the
amount and percentage of administrative expenses was primarily due to the
consolidation of the operating results of Yearcity and Jinan Worldwide, the
professional expenses incurred in connection with our acquisition of Friend
Birch and investment in Jinheng Holdings, and other professional
expenses.





Share-based
compensation. Our non-cash share-based compensation increased $465,640,
or 65.9%, to $1.2 million in 2009 from $706,295 in 2008. On November 24, 2009,
we granted options to purchase a total of 1,674,400 shares of our common stock
to certain officers, directors and employees with an exercise price of
$11.48.





Research and
development expenses.  Our research and development costs
increased $1.4 million, or 83.7%, to $3.0 million in 2009 from $1.6 million in
2008. As a percentage of sales revenue, research and development costs increased
to 1.4% for the year ended December 31, 2009 from 1.2% in 2008. Such dollar and
percentage increases were primarily attributable to the increased expenses
associated with development of new products, including alternative energy
vehicle parts.




Selling Expenses. Our selling expenses
include sales commissions, advertising and promotional materials costs, salaries
and fringe benefits of sales personnel, after-sale support services and other
sales related costs. Our selling expenses increased $3.7 million, or 89.8%, to
$7.8 million in 2009 from $4.1 million in 2008. As a percentage of sales
revenue, our selling expenses increased to 3.7% in 2009 from 2.9% in 2008. The
increase in the amount and percentage of selling expenses was mainly due to the
consolidation of the operating results of Yearcity and Jinan Worldwide which
incurred approximately $2.7 million selling expenses in 2009.





Total Expenses.  Our total expenses
increased $10.4 million, or 78.1%, to $23.6 million in 2009 from $13.3 million
in 2008. As a percentage of sales revenue, our total expenses increased to 11.2%
in 2009 from 9.4% in 2008. The increases in amount and percentage were mainly
due to the facts discussed above.





Other
Income. Our other income includes other payables waived, sales of scrap
materials, service income, and gain on disposal of property, plant and
equipment. Our other income decreased $182,668 to $1.2 million in 2009 from $1.4
million in 2008.





Government
Grants.Government grant
increased $2.6 million to $2.8million in 2009 from $192,882 in 2008. Government
grants are received for purchases of property, plant and equipment, to subsidize
the research and development expenses incurred, for compensation expenses
already incurred or for good performance of the Company.


36


Net finance
costs. Our financial costs increased $2.3 million to $4.6 million in 2009
from $2.2 million in 2008. Such increase was mainly due to an outstanding loan
in the amount of 7.2 million Euro (approximately $10.3 million). Since this loan
is denominated in Euro, with the appreciation of RMB against Euro, we had a
$70,802 net foreign exchange loss in 2009, as compared to a $975,305 net
exchange gain in 2008.





Equity in net
income of non-consolidated affiliates. We recognized a net income of $1.1
million from Money Victory Limited in 2008. We used the equity method to
recognize profit or loss for the investment in which we exercised significant
influence but did not control. We disposed of our investment in Money Victory
Limited in November 2008.




Income Before Income Taxes
and Noncontrolling interests.Our income before income
taxes and noncontrolling interests was $27.1 million in 2009, as compared to
$23.5 million in 2008.  As a percentage of sales revenue, income
before income and noncontrolling interests decreased to 12.8% in 2009 from 16.7%
in 2008. Such decrease in income before income tax and noncontrolling interests
was mainly due to factors discussed above.




Income Taxes.Income taxes increased
$1.0 million to $3.2 million in 2009 from $2.2 million in 2008. As a percentage
of sales revenue, our income taxes remained at 1.5% in 2009 and 2008. Our
effective income tax rate was 11.9% in 2009, which was 9.2% in
2008.





Noncontrolling
Interests. Our financial statements reflect an adjustment to our
consolidated group net income, and our noncontrolling interest decreased $1.5
million in 2009 to $996,114 from $2.5 million in 2008, reflecting the
controlling interests held by third parties in Jinzhou Dongwoo, Jinzhou Hanhua,
Jinzhou Karham.





Net Income
Attributable to WATG.  Our net income attributable to Wonder
Auto increased $3.9 million, or 20.9%, to $22.9 million in 2009 from $18.9
million in 2008, due to the factors discussed above, including increased market
demand in China. Excluding the increased $465,640 in non-cash share-based
compensation charge, our net income attributable to Wonder Auto increased $4.4
million, or 22.5%, to $24.0 million in 2009 from $19.6 million in
2008.





Year Ended December 31, 2008
Compared to Year Ended December 31, 2007





Sales Revenue.
Sales revenue increased $39.1 million, or 38.3%, to $141.2 million in 2008 from
$102.1 million in 2007. In 2008, sales revenue from alternators and starters,
rods and shafts, engine valves and tappets increased $20.6 million, $10.8
million and $7.7 million from 2007, respectively. The increase was mainly
attributable to the increased market demand for our mid to small displacement
alternator and starter products. We believe that our sales revenue increased in
2008 because of our ability to sell high quality products at competitive prices.
Our export sales increased significantly to $22.9 million, accounting for 16.2%
of the total sales revenue in 2008, as compared to 9.6% in
2007.  Furthermore, our sales revenue increased partly because of our
acquisition of Jinan Worldwide which contributed $7.7 million to our sales
revenue in 2008.




The
following tables show the different segments and geographic areas comprising our
total sales revenues:





Sales
Revenue by Product Segments


(all
amounts, other than percentages, in thousands of U.S. dollars)





Year
      Ended December 31,
                  
                  
                  Percent2008
                  
                  
                  2007
                  
                  
                  ChangeComponents
      of Sales RevenueAlternator
                  
                  
                  63,256
                  
                  
                  
                  59,790
                  
                  
                  
                  5.8
                  %Starter
                  
                  
                  52,138
                  
                  
                  
                  35,014
                  
                  
                  
                  48.9
                  %Rod
      and shaft
                  
                  
                  18,106
                  
                  
                  
                  7,280
                  
                  
                  
                  148.7
                  %Engine
      valve and tappet
                  
                  
                  7,690
                  
                  
                  
                  -
                  
                  
                  
                  -
                  %Total
      sales revenue
                  
                  
                  141,190
                  
                  
                  
                  102,084
                  
                  
                  
                  38.3
                  %


37





Revenue
By Geographic Areas


(all
amounts in thousands of U.S. dollars)





Year
      Ended December 31,2008
                
                
                2007PRC
                
                
                118,251
                
                
                
                92,329South
      Korea
                
                
                9,066
                
                
                
                4,650Brazil
                
                
                5,903
                
                
                
                2,633Mexico
                
                
                1,769
                
                
                
                -United
      States
                
                
                3,469
                
                
                
                1,647Others
                
                
                2,732
                
                
                
                825Total
                
                
                141,190
                
                
                
                102,084




Cost of Sales.  Our
cost of sales increased $28.3 million to $104.8 million in 2008 from $76.5
million in 2007. Such amount increase was mainly a result of the substantial
growth in sales volume. As a percentage of sales revenue, the cost of sales
decreased to 74.2% in 2008 from 74.9% in 2007.  The percentage
decrease was primarily attributable to the decrease of per unit cost of products
resulting from our ability to realize the benefits of economies of scale. We
also benefited from more efficient cost control management and improved
technology which allowed us to reduce raw material and component consumption per
unit of production.




Gross Profit.
Our gross profit increased $10.8 million to $36.4 million in 2008 from $25.6
million in 2007. Gross profit as a percentage of sales revenue was 25.8% in
2008, as compared to 25.1% in 2007. The increased gross margin was mainly
attributable to the factor as discussed above.




Administrative Expenses.Our
administrative expenses increased $3.3 million, or 91.5%, to $6.8 million in
2008 from $3.6 million in 2007. As a percentage of sales revenue, administrative
expenses increased to 4.8% in 2008 from 3.5% in 2007.  This dollar and
percentage increase of administrative expenses was mainly due to the
consolidation of the financial results of Jinzhou Hanhua, Jinzhou Karham, Fuxin
Huirui and Jinan Worldwide, and third party professional fees associated with
such acquisitions, as well as the audit and assessment costs in complying with
the rules and regulations related to our status as a public reporting company in
the United States.





Share-based
compensation. We incurred a non-cash employee compensation of $706,295 as
a result of the stock option grants to senior management and other staff made
under our equity incentive plan adopted in April 2008.  Such stock
option grants were terminated in December 2008.





Research and
development expenses.  Our research and development costs
increased $511,891, or 45.1%, to $1.6 million in 2008 from $1.1 million in 2007.
As a percentage of sales revenue, research and development costs increased to
1.2% for the year ended December 31, 2008 from 1.1% in 2007. Such dollar and
percentage increases were primarily attributable to the increased expenses
associated with development of new products.




Selling Expenses. Our selling expenses
include sales commissions, advertising and promotional materials costs, salaries
and fringe benefits of sales personnel, after-sale support services and other
sales related costs. Our selling expenses increased to $4.1 million in 2008 from
$3.3 million in 2007. The increased selling expenses were mainly attributable to
the increased sales commissions and salaries resulting from the growth of our
sales revenue, and the higher transportation costs during Beijing Olympic Games.
As a percentage of sales revenue, our selling expenses decreased to 2.9% in 2008
from 3.2% in 2007. This percentage decrease was primarily attributable to lower
warranty costs resulting from the improved product quality.




Unusual Charge –
Make Good Provision.In
connection with our private placement which closed in June 2006, two of our
stockholders Choice Inspire Limited, or CIL, and Empower Century Limited, or
ECL, pledged and deposited into escrow 3,300,000 shares of our common stock
pursuant to a “make good” escrow agreement with the private placement
investors.  Under the “make good” escrow agreement, the pledged shares
were deliverable to the investors, on a pro rata basis, if we did not meet
certain minimum net income thresholds during the fiscal years 2006 and 2007, but
would be released back to CIL and ECL if the net income thresholds were
achieved.  On February 8, 2007 and February 2, 2008, stockholders’ of
CIL and ECL transferred their rights to receive the 3,300,000 shares in escrow
for no consideration to Xiangdong Gao. who ultimately received the escrowed
shares. Per ASC 718, Accounting for Stock-Based Compensation, if the net income
threshold is met, the shares will be released back to CIL and ECL and treated as
an expense equal to the amount of the market value of the shares as of the date
when the respective performance goal was met.  We achieved the net
income thresholds for both 2006 and 2007, accordingly, we recognized a non-cash
expense of $7.5 million and $18.3 million in 2006 and 2007, respectively. As the
make good arrangement only applies to 2006 an 2007, no such compensation expense
was recognized in 2008.


38





Total Expenses.  Our total expenses
decreased $13.0 million to $13.3 million in 2008 from $26.3 million in 2007. As
a percentage of sales revenue, our total expenses decreased to 9.4% in 2008 from
25.7% in 2007. The decreases in amount and percentage were mainly due to the
non-cash expenses of $18.3 million related to the make good arrangement
recognized in 2007 as discussed above.





Other
Income. Our other income includes other payables waived, sales of scrap
materials, service income, and gain on disposal of property, plant and
equipment. Our other income increased $1.1 million to $1.4 million in 2008 from
$287,322 in 2007.





Net finance
costs. Our financial costs decreased $162,922 to $2.2 million in 2008
from $2.4 million in 2007. Such decrease was mainly due to an outstanding loan
in the amount of 8.3 million Euro (approximately $11.8 million). Since this loan
is denominated in Euro, with the appreciation of RMB against Euro, we had a
$975,305 net foreign exchange gain in 2008.





Equity in net
income of non-consolidated affiliates. We recognized a net income of $1.1
million from Money Victory Limited in 2008, as compared to $34,147 from Jinzhou
Wanyou in 2007. We used the equity method to recognize profit or loss for the
investment in which we exercised significant influence but did not
control.




Income
(Loss) Before Income Taxes and Noncontrolling
interests.Our income before income
taxes and minority interests was $23.5 million in 2008, as compared to a loss of
$1.2 million in 2007.  Such increase in income before income tax and
minority interests was mainly attributable to the non-cash expense of $18.3
million related to the make good arrangement recognized in 2007. No non-cash
expense related to the make good arrangement was recognized in
2008.




Income Taxes.Income taxes increased
$785,940 to $2.2 million in 2008 from $1.4 million in 2007. As a percentage of
sales revenue, our income taxes increased to 1.5% in 2008 from 1.4% in
2007.





Noncontrolling
Interests. Our financial statements reflect an adjustment to our
consolidated group net income, and our noncontrolling interest increased $1.3
million in 2008 to $2.5 million from $1.1 million in 2007, reflecting the
noncontrolling interests held by third parties in Jinzhou Dongwoo, Jinzhou
Hanhua, Jinzhou Karham and Jinan Worldwide.





Net
Income(Loss)/attributable to WATG.  Our net income was $18.9
million in 2008 as compared to a loss of $3.8 million in 2007. The significant
increase in net income was mainly attributable to the non-cash expense of $18.3
million related to the make good arrangement recognized in 2007. Other than the
$18.3 million non-cash expense, our net income increased $4.4 million in 2008
mainly because of the factors discussed above, including increased market demand
and increased export sales.




Liquidity
and Capital Resources





As of
December 31, 2009, we had cash and cash equivalents of $82.4 million and
restricted cash of $15.8 million. The following table provides detailed
information about our net cash flow for all financial statements periods
presented in this report.





Statement
of Cash Flow


(All
amounts in thousands of U.S. dollars)





Year
      Ended December 31,2009
                
                
                2008
                
                
                2007Net
      cash provided by operating activities
                
                $
                18,157
                
                
                $
                9,106
                
                
                $
                12,170Net
      cash used in investing activities
                
                
                (38,518
                )
                
                
                (37,266
                )
                
                
                (24,566
                )Net
      cash provided by financing activities
                
                
                94,537
                
                
                
                9,226
                
                
                
                29,232Effect
      of foreign currency translation on cash and cash
    equivalents
                
                
                79
                
                
                
                991
                
                
                
                1,063Net
      cash inflow(outflow)
                
                
                74,255
                
                
                
                (17,944
                )
                
                
                17,899




Operating Activities




We
believe our ability to generate cash from operating activities is one of our
fundamental financial strengths. We expect to meet all of our financial
commitments and operating needs for the foreseeable future.


39


Net cash
provided by operating activities was $18.2 million in 2009, as compared to $9.1
million in 2008. The increase was mainly attributable to increased trade
payables, increased inventories and other receivables, partially offset by an
increase in bills receivable.





Net cash
provided by operating activities was $9.1 million in 2008, as compared to $12.2
million in 2007. The decrease was mainly attributable to the increase of
finished product inventories as of December 31, 2008. Due to the global economic
crisis, in the fourth quarter of 2008, our sales of alternators and starters
were lower than the anticipated sales level which resulted in an increase of
inventory for finished goods. In addition, the acquisition of Jinan Worldwide in
the fourth quarter of 2008 also contributed to the increase of
inventory.




Investing Activities





Our main
uses of cash for investing activities in 2009 were for the acquisition of
property, plant and equipment.





Net cash
used in investing activities in 2009 was $38.5 million, as compared to $37.3
million in 2008. Net cash used in investing activities in 2009 was mainly
attributable to $13.0 million payment to acquire and to deposit for acquisition
of property, plant and equipment and $21.7 million paid to acquire Yearcity and
Friend Birch.





Net cash
used in investing activities in 2008 was $37.3 million, as compared to $24.6
million in 2007. Net cash used in investing activities in 2008 was mainly
attributable to a $5 million investment in Money Victory Limited, and payments
totaling $16.6 million for the acquisitions of Jinzhou Hanhua, Jinzhou Karham,
Fuxin Huirui and Jinan Worldwide. In addition, we spent approximately $17.3
million in connection with the acquisition of property, mainly for the purchase
of land use right for Jinzhou Motor and Jinzhou Equipment and the capacity
expansion of Jinzhou Wanyou.




Financing Activities




Net cash
provided by financing activities in 2009 totaled $94.5 million as compared to
$9.2 million in 2008. In November 2009, we completed an underwritten public
offering whereby we sold 6,900,000 shares of our common stock at a public
offering price of $10.75 per share and received a net proceeds of approximately
$69.0 million.





Net cash
provided by financing activities in 2008 totaled $9.2 million as compared to
$29.2 million provided by financing activities in 2007. The decrease in net cash
was mainly attributable to the $22.7 million proceeds we received from private
placement transaction closed in December 2007, which more than offset the $9.2
million increase in net proceeds from bank loans in 2008.




Our debt
to equity ratio was 40.5% as of December 31, 2009. We plan to maintain our debt
to equity ratio below 65%, increase long-term loans, decrease short-term loans
and increase the ratio of the borrowing in foreign currency to take advantage of
the expected appreciation of  RMB against the U.S.
dollar.




Loan
Facilities




As of
December 31, 2009, we had approximately $97.9 million of bank deposits, our
total assets were $362.3 million, and total equity was $198.5
million.





As of
December 31, 2009, the amount, maturity date and term of each of
our secured borrowings are as follows.


40




Short
Term Loans


(All
amounts in millions of U.S. dollars)





Bank
                    
                    Amount
                    
                    Maturity
      Date
                    
                    TermChina
      Construction Bank
                    
                    $
                    2.6
                    
                    October
      29, 2010
                    
                    12
      monthsChina
      construction Bank
                    
                    
                    1.5
                    
                    February
      24, 2010
                    
                    12
      monthsChina
      Construction Bank
                    
                    
                    5.9
                    
                    April
      12, 2010
                    
                    12
      monthsBank
      of China
                    
                    
                    4.4
                    
                    November
      26, 2010
                    
                    12
      monthsHuaxia
      Bank
                    
                    
                    2.9
                    
                    June
      30, 2010
                    
                    12
      monthsChina
      CITIC Bank
                    
                    
                    8.8
                    
                    April
      26, 2010
                    
                    12
      monthsChina
      CITIC Bank
                    
                    
                    5.9
                    
                    June
      28, 2010
                    
                    12
      monthsBank
      of China
                    
                    
                    2.9
                    
                    August16,
      2010
                    
                    12
      monthsBank
      of Jinzhou
                    
                    
                    0.4
                    
                    March
      30, 2010
                    
                    12
      monthsBank
      of Jinzhou
                    
                    
                    0.2
                    
                    August
      31, 2010
                    
                    12
      monthsBank
      of Jinzhou
                    
                    
                    0.4
                    
                    September
      23, 2010
                    
                    12
      monthsBank
      of China
                    
                    
                    2.9
                    
                    April
      28, 2010
                    
                    12monthsBank
      of China
                    
                    
                    1.0
                    
                    January
      24, 2010
                    
                    3
      monthsBank
      of China
                    
                    
                    1.5
                    
                    May
      19, 2010
                    
                    12
      monthsChina
      CITIC
                    
                    
                    2.9
                    
                    October
      21, 2010
                    
                    12
      monthsBank
      of Jinzhou
                    
                    
                    0.1
                    
                    October
      28, 2010
                    
                    12
      monthsBank
      of Jinan
                    
                    
                    2.9
                    
                    May
      15, 2010
                    
                    12
      monthsHuaxia
      Bank
                    
                    
                    2.9
                    
                    June
      22, 2010
                    
                    12monthsSZD
      Bank
                    
                    
                    2.9
                    
                    February
      28, 2010
                    
                    6
      monthsTotal
                    
                    $
                    53.0





Installment Loans


(All
amounts in millions of U.S. dollars)





Within
      1
                    Year
                  
                  
                  1-2
                    Years
                  
                  
                  2-3
                    Years
                  
                  
                  3-4
                    Years
                  
                  
                  4-5
                    Years
                  
                  
                  After
      5
                    Years
                  
                  
                  TotalBank
      of China*
                  
                  $
                  0.7
                  
                  
                  $
                  4.0
                  
                  
                  $
                  4.0
                  
                  
                  $
                  2.7
                  
                  
                  $
                  2.1
                  
                  
                  $
                  -
                  
                  
                  $
                  13.5DEG**
                  
                  
                  3.2
                  
                  
                  
                  3.2
                  
                  
                  
                  3.2
                  
                  
                  
                  0.7
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10.3Changqing*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.2
                  
                  
                  
                  0.8
                  
                  
                  
                  1.0Total
                  
                  $
                  3.9
                  
                  
                  $
                  7.2
                  
                  
                  $
                  7.2
                  
                  
                  $
                  3.4
                  
                  
                  $
                  2.3
                  
                  
                  $
                  0.8
                  
                  
                  $
                  24.8





*The
loans are denominated in RMB, we used the exchange rate of $1 =
RMB6.8166


**The
loan is denominated in Euro, we used the exchange rate of 1 Euro =
RMB9.8





During
the year ended December 31, 2009, we repaid bank loans in the total amount of
approximately $61.8 million. Approximately $56.9 million bank loans will mature
within the next twelve months. We plan to either repay these loans as they
mature or refinance them using other existing credit lines.





We
believe that we maintain good relationships with the banks providing credits and
loans to us, and our current available working capital should be adequate to
sustain our operations at our current levels through at least the next twelve
months.





As of the
date of this report, we believe that our currently available working capital,
including the aggregate proceeds of our capital raising activities and the
credit facilities referred to above, should be adequate to sustain our
operations at our current levels through at least the next twelve months. We
may, however, in the future, require additional cash resources due to the
changed business conditions, implementation of our strategy to expand our
production capacity or other investments or acquisitions we may decide to
pursue. If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.





Obligations
under Material Contracts





Below is
a table setting forth our contractual obligations as of December 31,
2009:


41




(All
amounts in thousands of U.S. dollars)





Total
                
                
                Less
      than
                  1
      year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than
                  5
      yearsLong
      term debt obligations
                
                $
                24.8
                
                
                $
                3.9
                
                
                $
                14.4
                
                
                $
                5.7
                
                
                $
                0.8Capital
      commitments
                
                
                1.3
                
                
                
                1.3
                
                
                
                —
                
                
                
                —
                
                
                
                —Operating
      lease obligations
                
                
                0.2
                
                
                
                0.2
                
                
                
                —
                
                
                
                —
                
                
                
                —Purchase
      obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                26.3
                
                
                $
                5.4
                
                
                $
                14.4
                
                
                $
                5.7
                
                
                $
                0.8





Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.





Seasonality




Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.




Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:





●
            Principles of
      consolidation.The consolidated
      financial statements include the accounts of the Company and its
      subsidiaries.  All significant inter-company accounts and
      transactions have been eliminated in
  consolidation.





●
            Share-based
      compensation.The Company adopted the provisions of ASC
      718 (previously SFAS 123(R)), which requires the use of the fair value
      method of accounting for share-based compensation. Under the fair value
      based method, compensation cost related to employee stock options or
      similar equity instruments which are equity-classified awards, is measured
      at the grant date based on the value of the award and is recognized over
      the requisite service period, which is usually the vesting period. ASC 718
      also requires measurement of cost of a liability-classified award based on
      its current fair value.





Fair
value of share options granted is determined using the Black-Scholes model.
Under this model, certain assumptions, including the risk-free interest rate,
the expected life of the options and the estimated fair value of the Company’s
common stock and the expected volatility, are required to determine the fair
value of the options. If different assumptions had been used, the fair value of
the options would have been different from the amount the Company computed and
recorded, which would have resulted in either an increase or decrease in the
compensation expense.





●
            Use of estimates.In preparing
      financial statements in conformity with accounting principles generally
      accepted in the United States of America, management makes estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosures of contingent assets and liabilities at the dates of the
      financial statements, as well as the reported amounts of revenues and
      expenses during the reporting periods.  These accounts and
      estimates include, but are not limited to, the valuation of accounts
      receivable, inventories, deferred income taxes, provision for warranty,
      goodwill, know-how, share-based compensation and the estimation on useful
      lives of property, plant and equipment.  Actual results could
      differ from those estimates.


42





●
            Allowance for doubtful
      accounts.The Company establishes an allowance for
      doubtful accounts based on management’s assessment of the collectability
      of trade receivables.  A considerable amount of judgment is
      required in assessing the amount of the allowance, the Company considers
      the historical level of credit losses and applies percentages to aged
      receivable categories.  The Company makes judgments about the
      creditworthiness of each customer based on ongoing credit evaluations, and
      monitors current economic trends that might impact the level of credit
      losses in the future.  If the financial condition of the
      customers were to deteriorate, resulting in their inability to make
      payments, a larger allowance may be
required.





Based on
the above assessment, during the reporting years, the management establishes the
general provisioning policy to make allowance equivalent to 100% of gross amount
of trade receivables due over 1 year.  Additional specific provision
is made against trade receivables aged less than 1 year to the extent which they
are considered to be doubtful.





Bad debts
are written off when identified.  The Company extends unsecured credit
to customers ranging from three to six months in the normal course of
business.  The Company does not accrue interest on trade accounts
receivable.





Historically,
losses from uncollectible accounts have not significantly deviated from the
general allowance estimated by the management and no significant additional bad
debts have been written off directly to the profit and loss.  This
general provisioning policy has not changed in the past since establishment and
the management considers that the aforementioned general provisioning policy is
adequate and not too excessive and does not expect to change this established
policy in the near future.





●
            Impairment of long-lived
      assets.Long-lived assets
      are tested for impairment in accordance with ASC 360-10-45 “Impairment or
      Disposal of Long-Lived Assets” (previously SFAS No. 144), Equity Method of
      Accounting for Investments in Common Stock, respectively.  The
      Company periodically evaluates potential impairment whenever events or
      changes in circumstances indicate that the carrying amount of the assets
      may not be recoverable.  The Company recognizes impairment of
      long-lived assets and investment in an affiliate in the event that the net
      book values of such assets exceed the future undiscounted cashflows
      attributable to such assets.  During the reporting periods, the
      Company has not identified any indicators that would require testing for
      impairment.





●
            Revenue recognition.Revenue from sales
      of the Company’s products is recognized when the significant risks and
      rewards of ownership have been transferred to the buyer at the time when
      the products are put into use by its customers, the sales price is fixed
      or determinable and collection is reasonably
  assured.





●
            Warranty.It is the policy
      of the Company to provide after sales support to the product of
      alternators and starters by way of a warranty program.  The
      Company provided warranties to certain customers with warranty periods
      ranging from two years or 50,000 km to three years or 60,000 km, whichever
      comes first.





Based on
the past experience, the Company sets up a policy of making a general provision
for warranty such that the closing balance of this provision is equal to certain
percentage of relevant sales during the reporting periods as follows
:-





Year
      ended December 31,
                  
                  %2009
                  
                  
                  12008
                  
                  
                  1.52007
                  
                  
                  1.5





As of
January 1, 2009, the management of the Company re-assessed the percentage for
provision of warranties by reviewing the historical claims information and
determined to adjust the percentage from 1.5% to 1.0%. Such decrease was
attributable to the improvement in the rate of defects for the Company’s
products after introduction of certain new technologies obtained from the
Company’s research and development.





Following
the acquisition of Yearcity in October, 2008, the Company maintains its policy
to provide after sales support to the product of engine valves and tappets by
way of a warranty program.  The Company provided warranties to certain
customers with warranty periods ranging from 1 to 1.5 years or 3,000 hours,
whichever comes first.


43





Based on
the past experience, the Company sets up a policy of making a general provision
for warranty in relation to the sales of engine valves and tappets such that the
closing balance of this provision is equal to 1.7% of relevant sales during the
reporting periods.





Recent
Accounting Pronouncements





FASB
Accounting Standards Codification (Accounting Standards Update “ASU” 2009-1). In
June 2009, the Financial Accounting Standard Board (“FASB”) approved its
Accounting Standards Codification (“Codification”) as the single source of
authoritative United States accounting and reporting standards applicable for
all non-governmental entities, with the exception of the SEC and its staff. The
Codification is effective for interim or annual financial periods ending after
September 15, 2009 and impacts our financial statements as all future references
to authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our financial
statements or disclosures as a result of implementing the
Codification.





As a
result of our implementation of the Codification during the quarter ended
September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current financial statements, we
will provide reference to both new and old guidance to assist in understanding
the impacts of recently adopted accounting literature, particularly for guidance
adopted since the beginning of the current fiscal year but prior to the
Codification.





Noncontrolling
Interests (Included in amended Topic ASC 810 “Consolidation”, previously SFAS
No. 160 “Noncontrolling Interests in Consolidated Financial Statements”, an
amendment of ARB No. 51). The amended topic establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. We adopted the
amended topic on January 1, 2009. As a result, we have reclassified financial
statement line items within our Consolidated Balance Sheets and Statements of
Income(Loss) and Comprehensive Income(Loss) for the prior period to conform to
this amended topic.





Business
Combinations (Included in amended Topic ASC 805 “Business Combinations”,
previously SFAS No. 141(R)). This ASC guidance addresses the accounting and
disclosure for identifiable assets acquired, liabilities assumed, and
noncontrolling interests in a business combination. The adoption of this amended
topic has no material impact on the Company’s financial statements.





Intangibles-Goodwill
and Other (Included in amended Topic ASC 350”, previously FASB staff position
(“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets). The
amended topic amends the factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142, “Goodwill and Other
Intangible Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. The amended topic is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. Early adoption is prohibited. The adoption of this
amended topic has no material effect on the Company's financial
statements.





Business
Combinations (Included in amended Topic ASC 805, previously FSP No. 141R-1
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”). Amended topic ASC 805 amends the
requirements for the provisions in FASB Statement 141R for the initial
recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. The amended topic eliminates the distinction between contractual
and non-contractual contingencies, including the initial recognition and
measurement criteria and instead carries forward most of the provisions for
acquired contingencies. The amended topic is effective for contingent assets and
contingent liabilities acquired in evaluating the impact. The management is in
the process of evaluating the impact of adopting this amended topic on the
Company’s financial statements.


44





Fair
Value Measurements and Disclosures (Included in amended Topic ASC 820,
previously FSP No. 157-4, “Determining Whether a Market is Not Active and a
Transaction Is Not Distressed”.) The amended topic clarifies when markets are
illiquid or that market pricing may not actually reflect the “real” value of an
asset. If a market is determined to be inactive and market price is reflective
of a distressed price then an alternative method of pricing can be used, such as
a present value technique to estimate fair value. The amended topic identifies
factors to be considered when determining whether or not a market is inactive.
The amended topic would be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009 and shall be applied prospectively. The adoption of this amended topic has
no material effect on the Company's financial statements.





Investments
- Debt and Equity Securities - Overall - Transition and Open Effective Date
Information (Included in amended Topic ASC 320, previously FASB Staff Position
No. 115-2 and Statement of Financial Accounting Standards No. 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments”). The amended
topic amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities through increased consistency in the timing of impairment recognition
and enhanced disclosures related to the credit and noncredit components of
impaired debt securities that are not expected to be sold. In addition,
increased disclosures are required for both debt and equity securities regarding
expected cash flows, credit losses, and securities with unrealized losses. The
adoption of this amended topic has no material impact on the Company’s financial
statements.





Interim
Disclosures about Fair Value of Financial Instruments (Included in amended Topic
ASC 825 “Financial Instruments”, previously FSP SFAS No. 107-1). This guidance
requires that the fair value disclosures required for all financial instruments
be included in interim financial statements. This guidance also requires
entities to disclose the method and significant assumptions used to estimate the
fair value of financial instruments on an interim and annual basis and to
highlight any changes from prior periods. The amended topic was effective for
interim periods ending after September 15, 2009. The adoption of this amended
topic has no material impact on the Company’s financial statements.





Subsequent
Events (Included in amended Topic ASC 855 “Subsequent Events”, previously SFAS
No. 165). The amended topic establishes accounting and disclosure requirements
for subsequent events. The amended topic details the period after the balance
sheet date during which we should evaluate events or transactions that occur for
potential recognition or disclosure in the financial statements, the
circumstances under which we should recognize events or transactions occurring
after the balance sheet date in its financial statements and the required
disclosures for such events. We adopted this amended topic effective June 1,
2009.





Accounting
for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers
and Servicing”, previously SFAS No. 166, “Accounting for Transfers of Financial
Assets - an Amendment of FASB Statement No. 140.”). The amended topic addresses
information a reporting entity provides in its financial statements about the
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement in transferred financial assets. Also, the amended topic removes the
concept of a qualifying special purpose entity, limits the circumstances in
which a transferor derecognizes a portion or component of a financial asset,
defines participating interest and enhances the information provided to
financial statement users to provide greater transparency. The amended topic is
effective for the first annual reporting period beginning after November 15,
2009 and will be effective for us as of January 1, 2010. The management is in
the process of evaluating the impact of adopting this amended topic on the
Company’s financial statements.


45





Consolidation
of Variable Interest Entities – Amended (Included in amended Topic ASC 810
“Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No.
46(R)”). The amended topic requires an enterprise to perform an analysis to
determine the primary beneficiary of a variable interest entity; to require
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity and to eliminate the quantitative approach previously
required for determining the primary beneficiary of a variable interest entity.
The amended topic also requires enhanced disclosures that will provide users of
financial statements with more transparent information about an enterprise’s
involvement in a variable interest entity. The amended topic is effective for
the first annual reporting period beginning after November 15, 2009 and will be
effective for us as of January 1, 2010. The management is in the process of
evaluating the impact of adopting this amended topic on the Company’s financial
statements





In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05 (“ASU
Update 2009-05”), an update to ASC 820, Fair Value Measurements and Disclosures.
This update provides amendments to reduce potential ambiguity in financial
reporting when measuring the fair value of liabilities. Among other provisions,
this update provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the valuation
techniques described in ASU Update 2009-05. ASU Update 2009-05 will become
effective for the Company’s annual financial statements for the year ended
December 31, 2009. The adoption of this ASU update has no material impact on the
Company’s financial statements.





The FASB
issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic
605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB
Emerging Issues Task Force.” This update provides application guidance on
whether multiple deliverables exist, how the deliverables should be separated
and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The management is in the process of evaluating
the impact of adopting this ASU update on the Company’s financial
statements.





The FASB
issued ASU-2010-09 (Topic 855) to amend guidance on subsequent events to remove
the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date
through which an entity has evaluated subsequent events. This change alleviates
potential conflicts with current SEC guidance. An SEC filer is still required to
evaluate subsequent events through the date financial statements are issued, but
disclosure of that date is no longer required. The amendments in ASU 2010-09
became effective upon issuance of the guidance.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Interest
Rate Risk





We are
exposed to interest rate risk primarily with respect to our short-term bank
loans and long-term bank loans. Although the interest rates, which are based on
the banks’ prime rates with respect to our short-term loans are fixed for the
terms of the loans, the terms are typically three to twelve months for
short-term bank loans and interest rates are subject to change upon
renewal.  There were no material changes in interest rates for
short-term bank loans renewed during the year ended December 31,
2009.





A
hypothetical 1.0% increase in the annual interest rates for all of our credit
facilities under which we had outstanding borrowings as of December 31, 2009,
would decrease net income before provision for income taxes by approximately
$7.8 million for the year ended December 31, 2009.  Management
monitors the banks’ prime rates in conjunction with our cash requirements to
determine the appropriate level of debt balances relative to other sources of
funds.  We have not entered into any hedging transactions in an effort
to reduce our exposure to interest rate risk.


46


Foreign
Exchange Risk





While our
reporting currency is the U.S. Dollar, all of our consolidated revenues and
consolidated costs and expenses are denominated in RMB.  All of our
assets are denominated in RMB except for cash.  As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be affected by fluctuations in the exchange rate between U.S. Dollars and
RMB.  If RMB depreciates against the U.S. Dollar, the value of our RMB
revenues, earnings and assets as expressed in our U.S. Dollar financial
statements will decline. In addition, we also have bank loan denominated in Euro
and our payment obligation may be affected by fluctuations in the exchange rate
between the Euro and RMB.  Assets and liabilities are translated at
exchange rates at the balance sheet dates and revenue and expenses are
translated at the average exchange rates and shareholders’ equity is translated
at historical exchange rates.  Any resulting translation adjustments
are not included in determining net income but are included in determining other
comprehensive income, a component of shareholders’ equity.  We have not
entered into any hedging transactions in an effort to reduce our exposure to
foreign exchange risk.




The value
of the RMB against the U.S. dollar, Euro and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate
or depreciate significantly in value against the U.S. dollar or Euro in the
medium to long term.  Moreover, it is possible that in the future, PRC
authorities may lift restrictions on fluctuations in RMB exchange rate and
lessen intervention in the foreign exchange market.





Inflation





Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results.  Although we do not believe
that inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if the
selling prices of our products do not increase with these increased
costs.




ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





The full
text of our audited consolidated financial statements as of December 31, 2009
and 2008 and for the years ended December 31, 2009, 2008 and 2007 begins on page
F-1 of this annual report.





The
following table sets forth certain unaudited financial information for each of
the eight quarters ended December 31, 2009 and 2008. The consolidated financial
statements for each of these quarters have been prepared on the same basis as
the audited consolidated financial statements included in this annual report
and, in the opinion of management, include all adjustments necessary for the
fair presentation of the results of operations for these periods. This
information should be read together with our audited consolidated financial
statements and the related notes included elsewhere in this annual
report.





(All
amounts in millions of U.S. dollars)





Year
      Ended December 31, 2009
                
                
                Year
      Ended December 31, 2008First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  Quarter
                
                
                First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  QuarterRevenue
                
                $
                39,976
                
                
                $
                49,651
                
                
                $
                58,962
                
                
                $
                62,435
                
                
                $
                31,117
                
                
                $
                36,659
                
                
                $
                39,266
                
                
                $
                34,148Gross
      profit
                
                
                10,094
                
                
                
                12,219
                
                
                
                13,954
                
                
                
                15,096
                
                
                
                8,173
                
                
                
                9,504
                
                
                
                10,126
                
                
                
                8,637Income
      before income taxes and noncontrolling interests
                
                
                6,315
                
                
                
                6,279
                
                
                
                7,857
                
                
                
                6,628
                
                
                
                4,900
                
                
                
                6,756
                
                
                
                7,594
                
                
                
                4,293Net
      income attributable to WATG
                
                
                5,172
                
                
                
                5,376
                
                
                
                6,507
                
                
                
                5,804
                
                
                
                3,986
                
                
                
                5,267
                
                
                
                6,354
                
                
                
                3,304Net
      income per shareBasic
                
                
                0.19
                
                
                
                0.20
                
                
                
                0.24
                
                
                
                0.19
                
                
                
                0.15
                
                
                
                0.20
                
                
                
                0.24
                
                
                
                0.11Diluted
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                0.19
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A


47


Earnings
per share are computed independently for each of the quarters presented.
Therefore, the sum of the quarterly net earnings per share will not necessarily
equal the total for the year.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





ITEM
      9A.
            CONTROLS
      AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.





As
required by Rule 13a-15 under the Exchange Act, our management,
including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2009.  Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2009, and as of the date that the
evaluation of the effectiveness of our disclosure controls and procedures was
completed, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Exchange Act defines internal control over financial
reporting as a process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and includes those
policies and procedures that:





●
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





●
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that
      our receipts and expenditures are being made only in accordance with
      authorizations of our management and directors;
  and;





●
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on our financial
statements.





All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the framework
set forth in the report entitled Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment, (ii) risk
assessment, (iii) control activities, (iv) information and communication, and
(v) monitoring. Based on our assessment we determined that, as of December 31,
2009, our internal control over financial reporting is effective based on those
criteria.


48




In
September 2009, the Company acquired 100% equity interest in Friend Birch,
thereby indirectly acquired its wholly owned subsidiaries, Jinzhou Lida and
Jinzhou Jiade. Because of limitation of time, the Company has not completed the
implementation of the internal control on these three subsidiaries by December
31, 2009 and management excluded them from its assessment of the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2009. These three entities’ internal control over financial reporting associated
with total assets of 1.88% and total sales revenues of 0.95% included in the
consolidated financial statements of the Company as of and for the year ended
December 31, 2009. Our audit of internal control over financial reporting of the
Company also excluded an evaluation of the internal control over financial
reporting of these three entities.





PKF
Certified Public Accountants, Hong Kong, China, a member firm of the PKF
International Limited network of legally independent firms, or PKF, our
Independent Registered Public Accounting Firm, has performed an audit of the
effectiveness of our internal control over financial reporting as of December
31, 2009, and, as part of its audit, has issued its attestation report on the
effectiveness of our internal controls over financial reporting herein as of
December 31, 2009. PKF’s attestation report is included in this Item 9A. This
audit is required to be performed in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our independent auditors
were given unrestricted access to all financial records and related
data.




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of


Wonder
Auto Technology, Inc.





We have
audited the internal control over financial reporting of Wonder Auto Technology,
Inc. (the “Company”) and its subsidiaries as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles; (3) that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (4) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.


49





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009 based on the COSO
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.





In
September 2009, the Company acquired 100% equity interest in Friend Birch
Limited, thereby indirectly acquired its wholly owned subsidiaries, Jinzhou Lida
Auto Parts Co., Ltd. and Jinzhou Jiade Machinery Co., Ltd. Because of limitation
of time, the Company has not completed the implementation of the internal
control on these three subsidiaries by December 31, 2009 and management excluded
from its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. These three entities’ internal
control over financial reporting associated with total assets of 1.88% and total
sales revenues of 0.95% included in the consolidated financial statements of the
Company as of and for the year ended December 31, 2009. Our audit of internal
control over financial reporting of the Company also excluded an evaluation of
the internal control over financial reporting of these three
entities.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2009 and 2008, and the related consolidated statements of
income (loss) and comprehensive income (loss), equity, and cash flows for each
of the three years then ended December 31, 2009 and our report dated March 4,
2010 expressed an unqualified opinion thereon.




/s/ PKF


PKF


Certified
Public Accountants


Hong
Kong, China


March 4,
2010





Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal control over financial reporting during the
fourth quarter of fiscal year 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





ITEM
      9B.
            OTHER
      INFORMATION.





We have
no information to disclose that was required to be disclosed in a report on Form
8-K during fourth quarter of fiscal year 2009, but was not
reported.





PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





The
information required by Item 10 of Part III is included in our Proxy
Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.





ITEM
      11.
            EXECUTIVE
      COMPENSATION.





The
information required by Item 11 of Part III is included in our Proxy
Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





The
information required by Item 12 of Part III is included in our Proxy
Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.


50


ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





The
information required by Item 13 of Part III is included in our Proxy
Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.





ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





The
information required by Item 14 of Part III is included in our Proxy
Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.





PART
IV




ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.





Financial
Statements and Schedules





The
financial statements are set forth under Item 8 of this annual report on Form
10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.





Exhibit
List





The list
of exhibits included in the attached Exhibit Index is hereby incorporated herein
by reference.


51


SIGNATURES




In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereto duly authorized individual.




Date:
March 4, 2010




WONDER
      AUTO TECHNOLOGY, INC.By:
                /s/Qingjie
      ZhaoQingjie
      ZhaoChief
      Executive OfficerBy:
                /s/
      Meirong YuanMeirong
      YuanChief
      Financial Officer




In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.





Signature
                      
                      Title
                      
                      Date/s/
      Qingjie Zhao
                      
                      
                      Chairman,
      Chief Executive Officer and Director
                      
                      March
      4, 2010Qingjie
      Zhao
                      
                      (Principal
      Executive Officer)/s/
      Meirong Yuan
                      
                      
                      Chief
      Financial Officer and Director
                      
                      March
      4, 2010Meirong
      Yuan
                      
                      (Principal
      Financial and Accounting Officer)/s/
      Larry Goldman
                      
                      
                      Director
                      
                      March
      4, 2010Larry
      Goldman/s/
      David Murphy
                      
                      
                      Director
                      
                      March
      4, 2010David
      Murphy/s/
      Xingye Zhang
                      
                      
                      Director
                      
                      March
      4, 2010Xingye
      Zhang


52




Wonder
Auto Technology, Inc.
 
 Consolidated
Financial Statements
 (Stated
in US dollars)
  
  Wonder
Auto Technology, Inc.
 Consolidated
Financial Statements
 
 Index to
Consolidated Financial Statements
 
 PagesReport
      of Independent Registered Public Accounting Firm
                  1Consolidated
      Statements of Income (Loss) and Comprehensive Income
(Loss)
                  2Consolidated
      Balance Sheets
                  3 -
      4Consolidated
      Statements of Cash Flows
                  5 -
      7Consolidated
      Statements of Equity
                  8Notes
      to Consolidated Financial Statements
                  9 -
      51
  
  Accountant
      &business advisers
  Report
of Independent Registered Public Accounting Firm
 
 To the
Board of Directors and Stockholders of
 Wonder
Auto Technology, Inc.
   We have
audited the accompanying consolidated balance sheets of Wonder Auto Technology,
Inc. (the “Company”) and its subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of income (loss) and comprehensive income
(loss), equity and cash flows for each of the three years in the period ended
December 31, 2009.  These financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
  We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
4, 2010 expressed an unqualified opinion thereon.
  
 PKF
 Certified
Public Accountants
 Hong
Kong, China
 March 4,
2010
  Tel
      852 2806 3822 | Fax 852 2806 3712
                      E-mail
      info@pkf-hk.com | www.pkf-hk.com
                      PKF
      | 26/F, Citicorp Centre | 18 Whitfield Road | Causeway Bay | Hong
      Kong
                      
                      PKF
      Hong Kong is a member firm of the PKF International Limited network of
      legally independent firms and does not accept any responsiblity or
      liability for the actions or inactions on the part of any other individual
      member firm or firms
 F-1
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Income (Loss) and Comprehensive Income (Loss)
 (Stated
in US Dollars)
 
 Year ended December 31,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007Sales
      revenue
                                                                  
                                                                  $
                                                                  211,024,016
                                                                  
                                                                  
                                                                  $
                                                                  141,189,559
                                                                  
                                                                  
                                                                  $
                                                                  102,083,722Cost
      of sales
                                                                  
                                                                  
                                                                  159,659,681
                                                                  
                                                                  
                                                                  
                                                                  104,750,150
                                                                  
                                                                  
                                                                  
                                                                  76,459,944Gross
      profit
                                                                  
                                                                  
                                                                  51,364,335
                                                                  
                                                                  
                                                                  
                                                                  36,439,409
                                                                  
                                                                  
                                                                  
                                                                  25,623,778Operating
      expensesAdministrative
      expenses
                                                                  
                                                                  
                                                                  11,673,683
                                                                  
                                                                  
                                                                  
                                                                  6,827,200
                                                                  
                                                                  
                                                                  
                                                                  3,565,332Share-based compensation - Note
      19
                                                                  
                                                                  
                                                                  1,171,935
                                                                  
                                                                  
                                                                  
                                                                  706,295
                                                                  
                                                                  
                                                                  
                                                                  -Research and development
      expenses
                                                                  
                                                                  
                                                                  3,026,895
                                                                  
                                                                  
                                                                  
                                                                  1,647,888
                                                                  
                                                                  
                                                                  
                                                                  1,135,997Selling
expenses
                                                                  
                                                                  
                                                                  7,767,770
                                                                  
                                                                  
                                                                  
                                                                  4,093,413
                                                                  
                                                                  
                                                                  
                                                                  3,290,689Unusual charge - make good
      provision
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  18,265,50023,640,283
                                                                  
                                                                  
                                                                  
                                                                  13,274,796
                                                                  
                                                                  
                                                                  
                                                                  26,257,518Income/(loss)
      from operations
                                                                  
                                                                  
                                                                  27,724,052
                                                                  
                                                                  
                                                                  
                                                                  23,164,613
                                                                  
                                                                  
                                                                  
                                                                  (633,740
                                                                  )Other income - Note
      4
                                                                  
                                                                  
                                                                  1,177,215
                                                                  
                                                                  
                                                                  
                                                                  1,359,883
                                                                  
                                                                  
                                                                  
                                                                  287,322Government grants - Note
      3
                                                                  
                                                                  
                                                                  2,754,978
                                                                  
                                                                  
                                                                  
                                                                  192,882
                                                                  
                                                                  
                                                                  
                                                                  1,496,547Net finance costs - Note
      5
                                                                  
                                                                  
                                                                  (4,577,660
                                                                  )
                                                                  
                                                                  
                                                                  (2,246,099
                                                                  )
                                                                  
                                                                  
                                                                  (2,409,021
                                                                  )Equity in net income of
      non-consolidatedaffiliates - Note
      3
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1,072,788
                                                                  
                                                                  
                                                                  
                                                                  34,147Income/(loss)
      before income taxes andnoncontrolling
      interests
                                                                  
                                                                  
                                                                  27,078,585
                                                                  
                                                                  
                                                                  
                                                                  23,544,067
                                                                  
                                                                  
                                                                  
                                                                  (1,224,745
                                                                  )Income
      taxes - Note 6
                                                                  
                                                                  
                                                                  (3,223,881
                                                                  )
                                                                  
                                                                  
                                                                  (2,174,948
                                                                  )
                                                                  
                                                                  
                                                                  (1,389,008
                                                                  )Net
      income/(loss) before noncontrolling interests
                                                                  
                                                                  
                                                                  23,854,704
                                                                  
                                                                  
                                                                  
                                                                  21,369,119
                                                                  
                                                                  
                                                                  
                                                                  (2,613,753
                                                                  )Net
      income attributable to noncontrollingInterests
      - Note 7
                                                                  
                                                                  
                                                                  (996,114
                                                                  )
                                                                  
                                                                  
                                                                  (2,460,352
                                                                  )
                                                                  
                                                                  
                                                                  (1,136,694
                                                                  )Net
      income/(loss) attributable to Wonder AutoTechnology,
      Inc. common stockholders
                                                                  
                                                                  $
                                                                  22,858,590
                                                                  
                                                                  
                                                                  $
                                                                  18,908,767
                                                                  
                                                                  
                                                                  $
                                                                  (3,750,447
                                                                  )Net
      income/(loss) before noncontrolling interests
                                                                  
                                                                  
                                                                  23,854,704
                                                                  
                                                                  
                                                                  
                                                                  21,369,119
                                                                  
                                                                  
                                                                  
                                                                  (2,613,753
                                                                  )Other
      comprehensive incomeForeign
      currency translation adjustments
                                                                  
                                                                  
                                                                  149,199
                                                                  
                                                                  
                                                                  
                                                                  4,613,096
                                                                  
                                                                  
                                                                  
                                                                  3,132,459Comprehensive
      income
                                                                  
                                                                  
                                                                  24,003,903
                                                                  
                                                                  
                                                                  
                                                                  25,982,215
                                                                  
                                                                  
                                                                  
                                                                  518,706Comprehensive
      income attributable tononcontrolling
      interests
                                                                  
                                                                  
                                                                  (996,881
                                                                  )
                                                                  
                                                                  
                                                                  (3,071,210
                                                                  )
                                                                  
                                                                  
                                                                  (1,299,259
                                                                  )Comprehensive
      income/(loss) attributable toWonder
      Auto Technology, Inc. commonStockholders
                                                                  
                                                                  $
                                                                  23,007,022
                                                                  
                                                                  
                                                                  $
                                                                  22,911,005
                                                                  
                                                                  
                                                                  $
                                                                  (780,553
                                                                  )Earnings/(loss)
      per share attributable toWonder
      Auto Technology, Inc. commonstockholders:
      basic
                                                                  
                                                                  $
                                                                  0.82
                                                                  
                                                                  
                                                                  $
                                                                  0.70
                                                                  
                                                                  
                                                                  $
                                                                  (0.16
                                                                  )Diluted
                                                                  
                                                                  $
                                                                  0.82
                                                                  
                                                                  
                                                                  
                                                                  N/A
                                                                  
                                                                  
                                                                  
                                                                  N/AWeighted
      average number of sharesoutstanding:
      basic
                                                                  
                                                                  
                                                                  27,829,583
                                                                  
                                                                  
                                                                  
                                                                  26,959,994
                                                                  
                                                                  
                                                                  
                                                                  24,140,816Diluted
                                                                  
                                                                  
                                                                  27,843,009
                                                                  
                                                                  
                                                                  
                                                                  N/A
                                                                  
                                                                  
                                                                  
                                                                  N/A
  See the
accompanying notes to consolidated financial statements
  F-2
  Wonder
Auto Technology, Inc.
 Consolidated
Balance Sheets
 (Stated
in US Dollars)
 
 As
      of December 31,2009
                      
                      
                      2008ASSETSCurrent assetsCash and cash
      equivalents
                      
                      $
                      82,414,287
                      
                      
                      $
                      8,159,156Restricted cash - Note
      9
                      
                      
                      15,753,748
                      
                      
                      
                      24,181,645Trade receivables, net - Note
      10
                      
                      
                      49,522,583
                      
                      
                      
                      46,571,619Bills
receivable
                      
                      
                      21,965,065
                      
                      
                      
                      8,388,926Other receivables, prepayments
      and deposits - Note 11
                      
                      
                      14,826,460
                      
                      
                      
                      16,408,304Inventories - Note
      12
                      
                      
                      51,119,562
                      
                      
                      
                      44,016,192Amount due from Hony Capital -
      Note 11(c)
                      
                      
                      -
                      
                      
                      
                      7,637,216Income tax
      recoverable
                      
                      
                      -
                      
                      
                      
                      289,000Deferred taxes - Note
      6
                      
                      
                      1,186,410
                      
                      
                      
                      1,075,766Total current
      assets
                      
                      
                      236,788,115
                      
                      
                      
                      156,727,824Intangible assets - Note
      13
                      
                      
                      32,907,720
                      
                      
                      
                      22,062,560Property, plant and equipment,
      net - Note 14
                      
                      
                      73,770,329
                      
                      
                      
                      69,131,579Land use rights - Note
      15
                      
                      
                      10,618,853
                      
                      
                      
                      10,391,527Deposit for acquisition of
      property, plant andequipment
                      
                      
                      7,435,563
                      
                      
                      
                      3,845,774Deferred taxes - Note
      6
                      
                      
                      731,575
                      
                      
                      
                      870,500TOTAL
      ASSETS
                      
                      $
                      362,252,155
                      
                      
                      $
                      263,029,764
 
 See the
accompanying notes to consolidated financial statements
  F-3
  Wonder
Auto Technology, Inc.
 Consolidated
Balance Sheets (Cont’d)
 (Stated
in US Dollars)
 
 As
      of December 31,2009
                                          
                                          
                                          2008LIABILITIES
      AND EQUITYLIABILITIESCurrent
    liabilitiesTrade payables - Note
      9
                                          
                                          $
                                          34,126,534
                                          
                                          
                                          $
                                          21,616,932Bills payable - Note
      9
                                          
                                          
                                          29,388,653
                                          
                                          
                                          
                                          31,247,100Other payables and accrued
      expenses - Note 16
                                          
                                          
                                          14,886,909
                                          
                                          
                                          
                                          20,465,014Provision for warranty - Notes
      3 and 17
                                          
                                          
                                          2,272,322
                                          
                                          
                                          
                                          2,377,620Income tax
    payable
                                          
                                          
                                          892,340
                                          
                                          
                                          
                                          -Payable to Hony Capital - Note
      16(f)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          10,187,216Secured borrowings - Note
      18
                                          
                                          
                                          57,082,779
                                          
                                          
                                          
                                          44,055,803Early retirement benefits cost
      - Note 3
                                          
                                          
                                          353,584
                                          
                                          
                                          
                                          419,301Total current
      liabilities
                                          
                                          
                                          139,003,121
                                          
                                          
                                          
                                          130,368,986Secured borrowings – Note
      18
                                          
                                          
                                          20,908,721
                                          
                                          
                                          
                                          16,054,478Deferred revenue - government
      grants - Note 3
                                          
                                          
                                          3,315,762
                                          
                                          
                                          
                                          2,806,777Early retirement benefits cost
      - Note 3
                                          
                                          
                                          550,397
                                          
                                          
                                          
                                          798,115TOTAL
      LIABILITIES
                                          
                                          
                                          163,778,001
                                          
                                          
                                          
                                          150,028,356COMMITMENTS AND CONTINGENCIES- Note 20STOCKHOLDERS’
      EQUITYPreferred stock: par value
      $0.0001 per share;authorized 10,000,000 shares in
      2009 and2008; none issued and
      outstanding
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Common stock: par value $0.0001
      per shareAuthorized 90,000,000 shares in
      2009 and2008;
      issued and outstanding 33,859,994 in 2009and
      26,959,994 shares in 2008 - Note 21
                                          
                                          
                                          3,386
                                          
                                          
                                          
                                          2,696Additional paid-in
      capital
                                          
                                          
                                          137,542,702
                                          
                                          
                                          
                                          71,349,599Statutory and other reserves -
      Note 22
                                          
                                          
                                          10,186,701
                                          
                                          
                                          
                                          7,628,541Accumulated other comprehensive
      income
                                          
                                          
                                          9,647,051
                                          
                                          
                                          
                                          8,424,270Retained
    earnings
                                          
                                          
                                          35,270,596
                                          
                                          
                                          
                                          14,654,587TOTAL
      WONDER AUTO TECHNOLOGY, INC.STOCKHOLDERS’
      EQUITY
                                          
                                          
                                          192,650,436
                                          
                                          
                                          
                                          102,059,693NONCONTROLLING
      INTERESTS
                                          
                                          
                                          5,823,718
                                          
                                          
                                          
                                          10,941,715TOTAL
      EQUITY
                                          
                                          
                                          198,474,154
                                          
                                          
                                          
                                          113,001,408TOTAL
      LIABILITIES AND EQUITY
                                          
                                          $
                                          362,252,155
                                          
                                          
                                          $
                                          263,029,764
 
 See the
accompanying notes to consolidated financial statements
  F-4
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows
 (Stated
in US Dollars)
 Year ended December 31,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007Cash
      flows from operating activitiesNet income/(loss) before
      noncontrolling interests
                                              
                                              $
                                              23,854,704
                                              
                                              
                                              $
                                              21,369,119
                                              
                                              
                                              $
                                              (2,613,753
                                              )Adjustments to reconcile net
      income/(loss) to netcash provided by operating
      activities:Depreciation
                                              
                                              
                                              5,858,870
                                              
                                              
                                              
                                              3,734,534
                                              
                                              
                                              
                                              2,014,045Amortization
      of intangible assets and landuse
      right
                                              
                                              
                                              687,148
                                              
                                              
                                              
                                              169,641
                                              
                                              
                                              
                                              90,712Deferred
      taxes
                                              
                                              
                                              26,640
                                              
                                              
                                              
                                              (112,140
                                              )
                                              
                                              
                                              (263,993
                                              )Loss/(gain)
      on disposal of property,plant
      and equipment
                                              
                                              
                                              299,018
                                              
                                              
                                              
                                              (129,374
                                              )
                                              
                                              
                                              20,255Gain
      on disposal of Man Do AutoTechnology
      Co., Ltd.
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (500
                                              )Loss
      on disposal of non-consolidatedAffiliate
                                              
                                              
                                              -
                                              
                                              
                                              
                                              122,788
                                              
                                              
                                              
                                              -Provision
      for doubtful debts
                                              
                                              
                                              180,718
                                              
                                              
                                              
                                              8,577
                                              
                                              
                                              
                                              2,159Provision
      of obsolete inventories
                                              
                                              
                                              1,018,826
                                              
                                              
                                              
                                              46,917
                                              
                                              
                                              
                                              39,115Exchange
      loss/(gain) on translation ofmonetary
      assets and liabilities
                                              
                                              
                                              195,307
                                              
                                              
                                              
                                              (1,242,479
                                              )
                                              
                                              
                                              532,738Equity
      in net income of non-consolidatedAffiliate
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,072,788
                                              )
                                              
                                              
                                              (34,147
                                              )Share-based
      compensation - Note 19
                                              
                                              
                                              1,171,935
                                              
                                              
                                              
                                              706,295
                                              
                                              
                                              
                                              -Deferred
      revenue amortized
                                              
                                              
                                              (260,372
                                              )
                                              
                                              
                                              (59,848
                                              )
                                              
                                              
                                              -Unusual
      charge - make good provision
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              18,265,500Changes in operating assets and
      liabilities:Trade
    receivables
                                              
                                              
                                              (2,959,820
                                              )
                                              
                                              
                                              2,993,828
                                              
                                              
                                              
                                              (10,651,989
                                              )Bills
    receivable
                                              
                                              
                                              (13,570,634
                                              )
                                              
                                              
                                              6,251,024
                                              
                                              
                                              
                                              (6,504,351
                                              )Other receivables, prepayments
      and deposits
                                              
                                              
                                              4,380,259
                                              
                                              
                                              
                                              (3,948,637
                                              )
                                              
                                              
                                              2,902Inventories
                                              
                                              
                                              (7,043,479
                                              )
                                              
                                              
                                              (14,773,890
                                              )
                                              
                                              
                                              2,265,298Trade payables
                                              
                                              
                                              12,040,815
                                              
                                              
                                              
                                              (53,217
                                              )
                                              
                                              
                                              2,554,508Bills payable
                                              
                                              
                                              (1,846,976
                                              )
                                              
                                              
                                              (956,502
                                              )
                                              
                                              
                                              5,110,761Amount due from a related
      company
                                              
                                              
                                              -
                                              
                                              
                                              
                                              78,516
                                              
                                              
                                              
                                              -Other payables and accrued
      expenses
                                              
                                              
                                              (6,608,069
                                              )
                                              
                                              
                                              (2,644,372
                                              )
                                              
                                              
                                              1,099,131Provision for
      warranty
                                              
                                              
                                              (105,569
                                              )
                                              
                                              
                                              262,316
                                              
                                              
                                              
                                              6,124Income tax
    payable
                                              
                                              
                                              1,151,157
                                              
                                              
                                              
                                              (1,526,913
                                              )
                                              
                                              
                                              235,971Early retirement benefits
      cost
                                              
                                              
                                              (313,139
                                              )
                                              
                                              
                                              (117,834
                                              )
                                              
                                              
                                              -Net
      cash flows provided by operating activities
                                              
                                              $
                                              18,157,339
                                              
                                              
                                              $
                                              9,105,561
                                              
                                              
                                              $
                                              12,170,486
 
 See the
accompanying notes to consolidated financial statements
  F-5
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows (Cont’d)
 (Stated
in US Dollars)
 Year ended December 31,2009
                              
                              
                              2008
                              
                              
                              2007Cash
      flows from investing activitiesPayments to acquire intangible
      assets
                              
                              $
                              (155,622
                              )
                              
                              $
                              (1,472,868
                              )
                              
                              $
                              (1,982
                              )Payments to acquire land use
      right
                              
                              
                              -
                              
                              
                              
                              (1,856,268
                              )
                              
                              
                              -Payments to acquire and for
      deposit foracquisition of property, plant
      and equipment
                              
                              
                              (12,959,259
                              )
                              
                              
                              (17,308,878
                              )
                              
                              
                              (8,023,761
                              )Proceeds from sales of
      property, plant andEquipment
                              
                              
                              30,592
                              
                              
                              
                              242,044
                              
                              
                              
                              25,803Proceeds from sales of Money
      Victory Limited
                              
                              
                              5,950,000
                              
                              
                              
                              -
                              
                              
                              
                              -Advanced to
    Winning
                              
                              
                              (8,013,693
                              )
                              
                              
                              -
                              
                              
                              
                              -Net cash paid to acquire
      Jinzhou Wanyou
                              
                              
                              (1,705,437
                              )
                              
                              
                              (293,400
                              )
                              
                              
                              (14,146,485
                              )Net cash paid to acquire Friend
      Birch - Note 2(b)
                              
                              
                              (11,728,042
                              )
                              
                              
                              -
                              
                              
                              
                              -Net cash paid to acquire
      Jinzhou Dongwoo
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (2,420,000
                              )Cash inflow from disposal of
      Man Do
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              500Net cash paid to acquire
      Jinzhou Hanhua
                              
                              
                              -
                              
                              
                              
                              (4,040,472
                              )
                              
                              
                              -Net cash paid to acquire
      Jinzhou Karham
                              
                              
                              -
                              
                              
                              
                              (703,712
                              )
                              
                              
                              -Net cash paid to acquire Money
      Victory
                              
                              
                              -
                              
                              
                              
                              (5,000,000
                              )
                              
                              
                              -Net cash paid to acquire Fuxin
      Huirui
                              
                              
                              -
                              
                              
                              
                              (140,990
                              )
                              
                              
                              -Net cash paid to acquire
      Yearcity
                              
                              
                              (9,936,057
                              )
                              
                              
                              (6,691,434
                              )
                              
                              
                              -Net
      cash flows used in investing activities
                              
                              
                              (38,517,518
                              )
                              
                              
                              (37,265,978
                              )
                              
                              
                              (24,565,925
                              )Cash
      flows from financing activitiesGovernment grants received in
      respect of property,plant and
    equipment
                              
                              
                              769,006
                              
                              
                              
                              -
                              
                              
                              
                              -Decrease/(Increase) in
      restricted cash
                              
                              
                              8,418,349
                              
                              
                              
                              2,293,532
                              
                              
                              
                              (3,736,383
                              )Dividend paid to
      Winning
                              
                              
                              -
                              
                              
                              
                              (644,030
                              )
                              
                              
                              (343,934
                              )Dividend paid to noncontrolling
      interests
                              
                              
                              (1,320,385
                              )
                              
                              
                              (1,653,271
                              )
                              
                              
                              (743,240
                              )Proceeds from secured
      borrowings
                              
                              
                              79,457,451
                              
                              
                              
                              18,426,341
                              
                              
                              
                              29,486,379Repayment of secured
      borrowings
                              
                              
                              (61,781,846
                              )
                              
                              
                              (9,196,570
                              )
                              
                              
                              (18,161,716
                              )Net proceeds from issue of
      shares
                              
                              
                              68,994,141
                              
                              
                              
                              -
                              
                              
                              
                              22,730,461Net
      cash flows provided by financing activities
                              
                              
                              94,536,716
                              
                              
                              
                              9,226,002
                              
                              
                              
                              29,231,567Effect
      of foreign currency translation on cashand cash
      equivalents
                              
                              
                              78,594
                              
                              
                              
                              990,578
                              
                              
                              
                              1,063,166Net
      increase/(decrease) in cash and cashEquivalents
                              
                              
                              74,255,131
                              
                              
                              
                              (17,943,837
                              )
                              
                              
                              17,899,294Cash
      and cash equivalents - beginning of year
                              
                              
                              8,159,156
                              
                              
                              
                              26,102,993
                              
                              
                              
                              8,203,699Cash
      and cash equivalents - end of year
                              
                              $
                              82,414,287
                              
                              
                              $
                              8,159,156
                              
                              
                              $
                              26,102,993
 
 See the
accompanying notes to consolidated financial statements
  F-6
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows (Cont’d)
 (Stated
in US Dollars)
  Year
      ended December 31,2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2007Supplemental
      disclosures for cash flowinformation:Cash paid for:Interest
                                                    
                                                    $
                                                    4,418,494
                                                    
                                                    
                                                    $
                                                    2,849,664
                                                    
                                                    
                                                    $
                                                    1,445,534Income
      taxes
                                                    
                                                    $
                                                    2,023,001
                                                    
                                                    
                                                    $
                                                    2,464,548
                                                    
                                                    
                                                    $
                                                    1,316,837Cash
      investing activities:Acquisitions (Note
      2)Fair value of assets
      acquired
                                                    
                                                    $
                                                    9,823,946
                                                    
                                                    
                                                    $
                                                    101,208,984
                                                    
                                                    
                                                    $
                                                    3,149,361Fair value of liabilities
      assumed
                                                    
                                                    $
                                                    3,107,514
                                                    
                                                    
                                                    $
                                                    86,049,295
                                                    
                                                    
                                                    $
                                                    309,044Non-cash
      investing and financing activities:Settlement
      of amount due to Hony Capital II,L.P.
      (“Hony Capital”) by offsetting with amountdue
      from Hony Capital
                                                    
                                                    $
                                                    7,626,804
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
  See the
accompanying notes to consolidated financial statements
  F-7
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Equity
 (Stated
in US Dollars)
 
 Wonder
      Auto Technology, Inc. stockholdersAccumulated
                                                
                                                
                                                RetainedAdditional
                                                
                                                
                                                Statutory
                                                
                                                
                                                other
                                                
                                                
                                                earnings/Common
      stock
                                                
                                                
                                                paid-in
                                                
                                                
                                                and
      other
                                                
                                                
                                                comprehensive
                                                
                                                
                                                (accumulated
                                                
                                                
                                                NoncontrollingNo.
      of shares
                                                
                                                
                                                Amount
                                                
                                                
                                                capital
                                                
                                                
                                                reserves
                                                
                                                
                                                income
                                                
                                                
                                                deficit)
                                                
                                                
                                                interests
                                                
                                                
                                                TotalBalance,
      January 1, 2007
                                                
                                                
                                                23,959,994
                                                
                                                
                                                $
                                                2,396
                                                
                                                
                                                $
                                                29,647,643
                                                
                                                
                                                $
                                                3,148,265
                                                
                                                
                                                $
                                                1,452,138
                                                
                                                
                                                $
                                                3,976,543
                                                
                                                
                                                $
                                                2,579,572
                                                
                                                
                                                $
                                                40,806,557Share
      issued for proceeds of $25.95 million
                                                
                                                
                                                3,000,000
                                                
                                                
                                                
                                                300
                                                
                                                
                                                
                                                25,949,700
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                25,950,000Cost
      of raising capital
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (3,219,539
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (3,219,539
                                                )Unusual
      charge - make good provision
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                18,265,500
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                18,265,500Net
      income
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (3,750,447
                                                )
                                                
                                                
                                                1,136,694
                                                
                                                
                                                
                                                (2,613,753
                                                )Dividend
      paid to noncontrolling interests
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (664,148
                                                )
                                                
                                                
                                                (664,148
                                                )Foreign
      currency translation adjustments
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,969,894
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                162,565
                                                
                                                
                                                
                                                3,132,459Appropriation
      to reserves
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,709,395
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,709,395
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Balance,
      December 31, 2007
                                                
                                                
                                                26,959,994
                                                
                                                
                                                
                                                2,696
                                                
                                                
                                                
                                                70,643,304
                                                
                                                
                                                
                                                4,857,660
                                                
                                                
                                                
                                                4,422,032
                                                
                                                
                                                
                                                (1,483,299
                                                )
                                                
                                                
                                                3,214,683
                                                
                                                
                                                
                                                81,657,076Noncontrolling
      interests arising fromAcquisition
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                6,274,626
                                                
                                                
                                                
                                                6,274,626Net
      income
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                18,908,767
                                                
                                                
                                                
                                                2,460,352
                                                
                                                
                                                
                                                21,369,119Dividend
      paid to noncontrolling interests
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,618,804
                                                )
                                                
                                                
                                                (1,618,804
                                                )Foreign
      currency translation adjustments
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,002,238
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                610,858
                                                
                                                
                                                
                                                4,613,096Appropriation
      to reserves
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,770,881
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (2,770,881
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Share-based
      compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                706,295
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                706,295Balance,
      December 31, 2008
                                                
                                                
                                                26,959,994
                                                
                                                
                                                
                                                2,696
                                                
                                                
                                                
                                                71,349,599
                                                
                                                
                                                
                                                7,628,541
                                                
                                                
                                                
                                                8,424,270
                                                
                                                
                                                
                                                14,654,587
                                                
                                                
                                                
                                                10,941,715
                                                
                                                
                                                
                                                113,001,408Share
      issued for proceeds of $74.18 million
                                                
                                                
                                                6,900,000
                                                
                                                
                                                
                                                690
                                                
                                                
                                                
                                                74,174,310
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                74,175,000Cost
      of raising capital
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (5,515,542
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (5,515,542
                                                )Net
      income
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                22,858,590
                                                
                                                
                                                
                                                996,114
                                                
                                                
                                                
                                                23,854,704Dividend
      paid to noncontrolling interests
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,320,385
                                                )
                                                
                                                
                                                (1,320,385
                                                )Foreign
      currency translation adjustments
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                148,432
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                767
                                                
                                                
                                                
                                                149,199Appropriation
      to reserves
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,242,581
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (2,242,581
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Acquisition
      of subsidiary fromnoncontrolling
      interests Note 2(a)
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (3,637,600
                                                )
                                                
                                                
                                                315,579
                                                
                                                
                                                
                                                1,074,349
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (4,794,493
                                                )
                                                
                                                
                                                (7,042,165
                                                )Share-based
      compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,171,935
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,171,935Balance,
      December 31, 2009
                                                
                                                
                                                33,859,994
                                                
                                                
                                                $
                                                3,386
                                                
                                                
                                                $
                                                137,542,702
                                                
                                                
                                                $
                                                10,186,701
                                                
                                                
                                                $
                                                9,647,051
                                                
                                                
                                                $
                                                35,270,596
                                                
                                                
                                                $
                                                5,823,718
                                                
                                                
                                                $
                                                198,474,154
  See the
accompanying notes to consolidated financial statements
  F-8
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 1.
              Corporate
      information and description of
business
 
 Wonder
Auto Technology, Inc. (the “Company”) was incorporated in the State of Nevada on
June 8, 2000.  The Company’s shares are quoted for trading on the
Nasdaq Global Market in the United States.
 
 The
Company is principally engaged in the design, development, manufacture and
marketing of automotive electrical parts, specifically starters and alternators
and manufacturing of engine valves and tappets for motor vehicles mainly in the
People’s Republic of China (the “PRC”). The major target markets of the
Company’s products are the PRC, South Korea and Brazil.
 
 The
products of the Company are suitable for use in a variety of
automobiles.  However, most of the Company’s products are used in
passenger cars with smaller engines having displacement below 1.6
liters.  The Company has also begun to manufacture and sell rectifier
and regulator products for use in alternators as well as various rods and shafts
for use in shock absorbers, alternators and starters.
 
 The
Company’s customers include automakers, engine manufacturers and, increasingly,
auto parts suppliers.
 
 The raw
materials used in the Company’s production are mainly divided into four
categories, metal parts, semiconductors, chemicals and packaging
materials.
 
 Currently
the Company has fourteen subsidiaries:
 Company name
                      
                      Place/date of
                        incorporation or
                        establishment
                      
                      The
                        Company's
                        effective
                        ownership
                        interest
                      
                      Common stock/
                        registered capital
                      
                      Principal activitiesWonder
      Auto Limited (“Wonder”)
                      
                      British
      Virgin Islands (“BVI”) / April 16, 2004
                      
                      100%
                      
                      Ordinary
      shares: Authorized: 50,000 shares of $1 each, Paid up: 245 shares of $1
      each
                      
                      Investment
      holdingJinzhou
      Halla Electrical Equipment Co., Ltd. (“Jinzhou Halla”)
                      
                      The
      PRC /  March 21, 1996
                      
                      100%
                      
                      Registered
      capital of $31,900,000 and fully paid up
                      
                      Manufacturing
      and selling of starters and alternatorsJinzhou
      Dongwoo Precision Co., Ltd. (“Jinzhou Dongwoo”)
                      
                      The
      PRC /  April 23, 2003
                      
                      50% *
                      
                      Registered
      capital of $2,800,000 and fully paid up
                      
                      Manufacturing
      and selling of accessories of alternatorsJinzhou
      Wanyou Mechanical Parts Co., Ltd. (“Jinzhou Wanyou”)
                      
                      The
      PRC / September 21, 2006
                      
                      100%
                      
                      Registered
      capital $54,950,000 and fully paid up
                      
                      Manufacturing
      and selling of rods and
shafts
  F-9
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 1.
              Corporate
      information and description of business
(Cont’d)
 
 Company name
                        
                        Place/date of
                          incorporation or
                          establishment
                        
                        The
                          Company's
                          effective
                          ownership
                          interest
                        
                        Common stock/
                          registered capital
                        
                        Principal activitiesJinzhou
      Wonder Motor Co., Ltd. (“Wonder Motor”)
                        
                        The
      PRC / September 24, 2007
                        
                        100%
                        
                        Registered
      capital of $3,500,000 and fully paid up
                        
                        Development
      stage companyJinzhou
      Wonder Auto Electrical Equipment Co., Ltd. (“Jinzhou
    Wonder”)
                        
                        The
      PRC / September 24, 2007
                        
                        100%
                        
                        Registered
      capital of $5,500,000 and fully paid up
                        
                        Manufacturing
      and selling of accessories of starters and alternatorsJinzhou
      Hanhua Electrical System Co., Ltd. (“Jinzhou Hanhua”)
                        
                        The
      PRC /  April 23, 2003
                        
                        50%
      *
                        
                        Registered
      capital of $2,369,000 and fully paid up
                        
                        Manufacturing
      and selling of accessories of startersJinzhou
      Karham Electrical Equipment Co., Ltd. (Jinzhou Karham”)
                        
                        The
      PRC /  May 20, 2006
                        
                        65%
                        
                        Registered
      capital of $950,000 and fully paid up
                        
                        Manufacturing
      and selling of accessories of startersFuxin
      Huirui Mechanical Co., Ltd. (“Fuxin Huirui”)
                        
                        The
      PRC / September 24, 2007
                        
                        100%
                        
                        Registered
      capital of $3,000,000 and paid up capital of $740,990
                        
                        Manufacturing
      and selling of accessories of alternatorsYearcity
      Limited (“Yearcity”)
                        
                        BVI
      /  March 10, 2005
                        
                        100%
                        
                        Authorized:
      50,000 shares of $1 each, Paid up: 100 share of $1 each
                        
                        Investment
      holdingJianan
      Worldwide Auto Accessories Co., Ltd. (“Jianan Worldwide”)
                        
                        The
      PRC / February 1956
                        
                        100%
                        
                        Registered
      capital of $20,700,000 and fully paid up
                        
                        Manufacturing
      and selling of valves and tappetsFriend
      Birch Limited (“Friend Birch”)
                        
                        Hong
      Kong / November 9, 2005
                        
                        100%
                        
                        Ordinary
      shares: Authorized and fully paid up: 10,000 shares of HK$1
      each
                        
                        Investment
      holdingJinzhou
      Jiade Machinery Co., Ltd. (“Jinzhou Jiade”)
                        
                        The
      PRC /  June 21, 2007
                        
                        100%
                        
                        Registered
      capital of RMB 12,000,000 and fully paid up
                        
                        Manufacturing
      and selling of accessories of rods and shaftsJinzhou
      Lida Auto Parts Co., Ltd. (“Jinzhou Lida”)
                        
                        The
      PRC /  October 23, 2008
                        
                        100%
                        
                        Registered
      capital of $1,000,000 and fully paid up
                        
                        Manufacturing
      and selling of accessories of rods and
shafts
 
 *
              The
      Company obtained the control over those subsidiaries by appointing more
      than half of members in the board of directors in accordance with those
      subsidiaries’ Memorandum and Articles of Association of which a valid
      board action only requires the approval of more than half of board
      members.
  F-10
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      and dispositions
 
 (a)
                On
      January 4, 2009, Jinzhou Halla entered into an equity transfer agreement
      (the “Equity Transfer Agreement”) with Magic Era Group Limited (“Magic
      Era”), a British Virgin Islands corporation, pursuant to which Jinzhou
      Halla agreed to acquire the 35% remaining equity interest in Yearcity at a
      consideration RMB48 million (equivalent to $7.04 million) (“Yearcity
      Consideration”), which was settled on July 3, 2009. Yearcity does not have
      any assets except its 100% equity ownership of Jinan Worldwide. Upon the
      completion of acquisition, Yearcity became the wholly owned subsidiary of
      the Company. Jinan Worldwide is a company established in PRC and engaged
      in the manufacturing of engine valves and tappets. The Company is the
      second largest market manufacturer of alternators and starters with its
      customers mainly engaged in gasoline engine and vehicle market in the PRC.
      Jinan Worldwide is the largest market manufacturer of engine valves and
      tappets in PRC with its customers mainly diesel engine and vehicle
      business. The acquisition can provide the Company an opportunity to expand
      its market from gasoline engine parts market to diesel engine parts market
      in the PRC.
 
 During
2008, the Company disposed of an unconsolidated affiliate, Money Victory Limited
(“Money Victory”), to Golden Stone Capital Limited (“Golden Stone”) at a cash
consideration of $5.95 million (“Money Victory Consideration”) which was still
outstanding and included in other receivables as of December 31,
2008.  On January 4, 2009, Wonder Auto Limited, Jinzhou Hall, Magic
Era and Golden Stone entered into a debt transfer agreement that a partial of
Yearcity Consideration amounting to $5.95 million was settled by offsetting with
Money Victory Consideration. During the third quarter of 2009, the Company was
notified by the PRC authority that this offsetting arrangement was not approved,
and paid cash to settle the $5.95 million to Magic Era on July 10, 2009 and
received the same amount from Golden Stone on July 13, 2009.
 
 In
accordance with Accounting Standards Codification 810“Consolidation” (previously SFAS
No. 160 “Noncontrolling Interests in Consolidated Financial Statements”, an
amendment of ARB No. 51), the acquisition of noncontrolling interest in
Yearcity was accounted for as a equity transaction. The carrying amount of the
noncontrolling interest in Yearcity was adjusted to reflect the change in the
Company’s equity interest in Yearcity. The difference between the fair value of
the consideration paid or payable and the amount by which the noncontrolling
interest of Yearcity adjusted was recognized in equity attributable to the
Company.
  F-11
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      and dispositions (Cont’d)
 
 The
schedule below illustrates the effects of changes in the Company’s equity
interest in Yearcity on the Company’s equity:
 Year
      ended December 31,2009
                                  
                                  
                                  2008Net
      income attributable to Wonder AutoTechnology,
      Inc. common stockholders
                                  
                                  $
                                  22,858,590
                                  
                                  
                                  $
                                  18,908,767Transfers
      to noncontrolling interestDecrease
      in the Company’s additional paid-incapital
      for purchase of 35% equity interestof
      Yearcity (Note a)
                                  
                                  
                                  (3,637,600
                                  )
                                  
                                  
                                  -Change
      from net income attributable to Wonder
                                    Auto
      Technology, Inc. common stockholders
                                    and
      transfers to noncontrolling interest
                                  
                                  $
                                  19,220,990
                                  
                                  
                                  $
                                  18,908,767
 
 Note:-
 
 a)
                                                  Total
      cash consideration paid for the acquisition of 35% equityinterest
      in Yearcity
                                                  
                                                  $
                                                  7,042,16535%
      noncontrolling interest in Yearcity
                                                  
                                                  
                                                  (4,794,493
                                                  )35%
      noncontrolling interest in accumulated other comprehensiveIncome
                                                  
                                                  
                                                  1,074,34935%
      noncontrolling interest in statutory and other reserves
                                                  
                                                  
                                                  315,579$
                                                  3,637,600
 
 (b)
                On
      September 22, 2009, Jinzhou Wanyou entered a Share Purchase Agreement
      (“Purchase Agreement”) with Winning International Development Limited
      (“Winning”), a British Virgin Islands corporation, pursuant to which
      Jinzhou Wanyou agreed to purchase Winning’s 100% equity interest in Friend
      Birch, a Hong Kong corporation, at a cash consideration of $12 million
      which was fully settled by the end of 2009. Upon the completion of the
      transaction on October 1, 2009, Friend Birch became a subsidiary of the
      Company and thereby indirectly acquiring Friend Birch’s wholly owned PRC
      subsidiaries, Jinzhou Jiade and Jinzhou Lida.  Jinzhou Jiade and
      Jinzhou Lida are companies engaged in designing, manufacturing and selling
      gas spring shafts and other thin mechanical shafts products, automotive
      springs and gas springs.  Pursuant to the Purchase Agreement,
      Winning was entitled to the cash dividend amounting to $1.58 million in
      respect of the retained profits on or before June 30,
  2009.
  F-12
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      and dispositions (Cont’d)
 
 The
following table summarizes the allocation of the purchase price reflecting the
amounts assigned to Friend Birch’s each major class of assets acquired and
liabilities assumed at the date of acquisition :
 
 October 1,2009Current
      assets
                                
                                $
                                1,904,178Property,
      plant and equipment, net
                                
                                
                                1,982,294Land
      use right
                                
                                
                                477,300Intangible
      assets - unpatented technical know-how
                                
                                
                                5,460,174Goodwill
                                
                                
                                5,283,568Current
      liabilities (Including dividend payable to Winningof
      $1.58 million pursuant to the Purchase Agreement)
                                
                                
                                (3,107,514
                                )Net
      assets acquired
                                
                                $
                                12,000,000
 
 Satisfied
by:-
 
 Cash
      payment
                          
                          $
                          12,000,000Net
      cash paid to acquire Friend Birch
                          
                          $
                          11,728,042
 
 As of
December 31, 2009, the consolidated balance sheet includes a goodwill identified
upon the acquisition of 100% equity interest in Friend Birch amounting to $5.3
million which represents the excess of the initial purchase price of $12 million
over the attributable share of fair value of acquired identifiable net assets of
Friend Birch of $6.7 million at the time of acquisition on October 1, 2009. None
of the goodwill recognized is expected to be deductible for income tax purposes.
The Company acquired Friend Birch to secure supply of raw materials and
components for its rods and shafts products.
  Based on
an independent third-party appraisal, there were no other significant
identifiable intangible assets (such as trademark, patents and favorable or
unfavorable lease arrangements) noted.  The excess of purchase price
over the fair value of net tangible and intangible assets acquired, representing
consideration paid for intangible assets which do not meet either the
separability criterion or the contractual-legal criterion in accordance with ASC
805, was recorded as goodwill.
  F-13
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      and dispositions (Cont’d)
 
 The
following unaudited pro forma financial information presents the combined
results of operations of the Company with the operations of Friend Birch for
year ended December 31, 2009, as if the acquisition had occurred as of the
beginning of fiscal year 2008:
 
 (Pro
      Forma)Year ended December 31,2009
                            
                            
                            2008Revenue
                            
                            $
                            211,701,001
                            
                            
                            $
                            141,296,400Net
      income attributable to Wonder Auto Technology,Inc. common
      stockholders
                            
                            $
                            23,327,878
                            
                            
                            $
                            19,015,608Earnings
      per share:  basic
                            
                            $
                            0.84
                            
                            
                            $
                            0.71diluted
                            
                            $
                            0.84
                            
                            
                            
                            N/A
 
 This
unaudited pro forma financial information is presented for informational
purposes only.  The unaudited pro forma financial information may not
necessarily reflect the future results of operations or the results of
operations had the Company owned and operated this business as of the beginning
of the period presented.
 
 3.
              Summary
      of significant accounting policies
 
 Principles of
consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries.  All significant inter-company accounts and transactions
have been eliminated in consolidation.
 
 Investments in
non-consolidated affiliates
 
 Equity
method investments are recorded at original cost and adjusted periodically to
recognize (i) our proportionate share of the investees’ net income or losses
after the date of investment; (ii) additional contributions made and dividends
or distributions received; and (iii) impairment losses resulting from
adjustments to net realizable value. The Company assesses the potential
impairment of our equity method investments.  The Company determines
fair value based on valuation methodologies, as appropriate, including the
present value of estimated future cash flows, estimates of sales proceeds, and
external appraisals. If an investment is determined to be impaired and the
decline in value is other than temporary, the Company records an appropriate
write-down.
 
 The
Company accounted for the 20.41% investment in Jinzhou Wanyou (an investment in
which the Company exercised significant influence but did not control until
April 2, 2007) using the equity method, under which the share of Jinzhou
Wanyou’s net income was recognized in the period in which it is earned by
Jinzhou Wanyou.
  F-14
 Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Investments in
non-consolidated affiliates (Cont’d)
 
 The
Company accounted for the 22.49% investment in Money Victory using the equity
method, under which the share of Money Victory’ net income was recognized in the
period in which it is earned by Money Victory.  On November 19, 2008,
Wonder entered into an assignment agreement (the “Assignment Agreement”) with
Golden Stone Capital Limited (“Golden Stone”), a British Virgin Islands
corporation, Money Victory and Lin Tan.  Pursuant to the Assignment
Agreement, Golden Stone has assumed all of the Wonder’s rights, obligations and
duties under the Stock Purchase Agreement with a cash purchase price of $5.95
million.  A loss of $122,788 resulted from the disposal after the
Company recorded equity in net income of $1,072,788 during the year ended
December 31, 2008.
 
 Noncontrolling
interests
 
 Noncontrolling
interests resulted from the consolidation of the following
subsidiaries:-
 -
                50%
      owned subsidiary, Jinzhou Dongwoo acquired in November,
    2006;
 -
                50%
      owned subsidiary, Jinzhou Hanhua acquired in January, 2008;
      and
 -
                65%
      owned subsidiary, Jinzhou Karham acquired in February,
    2008.
 
 Share-based
compensation
 
 The
Company adopted the provisions of ASC 718 (previously SFAS 123(R)), which
requires the use of the fair value method of accounting for share-based
compensation. Under the fair value based method, compensation cost related to
employee stock options or similar equity instruments which are equity-classified
awards, is measured at the grant date based on the value of the award and is
recognized over the requisite service period, which is usually the vesting
period. ASC 718 also requires measurement of cost of a liability-classified
award based on its current fair value.
 
 Fair
value of share options granted is determined using the Black-Scholes model.
Under this model, certain assumptions, including the risk-free interest rate,
the expected life of the options and the estimated fair value of the Company’s
common stock and the expected volatility, are required to determine the fair
value of the options. If different assumptions had been used, the fair value of
the options would have been different from the amount the Company computed and
recorded, which would have resulted in either an increase or decrease in the
compensation expense.
 
 Use of
estimates
 
 In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods.  These accounts and estimates include, but are not
limited to, the valuation of accounts receivable, inventories, deferred income
taxes, provision for warranty, goodwill, know-how, share-based compensation and
the estimation on useful lives of property, plant and
equipment.  Actual results could differ from those
estimates.
  F-15
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Concentrations of credit
risk
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade and
bills receivables.  As of December 31, 2009 and 2008, substantially
all of the Company’s cash and cash equivalents and restricted cash were held by
major financial institutions located in the PRC, which management believes are
of high credit quality.  With respect to trade and bills receivables,
the Company extends credit based on an evaluation of the customer’s financial
condition.  The Company generally does not require collateral for
trade receivables and maintains an allowance for doubtful accounts of trade
receivables.
 
 Regarding
bills receivable, they are undertaken by the banks to honor the payments at
maturity and the customers are required to place deposits with the banks
equivalent to certain percentage of the bills amount as
collateral.  These bills receivable can be sold to any third party at
a discount before maturity.  The Company does not maintain allowance
for bills receivable in the absence of bad debt experience and the payments are
undertaken by the banks.
 
 During
the reporting periods, customers representing 10% or more of the Company’s
consolidated sales are :-
 Year ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Beijing
      Hyundai Motor Company
                        
                        $
                        29,366,373
                        
                        
                        $
                        16,596,648
                        
                        
                        $
                        13,971,225Harbin
      Dongan Automotive Engine Manufacturing Company Limited
                        
                        
                        22,677,173
                        
                        
                        
                        14,754,205
                        
                        
                        
                        16,657,632$
                        52,043,546
                        
                        
                        $
                        31,350,853
                        
                        
                        $
                        30,628,857
 
 Details
of customers for 10% or more of the Company’s trade receivables are
:-
 
 As of December 31,2009
                      
                      
                      2008Mianyang
      Xinchen Engine Co. Ltd
                      
                      $
                      5,022,263
                      
                      
                      $
                      2,969,363
 
 Cash and cash
equivalents
 
 Cash and
cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three months or less.  As of
December 31, 2009 and 2008, almost all the cash and cash equivalents were
denominated in Renminbi (“RMB”) and were placed with banks in the
PRC.  They are not freely convertible into foreign currencies and the
remittance of these funds out of the PRC is subject to exchange control
restrictions imposed by the PRC government.  The remaining
insignificant balance of cash and cash equivalents were denominated in US
dollars.
  F-16
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Allowance for doubtful
accounts
 
 The
Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectibility of trade receivables.  As a
considerable amount of judgment is required in assessing the amount of the
allowance, the Company considers the historical level of credit losses and
applies percentages to aged receivable categories.  The Company makes
judgments about the creditworthiness of each customer based on ongoing credit
evaluations, and monitors current economic trends that might impact the level of
credit losses in the future.  If the financial condition of the
customers were to deteriorate, resulting in their inability to make payments, a
larger allowance may be required.
 
 Based on
the above assessment, during the reporting years, the management establishes the
general provisioning policy to make allowance equivalent to 100% of gross amount
of trade receivables due over 1 year.  Additional specific provision
is made against trade receivables aged less than 1 year to the extent which they
are considered to be doubtful.
 
 Bad debts
are written off when identified.  The Company extends unsecured credit
to customers ranging from three to six months in the normal course of
business.  The Company does not accrue interest on trade accounts
receivable.
 
 Historically,
losses from uncollectible accounts have not significantly deviated from the
general allowance estimated by the management and no significant additional bad
debts have been written off directly to the profit and loss.  This
general provisioning policy has not changed in the past since establishment and
the management considers that the aforementioned general provisioning policy is
adequate and not too excessive and does not expect to change this established
policy in the near future.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market.  Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable
condition.  In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels.  Our reserve requirements generally
increase as our projected demand requirements decrease due to market conditions,
product life cycle changes.  The Company estimates the demand
requirements based on market conditions, forecasts prepared by its customers,
sales contracts and orders in hand.
 
 In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses.  The Company
writes down the inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and the estimated market
value based upon assumptions about future demand and market
conditions.
  F-17
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Inventories
(Cont’d)
 
 Based on
the above assessment, the Company establishes a general provision to make a 50%
provision for inventories aged over 1 year.
 
 Historically,
the actual net realizable value is close to the management
estimation.
 
 Property, plant and
equipment
 
 Property,
plant and equipment are stated at cost less accumulated
depreciation.  Cost represents the purchase price of the asset and
other costs incurred to bring the asset into its existing use.
 
 Depreciation
is provided on straight-line basis over their estimated useful
lives.  The principal depreciation rates are as follows
:-
 Annual rate
                      
                      
                      Residual valueBuildings
                      
                      
                      2 -
      4.5%
                      
                      
                      Nil
      to 10%Plant
      and machinery
                      
                      
                      7 -
      10%
                      
                      
                      Nil
      to 10%Motor
      vehicles
                      
                      
                      8 -
      18%
                      
                      
                      Nil
      to 10%Furniture,
      fixtures and equipment
                      
                      
                      15%
                      
                      
                      Nil
      to 10%Tools
      and equipment
                      
                      
                      7 -
      18%
                      
                      
                      Nil
      to 10%Leasehold
      improvements
                      
                      
                      20%
                      
                      
                      Nil
 
 Construction
in progress mainly represents expenditures in respect of the Company’s new
offices and factories under construction.  All direct costs relating
to the acquisition or construction of the Company’s new office and factories are
capitalized as construction in progress. No depreciation is provided in respect
of construction in progress.
 
 Maintenance
or repairs are charged to expense as incurred.  Upon sale or
disposition, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.
 
 Trademarks and
patents
 
 Trademarks
and patents are stated at cost less accumulated
amortization.  Amortization is provided on a straight-line basis over
their useful lives of 10 years granted from the relevant PRC
authorities.
 
 Know-how
 
 Know-how
with infinite useful life is determined to have an indefinite useful life
pursuant to the purchase contracts as detailed in note 13(b).  It is
not subject to amortization until its useful life is determined to be no longer
indefinite.
 
 Know-how
with infinite useful life is stated at cost of purchase less any identified
impairment losses in the annual impairment test.
  F-18
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Know-how
(Cont’d)
 
 Know-how
with finite useful life is stated at cost less accumulated
amortization.  Amortization is provided on a straight-line basis over
their estimated useful lives of 5-10 years.
 
 Land use
rights
 
 Land use
rights are stated at cost less accumulated amortization.  Amortization
is provided using the straight-line method over the terms of the lease of 50
years obtained from the relevant PRC land authority.
 
 Customer
Contracts
 
 Customer
contracts are stated at cost less accumulated amortization. Amortization is
provided on a straight-line basis over their estimated useful lives of 1 year
from the date of acquisition.
 
 Deferred revenue -
government grants
 
 Government
grants are received for purchases of property, plant and equipment, to subsidize
the research and development expenses incurred, for compensation expenses
already incurred or for good performance of the Company.
 
 Receipts
of government grants to encourage research and development activities, which are
non-refundable, are credited to deferred income upon receipt. Grants applicable
to purchase of property, plant and equipment are amortized over the life of the
depreciable assets.  For research and development expenses, the
Company matches and offsets the government grants with the expenses of the
research and development activities as specified in the grant approval document
in the corresponding period when such expenses are
incurred.  Government grants received as compensation for expenses
already incurred in the prior period or for good performance of the Company are
recognized as income in the period they become recognizable.
 
 During
the year ended December 31, 2009, the Company received government grants of
$1,901,680 for good performance of the Company which is unconditional,
non-refundable and without any restrictions on usage at the time of grant to and
receipt by the Company.  Such grant is recognized as income for the
year.
 
 The
Company received certain government grants for the purchase of property, plant
and equipment since 2004.  Such subsidy was recorded as deferred
revenue and was amortized as income over the useful lives of the relevant
property, plant and equipment.  The Company received such government
grants of $769,006 during the year ended December 31, 2009. Amortization for the
year ended December 31, 2009 and 2008 was $260,372 and $59,848
respectively.
  F-19
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Deferred revenue -
government grants (Cont’d)
 
 The
Company received certain government grants from the relevant government
authorities as an encouragement to capitalize of the retained profits by the
Company’s subsidiaries.  Such government grant is unconditional,
non-refundable and without any restrictions on usage at the time of grant to and
receipt by the Company.  Government grant is recognized as income at
the time when the approval documents are obtained from the relevant government
authorities and when they are received. For the year ended December 31, 2007,
the Company received government grant of $1,496,547.
 
 In
addition, the Company received certain government grants from the relevant
government authorities to reimbursement the payment made to the defined
contribution plan. For the year ended December 31, 2009, the Company received
such grant of $592,926 and recognized as income.
 
 Impairment of long-lived
assets
 
 Long-lived
assets are tested for impairment in accordance with ASC 360-10-45 “Impairment or
Disposal of Long-Lived Assets” (previously SFAS No. 144), Equity Method of
Accounting for Investments in Common Stock, respectively.  The Company
periodically evaluates potential impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable.  The Company recognizes impairment of long-lived assets
and investment in an affiliate in the event that the net book values of such
assets exceed the future undiscounted cashflows attributable to such
assets.  During the reporting periods, the Company has not identified
any indicators that would require testing for impairment.
 
 Capitalized
interest
 
 The
interest cost associated with the major development and construction projects is
capitalized and included in the cost of the project.  When no debt is
incurred specifically for a project, interest is capitalized on amounts expended
on the project using weighted-average cost of the Company’s outstanding
borrowings. Capitalization of interest ceases when the project is substantially
complete or development activity is suspended for more than a brief
period.
 
 Revenue
recognition
 
 Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time when the
products are put into use by its customers, the sales price is fixed or
determinable and collection is reasonably assured.
  F-20
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Advertising, transportation,
research and development expenses
 
 Advertising,
transportation and other product-related costs are charged to expense as
incurred.
 
 Research
and development costs include expenditure incurred for “new product development
expenses”, “investment in research and development equipment” and “other
research and development expenses”.
 
 The “new
products development expenses” include salaries of personnel engaged and other
costs incurred for research and development of potential new
products.  They are expensed to the Statement of Income (Loss) and
Comprehensive Income (Loss).
 
 “Investments
in research and development equipment” represent payments for acquisition of
equipment for research and development use.  This equipment has other
alterative future uses, such as usage in Testing Department.  The
equipment is capitalized as tangible asset when acquired and included under
Non-current assets “Property, plant and equipment” in the Financial
Statements.  Depreciation is provided according to the depreciation
rates of corresponding categories of Property, plant and equipment being
capitalized and included.
 
 “Other
research and development expenses” represent payments for routine and ongoing
efforts to refine existing products.  These expenses are charged to
the Statement of Income (Loss) and Comprehensive Income (Loss).
 
 Advertising
expenses amounting to $19,993, $100,474 and $8,926 for three years ended
December 31, 2009, 2008 and 2007 respectively are included in selling
expenses.
 
 Transportation
expenses amounting to $1,425,581, $1,119,546 and $630,254 for three years ended
December 31, 2009, 2008 and 2007 respectively are included in selling
expenses.
 
 Research
and development expenditure for each of three years in the period ended December
31, 2009 are as follow :-
 Year ended December 31,Nature
                                  
                                  Included in
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007New
      products development expenses
                                  
                                  Operating
      expenses
                                  
                                  $
                                  2,564,748
                                  
                                  
                                  $
                                  1,249,894
                                  
                                  
                                  $
                                  534,503Investments
      in research and development equipment
                                  
                                  Property,
      plant and equipment
                                  
                                  
                                  704,616
                                  
                                  
                                  
                                  2,186,758
                                  
                                  
                                  
                                  2,388,867Other
      research and development expenses
                                  
                                  Operating
      expenses
                                  
                                  
                                  462,147
                                  
                                  
                                  
                                  397,994
                                  
                                  
                                  
                                  601,494$
                                  3,731,511
                                  
                                  
                                  $
                                  3,834,646
                                  
                                  
                                  $
                                  3,524,864
  F-21
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Warranty
 
 It is the
policy of the Company to provide after sales support to the product of
alternators and starters by way of a warranty programme.  The Company
provided warranties to certain customers with warranty periods ranging from two
years or 50,000 km to three years or 60,000 km, whichever comes
first.
 
 Based on
the past experience, the Company sets up a policy of making a general provision
for warranty such that the closing balance of this provision is equal to certain
percentage of relevant sales during the reporting periods as follows
:-
 
 Year ended December 31,
                    
                    %2009
                    
                    
                    12008
                    
                    
                    1.52007
                    
                    
                    1.5
 
 As of
January 1, 2009, the management of the Company re-assessed the percentage for
provision of warranties by reviewing the historical claims information and
determined to adjust the percentage from 1.5% to 1.0%. Such decrease was
attributable to the improvement in the rate of defects for the Company’s
products after introduction of certain new technologies obtained from the
Company’s research and development.
 
 Following
the acquisition of Yearcity in October, 2008, the Company maintains its policy
to provide after sales support to the product of engine valves and tappets by
way of a warranty programme.  The Company provided warranties to
certain customers with warranty periods ranging from 1 to 1.5 years or 3,000
hours, whichever comes first.
 
 Based on
the past experience, the Company sets up a policy of making a general provision
for warranty in relation to the sales of engine valves and tappets such that the
closing balance of this provision is equal to 1.7% of relevant sales during the
reporting periods.
 
 Early retirement benefits
cost
 
 The
Company adopted an early retirement scheme to provide eligible staff with
certain salaries and insurance benefits for their early retirement before
statutory retirement age, 55 for women and 65 for men.  The obligation
of early retirement benefits cost is recorded at the present value of the cost
expected to settle the obligation and is recognised when the application for
early retirement has been approved by the Company.  Since December 31,
2007, no further early retirement application is processed and approved by the
Company thereafter.
 
 As of
December 31, 2009, the discount rate of 6.3%, which was the average borrowing
rate of Renminbi loan in the PRC, was adopted to calculate the present value of
early retirement benefits cost.
  F-22
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Income
taxes
 
 The
Company uses the asset and liability method of accounting for income taxes
pursuant to ASC 740 “Income Taxes” (previously SFAS No. 109).  Under
the asset and liability method of ASC 740, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary
differences between the financial statements carrying amounts of existing assets
and liabilities and loss carryforwards and their respective tax
bases.  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.
 
 Dividends
 
 Dividends
are recorded in Company’s financial statements in the period in which they are
declared.
 
 Off-balance sheet
arrangements
 
 The
Company does not have any off-balance sheet arrangements.
 
 Comprehensive
income
 
 The
Company has adopted ASC 220, “Comprehensive Income”, which establishes standards
for reporting and display of comprehensive income (loss), its components and
accumulated balances.  Components of comprehensive income (loss)
include net income (loss) and foreign currency translation
adjustments.
 
 Foreign currency
translation
 
 The
functional currency of the Company is RMB and RMB is not freely convertible into
foreign currencies.  The Company maintains its financial statements in
the functional currency.  Monetary assets and liabilities denominated
in currencies other than the functional currency are translated into the
functional currency at rates of exchange prevailing at the balance sheet
date.  Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction.  Exchange gains or
losses arising from foreign currency transactions are included in the
determination of net income for the respective periods.
 
 For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars.  Assets and liabilities are translated at the exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates.  Any translation adjustments resulting are not
included in determining net income but are included in foreign exchange
adjustment to other comprehensive income, a component of stockholders’
equity.  The exchange rates in effect at December 31, 2009, 2008 and
2007 were RMB1 for $0.1467, $0.1467 and $0.1371 respectively.  There
is no significant fluctuation in exchange rate for the conversion of RMB to US
dollars after the balance sheet date.
  F-23
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Basic and diluted earnings
per share
 
 The
Company reports basic earnings per share in accordance with ASC 260, “Earnings
Per Share” (previously SFAS No. 128).  Basic earnings/(loss) per share
is computed using the weighted average number of shares outstanding during the
periods presented.  The weighted average number of shares of the
Company represents the common stock outstanding during the reporting
periods.  Diluted earnings/(loss) per share is computed using the
weighted average number of common shares outstanding during the periods plus the
effect of dilutive securities outstanding during the periods.  At
December 31, 2009, the Company had outstanding option exercisable into shares of
common stock, which was used in the computation of diluted
earnings.
 
 Fair value of financial
instruments
 
 The
Company adopted ASC 820 (previously Statement of Financial Accounting Standards
(“SFAS”) No. 157) on January 1, 2008. The adoption of ASC 820 did not materially
impact the Company’s financial position, results of operations or cash
flows.
 
 ASC 820
requires the disclosure of the estimated fair value of financial instruments
including those financial instruments for which fair value option was not
elected. Except for secured borrowings disclosed as below, the carrying amounts
of the financial assets and liabilities approximate to their fair values due to
short maturities or the applicable interest rates approximate the current market
rates :-
 
 As of December 31, 2009
                        
                        
                        As of December 31, 2008Carrying
                          amount
                        
                        
                        Fair value
                        
                        
                        Carrying
                          amount
                        
                        
                        Fair valueSecured
      borrowings
                        
                        $
                        77,991,500
                        
                        
                        $
                        79,500,570
                        
                        
                        $
                        60,110,281
                        
                        
                        $
                        61,196,042
 
 The fair
values of secured borrowings are estimated using discounted cash flow analyses,
based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.
  F-24
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements
 
 FASB
Accounting Standards Codification (Accounting Standards Update “ASU” 2009-1). In
June 2009, the Financial Accounting Standard Board (“FASB”) approved its
Accounting Standards Codification (“Codification”) as the single source of
authoritative United States accounting and reporting standards applicable for
all non-governmental entities, with the exception of the SEC and its staff. The
Codification is effective for interim or annual financial periods ending after
September 15, 2009 and impacts our financial statements as all future references
to authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our financial
statements or disclosures as a result of implementing the
Codification.
 
 As a
result of our implementation of the Codification during the quarter ended
September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current financial statements, we
will provide reference to both new and old guidance to assist in understanding
the impacts of recently adopted accounting literature, particularly for guidance
adopted since the beginning of the current fiscal year but prior to the
Codification.
 
 Noncontrolling Interests (Included
in amended Topic ASC 810 “Consolidation”, previously SFAS No. 160
“Noncontrolling Interests in Consolidated Financial Statements”, an amendment of
ARB No. 51).The amended topic establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. We adopted the
amended topic on January 1, 2009. As a result, we have reclassified financial
statement line items within our Consolidated Balance Sheets and Statements of
Income (Loss) and Comprehensive Income (Loss) for the prior period to conform to
this amended topic.
 
 Business Combinations (Included in
amended Topic ASC 805 “Business Combinations”, previously SFAS No. 141(R)).This ASC guidance addresses the accounting and disclosure for
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in a business combination. The adoption of this amended topic has no material
impact on the Company’s financial statements.
 
 Intangibles-Goodwill and Other
(Included in amended Topic ASC 350”, previously FASB staff position (“FSP”) FAS
142-3, Determination of the Useful Life of Intangible Assets).The
amended topic amends the factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142, “Goodwill and Other
Intangible Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. The amended topic is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. Early adoption is prohibited. The adoption of this
amended topic has no material effect on the Company's financial
statements.
  F-25
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements (Cont’d)
 
 Business Combinations (Included in
amended Topic ASC 805, previously FSP No. 141R-1 “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies”).Amended topic ASC 805 amends the requirements for the
provisions in FASB Statement 141R for the initial recognition and measurement,
subsequent measurement and accounting, and disclosures for assets and
liabilities arising from contingencies in business combinations. The amended
topic eliminates the distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement criteria and
instead carries forward most of the provisions for acquired contingencies. The
amended topic is effective for contingent assets and contingent liabilities
acquired in evaluating the impact. The adoption of this amended topic has no
material impact on the Company’s financial statements.
 
 Fair Value Measurements and
Disclosures (Included in amended Topic ASC 820, previously FSP No. 157-4,
“Determining Whether a Market is Not Active and a Transaction Is Not
Distressed”.)The amended topic clarifies when markets are illiquid or
that market pricing may not actually reflect the “real” value of an asset. If a
market is determined to be inactive and market price is reflective of a
distressed price then an alternative method of pricing can be used, such as a
present value technique to estimate fair value. The amended topic identifies
factors to be considered when determining whether or not a market is inactive.
The amended topic would be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009 and shall be applied prospectively. The adoption of this amended topic has
no material effect on the Company's financial statements.
 
 Investments - Debt and Equity
Securities - Overall - Transition and Open Effective Date Information (Included
in amended Topic ASC 320, previously FASB Staff Position No. 115-2 and Statement
of Financial Accounting Standards No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”).The amended topic amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities
through increased consistency in the timing of impairment recognition and
enhanced disclosures related to the credit and noncredit components of impaired
debt securities that are not expected to be sold. In addition, increased
disclosures are required for both debt and equity securities regarding expected
cash flows, credit losses, and securities with unrealized losses. The adoption
of this amended topic has no material impact on the Company’s financial
statements.
 
 Interim Disclosures about Fair Value
of Financial Instruments (Included in amended Topic ASC 825 “Financial
Instruments”, previously FSP SFAS No. 107-1).This guidance requires that
the fair value disclosures required for all financial instruments be included in
interim financial statements. This guidance also requires entities to disclose
the method and significant assumptions used to estimate the fair value of
financial instruments on an interim and annual basis and to highlight any
changes from prior periods. The amended topic was effective for interim periods
ending after September 15, 2009. The adoption of this amended topic has no
material impact on the Company’s financial statements.
  F-26
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements (Cont’d)
 
 Subsequent Events (Included in
amended Topic ASC 855 “Subsequent Events”, previously SFAS No. 165).The
amended topic establishes accounting and disclosure requirements for subsequent
events. The amended topic details the period after the balance sheet date during
which we should evaluate events or transactions that occur for potential
recognition or disclosure in the financial statements, the circumstances under
which we should recognize events or transactions occurring after the balance
sheet date in its financial statements and the required disclosures for such
events. We adopted this amended topic effective June 1, 2009.
 
 Accounting for Transfers of
Financial Assets (Included in amended Topic ASC 860 “Transfers and Servicing”,
previously SFAS No. 166, “Accounting for Transfers of Financial Assets - an
Amendment of FASB Statement No. 140.”).The amended topic addresses
information a reporting entity provides in its financial statements about the
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement in transferred financial assets. Also, the amended topic removes the
concept of a qualifying special purpose entity, limits the circumstances in
which a transferor derecognizes a portion or component of a financial asset,
defines participating interest and enhances the information provided to
financial statement users to provide greater transparency. The amended topic is
effective for the first annual reporting period beginning after November 15,
2009 and will be effective for us as of January 1, 2010. The management is in
the process of evaluating the impact of adopting this amended topic on the
Company’s financial statements.
 
 Consolidation of Variable Interest
Entities – Amended (Included in amended Topic ASC 810 “Consolidation”,
previously SFAS 167 “Amendments to FASB Interpretation No. 46(R)”). The
amended topic requires an enterprise to perform an analysis to determine the
primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest entity. The
amended topic also requires enhanced disclosures that will provide users of
financial statements with more transparent information about an enterprise’s
involvement in a variable interest entity. The amended topic is effective for
the first annual reporting period beginning after November 15, 2009 and will be
effective for us as of January 1, 2010. The management is in the process of
evaluating the impact of adopting this amended topic on the Company’s financial
statements
 
 In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05 (“ASU
Update 2009-05”), an update to ASC 820, Fair Value Measurements and Disclosures.
This update provides amendments to reduce potential ambiguity in financial
reporting when measuring the fair value of liabilities. Among other provisions,
this update provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the valuation
techniques described in ASU Update 2009-05. ASU Update 2009-05 will become
effective for the Company’s annual financial statements for the year ended
December 31, 2009. The adoption of this ASU update has no material impact on the
Company’s financial statements.
  F-27
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements (Cont’d)
 
 The FASB
issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic
605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB
Emerging Issues Task Force.” This update provides application guidance on
whether multiple deliverables exist, how the deliverables should be separated
and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The management is in the process of evaluating
the impact of adopting this ASU update on the Company’s financial
statements.
 
 The FASB
issued ASU-2010-09 (Topic 855) to amend guidance on subsequent events to remove
the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date
through which an entity has evaluated subsequent events. This change alleviates
potential conflicts with current SEC guidance. An SEC filer is still required to
evaluate subsequent events through the date financial statements are issued, but
disclosure of that date is no longer required. The amendments in ASU 2010-09
became effective upon issuance of the guidance.
 
 4.
              Other
      income
 
 Year ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Other
      payables waived
                      
                      $
                      117,200
                      
                      
                      $
                      773,158
                      
                      
                      $
                      -Sales
      of scrap and materials
                      
                      
                      366,953
                      
                      
                      
                      198,432
                      
                      
                      
                      30,772Services
      income
                      
                      
                      -
                      
                      
                      
                      240,053
                      
                      
                      
                      -Claims
      received from suppliers
                      
                      
                      579,870
                      
                      
                      
                      -
                      
                      
                      
                      179,696Gain
      on disposal of property, plant and Equipment
                      
                      
                      -
                      
                      
                      
                      129,374
                      
                      
                      
                      -Others
                      
                      
                      113,192
                      
                      
                      
                      18,866
                      
                      
                      
                      76,854$
                      1,177,215
                      
                      
                      $
                      1,359,883
                      
                      
                      $
                      287,322
  F-28
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 5.
              Net
      finance costs
 Year ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Interest
      income
                      
                      $
                      (859,613
                      )
                      
                      $
                      (314,290
                      )
                      
                      $
                      (111,784
                      )Interest
      expenses
                      
                      
                      4,429,401
                      
                      
                      
                      2,809,856
                      
                      
                      
                      1,627,063Less:
      Interest capitalized
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (131,287
                      )Bills
      discounting charges
                      
                      
                      352,949
                      
                      
                      
                      449,530
                      
                      
                      
                      203,708Bank
      charges
                      
                      
                      505,967
                      
                      
                      
                      245,474
                      
                      
                      
                      120,360Net
      exchange loss/(gain)
                      
                      
                      70,802
                      
                      
                      
                      (975,305
                      )
                      
                      
                      700,961Finance
      charges from early retirement benefits cost
                      
                      
                      78,154
                      
                      
                      
                      30,834
                      
                      
                      
                      -$
                      4,577,660
                      
                      
                      $
                      2,246,099
                      
                      
                      $
                      2,409,021
 
 6.
              Income
      taxes
 
 United
States
 
 Wonder
Auto Technology, Inc. is subject to the United States of America Tax law at tax
rate of 34%.  No provision for the US federal income taxes has been
made as the Company had no taxable income in this jurisdiction for the reporting
period.
 
 BVI
 
 Wonder
and Yearcity were incorporated in the BVI and, under the current laws of the
BVI, are not subject to income taxes.
 
 Hong
Kong
 
 Friend
Birch is incorporated in Hong Kong and subject to profit tax rate of 16.5% on
the assessable profits during the years.
  F-29
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
              Income
      taxes (Cont’d)
 
 PRC
 
 Corporate
income tax (“CIT”) to Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou
Hanhua, Jinzhou Karham, Fuxin Huirui and Jinan Worldwide in the PRC was charged
at 27%, of which 24% is for national tax and 3% is for local tax, of the
assessable profits before 2008.  The PRC’s legislative body, the
National People’s Congress, adopted the unified CIT Law on March 16,
2007.  This new tax law replaces the existing separate income tax laws
for domestic enterprises and foreign-invested enterprises and became effective
on January 1, 2008.  Under the new tax law, a unified income tax
rates is set at 25% for both domestic enterprises and foreign-invested
enterprises.  However, there will be a transition period for
enterprises, whether foreign-invested or domestic, that are currently receiving
preferential tax treatments granted by relevant tax
authorities.  Enterprises that are subject to an enterprise income tax
rate lower than 25% may continue to enjoy the lower rate and will transit into
the new tax rate over a five year period beginning on the effective date of the
CIT Law.  Enterprises that are currently entitled to exemptions for a
fixed term will continue to enjoy such treatment until the exemption term
expires.  Preferential tax treatment will continue to be granted to
industries and projects that qualify for such preferential treatments under the
new tax law.  As approved by the relevant tax authority in the PRC,
Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua, Jinzhou Karham,
Fuxin Huirui and Jinan Worldwide were entitled to two years’ exemption from the
first profit making calendar year of operations after offset of accumulated
taxable losses, followed by a 50% tax reduction for the immediate next three
calendar years (“tax holiday”).  The tax holiday of Jinzhou Halla
commenced in the fiscal financial year of 2001.  Accordingly, Jinzhou
Halla was subject to tax rate of 13.5% for 2003, 2004 and
2005.  Furthermore, Jinzhou Halla, being a Foreign Investment
Enterprise (“FIE”), engaged in an advanced technology industry, was approved to
enjoy a further three years’ 50% tax reduction for 2006, 2007 and 2008 and
thereafter subject to a rate of 15%. The tax holiday of Jinzhou Dongwoo
commenced in the fiscal year 2004.  Accordingly, Jinzhou Dongwoo was
subject to tax rate of 13.5% for 2006 and 2007, and subject to a tax rate of
12.5% for 2008 and 25% for 2009.  Jinzhou Wanyou has elected to
commence the tax holiday in the fiscal year 2007.  Accordingly,
Jinzhou Wanyou will be exempted from CIT for 2007 and 2008 and thereafter
entitled to a 50% reduction on CIT tax rate to 12.5% for 2009, 2010 and
2011.  The tax holiday of Jinzhou Hanhua commenced in the fiscal year
2005.  Accordingly, Jinzhou Hanhua was subject to tax rate of 13.5%
for 2007, and subject to a tax rate of 12.5% for 2008 and
2009.  Jinzhou Karham has elected to commence the tax holiday in the
fiscal year 2008.  Accordingly, Jinzhou Karham will be exempted from
CIT for 2008 and 2009 and thereafter entitled to a 50% reduction on CIT tax rate
12.5% for 2010, 2011 and 2012.  The tax holiday of Fuxin Huirui
commenced in the fiscal year 2008.  Accordingly, Fuxin Huirui will be
exempted from CIT for 2008 and 2009 and thereafter entitled to a 50% reduction
on CIT tax rate 12.5% for 2010, 2011 and 2012.  The tax holiday of
Jinan Worldwide commenced in the fiscal year of 2006.  Accordingly,
Jinan Worldwide was subject to tax rate of 12.5% for 2008, 2009 and
2010.  Wonder Motor, Jinzhou Wonder, Jinzhou Jiade and Jinzhou Lida is
subject to a tax rate of 25%.
  F-30
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
              Income
      taxes (Cont’d)
 
 PRC
(cont’d)
 
 The
components of the provision (benefit) for income taxes are :-
 
 Year ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Current
      taxes - PRC
                      
                      $
                      3,197,241
                      
                      
                      $
                      2,287,088
                      
                      
                      $
                      1,653,001Deferred
      taxes - PRC
                      
                      
                      26,640
                      
                      
                      
                      (112,140
                      )
                      
                      
                      (263,993
                      )$
                      3,223,881
                      
                      
                      $
                      2,174,948
                      
                      
                      $
                      1,389,008
 
 The
effective income tax expenses differs from the PRC statutory income tax rate of
25% for the year ended December 31, 2009 and 2008 and 27% for the year ended
December 2007 in the PRC as follows :-
 
 Year ended December 31,2009
                              
                              
                              2008
                              
                              
                              2007Provision
      for income taxes at PRC statutory income tax rate
                              
                              $
                              6,769,646
                              
                              
                              $
                              5,886,017
                              
                              
                              $
                              (330,681
                              )Non-deductible
      items for tax
                              
                              
                              1,689,306
                              
                              
                              
                              378,773
                              
                              
                              
                              5,058,702Income
      not subject to tax
                              
                              
                              (1,935,350
                              )
                              
                              
                              (166,134
                              )
                              
                              
                              (183,342
                              )Increase
      in deferred tax assets resulting resulting from a reduction of PRC
      enterprise income tax rate
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (194,321
                              )Over
      provision in respect of previous year
                              
                              
                              (91,142
                              )
                              
                              
                              (103,190
                              )
                              
                              
                              -Tax
      holiday
                              
                              
                              (3,208,579
                              )
                              
                              
                              (3,820,518
                              )
                              
                              
                              (2,961,350
                              )$
                              3,223,881
                              
                              
                              $
                              2,174,948
                              
                              
                              $
                              1,389,008
 
 During
the three years ended December 31, 2009, 2008 and 2007, the aggregate amounts of
benefit from tax holiday were $3,208,579, $3,820,518 and $2,961,350 and the
respective effect on earnings per share effect was $0.11, $0.14 and $0.12
respectively.
 
 In July
2006, the FASB issued ASC 740-10-25 (previously Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”).  This interpretation
requires recognition and measurement of uncertain income tax positions using a
“more-likely-than-not” approach.  The Company adopted this ASC
740-10-25 on January 1, 2007.  Under the new CIT Law which became
effective on January 1, 2008, the Company may be deemed to be a resident
enterprise by the PRC tax authorities.  If the Company was deemed to
be resident enterprise, the Company may be subject to the CIT at 25% on the
worldwide taxable income and dividends paid from PRC subsidiaries to their
overseas holding companies may be exempted from 10% PRC withholding
tax.  Except for certain immaterial interest income from bank deposits
placed with financial institutions outside the PRC, all of the Company’s income
is generated from the PRC operation.  Given the immaterial amount of
income generated from outside the PRC and the PRC subsidiaries do not intend to
pay dividends for the foreseeable future, the management considers that the
impact arising from resident enterprise on the Company’s financial position is
not significant.  The management evaluated the Company’s overall tax
positions and considered that no additional provision for uncertainty in income
taxes is necessary as of December 31, 2009.
  F-31
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
              Income
      taxes (Cont’d)
 
 PRC
(cont’d)
 
 Deferred
tax assets (liabilities) as of December 31, 2009 and 2008 are composed of the
following :-
 As of December 31,2009
                                  
                                  
                                  2008PRCCurrent
      deferred tax assets:Allowance
      for doubtful debts
                                  
                                  $
                                  125,343
                                  
                                  
                                  $
                                  72,950Provision
      for obsolete inventories
                                  
                                  
                                  313,391
                                  
                                  
                                  
                                  492,939Provision
      for warranty
                                  
                                  
                                  486,622
                                  
                                  
                                  
                                  385,539Accrued
      liabilities
                                  
                                  
                                  21,458
                                  
                                  
                                  
                                  -Unrealized
      profit
                                  
                                  
                                  239,596
                                  
                                  
                                  
                                  112,196Others
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,142$
                                  1,186,410
                                  
                                  
                                  $
                                  1,075,766United
      StatesNon
      current deferred tax assets:Tax
      losses
                                  
                                  $
                                  48,000
                                  
                                  
                                  $
                                  48,000Valuation
      allowances
                                  
                                  
                                  (48,000
                                  )
                                  
                                  
                                  (48,000
                                  )-
                                  
                                  
                                  
                                  -PRCNon
      current deferred tax assets (liabilities):Depreciation
      of property, plant and equipment
                                  
                                  
                                  766,457
                                  
                                  
                                  
                                  1,107,137Amortization
      of land use rights
                                  
                                  
                                  114,477
                                  
                                  
                                  
                                  11,477Amortization
      of know-how
                                  
                                  
                                  (252,547
                                  )
                                  
                                  
                                  (400,291
                                  )Early
      retirement benefits cost
                                  
                                  
                                  103,188
                                  
                                  
                                  
                                  152,177731,575
                                  
                                  
                                  
                                  870,500$
                                  731,575
                                  
                                  
                                  $
                                  870,500
 
 As of
December 31, 2009, the Company had net operating loss carried forward amounting
to $140,612 in the United States which, if unutilized, will expire through to
2023.
  F-32
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 7.
              Noncontrolling
      Interests
 
 It
represents the noncontrolling shareholders’ proportionate share of net income of
Jinzhou Dongwoo, Jinzhou Hanhua and Jinzhou Karkam.
 
 
 8.
              Earnings/(loss)
      per share
 
 The
following table sets forth the computation of basic and diluted earnings/(loss)
per share (“EPS”) for the reporting periods :-
 
 Year ended December 31,2009
                          
                          
                          2008
                          
                          
                          2007Numerator
      :-Net
      income/(loss) attributable to WonderAuto
      Technology, Inc. common StockholdersBasis
      and Diluted
                          
                          $
                          22,858,590
                          
                          
                          $
                          18,908,767
                          
                          
                          $
                          (3,750,447
                          )Denominator
      :-Weighted
      average common shares used to compute basic EPS
                          
                          
                          27,829,583
                          
                          
                          
                          26,959,994
                          
                          
                          
                          24,140,816Dilutive
      potential from assumed exercise of option to employees and
      Directors
                          
                          
                          13,426
                          
                          
                          
                          N/A
                          
                          
                          
                          N/AWeighted
      average common shares used to compute diluted EPS
                          
                          
                          27,843,009
                          
                          
                          
                          N/A
                          
                          
                          
                          N/AEarnings/(loss)
      per share - Basic
                          
                          $
                          0.82
                          
                          
                          $
                          0.70
                          
                          
                          $
                          (0.16
                          )Earnings/(loss)
      per share - Diluted
                          
                          $
                          0.82
                          
                          
                          
                          N/A
                          
                          
                          
                          N/A
 
 For 2008,
diluted earnings per share is not presented as the effect of share-based awards
were anti-dilutive. For 2007, the Company had no dilutive
instruments.  Accordingly, the basic and diluted earnings per share
are the same.
 
 9.
              Restricted
      cash, bills and trade payables
 
 As of December 31,2009
                        
                        
                        2008Bank
      deposits held as collateral for bills payable - Note (a)
                        
                        $
                        15,166,948
                        
                        
                        $
                        20,240,795Bank
      deposit held as collateral for import duty - Note (b)
                        
                        
                        586,800
                        
                        
                        
                        586,800Bank
      deposit held as collateral for bank loans
                        
                        
                        -
                        
                        
                        
                        3,354,050$
                        15,753,748
                        
                        
                        $
                        24,181,645
  F-33
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 9.
              Restricted
      cash, bills and trade payables
(Cont’d)
 
 Note:-
 
 (a)
                The
      Company is requested by certain of its suppliers to settle by issuance of
      bills for which the banks add their undertakings to guarantee their
      settlement at maturity.  These bills are interest-free with
      maturity of three to six months from date of issuance.  As
      security for the banks’ undertakings, the Company is required to deposit
      with such banks equal to 30% to 100% of the bills amount at the time of
      issuance and pay bank charges. These deposits will be used to settle the
      bills at maturity.
 
 Trade
payables represent trade creditors on open account.  They are
interest-free and unsecured.  The normal credit term given by these
suppliers to the Company ranges from one to three months.
 
 (b)
                The
      Company is entitled to exemption from import duty for importing fixed
      assets from overseas.  As of December 31, 2009 and 2008, certain
      imported fixed assets were pledged to DEG - Deutsche Investitions - und
      Entwicklungsgesellschaft mbH (“DEG”), a Germany Bank, for a loan granted
      to Jinzhou Halla.  Regarding the exemption from import duty, the
      Company is required by the tax authority to deposit an equal amount of
      import duty exempted in bank until the bank loan is fully
      settled.
  10.
              Trade
      receivables, net
 
 As of December 31,2009
                      
                      
                      2008Trade
      receivables
                      
                      $
                      49,753,654
                      
                      
                      $
                      46,621,756Less
      : allowance for doubtful accounts
                      
                      
                      (231,071
                      )
                      
                      
                      (50,137
                      )$
                      49,522,583
                      
                      
                      $
                      46,571,619
 
 An
analysis of the allowance for doubtful accounts for the years ended December 31,
2009, 2008 and 2007 is as follows:
 
 Year ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Balance
      at beginning of year
                      
                      $
                      50,137
                      
                      
                      $
                      37,071
                      
                      
                      $
                      32,150Addition
      of bad debt expense, net
                      
                      
                      180,718
                      
                      
                      
                      8,577
                      
                      
                      
                      2,159Translation
      adjustments
                      
                      
                      216
                      
                      
                      
                      4,489
                      
                      
                      
                      2,762Balance
      at end of year
                      
                      $
                      231,071
                      
                      
                      $
                      50,137
                      
                      
                      $
                      37,071
  F-34
 
 Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 11.
              Other
      receivables, prepayments and
deposits
 
 As
      of December 31,2009
                              
                              
                              2008Value
      added tax and other tax recoverable
                              
                              $
                              612,684
                              
                              
                              $
                              1,680,726Trade
      deposits paid to suppliers
                              
                              
                              4,235,230
                              
                              
                              
                              3,980,521Advances
      to staff for operating expenses
                              
                              
                              490,235
                              
                              
                              
                              415,191Other
      prepayments
                              
                              
                              873,033
                              
                              
                              
                              1,244,628Other
      receivables
                              
                              
                              601,585
                              
                              
                              
                              456,295Consideration
      receivable from Golden Stone in respect of disposal of 22.41% investment
      in MoneyVictory
      - Note 2(a)
                              
                              
                              -
                              
                              
                              
                              5,950,000Amount
      due from a third party - Note (a)
                              
                              
                              -
                              
                              
                              
                              2,680,943Amount
      due from Winning - Note (b)
                              
                              
                              8,013,693
                              
                              
                              
                              -$
                              14,826,460
                              
                              
                              $
                              16,408,304
 
 Notes
:-
 
 (a)
                The
      amount due from a third party represents an advance to Jinan Tian Chuang
      Auto Device Ltd which was the subsidiary of Jinan Worldwide until July 1,
      2006. The amount was interest free, unsecured and fully settled in
      January, 2009.
 
 (b)
              The
      amount was interest-free, unsecured and fully settled in February,
      2010.
 
 (c)
              The
      amount was interest-free, unsecured and fully offset with the amount due
      to Hony Capital (Note 16(f)).
 
 12.
              Inventories
 As
      of December 31,2009
                          
                          
                          2008Raw
      materials
                          
                          $
                          11,018,873
                          
                          
                          $
                          9,783,335Work-in-progress
                          
                          
                          5,123,749
                          
                          
                          
                          3,708,490Finished
      goods
                          
                          
                          36,282,415
                          
                          
                          
                          30,807,29552,425,037
                          
                          
                          
                          44,299,120Provision
      for obsolete inventories
                          
                          
                          (1,305,475
                          )
                          
                          
                          (282,928
                          )$
                          51,119,562
                          
                          
                          $
                          44,016,192
 
 Provision
for obsolete inventories of $1,108,826, $46,917 and $39,115 were charged to
operations during the years ended December 31, 2009, 2008 and 2007
respectively.
  F-35
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets
 As
      of December 31,2009
                                  
                                  
                                  2008Costs:Goodwill
      - Note (a)
                                  
                                  $
                                  24,188,350
                                  
                                  
                                  $
                                  18,904,782Customer
      contracts - Note (a)(ii)
                                  
                                  
                                  49,053
                                  
                                  
                                  
                                  49,053Unpatented
      know-how with infinite usefullife
      - Note (b)
                                  
                                  
                                  1,683,645
                                  
                                  
                                  
                                  1,683,645Unpatented
      know-how with finite useful life-
      Note (c)
                                  
                                  
                                  7,073,874
                                  
                                  
                                  
                                  1,467,000Trademarks
      and patents
                                  
                                  
                                  417,905
                                  
                                  
                                  
                                  26,14433,412,827
                                  
                                  
                                  
                                  22,130,624Accumulated
      amortization
                                  
                                  
                                  (505,107
                                  )
                                  
                                  
                                  (68,064
                                  )Net
                                  
                                  $
                                  32,907,720
                                  
                                  
                                  $
                                  22,062,560
 
 Note:-
 
 (a)       Goodwill
  As
      of December 31,2009
                          
                          
                          2008Goodwill
      identified upon acquisition of:-Jinzhou
      Dongwoo
                          (i)
                          
                          $
                          3,115,227
                          
                          
                          $
                          3,115,227Jinzhou
      Wanyou
                          (ii)
                          
                          
                          14,159,392
                          
                          
                          
                          14,159,392Jinzhou
      Hanhua
                          (iii)
                          
                          
                          1,630,163
                          
                          
                          
                          1,630,163Friend
      Birch
                          (iv)
                          
                          
                          5,283,568
                          
                          
                          
                          -$
                          24,188,350
                          
                          
                          $
                          18,904,782
 
 (i)
                  The
      amount represents a goodwill identified upon acquisition of Jinzhou
      Dongwoo amounting to $2.77 million which represents the excess of the
      purchase price of $4.85 million over the attributable share of fair value
      of acquired identifiable net assets of Jinzhou Dongwoo of $2.08 million at
      the time of acquisition on August 23, 2006.
    F-36
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets (Cont’d)
 
 (a)
              Goodwill
      (Cont’d)
 
 On
February 6, 2007, after considering the sufficiency of Jinzhou Dongwoo’s working
capital, the board of the directors of Jinzhou Dongwoo declared a cash dividend
to the former shareholders amounting to $0.68 million in respect of the fiscal
year ended December 31, 2005.  Pursuant to the Dongwoo Share Purchase
Agreement, Winning was entitled to its portion of $0.34
million.  Since it represents the distribution of pre-acquisition
profits of Jinzhou Dongwoo, a corresponding upward adjustment to goodwill was
made as an additional contingent consideration in the first quarter of
2007.
  (ii)
                The
      amount represents a goodwill identified upon the acquisition of 79.59%
      equity interest in Jinzhou Wanyou amounting to $14.16 million which
      represents the excess of the initial purchase price of $16.42 million over
      the attributable share of fair value of acquired identifiable net assets
      of Jinzhou Wanyou of $2.26 million at the time of acquisition on April 2,
      2007.
 
 On April
2, 2007, Wonder and Jinzhou Halla acquired a 79.59% equity interest in Wanyou in
two separately negotiated equity purchase transactions between Wonder and
Jinzhou Halla and two former equity owners of Jinzhou Wanyou. In the first
transaction, Wonder acquired a 40.81% equity interest in Jinzhou Wanyou from
Hong Kong Friend Branches Limited, a Hong Kong corporation, for a total cash
consideration of up to $8.42 million pursuant to a Share Purchase Agreement
(“Wanyou Share Purchase Agreement I”) dated April 2, 2007.  The whole
amount was included in the purchase consideration at the date of
acquisition.
 
 In the
second transaction, Jinzhou Halla acquired a 38.78% equity ownership in Jinzhou
Wanyou from Jinzhou Wonder Auto Suspension System Co., Ltd. for a total cash
consideration of up to $8.0 million pursuant to another Share Purchase Agreement
(“Wanyou Share Purchase Agreement II”) dated April 2, 2007. Under the Wanyou
Share Purchase Agreement II, the total consideration will be paid in three
installments. The first installment of $3.0 million is due within three months
after the execution of the Wanyou Share Purchase Agreement II. The second
installment of $3.0 million cash installment will be paid if Jinzhou Wanyou
achieves minimum net income of $2.95 million (equivalent of RMB 23 million) for
the period from April 2, 2007 to April 1, 2008. The third installment of $2
million cash payment will be paid if Jinzhou Wanyou attains minimum net income
of $3.72 million (equivalent of RMB 29 million) for the period from April
2, 2008 to April 1, 2009. The first and second installments was included the
purchase consideration at the date of acquisition. As of December 31, 2008,
Jinzhou Wanyou attained the minimum net income of $3.72 million (equivalent of
RMB 29 million), and a corresponding upward adjustment to goodwill of $2
million was made as an adjustment to the purchase consideration. A part of the
third installment, amounting to $293,400, was paid during the year ended
December 31, 2008.
  F-37
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets (Cont’d)
 
 Jinzhou
Wanyou was incorporated on September 21, 2006 and commenced its business in the
first quarter of 2007. The Company, with advice from an independent appraiser,
has identified all assets acquired (including intangible assets which meets
either the separability criterion or the contractual-legal criterion in
accordance with ASC 805 (formerly SFAS No. 141R para. 3k) as of the date of
acquisition and concluded that, except for the customer contracts, there were no
any other significant identifiable intangible assets (such as trademark, patents
and favorable or unfavorable lease arrangements) noted as the operating history
of Jinzhou Wanyou is limited. The fair value of customer contracts acquired was
determined by using estimated discounted net cash inflows from unfulfilled
orders in accordance with the signed contracts with Jinzhou Wanyou’s
customers.
 
 (iii)
                The
      amount represents a goodwill identified upon the acquisition of 50% equity
      interest in Jinzhou Hanhua amounting to $1.63 million which represents the
      excess of the initial purchase price of $4.10 million over the
      attributable share of fair value of acquired identifiable net assets of
      Jinzhou Hanhua of $2.47 million at the time of acquisition on January 1,
      2008.
 
 On April
8, 2008, after considering the sufficiency of Jinzhou Hanhua’s working capital,
the board of the directors of Jinzhou Hanhua declared a cash dividend amounting
to $1.29 million in respect of the fiscal year ended December 31,
2007.  Pursuant to the Share Purchase Agreement, Winning was entitled
to the cash dividend declared for the fiscal year ended December 31, 2007
amounting to $644,030.  Since $644,030 represents the distribution of
pre-acquisition profits of Jinzhou Hanhua to the former stockholder, Winning, a
corresponding upward adjustment to goodwill was made following an adjustment to
the fair value of net assets acquired in the third quarter of 2008.
 
 (iv)
                The
      amount represents a goodwill identified upon the acquisition of 100%
      equity interest in Friend Birch amounting to $5.3 million which represents
      the excess of the initial purchase price of $12 million over the
      attributable share of fair value of acquired identifiable net assets of
      Friend Birch of $6.7 million at the time of acquisition on October 1,
      2009.
 
 (b)
              In
      March 1996, the Company entered into two contracts with the Korean Company
      to purchase two technical know-how in relation to product design,
      manufacturing and quality control of alternators and starters at a cash
      consideration of $1.36 million.  This consideration was mutually
      agreed between Jinzhou Halla and the Korean Company.  Under the
      terms of the contracts, the Company is able to use such know-how for
      unlimited period of time.
 
 Since its
acquisition, no indicator of impairment was identified and accordingly it is
stated at cost.
  F-38
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets (Cont’d)
 
 (c)
                It
      mainly represents a unpatented know-how for production of rods and shafts
      of $5.46 million in connection with the acquisition of Friend Birch as
      detailed in note 2(b) and unpatented technical know-how in relation to
      product design, manufacturing and quality control of alternators and
      starters of $1.47 million acquired from third party in prior
      year.
 
 During
the three years ended December 31, 2009, 2008 and 2007 amortization charge was
$422,241, $26,746 and $38,318 respectively.
 
 The
estimated aggregate amortization expenses for know-how with finite useful life,
trademarks and patents for the five succeeding years is as follows
:-
 
 Year2010
                      
                      $
                      1,300,7642011
                      
                      
                      1,300,7642012
                      
                      
                      1,300,7642013
                      
                      
                      1,300,7642014
                      
                      
                      1,013,085$
                      6,216,141
 
 14.
              Property,
      plant and equipment, net
 As
      of December 31,2009
                            
                            
                            2008Costs:Buildings
                            
                            $
                            34,951,440
                            
                            
                            $
                            31,276,571Plant
      and machinery
                            
                            
                            45,801,702
                            
                            
                            
                            40,140,804Furniture,
      fixtures and equipment
                            
                            
                            1,211,966
                            
                            
                            
                            1,207,159Tools
      and equipment
                            
                            
                            5,898,088
                            
                            
                            
                            4,879,920Leasehold
      improvements
                            
                            
                            1,058,371
                            
                            
                            
                            602,785Motor
      vehicles
                            
                            
                            1,937,463
                            
                            
                            
                            1,972,14990,859,030
                            
                            
                            
                            80,079,388Accumulated
      depreciation
                            
                            
                            (19,505,275
                            )
                            
                            
                            (14,835,046
                            )Construction
      in progress - Note 3
                            
                            
                            2,416,574
                            
                            
                            
                            3,887,237Net
                            
                            $
                            73,770,329
                            
                            
                            $
                            69,131,579
 
 An
analysis of buildings, plant and machinery pledged to banks for banking loans
(Note 18a) is as follows :-
 As
      of December 31,2009
                            
                            
                            2008Costs:Buildings
                            
                            $
                            21,581,775
                            
                            
                            $
                            4,513,328Plant
      and machinery
                            
                            
                            13,210,287
                            
                            
                            
                            14,357,43034,792,062
                            
                            
                            
                            18,870,758Accumulated
      depreciation
                            
                            
                            (10,870,072
                            )
                            
                            
                            (9,910,994
                            )Net
                            
                            $
                            23,921,990
                            
                            
                            $
                            8,959,764
  F-39
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 14.
              Property,
      plant and equipment, net (Cont’d)
 
 (i)
              During
      the reporting periods, depreciation is included in
  :-
 
 Year
      ended December 31,2009
                            
                            
                            2008
                            
                            
                            2007Cost
      of sales and overheadsOf inventories
                            
                            $
                            4,381,713
                            
                            
                            $
                            3,095,204
                            
                            
                            $
                            1,491,634Other
                            
                            
                            1,477,157
                            
                            
                            
                            639,330
                            
                            
                            
                            522,411$
                            5,858,870
                            
                            
                            $
                            3,734,534
                            
                            
                            $
                            2,014,045
 
 During
the years ended December 31, 2009, 2008 and 2007, property, plant and equipment
with carrying amounts of $329,610, $112,670 and $46,058 were disposed of at
considerations of $30,592, $242,044 and $25,803 resulting in loss/(gain) of
$299,018, $(129,374) and $20,255 respectively.
 
 (ii)
              Construction
      in Progress
 
 Construction
in progress mainly comprises capital expenditure for construction of the
Company’s new offices and factories.
 
 15.
              Land
      use rights
 As
      of December 31,2009
                          
                          
                          2008Land
      use rights
                          
                          $
                          11,371,914
                          
                          
                          $
                          10,895,593Accumulated
      amortization
                          
                          
                          (753,061
                          )
                          
                          
                          (504,066
                          )$
                          10,618,853
                          
                          
                          $
                          10,391,527
 
 The
Company obtained the right from the relevant PRC land authority for a period of
fifty years to use the land on which the office premises, production facilities
and warehouse of the Company are situated.  The land use right of
carrying amount of $4,864,354 was pledged to a bank for the bank loans granted
to the Company (Note 18b).
 
 During
the three years ended December 31, 2009, 2008 and 2007, amortization amounted to
$264,907, $142,895 and $52,394 respectively.
 
 The
estimated aggregate amortization expenses for land use right for the five
succeeding years is as follows :-
 
 Year2010
                      
                      $
                      256,4002011
                      
                      
                      256,4002012
                      
                      
                      256,4002013
                      
                      
                      256,4002014
                      
                      
                      256,400$
                      1,282,000
  F-40
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 16.
              Other
      payables and accrued expenses
 As
      of December 31,2009
                          
                          
                          2008Accrued
      audit fee
                          
                          $
                          187,458
                          
                          
                          $
                          209,339Interest
      payable
                          
                          
                          197,841
                          
                          
                          
                          179,010Installment
      payment for acquisition of subsidiaries
                          
                          
                          99,756
                          
                          
                          
                          4,740,356Other
      accrued expenses
                          
                          
                          1,242,552
                          
                          
                          
                          1,183,740Other
      tax payable
                          
                          
                          390,921
                          
                          
                          
                          216,237Other
      payables
                          
                          
                          615,564
                          
                          
                          
                          1,803,752Payable
      for acquisition of property, plant and equipment
                          
                          
                          1,618,824
                          
                          
                          
                          1,507,234Sales
      receipt in advance from customers
                          
                          
                          867,563
                          
                          
                          
                          1,258,141Accrued
      salaries and bonus
                          
                          
                          138,925
                          
                          
                          
                          273,307Employee
      hosing maintenance fund - Note (a)
                          
                          
                          733,500
                          
                          
                          
                          727,281VAT
      and penalty payable - Note (b)
                          
                          
                          1,412,535
                          
                          
                          
                          2,586,135Compensation
      funds - Note (c)
                          
                          
                          1,479,273
                          
                          
                          
                          1,572,891Accrued
      staff welfare and social insurance- Note (d)
                          
                          
                          4,320,808
                          
                          
                          
                          4,016,881Amount
      due to a third party - Note (e)
                          
                          
                          -
                          
                          
                          
                          190,710Dividend
      payable to former shareholder - Winning
                          
                          
                          1,581,389
                          
                          
                          
                          -$
                          14,886,909
                          
                          
                          $
                          20,465,014
 
 Note
:-
 
 a)
                Jinan
      Worldwide was established in the PRC as a State-Owned Enterprise in
      February 1956 and transformed to a domestic company on May 28, 2005.
      Before transform to domestic company, Jinan Worldwide purchased certain
      residential properties from the Jinan Government. These properties are
      regarded as public housing. In accordance with the PRC regulation, when
      Jinan Worldwide sold the properties to its employees, Jinan Worldwide has
      to set up a housing maintenance fund which calculated at 20% of sales
      proceeds and used for the repair and maintenance work on such properties
      in the future. Once the fund is used up, the Company has no further
      obligation.
 
 b)
                VAT
      and penalty payable was imposed by the relevant PRC tax authority during
      2000 for incorrect VAT returns filed by the Jinan Worldwide during the
      period from 1997 to 1999.
 
 c)
                Compensation
      funds represent unutilized funds received from State-Owned Assets
      Supervision and Administration Commission of the State Council which are
      restricted for the compensation of affected employees after the
      transformation from a state-owned enterprise to domestic company completed
      on May 30, 2005.  An amount of $93,554 was utilized for the year
      ended December 31, 2009.
 
 d)
                Staff
      welfare and social insurance payable mainly represents accrued social
      insurance payable to the PRC municipal and provincial governments which
      covers pensions, unemployment and medical insurances and staff housing
      fund.
 
 e)
                The
      amount due to a third party represents an advance from Jinzhou Hivron Auto
      Electronics Co., Ltd.  The amount was interest free, unsecured
      and fully repaid in January,
2009.
 
 f)
                The
      amount was interest-free and unsecured. $7.6 million of which was offset
      with the amount due to Hony Capital while the remaining balance was
      settled in cash.
  F-41
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 17.
              Provision
      for warranty
 2009
                                    
                                    
                                    2008Balance,
      January 1
                                    
                                    $
                                    2,377,620
                                    
                                    
                                    $
                                    1,124,655Acquisition
      of Yearcity
                                    
                                    
                                    -
                                    
                                    
                                    
                                    900,608Claims
      paid for the year
                                    
                                    
                                    (1,873,143
                                    )
                                    
                                    
                                    (1,102,398
                                    )Provision
      for the year
                                    
                                    
                                    1,767,917
                                    
                                    
                                    
                                    1,365,206Translation
      adjustments
                                    
                                    
                                    (72
                                    )
                                    
                                    
                                    89,549Balance,
      December 31
                                    
                                    $
                                    2,272,322
                                    
                                    
                                    $
                                    2,377,620
 
 18.
              Secured
      borrowings
 As
      of December 31,2009
                                                  
                                                  
                                                  2008Short-term
      borrowingsShort-term
      loans - Note 18(i)
                                                  
                                                  $
                                                  53,164,080
                                                  
                                                  
                                                  $
                                                  42,481,386Long-term
      loans - current portion
                                                  
                                                  
                                                  3,918,699
                                                  
                                                  
                                                  
                                                  1,574,41757,082,779
                                                  
                                                  
                                                  
                                                  44,055,803Long-term
      borrowings - Note 18(ii)Interest
      bearing:--
      at 5.35% per annum
                                                  
                                                  
                                                  1,026,900
                                                  
                                                  
                                                  
                                                  --
      at 5.47% per annum
                                                  
                                                  
                                                  13,496,400
                                                  
                                                  
                                                  
                                                  --
      at 6.95% per annum
                                                  
                                                  
                                                  10,304,120
                                                  
                                                  
                                                  
                                                  11,760,895-
      at 7.56% per annum
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,868,00024,827,420
                                                  
                                                  
                                                  
                                                  17,628,895Less:
      current maturities
                                                  
                                                  
                                                  (3,918,699
                                                  )
                                                  
                                                  
                                                  (1,574,417
                                                  )20,908,721
                                                  
                                                  
                                                  
                                                  16,054,478$
                                                  77,991,500
                                                  
                                                  
                                                  $
                                                  60,110,281
 Notes
:-
 
 (i)
              The
      weighted-average interest rate for short-term loans as of December 31,
      2009 and December 31, 2008, were 5.28% and 6.75%,
      respectively.
 
 (ii)
              Long-term
      borrowings are repayable as
follows:-
 As
      of December 31,2009
                              
                              
                              2008Within
      one year
                              
                              $
                              3,918,699
                              
                              
                              $
                              1,574,417After
      one year but within two years
                              
                              
                              7,109,424
                              
                              
                              
                              9,016,834After
      two years but within three years
                              
                              
                              7,109,424
                              
                              
                              
                              3,148,834After
      three years but within four years
                              
                              
                              3,499,148
                              
                              
                              
                              3,148,834After
      four years but within five years
                              
                              
                              2,163,825
                              
                              
                              
                              739,976After
      five years
                              
                              
                              1,026,900
                              
                              
                              
                              -$
                              24,827,420
                              
                              
                              $
                              17,628,895
  F-42
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 18.
              Secured
      borrowings (Cont’d)
 
 As of
December 31, 2009, the Company’s had total bank lines of credit and borrowings
there under as follows:
 
 Facilities
      granted
                    
                    Granted
                    
                    
                    Amount utilized
                    
                    
                    UnusedSecured
      borrowings
                    
                    $
                    84,152,900
                    
                    
                    $
                    77,991,500
                    
                    
                    $
                    6,161,400
 
 The above
secured borrowings were secured by the following:
 
 (a)
              Property,
      plant and equipment with carrying value of $23,921,990 (note
      14);
 
 (b)
              Land
      use right with carrying value of $4,864,354 (note
  15);
 
 (c)
              Guarantees
      executed by third parties;
 
 (d)
              Guarantees
      executed by Yuncong Ma, the Company’s director;
  and
 
 (e)
              Guarantees
      executed by a related company of which Mr. Qingjie Zhao (“Mr. Zhao”), a
      director of the Company, is a director and a
  shareholder.
 
 During
the reporting periods, there was no covenant requirement undrer the banking
facilities granted to the Company.
  F-43
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 19.
              Share-based
      compensation
 
 The
Company granted share options to employees, directors and consultants to reward
for services.
 
 Stock
option plan
 
 (a)
                In
      April 30, 2008, the Board of Directors adopted the Wonder Auto Technology,
      Inc. 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan was
      approved by the Annual General Meeting on June 20, 2008. The 2008 Plan
      authorizes the issuance of options up to 3,500,000 shares of the Company’s
      common stock. The exercise price of the options granted, pursuant to the
      2008 Plan, must be at least equal to the fair market value of the
      Company’s common stock at the date of grant. The 2008 plan will terminate
      on May 1, 2018.
 
 Pursuant
to the 2008 Plan, the Company issued 270,000 options with an exercise price of
$9 per share on May 6, 2008.  One third of the options will vest and
become exercisable on each of the filing dates of the Company’s Annual Reports
on Form 10-K for fiscal years 2008, 2009 and 2010, respectively, upon the
achievement of certain income thresholds which set to be $22 million for fiscal
year 2008, $30.8 million for fiscal year 2009 and $43.15 million for fiscal year
2010.
 
 A summary
of share option plan activity for the year ended December 31, 2008 is presented
below:
 
 Number of
                        
                        
                        Exercise priceshares
                        
                        
                        per
      shareOutstanding
      as of January 1, 2008
                        
                        
                        -
                        
                        
                        $
                        -Granted
                        
                        
                        270,000
                        
                        
                        
                        9Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -Cancelled
                        
                        
                        (270,000
                        )
                        
                        
                        -Outstanding
      as of December 31, 2008
                        
                        
                        -
                        
                        
                        $
                        -Exercisable
      as of December 31, 2008
                        
                        
                        -
                        
                        
                        $
                        -
 
 The
grant-date fair values of options granted for 2008, 2009 and 2010 are $2.32,
$2.75 and $3.01 per share respectively. Compensation expense of $208,782 arising
from abovementioned share options granted was recognized for the year ended
December 31, 2008.
 
 On
December 31, 2008, the Compensation Committee of Board of Directors passed a
resolution to terminate the stock option agreements with each of the certain key
employees and directors of the Company (the “Holders”), thereby rescinding to
reward them for their past services and to promote future performance, by
entering into a termination and release agreements with each
Holder.  The unrecognized compensation costs of $497,513 related to
the above non-vested share options were recognized for the year ended December
31, 2008.
  F-44
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 19.
              Share-based
      compensation (Cont’d)
 
 The fair
values of the above option awards were estimated on the date of grant using the
Black-Scholes Option Valuation Model and graded vesting method together with the
following assumptions.
 2008
                        
                        
                        2009
                        
                        
                        2010Expected
      volatility
                        
                        
                        53.74
                        %
                        
                        
                        53.74
                        %
                        
                        
                        53.74
                        %Expected
      dividends
                        
                        Nil
                        
                        
                        Nil
                        
                        
                        NilExpected
      life
                        
                        1.4 years
                        
                        
                        2.4 years
                        
                        
                        3.4 yearsRisk-free
      interest rate
                        
                        
                        2.49
                        %
                        
                        
                        2.88
                        %
                        
                        
                        3.17
                        %
 
 (b)
                In
      November 24, 2009, the Board of Directors approved the Wonder Auto
      Technology, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The
      exercise price of the options granted, pursuant to the 2009 Plan, must be
      at least equal to the fair market value of the Company’s common stock at
      the date of grant. The 2009 plan will terminate on November 25,
      2012.
 
 Pursuant
to the 2009 Plan, the Company issued 1,674,400 options with an exercise price of
$11.48 per share on November 24, 2009.  One third of the options will
vest and become exercisable on each of the filing dates of the Company’s Annual
Reports on Form 10-K for fiscal years 2009, 2010 and 2011, respectively, upon
the achievement of certain income thresholds which set to be $23 million for
fiscal year 2009, $34.5 million for fiscal year 2010 and $42.3 million for
fiscal year 2011.
 
 A summary
of share option plan activity for the year ended December 31, 2009 is presented
below:
 
 Remaining
                        
                        AggregateNumber of
                        
                        
                        Exercise price
                        
                        contractual
                        
                        intrinsicshares
                        
                        
                        per share
                        
                        Term
                        
                        value (1)Outstanding
      as of January 1, 2009
                        
                        
                        -
                        
                        
                        $
                        -Granted
                        
                        
                        1,674,400
                        
                        
                        
                        11.48Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -Cancelled
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      as of December 31, 2009
                        
                        
                        1,674,400
                        
                        
                        $
                        11.48
                        
                        2.2
      years
                        
                        $
                        435,344Exercisable
      as of December 31, 2009
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        -
                        
                        $
                        -
 
 (1)
              Aggregate
      intrinsic value represents the values of the Company’s closing stock price
      on December 31, 2009 ($11.74) in excess of the exercise price ($11.48)
      multiplied by the number of options outstanding or
      exercisable.
 
 The
grant-date fair values of options granted for 2009, 2010 and 2011 are $3.47,
$7.22 and $8.91 per share respectively. Compensation expense of $1,171,935
arising from abovementioned share options granted was recognized for year ended
December 31, 2009.
  F-45
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 19.
              Share-based
      compensation (Cont’d)
 
 The fair
values of the above option awards were estimated on the date of grant using the
Black-Scholes Option Valuation Model and graded vesting method together with the
following assumptions.
 
 2009
                        
                        
                        2010
                        
                        
                        2011Expected
      volatility
                        
                        
                        80.02
                        %
                        
                        
                        127.81
                        %
                        
                        
                        140.72
                        %Expected
      dividends
                        
                        Nil
                        
                        
                        Nil
                        
                        
                        NilExpected
      life
                        
                        1.4 years
                        
                        
                        2.4 years
                        
                        
                        3.4 yearsRisk-free
      interest rate
                        
                        
                        0.28
                        %
                        
                        
                        0.73
                        %
                        
                        
                        1.22
                        %
 
 As of
December 31, 2009, there were unrecognized compensation costs of approximately
$9,767,478 related to the above non-vested share options which is expected to be
recognized over the 2.2 years.
 
 20.
              Commitments
      and contingencies
 
 a.
                Capital
      commitment
 
 As of
December 31, 2009, the Company had capital commitments amounting to $1,291,746
in respect of the acquisition of property, plant and equipment which were
contracted for but not provided in the financial statements.
 
 b.
              Operating lease
      arrangement
 
 As of
December 31, 2009, the Company had no non-cancelable operating leases for its
warehouses and shuttle bus.
 
 The
rental expense relating to the operating leases was $155,308 and $130,178 for
the two years ended December 31, 2009 and 2008 respectively.
 
 c.
              Guarantee
 
 The
Company guaranteed the following debts of third parties, which is summarized as
follows:
 
 As
      of December 31,2009
                      
                      
                      2008Guarantee
                      
                      $
                      14,670,000
                      
                      
                      $
                      -
 
 As of
December 31, 2009, the Company has provided various financial guarantees in
respect of loans made by banks to third parties which expiring in July
2014.  If the third parties fail to perform under their contractual
obligation, the Company will make future payments including the contractual
principal amounts, related interest and penalties.
  F-46
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 20.
              Commitments
      and contingencies (Cont’d)
 
 Management
has assessed the fair value of the obligations arising from the above financial
guarantees and considered it is immaterial for the Company. Therefore, no
obligation in respect to the above guarantees was recognized as of December 31,
2009.
 
 21.
              Common
      stock
 
 On
November 12, 2009, the Company completed a registered public offering in the
amount of 6,000,000 common stock at a price of $10.75 for gross proceeds to the
Company of $64,500,000. On November 16, 2009, the underwriters of the registered
public offering exercised over-allotment options to purchase 900,000 shares of
common stock at a price of $10.75.
 
 22.
              Statutory
      and other reserves
 
 The
Company’s statutory and other reserves comprise statutory reserve and enterprise
expansion fund of all subsidiaries in the PRC.
 
 As
      of December 31,2009
                        
                        
                        2008Statutory
      reserve
                        
                        $
                        10,109,939
                        
                        
                        $
                        7,567,171Enterprise
      expansion fund
                        
                        
                        76,762
                        
                        
                        
                        61,370$
                        10,186,701
                        
                        
                        $
                        7,628,541
 
 Statutory
reserve
 
 Under PRC
regulations, all subsidiaries in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC
GAAP.  In addition, these companies are required to set aside at least
10% of their after-tax net profits each year, if any, to fund the statutory
reserves until the balance of the reserves reaches 50% of their registered
capital.  The statutory reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year
losses.
 
 Enterprise expansion
fund
 
 In
accordance with the relevant laws and regulations of the PRC and articles of
association of certain subsidiaries in the PRC, the appropriation of income to
this fund is made in accordance with the recommendation of the board of
directors of the respective subsidiaries.  Upon approval by the board,
it can be used for future expansion or to increase the registered
capital.
  F-47
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 23.
              Defined
      contribution plan
 
 Pursuant
to the relevant PRC regulations, the Company is required to make contributions
at a rate of 30.6% to 45% of employees’ salaries and wages to a defined
contribution retirement scheme organized by a state-sponsored social insurance
plan in respect of the retirement benefits for the Company’s employees in the
PRC.  The only obligation of the Company with respect to retirement
scheme is to make the required contributions under the plan.  No
forfeited contribution is available to reduce the contribution payable in the
future years.  The defined contribution plan contributions were
charged to the consolidated statements of income.  The Company
contributed $3,208,267, $1,178,078 and $681,944 for the year ended December 31,
2009, 2008 and 2007, respectively.
  F-48
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              Segment
      information
 
 The
Company uses the “management approach” in determining reportable operating
segments.  The management approach considers the internal organization
and reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Company’s reportable segments.  Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue of
alternators, starters and rods and shafts and operating results of the Company
and, as such, the Company has determined that the Company has four operating
segments as defined by ASC 280, “Segments Reporting” (previously SFAS 131):
Alternators, starters, rods and shafts and valves and tappets.
 
 Alternators
                                          
                                          Starters
                                          
                                          
                                          Rods
      and shafts
                                          
                                          Valves
      and tappets
                                          
                                          TotalYear
      ended December 31
                                          
                                          Year
      ended December 31
                                          
                                          
                                          Year
      ended December 31
                                          
                                          Year
      ended December 31
                                          
                                          Year
      ended December 312009
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          2007
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          2007Revenue
      from
      externalcustomers
                                          
                                          $
                                          74,249,879
                                          
                                          $
                                          63,255,682
                                          
                                          
                                          $
                                          59,790,042
                                          
                                          $
                                          68,946,453
                                          
                                          
                                          $
                                          52,137,737
                                          
                                          
                                          $
                                          35,014,035
                                          
                                          
                                          $
                                          21,246,911
                                          
                                          
                                          $
                                          18,106,221
                                          
                                          
                                          $
                                          7,279,645
                                          
                                          $
                                          46,580,773
                                          
                                          
                                          $
                                          7,689,919
                                          
                                          $
                                          -
                                          
                                          $
                                          211,024,016
                                          
                                          
                                          $
                                          141,189,559
                                          
                                          $
                                          102,083,722Interest
      income
                                          
                                          
                                          111,416
                                          
                                          
                                          103,776
                                          
                                          
                                          
                                          57,177
                                          
                                          
                                          98,044
                                          
                                          
                                          
                                          76,208
                                          
                                          
                                          
                                          31,463
                                          
                                          
                                          
                                          27,922
                                          
                                          
                                          
                                          45,717
                                          
                                          
                                          
                                          16,631
                                          
                                          
                                          615,976
                                          
                                          
                                          
                                          3,519
                                          
                                          
                                          -
                                          
                                          
                                          853,358
                                          
                                          
                                          
                                          229,220
                                          
                                          
                                          105,271Interest
      expenses
                                          
                                          
                                          1,672,975
                                          
                                          
                                          1,303,730
                                          
                                          
                                          
                                          1,039,895
                                          
                                          
                                          1,568,857
                                          
                                          
                                          
                                          1,007,696
                                          
                                          
                                          
                                          368,790
                                          
                                          
                                          
                                          233,531
                                          
                                          
                                          
                                          68,424
                                          
                                          
                                          
                                          -
                                          
                                          
                                          1,306,989
                                          
                                          
                                          
                                          430,006
                                          
                                          
                                          -
                                          
                                          
                                          4,782,352
                                          
                                          
                                          
                                          2,809,856
                                          
                                          
                                          1,408,685Amortization
                                          
                                          
                                          134,841
                                          
                                          
                                          57,262
                                          
                                          
                                          
                                          42,945
                                          
                                          
                                          121,995
                                          
                                          
                                          
                                          56,679
                                          
                                          
                                          
                                          10,977
                                          
                                          
                                          
                                          290,148
                                          
                                          
                                          
                                          12,263
                                          
                                          
                                          
                                          36,790
                                          
                                          
                                          132,223
                                          
                                          
                                          
                                          31,131
                                          
                                          
                                          -
                                          
                                          
                                          679,207
                                          
                                          
                                          
                                          157,335
                                          
                                          
                                          90,712Depreciation
                                          
                                          
                                          1,614,448
                                          
                                          
                                          1,740,795
                                          
                                          
                                          
                                          1,619,077
                                          
                                          
                                          1,416,157
                                          
                                          
                                          
                                          1,004,002
                                          
                                          
                                          
                                          294,740
                                          
                                          
                                          
                                          535,106
                                          
                                          
                                          
                                          272,764
                                          
                                          
                                          
                                          100,228
                                          
                                          
                                          2,154,736
                                          
                                          
                                          
                                          708,314
                                          
                                          
                                          -
                                          
                                          
                                          5,720,447
                                          
                                          
                                          
                                          3,725,875
                                          
                                          
                                          2,014,045Segment
      profit
                                          
                                          
                                          8,855,967
                                          
                                          
                                          12,563,260
                                          
                                          
                                          
                                          11,103,589
                                          
                                          
                                          8,500,839
                                          
                                          
                                          
                                          6,967,496
                                          
                                          
                                          
                                          4,560,488
                                          
                                          
                                          
                                          4,248,860
                                          
                                          
                                          
                                          4,355,937
                                          
                                          
                                          
                                          1,822,949
                                          
                                          
                                          7,785,309
                                          
                                          
                                          
                                          445,508
                                          
                                          
                                          -
                                          
                                          
                                          29,390,975
                                          
                                          
                                          
                                          24,332,201
                                          
                                          
                                          17,487,026Segment
      assets
                                          
                                          
                                          99,396,049
                                          
                                          
                                          72,097,609
                                          
                                          
                                          
                                          79,027,844
                                          
                                          
                                          90,140,219
                                          
                                          
                                          
                                          58,300,925
                                          
                                          
                                          
                                          37,624,611
                                          
                                          
                                          
                                          61,480,760
                                          
                                          
                                          
                                          30,146,314
                                          
                                          
                                          
                                          23,278,939
                                          
                                          
                                          71,258,841
                                          
                                          
                                          
                                          92,832,061
                                          
                                          
                                          -
                                          
                                          
                                          322,275,869
                                          
                                          
                                          
                                          253,376,909
                                          
                                          
                                          139,931,394Expenditure
      forsegment
      assets
                                          
                                          $
                                          4,508,399
                                          
                                          $
                                          6,313,644
                                          
                                          
                                          $
                                          5,732,146
                                          
                                          $
                                          4,104,185
                                          
                                          
                                          $
                                          5,519,154
                                          
                                          
                                          $
                                          1,533,523
                                          
                                          
                                          $
                                          1,854,383
                                          
                                          
                                          $
                                          4,386,179
                                          
                                          
                                          $
                                          754,133
                                          
                                          $
                                          2,229,441
                                          
                                          
                                          $
                                          1,052,162
                                          
                                          $
                                          -
                                          
                                          $
                                          12,696,408
                                          
                                          
                                          $
                                          17,271,139
                                          
                                          $
                                          8,019,802
  F-49
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              Segment
      information (Cont’d)
 
 A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.
 
 Year
      ended December 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Total
      consolidated revenue
                                    
                                    $
                                    211,024,016
                                    
                                    
                                    $
                                    141,189,559
                                    
                                    
                                    $
                                    102,083,722Total
      profit for reportable segments
                                    
                                    $
                                    29,390,975
                                    
                                    
                                    $
                                    24,332,201
                                    
                                    
                                    $
                                    17,487,026Unallocated
      amounts relating tooperations:Interest
      income
                                    
                                    
                                    6,255
                                    
                                    
                                    
                                    85,070
                                    
                                    
                                    
                                    6,513Equity
      in net income of annon-consolidated
      affiliate
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,072,788
                                    
                                    
                                    
                                    -Loss
      on disposal of investment in anunconsolidated
      affiliate
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (122,788
                                    )
                                    
                                    
                                    -Other
      income
                                    
                                    
                                    5,183
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    16,203Finance
      costs
                                    
                                    
                                    (1,821
                                    )
                                    
                                    
                                    (247,985
                                    )
                                    
                                    
                                    (12,692
                                    )Amortization
                                    
                                    
                                    (7,941
                                    )
                                    
                                    
                                    (12,306
                                    )
                                    
                                    
                                    -Depreciation
                                    
                                    
                                    (138,423
                                    )
                                    
                                    
                                    (8,659
                                    )
                                    
                                    
                                    -Share-based
      compensation
                                    
                                    
                                    (1,171,935
                                    )
                                    
                                    
                                    (706,295
                                    )
                                    
                                    
                                    -Other
      general expenses
                                    
                                    
                                    (1,003,708
                                    )
                                    
                                    
                                    (847,959
                                    )
                                    
                                    
                                    (456,295
                                    )Unusual
      charge-make good provision
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (18,265,500
                                    )Income/(loss)
      before income taxes andnon-controlling
      interests
                                    
                                    $
                                    27,078,585
                                    
                                    
                                    $
                                    23,544,067
                                    
                                    
                                    $
                                    (1,224,745
                                    )
 
 As
      of December 31,2009
                              
                              
                              2008
                              
                              
                              2007AssetsTotal
      assets for reportable segments
                              
                              $
                              322,275,869
                              
                              
                              $
                              253,376,909
                              
                              
                              $
                              139,931,394Cash
      and cash equivalents
                              
                              
                              28,037,032
                              
                              
                              
                              259,630
                              
                              
                              
                              2,421,363Other
      receivables
                              
                              
                              8,177,536
                              
                              
                              
                              69,463
                              
                              
                              
                              39,948Receivable
      from disposal of annon-consolidated
      affiliate
                              
                              
                              -
                              
                              
                              
                              5,950,000
                              
                              
                              
                              -Deposit
      for acquisition of property, plantand
      equipment
                              
                              
                              96,863
                              
                              
                              
                              448,161
                              
                              
                              
                              -Inventories
                              
                              
                              185,354
                              
                              
                              
                              -
                              
                              
                              
                              -Intangible
      assets
                              
                              
                              383,719
                              
                              
                              
                              1,096
                              
                              
                              
                              -Land
      use right
                              
                              
                              927,240
                              
                              
                              
                              1,030,377
                              
                              
                              
                              -Property,
      plant and equipment
                              
                              
                              2,168,542
                              
                              
                              
                              1,894,128
                              
                              
                              
                              4,030$
                              362,252,155
                              
                              
                              $
                              263,029,764
                              
                              
                              $
                              142,396,735
  F-50
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              Segment
      information (Cont’d)
 
 All of
the Company’s long-lived assets are located in the PRC.  Geographic
information about the revenues, which are classified based on the customers, is
set out as follows :-
 
 Year
      ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007PRC
                        
                        $
                        188,377,177
                        
                        
                        $
                        118,250,788
                        
                        
                        $
                        92,328,725South
      Korea
                        
                        
                        5,868,145
                        
                        
                        
                        9,065,522
                        
                        
                        
                        4,650,040Brazil
                        
                        
                        6,996,130
                        
                        
                        
                        5,903,194
                        
                        
                        
                        2,633,065Mexico
                        
                        
                        1,583,701
                        
                        
                        
                        1,768,600
                        
                        
                        
                        -United
      States
                        
                        
                        7,134,827
                        
                        
                        
                        3,469,054
                        
                        
                        
                        1,646,823Others
                        
                        
                        1,064,036
                        
                        
                        
                        2,732,401
                        
                        
                        
                        825,069Total
                        
                        $
                        211,024,016
                        
                        
                        $
                        141,189,559
                        
                        
                        $
                        102,083,722
 
 25.
              Related
      parties transactions
 
 Apart
from the information as disclosed in note18 to the financial statements, the
Company had no other material transactions with its related parties during the
years.
 
 26.
              Subsequent
      events
 
 On
January 18, 2010, Wonder and Yearcity entered into two separate agreements with
Novophalt (China) Limited, a company incorporated in BVI, and Wonder Employee
Capital Limited (“WECL”), a company incorporated in BVI, for acquisition of
their 20.90% and 17.46% equity interests in Applaud Group Limited (“Applaud”) at
considerations of HK$62,915,086 (equivalent to approximately $8.12 million) and
HK$52,534,672 (equivalent to approximately $6.78 million)
respectively.  Both considerations were settled in January,
2010.  Since Mr. Zhao, a director of the Company, is the sole director
and owner of WECL, the acquisition of 17.46% equity interest in Applaud from
WECL is classified as a related party transaction.  Accordingly,
approvals of this transaction were obtained from the Audit Committee and the
Company’s Board of Directors with Mr. Zhao abstaining on January 15,
2010.
 
 Applaud,
a company incorporated in BVI, is an investment holding company which only holds
52.2% equity interest in Jinheng Automotive Safety Technology Holdings Limited
(“Jinheng Holdings”).  As a result of acquisition of 38.36% equity
interest in Applaud, the Company effectively holds 20.02% equity interest in
Jinheng Holdings. Jinheng Holdings is a high-tech automotive parts supplier that
is primarily engaged in developing, manufacturing and selling components of
automotive passive safety restraint systems (airbag and seatbelt), automotive
engine electronic injection management systems (EMS), and components of diesel
engines. Jinheng Holdings is listed on the Main Board of Hong Kong Stock
Exchange.
  F-51


EXHIBIT
INDEX





Exhibit
      No.
                  
                  Description1.1
                  
                  Purchase
      Agreement, dated November 10, 2009, by and among the Company and Piper
      Jaffray & Co., Jefferies & Company, Inc. and
      Oppenheimer & Co. Inc., as the representatives of the several
      underwriters named therein. [Incorporated by reference to Exhibit 1.1
      to the Company’s current report on Form 8-K filed on November 17,
      2009]3.1
                  
                  Articles
      of Incorporation of the Company as filed with the Secretary of State of
      Nevada. [Incorporated by reference to Exhibit 3.1 to the Company’s
      registration statement on Form SB-2 filed on December 11, 2001 in
      commission file number 333-74914]3.2
                  
                  Certificate
      of Amendment to Articles of Incorporation. [Incorporated by reference to
      Exhibit 3.1 to the Company’s current report on 8-K filed on February 13,
      2006]3.3
                  
                  Certificate
      of Amendment to Articles of Incorporation. [Incorporated by reference to
      appendix A to the Company’s definitive information statement on Schedule
      14C filed on July 31, 2006]3.4
                  
                  Amended
      and Restated Bylaws of the Company. [Incorporated by reference to Exhibit
      3.2 to the Company’s current report on 8-K filed on July 9,
      2007]10.1
                  
                  English
      Summary of Joint Venture Agreement, dated November 4, 2009, by and
      between Jinzhou Halla Electrical Equipment Co., Ltd. and Korea Teawon
      Dianzhuang Corporation. [Incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K filed on November 9,
      2009]10.2
                  
                  Share
      Purchase Agreement, dated as of September 22, 2009, by and between Jinzhou
      Wanyou Mechanical Parts Co., Ltd. and Winning International Development
      Limited. [Incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on September 25, 2009]10.3
                  
                  English
      translation of the Equity Transfer Agreement, dated as of January 4, 2009,
      by and between Jinzhou Halla Electrical Equipment Co., Ltd. and Magic Era
      Group Limited. [Incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on January 8, 2009]10.4
                  
                  English
      translation of Assignment Agreement, by and among Wonder Auto Limited,
      Golden Stone Capital Limited, Money Victory Limited and Lin Tan, dated
      November 19, 2008. [Incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K filed on November 20,
      2008]10.5
                  
                  English
      translation of the Equity Transfer Agreement, dated as of October 1, 2008,
      by and between Jinzhou Halla Electrical Equipment Co., Ltd. and Hony
      Capital II, L.P. [Incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K filed on October 6,
    2008]10.6
                  
                  English
      Summary of Stock Purchase Agreement, dated as of April 9, 2008, by and
      between Wonder Auto Limited and Lin Tan. [Incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K filed on April
      14, 2008]10.7
                  
                  Share
      Purchase Agreement, dated as of February 19, 2008, by and between Wonder
      Auto Limited and Koma Co., Ltd. [Incorporated by reference to Exhibit 10.1
      to the Company’s current report on Form 8-K filed on February 21,
      2008]10.8
                  
                  Share
      Purchase Agreement, dated as of April 2, 2007, by and between Wonder Auto
      Limited and Hong Kong Friend Branches Limited. [Incorporated by reference
      to Exhibit 10.1 to the Company’s current report on Form 8-K filed on April
      4, 2007]10.9
                  
                  Share
      Purchase Agreement, dated as of April 2, 2007, by and between Jinzhou
      Halla Electrical Equipment Co., Ltd. and Jinzhou Wonder Auto Suspension
      System Co., Ltd. [Incorporated by reference to Exhibit 10.2 to the
      Company’s current report on Form 8-K filed on April 4,
    2007]10.10
                  
                  English
      Summary of Framework Purchase Agreement, dated October 29, 2009, by
      and among Jinzhou Wonder Alternative Energy Vehicle Technology Co., Ltd.,
      Jinzhou Wonder Motor Co., Ltd. and Tianli Wang. [Incorporated by reference
      to Exhibit 10.1 to the Company’s current report on Form 8-K filed on
      October 30, 2009]10.11
                  
                  English
      Summary of Framework Purchase Agreement, dated October 29, 2009, by
      and among Jinzhou Wonder Alternative Energy Vehicle Technology Co., Ltd.,
      Jinzhou Halla Electrical Equipment Co., Ltd. and Tianli Wang.
      [Incorporated by reference to Exhibit 10.2 to the Company’s current report
      on Form 8-K filed on October 30,
2009]








Exhibit
      No.
                
                Description10.12
                
                Wonder
      Auto Technology, Inc., 2008 Equity Incentive Plan. [Incorporated by
      reference to Exhibit 10.1 to  the Company’s current report on
      Form 8-K filed on May 5, 2008]10.13
                
                Employment
      Contract between Jinzhou Halla Electrical Equipment Co., Ltd. and Seuk Jun
      Kim. [Incorporated by reference to Exhibit 10.19 to the Company’s current
      report on Form 8-K filed on June 22, 2006]10.14
                
                Employment
      Contract between Jinzhou Halla Electrical Equipment Co., Ltd. and Yuguo
      Zhao. [Incorporated by reference to Exhibit 10.20 to the Company’s current
      report on Form 8-K filed on June 22, 2006]10.15
                
                Employment
      Contract between Jinzhou Halla Electrical Equipment Co., Ltd. and Yongdong
      Liu. [Incorporated by reference to Exhibit 10.21 to the Company’s current
      report on Form 8-K filed on June 22, 2006]10.16
                
                Wonder
      Auto Technology, Inc. Independent Director’s Contract, dated as of March
      23, 2007, by and between the Company and Larry Goldman, CPA. [Incorporated
      by reference to Exhibit 10.1 to the Company’s current report on Form 8-K
      filed on March 29, 2007]10.17
                
                Indemnification
      Agreement, dated as of March 23, 2007, by and between the Company and
      Larry Goldman, CPA. [Incorporated by reference to Exhibit 10.4 to the
      Company’s current report on Form 8-K filed on March 29,
    2007]10.18
                
                Wonder
      Auto Technology, Inc. Independent Director’s Contract, dated as of April
      7, 2009, by and between the Company and Xiaoyu Zhang. [Incorporated by
      reference to Exhibit 10.1 to the Company’s current report on Form 8-K
      filed on April 8, 2009]10.19
                
                Indemnification
      Agreement, dated as of April 7, 2009, by and between the Company and
      Xiaoyu Zhang. [Incorporated by reference to Exhibit 10.3 to the Company’s
      current report on Form 8-K filed on April 8, 2009]10.20
                
                Wonder
      Auto Technology, Inc. Independent Director’s Contract, dated as of April
      7, 2009, by and between the Company and Xianzhang Wang. [Incorporated by
      reference to Exhibit 10.2 to the Company’s current report on Form 8-K
      filed on April 8, 2009]10.21
                
                Indemnification
      Agreement, dated as of April 7, 2009, by and between the Company and
      Xianzhang Wang. [Incorporated by reference to Exhibit 10.4 to the
      Company’s current report on Form 8-K filed on April 8,
    2009]14
                
                Code
      of Ethics. [Incorporated by reference to Exhibit 14 to the Company’s
      current report on Form 8-K filed on March 29, 2007]21
                
                Subsidiaries
      of the Company.*23
                
                Consent
      of PKF*31.1
                
                Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *31.2
                
                Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *32.1
                
                Certification
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002. *32.2
                
                Certification
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
*




*Filed
herewith.